10-K - WABC - Equibles

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

☐ 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: 001-09383

WESTAMERICA BANCORPORATION

(Exact name of the registrant as specified in its charter)

California	94-2156203
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification Number)

1108 Fifth Avenue, San Rafael, California 94901

(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (707) 863-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	WABC	The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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 ☑ No ☐

Indicate by check mark if whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2019 as reported on the NASDAQ Global Select Market, was $1,661,107,564.55. Shares of Common Stock held by each executive officer and director and by each person who owns 10% 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 February 20, 2020: 27,101,866 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Shareholders, to be held on April 23, 2020, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III to the extent described therein.

TABLE OF CONTENTS

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PART I
Item 1 Business	2
Item 1A Risk Factors	9
Item 1B Unresolved Staff Comments	14
Item 2 Properties	14
Item 3 Legal Proceedings	14
Item 4 Mine Safety Disclosures	14
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6 Selected Financial Data	18
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A Quantitative and Qualitative Disclosures About Market Risk	45
Item 8 Financial Statements and Supplementary Data	45
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91
Item 9A Controls and Procedures	91
Item 9B Other Information	91
PART III
Item 10 Directors, Executive Officers and Corporate Governance	92
Item 11 Executive Compensation	92
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93
Item 13 Certain Relationships, Related Transactions and Director Independence	93
Item 14 Principal Accountant Fees and Services	93
PART IV
Item 15 Exhibits, Financial Statement Schedules	93
Signatures	94
Exhibit Index	95

FORWARD-LOOKING STATEMENTS

This 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. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, future credit quality and performance, the appropriateness of the allowance for loan losses, loan growth or reduction, mitigation of risk in the Company’s loan and investment securities portfolios, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", “estimates”, "intends", "targeted", "projected", “forecast”, "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of any difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the national and regional economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing or security systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, hurricanes, fire, flood, drought, and other disasters, on the uninsured value of the Company’s assets and of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; (13) changes in the securities markets and (14) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. See also “Risk Factors” in Item 1A and other risk factors discussed elsewhere in this report.

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 (“BHCA”). Its legal headquarters are located at 1108 Fifth Avenue, San Rafael, California 94901. Principal administrative offices are located at 4550 Mangels Boulevard, Fairfield, California 94534 and its telephone number is (707) 863-6000. The Company provides a full range of banking services to individual and commercial customers in Northern and Central California through its subsidiary bank, Westamerica Bank (“WAB” or the “Bank”). The principal communities served are located in Northern and Central California, from Mendocino, Lake and 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 Bank owns 100% of the capital stock of Community Banker Services Corporation (“CBSC”), a company engaged in providing the Company and its subsidiaries with 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 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 six aforementioned business combinations were accounted for as poolings-of-interests.

During the period 2000 through 2005, the Company acquired three additional banks. These acquisitions were accounted for using the purchase accounting method.

On February 6, 2009, Westamerica Bank acquired the banking operations of County Bank (“County”) from the Federal Deposit Insurance Corporation (“FDIC”). On August 20, 2010, Westamerica Bank acquired assets and assumed liabilities of the former Sonoma Valley Bank (“Sonoma”) from the FDIC. The County and Sonoma acquired assets and assumed liabilities were measured at estimated fair values, as required by FASB ASC 805, Business Combinations.

At December 31, 2019, the Company had consolidated assets of approximately $5.6 billion, deposits of approximately $4.8 billion and shareholders’ equity of approximately $731 million. The Company and its subsidiaries employed 737 full-time equivalent staff as of December 31, 2019.

The Company’s 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 are available through the SEC’s website (https://www.sec.gov). Such documents as well as the Company’s director, officer and employee Code of Conduct and Ethics are also available free of charge from the Company by request to:

Westamerica Bancorporation

Corporate Secretary A-2M

Post Office Box 1200

Suisun City, California 94585-1200

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, 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 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 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 Commissioner of the California Department of Business Oversight (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. 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. 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.

The Gramm-Leach-Bliley Act (the “GLBA”), or the Financial Services Act of 1999, 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 an 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 an FHC. After the certification and declaration is filed, the FHC may engage either de novo or through 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 list of permissible activities in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after an FHC has commenced one or more of the financial activities. The Company has not elected to become an FHC.

Regulation and Supervision of Banks

The Bank is a California state-chartered Federal Reserve member bank and its deposits are insured by the FDIC. The Bank is subject to regulation, supervision and regular examination by the California Department of Business Oversight (“DBO”) and 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, shareholder rights and duties, and investment and lending activities.

In addition, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes limitations on 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.

On July 21, 2010, financial regulatory reform legislation entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

●	Centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and (as to banks with $10 billion or more in assets) enforcing compliance with federal consumer financial laws.
●	Restricted the preemption of state law by federal law and disallowed subsidiaries and affiliates of national banks from availing themselves of such preemption.
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●	Applied the same leverage and risk-based capital requirements that would apply to insured depository institutions to most bank holding companies.
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●	Required bank regulatory agencies to seek to make their capital requirements for banks countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.
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●	Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit Insurance Fund ("DIF") and increased the floor of the size of the DIF.
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●	Imposed comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself.
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●	Required large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management.
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●	Implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that would apply to all public companies, not just financial institutions.
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●	Made permanent the $250 thousand limit for federal deposit insurance.
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●	Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
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●	Amended the Electronic Fund Transfer Act ("EFTA") to, among other things, give the FRB the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. While the Company’s assets are currently less than $10 billion, interchange fees charged by larger institutions may dictate the level of fees smaller institutions will be able to charge to remain competitive.
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Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees may increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

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 resulting in assets being recognized on the balance sheet as assets, and the extension of credit facilities 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 1250% for assets with relatively higher credit risk, such as certain securitizations. 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 (related to the interest rate sensitivity of an institution’s assets and liabilities, and its off balance sheet financial instruments) in the evaluation of a bank’s capital adequacy.

As of December 31, 2019, the Company’s and the Bank’s respective ratios exceeded applicable regulatory requirements. See Note 9 to the consolidated financial statements for capital ratios of the Company and the Bank, compared to minimum capital requirements and for the Bank the standards for well capitalized depository institutions.

On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations over a transitional period 2015 through 2018. See the sections entitled “Capital Resources and Capital to Risk-Adjusted Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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 has 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 an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or 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 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 collectability 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 Company’s ability to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (“CGCL”). The CGCL provides that a corporation may make a distribution to its shareholders if (i) the corporation’s retained earnings equal or exceed the amount of the proposed distribution plus unpaid accrued dividends (if any) on securities with a dividend preference, or (ii) immediately after the dividend, the corporation’s total assets equal or exceed total liabilities plus unpaid accrued dividends (if any) on securities with a dividend preference.

The Company’s ability to pay dividends depends in part on the Bank’s ability to pay cash dividends to the Company. 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 or its holding company 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. The Federal Reserve Board has issued guidance indicating its expectations that a bank holding company will inform and consult with Federal Reserve supervisory staff sufficiently in advance of (i) declaring and paying a dividend that could raise safety and soundness concerns (e.g., declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid); (ii) redeeming or repurchasing regulatory capital instruments when the bank holding company is experiencing financial weaknesses; or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of the quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.

Premiums for Deposit Insurance

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level, asset quality and supervisory rating.

In July 2010, Congress in the Dodd-Frank Act increased the minimum for the DIF reserve ratio, the ratio of the amount in the fund to insured deposits, from 1.15% to 1.35% and required that the ratio reach that level by September 30, 2020. Further, the Dodd-Frank Act made banks with $10 billion or more in assets responsible for the increase from 1.15% to 1.35%, among other provisions.

In August, 2016, the FDIC announced the DIF reserve ratio surpassed the 1.15% reserve ratio target, triggering three major changes:

(1.)	The decline in the range of initial assessment rates for all banks from 5-35 basis points to 3-30 basis points;
(2.)	The assessment of a quarterly surcharge on large banks equal to an annual rate of 4.5 basis points in addition to regular assessments; and
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(3.)	A revised method to calculate risk-based assessment rates for established small banks (under $1 billion in assets) pursuant to an FDIC final rule issued April, 2016.
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In September 2018, the DIF reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30, 2020, deadline required under the Dodd-Frank Act. FDIC regulations provide for two changes to deposit insurance assessments upon reaching the minimum: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large banks) will cease; and (2) small banks will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. In January 2019, the Bank, which meets the definition of a “small Bank”, was advised by the FDIC its assessment credit to be applied when the reserve ratio is at or above 1.38% was $1.4 million. The Bank received notification from the FDIC during the third quarter 2019 that the reserve ratio exceeded 1.38%, and the FDIC applied the Bank’s assessment credits against the Bank’s second and third quarter 2019 deposit insurance premiums. The Company expects application of FDIC assessment credits against the Bank’s fourth quarter 2019 deposit insurance premiums and partial application against the Bank’s first quarter 2020 deposit insurance premiums. The Company cannot provide any assurance as to the effect of any future changes in its deposit insurance premium rates.

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 financial institutions 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 including merger applications.

Financial Privacy Legislation and Customer Information Security

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 Bank is subject to the FRB’s regulations in this area. 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

Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot 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 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 impose any filing or reporting obligations for banking organizations, but does require certain additional due diligence and recordkeeping practices.

