Page 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 2005 Commission File Number: 001-9383 WESTAMERICA BANCORPORATION (Exact Name of Registrant as Specified in its Charter) 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 [ x ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ x ] No [ ] 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 August 2, 2005 Common Stock, 32,465,538 No Par Value Page 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> Forward Looking Statements 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3 Notes to Unaudited Condensed Consolidated Financial Statements 7 Financial Summary 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 24 Item 4 - Controls and Procedures 24 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 25 Item 2 - Unregistered Sales of Equity Securities and Use of proceeds 25 Item 3 - Defaults upon Senior Securities 25 Item 4 - Submission of Matters to a Vote of Security Holders 25 Item 5 - Other Information 26 Item 6 - Exhibits 26 Exhibit 11 - Computation of Earnings Per Share 28 Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 29 Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 30 Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 31 Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 32 </TABLE> 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. 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) a slowdown in the national and California economies; (2) economic uncertainty created by terrorist threats and attacks on the United States and the actions taken in response; (3) the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; (4) changes in the interest rate environment; (5) changes in the regulatory environment; (6) significantly increasing competitive pressure in the banking industry ; (7) operational risks including data processing system failures or fraud; (8) the effect of acquisitions and integration of acquired businesses; (9) volatility of rate sensitive deposits and investments; (10) asset/liability matching risks and liquidity risks; and (11) changes in the securities markets. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2004, 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. Page 3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited) <TABLE> <CAPTION> At June 30, At --------------------------December 31, 2005 2004 2004 --------------------------------------- <S> <C> <C> <C> Assets: Cash and cash equivalents $194,749 $185,522 $126,153 Money market assets 540 534 534 Investment securities available for sale 691,609 1,024,798 931,710 Investment securities held to maturity, with market values of: $1,358,083 at June 30, 2005 1,349,555 $949,257 at June 30, 2004 960,522 $1,265,986 at December 31, 2004 1,260,832 Loans, gross 2,687,566 2,319,255 2,300,230 Allowance for loan losses (59,862) (53,949) (54,152) --------------------------------------- Loans, net of allowance for loan losses 2,627,704 2,265,306 2,246,078 Other real estate owned 40 0 0 Premises and equipment, net 34,864 35,343 35,223 Identifiable intangibles 28,297 3,166 2,894 Goodwill 124,122 18,996 18,996 Interest receivable and other assets 139,613 117,624 114,848 --------------------------------------- Total Assets $5,191,093 $4,611,811 $4,737,268 ======================================= Liabilities: Deposits: Noninterest bearing $1,377,680 $1,272,278 $1,273,825 Interest bearing: Transaction 614,246 569,575 591,593 Savings 1,114,631 1,072,701 1,091,981 Time 726,283 590,875 626,220 --------------------------------------- Total deposits 3,832,840 3,505,429 3,583,619 Short-term borrowed funds 828,280 712,553 735,423 Debt financing and notes payable 40,354 21,429 21,429 Liability for interest, taxes and other expenses 50,002 42,605 38,188 --------------------------------------- Total Liabilities 4,751,476 4,282,016 4,378,659 --------------------------------------- Shareholders' Equity: Authorized - 150,000 shares of common stock Issued and outstanding: 32,593 at June 30, 2005 316,680 31,784 at June 30, 2004 221,896 31,640 at December 31, 2004 227,829 Deferred compensation 2,423 2,146 2,146 Accumulated other comprehensive income: Unrealized gain (loss) on securities available for sale, net 8,185 (1,416) 9,638 Retained earnings 112,329 107,169 118,996 --------------------------------------- Total Shareholders' Equity 439,617 329,795 358,609 --------------------------------------- Total Liabilities and Shareholders' Equity $5,191,093 $4,611,811 $4,737,268 ======================================= See accompanying notes to unaudited condensed consolidated financial statements. </TABLE> Page 4 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Interest Income: Loans $39,941 $33,403 $74,874 $67,425 Money market assets and funds sold 1 0 1 1 Investment securities available for sale Taxable 4,760 8,035 10,878 19,410 Tax-exempt 3,313 3,644 6,665 7,518 Investment securities held to maturity Taxable 7,264 3,833 14,553 4,600 Tax-exempt 6,177 4,356 11,788 8,728 ---------------------------------------------------- Total interest income 61,456 53,271 118,759 107,682 ---------------------------------------------------- Interest Expense: Transaction deposits 340 124 602 236 Savings deposits 970 992 1,834 2,102 Time deposits 4,144 1,878 7,375 3,808 Short-term borrowed funds 4,655 1,285 8,224 2,416 Federal Home Loan Bank advance 0 2 0 897 Notes payable 637 316 1,067 652 ---------------------------------------------------- Total interest expense 10,746 4,597 19,102 10,111 ---------------------------------------------------- Net Interest Income 50,710 48,674 99,657 97,571 ---------------------------------------------------- Provision for loan losses 300 750 600 1,500 ---------------------------------------------------- Net Interest Income After Provision For Loan Losses 50,410 47,924 99,057 96,071 ---------------------------------------------------- Noninterest Income: Service charges on deposit accounts 7,542 7,360 14,469 14,228 Merchant credit card 2,417 909 3,715 1,735 Debit card 811 638 1,509 1,187 Financial services commissions 339 360 619 547 Trust fees 309 258 583 508 Mortgage banking 67 131 167 263 Securities gains (losses) 0 395 (4,903) 2,183 Loss on extinguishment of debt 0 (390) 0 (2,204) Other 3,994 2,000 6,515 4,079 ---------------------------------------------------- Total Noninterest Income 15,479 11,661 22,674 22,526 ---------------------------------------------------- Noninterest Expense: Salaries and related benefits 13,624 13,332 26,784 26,858 Occupancy 3,230 2,944 6,181 5,892 Data processing 1,539 1,521 3,087 3,038 Equipment 1,313 1,273 2,544 2,435 Amortization of intangibles 1,092 136 1,497 272 Courier service 964 888 1,890 1,772 Professional fees 604 511 1,324 921 Other 4,391 4,385 8,591 8,794 ---------------------------------------------------- Total Noninterest Expense 26,757 24,990 51,898 49,982 ---------------------------------------------------- Income Before Income Taxes 39,132 34,595 69,833 68,615 ---------------------------------------------------- Provision for income taxes 11,218 9,951 19,185 19,657 ---------------------------------------------------- Net Income $27,914 $24,644 $50,648 $48,958 ==================================================== Comprehensive Income: Change in unrealized gain on securities available for sale, net 4,674 (22,629) (1,453) (14,607) ---------------------------------------------------- Comprehensive Income $32,588 $2,015 $49,195 $34,351 ==================================================== Average Shares Outstanding 32,759 31,760 32,393 31,906 Diluted Average Shares Outstanding 33,364 32,343 33,024 32,502 Per Share Data: Basic Earnings $0.85 $0.78 $1.56 $1.53 Diluted Earnings 0.84 0.76 1.53 1.51 Dividends Paid 0.30 0.28 0.60 0.54 See accompanying notes to unaudited condensed consolidated financial statements. </TABLE> Page 5 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (unaudited) <TABLE> <CAPTION> Accumulated Compre- Common Deferred hensive Retained Shares Stock Compensation Income Earnings Total ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2003 32,287 $218,461 $1,824 $13,191 $106,895 $340,371 Net income for the period 48,958 48,958 Stock issued for stock options 214 6,166 6,166 Stock option tax benefits 1,826 1,826 Restricted stock activity 16 467 322 789 Purchase and retirement of stock (733) (5,024) (31,399) (36,423) Dividends (17,285) (17,285) Unrealized gain on securities available for sale, net (14,607) (14,607) ------------------------------------------------------------------------------ Balance, June 30, 2004 31,784 $221,896 $2,146 ($1,416) $107,169 $329,795 ============================================================================== Balance, December 31, 2004 31,640 $227,829 $2,146 $9,638 $118,996 $358,609 Net income for the period 50,648 50,648 Stock issued and stock options assumed for acquisition of Redwood Empire Bancorp 1,639 89,538 89,538 Stock issued for stock options 156 4,700 4,700 Stock option tax benefits 1,293 1,293 Restricted stock activity 21 797 277 1,074 Purchase and retirement of stock (863) (7,477) (38,022) (45,499) Dividends (19,293) (19,293) Unrealized loss on securities available for sale, net (1,453) (1,453) ------------------------------------------------------------------------------ Balance, June 30, 2005 32,593 $316,680 $2,423 $8,185 $112,329 $439,617 ============================================================================== </TABLE> Page 6 See accompanying notes to unaudited condensed consolidated financial statements. WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) <TABLE> <CAPTION> For