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 September 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ] Title of Class Shares Outstanding as of October 31, 2005 Common Stock, 32,099,571 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 8 Financial Summary 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 25 Item 4 - Controls and Procedures 25 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 26 Item 2 - Unregistered Sales of Equity Securities and Use of proceeds 26 Item 3 - Defaults upon Senior Securities 26 Item 4 - Submission of Matters to a Vote of Security Holders 26 Item 5 - Other Information 26 Item 6 - Exhibits 26 Exhibit 11 - Computation of Earnings Per Share 29 Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 30 Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 31 Exhibit 32.1 - Certification Required by 18 U.S.C. Section 1350 32 Exhibit 32.2 - Certification Required by 18 U.S.C. Section 1350 33 </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 September 30, At --------------------------December 31, 2005 2004 2004 --------------------------------------- <S> <C> <C> <C> Assets: Cash and cash equivalents $193,220 $165,277 $126,153 Money market assets 540 534 534 Investment securities available for sale 660,630 967,266 931,710 Investment securities held to maturity, with market values of: $1,350,109 at September 30, 2005 1,358,266 $1,089,568 at September 30, 2004 1,080,392 $1,265,986 at December 31, 2004 1,260,832 Loans, gross 2,675,907 2,301,991 2,300,230 Allowance for loan losses (59,674) (54,388) (54,152) --------------------------------------- Loans, net of allowance for loan losses 2,616,233 2,247,603 2,246,078 Other real estate owned 0 0 0 Premises and equipment, net 33,640 35,267 35,223 Identifiable intangibles 27,233 3,030 2,894 Goodwill 124,122 18,996 18,996 Interest receivable and other assets 139,207 117,706 114,848 --------------------------------------- Total Assets $5,153,091 $4,636,071 $4,737,268 ======================================= Liabilities: Deposits: Noninterest bearing $1,412,470 $1,323,446 $1,273,825 Interest bearing: Transaction 635,019 561,206 591,593 Savings 1,094,130 1,119,356 1,091,981 Time 732,316 641,798 626,220 --------------------------------------- Total deposits 3,873,935 3,645,806 3,583,619 Short-term borrowed funds 764,143 578,285 735,423 Debt financing and notes payable 40,318 21,429 21,429 Liability for interest, taxes and other expenses 42,671 38,627 38,188 --------------------------------------- Total Liabilities 4,721,067 4,284,147 4,378,659 --------------------------------------- Shareholders' Equity: Authorized - 150,000 shares of common stock Issued and outstanding: 32,198 at September 30, 2005 314,174 31,716 at September 30, 2004 222,344 31,640 at December 31, 2004 227,829 Deferred compensation 2,423 2,146 2,146 Accumulated other comprehensive income: Unrealized gain on securities available for sale, net 2,762 8,186 9,638 Retained earnings 112,665 119,248 118,996 --------------------------------------- Total Shareholders' Equity 432,024 351,924 358,609 --------------------------------------- Total Liabilities and Shareholders' Equity $5,153,091 $4,636,071 $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 Nine months ended September 30, September 30, 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Interest Income: Loans $40,008 $32,911 $114,882 $100,337 Money market assets and funds sold 1 0 2 1 Investment securities available for sale Taxable 4,427 7,171 15,305 26,581 Tax-exempt 3,278 3,550 9,943 11,068 Investment securities held to maturity Taxable 7,985 5,725 22,538 10,325 Tax-exempt 6,105 4,547 17,893 13,275 ---------------------------------------------------- Total interest income 61,804 53,904 180,563 161,587 ---------------------------------------------------- Interest Expense: Transaction deposits 401 163 1,004 399 Savings deposits 956 955 2,790 3,057 Time deposits 4,610 2,135 11,984 5,943 Short-term borrowed funds 5,421 1,473 13,645 3,890 Federal Home Loan Bank advance 0 0 0 897 Notes payable 640 316 1,707 968 ---------------------------------------------------- Total interest expense 12,028 5,042 31,130 15,154 ---------------------------------------------------- Net Interest Income 49,776 48,862 149,433 146,433 ---------------------------------------------------- Provision for loan losses 150 600 750 2,100 ---------------------------------------------------- Net Interest Income After Provision For Loan Losses 49,626 48,262 148,683 144,333 ---------------------------------------------------- Noninterest Income: Service charges on deposit accounts 7,436 7,465 21,905 21,693 Merchant credit card 2,631 899 6,346 2,633 Debit card 834 654 2,343 1,841 Financial services commissions 388 409 1,007 956 Trust fees 323 265 905 773 Mortgage banking 62 41 230 304 Gains on sales of real property 2,369 0 3,700 0 Securities gains (losses) 0 (14) (4,903) 2,169 Loss on extinguishment of debt 0 0 0 (2,204) Other 3,397 2,069 8,581 6,149 ---------------------------------------------------- Total Noninterest Income 17,440 11,788 40,114 34,314 ---------------------------------------------------- Noninterest Expense: Salaries and related benefits 13,621 13,054 40,405 39,912 Occupancy 3,201 3,022 9,383 8,913 Data processing 1,544 1,525 4,632 4,563 Equipment 1,347 1,101 3,891 3,536 Amortization of intangibles 1,064 136 2,561 408 Courier service 989 923 2,879 2,695 Professional fees 497 411 1,821 1,332 Other 4,528 4,319 13,117 13,114 ---------------------------------------------------- Total Noninterest Expense 26,791 24,491 78,689 74,473 ---------------------------------------------------- Income Before Income Taxes 40,275 35,559 110,108 104,174 ---------------------------------------------------- Provision for income taxes 11,081 10,464 30,266 30,121 ---------------------------------------------------- Net Income $29,194 $25,095 $79,842 $74,053 ==================================================== Comprehensive Income: Change in unrealized (loss) gain on securities available for sale, net (5,423) 9,602 (6,876) (5,005) ---------------------------------------------------- Comprehensive Income $23,771 $34,697 $72,966 $69,048 ==================================================== Average Shares Outstanding 32,352 31,713 32,379 31,841 Diluted Average Shares Outstanding 32,972 32,352 33,007 32,452 Per Share Data: Basic Earnings $0.90 $0.79 $2.47 $2.33 Diluted Earnings 0.89 0.78 2.42 2.28 Dividends Paid 0.30 0.28 0.90 0.82 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 74,053 74,053 Stock issued 237 7,084 7,084 Stock option tax benefits 2,003 2,003 Restricted stock activity 16 467 322 789 Purchase and retirement of stock (824) (5,671) (35,531) (41,202) Dividends (26,169) (26,169) Unrealized gain on securities available for sale, net (5,005) (5,005) ------------------------------------------------------------------------------ Balance, September 30, 2004 31,716 $222,344 $2,146 $8,186 $119,248 $351,924 ============================================================================== Balance, December 31, 2004 31,640 $227,829 $2,146 $9,638 $118,996 $358,609 Net income for the period Stock issued and stock options assumed for acquisition of Redwood Empire Bancor 1,639 89,538 89,538 Other