Programs To Mitigate Identity Theft

In November 2007, federal banking agencies together with the National Credit Union Administration and Federal Trade Commission adopted regulations under the Fair and Accurate Credit Transactions Act of 2003 to require financial institutions and other creditors to develop and implement a written identity theft prevention program to detect, prevent and mitigate identity theft in connection with certain new and existing accounts. Covered accounts generally include consumer accounts and other accounts that present a reasonably foreseeable risk of identity theft. Each institution’s program must include policies and procedures designed to: (i) identify indicators, or “red flags,” of possible risk of identity theft; (ii) detect the occurrence of red flags; (iii) respond appropriately to red flags that are detected; and (iv) ensure that the program is updated periodically as appropriate to address changing circumstances. The regulations include guidelines that each institution must consider and, to the extent appropriate, include in its program.

Pending Legislation

Changes to state laws and regulations (including changes in interpretation or enforcement) can affect the operating environment of BHCs 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 level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase.

Competition

The Bank’s principal competitors for deposits and loans are major banks and smaller community banks, savings and loan associations and credit unions. To a lesser extent, competitors include 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 offer investment vehicles that 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.

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. While the future impact of regulatory and legislative changes cannot be predicted with certainty, the business of banking will remain highly competitive.

ITEM 1A. RISK FACTORS

Readers and prospective investors in the Company’s securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this Report.

The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also impair the Company’s business operations. This Report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the company’s securities could decline significantly, and investors could lose all or part of their investment in the Company’s common stock.

Market and Interest Rate Risk

Changes in interest rates could reduce income and cash flow. ****

The Company’s income and cash flow depend to a great extent on the difference between the interest earned on loans and investment securities and the interest paid on deposits and other borrowings, and the Company’s success in competing for loans and deposits. The Company cannot control or prevent changes in the level of interest rates which fluctuate in response to general economic conditions, the policies of various governmental and regulatory agencies, in particular, the Federal Open Market Committee of the FRB, and pricing practices of the Company’s competitors. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and other borrowings, and the rates received on loans and investment securities and paid on deposits and other liabilities. The discussion in this Report under “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset, Liability and Market Risk Management” and “- Liquidity and Funding” and “Item 7A Quantitative and Qualitative Disclosures About Market Risk” is incorporated by reference in this paragraph.

Changes in capital market conditions could reduce asset valuations.

Capital market conditions, including interest rates, liquidity, investor confidence, bond issuer credit worthiness, perceived counter-party risk, the supply of and demand for financial instruments, the financial strength of market participants, and other factors can materially impact the value of the Company’s assets. An impairment in the value of the Company’s assets could result in asset write-downs, reducing the Company’s asset values, earnings, and equity.

The value of securities in the Company’s investment securities portfolio may be negatively affected by disruptions in securities markets.

The market for some of the investment securities held in the Company’s portfolio can be extremely volatile. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that the declines in market value will not result in other than temporary impairments of these assets, which would lead to loss recognition that could have a material adverse effect on the Company’s net income and capital levels.

The weakness of other financial institutions could adversely affect the Company.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of default of the Company’s counterparty or client. In addition, the Company’s credit risk may be increased when the collateral the Company holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the secured obligation. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations or earnings.

Shares of Company common stock eligible for future sale or grant of stock options and other equity awards 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 27.1 million shares of common stock were outstanding at December 31, 2019. Pursuant to its stock option plans, at December 31, 2019, the Company had outstanding options for 561 thousand shares of common stock, of which 190 thousand were currently exercisable. As of December 31, 2019, 1,327 thousand shares of Company common stock remained available for grants under the Company’s equity incentive plans. Sales of substantial amounts of Company common stock in the public market could adversely affect the market price of its common stock.

The Company’s payment of dividends on common stock could be eliminated or reduced.

Holders of the Company’s common stock are entitled to receive dividends only when, as and if declared by the Company’s Board of Directors. Although the Company has historically paid cash dividends on the Company’s common stock, the Company is not required to do so and the Company’s Board of Directors could reduce or eliminate the Company’s common stock dividend in the future.

The Company could repurchase shares of its common stock at price levels considered excessive.

The Company repurchases and retires its common stock in accordance with Board of Directors-approved share repurchase programs. At December 31, 2019, approximately 1.8 million shares remained available to repurchase under such plans. The Company has been active in repurchasing and retiring shares of its common stock when alternative uses of excess capital, such as acquisitions, have been limited. The Company could repurchase shares of its common stock at price levels considered excessive, thereby spending more cash on such repurchases as deemed reasonable and effectively retiring fewer shares than would be retired if repurchases were effected at lower prices.

Risks Related to the Nature and Geographical Location of the Company’s Business

The Company invests in loans that contain inherent credit risks that may cause the Company to incur losses.

The risk that borrowers may not pay interest or repay their loans as agreed is an inherent risk of the banking business. The company mitigates this risk by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals. Nonetheless, the Company may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves. The Company can provide no assurance that the credit quality of the loan portfolio will not deteriorate in the future and that such deterioration will not adversely affect the Company or its results of operations.

The Company’s operations are concentrated geographically in California, and poor economic conditions may cause the Company to incur losses.

Substantially all of the Company’s business is located in California. A portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2019, real estate served as the principal source of collateral with respect to approximately 57% of the Company’s loan portfolio. The Company’s financial condition and operating results will be subject to changes in economic conditions in California. The California economy was severely affected by the recessionary period of 2008 to 2009. Much of the California real estate market experienced a decline in values of varying degrees. This decline had an adverse impact on the business of some of the Company’s borrowers and on the value of the collateral for many of the Company’s loans. Generally, the counties surrounding and near San Francisco Bay have recovered more soundly from the recent recession than counties in the California “Central Valley,” from Sacramento in the north to Bakersfield in the south. Approximately 22% of the Company’s loans are to borrowers in the California “Central Valley.” Economic conditions in California’s diverse geographic markets can be vastly different and are subject to various uncertainties, including the condition of the construction and real estate sectors, the effect of drought on the agricultural sector and its infrastructure, and the California state and municipal governments’ budgetary and fiscal conditions. The Company can provide no assurance that conditions in any sector or geographic market of the California economy will not deteriorate in the future and that such deterioration will not adversely affect the Company.

10 -

The markets in which the Company operates are subject to the risk of earthquakes, fires, storms and other natural disasters.

All of the properties of the Company are located in California. Also, most of the real and personal properties which currently secure a majority of the Company’s loans are located in California. Further, the Company invests in securities issued by companies and municipalities operating throughout the United States, and in mortgage-backed securities collateralized by real property located throughout the United States. California and other regions of the United States are prone to earthquakes, brush and wildfires, flooding, drought and other natural disasters. In addition to possibly sustaining uninsured damage to its own properties, if there is a major earthquake, flood, drought, fire or other natural disaster, the Company faces the risk that many of its debtors may experience uninsured property losses, or sustained business or employment interruption and/or loss which may materially impair their ability to meet the terms of their debt obligations. A major earthquake, flood, prolonged drought, fire or other natural disaster in California or other regions of the United States could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Adverse changes in general business or economic conditions could have a material adverse effect on the Company’s financial condition and results of operations.

A sustained or continuing weakness or weakening in business and economic conditions generally or specifically in the principal markets in which the Company does business could have one or more of the following adverse impacts on the Company’s business:

●	a decrease in the demand for loans and other products and services offered by the Company;
●	an increase or decrease in the usage of unfunded credit commitments;
---	---
●	an increase or decrease in the amount of deposits;
---	---
●	a decrease in non-depository funding available to the Company;
---	---
●	an impairment of certain intangible assets, including goodwill;
---	---
●	an increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Company, which could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, reduced interest revenue and cash flows, and valuation adjustments on assets;
---	---
●	an impairment in the value of investment securities;
---	---
●	an impairment in the value of life insurance policies owned by the Company;
---	---
●	an impairment in the value of real estate owned by the Company.
---	---

The 2008 - 2009 financial crisis led to the failure or merger of a number of financial institutions. Financial institution failures can result in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. The failure of institutions with FDIC insured deposits can cause the DIF reserve ratio to decline, resulting in increased deposit insurance assessments on surviving FDIC insured institutions. Weak economic conditions can significantly weaken the strength and liquidity of financial institutions.

The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, are highly dependent upon the business environment in the markets where the Company operates, in the State of California and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, healthy labor markets, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, high rates of unemployment, deflation, pandemics, declines in business activity or consumer, investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation; natural disasters; or a combination of these or other factors.

Such business conditions could adversely affect the credit quality of the Company’s loans, the demand for loans, loan volumes and related revenue, securities valuations, amounts of deposits, availability of funding, results of operations and financial condition.

Regulatory Risks

Restrictions on dividends and other distributions could limit amounts payable to the Company.

As a holding company, a substantial portion of the Company’s cash flow typically comes from dividends paid by the Bank. Various statutory provisions restrict the amount of dividends the Company’s subsidiaries can pay to the Company without regulatory approval. A reduction in subsidiary dividends paid to the Company could limit the capacity of the Company to pay dividends. In addition, if any of the Company’s subsidiaries were to liquidate, that subsidiary’s creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before the Company, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary.

11 -

Adverse effects of changes in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.

The Company is subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of the Company’s customers and not for the benefit of investors. In the past, the Company’s business has been materially affected by these regulations.

Laws, regulations or policies, including accounting standards and interpretations currently affecting the Company and the Company’s subsidiaries, may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, the Company’s business may be adversely affected by any future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement including future acts of terrorism, major U.S. corporate bankruptcies and reports of accounting irregularities at U.S. public companies.

Additionally, the Company’s business is affected significantly by the fiscal and monetary policies of **** the federal government and its agencies. The Company is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States of America. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates of borrowings by depository institutions, (c) changing interest rates paid on balances financial institutions deposit with the FRB, and (d) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on the Company’s business, results of operations and financial condition. Under long- standing policy of the FRB, a BHC is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, the Company may be required to commit financial and other resources to its subsidiary bank in circumstances where the Company might not otherwise do so.