the six months ended June 30, 2005 2004 -------------------------- <S> <C> <C> Operating Activities: Net income $50,648 $48,958 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 2,067 1,917 Amortization of intangibles and other assets 2,414 1,148 Loan loss provision 600 1,500 Amortization of deferred net loan fees 23 21 (Increase) decrease in interest income receivable (617) 2,401 Increase in other assets (5,967) (4,391) Increase in income taxes payable 512 694 Increase (decrease) in interest expense payable 1,251 (462) (Decrease) increase in other liabilities (5,659) 3,115 Loss (gain) on sales of investment securities 4,903 (2,183) Loss on extinguishment of debt 0 2,204 Writedown of equipment 6 9 Gain on sale of real estate (1,331) 0 Gain on sales of other assets (800) 0 Originations of loans for resale (425) (3,562) Proceeds from sale of loans originated for resale 426 3,534 Net gain on sale of other real estate owned in satisfaction of debt 0 (231) -------------------------- Net Cash Provided by Operating Activities 48,051 54,672 -------------------------- Investing Activities: Net cash used in mergers and acquisitions (35,210) 0 Net repayments of loans 52,145 2,618 Purchases of investment securities available for sale 0 (76,027) Purchases of investment securities held to maturity (147,085) (494,486) Net (purchases)sales of FRB/FHLB stock (2,943) 6,331 Purchases of property, plant and equipment (793) (1,521) Proceeds from maturity of securities available for sale 67,386 243,046 Proceeds from maturity of securities held to maturity 67,990 56,558 Proceeds from sale of securities available for sale 196,109 199,185 Proceeds from sale of property and equipment 0 0 Proceeds from sale of real estate 1,752 0 Proceeds from sale of other real estate owned 0 321 -------------------------- Net Cash Provided (Used) by Investing Activities 199,351 (63,975) -------------------------- Financing Activities: Net (decrease) increase in deposits (120,760) 41,438 Net increase in short-term borrowings 5,459 121,906 Repayments to the Federal Home Loan Bank 0 (107,204) Repayments of notes payable (3,264) (3,214) Exercise of stock options 4,551 5,979 Repurchases/retirement of stock (45,499) (36,423) Dividends paid (19,293) (17,285) -------------------------- Net Cash (Used) Provided in Financing Activities (178,806) 5,197 -------------------------- Net Increase (Decrease) In Cash and Cash Equivalents 68,596 (4,106) -------------------------- Cash and Cash Equivalents at Beginning of Period 126,153 189,628 -------------------------- Cash and Cash Equivalents at End of Period $194,749 $185,522 ========================== Supplemental Disclosure of Noncash Activities: Loans transferred to other real estate owned $40 $0 Supplemental Disclosure of Cash Flow Activity: Unrealized loss on securities available for sale, net ($1,453) ($14,607) Interest paid for the period 20,962 9,649 Income tax payments for the period 18,788 18,850 Income tax benefit from stock option exercises 1,293 1,826 The acquisition of Redwood Empire Bancorp involved the following: Cash issued 57,128 -- Common stock issued 89,538 -- Liabilities assumed 504,901 -- Fair value of assets acquired, other than cash and cash equivalents (495,596) -- Core deposit intangible (16,600) -- Customer based intangible - merchant draft processing (10,300) -- Goodwill (107,153) -- Net cash and cash equivalent received 21,919 -- See accompanying notes to unaudited condensed consolidated financial statements. </TABLE> Page 7 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, 2005 and 2004 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, 2004. Note 2: Significant Accounting Policies. Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments. These estimates and judgments may affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. The most significant of these involve the Allowance for Loan 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, 2004. Note 3: Goodwill and Other 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 six months ended June 30, 2005. 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 second quarter of 2005, no such adjustments were recorded. In connection with the acquisition of Redwood Empire Bancorp ("REBC") in the first quarter of 2005, the Company recorded goodwill and identifiable intangibles of $109 million and $27 million, respectively, in accordance with the purchase method of accounting. The following table summarizes the Company's goodwill and identifiable intangible assets, as of January 1 and June 30 for 2005 and 2004 (dollars in thousands). In the second quarter of 2005 goodwill relating to the REBC acquisition was reduced by $3,381, of which $2,027 represents the premium received on the required divestiture of a former REBC branch office in Lake County. The balance of the adjustment related to stock options issued in connection with the acquisition. <TABLE> <CAPTION> At At January 1, June 30, 2005 Additions Reductions 2005 ---------------------------------------------------- <S> <C> <C> <C> <C> Goodwill $22,968 $108,507 ($3,381) $128,094 Accumulated Amortization (3,972) 0 0 (3,972) ---------------------------------------------------- Net $18,996 $108,507 ($3,381) $124,122 ==================================================== Core Deposit Intangibles $7,783 $16,600 $0 $24,383 Accumulated Amortization (4,889) 0 (880) (5,769) Merchant Draft Processing Intangible 0 10,300 0 10,300 Accumulated Amortization 0 0 (617) (617) ---------------------------------------------------- Net $2,894 $26,900 ($1,497) $28,297 ==================================================== At At January 1, June 30, 2004 Additions Reductions 2004 ---------------------------------------------------- Goodwill $22,968 $0 $0 $22,968 Accumulated Amortization (3,972) 0 0 (3,972) ---------------------------------------------------- Net $18,996 $0 $0 $18,996 ==================================================== Core Deposit Intangibles $7,783 $0 $0 $7,783 Accumulated Amortization (4,345) 0 (272) (4,617) ---------------------------------------------------- Net $3,438 $0 ($272) $3,166 ==================================================== </TABLE> At June 30, 2005, the estimated aggregate amortization of core deposit intangibles, in thousands of dollars, for the remainder of 2005 and annually through 2010 is $1,199, $2,279, $2,153, $2,021, $1,859, and $1,638, respectively. The weighted average amortization period for core deposit intangibles is 13.06 years. At June 30, 2005, the estimated aggregate amortization of merchant draft processing intangible, in thousands of dollars, for the remainder of 2005 and annually through 2010 is $924, $1,808, $1,500, $1,200, $962, and $774, respectively. The amortization period for merchant draft processing intangibles is 12.67 years. Page 8 Note 4: Stock Options As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation", the Company accounts for its stock option plans using the intrinsic value method. Accordingly, compensation expense is recorded on the grant date only if the current price of the underlying stock exceeds the exercise price of the option. Had compensation cost been determined based on the fair value method established by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> For the three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> Compensation cost based on fair value method, net of tax effect $487 $526 $974 $1,052 Net income: As reported $27,914 $24,644 $50,648 $48,958 Pro forma $27,427 $24,118 $49,674 $47,906 Basic earnings per share: As reported $0.85 $0.78 $1.56 $1.53 Pro forma 0.84 0.76 1.53 1.50 Diluted earnings per share: As reported $0.84 $0.76 $1.53 $1.51 Pro forma 0.82 0.75 1.50 1.47 </TABLE> SFAS 123 was revised in December, 2004 to require that, effective for periods beginning after June 15, 2005, the Company begin using the fair market value method for valuing and accounting for stock options. On April 14, 2005 the Securities and Exchange Commission announced the adoption of a new rule that amends the compliance dates and allows companies to implement Statement No. 123R at the beginning of their next fiscal year. The Company expects to apply the new requirements in 2006 on a modified retrospective basis, in which prior period financial statements will be adjusted to give effect to the fair-value-based method consistent with the above pro-forma amounts. Management expects that the effect of implementation will be to increase annual compensation expense in 2005 by approximately $3.4 million and decrease annual net income by approximately $2.0 million. Note 5: Post Retirement Benefits The Company uses an actuarial-based accrual method of accounting for post-retirement benefits. The Company offers a continuation of group insurance coverage to employees electing early retirement until age 65. The Company pays a portion of these early retirees' insurance premium which are determined at their date of retirement. In 2004, the Company started to reimburse 50 percent of Medicare Part B premiums for all retirees and spouses over 65. In accordance with SFAS No.132 "Employers' Disclosures about Pensions and Other Post-Retirement Benefits", the Company provides the following interim disclosure related to its post-retirement benefit plan. The following table sets forth the net periodic post retirement benefit costs for the six months ended June 30. <TABLE> <CAPTION> For the six months ended June 30, -------------------------- 2005 2004 -------------------------- (In thousands) <S> <C> <C> Service cost $139 $95 Interest cost 105 98 Amortization of unrecognized transition