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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K/A (Amendment No. 1)
 
     
(Mark One)
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from      to
Commission file number: 001-9383
Westamerica Bancorporation
(Exact name of the registrant as specified in its charter)
     
California   94-2156203
(State of incorporation)   (I.R.S. Employer Identification Number)
1108 Fifth Avenue, San Rafael, California 94901
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code:
(707) 863-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o
      The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2004 as reported on the Nasdaq National Market System, was approximately $1,598,661,045.43. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
      Number of shares outstanding of each of the registrant’s classes of common stock, as of the close of business on March 8, 2005: 33,009,928 Shares
DOCUMENTS INCORPORATED BY REFERENCE
      Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Stockholders, to be held on April 28, 2005, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III to the extent described therein.
 
 


This Amendment No.1 to the Company's Form 10-K is filed with respect to Item 7 to correct an inadvertent error in the subsection entitled "Asset and Liability Management" to indicate that the sale of investment securities described thereunder actually resulted in a $4.9 million loss before State and Federal tax benefits, not a $4.9 million realized loss, net of tax, as stated in the initial filing on Form 10-K.
TABLE OF CONTENTS
             
        Page
         
 PART I
   Business     2  
   Properties     9  
   Legal Proceedings     10  
   Submission of Matters to a Vote of Security Holders     10  
 
 PART II
   Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities     10  
   Selected Financial Data     12  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     13  
   Quantitative and Qualitative Disclosures About Market Risk     38  
   Financial Statements and Supplementary Data     39  
   Changes in and Disagreements on Accounting and Financial Disclosure     76  
   Controls and Procedures     76  
   Other Information     76  
 
 PART III
   Directors and Executive Officers of the Registrant     76  
   Executive Compensation     77  
   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     77  
   Certain Relationships and Related Transactions     77  
   Principal Accountant Fees and Services     77  
 
 PART IV
   Exhibits, Financial Statement Schedules, and Reports on Form 8-K     78  
 EXHIBIT 10.(F)
 EXHIBIT 10.(G)
 EXHIBIT 10.(H)
 EXHIBIT 11
 EXHIBIT 21
 EXHIBIT 23.(A)
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2
FORWARD-LOOKING STATEMENTS
      This Annual Report on Form 10-K 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) 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; (10) asset/liability matching risks and liquidity risks; and (11) changes in the securities markets. See also “Certain Additional Business Risks” in Item 1. and other risk factors discussed elsewhere in this Report.

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PART I
Item 1. Business
      WESTAMERICA BANCORPORATION (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC”). Its legal headquarters are located at 1108 Fifth Avenue, San Rafael, California 94901. Principal administrative offices are located at 4550 Mangels Boulevard in Fairfield, California 94534 and its telephone number is (707) 863-6000. The Company provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary bank, Westamerica Bank (“WAB” or the “Bank”). The principal communities served are Nevada Counties in the North to Kern County in the South. The Company’s strategic focus is on the banking needs of small businesses. In addition, the Company also owns 100% of the capital stock of Community Banker Services Corporation, a company engaged in providing the Company and its subsidiaries data processing services and other support functions.
      The Company was incorporated under the laws of the State of California in 1972 as “Independent Bankshares Corporation” pursuant to a plan of reorganization among three previously unaffiliated Northern California banks. The Company operated as a multi-bank holding company until mid-1983, at which time the then six subsidiary banks were merged into a single bank named Westamerica Bank and the name of the holding company was changed to Westamerica Bancorporation.
      The Company acquired five additional banks within its immediate market area during the early to mid 1990’s. In April, 1997, the Company acquired ValliCorp Holdings, Inc., parent company of ValliWide Bank, the largest independent bank holding company headquartered in Central California. Under the terms of all of the merger agreements, the Company issued shares of its common stock in exchange for all of the outstanding shares of the acquired institutions. The subsidiary banks acquired were merged with and into WAB. These business combinations were accounted for as poolings-of-interests.
      In August, 2000, the Company acquired First Counties Bank. The acquisition was valued at approximately $19.7 million and was accounted for using the purchase accounting method. The assets and liabilities of First Counties Bank were fully merged into WAB in September 2000. First Counties Bank had $91 million in assets and offices in Lake, Napa, and Colusa counties.
      In June of 2002 the Company acquired Kerman State Bank. The acquisition was valued at approximately $14.6 million and was accounted for using the purchase accounting method. The assets and liabilities of Kerman State Bank were fully merged into WAB immediately upon consummation of the merger. Kerman State Bank had $95 million in assets and three offices in Fresno county.
      On March 1, 2005, the Company acquired Santa Rosa based Redwood Empire Bancorp, the parent company of National Bank of the Redwoods (NBR). Based on the Company’s closing stock price on March 1, 2005, the cash and stock consideration, including the value of converted stock options and certain transaction costs, paid in the acquisition was valued at approximately $153 million. As of December 31, 2004, Redwood Empire had $511 million in assets and National Bank of the Redwoods had $436 million in loans and $391 million in deposits at seven banking offices located in Sonoma (5), Lake (1) and Mendocino (1) counties.
      As of the close of business on March 11, 2005, NBR was merged with and into Westamerica Bank. Three former NBR branches were consolidated into existing nearby Westamerica Bank branches and a fourth is expected to be consolidated during the second quarter of 2005. Westamerica has entered into an agreement to sell the former NBR branch in Lake County. This transaction is expected to be consummated during the summer of 2005. Two other branches located in Sonoma County will continue as Westamerica branches.
      At December 31, 2004, the Company had consolidated assets of approximately $4.7 billion, deposits of approximately $3.6 billion and shareholders’ equity of approximately $358.6 million. The Company and its subsidiaries employed 957 full-time equivalent staff.

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      The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as beneficial ownership reports on Forms 3, 4 and 5 as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) through its website (http://www.westamerica.com). Such documents are also available through the SEC’s website (http://www.sec.gov). Requests for the Form 10-K annual report, as well as the Company’s employee Code of Conduct and Ethics, can also be submitted to:
  Westamerica Bancorporation
  Corporate Secretary A-2M
  Post Office Box 1200
  Suisun City, California 94585-1200
Certain Additional Business Risks
      The Company’s business, financial condition and operating results can be impacted by a number of factors including, but not limited to, those set forth below, any one of which could cause the Company’s actual results to vary materially from recent results or from the Company’s anticipated future results.
      A portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2004, real estate served as the principal source of collateral with respect to approximately 50% of the Company’s loan portfolio. A worsening of current economic conditions, increased economic uncertainty created by concerns regarding terrorist attacks and geo-political risks, or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available for sale securities portfolio, as well as the Company’s financial condition and results of operations in general and the market value of the Company’s common stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company’s financial condition and results of operations.
      The earnings and growth of the Company are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. Such policies influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Company cannot be predicted. Additionally, state and federal tax policies can impact banking organizations.
      As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company.
      The Company is also subject to certain operations risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls and procedures to mitigate against such occurrences and maintains insurance coverage for certain of such risks, but should such an event occur that is not prevented or detected by the Company’s internal controls, is not insured or is in excess of applicable insurance limits, it could have an adverse impact on the Company’s business, financial condition or results of operations.
      Shares of Company common stock eligible for future sale could have a dilutive effect on the market for Company common stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 150 million shares of common stock (and two additional classes of 1 million shares each, denominated “Class B Common Stock” and “Preferred Stock”, respectively) of which approximately 31.6 million were outstanding at December 31, 2004. Pursuant to its stock option plans, at December 31, 2004, the Company had exercisable options outstanding of 2.0 million. As of December 31,

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2004, 7.1 million shares of Company common stock remained available for grants under the Company’s stock option plans (and stock purchase plan). Sales of substantial amounts of Company common stock in the public market could adversely affect the market price of its common stock.
Supervision and Regulation
      The following is not intended to be an exhaustive description of the statutes and regulations applicable to the Company’s or the Bank’s business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions. Moreover, major new legislation and other regulatory changes affecting the Company, the Bank, banking, and the financial services industry in general have occurred in the last several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted.
Regulation and Supervision of Bank Holding Companies
      The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company reports to, is registered with, and may be examined by, the Board of Governors of the Federal Reserve System (“FRB”). The FRB also has the authority to examine the Company’s subsidiaries. The costs of any examination by the FRB are payable by the Company. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and the Bank are subject to examination by, and may be required to file reports with, the California Commissioner of Financial Institutions (the “Commissioner”).
      The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See “Capital Standards.” The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. Under the BHCA, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company. Any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the prior approval of the FRB.
      The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of any class of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. However, a bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be closely related to banking or managing or controlling banks. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity.
      The FRB generally prohibits a bank holding company from declaring or paying a cash dividend that would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements which might adversely affect a bank holding company’s financial position. Under the FRB policy, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. See the section entitled “Restrictions on Dividends and Other Distributions” for additional restrictions on the ability of the Company and the Bank to pay dividends.
      Transactions between the Company and the Bank are restricted under Regulation W, which became effective on April 1, 2003. The regulation codifies prior interpretations of the FRB and its staff under Sections 23A and 23B of the Federal Reserve Act. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates: (a) to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and (b) to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates. The Company is considered to be an affiliate of the Bank.

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      A “covered transaction” includes, among other things, a loan or extension of credit to an affiliate; a purchase of securities issued by an affiliate; a purchase of assets from an affiliate, with some exceptions; and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
      Federal regulations governing bank holding companies and change in bank control (Regulation Y) provide for a streamlined and expedited review process for bank acquisition proposals submitted by well-run bank holding companies. These provisions of Regulation Y are subject to numerous qualifications, limitations and restrictions. In order for a bank holding company to qualify as “well-run,” both it and the insured depository institutions which it controls must meet the “well capitalized” and “well managed” criteria set forth in Regulation Y.
      On March 11, 2000, the Gramm-Leach-Bliley Act (the “GLBA”), or the Financial Services Act of 1999 became effective. The GLBA repealed provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated.
      The BHCA was also amended by the GLBA to allow new “financial holding companies” (“FHCs”) to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLBA amended section 4 of the BHCA in order to provide for a framework for the engagement in new financial activities. A bank holding company (“BHC”) may elect to become a FHC if all its subsidiary depository institutions are well capitalized and well managed. If these requirements are met, a BHC may file a certification to that effect with the FRB and declare that it elects to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or though an acquisition in any activity that has been determined by the FRB to be financial in nature or incidental to such financial activity. BHCs may engage in financial activities without prior notice to the FRB if those activities qualify under the new list of permissible activities in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after a FHC has commenced one or more of the financial activities. The Company has not elected to become a FHC.
      Under the GLBA, Federal Reserve member banks, subject to various requirements, as well as national banks, are permitted to engage through “financial subsidiaries” in certain financial activities permissible for affiliates of FHCs. However, to be able to engage in such activities the Bank must also be well capitalized and well managed and have received at least a “satisfactory” rating in its most recent CRA examination. The Company cannot be certain of the effect of the foregoing recently enacted legislation on its business, although there is likely to be consolidation among financial services institutions and increased competition for the Company.
Regulation and Supervision of Banks
      The Bank is a California state-chartered bank, is insured by the Federal Deposit Insurance Corporation (the “FDIC”) and is a member bank of the Federal Reserve System. As such, the Bank is subject to regulation, supervision and regular examination by the California Department of Financial Institutions (“DFI”) and the FRB. As a member bank of the Federal Reserve System, the Bank’s primary federal regulator is the FRB. The regulations of these agencies affect most aspects of the Bank’s business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of its activities and various other requirements.
      In addition to federal banking law, the Bank is also subject to applicable provisions of California law. Under California law, the Bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital requirements, deposits and borrowings, stockholder rights and duties, and investment and lending activities.
      California law permits a state chartered bank to invest in the stock and securities of other corporations, subject to a state-chartered bank receiving either general authorization or, depending on the amount of the proposed investment, specific authorization from the Commissioner. However, because the Bank is a member of the Federal Reserve System, its investment authority is limited by regulations promulgated by the FRB. In addition, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes limitations on

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the activities and equity investments of state chartered, federally insured banks. FDICIA also prohibits a state bank from making an investment or engaging in any activity as a principal that is not permissible for a national bank, unless the Bank is adequately capitalized and the FDIC approves the investment or activity after determining that such investment or activity does not pose a significant risk to the deposit insurance fund.
Capital Standards
      The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans.
      A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items.
      The federal banking agencies take into consideration concentrations of credit risk and risks from nontraditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. The federal banking agencies also consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off balance sheet position) in evaluation of a bank’s capital adequacy.
      As of December 31, 2004, the Company’s and the Bank’s respective ratios exceeded applicable regulatory requirements. See Note 8 to the consolidated financial statements for capital ratios of the Company and the Bank, compared to the standards for well capitalized depository institutions and for minimum capital requirements.
Prompt Corrective Action and Other Enforcement Mechanisms
      FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios.
      An institution that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.
Safety and Soundness Standards
      FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or

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effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.
      Federal banking agencies require banks to maintain adequate valuation allowances for potential credit losses. The Company has an internal staff that continually reviews loan quality and ultimately reports to the Board of Directors. This analysis includes a detailed review of the classification and categorization of problem loans, assessment of the overall quality and collectibility of the loan portfolio, consideration of loan loss experience, trends in problem loans, concentration of credit risk, and current economic conditions, particularly in the Bank’s market areas. Based on this analysis, management, with the review and approval of the Board, determines the adequate level of allowance required. The allowance is allocated to different segments of the loan portfolio, but the entire allowance is available for the loan portfolio in its entirety.
Restrictions on Dividends and Other Distributions
      The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.
      In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank’s net income for its last three fiscal years (less any distributions to shareholders during this period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner in an amount not exceeding the greatest of the bank’s retained earnings, the bank’s net income for its last fiscal year or the bank’s net income for its current fiscal year.
      The federal banking agencies also have the authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute.
Premiums for Deposit Insurance and Assessments for Examinations
      The Bank’s deposits are insured by the Bank Insurance Fund (BIF) administered by the FDIC. FDICIA established several mechanisms to increase funds to protect deposits insured by the BIF administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions which are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of insurance premiums will be.
Community Reinvestment Act and Fair Lending Developments
      The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.

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Financial Privacy Legislation
      The GLBA, in addition to the previously described changes in permissible nonbanking activities permitted to banks, BHCs and FHCs, also required the federal banking agencies, among other federal regulatory agencies, to adopt regulations governing the privacy of consumer financial information. The FRB adopted such regulations with an effective date of November 13, 2000, and a date of full compliance with the regulations on July 1, 2001. The Bank is subject to the FRB’s regulations.
Customer Information Security
      The federal bank regulatory agencies have established standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.
U.S.A. PATRIOT Act
      On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 or the “USA Patriot Act.” Title III of the Act is the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. It includes numerous provisions for fighting international money laundering and blocking terrorist access to the U.S. financial system. The goal of Title III is to prevent the U.S. financial system and the U.S. clearing mechanisms from being used by parties suspected of terrorism, terrorist financing and money laundering.
      The provisions of Title III of the USA Patriot Act which affect banking organizations, including the Bank, are generally set forth as amendments to the Bank Secrecy Act. These provisions relate principally to U.S. banking organizations’ relationships with foreign banks and with persons who are resident outside the United States. The USA Patriot Act does not immediately impose any new filing or reporting obligations for banking organizations, but does require certain additional due diligence and recordkeeping practices. Some requirements take effect without the issuance of regulations. Other provisions were implemented through regulations promulgated by the U.S. Department of the Treasury, in consultation with the FRB and other federal financial institutions regulators.
Sarbanes-Oxley Act of 2002
      On July 30, 2002, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). The stated goals of Sarbanes-Oxley are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. Sarbanes-Oxley generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports under the Securities Exchange Act of 1934 (the “Exchange Act”).
      Sarbanes-Oxley includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues. Sarbanes-Oxley represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees and public company shareholders.
      Sarbanes-Oxley addresses, among other matters: (i) independent audit committees for reporting companies whose securities are listed on national exchanges or automated quotation systems (the “Exchanges”) and expanded duties and responsibilities for audit committees; (ii) certification of financial statements by the chief executive officer and the chief financial officer; (iii) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers

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in the twelve month period following initial publication of any financial statements that later require restatement; (iv) a prohibition on insider trading during pension plan black out periods; (v) disclosure of off-balance sheet transactions; (vi) a prohibition on personal loans to directors and officers under most circumstances; (vii) expedited electronic filing requirements related to trading by insiders in an issuer’s securities on Form 4; (viii) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (ix) accelerated filing of periodic reports; (x) the formation of the Public Company Accounting Oversight Board (“PCAOB”) to oversee public accounting firms and the audit of public companies that are subject to the securities laws; (xi) auditor independence; (xii) internal control evaluation and reporting; and (xiii) various increased criminal penalties for violations of securities laws.
      Given the extensive role of the SEC, the PCAOB and the Exchanges in implementing rules relating to Sarbanes-Oxley’s new requirements, the federalization of certain elements traditionally within the sphere of state corporate law, the impact of Sarbanes-Oxley on reporting companies have been and will continue to be significant.
Pending Legislation
      Changes to state laws and regulations (including changes in interpretation or enforcement) can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and the Company’s operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon our financial condition or results of operations. It is likely, however, that the current high level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase.
Competition
      In the past, WAB’s principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and certain retail establishments have offered investment vehicles which also compete with banks for deposit business. Federal legislation in recent years has encouraged competition between different types of financial institutions and fostered new entrants into the financial services market, and it is anticipated that this trend will continue.
      The enactment of the Interstate Banking and Branching Act in 1994 and the California Interstate Banking and Branching Act of 1995 have increased competition within California. Regulatory reform, as well as other changes in federal and California law will also affect competition. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive.
      Legislative changes, as well as technological and economic factors, can be expected to have an ongoing impact on competitive conditions within the financial services industry. As an active participant in the financial markets, the Company believes that it continually adapts to these changing competitive conditions.
Item 2. Properties
     Branch Offices and Facilities
      WAB is engaged in the banking business through 87 offices in 22 counties in Northern and Central California including thirteen offices in Fresno County, eleven in Marin County, nine in Sonoma County, seven in Napa County, six in Kern County, five each in Stanislaus, Lake, Contra Costa and Solano Counties, three each in Alameda and Sacramento Counties, two each in Mendocino, Nevada, Placer and Tulare Counties, and one each in Colusa, Merced, San Francisco, Tuolumne, Kings, Madera, and Yolo Counties. WAB believes all of its offices are constructed and equipped to meet prescribed security requirements.

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      The Company owns 29 branch office locations and one administrative facility and leases 66 facilities. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance.
Item 3. Legal Proceedings
      Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, except ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
      There were no matters submitted to a vote of the shareholders during the fourth quarter of 2004.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholders Matters and Issuer Purchases of Equity Securities
      The Company’s common stock is traded on the NASDAQ National Market System (“NASDAQ”) under the symbol “WABC”. The following table shows the high and the low bid prices for the common stock, for each quarter, as reported by NASDAQ:
                   
    High   Low
         
2004:
               
 
First quarter
  $ 51.63     $ 47.85  
 
Second quarter
    52.99       47.58  
 
Third quarter
    55.80       49.04  
 
Fourth quarter
    61.05       54.43  
2003:
               
 
First quarter
  $ 41.94     $ 38.07  
 
Second quarter
    44.66       39.24  
 
Third quarter
    42.67       45.76  
 
Fourth quarter
    53.55       44.45  
      As of February 28, 2005, there were approximately 8,600 shareholders of record of the Company’s common stock.
      The Company has paid cash dividends on its common stock in every quarter since its formation in 1972, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries as well as policies of the Federal Reserve Board pursuant to the BHCA. See Item 1, “Business, Supervision and Regulation”. As of December 31, 2004, $179.1 million was available for payment of dividends by the Company to its shareholders, under applicable laws and regulations.
      See Note 17 to the consolidated financial statements included in this report for additional information regarding the amount of cash dividends declared and paid on common stock for the three most recent fiscal years.
      As discussed in Note 7 to the consolidated financial statements, in December 1986, the Company declared a dividend distribution of one common share purchase right (the “Right”) for each outstanding share of common stock. The terms of the Rights were most recently amended and restated in 2004. The new amended plan is very similar in purpose and effect to the plan as it existed prior to this amendment, aimed at helping the Board of Directors to maximize shareholder value in the event of a change of control of the Company and otherwise resist actions that the Board considers likely to injure the Company or its shareholders.