Following the recessions of 2008 and 2009, the FRB provided vast amounts of liquidity into the banking system. The FRB purchased large quantities of U.S. government securities, including agency-backed mortgage securities, increasing the demand for such securities thereby reducing interest rates. Interest rates remained historically low through 2016 as the monetary policy of the Federal Open Market Committee (the “FOMC”) was highly accommodative. The FRB began reducing these asset purchase activities in the fourth quarter 2013 and the FOMC began removing monetary stimulus in December 2016 and increased the federal funds rate by 2.00 percent to 2.50 percent through December 2018. During 2019, the FOMC reduced rates from 2.50 percent to 1.75 percent. The changes in the target range for the federal funds rate could reduce or increase liquidity in the markets and cause interest rates to fluctuate. In the rising interest environment, the Bank’s funding costs would increase, potentially reducing the availability of funds to the Bank to finance its existing operations, and causing fixed-rate investment securities and loans to decline in value.

Federal and state governments could pass legislation detrimental to the Company’s performance. ****

As an example, the Company could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank's borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Company could experience higher credit losses because of federal or state legislation or regulatory action that limits or delays the Bank's ability to foreclose on property or other collateral or makes foreclosure less economically feasible. Federal, state and local governments could pass tax legislation causing the Company to pay higher levels of taxes.

The FDIC insures deposits at insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. The FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund.

The behavior of depositors in regard to the level of FDIC insurance could cause our existing customers to reduce the amount of deposits held at the Bank, and could cause new customers to open deposit accounts at the Bank. The level and composition of the Bank's deposit portfolio directly impacts the Bank's funding cost and net interest margin.

12 -

Systems, Accounting and Internal Control Risks

The accuracy of the Company’s judgments and estimates about financial and accounting matters will impact operating results and financial condition.

The discussion under “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in this Report and the information referred to in that discussion is incorporated by reference in this paragraph. The Company makes certain estimates and judgments in preparing its financial statements. The quality and accuracy of those estimates and judgments will have an impact on the Company’s operating results and financial condition.

A new accounting standard will significantly change the manner in which the Company recognizes credit losses and may have a material impact on the Company’s results of operations, financial condition or liquidity.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting update, FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU changes the accounting for estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. The ASU replaces the incurred loss model with a model based on expected credit loss (“CECL”), which will accelerate recognition of credit losses. Additionally, credit losses relating to debt securities available-for-sale will be recorded through an allowance for credit losses under the new standard. The Company will adopt the ASU provisions effective January 1, 2020. The ASU significantly changed the manner in which the Company determines the adequacy of its allowance for loan losses. The Company is evaluating the impact the CECL model will have, but the Company may recognize a one-time cumulative-effect adjustment to its allowance for loan losses as of January 1, 2020. Any required adjustment to the allowance for loan losses resulting from this change in methodology will be accomplished through an offsetting after-tax-adjustment to shareholders’ equity. Moreover, the CECL model may create more volatility in the level of the allowance for loan losses after adoption. If the Company is required to materially increase the level of its allowance for loan losses for any reason, such increase could adversely affect its business, financial condition and results of operations. See Note 1 to the consolidated financial statements, “Recently Issued Accounting Standards” for more information on the CECL methodology.

The Company’s information systems may experience an interruption or breach in security.

The Company relies heavily on communications and information systems, including those of third party vendors and other service providers, to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s data processing, accounting, customer relationship management and other systems. Communication and information systems failures can result from a variety of risks including, but not limited to, events that are wholly or partially out of the Company’s control, such as telecommunication line integrity, weather, terrorist acts, natural disasters, accidental disasters, unauthorized breaches of security systems, energy delivery systems, cyber attacks, and other events. Although the Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Company’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the Company and its customers, there is no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately corrected by the Company or its vendors. The occurrence of any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s controls and procedures may fail or be circumvented*.*

Management regularly reviews and updates the Company’s internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. The Company maintains controls and procedures to mitigate against risks such as processing system failures and errors, and customer or employee fraud, and maintains insurance coverage for certain of these risks. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Events could occur which are not prevented or detected by the Company’s internal controls or are not insured against or are in excess of the Company’s insurance limits or insurance underwriters’ financial capacity. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

13 -

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Branch Offices and Facilities

Westamerica Bank is engaged in the banking business through 80 branch offices in 21 counties in Northern and Central California. WAB believes all of its offices are constructed and equipped to meet prescribed security requirements.

The Company owns 30 banking office locations and one centralized administrative service center facility and leases 56 facilities. Most of the leases contain renewal options and provisions for rental increases, principally for changes in the cost of living index, and for changes in other operating costs such as property taxes and maintenance.

ITEM 3. LEGAL PROCEEDINGS

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. 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, other than ordinary routine legal proceedings arising in the ordinary course of the Company’s business. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its business, financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the third quarter 2018, the Company achieved a mediated settlement to dismiss a lawsuit and accrued a liability for $3,500 thousand; the liability was paid in the first quarter 2019. In the second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $252 thousand. The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $5,542 thousand and accrued a liability for such amount in 2017; based on additional information received in the second quarter 2019, the Company increased such liability to $5,843 thousand by recognizing an expense of $301 thousand; the estimated liability is subject to revision.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the NASDAQ Stock Market (“NASDAQ”) under the symbol “WABC”. As of January 31, 2020, there were approximately 5,300 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. See Item 8, Financial Statements and Supplementary Data, Note 19 to the consolidated financial statements for recent quarterly dividend information. 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, cash balances, financial condition and capital requirements of the Company and its subsidiaries as well as policies of the FRB pursuant to the BHCA. See Item 1, “Business - Supervision and Regulation.”

The notes to the consolidated financial statements included in this Report contain additional information regarding the Company’s capital levels, capital structure, regulations affecting subsidiary bank dividends paid to the Company, the Company’s earnings, financial condition and cash flows, and cash dividends declared and paid on common stock.

14 -

Stock performance

The following chart compares the cumulative return on the Company’s stock during the ten years ended December 31, 2019 with the cumulative return on the S&P 500 composite stock index and NASDAQ’S Bank Index. The comparison assumes $100 invested in each on December 31, 2009 and reinvestment of all dividends.

	December 31,
	2009		2010		2011		2012		2013		2014
Westamerica Bancorporation (WABC)	$	100.00	$	102.89	$	83.95	$	84.15	$	115.14	$	103.08
S&P 500 (SPX)		100.00		115.05		117.34		135.88		179.79		204.19
NASDAQ Bank Index (CBNK)		100.00		114.29		102.20		120.83		171.36		179.68
	December 31,
---	---	---	---	---	---	---	---	---	---	---
	2015		2016		2017		2018		2019
Westamerica Bancorporation (WABC)	$	101.76	$	141.57	$	137.75	$	132.37	$	165.24
S&P 500 (SPX)		206.93		231.63		282.10		269.60		354.19
NASDAQ Bank Index (CBNK)		195.39		269.25		283.61		237.35		294.81

15 -

The following chart compares the cumulative return on the Company’s stock during the five years ended December 31, 2019 with the cumulative return on the S&P 500 composite stock index and NASDAQ’S Bank Index. The comparison assumes $100 invested in each on December 31, 2014 and reinvestment of all dividends.

	December 31,
	2014		2015		2016		2017		2018		2019
Westamerica Bancorporation (WABC)	$	100.00	$	98.72	$	137.33	$	133.63	$	128.41	$	160.30
S&P 500 (SPX)		100.00		101.34		113.44		138.15		132.03		173.46
NASDAQ Bank Index (CBNK)		100.00		108.74		149.85		157.84		132.10		164.07

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, as amended (the “Exchange Act”), of common stock during the quarter ended December 31, 2019 (in thousands, except per share data).

	2019
Period	(a) Total Number of<br> shares Purchased		(b) Average Price Paid<br> per Share		(c) Number of Shares<br> Purchased as Part of<br> Publicly Announced<br> Plans or Programs		(d) Maximum Number<br> of Shares that May<br> Yet Be Purchased<br> Under the Plans or<br> Programs
	(In thousands, except exercise price)
October 1 through October 31		-	$	-		-		1,750
November 1 through November 30		-		-		-		1,750
December 1 through December 31		-		-		-		1,750
Total		-	$	-		-		1,750

16 -

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 under stock option plans, and other ongoing requirements.

No shares were repurchased during the period from October 1, 2019 through December 31, 2019. A program approved by the Board of Directors on July 25, 2019 authorizes the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2020.

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17 -

ITEM 6. SELECTED FINANCIAL DATA

The following financial information for the five years ended December 31, 2019 has been derived from the Company’s audited consolidated financial statements. This information should be read in conjunction with those statements, notes and other information included elsewhere herein.