obligation 31 31 -------------------------- Net periodic cost $275 $224 ========================== The Company does not contribute to any post-retirement benefit plans. </TABLE> Page 9 WESTAMERICA BANCORPORATION Financial Summary (In thousands, except per share data) <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Net Interest Income (FTE)** $57,023 $54,271 $112,043 $108,877 Provision for Loan Losses (300) (750) (600) (1,500) Noninterest Income: Securities gains (losses) 0 395 (4,903) 2,183 Loss on extinguishment of debt 0 (390) 0 (2,204) Deposit service charges and other 15,479 11,656 27,577 22,547 Total noninterest income 15,479 11,661 22,674 22,526 Noninterest Expense (26,757) (24,990) (51,898) (49,982) Provision for income taxes (FTE)** (17,531) (15,548) (31,571) (30,963) ---------------------------------------------------- Net Income $27,914 $24,644 $50,648 $48,958 ==================================================== Average Shares Outstanding 32,759 31,760 32,393 31,906 Diluted Average Shares Outstanding 33,364 32,343 33,024 32,502 Shares Outstanding at Period End 32,593 31,784 32,593 31,784 As Reported: Basic Earnings Per Share $0.85 $0.78 $1.56 $1.53 Diluted Earnings Per Share $0.84 $0.76 $1.53 $1.51 Return On Assets 2.17% 2.21% 2.04% 2.20% Return On Equity 25.99% 31.11% 25.39% 30.82% Net Interest Margin (FTE)** 4.84% 5.21% 4.87% 5.24% Net Loan (Recoveries) Losses to Average Loans 0.04% 0.11% 0.01% 0.13% Efficiency Ratio* 36.9% 37.9% 38.5% 38.0% Average Balances: Total Assets $5,170,029 $4,482,261 $5,017,331 $4,466,967 Earning Assets 4,719,635 4,177,358 4,619,282 4,167,210 Total Gross Loans 2,670,663 2,268,989 2,522,686 2,275,444 Total Deposits 3,906,875 3,489,250 3,811,714 3,463,399 Shareholders' Equity 430,796 318,560 402,212 319,475 Balances at Period End: Total Assets $5,191,093 $4,611,811 Earning Assets 4,743,636 4,311,562 Total Gross Loans 2,687,566 2,319,255 Total Deposits 3,832,840 3,505,429 Shareholders' Equity 439,617 329,795 Financial Ratios at Period End: Allowance for Loan Losses to Loans 2.23% 2.33% Book Value Per Share $13.49 $10.38 Equity to Assets 8.47% 7.15% Total Capital to Risk Adjusted Assets 10.37% 11.78% Dividends Paid Per Share $0.30 $0.28 $0.60 $0.54 Dividend Payout Ratio 36% 37% 39% 36% The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read in conjunction with those statements, notes and the other information included elsewhere herein. *The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on a tax-equivalent basis and noninterest income). **Fully taxable equivalent </TABLE> Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Westamerica Bancorporation and subsidiaries (the "Company") reported second quarter 2005 net income of $27.9 million or $.84 diluted earnings per share. These results compare to net income of $24.6 million or $0.76 per share for the same period of 2004. On a year-to-date basis, the Company reported net income for the six months ended June 30, 2005 of $50.6 million or diluted earnings per share of $1.53, compared with $49.0 million or $1.51 per share for the same period of 2004. The second quarter of 2005 represents the first full quarter of operations following the March 1, 2005 acquisition of Redwood Empire Bancorp ("REBC"). The acquisition contributed to higher noninterest income including $1.5 million in revenue from the acquired REBC's merchant card processing unit. The second quarter of 2005 noninterest income also included a $1.3 million gain on sale of real estate. During the second quarter of 2005, the Company sold a branch in Lake County with approximately $34 million in deposits, as required by the Federal Reserve in connection with its approval of the REBC acquisition. A premium of $2.0 million on the sale of the branch was recorded as a reduction of goodwill associated with the purchase of REBC. Following is a summary of the components of net income for the periods indicated (dollars in thousands): <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Net interest income (FTE) $57,023 $54,271 $112,043 $108,877 Provision for loan losses (300) (750) (600) (1,500) Noninterest income 15,479 11,661 22,674 22,526 Noninterest expense (26,757) (24,990) (51,898) (49,982) Provision for income taxes (FTE) (17,531) (15,548) (31,571) (30,963) ---------------------------------------------------- Net income $27,914 $24,644 $50,648 $48,958 ==================================================== Average diluted shares 33,364 32,343 33,024 32,502 Diluted earnings per share $0.84 $0.76 $1.53 $1.51 Average total assets 5,170,029 4,482,261 5,017,331 4,466,967 Net income (annualized) to average total assets 2.17% 2.21% 2.04% 2.20% </TABLE> Net income for the second quarter of 2005 was $3.3 million or 13.3% more than the same quarter of 2004, primarily attributable to growth in net interest income (FTE) and higher noninterest income, partially offset by increases in noninterest expense and higher income taxes. The increase in net interest income (FTE) (up $2.8 million or 5.1%) was the net result of growth of average interest-earning assets largely due to the REBC acquisition and higher yields on those assets, partially reduced by higher funding costs and lower loan fee income. The loan loss provision decreased $450 thousand or 60.0% from a year ago, reflecting Management's assessment of credit risk for the loan portfolio. Noninterest income increased $3.8 million or 32.7% mainly due to $1.5 million in income from the REBC's merchant credit card unit, a $1.3 million gain on sale of real estate and growth in deposit fee income. Noninterest expense increased $1.8 million or 7.1% largely due to an increase in amortization of intangibles related to the REBC acquisition. The provision for income taxes (FTE) increased $2.0 million or 12.8% primarily due to higher profitability. Comparing the first six months of 2005 to the prior year, net income increased $1.7 million or 3.5%, mostly due to higher net interest income (FTE) and lower loan loss provision, partly offset by losses on sales of securities, increases in noninterest expense and an increased tax provision. The higher net interest income (FTE) was mainly caused by growth of average interest-earning assets from the REBC acquisition, partially offset by lower yields, the effect of one less accrual day and higher funding costs. The loan loss provision decreased $900 thousand or 60.0% to reflect Management's view on credit risk. Noninterest expense rose $1.9 million or 3.8% mainly due to an increase in amortization of intangibles. The income tax provision (FTE) increased $608 thousand or 2.0% primarily due to higher profitability. Page 11 Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands): <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Interest and fee income $61,456 $53,271 $118,759 $107,682 Interest expense (10,746) (4,597) (19,102) (10,111) FTE adjustment 6,313 5,597 12,386 11,306 ---------------------------------------------------- Net interest income (FTE) $57,023 $54,271 $112,043 $108,877 ==================================================== Average earning assets $4,719,635 $4,177,358 $4,619,282 $4,167,210 Net interest margin (FTE) 4.84% 5.21% 4.87% 5.24% </TABLE> The Company's primary source of revenue is net interest income, or the difference between interest income earned on loans and investments and interest expense paid on interest-bearing deposits and borrowings. Net interest income (FTE) increased during the second quarter of 2005 by $2.8 million or 5.1% from the same period in 2004 to $57.0 million, mainly due to growth of average earning assets (up $542 million), primarily due to the REBC acquisition, and higher yields on those assets (up 12 basis points "bp"), partially offset by higher rates paid on interest-bearing liabilities (up 66 bp), a higher volume of those liabilities (up $436 million), also primarily due to the REBC acquisition, and lower loans fees (down $259 thousand). Comparing the first six months of 2005 with the same period of 2004, net interest income (FTE) increased $3.2 million or 2.9%, primarily due to higher average earning assets including the acquisition (up $452 million), partially offset by lower yields on those assets (down 2 bp), the $363 thousand effect of one less accrual day, higher rates paid on interest-bearing liabilities (up 49 bp) and a higher volume of those liabilities (up $344 million). Interest and Fee Income Interest and fee income (FTE) for the second quarter of 2005, including revenue from the earning assets acquired from REBC, rose $8.9 million or 15.1% from the same period in 2004. The increase was caused by higher average earning assets (up $542 million), mostly due to the REBC acquisition, and higher yields on average earning assets (up 12 bp), partially offset by lower loan fees (down $259 thousand). The average earning asset increase of $542 million for the second quarter of 2005 compared to the same period in 2004 was substantially attributable to a $402 million increase in the loan portfolio. Growth in commercial real estate loans (up $178 million), residential real estate loans (up $135 million), commercial loans (up $58 million) and construction loans (up $43 million) were partially offset by a $20 million decline in indirect consumer loans. Average total investments grew $141 million for the second quarter of 2005 compared with the same period in 2004 primarily due to increases in municipal securities (up $168 million) and mortgage backed securities and collateralized mortgage obligations (up $129 million), reduced by declines in U.S. government sponsored entity obligations (down $127 