stock issued 198 6,116 6,116 Stock option tax benefits 1,659 1,659 Restricted stock activity 21 797 277 1,074 Purchase and retirement of stock (1,300) (11,765) (57,148) (68,913) Dividends (29,025) (29,025) Unrealized loss on securities available for sale, net (6,876) (6,876) Balance, September 30, 2005 32,198 $314,174 $2,423 $2,762 $112,665 $432,024 ============================================================================== See accompanying notes to unaudited condensed consolidated financial statements. </TABLE> Page 6 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) <TABLE> <CAPTION> For the nine months ended September 30, -------------------------- 2005 2004 -------------------------- <S> <C> <C> Operating Activities: Net income $79,842 $74,053 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 3,104 2,885 Amortization of intangibles 4,048 1,722 Loan loss provision 750 2,100 Amortization of net loan origination cost (156) (46) (Increase) decrease in interest income receivable (1,946) 541 Increase in other assets (4,868) (4,204) Decrease in income taxes payable (24) (3,494) Increase (decrease) in interest expense payable 1,495 (134) (Decrease) increase in other liabilities (9,182) 7,383 Loss (gain) on sales of investment securities 4,903 (2,169) Loss on extinguishment of debt 0 2,204 Gain on sales of real estate (3,700) 0 Net loss on writedown of equipment 9 9 Originations of loans for resale (425) (3,622) Net proceeds from sale of loans originated for resale 428 3,583 Net gain on sale of property acquired in satisfaction of debt (24) (231) Writedown on property acquired in satisfaction of debt 0 0 -------------------------- Net Cash Provided by Operating Activities 74,254 80,580 -------------------------- Investing Activities: Net cash used in mergers and acquisitions (35,210) 0 Net repayments of loans 63,643 19,801 Purchases of investment securities available for sale 0 (96,027) Purchases of investment securities held to maturity (213,191) (641,443) Purchases of FRB/FHLB securities (4,382) 0 Purchases of property, plant and equipment (1,020) (2,414) Proceeds from maturity of securities available for sale 89,007 317,231 Proceeds from maturity of securities held to maturity 125,385 89,976 Proceeds from sale of securities available for sale 196,109 209,085 Proceeds from sale of FRB/FHLB securities 1,513 0 Proceeds from sale of property and equipment 0 0 Proceeds from sale of real estate 4,533 0 Proceeds from property acquired in satisfaction of debt 64 321 -------------------------- Net Cash Provided (Used) In Investing Activities 226,451 (103,470) -------------------------- Financing Activities: Net (decrease) increase in deposits (79,664) 181,814 Net decrease in short-term borrowings (58,678) (12,361) Net payments to Federal Home Loan Bank 0 (107,204) Repayments of notes payable (3,301) (3,214) Exercise of stock options/issuance of shares 5,942 6,875 Repurchases/retirement of stock (68,913) (41,202) Dividends paid (29,025) (26,169) -------------------------- Net Cash Used In Financing Activities (233,639) (1,461) -------------------------- Net Increase (Decrease) In Cash and Cash Equivalents 67,066 (24,351) -------------------------- Cash and Cash Equivalents at Beginning of Period 126,153 189,628 -------------------------- Cash and Cash Equivalents at End of Period $193,219 $165,277 ========================== </TABLE> Page 7 <TABLE> <CAPTION> <S> <C> <C> Supplemental Disclosure of Noncash Activities: Loans transferred to other repossessed collateral $40 $0 Unrealized loss on securities available for sale ($6,876) ($5,005) Supplemental Disclosure of Cash Flow Activity: Interest paid for the period 33,234 15,019 Income tax payments for the period 30,427 30,010 Income tax benefit from stock option exercises 1,659 2,003 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 21,918 -- See accompanying notes to unaudited condensed consolidated financial statements. </TABLE> Page 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the nine months ended September 30, 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 nine months ended September 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 third 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 September 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 is related to stock options issued in connection with the acquisition. <TABLE> <CAPTION> At At January 1, September 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 (1,482) (6,371) Merchant Draft Processing Intangible 0 10,300 0 10,300 Accumulated Amortization 0 0 (1,079) (1,079) ---------------------------------------------------- Net $2,894 $26,900 ($2,561) $27,233 ==================================================== At At January 1, September 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 (408) (4,753) ---------------------------------------------------- Net $3,438 $0 ($408) $3,030 ==================================================== </TABLE> At September 30, 2005, the estimated aggregate amortization of core deposit intangibles, in thousands of dollars, for the remainder of 2005 and annually through 2010 is $597, $2,279, $2,153, $2,021, $1,859, and $1,638, respectively. The weighted average amortization period for core deposit intangibles is 12.82 years. At September 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 $462, $1,808, $1,500, $1,200, $962, and $774, respectively. The amortization period for merchant draft processing intangibles is 12.42 years. Page 9 Note 4: Stock Options As permitted by Statement of Financial Accounting Standard ("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 Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> Compensation cost based on fair value method, net of tax effect $487 $526 $1,461 $1,578 Net income: As reported $29,194 $25,095 $79,842 $74,053 Pro forma $28,707 $24,569 $78,381 $72,475 Basic earnings per share: As reported $0.90 $0.79 $2.47 $2.33 Pro forma 0.89 0.77 2.42 2.28 Diluted earnings per share: As reported $0.89 $0.78 $2.42 $2.28 Pro forma 0.87 0.76 2.37 2.23 </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 SFAS 123R that amended the compliance dates, requiring implementation by companies 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 2006 by approximately $3.1 million and decrease annual net income by approximately $1.8 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. The Company reimburses a portion 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 nine months ended September 30. <TABLE> <CAPTION> For the nine months ended September 30, -------------------------- 2005 2004 -------------------------- (In thousands) <S> <C> <C> Service cost $209 $143 Interest cost 158 147 Amortization of unrecognized transition obligation 46 46 -------------------------- Net periodic cost $413 $336 ========================== The Company does not fund its post-retirement benefit plan. </TABLE> Page 10 WESTAMERICA BANCORPORATION Financial Summary (In thousands, except per share data) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Net Interest Income (FTE)** $55,993 $54,528 $168,036 $163,405 Provision for Loan Losses (150) (600) (750) (2,100) Noninterest Income: Gains on sales of real property 2,369 0 3,700 0 Securities gains (losses) 0 (14) (4,903) 2,169 