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Securities Authorized for Issuance Under Equity Compensation Plans
      The following table summarizes the status of the Company’s equity compensation plans as of December 31, 2004 (in thousands, except exercise price):
                         
    (a)   (b)   (c)
             
            Number of Securities
            Remaining Available for
    Number of Securities       Future Issuance under
    to be Issued upon   Weighted-Average   Equity Compensation
    Exercise of   Exercise Price of   Plans (Excluding
    Outstanding Options,   Outstanding Options,   Securities Reflected in
Plan Category   Warrants and Rights   Warrants and Rights   Column (a))
             
Equity compensation plans approved by security holders
    3,058     $ 36       1,745*  
Equity compensation plans not approved by security holders
    0       N/A       0  
                   
Total
    3,058     $ 36       1,745  
                   
 
The Amended and Restated Stock Option Plan, Article III, provides that the number of shares reserved for Awards under the plan may increase on the first day of each fiscal year by an amount equal to the least of 1) 2% of the shares outstanding as of the last day of the prior fiscal year, 2) 675,000 shares, or 3) such lesser amount as determined by the Board.
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 December 31, 2004 (in thousands, except per share data).
                                 
    (a)   (b)   (c)   (d)
                 
            Total Number of    
    Total       Shares Purchased   Maximum Number of
    Number of   Average Price   as Part of Publicly   Shares that May Yet
    Shares   Paid per   Announced Plans   Be Purchased Under
Period   Purchased   Share   or Programs*   the Plans or Programs
                 
October 1 through October 31
    2       55.55       2       1,996  
November 1 through November 30
    108       59.77       108       1,888  
December 1 through December 31
    132       58.02       132       1,756  
                         
Total
    242       58.80       242       1,756  
                         
 
Includes 2 thousand, 5 thousand and 1 thousand shares purchased in October, November and December, 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 fourth quarter of 2004 pursuant to a program approved by the Board of Directors on August 27, 2004 authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2005. The new 2004 approved amount included 645,429 remaining shares available to be repurchased under the 2003 plan.

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Item 6. Selected Financial Data
      The following financial information for the five years ended December 31, 2004 has been derived from the Company’s Consolidated Financial Statements. This information should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere herein.
WESTAMERICA BANCORPORATION
FINANCIAL SUMMARY
                                           
    Year Ended December 31
     
    2004   2003   2002   2001   2000
                     
    (In thousands, except per share data)
Interest income
  $ 216,337     $ 223,493     $ 237,633     $ 257,056     $ 269,516  
Interest expense
    21,106       27,197       39,182       68,887       88,614  
                               
Net interest income
    195,231       196,296       198,451       188,169       180,902  
Provision for loan losses
    2,700       3,300       3,600       3,600       3,675  
Noninterest income:
                                       
 
Securities (impairment) gains, net
    (5,011 )     2,443       (4,278 )     0       0  
 
Loss on extinguishment of debt
    (2,204 )     (2,166 )     0       0       0  
 
Deposit service charges and other
    45,798       42,639       40,829       42,655       41,130  
Total noninterest income
    38,583       42,916       36,551       42,655       41,130  
Noninterest expense
    98,751       101,703       103,323       102,651       100,198  
                               
Income before income taxes
    132,363       134,209       128,079       124,573       118,159  
Provision for income taxes
    37,145       39,146       40,941       40,294       38,380  
                               
Net income
  $ 95,218     $ 95,063     $ 87,138     $ 84,279     $ 79,779  
                               
Earnings per share:
                                       
 
Basic
  $ 2.99     $ 2.89     $ 2.59     $ 2.39     $ 2.19  
 
Diluted
    2.93       2.85       2.55       2.36       2.16  
Per share:
                                       
 
Dividends paid
  $ 1.10     $ 1.00     $ 0.90     $ 0.82     $ 0.74  
 
Book value at December 31
    11.33       10.54       10.22       9.19       9.32  
Average common shares outstanding
    31,821       32,849       33,686       35,213       36,410  
Average diluted common shares outstanding
    32,461       33,369       34,225       35,748       36,936  
Shares outstanding at December 31
    31,640       32,287       33,411       34,220       36,251  
At December 31
                                       
Loans, net
  $ 2,246,078     $ 2,269,420     $ 2,440,411     $ 2,432,371     $ 2,429,880  
Investments
    2,192,542       1,949,288       1,386,833       1,158,139       1,149,310  
Total assets
    4,737,268       4,576,385       4,224,867       3,927,967       4,031,381  
Total deposits
    3,583,619       3,463,991       3,294,065       3,234,635       3,236,744  
Short-term borrowed funds
    735,423       590,646       349,736       271,911       386,942  
Federal Home Loan Bank advances
    0       105,000       170,000       40,000       0  
Debt financing and notes payable
    21,429       24,643       24,607       27,821       31,036  
Intangible assets
    21,890       22,433       23,176       19,013       20,376  
Shareholders’ equity
    358,609       340,371       341,499       314,359       337,747  
Financial Ratios:
                                       
For the year:
                                       
 
Return on assets
    2.10 %     2.19 %     2.17 %     2.18 %     2.06 %
 
Return on equity
    28.83 %     29.38 %     28.70 %     27.17 %     25.78 %
 
Net interest margin*
    5.14 %     5.39 %     5.76 %     5.71 %     5.48 %
 
Net loan losses to average loans
    0.11 %     0.15 %     0.14 %     0.15 %     0.17 %
 
Efficiency ratio*
    38.49 %     39.07 %     40.96 %     41.67 %     42.45 %
At December 31:
                                       
 
Equity to assets
    7.57 %     7.44 %     8.08 %     8.00 %     8.38 %
 
Total capital to risk-adjusted assets
    12.46 %     11.39 %     10.97 %     10.63 %     11.61 %
 
Allowance for loan losses to loans
    2.35 %     2.32 %     2.17 %     2.10 %     2.11 %
 
Fully taxable equivalent

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
      The following discussion addresses information pertaining to the financial condition and results of operations of Westamerica Bancorporation and Subsidiaries (the “Company”) that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes.
      It should be read in conjunction with those statements and notes found on pages 42 through 74, as well as with the other information presented throughout the Report.
Critical Accounting Policies
      The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the banking industry. Application of these principles requires management to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management.
      The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the Allowance for Loan Losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
      The Allowance for Loan Losses represents management’s estimate of the amount of loss in the loan portfolio that can be reasonably estimated as of the balance sheet date. Determining the amount of the Allowance for Loan Losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, uncertainties and conditions, all of which may be susceptible to significant change. A discussion of the factors driving changes in the amount of the Allowance for Loan losses is included in the “Credit Quality” discussion below.
OVERVIEW OF FINANCIAL RESULTS
Acquisition
      On August 25, 2004, the Company signed a definitive agreement to acquire Redwood Empire Bancorp, parent company of National Bank of the Redwoods. On January 26, 2005, the Federal Reserve System (“FRB”) approved the Company’s merger application subject to a divestiture of approximately $43 million in

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deposits in Lake County. The acquisition was completed on March 1, 2005. After adjusting for the divestiture the transaction was valued at approximately $153 million, including approximately $57 million paid in cash and issuance of the Company’s common stock valued at approximately $85 million, conversion of Redwood Empire stock options into Company stock options with a fair value of about $6 million and certain transaction related costs. During the second half of 2004, the Company reduced the allocation of its operating cash flow toward the repurchase and retirement of its common stock in order to meet the cash payment for the transaction. Further information related to the acquisition, including unaudited pro forma combined financial data, can be found in the Company’s Registration Statement on Form S-4 that was filed with the Securities and Exchange Commission on October 15, 2004.
Net Income
      In the fourth quarter of 2004, the Company recognized a $7.2 million securities impairment writedown to market value of Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock held in the available for sale investment portfolio. The writedown was recorded as a reduction in noninterest income. The after-tax effect was $4.2 million, net of tax benefits of $3.0 million. The decision to record the charge was made because an analysis by management indicated that current market declines in the value of this preferred stock would not recover within a conservative definition of a reasonable period of time. At December 31, 2004, the Company held FNMA and FHLMC preferred stock with an adjusted book value of $63.9 million and a tax-equivalent dividend yield of 7.65%.
      The Company reported net income of $95.2 million in 2004, reflecting a $4.2 million after-tax writedown in the value of FNMA and FHLMC preferred stock, representing a 0.2% increase from the $95.1 million earned in 2003, which was up 9.1% over 2002 earnings of $87.1 million.
Components of Net Income
                           
    Year ended December 31,
     
    2004   2003   2002
             
    (In thousands)
Net interest and fee income*
  $ 217,993     $ 217,407     $ 215,708  
Provision for loan losses
    (2,700 )     (3,300 )     (3,600 )
Noninterest income
    38,583       42,916       36,551  
Noninterest expense
    (98,751 )     (101,703 )     (103,323 )
Taxes*
    (59,907 )     (60,257 )     (58,198 )
                   
 
Net income
  $ 95,218     $ 95,063     $ 87,138  
                   
Net income per average fully-diluted share
  $ 2.93     $ 2.85     $ 2.55  
Net income as a percentage of average shareholders’ equity
    28.83 %     29.38 %     28.70 %
Net income as a percentage of average total assets
    2.10 %     2.19 %     2.17 %
                   
 
Fully taxable equivalent (FTE)
      Net income in 2004 was $155 thousand or 0.2% more than in 2003, after including a $4.2 million after-tax government sponsored entity (FNMA and FHLMC) preferred stock impairment charge in 2004. Net interest income (FTE) increased $586 thousand, the net result of higher average earning assets and lower funding costs, partially offset by declining earning asset yields and lower fee income. The loan loss provision declined $600 thousand, year over year, in accordance with Management’s assessment of credit risk for the loan portfolio. Noninterest income fell $4.3 million primarily due to the above impairment charge, partially offset by growth in deposit fee income. Noninterest expense declined $2.9 million because of lower personnel and other operational costs. The lower tax provision (FTE) (down $350 thousand) was due to the $3.0 million tax

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benefit of the impairment charge and higher low-income housing investment tax credits, offset in part by increased pretax income.
      Much of the growth in 2003 earnings was attributable to a $6.4 million increase in noninterest income, the result of greater service charge income, and because the 2002 total was reduced by a securities impairment charge of $4.3 million. Net interest income (FTE) increased $1.7 million, the net result of higher average earning assets and lower funding costs, partially offset by declining earning asset yields. The loan loss provision was reduced slightly and noninterest expense declined $1.6 million. The 2002 noninterest expense included $400 thousand in severance costs relating to the acquisition of Kerman State Bank (“KSB”). A $2.0 million increase in the tax provision (FTE) resulted mostly from higher earnings.
      The Company’s return on average total assets was 2.10% in 2004, compared to 2.19% and 2.17% in 2003 and 2002, respectively. Return on average equity in 2004 was 28.83%, compared to 29.38% and 28.70% in 2003 and 2002, respectively.
Net Interest Income
      The Company’s primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) in 2004 increased $586 thousand or 0.3% from 2003, to $218.0 million. Comparing 2003 to 2002, net interest income (FTE) increased $1.7 million or 0.8%.
Components of Net Interest Income
                           
    Year ended December 31,
     
    2004   2003   2002
             
    (In thousands)
Interest and fee income
  $ 216,337     $ 223,493     $ 237,633  
Interest expense
    (21,106 )     (27,197 )     (39,182 )
FTE adjustment
    22,762       21,111       17,257  
                   
 
Net interest income (FTE)
  $ 217,993     $ 217,407     $ 215,708  
                   
Net interest margin (FTE)
    5.14 %     5.39 %     5.76 %
                   
      Interest and fee income (FTE) declined $5.5 million or 2.3% from 2003 to 2004, the net result of declining yields on earning assets and lower loan fee income, partially offset by the effect of higher volume of earning assets. The total yield on earning assets, excluding loan fee income, declined from 5.99% in 2003 to 5.61% in 2004, following the general trend in interest rates within capital markets. The most significant yield declines in the loan portfolio were indirect consumer loans (down 92 basis points (“bp”)), commercial real estate loans (down 37 bp) and residential real estate loans (down 64 bp). Loan fee income, primarily prepayment fees, declined from $3.1 million in 2003 to $1.6 million in 2004, lowering the total earning asset yield an additional 4 bp from 2003. The investment portfolio yield declined 9 bp to 5.07% with declines occurring in U.S. government sponsored entity obligations (down from 3.83% to 3.41%, or 42 bp) and municipal securities (down from 7.14% to 6.80%, or 34 bp). The decline in investment yields was partly mitigated by increases in yields on collateralized mortgage obligations (up 79 bp) and other securities (up 101 bp). The lower yields caused interest income (excluding fees) to decline by $9.2 million, which was offset by the $5.2 million effect of growth in average earning assets (up $202.9 million to $4,236.9 million in 2004). The investment portfolio increased by $298.7 million, primarily the net result of increases in collateralized mortgage obligations (up $247.4 million), municipal securities (up $80.1 million) and U.S. government sponsored entity obligations (up $39.1 million), partially offset by a $60.5 million decline in other securities. The loan portfolio was reduced by $95.8 million with the largest decrease occurring in commercial real estate loans (down $119.5 million).

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      Interest expense fell $6.1 million or 22.4% from 2003 to 2004 due to declining rates paid on average interest-bearing liabilities and a change in mix of those liabilities. The average rate paid on interest-bearing liabilities dropped 24 bp to 0.73%. Notable decreases were on money market saving accounts (down 30 bp), CDs over $100 thousand (down 8 bp), retail CDs (down 19 bp) and customer sweep accounts (down 25 bp). Yields on overnight funds purchased increased 26 bp after a series of increases in the target rate for federal funds in the second half of 2004. Interest-bearing liabilities shifted from higher-rate to lower-rate categories. Federal Home Loan Bank (“FHLB”) advances were paid off entirely during 2004, reducing the average balance by $118.1 million. Retail CDs and CDs over $100 thousand fell by $35.8 million and $20.1 million, respectively. Overnight funds purchased and money market accounts rose by $138.5 million and $60.0 million, respectively. A $107.5 million increase in noninterest-bearing balances resulted in the reduction of expense by $1.3 million.
      Interest and fee income (FTE) decreased $10.3 million or 4.0% in 2003 from the previous year, due to the net effect of lower earning asset yields, partially offset by higher average balances of those assets. The total yield on earning assets dropped from 6.81% in 2002 to 6.06% in 2003, reflecting the declining trend in average market rates of interest and a reduction in higher yielding loan totals. The loan portfolio yield declined 65 bp to 6.58%, affected by declines in commercial loan yields (down 39 bp to 6.11%), commercial real estate loan yields (down 34 bp to 7.63%), residential real estate loan yields (down 117 bp to 5.09%), and indirect consumer loan yields (down 110 bp to 6.09%). The investment portfolio yield also fell 72 bp to 5.16%, mainly due to declines in U.S. Treasury securities yields (down 150 bp to 4.13%), U.S. government sponsored entity obligation yields (down 114 bp to 3.83%), mortgage backed securities and collateralized mortgage obligation yields (down 108 bp to 3.33%) and municipal securities yields (down 44 bp to 7.14%).
      Interest expense decreased $12.0 million or 30.6% in 2003 compared to 2002, due to lower interest rates, partly offset by higher average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 0.97% in 2003, 53 basis points lower than in 2002. Notable declines included money market savings accounts (down 54 bp to 0.75%), Public CDs (down 133 bp to 1.21%), Jumbo CDs (down 69 bp to 1.47%) and short-term borrowings (down 52 bp to 0.89%). Total interest-bearing liabilities grew $190 million or 7.3%, causing a $1.4 million increase in interest expense, mainly due to increases in short-term borrowings (up $129 million or 51.7%) and money market savings accounts (up $101 million or 19.4%). In addition, as a result of continuing marketing efforts to acquire commercial relationships, noninterest-bearing balances increased 9.1%, indirectly causing interest expense to decline an additional $1.0 million.
      The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts 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

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have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate.
      Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
                             
    Year Ended December 31, 2004
     
    Average   Interest   Rates
    Balance   Income/Expense   Earned/Paid
             
    (Dollars in thousands)
Assets
                       
Money market assets and funds sold
  $ 784     $ 1       0.13 %
Trading account securities
                 
Investment securities:
                       
 
Available for sale
                       
   
Taxable
    803,722       33,230       4.13 %
   
Tax-exempt
    293,067       21,619       7.38 %
 
Held to maturity Taxable
    451,635       17,209       3.81 %
   
Tax-exempt
    429,213       28,281       6.59 %
Loans:
                       
 
Commercial
                       
   
Taxable
    1,115,148       77,278       6.93 %
   
Tax-exempt
    239,495       16,045       6.70 %
 
Real estate construction
    36,148       2,517       6.96 %
 
Real estate residential
    360,208       16,049       4.46 %
 
Consumer
    507,483       26,870       5.29 %
                   
Earning assets
    4,236,903       239,099       5.64 %
Other assets
    299,549                  
                   
   
Total assets
  $ 4,536,452                  
                   
 
Liabilities and shareholders’ equity
                       
Deposits:
                       
 
Noninterest bearing demand
  $ 1,281,349              
 
Savings and interest-bearing transaction
    1,662,347       4,543       0.27 %
 
Time less than $100,000
    271,212       4,038       1.49 %
 
Time $100,000 or more
    350,400       4,466       1.27 %
                   
   
Total interest-bearing deposits
    2,283,959       13,047       0.57 %
Short-term borrowed funds
    556,415       5,878       1.06 %
Federal Home Loan Bank advances
    24,153       897       3.65 %
Debt financing and notes payable
    21,706       1,284       5.91 %
                   
 
Total interest-bearing liabilities
    2,886,233       21,106       0.73 %
Other liabilities
    38,540                  
Shareholders’ equity
    330,330                  
                   
 
Total liabilities and shareholders’ equity
  $ 4,536,452                  
                   
Net interest spread(1)
                    4.91 %
Net interest income and interest margin(2)
          $ 217,993       5.14 %
                   
 
(1)  Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
(2)  Net interest margin is computed by dividing net interest income by total average earning assets.

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Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
                             
    ?Year Ended December 31, 2003
     
    Average   Interest   Rates
    Balance   Income/Expense   Earned/Paid
             
    (Dollars in thousands)
 
Assets
                       
Money market assets and funds sold
  $ 875     $ 8       0.91 %
Trading account securities
                 
Investment securities:
                       
 
Available for sale
                       
   
Taxable
    842,729       35,385       4.20 %
   
Tax-exempt
    310,200       23,415       7.55 %
 
Held to maturity
                       
   
Taxable
    197,957       5,038       2.54 %
   
Tax-exempt
    327,933       22,814       6.96 %
Loans:
                       
 
Commercial
                       
   
Taxable
    1,253,514       91,191       7.27 %
   
Tax-exempt
    209,911       15,095       7.19 %
 
Real estate construction
    42,362       3,049       7.20 %
 
Real estate residential
    342,118       17,409       5.09 %
 
Consumer
    506,365       31,200       6.16 %
                   
Earning assets
    4,033,964       244,604       6.06 %
Other assets
    298,743                  
                   
   
Total assets
  $ 4,332,707                  
                   
 
Liabilities and shareholders’ equity
                       
Deposits:
                       
 
Noninterest bearing demand
  $ 1,173,853              
 
Savings and interest-bearing transaction
    1,578,721       6,818       0.43 %
 
Time less than $100,000
    307,054       5,147       1.68 %
 
Time $100,000 or more
    370,549       5,020       1.35 %
                   
   
Total interest-bearing deposits
    2,256,324       16,985       0.75 %
Short-term borrowed funds
    378,362       3,415       0.90 %
Federal Home Loan Bank advances
    142,271       5,318       3.74 %
Debt financing and notes payable
    21,222       1,479       6.97 %
                   
 
Total interest-bearing liabilities
    2,798,179       27,197       0.97 %
Other liabilities
    37,120                  
Shareholders’ equity
    323,555                  
                   
 
Total liabilities and shareholders’ equity
  $ 4,332,707                  
                   
Net interest spread(1)
                    5.09 %
Net interest income and interest margin(2)
          $ 217,407       5.39 %
                   
 
(1)  Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
(2)  Net interest margin is computed by dividing net interest income by total average earning assets.