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

	For the Years Ended December 31,
	2019			2018			2017			2016			2015
	(In thousands, except per share data and ratios)
Interest and loan fee income	$	158,682		$	151,723		$	138,312		$	135,919		$	136,529
Interest expense		1,888			1,959			1,900			2,116			2,424
Net interest and loan fee income		156,794			149,764			136,412			133,803			134,105
Provision (reversal) for loan losses		-			-			(1,900	)		(3,200	)		-
Noninterest income:	****	****	****	****	****	****	****	****	****	****	****	****	****	****	****
Securities gains (losses)		217			(52	)		7,955			-			-
Other noninterest income		47,191			48,201			48,673			46,574			47,867
Total noninterest income		47,408			48,149			56,628			46,574			47,867
Noninterest expense:	****	****	****	****	****	****	****	****	****	****	****	****	****	****	****
Loss contingency		553			3,500			5,542			3			-
Other noninterest expense		98,433			103,416			102,226			103,617			105,300
Total noninterest expense		98,986			106,916			107,768			103,620			105,300
Income before income taxes		105,216			90,997			87,172			79,957			76,672
Income tax provision		24,827			19,433			37,147			21,104			17,919
Net income	$	80,389		$	71,564		$	50,025		$	58,853		$	58,753
Average common shares outstanding		26,956			26,649			26,291			25,612			25,555
Average diluted common shares outstanding		27,006			26,756			26,419			25,678			25,577
Common shares outstanding at December 31,		27,062			26,730			26,425			25,907			25,528
Per common share:	****	****	****	****	****	****	****	****	****	****	****	****	****	****	****
Basic earnings	$	2.98		$	2.69		$	1.90		$	2.30		$	2.30
Diluted earnings		2.98			2.67			1.89			2.29			2.30
Book value at December 31,		27.03			23.03			22.34			21.67			20.85
Financial ratios:	****	****	****	****	****	****	****	****	****	****	****	****	****	****	****
Return on assets		1.44	%		1.27	%		0.92	%		1.12	%		1.16	%
Return on common equity		11.90	%		11.35	%		8.39	%		10.85	%		11.32	%
Net interest margin (FTE)^(1)^		3.11	%		2.98	%		2.95	%		3.03	%		3.36	%
Net loan losses to average loans		0.16	%		0.14	%		0.08	%		0.04	%		0.11	%
Efficiency ratio^(2)^		47.4	%		52.52	%		52.51	%		53.55	%		53.69	%
Equity to assets		13.02	%		11.05	%		10.71	%		10.46	%		10.30	%
Period end balances:	****	****	****	****	****	****	****	****	****	****	****	****	****	****	****
Assets	$	5,619,555		$	5,568,526		$	5,513,046		$	5,366,083		$	5,168,875
Loans		1,126,664			1,207,202			1,287,982			1,352,711			1,533,396
Allowance for loan losses		19,484			21,351			23,009			25,954			29,771
Investment securities		3,816,918			3,641,026			3,352,371			3,237,070			2,886,291
Deposits		4,812,621			4,866,839			4,827,613			4,704,741			4,540,659
Identifiable intangible assets and goodwill		123,064			123,602			125,523			128,600			132,104
Short-term borrowed funds		30,928			51,247			58,471			59,078			53,028
Shareholders' equity		731,417			615,591			590,239			561,367			532,205
Capital ratios at period end:	****	****	****	****	****	****	****	****	****	****	****	****	****	****	****
Total risk based capital		16.83	%		17.03	%		16.17	%		15.95	%		13.39	%
Tangible equity to tangible assets		11.07	%		9.04	%		8.63	%		8.26	%		7.94	%
Dividends paid per common share	$	1.63		$	1.60		$	1.57		$	1.56		$	1.53
Common dividend payout ratio		55	%		60	%		83	%		68	%		67	%
^(1)^	Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.
---	---
^(2)^	The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis and noninterest income).

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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 47 through 87, as well as with the other information presented throughout this Report.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the banking industry. Application of these principles requires the Company 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 accounting 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.

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 accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Loan Portfolio Credit Risk” discussion below.

Financial Overview

Westamerica Bancorporation and subsidiaries’ (collectively, the “Company”) reported net income of $80.4 million or $2.98 diluted earnings per common share (“EPS”) in 2019. Results for 2019 include a tax-exempt life insurance gain of $433 thousand and $553 thousand in loss contingencies. The loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit. The tax-exempt life insurance gain and loss contingencies did not have a significant impact on the EPS for 2019. Although loss contingencies represent estimated liabilities, which are subject to revision, the Company does not anticipate additional losses for either of these matters. The 2019 results compare to net income of $71.6 million or $2.67 EPS in 2018 and net income of $50.0 million or $1.89 EPS for the year ended December 31, 2017. The 2018 results include a $585 thousand tax-exempt life insurance policy gain and a $3.5 million loss contingency for a mediated settlement to dismiss a lawsuit, which on an aggregate basis reduced EPS $0.07. The liability was paid in January 2019. The 2017 results include $12.3 million in adjustments to net deferred tax asset values triggered by enactment of the Tax Cuts and Jobs Act of 2017 (the “Act”) which reduced EPS $0.48, recognition of a $5.5 million loss contingency, which reduced EPS $0.12, and securities gains of $8.0 million, which increased EPS $0.18.

The Company’s principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low through 2016 as the monetary policy of the Federal Open Market Committee (the “FOMC”) was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The changed composition of the earning assets and low market interest rates pressured the net interest margin to lower levels. The FOMC began removing monetary stimulus in December 2016 and increased the federal funds rate by 2.00% to 2.50% through June 2019, although longer-term rates did not increase by a similar magnitude. The increase in market interest rates benefited the Company’s earning asset yields until the FOMC cut the federal funds rate in July 2019 by 0.25%, in September 2019 by 0.25% and in October by 0.25%.

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The funding source of the Company’s earning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. The average 2019 volume of checking and savings deposits was 96.2% of average total deposits.

Credit quality remained solid with nonperforming assets totaling $4.9 million at December 31, 2019 and net chargeoffs of $1.9 million in 2019. The Company did not recognize a provision for loan losses in 2019.

The Company presents its net interest margin and net interest income on an FTE basis using the current statutory federal tax rate. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks, therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on an FTE basis. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the federal statutory tax rate of 35% for 2017. Due to the Act, the federal tax rate was 21% for 2019 and 2018; as such, the upward adjustment to reflect the effect of income exempt from federal taxation is lower in 2019 and 2018 than in 2017.

The Company’s significant accounting policies (see Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements below) are fundamental to understanding the Company’s results of operations and financial condition.The Company adopted the FASB ASU 2016-02, Leases (Topic 842) provisions effective January 1, 2019, and recorded a lease liability of $15.3 million and right-of-use asset of $15.3 million for facilities leases. The change in occupancy and equipment expense was not material. The Company also adopted the FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities on January 1, 2019. The implementing entry reduced the carrying value of investment securities by $3.1 million and reduced retained earnings by $2.8 million, net of tax. The change in premium amortization method was not material to revenue recognition.

Net Income

Following is a summary of the components of net income for the periods indicated:

	For the Years Ended December 31,
	2019		2018			2017
	( in thousands, except per share data)
Net interest and loan fee income			$	149,764		$	136,412
FTE adjustment				5,646			12,182
Net interest and loan fee income (FTE)				155,410			148,594
Reversal of (provision for) loan losses				-			1,900
Noninterest income				48,149			56,628
Noninterest expense		)		(106,916	)		(107,768	)
Income before income taxes (FTE)				96,643			99,354
Income taxes (FTE)		)		(25,079	)		(49,329	)
Net income			$	71,564		$	50,025
Net income per average fully-diluted common share			$	2.67		$	1.89
Net income as a percentage of average shareholders' equity		%		11.35	%		8.39	%
Net income as a percentage of average total assets		%		1.27	%		0.92	%

All values are in US Dollars.

Comparing 2019 with 2018, net income increased $8.8 million. Net interest and loan fee (FTE) income increased $6.0 million due to a higher net yield on earning assets and higher average balances of investments, partially offset by lower average balances of interest-bearing cash and loans. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In 2019, noninterest income decreased $741 thousand compared with 2018 due to lower income from service charges on deposit accounts, other service charges and debit card fees, offset in part by an increase in merchant processing services and securities gains in 2019. In 2019 noninterest expense decreased $7.9 million compared with 2018 primarily due to decreases in loss contingencies, salaries and related benefits, FDIC insurance assessments, and intangible amortization. The effective tax rates (FTE) was 26.8% for 2019 compared with 26.0% for 2018.

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Comparing 2018 with 2017, net income increased $21.5 million. Net interest and loan fee income increased in 2018 compared with 2017 mostly attributable to higher average balances of investments and higher yields on earning assets as market interest rates rose. The increase was offset by lower average balances of loans. Net interest and loan fee income (FTE) in 2018 included a lower FTE adjustment than in 2017 due to the reduced federal corporate tax as a result of enactment of the Act. The provision for loan losses remained zero, reflecting Management's evaluation of losses inherent in the loan portfolio. In 2018, noninterest income decreased $8.5 million compared with 2017 because 2017 results included $8.0 million in gains of sale of securities. The non-FTE book tax provision for 2018, which reflected the tax-exempt nature of a $585 thousand life insurance policy gain, was $19.4 million compared with $37.1 million for 2017, representing effective tax rates of 21.4% and 42.6%, respectively. The non-FTE book tax provision for 2017 includes $12.3 million in adjustments to net deferred tax asset values triggered by enactment of the Act. The federal statutory tax rate was reduced from 35% in 2017 to 21% in 2018 due to the Act. The non-FTE book tax provisions for 2018 and 2017 include tax benefits of $737 thousand and $698 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements.

Net Interest and Loan Fee Income (FTE)

The Company's primary source of revenue is net interest income, or the difference between interest income earned on loans and investment securities and interest expense paid on interest-bearing deposits and other borrowings.

Components of Net Interest and Loan Fee Income (FTE)

	For the Years Ended December 31,
	2019		2018			2017
	( in thousands)
Interest and loan fee income			$	151,723		$	138,312
Interest expense		)		(1,959	)		(1,900	)
Net interest and loan fee income				149,764			136,412
FTE adjustment				5,646			12,182
Net interest and loan fee income (FTE)			$	155,410		$	148,594
Net interest margin (FTE)		%		2.98	%		2.95	%

All values are in US Dollars.