million) and preferred stock & corporate securities (down $29 million). The average yield on the Company's earning assets, excluding loan fee income, increased from 5.59% in the second quarter of 2004 to 5.71% in the same period in 2005 (up 12 bp). The composite yield on loans, excluding loan fees, rose 11 bp to 6.14%. Increases in commercial loans (up 87 bp) and personal credit lines (up 137 bp) were partially offset by declines in yields on commercial real estate loans (down 31 bp) and indirect consumer loans (down 50 bp). The investment portfolio yield increased 11 bp to 5.16%, mainly caused by increases in the yield on preferred stock & corporate securities (up 85 bp) and mortgage backed securities and collateralized mortgage obligations (up 15 bp), partially offset by a 39 bp decline in municipal securities. Comparing the first two quarters of 2005 with the corresponding period a year ago, interest and fee income (FTE) was up $3.2 million or 2.9%. The increase largely resulted from a higher volume of earning assets, partially offset by lower yields on those assets and the effect of one less accrual day. Average earning assets increased $452 million or 10.8% for the first half of 2005 compared with the same period of 2004, due to loan growth from the REBC acquisition and an increase in investments. The loan portfolio grew $247 million, the net result of increases in commercial real estate loans (up $91 million), residential real estate loans (up $105 million), commercial loans (up $38 million), construction loans (up $25 million), and a $17 million decline in indirect consumer loans. Investments rose $205 million due to growth in municipal securities (up 140 million) and mortgage backed securities and collateralized mortgage obligations (up $161 million), partially offset by decreases in preferred stock & corporate securities (down $40 million) and U.S. government sponsored entity obligations (down $57 million). The average yield on earning assets excluding loan fees for the first half of 2005 was 5.66% compared with 5.68% in the corresponding period of 2004. The investment portfolio yield fell by 6 bp. The decrease resulted mostly from lower yields on municipal securities (down 40 bp) and U.S. government sponsored entity obligations (down 9 bp), net of increases in mortgage backed securities and collateralized mortgage obligations (up 20 bp) and preferred stock & corporate securities (up 23 bp). Page 12 The loan portfolio yield excluding loan fees for the first half of 2005 compared with the same period of 2004 was higher by 2 bp, due to increases in commercial loans (up 67 bp) and personal credit lines (up 121 bp), partially offset by lower yields on indirect consumer loans (down 59 bp) and commercial real estate loans (down 21 bp). Interest Expense Interest expense in the second quarter of 2005, including expense of liabilities acquired from REBC acquisition, increased $6.1 million or 133.8% compared with the same period in 2004. The increase was attributable to higher rates paid on the interest-bearing liabilities and growth in those liabilities. The average rate paid on interest-bearing liabilities increased from 0.64% in the second quarter of 2004 to 1.30% in the same quarter of 2005. Rates paid on most liabilities moved with general market conditions. The average rate on federal funds purchased rose 195 bp. The average long term debt rate increased 41 bp due to assumption of $23 million of REBC's subordinated debentures. Rates on deposits increased as well, including those on CDs over $100 thousand, which rose 125 bp; and on retail CDs, which went up by 60 bp. An 8 bp decline in money market saving accounts partially offset the increase. Interest-bearing liabilities grew $436 million or 15.2% for the second quarter of 2005 over the same period of 2004. Federal funds purchases increased $261 million. Long-term debt increased $18.9 million, the net result of assumption of REBC's debt and an annual principal repayment. Most categories of deposits grew including CDs over $100 thousand (up $108 million), retail CDs (up $34 million) and money market savings (up $55 million). These increases were partially reduced by a $130 million decline in other short-term borrowings. Comparing the first half of 2005 to the corresponding period of 2004, interest expense rose $9.0 million or 88.9%, due to higher rates paid on interest-bearing liabilities and growth of such liabilities. Rates paid on liabilities averaged 1.19% during the first six months of 2005 compared to 0.70% in the first six months of 2004. Rates on most interest-bearing liabilities moved up with the general trend in the market. Federal funds purchased rose 173 bp. Rates on most deposits were also higher: CDs over $100 thousand which rose 108 bp, retail CDs which increased by 52 bp, and regular savings which increased by 8 bp. A 14 bp decline in the average rate on money market savings accounts partially offset the increase. Interest-bearing liabilities grew $344.0 million or 12.0% over the first half of 2004. Federal funds purchased rose $207 million and long-term debt increased $12 million. CDs over $100 thousand, retail CDs and money market savings increased $87 million, $11 million and $57 million, respectively. These increases were partially offset by a $56 million decrease in other short-term borrowings and a $48 million decline in average FHLB advances due to prepayments. In all periods, the Company has attempted to continue increasing the balances of more profitable, lower-cost transaction accounts in order to minimize the cost of funds. Net Interest Margin (FTE) The following summarizes the components of the Company's net interest margin for the periods indicated: <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Yield on earning assets 5.75% 5.65% 5.70% 5.73% Rate paid on interest-bearing liabilities 1.30% 0.64% 1.19% 0.70% ---------------------------------------------------- Net interest spread 4.45% 5.01% 4.51% 5.03% Impact of all other net noninterest bearing funds 0.39% 0.20% 0.36% 0.21% ---------------------------------------------------- Net interest margin 4.84% 5.21% 4.87% 5.24% ==================================================== </TABLE> During the second quarter of 2005, the net interest margin declined 37 bp compared to the same period in 2004. Rates paid on interest-bearing liabilities climbed faster than yields on earning assets, resulting in a 56 bp decline in net interest spread. The decline in the net interest spread was partially mitigated by the higher value of noninterest bearing funding sources. While the average balance of these sources increased $12 million or 1.4%, their value increased 19 bp because of the higher market rates of interest at which they could be invested. The net interest margin in the first half of 2005 declined by 37 bp when compared with the same period of 2004. Earning asset yields declined 3 bp and the cost of interest-bearing liabilities rose by 49 bp, resulting in a 52 bp decrease in the interest spread. Noninterest bearing funding sources increased $30 million or 3.5%, their margin contribution increased by 15 bp. Page 13 Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amount of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate (dollars in thousands). <TABLE> <CAPTION> For the three months ended June 30, 2005 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $664 $1 0.60% Investment securities: Available for sale Taxable 444,661 4,760 4.28% Tax-exempt 266,299 4,873 7.32% Held to maturity Taxable 731,214 7,264 3.97% Tax-exempt 606,134 9,523 6.28% Loans: Commercial: Taxable 394,956 6,921 7.03% Tax-exempt 249,472 4,132 6.64% Commercial real estate 956,931 16,905 7.09% Real estate construction 80,254 1,446 7.23% Real estate residential 496,133 5,589 4.51% Consumer 492,917 6,355 5.17% -------------------------- Total loans 2,670,663 41,348 6.21% -------------------------- Total earning assets 4,719,635 67,769 5.75% Other assets 450,394 ------------- Total assets $5,170,029 ============= Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,387,984 $-- -- Savings and interest-bearing transaction 1,763,669 1,310 0.30% Time less than $100,000 307,118 1,542 2.01% Time $100,000 or more 448,104 2,602 2.33% -------------------------- Total interest-bearing deposits 2,518,891 5,454 0.87% Short-term borrowed funds 745,499 4,655 2.47% Federal Home Loan Bank advances 0 0 0.00% Debt financing and notes payable 40,377 637 6.31% -------------------------- Total interest-bearing liabilities 3,304,767 10,746 1.30% Other liabilities 46,482 Shareholders' equity 430,796 ------------- Total liabilities and shareholders' equity $5,170,029 ============= Net interest spread (1) 4.45% Net interest income and interest margin (2) $57,023 4.84% ========================== (1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets. </TABLE> Page 14 <TABLE> <CAPTION> For the three months ended June 30, 2004 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $915 $0 0.00% Investment securities: Available for sale Taxable 796,597 8,035 4.03% Tax-exempt 295,698 5,435 7.35% Held to maturity Taxable 404,542 3,833 3.79% Tax-exempt 410,617 6,794 6.62% Loans: Commercial: Taxable 352,119 4,778 5.46% Tax-exempt 234,780 3,958 6.78% Commercial real estate 779,408 14,709 7.59% Real estate construction 36,789 601 6.57% Real estate residential 361,069 3,996 4.43% Consumer 504,824 6,729 5.36% -------------------------- Total loans 2,268,989 34,771 6.16% -------------------------- Total earning assets 4,177,358 58,868 5.65% Other assets 304,903 ------------- Total assets $4,482,261 