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Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin
                               
    Year Ended December 31, 2002
     
    Average   Interest   Rates
    Balance   Income/Expense   Earned/Paid
             
    (Dollars in thousands)
Assets
                       
Money market assets and funds sold
  $ 1,143     $ 12       1.05 %
Trading account securities
                 
Investment securities:
                       
 
Available for sale
                       
   
Taxable
    656,284       32,426       4.94 %
   
Tax-exempt
    309,931       23,343       7.53 %
 
Held to maturity
                       
   
Taxable
    137,529       6,810       4.95 %
   
Tax-exempt
    167,001       12,398       7.42 %
Loans:
                       
 
Commercial
                       
   
Taxable
    1,376,262       103,690       7.53 %
   
Tax-exempt
    196,900       14,959       7.60 %
 
Real estate construction
    55,457       4,105       7.40 %
 
Real estate residential
    331,822       20,763       6.26 %
 
Consumer
    505,435       36,384       7.20 %
                   
Earning assets
    3,737,764       254,890       6.81 %
Other assets
    284,763                  
                   
   
Total assets
  $ 4,022,527                  
                   
 
Liabilities and shareholders’ equity
                       
Deposits:
                       
 
Noninterest bearing demand
  $ 1,075,845              
 
Savings and interest-bearing transaction
    1,492,611       11,942       0.80 %
 
Time less than $100,000
    334,601       8,289       2.48 %
 
Time $100,000 or more
    368,456       8,414       2.28 %
                   
     
Total interest-bearing deposits
    2,195,668       28,645       1.30 %
Short-term borrowed funds
    249,439       3,524       1.41 %
Federal Home Loan Bank advances
    138,615       5,225       3.72 %
Debt financing and notes payable
    24,875       1,788       7.19 %
                   
 
Total interest-bearing liabilities
                       
Other liabilities
    2,608,597       39,182       1.50 %
Shareholders’ equity
    34,512                  
      303,573                  
                   
 
Total liabilities and shareholders’ equity
  $ 4,022,527                  
                   
Net interest spread(1)
                    5.31 %
Net interest income and interest margin(2)
          $ 215,708       5.76 %
                   
 
(1)  Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
(2)  Net interest margin is computed by dividing net interest income by total average earning assets.

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      The following table sets forth a summary of the changes in interest income and interest expense due to changes in average assets 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.
 Summary of Changes in Interest Income and Expense
                               
    Years Ended December 31, 2004
    Compared with 2003
     
    Volume   Rate   Total
             
    (Dollars in thousands)
Increase (decrease) in interest and fee income:
                       
 
Money market assets and funds sold
  $ (1 )   $ (6 )   $ (7 )
 
Trading account securities
                 
 
Investment securities:
                       
   
Available for sale
                       
     
Taxable
    (1,597 )     (558 )     (2,155 )
     
Tax-exempt(1)
    (1,255 )     (541 )     (1,796 )
   
Held to maturity
                       
     
Taxable
    8,787       3,384       12,171  
     
Tax-exempt(1)
    6,739       (1,272 )     5,467  
 
Loans:
                       
   
Commercial:
                       
     
Taxable
    (10,102 )     (3,811 )     (13,913 )
     
Tax-exempt(1)
    2,043       (1,093 )     950  
   
Real estate construction
    (434 )     (98 )     (532 )
   
Real estate residential
    916       (2,276 )     (1,360 )
   
Consumer
    140       (4,470 )     (4,330 )
                   
     
Total loans(1)
    (7,437 )     (11,748 )     (19,185 )
                   
Total increase (decrease) in interest and fee income(1)
    5,236       (10,741 )     (5,505 )
                   
Increase (decrease) in interest expense:
                       
 
Deposits:
                       
   
Savings/interest-bearing
    355       (2,630 )     (2,275 )
   
Time less than $100,000
    (561 )     (548 )     (1,109 )
   
Time $100,000 or more
    (259 )     (295 )     (554 )
                   
 
Total interest-bearing
    (465 )     (3,473 )     (3,938 )
 
Short-term borrowed funds
    1,813       650       2,463  
 
Federal Home Loan Bank advances
    (4,372 )     (49 )     (4,421 )
 
Notes and mortgages payable
    36       (231 )     (195 )
                   
   
Total increase (decrease) in interest expense
    (2,988 )     (3,103 )     (6,091 )
                   
 
Increase (decrease) in net interest income(1)
  $ 8,224     $ (7,638 )   $ 586  
                   
 
(1)  Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

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Summary of Changes in Interest Income and Expense
                               
    2003 Compared with 2002
     
    Volume   Rate   Total
             
    Years Ended December 31,
    (Dollars in thousands)
Increase (decrease) in interest and fee income:
                       
 
Money market assets and funds sold
  $ (3 )   $ (1 )   $ (4 )
 
Trading account securities
                 
 
Investment securities:
                       
   
Available for sale
                       
     
Taxable
    8,307       (5,348 )     2,959  
     
Tax-exempt(1)
    20       52       72  
   
Held to maturity
                       
     
Taxable
    2,302       (4,074 )     (1,772 )
     
Tax-exempt(1)
    11,242       (826 )     10,416  
 
Loans:
                       
   
Commercial:
                       
     
Taxable
    (9,116 )     (3,383 )     (12,499 )
     
Tax-exempt(1)
    959       (823 )     136  
   
Real estate construction
    (945 )     (111 )     (1,056 )
   
Real estate residential
    627       (3,981 )     (3,354 )
   
Consumer
    67       (5,251 )     (5,184 )
                   
     
Total loans(1)
    (8,408 )     (13,549 )     (21,957 )
                   
Total increase (decrease) in interest and fee income(1)
    13,460       (23,746 )     (10,286 )
                   
Increase (decrease) in interest expense:
                       
 
Deposits:
                       
   
Savings/interest-bearing
    654       (5,778 )     (5,124 )
   
Time less than $100,000
    (638 )     (2,504 )     (3,142 )
   
Time $100,000 or more
    48       (3,442 )     (3,394 )
                   
 
Total interest-bearing
    64       (11,724 )     (11,660 )
 
Short-term borrowed funds
    1,434       (1,544 )     (110 )
 
Federal Home Loan Bank advances
    136       (43 )     93  
 
Notes and mortgages payable
    (256 )     (52 )     (308 )
                   
   
Total increase (decrease) in interest expense
    1,378       (13,363 )     (11,985 )
                   
 
Increase (decrease) in net interest income(1)
  $ 12,082     $ (10,383 )   $ 1,699  
                   
 
(1)  Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
Provision for Loan Losses
      The provision for loan losses was $2.7 million for 2004, compared with $3.3 million for 2003 and $3.6 million for 2002. The reductions in the provision reflects Management’s view of credit risk in the loan portfolio and the results of the Company’s continuing efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts. For further information regarding net credit losses and the allowance for loan losses, see the “Credit Quality” section of this report.

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Investment Portfolio
      The Company maintains a securities portfolio consisting of U.S. Government sponsored entities, state and political subdivisions, asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian.
      The objective of the held to maturity portfolio is to maintain a prudent yield and provide collateral to pledge for federal, state and local government deposits and other borrowing facilities. The held to maturity investment portfolio had a duration of 4.4 years at December 31, 2004 and, on the same date, those investments included $1,118.3 million in fixed-rate and $142.5 million in adjustable-rate securities.
      Investment securities available for sale are generally used to supplement the Company’s liquidity, provide a prudent yield, and provide collateral for public deposits. Unrealized net gains and losses on these securities are recorded as an adjustment to equity, net of taxes, and are not reflected in the current earnings of the Company. If a security is sold, any gain or loss is recorded as a credit or charge to earnings and the equity adjustment is reversed. At December 31, 2004, the Company held $931.7 million in securities classified as investments available for sale with a duration of 3.4 years. At December 31, 2004, an unrealized gain of $9.6 million, net of taxes of $7.0 million, related to these securities, was included in shareholders’ equity.
      The Company had no trading securities at December 31, 2004, 2003 and 2002.
      For more information on investment securities, see Notes 1 and 2 to the consolidated financial statements.
      The following table shows the carrying amount (fair value) of the Company’s investment securities available for sale as of the dates indicated:
Available for Sale Portfolio
                           
    At December 31,
     
    2004   2003   2002
             
    (Dollars in thousands)
U.S. Treasury
  $ 0     $ 0     $ 21,088  
U.S. Government sponsored entities
    557,057       961,727       385,508  
States and political subdivisions
    247,731       278,393       296,259  
Asset backed securities
    3,257       12,990       42,075  
Corporate securities
    48,658       73,425       144,497  
Other
    75,007       87,376       58,421  
                   
 
Total
  $ 931,710     $ 1,413,911     $ 947,848  
                   
      The following table sets forth the relative maturities and yields of the Company’s available for sale securities (stated at amortized cost) at December 31, 2004. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the

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amortized cost value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate.
     Available for Sale Maturity Distribution
                                                             
    At December 31, 2004
     
        After One   After Five    
    Within   but Within   but Within   After Ten   Mortgage-    
    One Year   Five Years   Ten Years   Years   backed   Other   Total
                             
    (Dollars in thousands)
U.S. Government sponsored entities
  $     $ 308,859     $ 46     $     $     $     $ 308,905  
 
Interest rate
    %     3.30 %     7.95 %     %     %     %     3.30 %
States and political subdivisions
    3,955       33,853       152,073       44,242                   234,123  
 
Interest rate (FTE)
    7.32 %     7.67 %     7.33 %     7.06 %                 7.33 %
Asset-backed securities
          3,256                               3,256  
 
Interest rate
          2.87 %                             2.87 %
Other securities
    22,187       25,130                               47,317  
 
Interest rate
    5.95 %     6.54 %                             6.26 %
                                           
 
Subtotal
    26,142       371,098       152,119       44,242                   593,601  
 
Interest rate
    6.16 %     3.91 %     7.33 %     7.06 %                 5.11 %
Mortgage backed securities
                            253,936             253,936  
 
Interest rate
                            4.22 %           4.22 %
Other without set maturities
                                  67,541       67,541  
 
Interest rate
                                  7.61 %     7.61 %
                                           
   
Total
  $ 26,142     $ 371,098     $ 152,119     $ 44,242     $ 253,936     $ 67,541     $ 915,078  
 
Interest rate
    6.16 %     3.91 %     7.33 %     7.06 %     4.22 %     7.61 %     5.05 %
                                           
      The following table shows the carrying amount (amortized cost) and fair value of the Company’s investment securities held to maturity as of the dates indicated:
     Held to Maturity Portfolio
                           
    At December 31,
     
    2004   2003   2002
             
    (Dollars in thousands)
U.S. Government sponsored entities
    736,137       98,287       201,486  
States and political subdivisions
    524,695       417,984       212,569  
Asset backed securities
    0       6,322       9,769  
Other
    0       12,784       15,161  
                   
 
Total
  $ 1,260,832     $ 535,377     $ 438,985  
                   
Fair value
  $ 1,265,986     $ 542,729     $ 450,771  
                   
      The following table sets forth the relative maturities and yields of the Company’s held to maturity securities at December 31, 2004. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the amortized value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate.

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     Held to Maturity Maturity Distribution
                                                               
    At December 31, 2004
     
        After One   After Five    
    Within   but Within   but Within   After Ten   Mortgage-    
    One Year   Five Years   Ten Years   Years   Backed   Other   Total
                             
    (Dollars in thousands)
U.S. Government sponsored entities
  $     $ 227,056     $     $     $     $     $ 227,056  
     
Interest rate
    %     3.43 %     %     %     %     %     3.43 %
States and political subdivisions
    9,799       44,281       74,395       396,220                   524,695  
     
Interest rate (FTE)
    6.81 %     6.85 %     6.54 %     6.08 %                 6.23 %
Asset backed
                                         
     
Interest rate
                                         
Other securities
                                         
     
Interest rate
                                         
                                           
 
Subtotal
    9,799       271,337       74,395       396,220                   751,751  
     
Interest rate
    6.81 %     3.99 %     6.54 %     6.08 %                 5.38 %
Mortgage backed
                            509,081             509,081  
     
Interest rate
                            4.22 %           4.22 %
                                           
   
Total
  $ 9,799     $ 271,337     $ 74,395     $ 396,220     $ 509,081     $     $ 1,260,832  
     
Interest rate
    6.81 %     3.99 %     6.54 %     6.08 %     4.22 %     %     4.91 %
                                           
Loan Portfolio
      The following table shows the composition of the loan portfolio of the Company by type of loan and type of borrower, on the dates indicated:
Loan Portfolio Distribution
                                         
    At December 31,
     
    2004   2003   2002   2001   2000
                     
    (Dollars in thousands)
Commercial and commercial real estate
  $ 1,388,639     $ 1,429,645     $ 1,588,803     $ 1,576,723     $ 1,562,462  
Real estate construction
    29,724       38,019       45,547       69,658       64,195  
Real estate residential
    375,532       347,794       330,460       347,114       355,488  
Consumer
    506,338       507,911       530,054       491,793       502,367  
Unearned income
    (3 )     (39 )     (226 )     (831 )     (2,353 )
                               
Gross loans
  $ 2,300,230     $ 2,323,330     $ 2,494,638     $ 2,484,457     $ 2,482,159  
Allowance for loan losses
    (54,152 )     (53,910 )     (54,227 )     (52,086 )     (52,279 )
                               
Net loans
  $ 2,246,078     $ 2,269,420     $ 2,440,411     $ 2,432,371     $ 2,429,880  
                               

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      The following table shows the maturity distribution and interest rate sensitivity of commercial, commercial real estate, and construction loans at December 31, 2004. Balances exclude loans to individuals and residential mortgages totaling $881.9 million. These types of loans are typically paid in monthly installments over a number of years.
     Loan Maturity Distribution
                                   
    At December 31, 2004
     
    Within   One to   After Five    
    One Year   Five Years   Years   Total
                 
    (Dollars in thousands)
Commercial and commercial real estate *
  $ 502,468     $ 669,127     $ 217,044     $ 1,388,639  
Real estate construction
    29,724       0       0       29,724  
                         
 
Total
  $ 532,192     $ 669,127     $ 217,044     $ 1,418,363  
                         
Loans with fixed interest rates
  $ 91,602     $ 321,000     $ 217,044     $ 629,646  
Loans with floating or adjustable interest rates
    440,590       348,127       0       788,717  
                         
 
Total
  $ 532,192     $ 669,127     $ 217,044     $ 1,418,363  
                         
 
Includes demand loans
Commitments and Letters of Credit
      It is not the policy of the Company to issue formal commitments on lines of credit except to a limited number of well-established and financially responsible local commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of Letters of Credit to facilitate the customers’ particular business transactions. Commitment fees generally are not charged except where Letters of Credit are involved. Commitments and lines of credit typically mature within one year. For further information, see Note 12 to the consolidated financial statements.
Credit Quality
      The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with higher credit risk and to increase diversification of the loan portfolio. Credit reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Loans receiving lesser grades fall under the “classified loans” category, which includes all nonperforming and potential problem loans, and receive an elevated level of Management attention to ensure collection.
Classified Loans and Other Real Estate Owned
      The following summarizes the Company’s classified loans for the periods indicated:
Classified Loans and OREO
                 
    At December 31,
     
    2004   2003
         
    (Dollars in thousands)
Classified loans
  $ 19,225     $ 23,316  
Other real estate owned
    0       90  
             
Total
  $ 19,225     $ 23,406  
             

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      Classified loans at December 31, 2004 declined $4.1 million or 17.5% to $19.2 million from December 31, 2003, mainly due to upgrades, payoffs, principal reductions and chargeoffs, partially reduced by new downgrades and new loans. Other real estate owned decreased $90 thousand from the prior year to none, due to sales of two small properties.
Nonperforming Loans
      Nonperforming credits include nonaccrual loans and loans 90 or more days past due and still accruing. Loans are placed on nonaccrual status upon becoming delinquent 90 days or more, 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, some 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 by Management as “performing nonaccrual” and are included in total nonaccrual credits. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Nonaccrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal.
      The following table summarizes the nonperforming assets of the Company for the periods indicated:
     Nonperforming Loans and OREO
                                             
    At December 31,
     
    2004   2003   2002   2001   2000
                     
    (Dollars in thousands)
Performing nonaccrual loans
  $ 4,072     $ 1,658     $ 3,464     $ 3,055     $ 3,499  
Nonperforming nonaccrual loans
    2,970       5,759       5,717       5,058       4,525  
                               
 
Nonaccrual loans
    7,042       7,417       9,181       8,113       8,024  
                               
Loans 90 or more days past due and still accruing
    10       199       738       550       650  
Other real estate owned
    0       90       381       523       2,065  
                               
   
Total Nonperforming loans and OREO
  $ 7,052     $ 7,706     $ 10,300     $ 9,186     $ 10,739  
                               
Allowance for loan losses as a percentage of nonaccrual loans and loans 90 or more days past due and still accruing
    768 %     708 %     547 %     601 %     603 %
Allowance for loan losses as a percentage of total nonperforming loans and OREO
    768 %     700 %     526 %     567 %     487 %
                               
      Performing nonaccrual loans at December 31, 2004 were $2.4 million higher than the previous year, due to new loans placed on performing nonaccrual, partially offset by payoffs, chargeoffs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual. Nonperforming nonaccrual loans at December 31, 2004 decreased $2.8 million from the same period a year ago, attributable to loans being returned to accrual status, transfers to repossessed collateral or being charged off or paid off, partially offset by loans being added to nonperforming nonaccrual. There was no OREO at December 31, 2004 as a result of sales of two small properties.
      Performing nonaccrual loans at December 31, 2003 were $1.8 million below the previous year, while nonperforming loans remained at the same level. With the exception of four relationships totaling $477 thousand, all loans on nonaccrual status in 2002 were either paid off, charged off or brought current in 2003. Except for one property, all foreclosed property owned in 2002 was disposed of at a small total net gain during 2003; the $90 thousand in OREO at December 31, 2003 consisted of two small parcels.
      The Company had no restructured loans as of December 31, 2004, 2003 and 2002.

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      The amount of gross interest income that would have been recorded if all nonaccrual loans had been current in accordance with their original terms while outstanding during the period was $462 thousand in 2004, $527 thousand in 2003 and $629 thousand in 2002. The amount of interest income that was recognized on nonaccrual loans from cash payments made in 2004, 2003 and 2002 was $439 thousand, $592 thousand and $489 thousand, respectively. Cash payments received, which were applied against the book balance of performing and nonperforming nonaccrual loans outstanding at December 31, 2004, totaled approximately $135 thousand, compared with $330 thousand in 2003 and $281 thousand in 2002. Management believes the overall credit quality of the loan portfolio continues to be strong; however, total nonperforming assets could fluctuate from year to year. The performance of any individual loan can be impacted by external factors such as the interest rate environment or factors particular to the borrower. The Company expects to maintain nonperforming loans and OREO at their current levels; however, no assurance can be given that additional increases in nonaccrual loans will not occur in future periods.
     Loan Loss Experience
      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 $54.2 million allowance for loan losses, which is equivalent to 2.35% of total loans at December 31, 2004, to be adequate as a reserve against losses as of December 31, 2004.
      During 2003, Management refined its allowance methodology for commercial real estate loans, agricultural loans and certain municipal loans. This refinement had the effect of increasing the allowance allocation for commercial loans with a corresponding decrease in the unallocated allowance as of December 31, 2003.