Comparing 2019 with 2018, net interest and loan fee (FTE) income increased $6.0 million due to a higher net yield on earning assets (up 0.12%) and higher average balances of investments (up $127 million), partially offset by lower average balances of interest-bearing cash (down $101 million) and loans (down $47 million).

Comparing 2018 with 2017, net interest and loan fee income increased $13.4 million due to higher average balances of investments (up $270 million) and higher yield on interest earning assets (up 0.03%), offset by lower average balances of loans (down $106 million). The FTE adjustment was lower in 2018 compared with 2017 mainly due to the reduced federal corporate tax rate as a result of enactment of the Act.

The yield on earning assets (FTE) was 3.14% in 2019, 3.02% in 2018 and 2.99% in 2017. The net interest margin (FTE) increased in 2019, reflecting earning assets repriced to higher yields. The 2019 yield on earning assets (FTE) reflected higher market interest rates which offset the impact of the reduced FTE adjustment.

The Company’s funding cost was 0.03% in 2019 compared with 0.04% in 2018 and 2017. Average balances of time deposits declined $64 million from 2017 to 2019 while lower-cost checking and savings deposits grew 3% in the same period. Average balances of checking and saving deposits accounted for 96.2% of average total deposits in 2019 compared with 95.6% in 2018 and 94.8% in 2017.

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Summary of Average Balances, Yields/Rates and Interest Differential

The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes reversal of previously accrued interest on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the federal statutory tax rate of 35 percent for 2017. Due to the Tax Cuts and Jobs Act of 2017, the federal tax rate is 21 percent for 2018 and 2019; as such, the upward adjustment to reflect the effect of income exempt from federal taxation is lower in 2019 and 2018 than in 2017.

Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin


	Interest
	Income/		Yields/
	Expense		Rates

Assets
Investment securities:
Taxable	$	77,800		2.52	%
Tax-exempt (1)		19,923		3.24	%
Total investments (1)		97,723		2.64	%
Loans:
Taxable		56,550		5.08	%
Tax-exempt (1)		2,028		4.10	%
Total loans (1)		58,578		5.04	%
Total interest bearing cash		6,993		2.15	%
Total interest-earning assets(1)		163,294		3.14	%
Other assets
Total assets
Liabilities and shareholders' equity
Noninterest-bearing demand	$	-		-	%
Savings and interest-bearing transaction		1,274		0.05	%
Time less than 100,000		254		0.25	%
Time 100,000 or more		326		0.41	%
Total interest-bearing deposits		1,854		0.07	%
Short-term borrowed funds		34		0.07	%
Total interest-bearing liabilities		1,888		0.07	%
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Net interest spread (1) (2)				3.07	%
Net interest and fee income and interest margin (1) (3)	$	161,406		3.11	%

All values are in US Dollars.

^(1)^	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
^(2)^	Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
^(3)^	Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin


	Interest
	Income/		Yields/
	Expense		Rates

Assets
Investment securities:
Taxable	$	65,330		2.31	%
Tax-exempt (1)		24,610		3.29	%
Total investments (1)		89,940		2.51	%
Loans:
Taxable		57,240		4.96	%
Tax-exempt (1)		2,264		4.07	%
Total loans (1)		59,504		4.92	%
Total interest bearing cash		7,925		1.86	%
Total interest-earning assets(1)		157,369		3.02	%
Other assets
Total assets
Liabilities and shareholders' equity
Noninterest-bearing demand	$	-		-	%
Savings and interest-bearing transaction		1,275		0.05	%
Time less than 100,000		279		0.23	%
Time 100,000 or more		368		0.39	%
Total interest-bearing deposits		1,922		0.07	%
Short-term borrowed funds		37		0.06	%
Total interest-bearing liabilities		1,959		0.07	%
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Net interest spread (1) (2)				2.95	%
Net interest and fee income and interest margin (1) (3)	$	155,410		2.98	%

All values are in US Dollars.

^(1)^	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
^(2)^	Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
^(3)^	Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin


	Interest
	Income/		Yields/
	Expense		Rates

Assets
Investment securities:
Taxable	$	51,445		2.06	%
Tax-exempt (1)		31,737		3.92	%
Total investments (1)		83,182		2.52	%
Loans:
Taxable		59,700		4.77	%
Tax-exempt (1)		3,136		5.00	%
Total loans (1)		62,836		4.78	%
Total interest bearing cash		4,476		1.10	%
Total interest-earning assets (1)		150,494		2.99	%
Other assets
Total assets
Liabilities and shareholders' equity
Noninterest-bearing demand	$	-		-	%
Savings and interest-bearing transaction		1,123		0.05	%
Time less than 100,000		318		0.23	%
Time 100,000 or more		415		0.38	%
Total interest-bearing deposits		1,856		0.07	%
Short-term borrowed funds		44		0.06	%
Total interest-bearing liabilities		1,900		0.07	%
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Net interest spread (1) (2)				2.92	%
Net interest and fee income and interest margin (1) (3)	$	148,594		2.95	%

All values are in US Dollars.

^(1)^	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
^(2)^	Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities.
^(3)^	Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits.

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Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid

The following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances (volume) and changes in average interest yields/rates for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

Summary of Changes in Interest Income and Expense




			Yield/Rate			Total

Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable	5,979		$	6,491		$	12,470
Tax-exempt (1)	(4,341	)		(346	)		(4,687	)
Total investments (1)	1,638			6,145			7,783
Loans:
Taxable	(2,049	)		1,359			(690	)
Tax-exempt (1)	(248	)		12			(236	)
Total loans (1)	(2,297	)		1,371			(926	)
Total interest bearing cash	(1,882	)		950			(932	)
Total (decrease) in interest and loan fee income (1)	(2,541	)		8,466			5,925
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction	(27	)		26			(1	)
Time less than 100,000	(38	)		13			(25	)
Time 100,000 or more	(62	)		20			(42	)
Total interest-bearing deposits	(127	)		59			(68	)
Short-term borrowed funds	(7	)		4			(3	)
Total (decrease) increase in interest expense	(134	)		63			(71	)
(Decrease) increase in net interest and loan fee income (1)	(2,407	)	$	8,403		$	5,996

All values are in US Dollars.

^(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




			Yield/Rate			Total

Increase (decrease) in interest and loan fee income:
Investment securities:
Taxable	6,839		$	7,046		$	13,885
Tax-exempt (1)	(2,417	)		(4,710	)		(7,127	)
Total investments (1)	4,422			2,336			6,758
Loans:
Taxable	(4,715	)		2,255			(2,460	)
Tax-exempt (1)	(355	)		(517	)		(872	)
Total loans (1)	(5,070	)		1,738			(3,332	)
Total interest bearing cash	219			3,230			3,449
Total (decrease) in interest and loan fee income (1)	(429	)		7,304			6,875
Increase (decrease) in interest expense:
Deposits:
Savings and interest-bearing transaction	32			120			152
Time less than 100,000	(39	)		-			(39	)
Time 100,000 or more	(55	)		8			(47	)
Total interest-bearing deposits	(62	)		128			66
Short-term borrowed funds	(7	)		-			(7	)
Total (decrease) increase in interest expense	(69	)		128			59
(Decrease) increase in net interest and loan fee income (1)	(360	)	$	7,176		$	6,816

All values are in US Dollars.

^(1)^	Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

Provision for Loan Losses

The Company provided no provision for loan losses in 2019 and 2018. The Company recorded a reversal of the provision for loan losses of $1.9 million in 2017. Classified loans declined $3.8 million in 2019. Nonaccrual loans were $4 million at December 31, 2019 compared with $5 million at December 31, 2018. These factors were reflected in Management’s evaluation of credit quality, the level of the provision for loan losses in 2019, and the adequacy of the allowance for loan losses at December 31, 2019. For further information regarding credit risk, net credit losses and the allowance for loan losses, see the “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” sections of this Report.

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Noninterest Income

Components of Noninterest Income

	For the Years Ended December 31,
	2019		2018			2017
	(In thousands)
Service charges on deposit accounts	$	17,882	$	18,508		$	19,612
Merchant processing services		10,132		9,630			8,426
Debit card fees		6,357		6,643			6,421
Trust fees		2,963		2,938			2,875
ATM processing fees		2,776		2,752			2,610
Other service fees		2,255		2,567			2,584
Life insurance gains		433		585			-
Financial services commissions		392		499			639
Securities gains (losses)		217		(52	)		7,955
Other noninterest income		4,001		4,079			5,506
Total Noninterest Income	$	47,408	$	48,149		$	56,628

In 2019, noninterest income decreased $741 thousand compared with 2018. Income from service charges on deposit accounts decreased due to lower overdraft fees in 2019. Other service charges decreased due to lower income from internet banking. Debit card fees and financial services commissions decreased in 2019. Merchant processing services increased due to successful sales efforts and higher transaction volumes and partially offset the decrease in noninterest income in 2019 compared with 2018.

In 2018, noninterest income decreased $8.5 million compared with 2017 primarily because 2017 results included $8.0 million in gains on sale of securities. Service charges on deposit accounts decreased $1.1 million due to declines in fees for overdrafts, checking accounts and analyzed accounts. The decreases in other noninterest income were partially offset by an increase in merchant processing services fees of $1.2 million due to successful sales efforts and higher transaction volumes and a $585 thousand life insurance gain in 2018.