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,256,128 $-- -- Savings and interest-bearing transaction 1,619,797 1,116 0.28% Time less than $100,000 273,552 956 1.41% Time $100,000 or more 339,773 922 1.08% -------------------------- Total interest-bearing deposits 2,233,122 2,994 0.54% Short-term borrowed funds 614,065 1,285 0.83% Federal Home Loan Bank advances 0 2 N/A Debt financing and notes payable 21,428 316 5.90% -------------------------- Total interest-bearing liabilities 2,868,615 4,597 0.64% Other liabilities 38,958 Shareholders' equity 318,560 ------------- Total liabilities and shareholders' equity $4,482,261 ============= Net interest spread (1) 5.01% Net interest income and interest margin (2) $54,271 5.21% ========================== (1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets. </TABLE> Page 15 <TABLE> <CAPTION> For the six months ended June 30, 2005 --------------------------------------- Interest Rates Average income/ earned/ Balance expense paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $686 $1 0.29% Investment securities: Available for sale Taxable 514,031 10,878 4.23% Tax-exempt 268,344 9,822 7.32% Held to maturity Taxable 735,800 14,553 3.96% Tax-exempt 577,735 18,207 6.30% Loans: Commercial: Taxable 372,063 12,622 6.84% Tax-exempt 248,513 8,232 6.68% Commercial real estate 883,369 31,659 7.23% Real estate construction 62,995 2,256 7.22% Real estate residential 458,928 10,195 4.44% Consumer 496,818 12,720 5.16% -------------------------- Total loans 2,522,686 77,684 6.20% -------------------------- Total earning assets 4,619,282 131,145 5.70% Other assets 398,049 ------------- Total assets $5,017,331 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,351,234 $-- -- Savings and interest-bearing transaction 1,744,122 2,436 0.28% Time less than $100,000 289,290 2,780 1.94% Time $100,000 or more 427,068 4,595 2.17% -------------------------- Total interest-bearing deposits 2,460,480 9,811 0.80% Short-term borrowed funds 724,483 8,224 2.26% Federal Home Loan Bank advances 0 0 0.00% Debt financing and notes payable 33,629 1,067 6.35% -------------------------- Total interest-bearing liabilities 3,218,592 19,102 1.19% Other liabilities 45,293 Shareholders' equity 402,212 ------------- Total liabilities and shareholders' equity $5,017,331 ============= Net interest spread (1) 4.51% Net interest income and interest margin (2) $112,043 4.87% ========================== (1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets. </TABLE> Page 16 <TABLE> <CAPTION> For the six months ended June 30, 2004 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid Assets: --------------------------------------- <S> <C> <C> <C> Money market assets and funds sold $792 $1 0.25% Investment securities: Available for sale Taxable 922,406 19,410 4.21% Tax-exempt 302,290 11,215 7.42% Held to maturity Taxable 257,345 4,600 3.57% Tax-exempt 408,933 13,603 6.65% Loans: Commercial Taxable 348,940 9,603 5.53% Tax-exempt 233,181 7,927 6.84% Commercial real estate 792,414 29,565 7.50% Real estate construction 37,778 1,286 6.85% Real estate residential 353,975 7,976 4.51% Consumer 509,156 13,802 5.45% -------------------------- Total loans 2,275,444 70,159 6.20% -------------------------- Total earning assets 4,167,210 118,988 5.73% Other assets 299,757 ------------- Total assets $4,466,967 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,232,714 $-- -- Savings and interest-bearing transaction 1,612,498 2,338 0.29% Time less than $100,000 278,099 1,959 1.42% Time $100,000 or more 340,088 1,849 1.09% -------------------------- Total interest-bearing deposits 2,230,685 6,146 0.55% Short-term borrowed funds 573,612 2,416 0.84% Federal Home Loan Bank advance 48,306 898 3.67% Debt financing and notes payable 21,983 651 5.93% -------------------------- Total interest-bearing liabilities 2,874,586 10,111 0.70% Other liabilities 40,192 Shareholders' equity 319,475 ------------- Total liabilities and shareholders' equity $4,466,967 ============= Net interest spread (1) 5.03% Net interest income and interest margin (2) $108,877 5.24% ========================== (1) Net interest spread represents the average yield earned on earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense (annualized), divided by the average balance of earning assets. </TABLE> Page 17 Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands). <TABLE> <CAPTION> Three months ended June 30, 2005 compared with three months ended June 30, 2004 --------------------------------------- Volume Rate Total --------------------------------------- <S> <C> <C> <C> Interest and fee income: Money market assets and funds sold $0 $1 $1 Investment securities: Available for sale Taxable (3,723) 448 (3,275) Tax-exempt (538) (24) (562) Held to maturity Taxable 3,247 184 3,431 Tax-exempt 3,085 (356) 2,729 Loans: Commercial: Taxable 635 1,508 2,143 Tax-exempt 253 (79) 174 Commercial real estate 3,216 (1,020) 2,196 Real estate construction 779 66 845 Real estate residential 1,520 73 1,593 Consumer (149) (225) (374) --------------------------------------- Total loans 6,254 323 6,577 --------------------------------------- Total earning assets 8,325 576 8,901 --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 105 89 194 Time less than $100,000 129 457 586 Time $100,000 or more 368 1,312 1,680 --------------------------------------- Total interest-bearing deposits 602 1,858 2,460 --------------------------------------- Short-term borrowed funds 329 3,041 3,370 Federal Home Loan Bank advances 0 (2) (2) Debt financing and notes payable 298 23 321 --------------------------------------- Total interest-bearing liabilities 1,229 4,920 6,149 --------------------------------------- Increase (decrease) in Net Interest Income $7,096 ($4,344) $2,752 ======================================= </TABLE> Page 18 <TABLE> <CAPTION> Six months ended June 30, 2005 compared with six months ended June 30, 2004 --------------------------------------- Volume Rate Total --------------------------------------- <S> <C> <C> <C> Interest and fee income: Money market assets and funds sold $0 $0 $0 Investment securities: Available for sale Taxable (8,695) 163 ($8,532) Tax-exempt (1,250) (143) ($1,393) Held to maturity Taxable 9,397 556 $9,953 Tax-exempt 5,333 (729) $4,604 Loans: Commercial: Taxable 612 2,407 $3,019 Tax-exempt 483 (178) $305 Commercial real estate 3,187 (1,093) $2,094 Real estate construction 896 74 $970 Real estate residential 2,329 (110) $2,219 Consumer (387) (695) ($1,082) --------------------------------------- Total loans 7,120 405 7,525 --------------------------------------- Total earning assets 11,905 252 12,157 --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 177 (79) $98 Time less than $100,000 68 753 $821 Time $100,000 or more 552 2,194 $2,746 --------------------------------------- Total interest-bearing deposits 797 2,868 3,665 --------------------------------------- Short-term borrowed funds 749 5,059 $5,808 Federal Home Loan Bank advances 0 (898) ($898) Debt financing and notes payable 364 52 $416 --------------------------------------- Total interest-bearing liabilities 1,910 7,081 8,991 --------------------------------------- Increase (decrease) in Net Interest Income $9,995 ($6,829) $3,166 ======================================= </TABLE> Page 19 Provision for Loan Losses The level of the provision for loan losses during each of the periods presented reflects the Company's continued efforts to manage credit costs by enforcing underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The Company provided $300 thousand for loan losses in the second quarter of 2005, compared with $750 thousand in the second quarter of 2004. For the first six months of 2005 and 2004, $600 thousand and $1.5 million were provided in each respective period. Additionally, $5.2 million of allowance was acquired from REBC in the first quarter of 2005. The provision reflects management's assessment of credit risk in the loan portfolio for each of the periods presented. For further information regarding net credit losses and the allowance for loan losses, see the "Classified Loans" section of this report. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands). <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Service charges on deposit accounts $7,542 $7,360 $14,469 $14,228 Merchant credit card fees 2,417 909 3,715 1,735 ATM fees and interchange 709 643 1,333 1,226 Debit card fees 811 638 1,509 1,187 Other service fees 429 463 834 856 Financial services commissions 339 360 619 547 Trust fees 309 258 583 508 Official check sales income 267 137 492 264 Mortgage banking income 67 131 167 263 Gains on sale of foreclosed property 0 8 0 231 Securities gains (losses) 0 395 (4,903) 2,183 Loss on extinguishment of debt 0 (390) 0 (2,204) Gain on sale of real estate 1,331 0 1,331 0 Other noninterest income 1,258 749 2,525 1,502 ---------------------------------------------------- Total $15,479 $11,661 $22,674 $22,526 ==================================================== </TABLE> Noninterest income for the second quarter of 2005 increased by $3.8 million or 32.7% from the same period in 2004. The increase was primarily due to a $1.5 million increase in merchant credit card fees due to the acquisition of REBC's merchant card processing unit and a $1.3 million gain on sale of real estate. Service charges on deposits increased $182 thousand mainly due to a $391 thousand increase in overdraft fees as a result of repricing in February of 2005 and the increased customer base due to the acquisition, partially offset by a $258 thousand decrease in account analysis deficit fees. Debit card fees increased $173 thousand or 27.1% due to increased usage and the higher customer base. Official check sales income increased $130 thousand or 94.9% due to the higher earnings credit rate received on outstanding items. The second quarter of 2004 included a $395 thousand gain on sale of securities and a $390 thousand loss on the extinguishment of $20 million of FHLB advances. Other noninterest income increased $509 thousand or 68.0% mostly due to a $399 thousand gain on sales of other assets. In the first half of 2005, noninterest income increased $148 thousand or 0.7% compared with the same period of the previous year. Service charges on deposits increased $241 thousand or 1.7% mainly due to a $959 thousand increase in overdraft fees as a result of repricing in February of 2005, partially offset by a $701 thousand decrease in account analysis deficit fees. Merchant credit card fees increased $2.0 million or 114.1% attributable to the acquisition of REBC's merchant card processing unit. ATM fees and interchange income rose by $107 thousand or 8.7% due to repricing in February of 2005 and increased usage. A $322 thousand or 27.1% increase in debit card fee income was primarily due to increased usage. Official check sales income increased $228 thousand or 86.4% due to the higher earnings credit rate. The prior year benefited from $231 thousand in gains on foreclosed property. The 2005 period included $4.9 million in losses on sales of securities recorded in connection with management of the Company's interest risk position reflecting the REBC acquisition. The first half of 2004 benefited from $2.2 million in gains on sales of securities which offset the $2.2 million in losses on extinguishment of debt which was incurred as a result of prepayment of $105 million in FHLB advances. The first half of 2005 included a $1.3 million gain on sale of real estate. Other noninterest income increased $1.0 million or 68.1% primarily due to a $800 gain on sale of other assets and higher letter-of-credit fee income. Page 20 Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Salaries and related benefits $13,624 $13,332 $26,784 $26,858 Occupancy 3,230 2,944 6,181 5,892 Data processing services 1,539 1,521 3,087 3,038 Equipment 1,313 1,273 2,544 2,435 Courier service 964 888 1,890 1,772 Telephone 553 535 1,081 1,107 Professional fees 604 511 1,324 921 Postage 376 364 797 758 Stationery and supplies 304 309 652 597 Loan expense 232 295 436 550 Advertising/public relations 275 290 481 505 Merchant credit card 263 268 520 541 Correspondent Service Charges 264 239 514 478 Operational losses 200 238 390 481 Amortization of deposit intangibles 1,092 136 1,497 272 Other noninterest expense 1,924 1,847 3,720 3,777 ---------------------------------------------------- Total $26,757 $24,990 $51,898 $49,982 ==================================================== Average full time equivalent staff 974 995 969 998 Noninterest expense to revenues (FTE) 36.91% 37.90% 38.52% 38.04% </TABLE> Noninterest expense increased $1.8 million or 7.1% in the second quarter of 2005 compared to the same period in 2004. Salaries and related benefits increased $292 thousand or 2.2%, primarily the net result of a $300 thousand increase in salary and wages, a $184 thousand decrease in incentives and bonuses, and increases in group insurance and retirement plan expenses. The increase in regular salaries was attributable to payment to non-continuing REBC employees and annual merit increases to continuing staff, partially offset by the effect of a smaller workforce. Occupancy expense was higher by $286 thousand or 9.7% primarily due to a $134 thousand increase in rental of bank premises, net of income from subleased spaces. The increase in rent was the net result of a $232 thousand in additional rent payments for the REBC offices and annual increases for other locations, partially offset by savings from branch consolidation and relocations. A $956 thousand increase in amortization of identifiable intangibles was attributable to the acquisition. In the first six months of 2005, noninterest expense rose $1.9 million or 3.8% compared with the corresponding period of 2004. Occupancy expense increased $289 thousand or 4.9% due to moving expenses, higher rent, net of sublease income, increases in depreciation, real estate taxes and miscellaneous occupancy expenses. Equipment expense increased $109 thousand or 4.5% mainly due to higher depreciation. Courier service expense rose by $118 thousand 6.7%. Professional fees increased $403 thousand or 43.8% due to a $343 thousand increase in audit and accounting costs primarily due to additional charges from the Company's independent auditor in connection with new audit requirements promulgated by the Public Company Accounting Oversight Board and increased legal fees for the acquisition. A $1.2 million increase in amortization of identifiable intangibles was attributable to the REBC acquisition. These increases were reduced by a $114 thousand or 20.7% decline in loan expense due to lower activity. Provision for Income Tax During the second quarter of 2005, the Company recorded income tax expense (FTE) of $17.5 million, $2.0 million or 12.8% higher than the second quarter of 2004. The current quarter provision represents an effective tax rate of 38.6%, compared to 38.7% for the second quarter of 2004. On a year-to-date basis, the income tax provision (FTE) was $31.6 million for 2005 compared with $31.0 million for 2004. The effective tax rate of 38.4% for the first half of 2005 is lower than the 38.7% for the same period of 2004. The lower tax rates in 2005 are due to benefits realized from additional investments in low income housing projects and other tax-favored assets. Classified Loans The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk and to increase diversification of earning assets. Loan reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Loans receiving lesser grades fall under the "classified" category, which includes all nonperforming and potential problem loans, and receive an elevated level of attention to ensure collection. Other real estate owned is recorded at the lower of cost or market. Page 21 The following is a summary of classified loans and other real estate owned on the dates indicated (dollars in thousands): <TABLE> <CAPTION> At June 30, At --------------------------December 31, 2005 2004 2004 --------------------------------------- <S> <C> <C> <C> Classified loans $37,615 $21,495 $19,225 Other real estate owned 40 0 0 --------------------------------------- Classified loans and other real estate owned $37,655 $21,495 $19,225 ======================================= Allowance for loan losses / classified loans 159% 251% 282% </TABLE> Classified loans at June 30, 2005, increased $16.1 million or 75.0% from a year ago, primarily due to the classified loans totaling $16.1 million acquired from REBC. A $18.4 million or 95.7% increase in classified loans from December 31, 2004 was also largely due to the classified loans acquired from REBC and other normal activity. One property was added to other real estate owned in the second quarter of 2005. Nonperforming Loans Nonperforming loans include nonaccrual loans and loans 90 days past due as to principal or interest and still accruing. Loans are placed on nonaccrual status when they become 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified as "performing nonaccrual" and are included in total nonperforming assets. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Any subsequent interest received is recorded as interest income on a cash basis. The following is a summary of nonperforming loans and OREO on the dates indicated (dollars in thousands): <TABLE> <CAPTION> At June 30, At --------------------------December 31, 2005 2004 2004 --------------------------------------- <S> <C> <C> <C> Performing nonaccrual loans $6,072 $2,233 $4,071 Nonperforming, nonaccrual loans 1,560 4,695 2,970 --------------------------------------- Total nonaccrual loans 7,632 6,928 7,041 Loans 90 days past due and still accruing 84 202 10 --------------------------------------- Total nonperforming loans 7,716 7,130 7,051 Other real estate owned 40 0 0 --------------------------------------- Total $7,756 $7,130 $7,051 ======================================= Allowance for loan losses / nonperforming loans 776% 757% 768% </TABLE> Performing nonaccrual loans at June 30, 2005 increased $3.8 million or 171.9% and $2.0 million or 49.2% from a year ago and December 31, 2004, respectively, as a result of the $4.0 million performing nonaccrual loans acquired from REBC and new loans being placed on nonaccrual, less charge-offs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual. Nonperforming nonaccrual loans at June 30, 2005 decreased $3.1 million or 66.8% and $1.4 million or 47.5% from the previous year and December 31, 2004, respectively. The decrease was due to the net result of loans being returned to accrual status or being charged off or paid off, and others being added to nonperforming nonaccrual. Changes in other real estate owned are discussed above under "Classified Assets". The Company had no restructured loans as of June 30, 2005, June 30, 2004 and December 31, 2004. The amount of gross interest income that would have been recorded for nonaccrual loans for the three and six month periods ended June 30, 2005, if all such loans had performed in accordance with their original terms, was $150 thousand and $274 thousand, respectively, compared to $111 thousand and $231 