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      The following table summarizes the loan loss experience of the Company for the periods indicated:
     Loan Loss Allowance, Chargeoffs & Recoveries
                                           
    Year Ended December 31,
     
    2004   2003   2002   2001   2000
                     
    (dollars in thousands)
Total loans outstanding
  $ 2,300,230     $ 2,323,330     $ 2,494,638     $ 2,484,457     $ 2,482,159  
Average loans outstanding during the period
    2,258,482       2,354,270       2,465,876       2,465,616     $ 2,369,065  
Analysis of the Allowance
                                       
Balance, beginning of period
  $ 53,910     $ 54,227     $ 52,086     $ 52,279     $ 51,574  
Additions to the allowance charged to operating expense
    2,700       3,300       3,600       3,600       3,675  
Allowance acquired through merger
    0       0       2,050       0       1,036  
Loans charged off:
                                       
 
Commercial and commercial real estate
    (2,154 )     (2,455 )     (1,885 )     (2,475 )     (4,148 )
 
Real estate construction
    0       0       0       (10 )     0  
 
Real estate residential
    0       (26 )     0       0       (16 )
 
Consumer
    (3,439 )     (4,352 )     (4,340 )     (4,968 )     (3,818 )
                               
Total chargeoffs
    (5,593 )     (6,833 )     (6,225 )     (7,453 )     (7,982 )
                               
Recoveries of loans previously charged off:
                                       
 
Commercial and commercial real estate
    1,623       1,234       950       1,577       2,333  
 
Real estate construction
    0       0       0       0       0  
 
Real estate residential
    0       0       0       243       0  
 
Consumer
    1,512       1,982       1,766       1,840       1,643  
                               
Total recoveries
    3,135       3,216       2,716       3,660       3,976  
                               
Net loan losses
    (2,458 )     (3,617 )     (3,509 )     (3,793 )     (4,006 )
                               
Balance, end of period
  $ 54,152     $ 53,910     $ 54,227     $ 52,086     $ 52,279  
                               
Net loan losses to average loans
    0.11 %     0.15 %     0.14 %     0.15 %     0.17 %
Allowance for loan losses as a percentage of loans outstanding
    2.35 %     2.32 %     2.17 %     2.10 %     2.11 %

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     Allocation of the Allowance for Loan Losses
      The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated:
     Allocation of the Allowance for Loan Losses
                                                                                 
    At December 31,
     
    2004   2003   2002   2001   2000
                     
    Allocation   Loans as   Allocation   Loans as   Allocation   Loans as   Allocation   Loans as   Allocation   Loans as
    of the   Percent   of the   Percent   of the   Percent   of the   Percent   of the   Percent
    Allowance   of Total   Allowance   of Total   Allowance   of Total   Allowance   of Total   Allowance   of Total
    Balance   Loans   Balance   Loans   Balance   Loans   Balance   Loans   Balance   Loans
                                         
    (Dollars in thousands)
Commercial
  $ 29,857       60 %   $ 31,875       61 %   $ 23,692       64 %   $ 21,206       63 %   $ 21,632       63 %
Real estate construction
    1,441       1 %     1,827       2 %     2,370       2 %     4,860       3 %     4,344       3 %
Real estate residential
    917       16 %     870       15 %     893       13 %     417       14 %     427       14 %
Consumer
    5,140       22 %     6,423       22 %     7,862       21 %     4,986       20 %     5,648       20 %
Unallocated portion
    16,797             12,915             19,410             20,617             20,228        
                                                             
Total
  $ 54,152       100 %   $ 53,910       100 %   $ 54,227       100 %   $ 52,086       100 %   $ 52,279       100 %
                                                             
     Impaired Loans
      The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan’s original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans that are collectively evaluated for impairment. In measuring impairment, the Company reviews all commercial and construction loans classified “Substandard” and “Doubtful” that meet materiality thresholds of $250 thousand and $100 thousand, respectively. The Company considers classified loans below the established thresholds to represent immaterial credit risk. All loans classified as “Loss” are considered impaired.
      Commercial and construction loans that are not classified, and large groups of smaller-balance homogeneous loans such as installment, personal revolving credit, residential real estate and student loans, are evaluated collectively for impairment under the Company’s standard loan loss reserve methodology. The Company generally identifies loans to be reported as impaired when such loans are in nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan.
      The following summarizes the Company’s impaired loans for the periods indicated:
     Impaired Loans
                 
    Year Ended
    December 31,
     
    2004   2003
         
    (Dollars in thousands)
Total impaired loans
  $ 0     $ 1,664  
             
Specific reserves
  $ 0     $ 623  
             
      The average balance of the Company’s impaired loans for the year ended December 31, 2004 was $731 thousand compared to $1.8 million in 2003. Portions of the Company’s allowance for loan losses were

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allocated to each of these impaired loans. In general, the Company does not recognize any interest income on troubled debt restructuring or loans that are classified as nonaccrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company’s recorded investment in such loans is deemed collectible.
Asset and Liability Management
      The fundamental objective of the Company’s management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk.
      In adjusting the Company’s asset/liability position, Management attempts to manage interest rate risk while enhancing net interest margin and net interest income. At times, depending on expected increases or decreases in general interest rates, the relationship between long and short term interest rates, market conditions and competitive factors, Management may adjust the Company’s interest rate risk position in order to manage its net interest margin and net interest income. The Company’s results of operations and net portfolio values remain subject to changes in interest rates and to fluctuations in the difference between long and short term interest rates.
      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 judgment, at December 31, 2004, 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. Similarly, at December 31, 2003, simulations were conducted with the Federal Funds rate rising by 200 basis points or declining by 50 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.
      The following tables summarize the simulated change in NII (FTE), based on the 12-month period ending December 31, 2005 and 2004:
     Simulated Changes to Net Interest Income
                                 
            Estimated Increase
            (Decrease) in NII
         
2005   Estimated    
Changes in Interest Rates (Basis Points)   NII Amount   Amount   Percent
             
    (Dollars in millions)
  +200         $ 215.5     $ (7.5 )     -3.5 %
            223.0              
  -100           223.5       0.5       0.2 %
                                 
            Estimated Increase
            (Decrease) in NII
         
2004   Estimated    
Changes in Interest Rates (Basis Points)   NII Amount   Amount   Percent
             
    (Dollars in millions)
  +200         $ 215.8     $ (3.9 )     -1.8 %
            219.7              
  -50           219.9       0.2       0.1 %
      Management reviewed its interest rate risk position, 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

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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 interest rate sensitivity gaps inherent in the Company’s asset and liability portfolios at December 31, 2004:
Interest Rate Sensitivity Analysis
                                                     
    Repricing within (days)        
        Non-    
    0-90   91-180   181-365   Over 365   Repricing   Total
                         
    (Dollars in thousands)
Assets
                                               
 
Investment securities
  $ 49,066     $ 49,942     $ 89,846     $ 2,003,688           $ 2,192,542  
 
Loans
  $ 593,809     $ 109,935     $ 208,037     $ 1,388,449             2,300,230  
 
Other assets
                            244,496       244,496  
                                     
   
Total assets
  $ 642,875     $ 159,877     $ 297,883     $ 3,392,137     $ 244,496     $ 4,737,268  
                                     
Liabilities
                                               
 
Noninterest bearing
  $                 $     $ 1,273,825     $ 1,273,825  
 
Interest-bearing:
                                               
   
Transaction
    591,593       0       0       0             591,593  
   
Money market savings
    764,373       0       0       0             764,373  
   
Passbook savings
    327,608       0       0       0             327,608  
   
Time
    403,271       89,524       70,687       62,738             626,220  
Short-term borrowings
                                               
 
Federal funds purchased
    568,275       0       0       0             568,275  
 
Other
    167,148       0       0       0             167,148  
 
Debt financing and notes payable
    3,214       0       0       18,215             21,429  
 
Other liabilities
                            38,188       38,188  
Shareholders’ equity
                            358,609       358,609  
                                     
   
Total liabilities and shareholders’ equity
  $ 2,825,482     $ 89,524     $ 70,687     $ 80,953     $ 1,670,622     $ 4,737,268  
                                     
Net (liabilities) assets subject to repricing
    (2,182,607 )     70,353       227,196       3,311,184       (1,426,126 )        
                                     
Cumulative net (liabilities) assets subject to repricing
    (2,182,607 )     (2,112,254 )     (1,885,058 )     1,426,126       0          
                                     
      The repricing terms of the table above do not represent contractual principal maturities, but rather principal cash flows and balances available for repricing. The interest rate sensitivity report shown above categorizes interest-bearing transaction deposits, savings deposits and other short-term borrowings as repricing within 90 days. However, it is the experience of Management that the historical interest rate volatility of these funding sources can be similar to liabilities with longer repricing dates, depending on market conditions. Moreover, the degree to which these deposits respond to changes in money market rates usually is less than the response of interest-rate sensitivity loans. These factors cause Management to believe the cumulative net liability position shown above to indicate a much greater degree of liability sensitivity than reasonably exists based on the additional analysis previously discussed.
Liquidity
      The Company’s principal source of asset liquidity is investment securities available for sale and principal payments from consumer loans. At December 31, 2004, investment securities available for sale totaled

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$932 million. At December 31, 2004, residential real estate loans and indirect auto loans totaled $796 million, which were experiencing stable monthly principal payments of approximately $20 million. In addition, at December 31, 2004, the Company had customary lines for overnight borrowings from other financial institutions in excess of $500 million and a $35 million line of credit, under which no amount was outstanding at December 31, 2004. As a member of the Federal Reserve System, the Company also has the ability to borrow from the Federal Reserve. The Company’s short-term debt rating from Fitch Ratings is F1 with a stable outlook. 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 expects the Company can access additional long-term debt financing if desired.
      The Company generates significant liquidity from its operating activities. The Company’s profitability during 2004, 2003 and 2002 contributed to substantial operating cash flows of $113.5 million, $115.4 million and $90.6 million, respectively. The operating cash flow in 2004 was more than sufficient to pay $35.1 million in shareholder dividends, retire $55.4 million of the Company’s common stock, and accumulate approximately $39 million in cash and cash equivalents which were used to satisfy the cash consideration for the Company’s acquisition of Redwood Empire Bancorp. In 2003, operating activities provided a substantial portion of cash for $32.9 million in shareholder dividends and $70.8 million of stock repurchase. Similarly, in 2002, the operating activities provided a substantial portion of cash for $30.3 million in shareholder dividends and $64.0 million for the Company’s stock repurchase programs.
      During 2004, financing activities included a $119.6 million increase in deposits and a $144.8 million increase in short-term borrowings, offset in part by a $107.2 million payment of FHLB advances and prepayment fees. In 2003, other financing activities included the net result of a $169.9 million increase in deposits and a $240.9 million increase in short-term borrowings, reduced by a $67.2 million payment of FHLB advances including a loss on extinguishment of debt. During 2002, other financing activities included a $88.1 million increase in short-term borrowings and $130.0 million from FHLB advances, reduced by a $24.1 million decrease in deposits.
      The Company had net cash outflows in its investing activities in all three fiscal years. In 2004, purchases, net of sales and maturities, of investment securities were $270.3 million, which was generally financed by a $119.6 million increase in deposits and a $144.8 million increase in short-term borrowings. In 2003, purchases, net of maturities, of investment securities were $560.4 million, which was in part offset by net repayments of loans of $164.5 million. The investment securities portfolio increase was generally financed by a $169.9 million increase in deposits, and a $240.9 million increase in short-term borrowings. During 2002 purchases net of sales and maturities of investment securities of $201.6 million were reduced by net repayments of loans of $45.3 million and $5.4 million cash obtained in the KSB acquisition, resulting in net cash used of $152.1 million.
      In the first quarter of 2005, the Company used approximately $57 million in cash as a partial payment for the acquisition of Redwood Empire Bancorp, which use had been largely facilitated in 2004 by adjusting the allocation of operating cash flow from repurchases and retirement of common stock. The Company anticipates maintaining its cash levels through the end of 2005 mainly due to increased profitability and retained earnings. It is anticipated that loan demand will increase moderately, 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, resulting in an increase in the investment securities portfolio, a reduction of time deposits and borrowed funds, or a combination of both. However, due to concerns regarding consumer confidence, possible terrorist attacks, the war in Iraq, and uncertainty in the general economic environment, loan demand and levels of customer deposits are not certain. Shareholder dividends and share repurchases are expected to continue in 2005.
      The Parent Company’s primary source of liquidity is dividends from Westamerica Bank (the “Bank”). Dividends from the Bank are subject to certain regulatory limitations. During 2004, 2003 and 2002, the Bank declared dividends to the Company of $95, $88 and $84 million, respectively. See Note 15 to the consolidated financial statements.

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      The following table sets forth the known contractual obligations of the Company at December 31, 2004:
Contractual Obligations
                                           
    At December 31, 2004
     
    Within   One to   Three to   After    
    One Year   Three Years   Five Years   Five Years   Total
                     
    (Dollars in thousands)
Long-Term Debt Obligations
  $ 3,214     $ 3,215     $ 0     $ 15,000     $ 21,429  
Operating Lease Obligations
    4,590       7,020       3,772       6,075       21,457  
Purchase Obligations
    5,562       11,124       0       0       16,686  
                               
 
Total
  $ 13,366     $ 21,359     $ 3,772     $ 21,075     $ 59,572  
                               
      Long-Term Debt Obligations and Operating Lease Obligations are discussed in the consolidated financial statements at Notes 6 and 11, respectively. The Purchase Obligation consists of the Company’s minimum liability under a contract with a third-party automated services provider.
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’s capital position represents the level of capital available to support continued operations and expansion.
      The Company repurchases its Common Stock in the open market with the intention of supporting shareholder returns and mitigating the dilutive impact of issuing new shares for employee stock awards, and option plans. In addition to these systematic repurchases, other programs have been implemented to optimize the Company’s use of equity capital and enhance shareholder value. Pursuant to these programs, the Company repurchased 1.1 million shares in 2004, 1.6 million shares in 2003 and 1.6 million shares in 2002. As in 2004, the Company retains the flexibility to reduce share repurchase activity to conserve cash for strategic acquisitions or other purposes. At December 31, 2004, the Company had accumulated $39 million in cash and cash equivalents toward Redwood Empire Bancorp cash merger consideration of approximately $57 million.
      In the first quarter of 2005, the Company issued approximately 1.6 million new shares in connection with the Redwood Empire Bancorp acquisition. It is the Company’s intention to continue its repurchase programs from time to time subsequent to the acquisition, subject to market conditions.
      The Company’s primary capital resource is shareholders’ equity, which increased $18.2 million or 5.4% from the previous year, the net result of $95.2 million in profits earned during the year and a $16.3 million in issuance of stock in connection with exercises of employee stock options substantially reduced by a $3.6 million decline in unrealized gains on securities available-for-sale, $35.1 million in dividends paid and $55.4 million in stock repurchases.
      The ratio of total risk-based capital to risk-adjusted assets rose from 11.39% at the end of 2003 to 12.46% at the end of 2004, due to the combination of higher common stock and retained earnings and growth in lower risk-adjusted assets. Similarly, tier I risk-based capital to risk-adjusted assets also increased to 11.09% at December 31, 2004 from 10.13% a year ago.
     Capital to Risk-Adjusted Assets
                         
    At December 31,
     
        Minimum
        Regulatory
    2004   2003   Requirement
             
Tier I Capital
    11.09 %     10.13 %     4.00 %
Total Capital
    12.46 %     11.39 %     8.00 %
Leverage ratio
    7.06 %     6.85 %     4.00 %
                   

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      Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company’s future needs. All ratios are in excess of the regulatory definition of “well capitalized,” which the Company intends to meet.
      The Company’s acquisition of Redwood Empire Bancorp on March 1, 2005 will result in the addition of approximately $91 million of additional common equity and the assumption of $20 million subordinated debt which qualifies as regulatory capital. However, the transaction will also cause the creation of goodwill and other intangible assets of approximately $128 million, so that the effect will be to reduce Tier 1 and Total Capital. The Company’s Tier 1 Capital and Total Capital Ratios will each decrease accordingly. However, as of March 31, 2005, the Company anticipates it will still be considered “well-Capitalized”.
Financial Ratios
      The following table shows key financial ratios for the periods indicated:
                           
    At December 31,
     
    2004   2003   2002
             
Return on average total assets
    2.10 %     2.19 %     2.17 %
Return on average shareholders’ equity
    28.83 %     29.38 %     28.70 %
Average shareholders’ equity as a percentage of:
                       
 
Average total assets
    7.28 %     7.47 %     7.55 %
 
Average total loans
    14.63 %     13.74 %     12.31 %
 
Average total deposits
    9.27 %     9.43 %     9.28 %
Dividend payout ratio (diluted EPS)
    38 %     35 %     35 %
Deposit categories
      The Company primarily attracts deposits from local businesses and professionals, as well as through retail certificates of deposit, savings and checking accounts.
      The following table summarizes the Company’s average daily amount of deposits and the rates paid for the periods indicated:
Deposit Distribution and Average Rates Paid
                                                                           
    Years Ended December 31,
     
    2004   2003   2002
             
        Percentage           Percentage           Percentage    
    Average   of Total       Average   of Total       Average   of Total    
    Balance   Deposits   Rate*   Balance   Deposits   Rate*   Balance   Deposits   Rate*
                                     
    (Dollars in thousands)
Noninterest bearing demand
  $ 1,281,349       35.9 %     %   $ 1,173,853       34.2 %     %   $ 1,075,845       32.9 %     %
Interest bearing:
                                                                       
 
Transaction
    577,296       16.2 %     0.11 %     563,022       16.4 %     0.13 %     534,190       16.3 %     0.29 %
 
Savings
    1,085,051       30.4 %     0.36 %     1,015,699       29.6 %     0.60 %     958,421       29.3 %     1.09 %
 
Time less than $100 thousand
    271,212       7.6 %     1.49 %     307,054       9.0 %     1.68 %     334,601       10.2 %     2.48 %
 
Time $100 thousand or more
    350,400       9.8 %     1.27 %     370,549       10.8 %     1.35 %     368,456       11.3 %     2.28 %
                                                       
Total
  $ 3,565,308       100.0 %     0.57 %   $ 3,430,177       100.0 %     0.75 %   $ 3,271,513       100.0 %     1.30 %
                                                       
 
Rate is computed based on interest-bearing deposits
      During 2004, total average deposits increased by $135.1 million or 3.9% from 2003 due to an inflow of $107.5 million of noninterest bearing deposits, a $14.3 million increase in interest bearing demand deposits and a $69.4 million increase in savings deposits, partially offset by declines in consumer CDs (down $35.8 million) and public and jumbo CDs (down $20.1 million).