Noninterest Expense

Components of Noninterest Expense

	For the Years Ended December 31,
	2019		2018		2017
	(In thousands)
Salaries and related benefits	$	51,054	$	53,007	$	51,519
Occupancy and equipment		20,240		19,679		19,430
Outsourced data processing services		9,471		9,229		9,035
Professional fees		2,465		2,842		2,161
Courier service		1,878		1,779		1,732
Loss Contingency		553		3,500		5,542
Amortization of identifiable intangibles		538		1,921		3,077
Impairment of tax credit investments		-		-		625
Other noninterest expense		12,787		14,959		14,647
Total Noninterest Expense	$	98,986	$	106,916	$	107,768

In 2019, noninterest expense decreased $7.9 million compared with 2018 primarily due to decreases in loss contingencies, salaries and related benefits, FDIC insurance assessments, and intangible amortization. The 2019 loss contingencies include a $301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $252 thousand settlement to dismiss a lawsuit. Although loss contingencies represent estimated liabilities, which are subject to revision, the Company does not anticipate additional losses for either of these matters. Salaries and related benefits decreased $1.9 million primarily due to employee attrition and lower incentives and employee benefit costs. Amortization of intangibles decreased $1.4 million as assets are amortized on a declining balance method. FDIC insurance assessments (included in “other noninterest expense”) decreased primarily due to application of the Bank’s assessment credit described in Part 1, Item 1, “Premiums for Deposit Insurance”.

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In 2018, noninterest expense decreased $852 thousand compared with 2017. The 2018 noninterest expense included a $3.5 million mediated settlement to dismiss a lawsuit. The 2017 noninterest expense included a $5.5 million loss contingency and a $625 thousand impairment of low income housing limited partnership investments due to enactment of the Act. The 2017 loss contingency represents the Company’s estimated refunds to customers of revenue recognized in prior years. Salaries and related benefits increased $1.5 million primarily due to the annual merit increase cycle and higher incentives and employee benefit costs. Professional fees increased $681 thousand due to higher legal and consulting fees. Amortization of intangibles decreased $1.2 million as assets are amortized on a declining balance method.

Provision for Income Tax

The Company’s income tax provision was $24.8 million in 2019 compared with $19.4 million in 2018 and $37.1 million in 2017, representing effective tax rates of 23.6%, 21.4% and 42.6%, respectively. The effective tax rate (FTE) was 26.8% in 2019, 26.0% in 2018 and 49.7% in 2017.

The higher effective tax rate (FTE) in 2019 compared with 2018 is due to lower levels of tax-exempt interest income and stock compensation tax deductions in 2019. The tax provisions (FTE) for 2019 and 2018 include tax benefits of $435 thousand and $737 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements. In 2019, the Company decreased unrecognized tax benefits by $909 thousand related to settlements with taxing authorities. The settlements incorporated amended tax returns for which the Company had recognized a deferred tax asset in the amount of $1,003 thousand.

The 2017 income tax provision included a $12.3 million charge to re-measure the Company’s net deferred tax asset triggered by enactment of the Tax Cuts and Jobs Act of 2017. The book tax provisions for 2018 and 2017 include tax benefits of $737 thousand and $698 thousand, respectively, for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements. The lower effective tax rate for 2018 compared with 2017 reflects a reduction in the federal corporate tax rate as a result of enactment of the Act and the tax-exempt nature of a $585 thousand life insurance policy gain.

Investment Securities Portfolio

The Company maintains an investment securities portfolio consisting of securities issued by the U.S. Treasury, U.S. Government sponsored entities, agency and non-agency mortgage backed securities, state and political subdivisions, corporations, and other securities.

Management has managed the investment securities portfolio in response to changes in deposit and loan volumes. The carrying value of the Company’s investment securities portfolio was $3.8 billion at December 31, 2019 and $3.6 billion at December 31, 2018.

Management continually evaluates the Company’s investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, liquidity, and the level of interest rate risk to which the Company is exposed. These evaluations may cause Management to change the level of funds the Company deploys into investment securities and change the composition of the Company’s investment securities portfolio.

At December 31, 2019, substantially all of the Company’s investment securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. There have been no significant differences in the Company’s internal analyses compared with the ratings assigned by the third party credit rating agencies.

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The Company had no equity securities at December 31, 2019. All of the equity securities were sold with no gains or losses from the sale during the third quarter 2019. The market value of the equity securities was $1,747 thousand at December 31, 2018. The Company recognized gross unrealized holding gains of $50 thousand in earnings in 2019.

The following table shows the fair value carrying amount of the Company’s equity securities and debt securities available for sale as of the dates indicated:

	At December 31,
	2019		2018		2017
	(In thousands)
Equity securities:
Mutual funds	$	-	$	1,747	$	1,800
Total equity securities		-		1,747		1,800
Debt securities available for sale:
U.S. Treasury securities		20,000		139,574		-
Securities of U.S. Government sponsored entities		111,167		164,018		119,319
Agency residential mortgage-backed securities (MBS)		939,750		853,871		767,706
Non-agency residential MBS		-		114		154
Agency commercial MBS		3,708		1,842		2,219
Securities of U.S. Government entities		544		1,119		1,590
Obligations of states and political subdivisions		163,139		179,091		185,221
Corporate securities		1,833,783		1,315,041		1,115,498
Collateralized Loan Obligations		6,755		-		-
Total debt securities available for sale		3,078,846		2,654,670		2,191,707
Total	$	3,078,846	$	2,656,417	$	2,193,507

The following table sets forth the relative maturities and contractual yields of the Company’s debt securities available for sale (stated at fair value) at December 31, 2019. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years.

Debt Securities Available for Sale Maturity Distribution

	At December 31, 2019
	Within one year		After one but<br> within five<br> years			After five but<br> within ten<br> years			After ten years			Mortgage-<br> backed			Total
	( in thousands)
U.S. Treasury securities			$	-		$	-		$	-		$	-		$	20,000
Interest rate		%		-	%		-	%		-	%		-	%		2.56	%
Securities of U.S. Government sponsored entities				110,166			-			-			-			111,167
Interest rate		%		1.92	%		-	%		-	%		-	%		1.93	%
Securities of U.S. Government entities				-			544			-			-			544
Interest rate		%		-	%		3.61	%		-	%		-	%		3.61	%
Obligations of states and political subdivisions				45,770			64,052			34,465			-			163,139
Interest rate		%		4.15	%		4.00	%		2.96	%		-	%		3.58	%
Corporate securities				966,455			611,926			-			-			1,833,783
Interest rate		%		2.69	%		3.22	%		-	%		-	%		2.85	%
Collaterized loan obligations				-			6,755			-			-			6,755
Interest rate		%		-	%		2.78	%		-	%		-	%		2.78	%
Subtotal				1,122,391			683,277			34,465			-			2,135,388
Interest rate		%		2.67	%		3.29	%		2.96	%		-	%		2.85	%
MBS				-			-			-			943,458			943,458
Interest rate		%		-	%		-	%		-	%		2.36	%		2.36	%
Total			$	1,122,391		$	683,277		$	34,465		$	943,458		$	3,078,846
Interest rate		%		2.67	%		3.29	%		2.96	%		2.36	%		2.70	%

All values are in US Dollars.

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The following table shows the amortized cost carrying amount and fair value of the Company’s debt securities held to maturity as of the dates indicated:

	At December 31,
	2019		2018		2017
	(In thousands)
Agency residential MBS	$	353,937	$	447,332	$	545,883
Non-agency residential MBS		2,354		3,387		4,462
Agency commercial MBS		-		-		9,041
Obligations of states and political subdivisions		381,781		533,890		599,478
Total	$	738,072	$	984,609	$	1,158,864
Fair value	$	744,296	$	971,445	$	1,155,342

The following table sets forth the relative maturities and contractual yields of the Company’s debt securities held to maturity at December 31, 2019. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years.

Debt Securities Held to Maturity Maturity Distribution

	At December 31, 2019
	Within one year		After one but<br> within five<br> years			After five but<br> within ten<br> years			After ten years			Mortgage-<br> backed			Total
	( in thousands)
Obligations of states and political subdivisions			$	161,911		$	149,492		$	-		$	-		$	381,781
Interest rate		%		2.98	%		3.54	%		-	%		-	%		3.04	%
MBS				-			-			-			356,291			356,291
Interest rate		%		-	%		-	%		-	%		1.94	%		1.94	%
Total			$	161,911		$	149,492		$	-		$	356,291		$	738,072
Interest rate		%		2.98	%		3.54	%		-	%		1.94	%		2.51	%

All values are in US Dollars.

The following table summarizes total corporate securities by the industry sector in which the issuing companies operate:

	At December 31, 2019				At December 31, 2018
	Market value	As a percent of<br> total corporate<br> securities			Market value		As a percent of<br> total corporate<br> securities
	( in thousands)
Financial			42	%	$	531,512		40	%
Utilities			12	%		197,568		15	%
Consumer, Non-cyclical			10	%		169,851		13	%
Industrial			10	%		152,636		12	%
Communications			7	%		49,642		4	%
Technology			6	%		105,324		8	%
Energy			5	%		19,668		1	%
Basic Materials			4	%		30,410		2	%
Consumer, Cyclical			4	%		58,430		5	%
Total Corporate securities			100	%	$	1,315,041		100	%

All values are in US Dollars.

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The following tables summarize the total general obligation and revenue bonds issued by states and political subdivisions held in the Company’s investment securities portfolios as of the dates indicated, identifying the state in which the issuing government municipality or agency operates.

At December 31, 2019, the Company’s investment securities portfolios included securities issued by 451 state and local government municipalities and agencies located within 42 states. The largest exposure to any one municipality or agency was $9.0 million (fair value) represented by one general obligation bond.