Loss on extinguishment of debt 0 0 0 (2,204) Deposit service charges and other 15,071 11,802 41,317 34,349 ---------------------------------------------------- Total noninterest income 17,440 11,788 40,114 34,314 Noninterest Expense (26,791) (24,491) (78,689) (74,473) Provision for income taxes (FTE)** (17,298) (16,130) (48,869) (47,093) ---------------------------------------------------- Net Income $29,194 $25,095 $79,842 $74,053 ==================================================== Average Shares Outstanding 32,352 31,713 32,379 31,841 Diluted Average Shares Outstanding 32,972 32,352 33,007 32,452 Shares Outstanding at Period End 32,198 31,716 32,198 31,716 As Reported: Basic Earnings Per Share $0.90 $0.79 $2.47 $2.33 Diluted Earnings Per Share $0.89 $0.78 $2.42 $2.28 Return On Assets 2.25% 2.19% 2.11% 2.20% Return On Equity 27.30% 30.05% 26.06% 30.56% Net Interest Margin (FTE)** 4.76% 5.11% 4.84% 5.20% Net Loan Losses to Average Loans 0.05% 0.03% 0.02% 0.10% Efficiency Ratio* 36.5% 36.9% 37.8% 37.7% Average Balances: Total Assets $5,141,666 $4,557,925 $5,058,776 $4,497,287 Earning Assets 4,695,342 4,260,701 4,644,636 4,198,373 Total Gross Loans 2,643,270 2,247,664 2,562,880 2,266,184 Total Deposits 3,872,414 3,616,319 3,831,947 3,514,373 Shareholders' Equity 424,277 332,219 409,567 323,723 Balances at Period End: Total Assets $5,153,091 $4,636,071 Earning Assets 4,709,647 4,356,748 Total Gross Loans 2,675,907 2,301,991 Total Deposits 3,873,935 3,645,806 Shareholders' Equity 432,024 351,924 Financial Ratios at Period End: Allowance for Loan Losses to Loans 2.23% 2.36% Book Value Per Share $13.42 $11.10 Equity to Assets 8.38% 7.59% Total Capital to Risk Adjusted Assets 10.41% 12.29% Dividends Paid Per Share $0.30 $0.28 $0.90 $0.82 Dividend Payout Ratio 34% 36% 37% 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). ** Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate. </TABLE> Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Westamerica Bancorporation and subsidiaries (the "Company") reported third quarter 2005 net income of $29.2 million or $.89 diluted earnings per share. These results compare to net income of $25.1 million or $0.78 diluted earnings per share for the same period of 2004. The third quarter of 2005 noninterest income included a $2.4 million gain on sale of real estate and $588 thousand in tax-exempt insurance proceeds which, on a combined basis, accounted for $0.06 diluted earnings per share. On a year-to-date basis, the Company reported net income for the nine months ended September 30, 2005 of $79.8 million or diluted earnings per share of $2.42, compared with $74.1 million or $2.28 diluted earnings per share for the same period of 2004. The 2005 year-to-date results included gains on real estate sales, and life insurance proceeds, offset by securities losses, which reduced net income by $100 thousand. Following is a summary of the components of net income for the periods indicated (in thousands except per share amounts): <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Net interest income (FTE) $55,993 $54,528 $168,036 $163,405 Provision for loan losses (150) (600) (750) (2,100) Noninterest income: Gains on sales of real property 2,369 0 3,700 0 Securities gains (losses) 0 (14) (4,903) 2,169 Loss on extinguishment of debt 0 0 0 (2,204) Deposit service charges and other 15,071 11,802 41,317 34,349 ---------------------------------------------------- Total noninterest income 17,440 11,788 40,114 34,314 Noninterest expense (26,791) (24,491) (78,689) (74,473) Provision for income taxes (FTE) (17,298) (16,130) (48,869) (47,093) ---------------------------------------------------- Net income $29,194 $25,095 $79,842 $74,053 ==================================================== Average diluted shares 32,972 32,352 33,007 32,452 Diluted earnings per share $0.89 $0.78 $2.42 $2.28 Average total assets $5,141,666 $4,557,925 $5,058,776 $4,497,287 Net income (annualized) to average total assets 2.25% 2.19% 2.11% 2.20% </TABLE> Net income for the third quarter of 2005 was $4.1 million or 16.3% more than the same quarter of 2004, attributable to higher noninterest income, growth in net interest income (FTE) and lower loan loss provision, partially offset by increases in noninterest expense and income taxes. The increase in net interest income (FTE) (up $1.5 million or 2.7%) was the net result of growth of average interest-earning assets largely due to the Redwood Empire Bancorp ("REBC") acquisition and higher yields on those assets, partially reduced by higher funding costs. The loan loss provision decreased $450 thousand from a year ago, reflecting Management's assessment of credit risk for the loan portfolio. Noninterest income increased $5.7 million or 47.9% mainly due to an increase of $1.7 million in income from merchant credit card, a $2.4 million gain on sale of real estate, and $588 thousand in life insurance proceeds. Noninterest expense increased $2.3 million or 9.4% largely due to an increase in amortization of intangibles related to the REBC acquisition and higher salaries and related benefits. The provision for income taxes (FTE) increased $1.2 million or 7.2% primarily due to higher profitability, partially offset by the favorable resolution of an outstanding state tax position. Comparing the first nine months of 2005 to the prior year, net income increased $5.8 million or 7.8%, due to higher net interest income (FTE), lower loan loss provision and higher noninterest income, partly offset by increases in noninterest expense and tax provision. The higher net interest income (FTE) was mainly caused by growth of average interest-earning assets from the REBC acquisition and higher yields on those assets, partially offset by the effect of one less accrual day and higher funding costs. The loan loss provision decreased $1.4 million to reflect Management's assessment on credit risk. Noninterest income increased largely due to an increase of $3.7 million in income from merchant credit card, a $3.7 million gain on sale of real estate, and $588 thousand in life insurance proceeds, partially offset by a $4.9 million loss on sale of securities. Noninterest expense rose $4.2 million or 5.7% mainly due to an increase in amortization of intangibles. The income tax provision (FTE) increased $1.8 million or 3.8% primarily due to higher profitability, partially offset by the favorable resolution of an outstanding state tax position. Page 12 Net Interest Income Following is a summary of the components of net interest income for the periods indicated (in thousands): <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Interest and fee income $61,804 $53,904 $180,563 $161,587 Interest expense (12,028) (5,042) (31,130) (15,154) FTE adjustment 6,217 5,666 18,603 16,972 ---------------------------------------------------- Net interest income (FTE) $55,993 $54,528 $168,036 $163,405 ==================================================== Average earning assets $4,695,342 $4,260,701 $4,644,636 $4,198,373 Net interest margin (FTE) 4.76% 5.11% 4.84% 5.20% </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 third quarter of 2005 by $1.5 million or 2.7% from the same period in 2004 to $56.0 million, mainly due to growth of average earning assets (up $435 