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      During 2003, total average deposits increased by $139 million or 4.2% from 2002 primarily due to an inflow of $98 million of noninterest bearing deposits, increases in interest bearing demand (up $29 million) and savings deposits (up $37 million), partly offset by a $28 million decline in consumer CDs.
      The following sets forth, by time remaining to maturity, the Company’s domestic time deposits in amounts of $100 thousand or more:
Deposit Over $100,000 Maturity Distribution
         
    December 31,
    2004
     
    (In thousands)
Three months or less
  $ 287,582  
Over three through six months
    34,410  
Over six through twelve months
    28,828  
Over twelve months
    14,479  
       
Total
  $ 365,299  
       
Short-term Borrowings
      The following table sets forth the short-term borrowings of the Company for the periods indicated:
Short-Term Borrowings Distribution
                           
    At December 31,
     
    2004   2003   2002
             
    (In thousands)
Federal funds purchased
  $ 568,275     $ 438,500     $ 146,425  
Other borrowed funds:
                       
 
Retail repurchase agreements
    167,148       152,146       203,311  
                   
 
Total short term borrowings
  $ 735,423     $ 590,646     $ 349,736  
                   
      Further detail of other borrowed funds is as follows:
Other Borrowed Funds Balances and Rates Paid
                           
    Years Ended December 31,
     
    2004   2003   2002
             
    (Dollars in thousands)
Outstanding amount:
                       
 
Average for the year
  $ 195,118     $ 156,137     $ 184,942  
 
Maximum during the year
    400,372       199,276       239,130  
Interest rates:
                       
 
Average for the year
    0.45 %     0.58 %     1.34 %
 
Average at period end
    0.27 %     0.43 %     0.77 %

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Noninterest Income
Components of Noninterest Income
                           
    Years Ended December 31,
     
    2004   2003   2002
             
    (Dollars in thousands)
Service charges on deposit accounts
  $ 28,621     $ 26,381     $ 24,447  
Merchant credit card fees
    3,509       3,619       3,730  
ATM fees & interchange
    2,487       2,378       2,396  
Debit card fees
    2,541       2,125       1,879  
Trust fees
    1,027       995       1,020  
Financial services commissions
    1,250       893       1,315  
Mortgage banking income
    386       851       985  
Official check sales fees
    631       505       637  
Gains on sale of foreclosed property
    231       122       108  
Investment securities gains (losses)
    2,169       2,443       (18 )
Investment securities impairment
    (7,180 )     0       (4,260 )
Loss on extinguishment of debt
    (2,204 )     (2,166 )     0  
Other noninterest income
    5,115       4,770       4,312  
                   
 
Total
  $ 38,583     $ 42,916     $ 36,551  
                   
      Noninterest income for 2004 was $4.3 million or 10.1% lower than 2003 mainly due to the $7.2 million writedown of FNMA and FHLMC preferred stock and loss on extinguishment of debt to repay the remaining $105 million in FHLB advances, partially mitigated by $2.2 million in gain on sale of securities and growth in deposit fee income. Higher deposit service charge income was attributable to higher service fees on transaction accounts and repricing of checking account fees (effective in February 2004), partially reduced by lower income from account analysis deficit fees and a reduction in fees collected on deposited items returned. Debit card fees rose $416 thousand due to increased usage. A $357 thousand increase in financial services commission income was largely due to higher sales of fixed and variable annuities and mutual funds. Other noninterest income was higher by $345 thousand mostly due to increases in wire service fee income (up $270 thousand), official check charges (up $126 thousand), gains on sale of OREO (up $109 thousand), and ATM related fees (up $109 thousand), partially offset by income unique to 2003 such as a $118 thousand gain on sale of the former branch building and $115 thousand gain realized from an insurance company demutualization. Mortgage banking service fee income declined $465 thousand due to reduced mortgage loan activity, lower investor loan fees and net losses on sale of those loans. Merchant credit card income fell $110 thousand mostly due to higher interchange costs.
      Noninterest income increased $6.4 million or 17.4% in 2003 compared to 2002, principally due to higher service charges on deposit accounts and because the 2002 total was reduced by a securities impairment charge of $4.3 million. In 2003, $2.4 million in gains on securities sales were recorded, offsetting a $2.2 million loss on extinguishment of debt to reduce FHLB advances by $65 million. A $1.9 million increase in service charges resulted from a $2.6 million increase from service fees on transaction accounts which were introduced in January of 2003, partially offset by a $435 thousand decline in account analysis income and a $130 thousand decrease in checking account activity charges. Debit card income grew $246 thousand due to increased usage partially offset by lower debit card processing rates mandated in August. Other noninterest income rose $476 thousand primarily due to $288 thousand in gains on asset sales and a $97 thousand increase in limited partnership distribution, partially reduced by a $90 thousand decrease in interest recoveries on charged-off loans. Decreases in noninterest income included a $422 thousand decline in financial services income due to lower sales of investment products, a $111 thousand decrease in merchant credit card service income due to lower volumes and higher interchange costs, a $134 thousand decrease in mortgage banking service fees due to

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lower investor loan fees and a $132 thousand decrease in official check income due to lower earnings on outstanding checks.
Noninterest Expense
Components of Noninterest Expense
                           
    Years Ended December 31,
     
    2004   2003   2002
             
    (Dollars in thousands)
Salaries and wages
  $ 36,278     $ 36,631     $ 37,877  
Incentive compensation
    4,905       5,438       6,068  
Other personnel benefits
    11,324       11,905       11,415  
Occupancy
    11,935       12,152       11,971  
Data processing
    6,057       6,121       6,078  
Equipment
    4,794       5,364       5,873  
Courier service
    3,605       3,695       3,642  
Telephone
    2,112       1,898       1,700  
Professional fees
    1,869       1,886       1,770  
Postage
    1,407       1,624       1,601  
Loan expenses
    1,077       1,322       1,324  
Stationery and supplies
    1,280       1,301       1,451  
Merchant credit card processing
    1,104       1,183       1,412  
Advertising and public relations
    1,037       1,066       1,190  
Operational losses
    964       936       916  
Amortization of deposit intangibles
    543       743       1,003  
Amortization of goodwill
                 
Other
    8,460       8,438       8,032  
                   
 
Total
  $ 98,751     $ 101,703     $ 103,323  
                   
Noninterest expense to revenues (“efficiency ratio”)(FTE)
    38.5 %     39.1 %     41.0 %
Average full-time equivalent staff
    984       1,026       1,072  
Total average assets per full-time staff
  $ 4,610     $ 4,223     $ 3,752  
                   
      Noninterest expense decreased by $2.9 million in 2004 compared to 2003, led by a $1.4 million decline in personnel-related costs. Salaries and wages declined $353 thousand largely due to a fewer number of employees, partly offset by merit increases granted to continuing staff. Incentive compensation fell $533 thousand as a result of a $404 thousand reduction in executive bonus costs. Other personnel benefits decreased $581 thousand primarily due to a $600 thousand decline in accruals for restricted performance shares. Equipment expense dropped $570 thousand, with lower depreciation and repair and maintenance costs. Occupancy expense fell $217 thousand mainly due to lower utility costs. Loan expense decreased $245 thousand due to lower loan activity. Postage declined $217 thousand from lower usage and a refund received in connection with changing mail handling vendors. Amortization of intangible assets decreased $200 thousand. Telephone expense rose $214 thousand mostly due to costs associated with the new branch network system.
      Noninterest expense decreased $1.6 million or 1.6% in 2003 compared to 2002. Much of the decrease was due to lower salaries and wages expense, which was down $1.2 million or 3.3%. The cost savings resulted primarily from 4.3% fewer employees, partially offset by merit increases granted to continuing staff. Additionally, 2002 included $366 thousand in severance costs relating to the KSB acquisition. The $630 thousand or 10.4% decline in incentive pay was mainly attributable to lower incentives due to slower loan growth. Equipment expense decreased $509 thousand or 8.7% mostly due to lower depreciation. Amortization

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of intangibles fell $260 thousand or 26.0% largely due to the expiration of the deposit intangibles from a prior acquisition. Stationery and supplies expense declined $150 thousand or 10.3% as a result of bankwide cost reduction efforts and office consolidation. A $229 thousand or 16.2% decline in merchant credit card expense was realized mostly through contract re-negotiation. Advertising and public relations expense was lower by $124 thousand or 10.4% primarily due to lower spending on overall business development.
      Other categories of expense increased from 2002, partially offsetting the decreases outlined above. Other personnel benefits expense rose $490 thousand or 4.3% mainly due to increases in expenses relating to workers compensation insurance, certain retirement benefits and health insurance. Occupancy increased $181 thousand or 1.5% mostly due to higher utility costs and lower sublease income. Telephone expense increased $198 thousand or 11.6% due to cost associated with teller network system upgrades. Professional expense increased $116 thousand or 6.6% and other expense rose $406 thousand or 5.1% mainly due to increases in the Company’s share of low-income housing operating losses (up $213 thousand), internet banking expense, and check card network expense.
      The ratio of average assets per full-time equivalent staff was $4.61 million in 2004 compared to $4.22 million and $3.75 million in 2003 and 2002, respectively.
Provision for Income Tax
      The income tax provision (FTE) decreased by $350 thousand or 0.6% in 2004 compared to 2003, primarily as a result of the $3.0 million tax benefit resulting from the impairment charge, partially offset by $1.7 million higher FTE adjustment for increased earnings on tax-advantaged investments and loans. The 2004 provision (FTE) of $59.9 million reflects an effective tax rate of 38.6% compared to a provision of $60.3 million in 2003, representing an effective tax rate of 38.8%. The nominal tax rate declined from 29.2% to 28.1% primarily attributable to income tax credits on low income housing investment and tax-exempt interest.
      The provision for income taxes (FTE) was higher by $2.0 million or 3.5% in 2003 compared to 2002. Income before taxes increased 6.9%, resulting in a decrease in the effective tax rate from 40.0% to 38.8%. Similarly, the nominal tax rate decreased from 32.0% to 29.2%, primarily the result of growth of tax-favored investments and loans.
Item 7A. 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.

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Item 8. Financial Statements and Supplementary Data
INDEX
         
    Page
     
Management’s Report on Internal Control Over Financial Reporting
    40  
Report of Independent Registered Public Accounting Firm
    41  
Consolidated Balance Sheets as of December 31, 2004 and 2003
    42  
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2004, 2003 and 2002
    43  
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002
    45  
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    46  
Notes to Consolidated Financial Statements
    48  
Report of Independent Registered Public Accounting Firm
    75  

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      Management of Westamerica Bancorporation and Subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2004. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
      Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 based upon criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, Management determined that the Company’s internal control over financial reporting was effective as of December 31, 2004 based on the criteria in Internal Control — Integrated Framework issued by COSO.
      The Company’s independent registered public accounting firm have issued an attestation report on Management’s assessment of the Company’s internal control over financial reporting. This report is included below.
Dated March 4, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Westamerica Bancorporation:
      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Westamerica Bancorporation and Subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 4, 2005 expressed an unqualified opinion on those consolidated financial statements.
  /s/ KPMG LLP
 
 
  KPMG LLP
San Francisco, California
March 4, 2005

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WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS
                         
    Balances as of December 31,
     
    2004   2003
         
    (In thousands)
 
ASSETS
 
Cash and cash equivalents (Note 15)
  $ 126,153     $ 189,628  
 
Money market assets
    534       534  
 
Investment securities available for sale (Note 2)
    931,710       1,413,911  
 
Investment securities held to maturity; market values of $1,265,986 in 2004 and $542,729 in 2003 (Note 2)
    1,260,832       535,377  
 
Loans, net of an allowance for loan losses of:
               
   
$54,152 in 2004 and $53,910 in 2003 (Notes 3, 4 and 14)
    2,246,078       2,269,420  
 
Other real estate owned
    0       90  
 
Premises and equipment, net (Note 5)
    35,223       35,748  
 
Interest receivable and other assets (Note 9)
    136,738       131,677  
             
     
Total Assets
  $ 4,737,268     $ 4,576,385  
             
 
LIABILITIES
 
Deposits:
               
   
Noninterest bearing
  $ 1,273,825     $ 1,240,379  
   
Interest bearing:
               
     
Transaction
    591,593       561,696  
     
Savings
    1,091,981       1,058,082  
     
Time (Notes 2 and 6)
    626,220       603,834  
       
Total deposits
    3,583,619       3,463,991  
             
 
Short-term borrowed funds (Notes 2 and 6)
    735,423       590,646  
 
Federal Home Loan Bank advances (Note 6)
    0       105,000  
 
Notes Payable (Note 6)
    21,429       24,643  
 
Liability for interest, taxes and other expenses (Note 9)
    38,188       51,734  
             
       
Total Liabilities
    4,378,659       4,236,014  
             
Shareholders’ Equity (Notes 7, 8 and 15)
               
 
Common Stock (no par value) Authorized — 150,000 shares Issued and outstanding — 31,640 in 2004 and 32,287 in 2003
    227,829       218,461  
 
Deferred compensation
    2,146       1,824  
 
Accumulated other comprehensive income:
               
   
Unrealized gain on securities available for sale, net
    9,638       13,191  
 
Retained earnings
    118,996       106,895  
             
       
Total Shareholders’ Equity
    358,609       340,371  
             
       
Total Liabilities and Shareholders’ Equity
  $ 4,737,268     $ 4,576,385  
             
See accompanying notes to consolidated financial statements.

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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                               
    For the Years Ended December 31,
     
    2004   2003   2002
             
    (In thousands, except per share data)
Interest and Fee Income
                       
 
Loans
  $ 133,226     $ 152,758     $ 174,810  
 
Money market assets and funds sold
    1       8       12  
 
Investment securities:
                       
   
Available for sale
                       
     
Taxable
    33,230       35,385       32,426  
     
Tax-exempt
    14,514       15,563       14,960  
   
Held to maturity
                       
     
Taxable
    17,209       5,038       6,810  
     
Tax-exempt
    18,157       14,741       8,615  
                   
     
Total Interest and fee Income
    216,337       223,493       237,633  
                   
Interest Expense
                       
 
Transaction deposits
    612       727       1,533  
 
Savings deposits
    3,931       6,091       10,409  
 
Time deposits (Note 6)
    8,504       10,167       16,703  
 
Short-term borrowed funds (Note 6)
    5,878       3,415       3,524  
 
Federal Home Loan Bank advances
    897       5,318       5,225  
 
Debt financing and notes payable (Note 6)
    1,284       1,479       1,788  
                   
   
Total Interest Expense
    21,106       27,197       39,182  
                   
Net Interest Income
    195,231       196,296       198,451  
 
Provision for loan losses (Note 3)
    2,700       3,300       3,600  
                   
Net Interest Income After Provision for Loan Losses
    192,531       192,996       194,851  
                   
Noninterest Income
                       
 
Service charges on deposit accounts
    28,621       26,381       24,446  
 
Merchant credit card
    3,509       3,619       3,730  
 
Financial services commissions
    1,250       893       1,315  
 
Mortgage banking
    386       851       985  
 
Trust fees
    1,027       995       1,020  
 
Securities (impairment) gains, net
    (5,011 )     2,443       (4,278 )
 
Loss on extinguishment of debt
    (2,204 )     (2,166 )     0  
 
Other
    11,005       9,900       9,333  
                   
   
Total Noninterest Income
    38,583       42,916       36,551  
                   
Noninterest Expense
                       
 
Salaries and related benefits (Note 13)
    52,507       53,974       55,360  
 
Occupancy (Notes 5 and 11)
    11,935       12,152       11,971  
 
Furniture and equipment (Notes 5 and 11)
    4,794       5,364       5,873  
 
Data processing
    6,057       6,121       6,078  
 
Courier Service
    3,605       3,695       3,643  
 
Professional fees
    1,869       1,886       1,770  

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    For the Years Ended December 31,
     
    2004   2003   2002
             
    (In thousands, except per share data)
 
Other real estate owned
    (7 )     46       143  
 
Other
    17,991       18,465       18,485  
                   
   
Total Noninterest Expense
    98,751       101,703       103,323  
                   
Income Before Income Taxes
    132,363       134,209       128,079  
 
Provision for income taxes (Note 9)
    37,145       39,146       40,941  
                   
Net Income
  $ 95,218     $ 95,063     $ 87,138  
                   
Comprehensive Income, net:
                       
 
Change in unrealized gain on securities available for sale, net
    (3,553 )     (5,961 )     7,252  
                   
Comprehensive Income
  $ 91,665     $ 89,102     $ 94,390  
                   
Average Shares Outstanding
    31,821       32,849       33,686  
Diluted Average Shares Outstanding
    32,461       33,369       34,225  
Per Share Data (Note 7)
                       
 
Basic earnings
  $ 2.99     $ 2.89     $ 2.59  
 
Diluted earnings
    2.93       2.85       2.55  
 
Dividends paid
    1.10       1.00       0.90  
See accompanying notes to consolidated financial statements.

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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
                                                   
                Accumulated        
                Other        
        Common   Deferred   Comprehensive   Retained    
    Shares   Stock   Compensation   Income (Loss)   Earnings   Total
                         
    (In thousands)
December 31, 2001
    34,220       208,033       1,041       11,900       93,385       314,359  
 
Net income for the year 2002
                                    87,138       87,138  
 
Stock issued in connection with purchase of Kerman State Bank
    355       14,620                               14,620  
 
Stock issued for stock options
    366       8,652                               8,652  
 
Stock option tax benefits
            2,985                               2,985  
 
Restricted stock activity
    20       557       231                       788  
 
Purchase and retirement of stock
    (1,550 )     (18,921 )                     (45,112 )     (64,033 )
 
Dividends
                                    (30,262 )     (30,262 )
 
Unrealized gain on securities available for sale, net
                            7,252               7,252  
                                     
December 31, 2002
    33,411       215,926       1,272       19,152       105,149       341,499  
 
Net income for the year 2003
                                    95,063       95,063  
 
Stock issued for stock options
    425       8,353                               8,353  
 
Stock option tax benefits
            4,162                               4,162  
 
Restricted stock activity
    24       407       552                       959  
 
Purchase and retirement of stock
    (1,573 )     (10,387 )                     (60,382 )     (70,769 )
 
Dividends
                                    (32,935 )     (32,935 )
 
Unrealized gain on securities available for sale, net
                            (5,961 )             (5,961 )
                                     
December 31, 2003
    32,287       218,461       1,824       13,191       106,895       340,371  
 
Net income for the year 2004
                                    95,218       95,218  
 
Stock issued for stock options
    403       12,810                               12,810  
 
Stock option tax benefits
            3,508                               3,508  
 
Restricted stock activity
    16       467       322                       789  
 
Purchase and retirement of stock
    (1,066 )     (7,417 )                     (48,027 )     (55,444 )
 
Dividends
                                    (35,090 )     (35,090 )
 
Unrealized loss on securities available for sale, net
                            (3,553 )             (3,553 )
                                     
December 31, 2004
    31,640     $ 227,829     $ 2,146     $ 9,638     $ 118,996     $ 358,609  
                                     
See accompanying notes to consolidated financial statements.

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WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
                             
    For the Years Ended December 31,
     
    2004   2003   2002
             
    (In thousands)
Operating Activities:
                       
Net income
  $ 95,218     $ 95,063     $ 87,138  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
 
Depreciation and amortization of fixed assets
    3,867       3,993       4,507  
 
Amortization of intangibles and other assets
    2,296       1,944       1,989  
 
Loan loss provision
    2,700       3,300       3,600  
 
Amortization of deferred net loan (cost) fees
    (105 )     249       420  
 
Decrease (increase) in interest income receivable
    1,217       (269 )     501  
 
(Increase) decrease in other assets
    (1,547 )     57,671       (9,815 )
 
(Decrease) increase in income taxes payable
    (3,779 )     6,550       (833 )
 
Increase (decrease) in interest expense payable
    43       (1,027 )     (1,724 )
 
Increase (decrease) in other liabilities
    7,020       (53,279 )     71  
 
Gain on sale of securities
    (2,169 )     (2,443 )     (18 )
 
Gain on other assets
    (402 )     0       (288 )
 
Loss on extinguishment of debt
    2,204       2,166       0  
 
Net loss on sales/write-down of fixed assets
    47       142       558  
 
Originations of loans for resale
    (3,988 )     (9,113 )     (12,431 )
 
Net proceeds from sale of loans originated for resale
    3,955       10,233       12,605  
 
Net gain on sale of property acquired in satisfaction of debt
    (231 )     (122 )     (108 )
 
Write-downs of other real estate owned
    0       307       126  
 
Impairment of investment securities
    7,180       0       4,260  
                   
   
Net Cash Provided by Operating Activities
    113,526       115,365       90,558  
                   
Investing Activities
                       
Net cash obtained in mergers and acquisitions
    0       0       5,368  
Net repayments of loans
    20,778       164,521       45,346  
Purchases of money market assets
    0       0       0  
Purchases of investment securities available for sale
    (96,027 )     (1,072,090 )     (1,618,742 )
Purchases of investment securities held to maturity
    (890,836 )     (371,037 )     (272,184 )
Purchases of property, plant and equipment
    (3,390 )     (4,345 )     (2,103 )
Proceeds from maturity/calls of securities available for sale
    348,027       496,011       1,629,286  
Proceeds from maturity/calls of securities held to maturity
    158,929       233,580       58,993  
Proceeds from sale of securities available for sale
    209,173       153,128       1,000  
Proceeds from sale of property and equipment
    0       1,859       548  
Proceeds from sale of other real estate owned
    321       1,882       391  
                   
   
Net Cash Used In Investing Activities
    (253,025 )     (396,491 )     (152,097 )
                   
Financing Activities
                       
Net increase (decrease) in deposits
    119,628       169,925       (24,137 )
Net increase in short-term borrowings
    144,776       240,910       88,100  
Repayments to the Federal Home Loan Bank
    (107,204 )     (67,166 )     0  
Advances from the Federal Home Loan Bank
    0       0       130,000  
(Repayments) advances of notes payable
    (3,214 )     36       (3,214 )
Exercise of stock options/issuance of shares
    12,572       8,176       8,480  
Retirement of common stock including repurchases
    (55,444 )     (70,769 )     (64,033 )
Dividends paid
    (35,090 )     (32,935 )     (30,262 )
                   
   
Net Cash Provided By Financing Activities
    76,024       248,177       104,934  
                   
Net (Decrease) Increase In Cash and Cash Equivalents
    (63,475 )     (32,949 )     43,395  
Cash and Cash Equivalents at Beginning of Year
    189,628       222,577       179,182  
                   
Cash and Cash Equivalents at End of Year
  $ 126,153     $ 189,628     $ 222,577  
                   

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    For the Years Ended December 31,
     
    2004   2003   2002
             
    (In thousands)
Supplemental Disclosures:
                       
Supplemental disclosure of noncash activities:
                       
   
Loans transferred to other real estate owned
  $ 0     $ 1,800     $ 375  
   
Unrealized (loss) gain on securities available for sale, net
    (3,553 )     (5,961 )     7,252  
 
The acquisition of Kerman State Bank involved the following:
                       
     
Common Stock issued
    0       0       14,620  
     
Liabilities assumed
    0       0       85,085  
     
Fair value of assets acquired, other than cash and cash equivalents
    0       0       (89,170 )
     
Core deposit intangible
    0       0       (2,500 )
     
Goodwill
    0       0       (2,667 )
     
Net Cash and Cash Equivalents Received
    0       0       5,368  
 
Supplemental disclosure of cash flow activity:
                       
     
Interest paid for the period
    21,149       26,547       40,858  
     
Income tax payments for the period
    37,432       33,146       40,272  
     
Tax benefit from stock option exercises
    3,508       4,162       2,985  
See accompanying notes to consolidated financial statements.