thousand, respectively, for the second quarter and the first half of 2004. The amount of interest income that was recognized on nonaccrual loans from all cash payments, including those related to interest owed from prior years, made during the three and six months ended June 30, 2005, totaled $120 thousand and $285 thousand, respectively, compared to $102 thousand and $167 thousand, respectively, for the comparable periods in 2004. These cash payments represent annualized yields of 6.02% and 7.88%, respectively, for the second quarter and the first six months of 2005 compared to 5.98% and 4.78%, respectively, for the second quarter and the first half of 2004. Page 22 Total cash payments received during the second quarter of 2005 which were applied against the book balance of nonaccrual loans outstanding at June 30, 2005, totaled approximately $77 thousand. Cash payments received totaled $228 thousand for the six months ended June 30, 2005. Management believes the overall credit quality of the loan portfolio continues to be strong; however, nonperforming assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual loans will not occur in the future. Allowance for Loan Losses The Company's allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall loan loss experience, the amount of past due, nonperforming loans and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is specifically allocated to impaired and other identified loans whose full collectibility is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. A second allocation is based in part on quantitative analyses of historical loan loss experience, in which criticized and classified loan balances identified through an internal loan review process are analyzed using a linear regression model to determine standard loss rates. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines are analyzed based on the historical loss rates and delinquency trends, grouped by the number of days the payments on these loans are delinquent. Last, allocations are made to general loan categories based on commercial office vacancy rates, mortgage loan foreclosure trends, agriculture commodity prices, and levels of government funding. The remainder of the reserve is considered to be unallocated and is established at a level considered necessary based on relevant economic conditions and available data, including unemployment statistics, unidentified economic and business conditions; the quality of lending management and staff; credit quality trends; concentrations of credit; and changing underwriting standards due to external competitive factors. Management considers the $59.9 million allowance for loan losses, which is equivalent to 2.23% of total loans at June 30, 2005, to be adequate as a reserve against losses as of June 30, 2005. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands): <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Balance, beginning of period $59,859 $53,835 $54,152 $53,910 Loan loss provision 300 750 600 1,500 Allowance acquired through merger 0 0 5,213 0 Loans charged off (754) (1,324) (1,353) (2,882) Recoveries of previously charged off loans 457 688 1,250 1,421 ---------------------------------------------------- Net credit losses (297) (636) (103) (1,461) ---------------------------------------------------- Balance, end of period $59,862 $53,949 $59,862 $53,949 ==================================================== Allowance for loan losses / loans outstanding 2.23% 2.33% </TABLE> Asset and Liability Management The fundamental objective of the Company's management of assets and liabilities is to maximize economic value while maintaining adequate liquidity and a conservative level of interest rate risk. The Company actively solicits loans and transaction deposit accounts. Asset and liability management techniques include adjusting the duration, liquidity, volume, rates and yields, and other attributes of its loan products, investment securities, deposit products, and other funding sources to achieve company objectives. The primary analytical tool used by the Company to quantify interest rate risk is a simulation model to project changes in net interest income ("NII") that result from forecast changes in interest rates. This analysis calculated the difference between a NII forecast over a 12-month period using a stable interest rate scenario and a NII forecast using a rising or falling interest rate scenario with the Federal Funds rate serving as a "primary indicator." Based on economic conditions, interest rate levels, anticipated monetary policy and Management's judgment, at June 30, 2005, simulations were conducted with the Federal Funds rate rising by 200 basis points or declining by 100 basis points over the 12-month forecast interval triggering a response in the other rates. Company policy requires that such simulated changes in NII should be within certain specified ranges or steps must be taken to reduce interest rate risk. A variety of factors affect the timing and magnitude of interest rate changes such as general economic conditions, fiscal policy, monetary policy, political developments, terrorism, and a variety of other factors. Given current conditions, the Company is anticipating rising rates, although the timing and extent of increasing rates remains uncertain. The Company generally maintains an interest rate risk position near neutral, such that changing interest rates will not cause significant changes in net interest income. Page 23 Management reviewed its interest rate risk position late in the first quarter of 2005, taking into account the acquisition of Redwood Empire Bancorp. In Management's judgment, the Company's interest rate risk exposure would be reduced through the sale of investment securities available for sale, with the proceeds from sale applied to reduce short-term borrowed funds. During the first quarter 2005, the Company sold $170.0 million of investment securities available for sale with a duration of 3.2 years and book yield of 3.29% at a realized loss of $4.9 million. The following table summarizes the simulated change in NII (FTE), based on the 12-month period ending June 30, 2006 incorporating the acquisition of Redwood Empire Bancorp and the sale of investment securities described above: Simulated Changes to Net Interest Income <TABLE> <CAPTION> Estimated Increase (Decrease) in NII -------------------------- Twelve months ended June 30, 2006 Estimated Changes in Interest Rates (Basis Points) NII Amount Amount Percent --------------------------------------- --------------------------------------- (Dollars in millions) <S> <C> <C> <C> +200 $224.5 -$4.3 -1.9% --- 228.8 --- --- -100 229.5 0.7 0.3% </TABLE> During the first quarter 2004, the Company sold $144.8 million of available-for-sale securities to reduce the average duration of the securities portfolios in a rising rate environment. The Company realized securities gains of $1.8 million from these sales. Also, during the first quarter of 2004, the Company retired $85 million in FHLB advances with a weighted average interest rate of 3.63% in an effort to reduce its aggregate cost of funds. The majority of the retired FHLB advances had scheduled maturity dates prior to January 15, 2005, while others had scheduled maturity dates ranging from May to August 2005. Losses totaling $1.8 million were incurred during the first quarter of 2004 to retire the FHLB advances prior to their scheduled maturity dates. Liquidity The Company's principal source of asset liquidity is investment securities available for sale and principal payments from consumer loans. At June 30, 2005, investment securities available for sale totaled $692 million, representing a decrease of $240 million from December 31, 2004. The decrease is primarily attributable to the sale of $170 million of investment securities available for sale, as described above and principal payments. Additionally, during the six months ended June 30, 2005, principal payments from maturities, call, and paydowns from all investment securities totaled approximately $135 million. At June 30, 2005, indirect auto loans totaled $405.7 million, which were experiencing stable monthly principal payments of approximately $20 million. In addition, at June 30, 2005, the Company had customary lines for overnight borrowings from other financial institutions in excess of $700 million and a $35 million line of credit, under which $12.2 million was outstanding. Additionally, as a member of the Federal Reserve System, the Company has access to borrowing from the Federal Reserve. The Company's short-term debt rating from Fitch Ratings is F1. Management expects the Company can access short-term debt financing if desired. The Company's long-term debt rating from Fitch Ratings is A with a stable outlook. Management is confident the Company could access additional long-term debt financing if desired. The Company generates significant liquidity from its operating activities. The Company's profitability during the first six months of 2005 and 2004 contributed to substantial operating cash flows of $48.1 million and $54.7 million, respectively. In 2005, operating activities and retained earnings from prior years provided cash for $19.3 million in shareholder dividends, $3.3 million for repayment of long term debt and $45.5 million utilized to repurchase common stock. In 2004, operating activities provided a substantial portion of cash for $36.4 million of Company stock repurchases, $17.3 million in shareholder dividends and $3.2 million for repayment of long term debt. In the first six months