million), primarily due to the REBC acquisition, and higher yields on those assets (up 19 basis points "bp"), partially offset by higher rates paid on interest-bearing liabilities (up 76 bp) and a higher volume of those liabilities (up $384 million), also primarily due to the REBC acquisition. Comparing the first nine months of 2005 with the same period of 2004, net interest income (FTE) increased $4.6 million or 2.8%, primarily due to higher average earning assets including the acquisition (up $446 million) and higher yields on those assets (up 5 bp), partially offset by higher rates paid on interest-bearing liabilities (up 58 bp), a higher volume of those liabilities (up $357 million) and the $285 thousand effect of one less accrual day. Interest and Fee Income Interest and fee income (FTE) for the third quarter of 2005 rose $8.5 million or 14.2% from the same period in 2004. The increase was caused primarily by higher average earning assets (up $435 million), mostly due to the REBC acquisition, and higher yields on average earning assets (up 19 bp). The average earning asset increase of $435 million for the third quarter of 2005 compared to the same period in 2004 was substantially attributable to a $396 million increase in the loan portfolio: commercial real estate loans (up $185 million), residential real estate loans (up $124 million), commercial loans (up $47 million) and construction loans (up $39 million). Average total investments grew $39 million for the third quarter of 2005 compared with the same period in 2004 due to increases in municipal securities (up $146 million) and mortgage backed securities and collateralized mortgage obligations (up $106 million), reduced by declines in U.S. government sponsored entity obligations (down $187 million) and preferred stock & corporate securities (down $26 million). The average yield on the Company's earning assets, excluding loan fee income, increased from 5.56% in the third quarter of 2004 to 5.75% in the same period in 2005 (up 19 bp). The composite yield on loans, excluding loan fees, rose 15 bp to 6.18%. Increases in commercial loans (up 75 bp) and personal credit lines (up 159 bp) were partially offset by declines in yields on commercial real estate loans (down 23 bp) and indirect consumer loans (down 29 bp). The investment portfolio yield increased 17 bp to 5.19%, mainly caused by increases in the yield on US. Government sponsored entity obligations (up 14 bp), preferred stock & corporate securities (up 54 bp) and mortgage backed securities and collateralized mortgage obligations (up 9 bp), partially offset by a 34 bp decline in municipal securities. The decline in the yield on municipal securities was attributable to yields on maturities, calls and serial payments exceeding yields on securities purchased. Comparing the first nine months of 2005 with the corresponding period a year ago, interest and fee income (FTE) was up $20.6 million or 11.5%. The increase largely resulted from a higher volume of earning assets and higher yields on those assets, partially offset by the effect of one less accrual day. Average earning assets increased $446 million or 10.6% for the first nine months 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 $297 million due to increases in commercial real estate loans (up $122 million), residential real estate loans (up $112 million), commercial loans (up $41 million) and construction loans (up $30 million). Investments rose $150 million due to growth in municipal securities (up 142 million) and mortgage backed securities and collateralized mortgage obligations (up $143 million), reduced by decreases in U.S. government sponsored entity obligations (down $100 million) and preferred stock & corporate securities (down $35 million). The average yield on earning assets excluding loan fees for the first three quarters of 2005 was 5.69% compared with 5.64% in the corresponding period of 2004. The loan portfolio yield excluding loan fees for the first nine months of 2005 compared with the same period of 2004 was higher by 6 bp, due to increases in commercial loans (up 70 bp) and personal credit lines (up 135 bp), partially offset by lower yields on indirect consumer loans (down 49 bp) and commercial real estate loans (down 21 bp). Page 13 The investment portfolio yield rose by 2 bp. The increase resulted mostly from higher yields on mortgage backed securities and collateralized mortgage obligations (up 15 bp) and preferred stock & corporate securities (up 27 bp), net of a 38 bp decrease in yields on municipal securities. Interest Expense Interest expense in the third quarter of 2005, including expense associated with liabilities assumed in the REBC acquisition, increased $7.0 million 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 0.69% in the third quarter of 2004 to 1.45% in the same quarter of 2005. Rates paid on most liabilities moved with general market conditions. The average rate on short-term borrowings rose 176 bp. Rates on deposits increased as well, including those on CDs over $100 thousand, which rose 144 bp; on retail CDs, which went up by 58 bp; and on money market checking accounts, which rose 14 bp. Interest-bearing liabilities grew $384 million or 13.3% for the third quarter of 2005 over the same period of 2004. Short-term borrowings increased $203 million. Long-term debt increased $18.9 million, due to the assumption of REBC's debt, reduced by an annual principal repayment. Most categories of deposits grew including CDs over $100 thousand (up $108 million). Comparing the first nine months of 2005 to the corresponding period of 2004, interest expense rose $16.0 million, due to higher rates paid on interest-bearing liabilities and growth of such liabilities. Rates paid on liabilities averaged 1.28% during the first nine months of 2005 compared to 0.70% in the corresponding period of 2004. Rates on most interest-bearing liabilities moved up with the general trend in the market. The average rate on short-term borrowings rose 155 bp. Rates on most deposits were also higher: CDs over $100 thousand which rose 121 bp, retail CDs which increased by 54 bp, and money market checking accounts which increased by 12 bp. A 9 bp decline in the average rate on money market saving accounts partially offset the increase. Interest-bearing liabilities grew $357 million or 12.4% over the first nine months of 2004. Short-term borrowings rose $168 million and long-term debt increased $14 million. CDs over $100 thousand and retail CDs increased $94 million and $12 million, respectively. These increases were partially offset by a $32 million decline in average FHLB advances due to prepayments in 2004. In all periods, the Company has attempted to continue increasing the balances of more profitable, noninterest bearing and 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 Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Yield on earning assets 5.77% 5.58% 5.73% 5.68% Rate paid on interest-bearing liabilities 1.45% 0.69% 1.28% 0.70% ---------------------------------------------------- Net interest spread 4.32% 4.89% 4.45% 4.98% Impact of all other net noninterest bearing funds 0.44% 0.22% 0.39% 0.22% ---------------------------------------------------- Net interest margin 4.76% 5.11% 