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Business and Accounting Policies
      Westamerica Bancorporation, a registered bank holding company (the “Company”), provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary bank, Westamerica Bank (the “Bank”). The Bank is subject to competition from both financial and nonfinancial institutions and to the regulations of certain agencies and undergoes periodic examinations by those regulatory authorities.
Summary of Significant Accounting Policies
      The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The following is a summary of significant policies used in the preparation of the accompanying financial statements.
      Accounting Estimates. 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, as discussed below under “Allowance for Loan Losses”.
      Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all the Company’s subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The Company does not maintain or conduct transactions with any unconsolidated special purpose entities other than low income housing partnerships sponsored by third parties.
      Business Combinations. In a business combination, the results of operations of the acquired entity are included in the consolidated financial statements from the date of acquisition. Assets and liabilities of the entity acquired are recorded at fair value on the date of acquisition and goodwill is recorded as the excess of the purchase price over the fair value of the net assets (including identifiable intangibles such as core deposits) acquired. See “Intangible Assets” below.
      Cash Equivalents. Cash equivalents include Due From Banks balances and Federal Funds Sold which are both readily convertible to known amounts of cash and are generally 90 days or less from maturity, presenting insignificant risk of changes in value due to interest rate changes.
      Securities. Investment securities consist of debt securities of the U.S. Treasury, government sponsored entities, states, counties and municipalities, corporations, mortgage-backed securities, and equity securities. The Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Securities transactions are recorded on a trade date basis. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. Securities not included in trading or held to maturity are classified as available for sale. Trading and available for sale securities are recorded at fair value. Held to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate component of shareholders’ equity until realized.
      A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Unrealized investment securities losses are evaluated at least quarterly on pools of securities with similar attributes to determine whether such declines in value should be considered “other than temporary” and therefore be subject to immediate loss recognition in income. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates, there

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
has not been significant deterioration in the financial condition of the issuer, and the Company has the intent and ability to hold the security for a sufficient time to recover the carrying value. An unrealized loss in the value of an equity security is generally considered temporary when the fair value of the security is below the carrying value primarily due to current market conditions and not deterioration in the financial condition of the issuer, and the Company has the intent and ability to hold the security for a sufficient time to recover the carrying value. Other factors that may be considered in determining whether a decline in the value of either a debt or an equity security is “other than temporary” include ratings by recognized rating agencies; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and near-term prospects of the issuer and recommendations of investment advisors or market analysts.
      Purchase premiums and discounts are amortized or accreted over the estimated life of the related investment security as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized in interest income upon disposition of the related security. Dividend and interest income are recognized when earned. Realized gains and losses from the sale of available for sale securities are included in earnings using the specific identification method.
      Loans. Loans are stated at the principal amount outstanding, net of unearned discount and deferred fees (costs). Interest is accrued daily on the outstanding balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some 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. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Performing nonaccrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal. Certain consumer loans or auto and credit card receivables are charged to the allowance when they become 120 days past due. Nonrefundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the contractual loan lives. Upon prepayment, unamortized loan fees are immediately recognized in interest income. Other fees, including those collected upon principal prepayments, are included in interest income when received. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an individual loan basis. The Company recognizes a loan as impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. Income recognition on impaired loans conforms to that used on nonaccrual loans.
      Allowance for Loan Losses. The allowance for loan losses is established through provisions for loan losses charged to income. Losses on loans, including impaired loans, are charged to the allowance for loan losses when all or a portion of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. 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 credit loss experience, the amount of past due, nonperforming 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

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
credit 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.
      Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and some vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for loan losses. Other real estate owned is recorded at the lower of the related loan balance or fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Subsequently, other real estate owned is valued at the lower of the amount recorded at the date acquired or the then current fair value less estimated disposition costs. Subsequent losses incurred due to any decline in annual independent property appraisals are recognized as noninterest expense. Routine holding costs, such as property taxes, insurance, maintenance and losses from sales and dispositions, are recognized as noninterest expense.
      Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter.
      Intangible assets. Intangible assets (which are included in Other Assets) are comprised of goodwill and core deposit intangibles acquired in business combinations. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, Management reviews the asset for impairment. Any goodwill and any intangible asset determined to have an indefinite useful life acquired in a purchase business combination is not amortized, but is periodically evaluated for impairment in accordance with the appropriate accounting literature.
      The following table summarizes the Company’s goodwill and core deposit intangible assets as of January 1 and December 31 for 2004 and 2003 (dollars in thousands):
                                 
    At           At
    January 1,           December 31,
    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       544       (4,889 )
                         
Net
  $ 3,438     $ 0     $ 544     $ 2,894  
                         

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                 
    At           At
    January 1,           December 31,
    2003   Additions   Reductions   2003
                 
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
    (3,603 )     0       742       (4,345 )
                         
Net
  $ 4,180     $ 0     $ 742     $ 3,438  
                         
      At December 31, 2004, the estimated amortization of core deposit intangibles, in thousands of dollars, annually through 2009 is $469 in 2005 and $427 per year thereafter. The weighted average amortization period for core deposit intangibles is 6.8 years.
      Impairment of Long-Lived Assets. The Company reviews its long-lived assets and certain intangibles for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
      Income taxes. The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
      Derivative Instruments and Hedging Activities. The Company’s accounting for derivative instruments, including certain derivative instruments embedded in other contracts, requires the Company to recognize those items as assets or liabilities in the statement of financial position and measure them at fair value.
      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

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SFAS 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:
                           
    2004   2003   2002
             
    (In thousands, except per share
    data)
Compensation cost based on fair value method, net of tax effect
  $ 2,105     $ 2,388     $ 3,600  
Net income:
                       
 
As reported
  $ 95,218     $ 95,063     $ 87,138  
 
Pro forma
    93,113       92,675       83,538  
Basic earnings per share:
                       
 
As reported
  $ 2.99     $ 2.89     $ 2.59  
 
Pro forma
    2.93       2.82       2.48  
Diluted earnings per share:
                       
 
As reported
  $ 2.93     $ 2.85     $ 2.55  
 
Pro forma
    2.87       2.78       2.44  
                   
      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. As allowed by SFAS 123 (revised), the Company expects to apply the new requirements 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.
      Earnings Per Share. Basic earnings per share are computed by dividing net income by the average number of shares outstanding during the year. Diluted earnings per share are computed by dividing net income by the average number of shares outstanding during the year plus the impact of dilutive common stock equivalents (e.g. stock options outstanding).
      Extinguishment of Debt. Gains and losses, including fees, incurred in connection with the early extinguishment of debt are charged to current earnings as reductions in noninterest income.
      Other. Securities and other property held by the Bank in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries.
Note 2: Investment Securities
      The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of December 31, 2004, follows:
                                 
        Gross   Gross   Estimated
    Amortized   Unrealized   Unrealized   Market
    Cost   Gains   Losses   Value
                 
    (In thousands)
Securities of U.S. Government sponsored entities
  $ 562,842     $ 783     $ (6,568 )   $ 557,057  
Obligations of States and political subdivisions
    234,123       13,622       (14 )     247,731  
Asset-backed securities
    3,256       1       0       3,257  
Corporate bonds
    47,316       1,342       0       48,658  
Other securities
    67,541       7,493       (27 )     75,007  
                         
Total
  $ 915,078     $ 23,241     $ (6,609 )   $ 931,710  
                         

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of December 31, 2004, follows:
                                 
        Gross   Gross   Estimated
    Amortized   Unrealized   Unrealized   Market
    Cost   Gains   Losses   Value
                 
    (In thousands)
Securities of U.S. Government sponsored entities
  $ 736,137     $ 1,593     $ (4,627 )   $ 733,103  
Obligations of States and political subdivisions
    524,695       10,840       (2,652 )     532,883  
Asset-backed securities
    0       0       0       0  
Other securities
    0       0       0       0  
                         
Total
  $ 1,260,832     $ 12,433     $ (7,279 )   $ 1,265,986  
                         
      The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of December 31, 2003, follows:
                                 
        Gross   Gross   Estimated
    Amortized   Unrealized   Unrealized   Market
    Cost   Gains   Losses   Value
                 
    (In thousands)
Securities of U.S. Government sponsored entities
  $ 963,922     $ 4,325     $ (6,520 )     961,727  
Obligations of States and political subdivisions
    260,790       17,655       (52 )     278,393  
Asset-backed securities
    12,926       66       (2 )     12,990  
Corporate bonds
    69,703       3,721       0       73,424  
Other securities
    83,809       6,697       (3,129 )     87,377  
                         
Total
  $ 1,391,150     $ 32,464     $ (9,703 )   $ 1,413,911  
                         
      The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of December 31, 2003, follows:
                                 
        Gross   Gross   Estimated
    Amortized   Unrealized   Unrealized   Market
    Cost   Gains   Losses   Value
                 
    (In thousands)
Securities of U.S. Government sponsored entities
  $ 98,287     $ 939     $ (1,112 )   $ 98,114  
Obligations of States and political subdivisions
    417,984       10,642       (3,112 )     425,514  
Asset-backed securities
    6,322       18       (23 )     6,317  
Other securities
    12,784       0       0       12,784  
                         
Total
  $ 535,377     $ 11,599     $ (4,247 )   $ 542,729  
                         

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The amortized cost and estimated market value of securities at December 31, 2004, by contractual maturity, are shown in the following table:
                                   
    Securities Available for    
    Sale   Securities Held to Maturity
         
        Estimated       Estimated
    Amortized   Market   Amortized   Market
    Cost   Value   Cost   Value
                 
    (In thousands)
Maturity in years:
                               
 
1 year or less
  $ 26,142     $ 26,502     $ 9,799     $ 9,885  
 
1 to 5 years
    371,098       370,048       271,337       272,239  
 
5 to 10 years
    152,119       161,243       74,395       77,508  
 
Over 10 years
    44,242       46,942       396,220       399,992  
                         
Subtotal
    593,601       604,735       751,751       759,624  
Mortgage-backed
    253,936       251,968       509,081       506,362  
Other securities
    67,541       75,007       0       0  
                         
Total
  $ 915,078     $ 931,710     $ 1,260,832     $ 1,265,986  
                         
      Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities. At December 31, 2004 and 2003, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.
      An analysis of gross unrealized losses of the available for sale investment securities portfolio as of December 31, 2004, follows:
                                                   
    Less than 12 Months   12 months or longer   Total
             
        Unrealized       Unrealized       Unrealized
    Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
                         
    (In thousands)
Securities of U.S. Government sponsored entities
  $ 418,488     $ (5,413 )   $ 20,058     $ (1,155 )   $ 438,546     $ (6,568 )
Obligations of States and political subdivisions
    703       (2 )     2,015       (12 )     2,718       (14 )
Asset-backed securities
    0       0       0       0       0       0  
Corporate bonds
    0       0       0       0       0       0  
Other securities
    1,974       (27 )     0       0       1,974       (27 )
                                     
 
Subtotal, debt securities
    421,165       (5,442 )     22,073       (1,167 )     443,238       (6,609 )
Common stock
    0       0       0       0       0       0  
                                     
Total
  $ 421,165     $ (5,442 )   $ 22,073     $ (1,167 )   $ 443,238     $ (6,609 )
                                     

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      An analysis of gross unrealized losses of the held to maturity investment securities portfolio as of December 31, 2004, follows:
                                                   
    Less than 12 Months   12 months or longer   Total
             
        Unrealized       Unrealized       Unrealized
    Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
                         
    (In thousands)
Securities of U.S. Government sponsored entities
  $ 449,345     $ (4,010 )   $ 23,018     $ (617 )   $ 472,363     $ (4,627 )
Obligations of States and political subdivisions
    67,763       (548 )     101,554       (2,104 )     169,317       (2,652 )
Asset-backed securities
    0       0       0       0       0       0  
Corporate bonds
    0       0       0       0       0       0  
Other securities
    0       0       0       0       0       0  
                                     
 
Subtotal, debt securities
    517,108       (4,558 )     124,572       (2,721 )     641,680       (7,279 )
Common stock
    0       0       0       0       0       0  
                                     
Total
  $ 517,108     $ (4,558 )   $ 124,572     $ (2,721 )   $ 641,680     $ (7,279 )
                                     
      Substantially all of the securities set forth in the table above are investment-grade debt securities which have experienced a decline in fair value due to changes in market interest rates, not in estimated cash flows. Since the Company has the intent and ability to retain its investment in these securities for a period of time to allow for any anticipated recovery in market value, no other than temporary impairment was recorded on these securities at December 31, 2004.
      In the fourth quarter of 2004, the Company recognized a $7.2 million securities impairment writedown to market value of certain issues of Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock held in the available for sale investment portfolio. The writedown was recorded as a reduction in noninterest income. The after-tax effect was $4.2 million, net of tax benefits of $3.0 million. At December 31, 2004, the Company held FNMA and FHLMC preferred stock with an adjusted book value of $63.9 million and a tax-equivalent dividend yield of 7.65%.
      As of December 31, 2004, $814.8 million of investment securities were pledged to secure public deposits and short-term funding needs, compared to $722.4 million in 2003. The Bank is a member of the Federal Reserve Bank and holds Federal Reserve Bank stock stated at cost of $6.3 million for both December 31, 2004 and 2003. In 2003, the Bank was a member of the Federal Home Loan Bank (“FHLB”) and held stock carried at cost of $6.3 million at December 31, 2003. The same stock was sold in 2004 and the Bank is no longer a member of the FHLB.

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3: Loans and Allowance for Loan Losses
      Loans at December 31 consisted of the following:
                     
    2004   2003
         
    (In thousands)
Commercial
  $ 647,462     $ 619,317  
Real estate-commercial
    741,177       810,328  
Real estate-construction
    29,724       38,019  
Real estate-residential
    375,532       347,794  
             
 
Total real estate loans
    1,146,433       1,196,141  
Installment and personal
    506,338       507,911  
Unearned income
    (3 )     (39 )
             
 
Gross loans
    2,300,230       2,323,330  
Allowance for loan losses
    (54,152 )     (53,910 )
             
   
Net loans
  $ 2,246,078     $ 2,269,420  
             
      There were no loans originated for resale at December 31, 2004 and 2003.
      The following summarizes the allowance for loan losses of the Company for the periods indicated:
                         
    2004   2003   2002
             
    (In thousands)
Balance at January 1,
  $ 53,910     $ 54,227     $ 52,086  
Provision for loan losses
    2,700       3,300       3,600  
Loans charged off
    (5,593 )     (6,833 )     (6,225 )
Recoveries of loans previously charged off
    3,135       3,216       2,716  
Acquisition
                2,050  
                   
Balance at December 31,
  $ 54,152     $ 53,910     $ 54,227  
                   
      At December 31, 2004, there were no specific impaired loans, compared with $1.7 million in 2003. Total reserves allocated to these loans were none for 2004 and $623 thousand in 2003. For the year ended December 31, 2004, the average recorded net investment in impaired loans was approximately $731 thousand compared to $1.8 million and $1.3 million, for the years ended December 31, 2003 and 2002, respectively. In general, the Company does not recognize any interest income on troubled debt restructuring or on loans that are classified as nonaccrual. The Company had no troubled debt restructurings at December 31, 2004. For other impaired loans, interest income may be recorded as cash is received, provided that the Company’s recorded investment in such loans is deemed collectible.
      Nonaccrual loans at December 31, 2004 and 2003 were $7.0 million and $7.4 million, respectively. The following is a summary of the effect of nonaccrual loans on interest income for the years ended December 31:
                         
    2004   2003   2002
             
    (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms
  $ 462     $ 527     $ 629  
Less: Interest income recognized on nonaccrual loans
    (439 )     (592 )     (489 )
                   
Total effect on interest income
  $ 23     $ (65 )   $ 140  
                   

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      There were no commitments to lend additional funds to borrowers whose loans are included above.
Note 4: Concentration of Credit Risk
      The Company’s business activity is with customers in Northern and Central California. The loan portfolio is well diversified, although the Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments and standby letters of credit related to real estate loans of $30.6 million and $40.7 million at December 31, 2004 and 2003, respectively. The Company requires collateral on all real estate loans and generally attempts to maintain loan-to-value ratios no greater than 75% on commercial real estate loans and no greater than 80% percent on residential real estate loans unless covered by mortgage insurance.
Note 5: Premises and Equipment
      Premises and equipment as of December 31 consisted of the following:
                           
        Accumulated    
        Depreciation    
        and   Net Book
    Cost   Amortization   Value
             
    (In thousands)
2004
                       
Land
  $ 8,834     $     $ 8,834  
Buildings and improvements
    33,875       (15,340 )     18,535  
Leasehold improvements
    4,565       (2,840 )     1,725  
Furniture and equipment
    11,715       (5,586 )     6,129  
                   
 
Total
  $ 58,989     $ (23,766 )   $ 35,223  
                   
2003
                       
Land
  $ 8,834     $     $ 8,834  
Buildings and improvements
    32,634       (13,566 )     19,068  
Leasehold improvements
    5,256       (3,280 )     1,976  
Furniture and equipment
    10,432       (4,562 )     5,870  
                   
 
Total
  $ 57,156     $ (21,408 )   $ 35,748  
                   
      Depreciation and amortization included in noninterest expense amounted to $3.9 million in 2004, $4.0 million in 2003, and $4.5 million in 2002.