	At December 31, 2019
	Amortized		Fair
	Cost		Value
	(In thousands)
Obligations of states and political subdivisions:
General obligation bonds:
California	$	83,984	$	86,527
Texas		36,396		36,815
New Jersey		29,347		29,688
Washington		23,862		24,516
Minnesota		20,624		20,871
Other (33 states)		189,286		193,302
Total general obligation bonds	$	383,499	$	391,719
Revenue bonds:
California	$	31,829	$	32,278
Kentucky		16,384		16,680
Colorado		12,176		12,479
Washington		11,208		11,509
Indiana		9,935		10,145
Virginia		8,027		8,328
Arizona		7,912		8,106
Other (25 states)		60,338		61,347
Total revenue bonds	$	157,809	$	160,872
Total obligations of states and political subdivisions	$	541,308	$	552,591

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At December 31, 2018, the Company’s investment securities portfolios included securities issued by 583 state and local government municipalities and agencies located within 43 states. The largest exposure to any one municipality or agency was $9.3 million (fair value) represented by eight general obligation bonds.

	At December 31, 2018
	Amortized		Fair
	Cost		Value
	(In thousands)
Obligations of states and political subdivisions:
General obligation bonds:
California	$	104,607	$	105,730
Texas		56,653		56,286
New Jersey		35,501		35,527
Minnesota		29,609		29,593
Other (35 states)		267,402		266,136
Total general obligation bonds	$	493,772	$	493,272
Revenue bonds:
California	$	35,164	$	35,399
Kentucky		19,320		19,328
Colorado		14,564		14,539
Washington		13,034		13,228
Iowa		13,202		13,052
Indiana		12,007		12,034
Other (28 states)		113,047		112,805
Total revenue bonds	$	220,338	$	220,385
Total obligations of states and political subdivisions	$	714,110	$	713,657

At December 31, 2019 and December 31, 2018, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 20 revenue sources at December 31, 2019 and 22 revenue sources December 31, 2018. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following tables.

	At December 31, 2019
	Amortized		Fair
	Cost		Value
	(In thousands)
Revenue bonds by revenue source:
Water	$	36,960	$	37,699
Sewer		19,039		19,545
Sales tax		15,695		16,101
Lease (renewal)		15,230		15,539
Lease (abatement)		10,913		11,160
Other (15 sources)		59,972		60,828
Total revenue bonds by revenue source	$	157,809	$	160,872

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	At December 31, 2018
	Amortized		Fair
	Cost		Value
	(In thousands)
Revenue bonds by revenue source:
Water	$	46,326	$	46,671
Sales tax		28,264		28,517
Sewer		28,335		28,502
Lease (renewal)		17,013		17,051
College & University		13,919		13,714
Other (17 sources)		86,481		85,930
Total revenue bonds by revenue source	$	220,338	$	220,385

See Note 2 to the consolidated financial statements for additional information related to the investment securities.

Loan Portfolio

The Company originates loans with the intent to hold such assets until principal is repaid. Management follows written loan underwriting policies and procedures which are approved by the Bank’s Board of Directors. Loans are underwritten following approved underwriting standards and lending authorities within a formalized organizational structure. The Board of Directors also approves independent real estate appraisers to be used in obtaining estimated values for real property serving as loan collateral. Prevailing economic trends and conditions are also taken into consideration in loan underwriting practices.

All loan applications must be for clearly defined legitimate purposes with a determinable primary source of repayment, and as appropriate, secondary sources of repayment. All loans are supported by appropriate documentation such as current financial statements, tax returns, credit reports, collateral information, guarantor asset verification, title reports, appraisals, and other relevant documentation.

Commercial loans represent term loans used to acquire durable business assets or revolving lines of credit used to finance working capital. Underwriting practices evaluate each borrower’s cash flow as the principal source of loan repayment. Commercial loans are generally secured by the borrower’s business assets as a secondary source of repayment. Commercial loans are evaluated for credit-worthiness based on prior loan performance and borrower financial information including cash flow, borrower net worth and aggregate debt.

Commercial real estate loans represent term loans used to acquire or refinance real estate to be operated by the borrower in a commercial capacity. Underwriting practices evaluate each borrower’s global cash flow as the principal source of loan repayment, independent appraisal of value of the property, and other relevant factors. Commercial real estate loans are generally secured by a first lien on the property as a secondary source of repayment.

Real estate construction loans represent the financing of real estate development. Loan principal disbursements are controlled through the use of project budgets, and disbursements are approved based on construction progress, which is validated by project site inspections. A first lien on the real estate serves as collateral to secure the loan.

Residential real estate loans generally represent first lien mortgages used by the borrower to purchase or refinance a principal residence. For interest-rate risk purposes, the Company offers only fully-amortizing, adjustable-rate mortgages. In underwriting first lien mortgages, the Company evaluates each borrower’s ability to repay the loan, an independent appraisal of the value of the property, and other relevant factors. The Company does not offer riskier mortgage products, such as non-amortizing “interest-only” mortgages and “negative amortization” mortgages.

For loans secured by real estate, the Bank requires title insurance to insure the status of its lien and each borrower is obligated to insure the real estate collateral, naming the Company as loss payee, in an amount sufficient to repay the principal amount outstanding in the event of a property casualty loss.

Consumer installment and other loans are predominantly comprised of indirect automobile loans with underwriting based on credit history and scores, personal income, debt service capacity, and collateral values.

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Loan volumes have declined due to payoffs and problem loan workout activities, particularly with purchased loans, and reduced volumes of loan originations. The Company did not take an aggressive posture relative to loan portfolio growth during the post-recession period of historically low interest rates. Management increased investment securities as loan volumes declined.

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

	At December 31,
	2019		2018		2017		2016		2015
	(In thousands)
Commercial	$	222,085	$	275,080	$	335,996	$	354,697	$	382,748
Commercial real estate		578,758		580,480		568,584		542,171		637,456
Construction		1,618		3,982		5,649		2,555		3,951
Residential real estate		32,748		44,866		65,183		87,724		120,091
Consumer installment and other		291,455		302,794		312,570		365,564		389,150
Total loans	$	1,126,664	$	1,207,202	$	1,287,982	$	1,352,711	$	1,533,396

The following table shows the maturity distribution and interest rate sensitivity of commercial, commercial real estate, and construction loans at December 31, 2019. Balances exclude residential real estate loans and consumer loans totaling $324.2 million. These types of loans are typically paid in monthly installments over a number of years.

Loan Maturity Distribution

	At December 31, 2019
	Within One<br> Year		One to Five<br> Years		After Five<br> Years		Total
	(In thousands)
Commercial and Commercial real estate	$	81,528	$	153,156	$	566,159	$	800,843
Construction		1,618		-		-		1,618
Total	$	83,146	$	153,156	$	566,159	$	802,461
Loans with fixed interest rates	$	36,610	$	64,427	$	32,451	$	133,488
Loans with floating or adjustable interest rates		46,536		88,729		533,708		668,973
Total	$	83,146	$	153,156	$	566,159	$	802,461

Commitments and Letters of Credit

The Company issues formal commitments on lines of credit to well-established and financially responsible 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 are generally charged for commitments and letters of credit. Commitments on lines of credit and letters of credit typically mature within one year. For further information, see the accompanying notes to the consolidated financial statements.

Loan Portfolio Credit Risk

The Company extends loans to commercial and consumer customers which expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans.

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The preparation of the financial statements requires Management to estimate the amount of losses inherent in the loan portfolio and establish an allowance for credit losses. The allowance for credit losses is maintained by assessing or reversing a provision for loan losses through the Company’s earnings. In estimating credit losses, Management must exercise judgment in evaluating information deemed relevant, such as financial information regarding individual borrowers, overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.

The Company closely monitors the markets in which it conducts its lending operations and follows a strategy to control exposure to loans with high credit risk. The Bank’s organization structure separates the functions of business development and loan underwriting; Management believes this segregation of duties avoids inherent conflicts of combining business development and loan approval functions. In measuring and managing credit risk, the Company adheres to the following practices.

●	The Bank maintains a Loan Review Department which reports directly to the audit committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans to challenge the credit risk grades assigned by Management using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated Management attention to maximize collection.
●	The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans.
---	---

●

The Bank maintains a Loan Review Department which reports directly to the audit committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans to challenge the credit risk grades assigned by Management using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated Management attention to maximize collection.

●

The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans.

---

Classified loans with higher levels of credit risk are further designated as “nonaccrual loans.” Management places classified loans on nonaccrual status when full collection of contractual interest and principal payments is in doubt. Uncollected interest previously accrued on loans placed on nonaccrual status is reversed as a charge against interest income. The Company does not accrue interest income on loans following placement on nonaccrual status. Interest payments received on nonaccrual loans are applied to reduce the carrying amount of the loan unless the carrying amount is well secured by loan collateral. “Nonperforming assets” include nonaccrual loans, loans 90 or more days past due and still accruing, and repossessed loan collateral (commonly referred to as “Other Real Estate Owned”).

Nonperforming Assets

	At December 31,
	2019		2018		2017		2016		2015
	(In thousands)
Nonperforming nonaccrual loans	$	659	$	998	$	1,641	$	3,956	$	14,648
Performing nonaccrual loans		3,781		3,870		4,285		4,429		350
Total nonaccrual loans		4,440		4,868		5,926		8,385		14,998
Accruing loans 90 or more days past due		440		551		531		497		295
Total nonperforming loans		4,880		5,419		6,457		8,882		15,293
Other real estate owned		43		350		1,426		3,095		9,264
Total nonperforming assets	$	4,923	$	5,769	$	7,883	$	11,977	$	24,557

Nonperforming assets have declined during 2019 due to payoffs, chargeoffs and sale of Other Real Estate Owned. At December 31, 2019, one loan secured by commercial real estate with a balance of $3.7 million was on nonaccrual status. The remaining eight nonaccrual loans held at December 31, 2019 had an average carrying value of $96 thousand.