4.84% 5.20% ==================================================== </TABLE> During the third quarter of 2005, the net interest margin declined 35 bp compared to the same period in 2004. Rates paid on interest-bearing liabilities climbed faster than yields on earning assets, resulting in a 57 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. The average balance of these sources increased $51 million or 3.7% to $1.4 billion, and their value increased 22 bp because of the higher market rates of interest at which they could be invested. The net interest margin in the first nine months of 2005 declined by 36 bp when compared with the same period of 2004. Earning asset yields rose 5 bp and the cost of interest-bearing liabilities rose by 58 bp, resulting in a 53 bp decrease in the interest spread. Noninterest bearing funding sources increased $89 million or 6.7%, and their margin contribution increased by 17 bp. Page 14 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 a "fully taxable equivalent" ("FTE") basis in order 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 September 30, 2005 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $750 $1 0.53% Investment securities: Available for sale Taxable 419,670 4,427 4.22% Tax-exempt 261,428 4,814 7.37% Held to maturity Taxable 773,863 7,985 4.13% Tax-exempt 596,362 9,399 6.30% Loans: Commercial: Taxable 387,812 7,019 7.18% Tax-exempt 249,607 4,092 6.50% Commercial real estate 937,380 16,819 7.12% Real estate construction 73,911 1,367 7.34% Real estate residential 489,649 5,521 4.51% Consumer 504,911 6,577 5.17% -------------------------- Total loans 2,643,270 41,395 6.21% -------------------------- Total earning assets 4,695,343 68,021 5.75% Other assets 446,323 ------------- Total assets $5,141,666 ============= Liabilities and shareholders' equity Deposits: Noninterest bearing demand $1,400,272 $-- -- Savings and interest-bearing transaction 1,736,917 1,357 0.31% Time less than $100,000 279,932 1,462 2.07% Time $100,000 or more 455,293 3,148 2.74% -------------------------- Total interest-bearing deposits 2,472,142 5,967 0.96% Short-term borrowed funds 754,215 5,421 2.81% Federal Home Loan Bank advances 0 0 N/A Debt financing and notes payable 40,340 640 6.35% -------------------------- Total interest-bearing liabilities 3,266,697 12,028 1.45% Other liabilities 50,420 Shareholders' equity 424,277 ------------- Total liabilities and shareholders' equity $5,141,666 ============= Net interest spread (1) 4.30% Net interest income and interest margin (2) $55,993 4.76% ========================== (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 three months ended September 30, 2004 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $699 $0 0.00% Investment securities: Available for sale Taxable 712,378 7,171 4.03% Tax-exempt 286,551 5,291 7.39% Held to maturity Taxable 586,212 5,725 3.91% Tax-exempt 427,197 7,081 6.63% Loans: Commercial: Taxable 351,467 5,105 5.78% Tax-exempt 238,481 4,029 6.72% Commercial real estate 752,395 13,955 7.38% Real estate construction 34,977 619 7.04% Real estate residential 365,559 4,047 4.43% Consumer 504,785 6,547 5.16% -------------------------- Total loans 2,247,664 34,302 6.08% -------------------------- Total earning assets 4,260,701 59,570 5.58% Other assets 297,224 ------------- Total assets $4,557,925 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,305,840 $-- -- Savings and interest-bearing transaction 1,696,316 1,118 0.26% Time less than $100,000 266,584 999 1.49% Time $100,000 or more 347,579 1,136 1.30% -------------------------- Total interest-bearing deposits 2,310,479 3,253 0.56% Short-term borrowed funds 550,909 1,473 1.05% Federal Home Loan Bank advances 0 0 N/A Debt financing and notes payable 21,428 316 5.90% -------------------------- Total interest-bearing liabilities 2,882,816 5,042 0.69% Other liabilities 37,050 Shareholders' equity 332,219 ------------- Total liabilities and shareholders' equity $4,557,925 ============= Net interest spread (1) 4.89% Net interest income and interest margin (2) $54,528 5.11% ========================== (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 nine months ended September 30, 2005 --------------------------------------- Interest Rates Average income/ earned/ Balance expense paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $708 $2 0.38% Investment securities: Available for sale Taxable 502,581 15,305 4.06% Tax-exempt 245,665 14,635 7.94% Held to maturity Taxable 748,789 22,538 4.01% Tax-exempt 584,012 27,607 6.30% Loans: Commercial: Taxable 377,313 19,641 6.96% Tax-exempt 248,877 12,324 6.62% Commercial real estate 901,373 48,477 7.19% Real estate construction 66,634 3,623 7.27% Real estate residential 469,169 15,716 4.42% Consumer 499,515 19,298 5.17% -------------------------- Total loans 2,562,881 119,079 6.20% -------------------------- Total earning assets 4,644,636 199,166 5.73% Other assets 414,140 ------------- Total assets $5,058,776 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,367,580 $-- -- Savings and interest-bearing transaction 1,741,720 3,794 0.29% Time less than $100,000 286,170 4,243 1.98% Time $100,000 or more 436,477 7,741 2.37% -------------------------- Total interest-bearing deposits 2,464,367 15,778 0.86% Short-term borrowed funds 734,394 13,645 2.45% Federal Home Loan Bank advances 0 0 N/A Debt financing and notes payable 35,866 1,707 6.35% -------------------------- Total interest-bearing liabilities 3,234,627 31,130 1.28% Other liabilities 47,002 Shareholders' equity 409,567 ------------- Total liabilities and shareholders' equity $5,058,776 ============= Net interest spread (1) 4.45% Net interest income and interest margin (2) $168,036 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 17 <TABLE> <CAPTION> For the nine months ended September 30, 2004 --------------------------------------- Interest Rates Average Income/ Earned/ Balance Expense Paid --------------------------------------- <S> <C> <C> <C> Assets: Money market assets and funds sold $761 $1 0.18% Investment securities: Available for sale Taxable 851,878 26,581 4.16% Tax-exempt 297,013 16,505 7.41% Held to maturity Taxable 367,471 10,325 3.75% Tax-exempt 415,066 20,685 6.64% Loans: Commercial Taxable 346,449 14,709 5.67% Tax-exempt 238,281 11,956 6.70% Commercial real estate 779,075 43,520 7.46% Real estate construction 36,844 1,905 6.91% Real estate residential 357,836 12,023 4.48% Consumer 507,699 20,349 5.35% -------------------------- Total loans 2,266,184 104,462 6.16% -------------------------- Total earning assets 4,198,373 178,559 5.68% Other assets 298,914 ------------- Total assets $4,497,287 ============= Liabilities and shareholders' equity: Deposits: Noninterest bearing demand $1,257,089 $-- -- Savings and interest-bearing transaction 1,640,438 3,456 0.28% Time less than $100,000 274,261 2,958 1.44% Time $100,000 or more 342,585 2,985 1.16% -------------------------- Total interest-bearing deposits 2,257,284 9,399 0.56% Short-term borrowed funds 566,044 3,890 0.90% Federal Home Loan Bank advance 32,204 897 3.66% Debt financing and notes payable 21,798 968 5.92% -------------------------- Total interest-bearing liabilities 2,877,330 15,154 0.70% Other liabilities 39,145 Shareholders' equity 