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6: Deposits and Borrowed Funds
      Notes payable, including the unsecured obligations of the Company, as of December 31, 2004 and 2003, were as follows:
                 
    2004   2003
         
    (In thousands)
Senior note, issued by Westamerica Bancorporation, originated in October 2003 and maturing October 31, 2013. Interest of 5.31% per annum is payable semiannually on April 30 and October 31, with original principal payment due at maturity
  $ 15,000     $ 15,000  
Senior notes, issued by Westamerica Bancorporation, originated in February 1996 and maturing February 1, 2006. Interest of 7.11% per annum is payable semiannually on February 1 and August 1, with annual principal payments commencing February 1, 2000 and the remaining principal amount due at maturity
    6,429       9,643  
             
Total notes payable
  $ 21,429     $ 24,643  
             
      The senior notes are subject to financial covenants requiring the Company to maintain, at all times, certain minimum levels of consolidated tangible net worth and maximum levels of capital debt. The Company is in compliance with all of the covenants in the senior notes indenture as of December 31, 2004.
      Short-term borrowed funds include federal funds purchased, business customers’ sweep accounts, outstanding amounts under lines of credit, and securities sold with repurchase agreements which are held in the custody of independent securities brokers. The Company’s line of credit increased to $35 million in 2004 from $10 million a year ago. Compensating balance arrangements for such line are not significant to the operations of the Company. FHLB advances ranged in maturity from 0.8 years to 1.7 years at December 31, 2003. Interest paid on time deposits in excess of $100 thousand was $4.5 million in 2004 and $5.0 million in 2003. The following table summarizes deposits and borrowed funds of the Company for the periods indicated:
                                                   
    2004   2003
         
        Weighted       Weighted
    Balance at   Average   Average   Balance at   Average   Average
    December 31,   Balance   Rate   December 31,   Balance   Rate
                         
    (In thousands)   (In thousands)
Federal funds purchased
  $ 568,275     $ 360,771       1.38 %   $ 438,500     $ 222,225       1.13 %
Sweep accounts
    163,439       152,299       0.31       149,479       150,311       0.56  
Securities sold under repurchase agreements
    3,709       42,820       0.95       2,667       3,264       0.87  
Line of credit
    0       526       2.72       0       2,561       1.88  
FHLB advances
    0       24,153       3.65       105,000       142,272       3.69  
Time deposits
                                               
 
Over $100 thousand
    365,299       350,400       1.27       315,253       370,549       1.35  
Note 7: Shareholders’ Equity
      In 1995, the Company adopted the 1995 Stock Option Plan. Stock appreciation rights, restricted performance shares, incentive stock options and non-qualified stock options are available under this plan. Under the terms of the plan, on January 1 of each year beginning in 1995, 2% of the Company’s issued and outstanding shares of common stock will be reserved for granting. At December 31, 2004, 2003, and 2002,

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately 1.7 million, 1.6 million and 1.5 million shares, respectively, were available for issuance. Options are granted with an exercise price equal to fair market value of the related common stock and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. A Restricted Performance Share (“RPS”) grant becomes vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period.
      Under the Stock Option Plan adopted by the Company in 1985, 2.3 million shares were reserved for issuance. Stock appreciation rights, incentive stock options and non-qualified stock options are available under this plan. Options are granted with an exercise price equal to fair market value of the related common stock and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. The 1985 plan was amended in 1990 to provide for RPS grants. An RPS grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period.
      Separate stock option plans maintained by acquired companies were terminated following the effective dates of the mergers. All outstanding options were substituted for the Company’s options, adjusted for the exchange ratios as defined in the merger agreements.
      Stock Options. A summary of the status of the Company’s stock options as of December 31, 2004, 2003 and 2002, and changes during the years ended on those dates, follows:
                                                 
    2004   2003   2002
             
        Weighted       Weighted       Weighted
        Average       Average       Average
    Number   Exercise   Number   Exercise   Number   Exercise
    of shares   Price   of shares   Price   of shares   Price
                         
Outstanding at beginning of year
    2,972,517     $ 33       2,812,127     $ 30       2,670,544     $ 27  
Granted
    539,780       50       577,880       41       615,420       39  
Acquisitions converted
                            15,562       27  
Exercised
    (398,877 )     32       (417,112 )     20       (362,202 )     23  
Forfeited
    (55,890 )     42       (378 )     56       (127,197 )     33  
                                     
Outstanding at end of year
    3,057,530     $ 36       2,972,517     $ 33       2,812,127     $ 30  
                                     
Options exercisable at end of year
    1,998,611     $ 32       1,900,330     $ 30       1,787,843     $ 27  
                                     

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table summarizes information about options outstanding at December 31, 2004 and 2003:
                                         
    Options Outstanding    
        Options Exercisable
        Weighted        
        Average   Weighted       Weighted
Range of   Number   Remaining   Average   Number   Average
Exercise   Outstanding   Contractual   Exercise   Exercisable at   Exercise
Price   at 12/31/2004   Life (yrs)   Price   12/31/2004   Price
                     
2004
                                       
$10 – 15
    11,237       3.3     $ 13       11,237     $ 13  
 15 – 19
    79,650       1.1       15       79,650       15  
 19 – 20
    132,150       2.1       19       132,150       19  
 20 – 24
    429,196       5.1       24       429,196       24  
 32 – 33
    257,760       3.1       33       257,760       33  
 33 – 35
    336,120       4.1       35       336,120       35  
 35 – 40
    763,939       6.6       39       591,960       39  
 40 – 45
    780,988       8.4       44       160,538       41  
 45 – 50
    266,490       9.1       50       0       0  
                               
$10 – 55
    3,057,530       6.1     $ 36       1,998,611     $ 32  
                               
                                         
    Options Outstanding    
        Options Exercisable
        Weighted        
        Average   Weighted       Weighted
Range of   Number   Remaining   Average   Number   Average
Exercise   Outstanding   Contractual   Exercise   Exercisable at   Exercise
Price   at 12/31/2003   Life (yrs)   Price   12/31/2003   Price
                     
2003
                                       
$10 – 15
    35,638       2.0     $ 11       35,638     $ 11  
 15 – 19
    126,887       2.0       15       126,887       15  
 19 – 20
    154,030       2.9       19       154,030       19  
 20 – 24
    442,576       6.0       24       442,579       24  
 32 – 33
    333,270       4.1       33       333,270       33  
 33 – 35
    385,530       5.1       35       385,530       35  
 35 – 40
    916,206       7.6       39       421,896       39  
 40 – 55
    578,380       9.0       41       500       48  
                               
$10 – 55
    2,972,517       6.4     $ 33       1,900,330     $ 30  
                               
      Restricted Performance Shares. A summary of the status of the Company’s RPSs as of December 31, 2004, 2003, and 2002, and changes during the years ended on those dates, follows:
                         
    2004   2003   2002
             
Outstanding at beginning of year
    53,900       57,550       61,470  
Granted
    19,610       20,720       19,520  
Exercised
    (15,760 )     (24,370 )     (19,908 )
Forfeited
    0       0       (3,532 )
                   
Outstanding at end of year
    57,750       53,900       57,550  
                   

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      As of December 31, 2004, 2003, and 2002, the RPSs had a weighted-average contractual life of 1.3, 1.3, and 1.1 years, respectively. The compensation cost that was charged against income for the Company’s RPSs granted was $1.2 million, $1.8 million, and $1.8 million for 2004, 2003, and 2002, respectively. There were no stock appreciation rights or incentive stock options granted in 2004, 2003, and 2002.
      No compensation cost has been recognized for stock options. However, the fair value of each non-qualified stock option grant is estimated on the date of the grant using an option pricing model with the following assumptions used for calculating weighted-average non-qualified stock option grants in 2004, 2003, and 2002:
                         
    2004   2003   2002
             
Expected dividend yield
    2.25 %     2.46 %     1.68 %
Expected volatility
    15       17       20  
Risk-free interest rate
    3.41 %     3.30 %     4.60 %
Expected lives
    7.0 years       7.0 years       7.0 years  
      The weighted-average grant date fair values of non-qualified stock options granted during 2004, 2003, and 2002, were $6.93, $5.79, and $8.62, respectively.
      A reconciliation of the number of shares used in the basic EPS computation to the amounts used in the diluted EPS computation for the years ended December 31, is as follows:
                           
    Net   Number   Per Share
    Income   of Shares   Amount
             
    (In thousands,
    except per share data)
2004
                       
Basic EPS:
                       
 
Income available to common shareholders
  $ 95,218       31,821     $ 2.99  
Effect of dilutive securities:
                       
 
Stock options outstanding
          640        
                   
Diluted EPS:
                       
 
Income available to common shareholders plus assumed conversions
  $ 95,218       32,461     $ 2.93  
                   
                           
    Net   Number   Per Share
    Income   of Shares   Amount
             
    (In thousands,
    except per share data)
2003
                       
Basic EPS:
                       
 
Income available to common shareholders
  $ 95,063       32,849     $ 2.89  
Effect of dilutive securities:
                       
 
Stock options outstanding
          520        
                   
Diluted EPS:
                       
 
Income available to common shareholders plus assumed conversions
  $ 95,063       33,369     $ 2.85  
                   

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                           
    Net   Number   Per Share
    Income   of Shares   Amount
             
    (In thousands,
    except per share data)
2002
                       
Basic EPS:
                       
 
Income available to common shareholders
  $ 87,138       33,686     $ 2.59  
Effect of dilutive securities:
                       
 
Stock options outstanding
          539        
                   
Diluted EPS:
                       
 
Income available to common shareholders plus assumed conversions
  $ 87,138       34,225     $ 2.55  
                   
      Shareholders have authorized two additional classes of stock of one million shares each, to be denominated “Class B Common Stock” and “Preferred Stock,” respectively, in addition to the 150 million shares of common stock presently authorized. At December 31, 2004, no shares of Class B Common Stock or Preferred Stock had been issued.
      In December 1986, the Company declared a dividend distribution of one common share purchase right (the “Right”) for each outstanding share of common stock. The Rights, which have been amended and restated in 1989, 1992, 1995, 1999 and 2004, are exercisable only in the event of an acquisition of, or announcement of a tender offer to acquire, 10 percent or more of the Company’s stock without the prior consent of the Board of Directors. If the Rights become exercisable, the holder may purchase one share of the Company’s common stock for $110.00, subject to adjustment. In the event a person or a group has acquired, or obtained the right to acquire, beneficial ownership of securities having 10 percent or more of the voting power of all outstanding voting power of the Company, proper provision shall be made so that each holder of a Right will, for a 60-day period thereafter, have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right, to the extent available, and then a common stock equivalent having a market value of two times the exercise price of the Right. Under certain circumstances, the Rights may be redeemed by the Company at $.001 per Right prior to becoming exercisable and in certain circumstances thereafter. The Rights will expire on the earliest of (i) December 31, 2009, (ii) consummation of a merger transaction meeting certain characteristics or (iii) redemption of the Rights by the Company.
Note 8:     Risk-Based Capital
      The Company and the Bank are subject to various regulatory capital adequacy requirements administered by federal and state agencies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required that regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate discretionary actions by regulators that, if undertaken, could have a direct, material effect on the Company’s financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Bank maintain minimum ratios of capital to risk-weighted assets. There are two categories of capital under the guidelines: Tier 1 capital includes common shareholders’ equity and qualifying preferred stock less goodwill and other deductions including the unrealized net gains and losses, after taxes, of available for sale securities. Tier 2 capital includes preferred stock not qualifying for Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Company and the allowance for loan losses, subject to limitations by the guidelines. Under the guidelines, capital is compared to the relative risk of the balance sheet, derived from applying one of four risk weights (0%, 20%, 50% and 100%) to the different

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
balance sheet and off-balance sheet assets, primarily based on the credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
      As of December 31, 2004, the Company and the Bank met all capital adequacy requirements to which they are subject.
      The most recent notification from the Federal Reserve Board categorized the Company and the Bank as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. Since that notification, there are no conditions or events that Management believes have changed the risk-based capital category of the Company or the Bank.
      The following table shows capital ratios for the Company and the Bank as of December 31, 2004 and 2003:
                                                   
                    To Be Well
                    Capitalized Under
                the FDICIA
            For Capital   Prompt Corrective
            Adequacy Purposes   Action Provisions
                 
    Amount   Ratio   Amount   Ratio   Amount   Ratio
                         
    (Dollars in thousands)
2004
                                               
Total Capital (to risk-weighted assets)
                                               
 
Consolidated Company
  $ 367,333       12.46 %   $ 235,904       8.00 %   $ 294,880       10.00 %
 
Westamerica Bank
    330,288       11.32 %     233,380       8.00 %     291,725       10.00 %
Tier 1 Capital (to risk-weighted assets)
                                               
 
Consolidated Company
    327,070       11.09 %     117,952       4.00 %     176,928       6.00 %
 
Westamerica Bank
    287,497       9.86 %     116,690       4.00 %     175,035       6.00 %
Leverage Ratio*
                                               
 
Consolidated Company
    327,070       7.06 %     185,282       4.00 %     231,602       5.00 %
 
Westamerica Bank
    287,497       6.25 %     184,039       4.00 %     230,049       5.00 %
                                     
                                                   
                    To Be Well
                    Capitalized Under
                the FDICIA
            For Capital   Prompt Corrective
            Adequacy Purposes   Action Provisions
                 
    Amount   Ratio   Amount   Ratio   Amount   Ratio
                         
    (Dollars in thousands)
2003
                                               
Total Capital (to risk-weighted assets)
                                               
 
Consolidated Company
  $ 342,627       11.39 %   $ 240,604       8.00 %   $ 300,755       10.00 %
 
Westamerica Bank
    332,643       11.18 %     237,921       8.00 %     297,401       10.00 %
Tier 1 Capital (to risk-weighted assets)
                                               
 
Consolidated Company
    304,734       10.13 %     120,302       4.00 %     180,453       6.00 %
 
Westamerica Bank
    289,166       9.72 %     118,960       4.00 %     178,441       6.00 %
Leverage Ratio*
                                               
 
Consolidated Company
    304,734       6.88 %     177,159       4.00 %     221,449       5.00 %
 
Westamerica Bank
    289,166       6.57 %     176,000       4.00 %     209,905       5.00 %
                                     

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The leverage ratio consists of Tier 1 capital divided by quarterly average assets excluding certain intangible assets. The minimum leverage ratio guideline is 3.00% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations.
Note 9:     Income Taxes
      Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of these financial statements and could vary significantly from amounts shown on the tax returns as filed. Accordingly, variances from amounts previously reported are primarily as a result of adjustments to conform to tax returns as filed.
      The components of the net deferred tax asset as of December 31 are as follows:
                     
    2004   2003
         
    (In thousands)
Deferred tax asset
               
 
Allowance for loan losses
  $ 22,737     $ 22,619  
 
State franchise taxes
    4,700       4,097  
 
Deferred compensation
    7,649       6,866  
 
Real estate owned
    0       16  
 
Net operating loss carryforwards
    29       81  
 
Interest on nonaccrual loans
    68       128  
 
Other reserves
    516       619  
 
Impaired asset writedown
    3,019       0  
 
Other
    1,505       1,390  
             
   
Subtotal deferred tax asset
    40,223       35,816  
Valuation allowance
    0       0  
             
 
Total deferred tax asset
    40,223       35,816  
             
Deferred tax liability
               
 
Net deferred loan costs
    306       821  
 
Fixed assets
    496       1,217  
 
Intangible assets
    928       971  
 
Securities available for sale
    6,993       9,570  
 
Leases
    1,422       1,401  
 
Other
    398       398  
             
Total deferred tax liability
    10,543       14,378  
             
Net deferred tax asset
  $ 29,680     $ 21,438  
             
      The Company believes a valuation allowance is not needed to reduce the gross deferred tax asset because it is more likely than not that the gross deferred tax asset will be realized through recoverable taxes or future

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
taxable income. Net deferred tax assets are included with Interest Receivable and Other Assets in the Consolidated Balance Sheets.
      The provision for federal and state income taxes consists of amounts currently payable and amounts deferred which, for the years ended December 31, are as follows:
                           
    2004   2003   2002
             
    (In thousands)
Current income tax expense:
                       
 
Federal
  $ 28,619     $ 26,182     $ 30,460  
 
State
    14,191       13,517       15,215  
                   
 
Total current
    42,810       39,699       45,675  
                   
Deferred income tax (benefit) expense:
                       
 
Federal
    (4,526 )     (542 )     (3,150 )
 
State
    (1,139 )     (11 )     (1,584 )
                   
 
Total deferred
    (5,665 )     (553 )     (4,734 )
                   
Provision for income taxes
  $ 37,145     $ 39,146     $ 40,941  
                   
      The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate of 35% to income before taxes, as follows:
                             
    2004   2003   2002
             
    (In thousands)
Federal income taxes due at statutory rate
  $ 46,327     $ 46,973     $ 44,828  
(Reductions) increases in income taxes resulting from:
                       
   
Interest on state and municipal securities not taxable for federal income tax purposes
    (13,981 )     (12,921 )     (10,913 )
 
State franchise taxes, net of federal income tax benefit
    8,483       8,779       8,861  
 
Costs related to acquisitions
    49             55  
 
Low income housing tax credits
    (1,925 )     (1,749 )     (1,646 )
 
Other
    (1,808 )     (1,936 )     (244 )
                   
Provision for income taxes
  $ 37,145     $ 39,146     $ 40,941  
                   
      At December 31, 2004, the company had the following net operating loss and general tax credit carryforwards for tax return purposes.
                   
    Net Operating    
    Loss   Tax Credit
Expires Dec. 31,   Carryforwards   Carryforwards
         
(In thousands)
2017
  $ 416     $ 0  
             
 
Total
  $ 416     $ 0  
             
Note 10: Fair Value of Financial Instruments
      The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
discounts to fair value which may occur when financial instruments are sold in larger quantities. Such financial instruments and their estimated fair values at December 31 were:
                 
    2004   2003
         
    (In thousands)
Cash and cash equivalents
  $ 126,153     $ 189,628  
Money market assets
    534       534  
Interest and taxes receivable
    60,437       61,485  
Noninterest bearing and interest-bearing transaction and savings deposits
    2,957,399       2,860,157  
Short-term borrowed funds
    735,423       590,646  
Interest payable
    2,117       2,075  
             
      The fair values at December 31 of the following financial instruments were estimated using quoted market prices:
                                 
    2004   2003
         
    Book Value   Fair Value   Book Value   Fair Value
                 
    (In thousands)
Investment securities available for sale
  $ 915,078     $ 931,710     $ 1,391,150     $ 1,413,911  
Investment securities held to maturity
    1,260,832       1,265,986       535,377       542,729  
                         
      Loans were separated into two groups for valuation. Variable rate loans, except for those described below which reprice frequently with changes in market rates, were valued using historical data. Fixed rate loans and variable rate loans that have reached their maximum rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the $54.2 million allowance for loan losses in 2004 and $53.9 million in 2003 were applied against the estimated fair values to recognize future defaults of contractual cash flows. The book values and the estimated fair values of loans at December 31 were:
                                 
    2004   2003
         
    Book Value   Fair Value   Book Value   Fair Value
                 
    (In thousands)
Loans
  $ 2,246,078     $ 2,253,939     $ 2,269,420     $ 2,282,364  
                         
      The fair values of time deposits and notes payable were estimated by discounting future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics. The book values and the estimated fair values at December 31 were:
                                 
    2004   2003
         
    Book Value   Fair Value   Book Value   Fair Value
                 
    (In thousands)
Time deposits
  $ 626,220     $ 626,737     $ 603,834     $ 605,491  
Federal Home Loan Bank advances
    0       0       105,000       105,838  
Notes payable
    21,429       21,927       24,643       24,312  
                         
      The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11: Lease Commitments
      Twenty-nine banking offices and a centralized administrative service center are owned and sixty-six facilities are leased. Substantially all the leases contain multiple renewal options and provisions for rental increases, principally for cost of living index, property taxes and maintenance. The Company also leases certain pieces of equipment.
      Minimum future rental payments, net of sublease income, at December 31, 2004, are as follows:
             
    (In
    thousands)
   
2005
  $ 4,590  
   
2006
    4,059  
   
2007
    2,961  
   
2008
    2,237  
   
2009
    1,535  
 
Thereafter
    6,075  
       
Total minimum lease payments
  $ 21,457  
       
      Total rentals for premises and equipment, net of sublease income, included in noninterest expense were $4.8 million in 2004, $4.5 million in 2003 and $4.3 million in 2002.
Note 12: Commitments and Contingent Liabilities
      Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $410.0 million and $393.4 million at December 31, 2004 and 2003, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Standby letters of credit outstanding totaled $22.5 million and $24.1 million at December 31, 2004 and 2003, respectively.
      Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations.
Note 13: Retirement Benefit Plans
      The Company sponsors a defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. Contributions are subject to a five-year cliff vesting schedule; contributions charged to noninterest expense were $1.6 million in 2004, 2003 and 2002.
      In addition to the Deferred Profit-Sharing Plan, all salaried employees are eligible to participate in the voluntary Tax Deferred Savings/ Retirement Plan (ESOP) upon completion of a 90-day introductory period. The Tax Deferred Savings/Retirement Plan allows employees to defer, on a pretax basis, a portion of their salaries as contributions to this Plan. Participants may invest in several funds, including one fund that invests exclusively in Westamerica Bancorporation common stock. The matching contributions by the Company vest immediately; such contributions charged to compensation expense were $1.5 million in 2004, 2003, and 2002.