of 2005, the Company's primary investment was the REBC acquisition. The Company paid cash of $35 million and issued 1.6 million shares of its common stock to REBC shareholders in exchange for $435 million loans, $47 million investment securities, $370 million deposits, a merchant card processing business, and other assets and liabilities. The Company expects the earnings stream generated from the acquired business relative to the consideration paid to be accretive to its diluted earnings per share. In the first six months of 2005, the Company also sold approximately $196 million in securities available for sale to manage its interest rate risk position in light of the REBC acquisition. The Company also divested approximately $34 million in deposits in a branch sale required by regulators in approving the REBC acquisition. In 2004, the Company's deposits and short-term borrowing increased $163 million, which was used to prepay $107 million FHLB advances and increase investment securities $72 million. The Company anticipates maintaining its cash levels in 2005 mainly through increased profitability and retained earnings. It is anticipated that loan demand will increase moderately during the remainder of 2005, although such demand will be dictated by economic conditions. The growth of deposit balances is expected to exceed the anticipated growth in loan demand through the end of 2005. Depending on economic conditions, interest rate levels, and a variety of other conditions, excess deposit growth may be used to purchase investment securities or to reduce short-term borrowings. However, due to concerns regarding uncertainty in the general economic environment, possible terrorist attacks and the war in Iraq, loan demand and levels of customer deposits are not certain. Shareholder dividends and share repurchases are expected to continue in 2005. Page 24 Westamerica Bancorporation ("the Parent Company") is separate and apart from Westamerica Bank ("the Bank") and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends to its shareholders, and interest and principal on outstanding debt. Substantially all of the Parent Company's revenues are obtained from subsidiary service fees and dividends. Payment of such dividends to the Parent Company by the Bank is limited under regulations for Federal Reserve member banks and California law. The amount that can be paid in any calendar year, without prior approval from federal and state regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends paid. The Company believes that such restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company repurchases shares of its common stock in the open market pursuant to stock repurchase plans approved by the Board with the intention of lessening the dilutive impact of issuing new shares under stock option plans, returning excess capital to shareholders, and other ongoing requirements. These programs have been implemented to optimize the Company's use of equity capital and enhance shareholder value. Pursuant to these programs, the Company collectively repurchased 863 thousand shares and 733 thousand shares in the first half of 2005 and 2004, respectively. The Company's capital position represents the level of capital available to support continued operations and expansion. The Company's primary capital resource is shareholders' equity, which was $439.6 million at June 31, 2005. This amount, which is reflective of the effect of proceeds of $89.5 million from the issuance of stock in connection of the REBC acquisition and the generation of earnings, offset by common stock repurchases and dividends paid to shareholders, represents an increase of $109.8 million or 33.3% from a year ago, and an increase of $81.0 million or 22.6% from December 31, 2004. Due to an increase in shareholders' equity, the Company's ratio of equity to total assets rose to 8.47% at June 30, 2005, from 7.15% a year ago and 7.57% on December 31, 2004. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: <TABLE> <CAPTION> At June 30, At Minimum --------------------------December 31, Regulatory 2005 2004 2004 Requirement ---------------------------------------------------- <S> <C> <C> <C> <C> Tier I Capital 9.04% 10.37% 11.09% 4.00% Total Capital 10.37% 11.78% 12.46% 8.00% Leverage ratio 5.96% 6.89% 7.06% 4.00% </TABLE> The risk-based capital ratios declined at June 30, 2005, compared with June 30 and December 31 of 2004, due to the REBC acquisition. The Company anticipated its capital requirements following the REBC acquisition. The increase in capital ratios from June 30, 2004 to December 31, 2004 reflects the Company's capital management in preparation for the REBC acquisition. Equity issued in the acquisition of $89.5 million was more than offset by the intangible assets that were recorded, thereby decreasing Tier I and Total Capital from December 31, 2004 to June 30, 2005. In addition, risk-weighted assets increased, resulting in lower capital ratios. Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's anticipated future needs. All ratios as shown in the table above are in excess of the regulatory definition of "well capitalized". Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors. Interest rate risk as discussed above is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange risk, equity price risk and commodity price risk, are not significant in the normal course of the Company's business activities. Item 4. Controls and Procedures The Company's principal executive officer and the person performing the functions of the Company's principal financial officer have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of June 30, 2005. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. The evaluation did not identify any change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings Due to the nature of the banking business, the Company's Subsidiary Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Subsidiary Bank. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) None (b) None (c) Issuer Purchases of Equity Securities The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended June 30, 2005 (in thousands, except per share data). <TABLE> <CAPTION> (c) (d) Total Maximum Number Number of Shares of Shares (b) Purchased that May (a) Average as Part of Yet Be Total Price Publicly Purchased Number of Paid Announced Under the Shares per Plans Plans or Period Purchased Share or Programs* Programs ---------------------------------------------------------------- <S> <C> <C> <C> <C> <C> April 1 through April 30 195 $49.75 195 1,188 May 1 through May 31 158 52.71 158 1,030 ---------------------------------------------------------------- June 1 through June 30 137 52.03 137 893 ---------------------------------------------------------------- Total 490 $51.34 490 893 ================================================================ </TABLE> * Includes 10, 10 and 3 shares purchased in April, May and June, respectively, by the Company in private transactions with the independent administrator of the Company's Tax Deferred Savings/Retirement Plan (ESOP). The Company includes the shares purchased in such transactions within the total number of shares authorized for purchase pursuant to the currently existing publicly announced program. The Company repurchases shares of its common stock in the open market to optimize the Company's use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements. Shares were repurchased during the second quarter of 2005 pursuant to a program approved by the Board of Directors on August 27, 2004 authorizing the purchase of up to 2,000,000 shares of the Company's common stock from time to time prior to September 1, 2005. The 2004 approved amount included 645,429 remaining shares available to be repurchased under the 2003 plan. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders Proxies for the Annual Meeting of shareholders held on April 28, 2005, were solicited pursuant Regulation 14A of the Securities Exchange Act of 1934. The Report of Inspector of election indicates that 27,136,885 shares of the Common Stock of the Company, out of 31,515,786 shares outstanding on February 28, 2005 the record date, were present, in person or by proxy, at the meeting. There were no "broker non-votes" because the election because the election of directors is considered "routine" under applicable exchange rules and therefore, on this matter, brokers were able to vote shares for which no direction was provided by the beneficial owner. The following matter was submitted to a vote of the shareholders: Page 26 1. - Election of directors: For Withheld ----- -------- Etta Allen 26,299,315 837,569 Louis E. Bartolini 26,295,829 841,056 E.J. Bowler 26,453,581 683,303 Arthur C. Latno, Jr. 25,816,007 1,320,878 Patrick D. Lynch 25,771,913 1,364,971 Catherine C. MacMillan 26,317,245 819,640 Ronald A. Nelson 26,462,075 674,810 Carl R. Otto 26,316,139 820,746 David L. Payne 26,428,061 708,824 Edward B. Sylvester 26,409,303 727,582 Shareholders were to cast their vote for or to withhold their vote. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11: Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution 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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2: Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 27 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WESTAMERICA BANCORPORATION (Registrant) August 9, 2005 /s/ DENNIS R. HANSEN - -------------- -------------------- Date Dennis R. Hansen Senior Vice President and Controller (Chief Accounting Officer)