323,723 ------------- Total liabilities and shareholders' equity $4,497,287 ============= Net interest spread (1) 4.98% Net interest income and interest margin (2) $163,405 5.20% ========================== (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 18 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 September 30, 2005 compared with three months ended September 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 (3,056) 312 (2,744) Tax-exempt (463) (14) (477) Held to maturity Taxable 1,935 325 2,260 Tax-exempt 2,686 (368) 2,318 Loans: Commercial: Taxable 571 1,343 1,914 Tax-exempt 191 (128) 63 Commercial real estate 3,367 (503) 2,864 Real estate construction 721 27 748 Real estate residential 1,398 76 1,474 Consumer 4 26 30 --------------------------------------- Total loans 6,252 841 7,093 --------------------------------------- Total earning assets 7,354 1,097 8,451 --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 28 211 239 Time less than $100,000 53 410 463 Time $100,000 or more 438 1,574 2,012 --------------------------------------- Total interest-bearing deposits 519 2,195 2,714 --------------------------------------- Short-term borrowed funds 709 3,239 3,948 Federal Home Loan Bank advances 0 0 0 Debt financing and notes payable 299 25 324 --------------------------------------- Total interest-bearing liabilities 1,527 5,459 6,986 --------------------------------------- Increase (decrease) in Net Interest Income $5,827 ($4,362) $1,465 ======================================= </TABLE> Page 19 <TABLE> <CAPTION> Nine months ended September 30, 2005 compared with nine months ended September 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 (10,677) (599) ($11,276) Tax-exempt (3,011) 1,141 ($1,870) Held to maturity Taxable 11,414 799 $12,213 Tax-exempt 8,019 (1,097) $6,922 Loans: Commercial: Taxable 1,342 3,590 $4,932 Tax-exempt 508 (140) $368 Commercial real estate 6,559 (1,602) $4,957 Real estate construction 1,612 106 $1,718 Real estate residential 3,729 (36) $3,693 Consumer (376) (675) ($1,051) --------------------------------------- Total loans 13,374 1,243 14,617 --------------------------------------- Total earning assets 19,119 1,488 20,607 --------------------------------------- Interest expense: Deposits: Savings and interest-bearing transaction 211 127 $338 Time less than $100,000 120 1,165 $1,285 Time $100,000 or more 977 3,779 $4,756 --------------------------------------- Total interest-bearing deposits 1,308 5,071 6,379 --------------------------------------- Short-term borrowed funds 1,418 8,337 $9,755 Federal Home Loan Bank advances 0 (897) ($897) Debt financing and notes payable 664 75 $739 --------------------------------------- Total interest-bearing liabilities 3,390 12,586 15,976 --------------------------------------- Increase (decrease) in Net Interest Income $15,729 ($11,098) $4,631 ======================================= </TABLE> Page 20 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 $150 thousand for loan losses in the third quarter of 2005, compared with $600 thousand in the corresponding period of 2004. For the first nine months of 2005 and 2004, $750 thousand and $2.1 million were provided in each respective period. 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 (in thousands). <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Service charges on deposit accounts $7,436 $7,465 $21,905 $21,693 Merchant credit card fees 2,631 899 6,346 2,633 Debit card fees 834 654 2,343 1,841 ATM fees and interchange 725 664 2,058 1,889 Other service fees 481 466 1,315 1,322 Financial services commissions 388 409 1,007 956 Trust fees 323 265 905 773 Official check sales income 308 173 800 438 Mortgage banking income 62 41 230 304 Gains on sale of foreclosed property 24 0 24 231 Securities gains (losses) 0 (14) (4,903) 2,169 Loss on extinguishment of debt 0 0 0 (2,204) Gain on sale of real estate 2,369 0 3,700 0 Other noninterest income 1,859 766 4,384 2,269 ---------------------------------------------------- Total $17,440 $11,788 $40,114 $34,314 ==================================================== </TABLE> Noninterest income for the third quarter of 2005 increased by $5.7 million or 47.9% from the same period in 2004. The increase was primarily due to a $2.4 million gain on sale of real estate and a $1.7 million increase in merchant credit card fees due to the acquisition of REBC's merchant card processing unit. Debit card fees increased $180 thousand or 27.5% due to increased usage and a larger customer base. Official check sales income increased $135 thousand or 78.0% due to a larger earnings credit rate received on outstanding items. Other noninterest income increased $1.1 million or 142.7% mostly due to $588 thousand in insurance proceeds. In the first nine months of 2005, noninterest income increased $5.8 million or 16.9% compared with the same period of the previous year mainly due to $3.7 million in gains on sales of real estate and a $3.7 million increase in merchant credit card fees. Service charges on deposits increased $212 thousand or 1.0% mainly due to a $1.2 million increase in overdraft fees as a result of repricing in February of 2005, partially offset by a $961 thousand decrease in account analysis deficit fees. A $502 thousand or 27.3% increase in debit card fee income was primarily due to increased usage. ATM fees and interchange income rose by $169 thousand or 8.9% due to repricing in February of 2005 and increased usage. Trust fees were higher by $132 thousand or 17.1% largely due to increased court fees. Official check sales income increased $362 thousand or 82.6% due to the higher earnings credit rate. The prior year benefited from $231 thousand in gains on foreclosed property compared with $24 thousand in gain in 2005. 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 2004 period 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 prepaying $105 million in FHLB advances. Other noninterest income increased $2.1 million due, in part, to $588 thousand in insurance proceeds. Page 21 Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Salaries and related benefits $13,621 $13,054 $40,405 $39,912 Occupancy 3,201 3,022 9,383 8,913 Data processing services 1,544 1,525 4,632 4,563 Equipment 1,347 1,101 3,891 3,536 Courier service 989 923 2,879 2,695 Telephone 537 529 1,618 1,636 Professional fees 497 411 1,821 1,332 Postage 377 288 1,175 1,046 Stationery and supplies 298 333 950 930 Loan expense 309 289 745 839 Advertising/public relations 247 241 728 746 Merchant credit card 272 292 792 833 Correspondent Service Charges 233 233 747 712 Operational losses 222 265 612 747 Amortization of deposit intangibles 1,064 136 2,561 408 Other noninterest expense 2,033 1,849 5,750 5,625 ---------------------------------------------------- Total $26,791 $24,491 $78,689 $74,473 ==================================================== Average full time equivalent staff 956 980 964 992 Noninterest expense to revenues (FTE) 36.48% 36.93% 37.80% 37.67% </TABLE> Noninterest expense increased $2.3 million or 9.4% in the third quarter of 2005 compared to the same period in 2004. Salaries and related benefits increased $567 thousand or 4.3%, primarily due to a $465 thousand increase in salary and wages, increases