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company offers a continuation of group insurance coverage to employees electing early retirement, for the period from the date of retirement until age 65. The Company pays a portion of these early retirees’ insurance premiums which are determined at their date of retirement. The Company reimburses Medicare Part B premiums for all retirees and spouses over age 65. In 2004, the Company started to reimburse 50 percent of Medicare Part B premiums for retirees and spouses over 65. The Company continues to use an actuarial-based accrual method of accounting for post-retirement benefits. The Company uses a September 30 measurement date for determining post-retirement benefit calculations.
      The following table sets forth the net periodic post-retirement benefit cost for the years ended December 31 and the funded status of the Post-retirement Benefit Plan and the change in the benefit obligation as of December 31:
                         
    2004   2003   2002
             
    (In thousands)
Service cost
  $ 190     $ 243     $ 221  
Interest cost
    196       181       184  
Amortization of unrecognized transition obligation
    61       61       61  
                   
Net periodic cost
  $ 447     $ 485     $ 466  
                   
                               
    2004   2003   2002
             
    (In thousands)
Change in benefit obligation
                       
Benefit obligation at beginning of year
  $ 3,736     $ 3,455     $ 3,174  
Service cost
    190       243       221  
Interest cost
    196       181       184  
Benefits paid
    (106 )     (143 )     (124 )
                   
 
Benefit obligation at end of year
  $ 4,016     $ 3,736     $ 3,455  
                   
Accumulated post retirement benefit obligation attributable to:
                       
   
Retirees
  $ 2,686     $ 2,536     $ 2,483  
   
Fully eligible participants
    1,067       931       788  
   
Other
    263       269       184  
                   
     
Total
  $ 4,016     $ 3,736     $ 3,455  
                   
Fair value of plan assets
                 
                   
Accumulated post retirement benefit obligation in excess of plan assets
  $ 4,016     $ 3,736     $ 3,455  
                   
Comprised of:
                       
   
Unrecognized transition obligation
  $ 795     $ 857     $ 918  
   
Recognized post-retirement obligation
    3,221       2,879       2,537  
                   
     
Total
  $ 4,016     $ 3,736     $ 3,455  
                   

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional Information
     Assumptions
                           
    2004   2003   2002
             
Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost at December 31
                       
 
Discount rate
    5.25 %     5.25 %     5.80 %
      The assumed annual average rate of inflation used to measure the expected cost of benefits covered by the plan was 7.00 percent for 2005 and beyond.
      Assumed benefit inflation rates have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed benefit inflation rate would have the following effect on 2004 results:
                 
    One   One
    Percentage   Percentage
    Point   Point
    Increase   Decrease
         
    (In thousands)
Effect on total service and interest cost components
  $ 223     $ (184 )
Effect on post-retirement benefit obligation
    721       (575 )
Note 14: Related Party Transactions
      Certain directors and executive officers of the Company and/or its subsidiaries were loan customers of the Bank during 2004 and 2003. All such loans were made in the ordinary course of business on normal credit terms, including interest rate and collateral requirements. In the opinion of Management, these credit transactions did not involve, at the time they were contracted, more than the normal risk of collectibility or present other unfavorable features. The table below reflects information concerning loans to certain directors and executive officers and/or family members during 2004 and 2003:
                 
    2004   2003
         
    (In thousands)
Beginning balance
  $ 2,331     $ 2,054  
Originations
    55       662  
Payoffs/principal payments
    (54 )     (385 )
             
At December 31,
  $ 2,332     $ 2,331  
             
Percent of total loans outstanding
    0.10 %     0.10 %
Note 15: Regulatory Matters
      Payment of dividends to the Company by the Bank is limited under regulations for Federal Reserve member banks. The amount that can be paid in any calendar year, without prior approval from 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. Under this regulation, Westamerica Bank sought and obtained approval during 2004 to pay to the Company dividends of $94.7 million in excess of net profits as defined. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972. As of December 31, 2004, $179.1 million was available for payment of dividends by the Company to its shareholders.

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Bank is required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. The Bank’s daily average on deposit at the Federal Reserve Bank was $22.5 million in 2004 and $18.8 million in 2003.
Note 16: Westamerica Bancorporation (Parent Company Only)
Statements of Income and Comprehensive Income
                             
For the Years Ended December 31,   2004   2003   2002
             
    (In thousands)
Dividends from subsidiaries
  $ 98,436     $ 91,390     $ 87,449  
Interest income
    394       289       204  
Other income
    5,758       5,660       5,819  
                   
 
Total income
    104,588       97,339       93,472  
                   
Interest on borrowings
    1,298       892       1,113  
Salaries and benefits
    5,850       6,790       6,615  
Other expense
    2,365       2,394       2,594  
                   
 
Total expenses
    9,513       10,076       10,322  
                   
Income before taxes and equity in undistributed income of subsidiaries
    95,075       87,263       83,150  
Income tax benefit
    2,321       2,787       2,294  
Earnings of subsidiaries (less) greater than subsidiary dividends
    (2,178 )     5,013       1,694  
                   
   
Net income
  $ 95,218     $ 95,063     $ 87,138  
                   
Comprehensive income, net:
                       
 
Change in unrealized (loss) gain on securities available for sale, net
    (3,553 )     (5,961 )     7,252  
                   
   
Comprehensive income
  $ 91,665     $ 89,102     $ 94,390  
                   

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Balance Sheets
                   
    December 31,
     
    2004   2003
         
Assets
               
Cash and cash equivalents
  $ 37,909     $ 10,608  
Money market assets and investment securities available for sale
    10,004       9,584  
Investment in subsidiaries
    324,346       330,368  
Premises and equipment, net
    12,198       12,373  
Accounts receivable from subsidiaries
    586       548  
Other assets
    12,612       11,262  
             
 
Total assets
  $ 397,655     $ 374,743  
             
Liabilities
               
Notes payable
  $ 21,429     $ 24,643  
Other liabilities
    17,617       9,729  
             
 
Total liabilities
    39,046       34,372  
Shareholders’ equity
    358,609       340,371  
             
 
Total liabilities and shareholders’ equity
  $ 397,655     $ 374,743  
             

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Statements of Cash Flows
                               
    For the Years Ended December 31,
     
    2004   2003   2002
             
Operating Activities
                       
 
Net income
  $ 95,218     $ 95,063     $ 87,138  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
     
Depreciation
    321       536       633  
     
(Increase) decrease in accounts receivable from affiliates
    (39 )     25       37  
     
Increase in other assets
    (363 )     (1,804 )     (348 )
     
Provision for deferred income tax
    8,251       2,226       1,545  
     
Increase in other liabilities
    2,973       3,085       2,934  
     
Earnings of subsidiaries greater (less) than subsidiary dividends
    2,178       (5,013 )     (1,694 )
                   
Net cash provided by operating activities
    108,539       94,118       90,245  
Investing Activities
                       
     
Purchases of premises and equipment
    (146 )     376       402  
     
Net increase in short term investments
    (4 )     (5 )     (527 )
     
Purchase of investment securities available for sale
    88       0       0  
     
Proceeds from sale/maturities of investment securities
    0       0       1,508  
                   
Net cash (used) provided by investing activities
    (62 )     371       1,383  
Financing Activities
                       
     
(Decrease) increase in short-term debt
    0       (1,800 )     1,800  
     
Net (reductions) increases in notes payable and long-term borrowings
    (3,214 )     11,786       (6,849 )
     
Exercise of stock options/issuance of shares
    12,572       8,176       8,480  
     
Retirement of common stock including repurchases
    (55,444 )     (70,769 )     (64,033 )
     
Dividends
    (35,090 )     (32,935 )     (30,262 )
                   
Net cash used in financing activities
    (81,176 )     (85,542 )     (90,864 )
                   
Net increase (decrease) in cash and cash equivalents
    27,301       8,947       764  
Cash and cash equivalents at beginning of year
    10,608       1,661       897  
                   
Cash and cash equivalents at end of year
  $ 37,909     $ 10,608     $ 1,661  
                   
Supplemental disclosure:
                       
   
Unrealized (loss) gain on securities available for sale, net
  $ (3,553 )   $ (5,961 )   $ 7,252  
   
Issuance of common stock in connection with Bank acquisitions
    0       0       14,620  

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 17: Quarterly Financial Information (Unaudited)
                                 
    March 31,   June 30,   September 30,   December 31,
                 
    (In thousands, except per share data and price range of common stock)
2004
                               
Interest and fee income (FTE)
  $ 60,120     $ 58,868     $ 59,570     $ 60,542  
Net interest income (FTE)
    54,605       54,271       54,528       54,589  
Provision for loan losses
    750       750       600       600  
Noninterest income
    10,866       11,661       11,788       4,268  
Noninterest expense
    24,992       24,990       24,491       24,278  
Income before taxes (FTE)
    39,729       40,192       41,225       33,979  
Net income
    24,314       24,644       25,095       21,165  
Basic earnings per share
    0.76       0.78       0.79       0.66  
Diluted earnings per share
    0.74       0.76       0.78       0.65  
Dividends paid per share
    0.26       0.28       0.28       0.28  
Price range, common stock
    47.85 – 51.63       47.58 – 52.99       49.04 – 55.80       54.43 – 61.05  
2003
                               
Interest and fee income (FTE)
  $ 61,799     $ 61,733     $ 60,552     $ 60,520  
Net interest income (FTE)
    54,062       54,324       54,264       54,757  
Provision for loan losses
    900       900       750       750  
Noninterest income
    10,375       11,036       11,013       10,492  
Noninterest expense
    25,535       25,476       25,534       25,158  
Income before taxes (FTE)
    38,002       38,984       38,993       39,341  
Net income
    23,012       23,671       24,073       24,307  
Basic earnings per share
    0.70       0.72       0.73       0.74  
Diluted earnings per share
    0.69       0.71       0.72       0.73  
Dividends paid per share
    0.24       0.24       0.26       0.26  
Price range, common stock
    38.07 – 41.94       39.24 – 44.66       42.67 – 45.76       44.45 – 53.55  
2002
                               
Interest and fee income (FTE)
  $ 63,133     $ 63,325     $ 64,913     $ 63,519  
Net interest income (FTE)
    52,712       53,096       54,914       54,985  
Provision for loan losses
    900       900       900       900  
Noninterest income
    9,999       5,884       10,455       10,213  
Noninterest expense
    25,693       25,909       25,964       25,757  
Income before taxes (FTE)
    36,118       32,171       38,505       38,541  
Net income
    21,659       19,347       22,877       23,255  
Basic earnings per share
    0.64       0.58       0.68       0.69  
Diluted earnings per share
    0.63       0.57       0.67       0.68  
Dividends paid per share
    0.22       0.22       0.22       0.24  
Price range, common stock
    35.22 – 42.95       38.70 – 45.27       34.11 – 42.65       35.46 – 43.59  

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WESTAMERICA BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 18: Acquisition (Unaudited)
      On March 1, 2005 the Company completed its acquisition of Redwood Empire Bancorp (“REBC”), parent company of National Bank of the Redwoods (“NBR”). Pursuant to the Merger Agreement between the Company and REBC, and after adjustment in connection with the disposition of certain NBR deposits in Lake County, each share of REBC Common Stock outstanding at the merger closing was converted into 0.3263 shares of WABC Common Stock and cash of $11.37 per share. Approximately 1.6 million shares of Company stock were issued at a value of approximately $85 million and outstanding REBC stock options were converted into stock options of the Company with fair value of approximately $6 million. In addition, REBC shareholders were paid cash totaling approximately $57 million. Including certain costs to complete the acquisition the total cost was approximately $153 million. The acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141. Under this method of accounting, the purchase price will be allocated to assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. At December 31, 2004 REBC had loans of $436 million, deposits of $391 million and shareholders’ equity of $30 million.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Westamerica Bancorporation:
      We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation and Subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westamerica Bancorporation and Subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
  /s/ KPMG LLP
 
 
  KPMG LLP
San Francisco, California
March 4, 2005

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Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
      None.
Item 9A. 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 December 31, 2004. 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 December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting and the attestation Report of Independent Registered Public Accounting Firm are found on pages 40-41, immediately preceding the financial statements.
Item 9B. Other Information
      None.
PART III
Item 10. Directors and Executive Officers of the Registrant
      The information regarding Directors of the Registrant and compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item 10 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the captions “Board of Directors and Committees — Audit Committee”, “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Executive Officers
      The executive officers of the Corporation and Westamerica Bank serve at the pleasure of the Board of Directors and are subject to annual appointment by the Board at its first meeting following the Annual Meeting of Shareholders. It is anticipated that each of the executive officers listed below will be reappointed to serve in such capacities at that meeting.
             
        Held
Name of Executive   Position   Since
         
David L. Payne
  Mr. Payne, born in 1955, is the Chairman of the Board, President and Chief Executive Officer of the Corporation. Mr. Payne is President and Chief Executive Officer of Gibson Printing and Publishing Company and Gibson Radio and Publishing Company which are newspaper, commercial printing and real estate investment companies headquartered in Vallejo, California.     1984  
Robert W. Entwisle
  Mr. Entwisle, born in 1947, is Senior Vice President.     1986  
Jennifer J. Finger
  Ms. Finger, born in 1954, is Senior Vice President and Chief Financial Officer for the Corporation.     1997  

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        Held
Name of Executive   Position   Since
         
Dennis R. Hansen
  Mr. Hansen, born in 1950, is Senior Vice President and Controller for the Corporation.     1978  
Robert A. Thorson
  Mr. Thorson, born in 1960, is Senior Vice President and Treasurer for the Corporation. Mr. Thorson joined Westamerica Bancorporation in 1989 and was Vice President and Manager of Human Resources from 1995 until 2001.     2002  
Hans T. Y. Tjian
  Mr. Tjian, born in 1939, is Senior Vice President and manager of the Operations and Systems Administration of Westamerica Bank.     1989  
Frank R. Zbacnik
  Mr. Zbacnik, born in 1947, is Senior Vice President and Chief Credit Administrator of Westamerica Bank. Mr. Zbacnik joined Westamerica Bank in 1984 and was Vice President and Manager of Retail Credit from 1995 until 2000.     2001  
      The Company has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K of the Securities Act of 1933) that is applicable to its senior financial officers including its chief executive officer, chief financial officer, and principal accounting officer & controller. This Code of Ethics has been filed as Exhibit 14 to this Annual Report on Form 10-K.
Item 11. Executive Compensation
      The information required by this Item 11 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the captions “Executive Compensation,” “Stock Options,” and “Other Compensation Arrangements” in the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
      The information required by this Item 12 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Stock Ownership” in the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Item 13. Certain Relationships and Related Transactions
      The information required by this Item 13 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Corporation Transactions with Directors and Management” in the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Item 14. Principal Accountant Fees and Services
      The information required by this Item 14 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Audit Fees” in the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.

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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
      (a) 1. Financial Statements:
      See Index to Financial Statements on page 39. The financial statements included in Item 8 are filed as part of this report.
      (a) 2. Financial statement schedules required. No financial statement schedules are filed as part of this report since the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.
      (a) 3. Exhibits:
      The following documents are included or incorporated by reference in this Annual Report on Form 10-K:
         
Exhibit    
Number    
     
  2(b)     Agreement and Plan of Reorganization and Merger, dated March 14, 2000, by and among Westamerica Bancorporation, Westamerica Bank and First Counties Bank, incorporated by reference to Exhibit 2 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 17, 2000
  2(c)     Agreement and Plan of Reorganization, dated February 25, 2002, among Westamerica Bancorporation, Westamerica Bank and Kerman State Bank, incorporated by reference to Exhibit 2 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 8, 2002
  2(c)     Agreement and Plan of Reorganization, dated August 25, 2004, among Westamerica Bancorporation, Westamerica Bank and Redwood Empire Bancorp and National Bank of the Redwoods, incorporated by reference to Exhibit 2.1 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 27, 2004
  3(a)     Restated Articles of Incorporation (composite copy), incorporated by reference to Exhibit 3(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 30, 1998
  3(b)     By-laws, as amended (composite copy), incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the third quarter ended September 30, 2003, filed with the Securities and Exchange Commission on November 13, 2003
  4(a)     Amended and Restated Rights Agreement dated as of December 31, 2004, incorporated by reference to Exhibit 99 to the Registrant’s Form 8-A/ A, Amendment No. 4, filed with the Securities and Exchange Commission on December 22, 2004
  10(a)*     Amended and Restated Stock Option Plan of 1995, incorporated by reference to Exhibit A to the Registrant’s definitive Proxy Statement pursuant to Regulation 14(a) filed with the Securities and Exchange Commission on March 17, 2003
  10(b)*     Employment Agreement with Robert W. Entwisle dated January 7, 1987, incorporated by reference to Exhibit 10(c) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities and Exchange Commission on March 31, 1999
  10(c)     Note Purchase Agreement by and between Westamerica Bancorporation and The Northwestern Mutual Life Insurance Company dated as of October 30, 2003, pursuant to which registrant issued its 5.31% Senior Notes due October 31, 2013 in the principal amount of $15 million and form of 5.31% Senior Note due October 31, 2013 incorporated by reference to Exhibit 4 of Registrant’s Quarterly Report on Form 10-Q for the third quarter ended September 30, 2003, filed with the Securities and Exchange Commission on November 13, 2003
  10(d)*     Westamerica Bancorporation Chief Executive Officer Deferred Compensation Agreement by and between Westamerica Bancorporation and David L. Payne, dated December 18, 1998 incorporated by reference to Exhibit 10(e) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the Securities and Exchange Commission on March 29, 2000

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Exhibit    
Number    
     
  10(e)*     Description of Executive Cash Bonus Program incorporated by reference to Exhibit 10 of the Registrant’s Form 8-K filed with the Securities Exchange Commission on March 14, 2005
  10(f)*     Non-Qualified Annuity Performance Agreement with David L. Payne dated November 19, 1997
  10(g)*     Form of Nonstatutory Stock Option Agreement pursuant to the Westamerica Bancorporation Amended and Restated Stock Option Plan of 1995
  10(h)*     Form of Restricted Performance Share Grant Agreement pursuant to the Westamerica Bancorporation Amended and Restated Stock Option Plan of 1995
  11     Computation of Earnings Per Share on common and common equivalent shares and on common shares assuming full dilution
  14     Code of Ethics incorporated by reference to Exhibit 14 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 10, 2004
  21     Subsidiaries of the registrant
  23(a)     Consent of KPMG LLP
  31 .1   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
  31 .2   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
  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
  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
 
Indicates management contract or compensatory plan or arrangement. The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary A-2M, Westamerica Bancorporation, P.O. Box 1200, Suisun City, California 94585-1200, and payment to the Company of $.25 per page.
      (b) 1. Reports on Form 8-K
      On October 20, 2004, the Company filed a report on form 8-K with respect to item 12, therein, reporting third quarter, 2004 financial results. Included in the report was a press release dated October 19, 2004. On December 22, 2004, the Company filed a report on form 8-K with respect to Amended and Restated Rights Agreement dated as of December 31, 2004 between Westamerica Bancorporation and Computershare Investor Services, LLC.

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SIGNATURES
      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  WESTAMERICA BANCORPORATION
 
  /s/ Dennis R. Hansen
 
 
  Dennis R. Hansen
  Senior Vice President and Controller
  Principal Accounting Officer
Date: March 16, 2005
      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
                 
Signature   Title   Date
         
 
/s/ David L. Payne
 
David L. Payne
  Chairman of the Board and Director President and Chief Executive Officer   March 15, 2005
 
/s/ Etta Allen
 
Etta Allen
    Director     March 15, 2005
 
/s/ Louis E. Bartolini
 
Louis E. Bartolini
    Director     March 15, 2005
 
/s/ E. Joseph Bowler
 
E. Joseph Bowler
    Director     March 15, 2005
 
/s/ Arthur C. Latno, Jr.
 
Arthur C. Latno, Jr. 
    Director     March 15, 2005
 
/s/ Patrick D. Lynch
 
Patrick D. Lynch
    Director     March 15, 2005
 
/s/ Catherine C. MacMillan
 
Catherine C. MacMillan
    Director     March 15, 2005
 
/s/ Ronald A. Nelson
 
Ronald A. Nelson
    Director     March 15, 2005
 
/s/ Carl Otto
 
Carl Otto
    Director     March 15, 2005
 
/s/ Edward B. Sylvester
 
Edward B. Sylvester
    Director     March 15, 2005

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