in workers compensation claims, retirement plan expenses and group insurance, partially reduced by a $108 thousand decline in incentives and bonuses. The increase in regular salaries was attributable to annual merit increases to continuing staff, partially offset by the effect of a smaller workforce. Occupancy expense was higher by $179 thousand or 5.9% primarily due to an increase in rental of bank premises, net of income from subleased spaces. The increase in rent was the net result of $222 thousand in additional rent payments for the REBC offices and annual increases for other locations, partially offset by savings from branch consolidation and relocations. Equipment expense rose by $246 thousand or 22.3% mostly due to an increase in repair and maintenance costs. A $928 thousand increase in amortization of identifiable intangibles was attributable to the REBC acquisition. Other noninterest expense increased $184 thousand or 10.0% primarily due to a $132 thousand increase in low-income housing amortization and higher internet banking expense, partially offset by reduced insurance costs. In the first nine months of 2005, noninterest expense rose $4.2 million or 5.7% compared with the corresponding period of 2004. Salaries and related benefits increased $493 thousand or 1.2%, primarily the net result of a $915 thousand increase in salary and wages, a $166 thousand increase in retirement plan expenses and a $152 thousand increase in group insurance, partially reduced by a $796 thousand decline in incentives and bonuses. 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 $470 thousand or 5.3% primarily due to a $154 thousand increase in rent, net of sublease income, moving expense, higher utility costs and an increase in miscellaneous occupancy expenses. Equipment expense increased $355 thousand or 10.0% mainly due to a $177 thousand increase in depreciation and higher repair and maintenance costs. Courier service expense rose by $184 thousand (6.8%). Professional fees increased $489 thousand or 36.7% due to a $446 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. Postage increased $129 thousand or 12.3%. A $2.2 million increase in amortization of identifiable intangibles was attributable to the REBC acquisition. Other noninterest expense increased $124 thousand or 2.2% largely due to a $173 thousand increase in amortization of low-income housing investments as tax benefits are realized and a $158 thousand increase in internet banking expense, partially offset by reduced insurance costs and lower employee relations expenses. These increases were reduced by a $135 thousand or 18.1% decline in operational losses. Provision for Income Tax During the third quarter of 2005, the Company recorded income tax expense (FTE) of $17.3 million, $1.2 million or 7.2% higher than the third quarter of 2004. The current quarter provision represents an effective tax rate of 37.2% (FTE), compared to 39.1% (FTE) for the third quarter of 2004. On a year-to-date basis, the income tax provision (FTE) was $48.9 million for 2005 compared with $47.1 million for 2004. The effective tax rate of 38.0% (FTE) for the first nine months of 2005 is lower than the 38.9% (FTE) for the same period of 2004. The lower tax rates in 2005 are mostly due to anticipated State tax refunds in connection with the acceptance of amended returns for 1999-2001 and the tax-free nature of $588 thousand in life insurance proceeds. Page 22 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 the loan portfolio. 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. The following is a summary of classified loans and other real estate owned on the dates indicated (dollars in thousands): <TABLE> <CAPTION> At September 30, At --------------------------December 31, 2005 2004 2004 --------------------------------------- <S> <C> <C> <C> Classified loans $36,656 $20,868 $19,225 Other real estate owned 0 0 0 --------------------------------------- Classified loans and other real estate owned $36,656 $20,868 $19,225 ======================================= Allowance for loan losses / classified loans 163% 261% 282% </TABLE> Classified loans at September 30, 2005, increased $15.8 million and $17.4 million from a year ago and December 31, 2004, respectively. The increase was primarily due to the classified loans totaling $16.1 million acquired from REBC. 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 September 30, At --------------------------December 31, 2005 2004 2004 --------------------------------------- <S> <C> <C> <C> Performing nonaccrual loans $4,514 $2,777 $4,071 Nonperforming, nonaccrual loans 2,293 3,996 2,970 Total nonaccrual loans 6,807 6,773 7,041 Loans 90 days past due and still accruing 1,334 182 10 --------------------------------------- Total nonperforming loans 8,141 6,955 7,051 Other real estate owned 0 0 0 --------------------------------------- Total $8,141 $6,955 $7,051 ======================================= Allowance for loan losses / nonperforming loans 733% 782% 768% </TABLE> Performing nonaccrual loans at September 30, 2005 increased $1.7 million and $443 thousand 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 September 30, 2005 decreased $1.7 million and $677 million from a year ago 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. Loans 90 days past due and still accruing increased $1.2 million and $1.3 million from September 30, 2004 and December 31, 2004, respectively. The increase was attributable to a $1.2 million commercial loan which is 100 percent secured by Westamerica Bank certificates of deposit. Such loan was brought current in October 2005. The Company had no restructured loans as of September 30, 2005, September 30, 2004 and December 31, 2004. The amount of gross interest income that would have been recorded for nonaccrual loans for the three and nine month periods ended September 30, 2005, if all such loans had performed in accordance with their original terms, was $148 thousand and $422 thousand, respectively, compared to $102 thousand and $332 thousand, respectively, for the third quarter and the first three quarters of 2004. Page 23 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 nine months ended September 30, 2005, totaled $23 thousand and $308 thousand, respectively, compared to $85 thousand and $252 thousand, respectively, for the comparable periods in 2004. These cash payments represent annualized yields of 1.28% and 5.67%, respectively, for the third quarter and the first nine months of 2005 compared to 5.46% and 4.99%, respectively, for the third quarter and the first nine months of 2004. Total cash payments received during the third quarter and first nine months of 2005 which were applied against the book balance of nonaccrual loans outstanding at September 30, 2005, totaled approximately $101 thousand and $329 thousand, respectively. 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 $59.7 million allowance for loan losses, which is equivalent to 2.23% of total loans at September 30, 2005, to be adequate as a reserve against losses as of September 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 Nine months ended September 30, September 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- <S> <C> <C> <C> <C> Balance, beginning of period $59,862 $53,949 $54,152 $53,910 Loan loss provision 150 600 750 2,100 Allowance acquired through merger 0 0 5,213 0 Loans charged off (684) (1,116) (2,037) (3,998) Recoveries of previously charged off loans 346 955 1,596 2,376 ---------------------------------------------------- Net credit losses (338) (161) (441) (1,622) ---------------------------------------------------- Balance, end of period $59,674 $54,388 $59,674 $54,388 ==================================================== Allowance for loan losses / loans outstanding 2.23% 2.36% </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 September 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. Page 24 A variety of factors affect the timing and magnitude of interest rate changes such as general economic conditions, fiscal policy, monetary policy, international trade and related economic developments, 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 across the term to maturity spectrum 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. The following table summarizes the simulated change in NII (FTE), based on the 12-month period ending September 30, 2006: Simulated Changes to Net Interest Income <TABLE> <CAPTION> Estimated Increase (Decrease) in NII ----------------- Twelve months ended September 30, 2006 Estimated Changes in Interest Rates (Basis Points) NII Amount Amount Percent ---------------------------------------- --------------------------------------- (Dollars in millions) <S> <C> <C> <C> +200 $218.3 ($6.8) -3.0% --- 225.1 --- --- -100 226.0 0.9 0.4% </TABLE> Liquidity The Company's principal source of asset liquidity is investment securities available for sale and principal payments from outstanding consumer and other loans. At September 30, 2005, investment securities available for sale totaled $661 million, representing a decrease of $271.1 million from December 31, 2004. The decrease is primarily attributable to the sale of $196 million of investment securities available for sale and principal payments. Additionally, during the nine months ended September 30, 2005, principal payments from maturities, call, and paydowns from all investment securities totaled approximately $214 million. At September 30, 2005, indirect auto loans totaled $418 million, which were experiencing stable monthly principal payments of approximately $18 million. In addition, at September 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 $10 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 nine months of 2005 and 2004 contributed to substantial operating cash flows of $74.3 million and $80.6 million, respectively. In 2005, operating activities and retained earnings from prior years provided cash for $29.0 million in shareholder dividends, $3.3 million for repayment of long term debt and $68.9 million utilized to repurchase common stock. In 2004, operating activities provided cash for $41.2 million of Company stock repurchases, $26.2 million in shareholder dividends and $3.2 million for repayment of long term debt. In 2004, the Company reduced its level of stock repurchases to accumulate cash for the purpose of distributing $57 million to REBC shareholders as a part of the merger consideration. In the first nine months of 2005, the Company's primary investment was the REBC acquisition. The Company paid cash of $57 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. In the first nine 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 increased $181.8 million, which was used to prepay $107 million FHLB advances and finance a substantial portion of a $121.2 million increase in investment securities. 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 and political environment, loan demand and levels of customer deposits are not certain. Shareholder dividends and share repurchases are expected to continue in 2005. 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 payments 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. Page 25 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 returning excess capital to shareholders, lessening the dilutive impact of issuing new shares under stock option plans, 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 1.3 million shares and 824 thousand shares in the first three quarters 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 $432.0 million at September 31, 2005. This amount, which is reflective of the effect of issuing $89.5 million of stock in connection with the REBC acquisition and the generation of $79.8 million in earnings, offset by common stock repurchases and dividends paid to shareholders of $97.9 million, represents an increase of $80.1 million or 22.8% from a year ago, and an increase of $73.4 million or 20.5% from December 31, 2004. The Company's ratio of equity to total assets rose to 8.38% at September 30, 2005, from 7.59% 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 September 30, At Minimum ------------------------December 31, Regulatory 2005 2004 2004 Requirement -------------------------------------------------- <S> <C> <C> <C> <C> Tier I Capital 9.09% 10.93% 11.09% 4.00% Total Capital 10.41% 12.29% 12.46% 8.00% Leverage ratio 5.99% 7.09% 7.06% 4.00% </TABLE> The risk-based capital ratios declined at September 30, 2005, compared with September 30 and December 31 of 2004, due to the REBC acquisition. The increase in capital ratios from September 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 subsequent to the acquisition. In addition, risk-weighted assets increased, resulting in lower capital ratios. The decrease in Tier I Capital and an increase in average total assets resulted in the lower leverage ratio at September 30, 2005 compared with a year ago and the end of 2004. 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 September 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 September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 26 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 September 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> July 1 through July 31 119 $53.80 119 774 --------------------------------------------------------------- August 1 through August 31 299 53.62 299 475 --------------------------------------------------------------- September 1 through September 30 19 51.40 19 1,981 --------------------------------------------------------------- Total 437 $53.57 437 1,981 =============================================================== </TABLE> * Includes 4 shares purchased in each of July, August and September 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. On August 27, 2004 the Board of Directors authorized a program for the purchase of up to 2,000,000 shares of the Company's common stock from time to time prior to September 1, 2005. A replacement plan was approved by the Board of Directors on August 25, 2005 to repurchase up to 2,000,000 shares prior to September 1, 2006. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Page 27 Item 6. Exhibits 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 28 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) November 4, 2005 /s/ JOHN "ROBERT" THORSON - ---------------- -------------------------- Date John "Robert" Thorson Senior Vice President and Chief Financial Officer (Chief Accounting Officer)