Management believes the overall credit quality of the loan portfolio is reasonably stable; however, classified and nonperforming assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent loans will not occur in the future.

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Allowance for Credit Losses

The Company’s allowance for loan losses represents Management’s estimate of loan losses inherent in the loan portfolio. In evaluating credit risk for loans, Management measures loss potential of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected.

The following table summarizes the allowance for loan losses, chargeoffs and recoveries for the periods indicated:

	For the Years Ended December 31,
	2019		2018			2017			2016			2015
	( in thousands)
Analysis of the Allowance for Loan Losses
Balance, beginning of period			$	23,009		$	25,954		$	29,771		$	31,485
(Reversal of) provision for loan losses				-			(1,900	)		(3,200	)		-
Loans charged off:
Commercial		)		(513	)		(961	)		(2,023	)		(756	)
Commercial real estate				(240	)		-			-			(449	)
Construction				-			-			-			(431	)
Residential real estate				-			-			-			-
Consumer and other installment		)		(4,124	)		(4,957	)		(4,749	)		(3,493	)
Total chargeoffs		)		(4,877	)		(5,918	)		(6,772	)		(5,129	)
Recoveries of loans previously charged off:
Commercial				1,447			762			4,028			1,174
Commercial real estate				-			88			554			290
Construction				-			1,899			-			45
Consumer and other installment				1,772			2,124			1,573			1,906
Total recoveries				3,219			4,873			6,155			3,415
Net loan losses		)		(1,658	)		(1,045	)		(617	)		(1,714	)
Balance, end of period			$	21,351		$	23,009		$	25,954		$	29,771
Net loan losses as a percentage of average loans		%		0.14	%		0.08	%		0.04	%		0.11	%

All values are in US Dollars.

The Company's allowance for loan losses is maintained at a level considered appropriate 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 and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is individually allocated to impaired loans whose full collectability of principal is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. The Company evaluates all loans with outstanding principal balances in excess of $500 thousand that are classified or on nonaccrual status and all “troubled debt restructured” loans for impairment. The remainder of the loan portfolio is collectively evaluated for impairment based in part on quantitative analyses of historical loan loss experience of loan portfolio segments to determine standard loss rates for each segment. The loss rate for each loan portfolio segment reflects both the historical loss experience during a look-back period and a loss emergence period. Liquidating purchased consumer installment loans are evaluated separately by applying historical loss rates to forecasted liquidating principal balances to measure losses inherent in this portfolio segment. The loss rates are applied to segmented loan balances to allocate the allowance to the segments of the loan portfolio.

The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of December 31, 2019 is economic and business conditions $0.5 million. Also included in the unallocated allowance is the risk of losses attributable to general attributes of the Company's loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management are: concentrations of credit at $1.2 million, adequacy of lending Management and staff at $0.9 million, and loan review system at $1.1 million.

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The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated:

	At December 31,
	2019				2018					2017					2016					2015
	Allocation of the Allowance Balance	Loans as<br> Percent of<br> Total Loans			Allocation of<br> the<br> Allowance<br> Balance		Loans as<br> Percent of<br> Total Loans			Allocation of<br> the<br> Allowance<br> Balance		Loans as<br> Percent of<br> Total Loans			Allocation of<br> the<br> Allowance<br> Balance		Loans as<br> Percent of<br> Total Loans			Allocation of<br> the<br> Allowance<br> Balance		Loans as<br> Percent of<br> Total Loans
	( in thousands)
Commercial			20	%	$	6,311		23	%	$	7,746		26	%	$	8,327		26	%	$	9,559		25	%
Commercial real estate			51	%		3,884		48	%		3,849		44	%		3,330		40	%		4,212		42	%
Construction			-	%		1,465		-	%		335		1	%		152		-	%		235		-	%
Residential real estate			3	%		869		4	%		995		5	%		1,330		7	%		1,801		8	%
Consumer installment and other			26	%		5,645		25	%		6,418		24	%		7,980		27	%		8,001		25	%
Unallocated portion			-	%		3,177		-	%		3,666		-	%		4,835		-	%		5,963		-	%
Total			100	%	$	21,351		100	%	$	23,009		100	%	$	25,954		100	%	$	29,771		100	%

All values are in US Dollars.

The portion of the allowance for loan losses ascribed to loan segments changed from December 31, 2018 to December 31, 2019 based on Management’s evaluation of credit risk. The allowance for loan losses ascribed to commercial loans, construction loans and residential real estate loans declined primarily due to lower levels of credit exposure. The allowance for loan losses ascribed to consumer installment loans increased based on Management’s assessment of delinquency rates.

	Allowance for Loan Losses
	For the Twelve Months Ended December 31, 2019
													Consumer
				Commercial						Residential			Installment
	Commercial			Real Estate			Construction			Real Estate			and Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	6,311		$	3,884		$	1,465		$	869		$	5,645		$	3,177	$	21,351
(Reversal) provision		(2,023	)		(16	)		(1,356	)		(663	)		3,534			524		-
Chargeoffs		(97	)		-			-			-			(4,473	)		-		(4,570	)
Recoveries		768			196			-			-			1,739			-		2,703
Total allowance for loan losses	$	4,959		$	4,064		$	109		$	206		$	6,445		$	3,701	$	19,484
	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	At December 31, 2019
	Commercial		Commercial<br> Real Estate		Construction		Residential<br> Real Estate		Consumer<br> Installment and<br> Other		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	2,413	$	-	$	-	$	-	$	-	$	-	$	2,413
Collectively evaluated for impairment		2,546		4,064		109		206		6,445		3,701		17,071
Total	$	4,959	$	4,064	$	109	$	206	$	6,445	$	3,701	$	19,484
Carrying value of loans:
Individually evaluated for impairment	$	8,182	$	7,409	$	-	$	190	$	43	$	-	$	15,824
Collectively evaluated for impairment		213,903		571,349		1,618		32,558		291,412		-		1,110,840
Total	$	222,085	$	578,758	$	1,618	$	32,748	$	291,455	$	-	$	1,126,664

Management considers the $19.4 million allowance for loan losses to be adequate as a reserve against probable incurred loan losses in the loan portfolio as of December 31, 2019.

See Note 3 to the consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, and allowance for loan losses.

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37 -

Asset/Liability and Market Risk Management

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. 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.

Interest Rate Risk

Interest rate risk is a significant market risk affecting the Company. Many factors affect the Company’s exposure to interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Financial instruments may mature or re-price at different times. Financial instruments may re-price at the same time but by different amounts. Short-term and long-term market interest rates may change by different amounts. The timing and amount of cash flows of various financial instruments may change as interest rates change. In addition, the changing levels of interest rates may have an impact on loan demand and demand for various deposit products.

The Company’s earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States government and its agencies, particularly the FOMC. The monetary policies of the FOMC can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on loans and investment securities and paid for deposits and other borrowings. The nature and impact of future changes in monetary policies are generally not predictable.

Management attempts to manage interest rate risk while enhancing the net interest margin and net interest income. At times, depending on expected increases or decreases in market 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. 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.

Management monitors the Company’s interest rate risk using a purchased simulation model, which is periodically validated using supervisory guidance issued by the Board of Governors of the Federal Reserve System, SR 11-7 “Guidance on Model Risk Management.” Management measures its exposure to interest rate risk using both a static and dynamic composition of financial instruments. Within the static composition simulation, cash flows are assumed redeployed into like financial instruments at prevailing rates and yields. Within the dynamic composition simulation, Management makes assumptions regarding the expected change in the volume of financial instruments given the assumed change in market interest rates. Both simulations are used to measure expected changes in net interest income assuming various levels of change in market interest rates.

The Company’s asset and liability position was slightly “asset sensitive” at December 31, 2019, depending on the interest rate assumptions applied to each simulation model. An “asset sensitive” position results in a slightly larger change in interest income than in interest expense resulting from application of assumed interest rate changes.

At December 31, 2019, Management’s most recent measurements of estimated changes in net interest income were:

Static Simulation (balance sheet composition unchanged):
Assumed Immediate Parallel Shift in Interest Rates	-1.00	%	0.00	%	1.00	%
First Year Change in Net Interest Income	-8.20	%	0.00	%	5.10	%
Dynamic Simulation (balance sheet composition changes):
Assumed Change in Interest Rates Over 1 Year	-1.00	%	0.00	%	1.00	%
First Year Change in Net Interest Income	-4.10	%	0.00	%	1.90	%

Simulation estimates depend on, and will change with, the size and mix of the actual and projected composition of financial instruments at the time of each simulation.

The Company does not currently engage in trading activities or use derivative instruments to manage interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors.

38 -

Market Risk - Equity Markets

Equity price risk can affect the Company. Preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Changes in value of preferred or common stock holdings are recognized in the Company's income statement.

Fluctuations in the Company's common stock price can impact the Company's financial results in several ways. First, the Company has at times repurchased and retired its common stock; the market price paid to retire the Company's common stock affects the level of the Company's shareholders' equity, cash flows and shares outstanding. Second, the Company's common stock price impacts the number of dilutive equivalent shares used to compute diluted earnings per share. Third, fluctuations in the Company's common stock price can motivate holders of options to purchase Company common stock through the exercise of such options thereby increasing the number of shares outstanding and potentially adding volatility to the book tax provision. Finally, the amount of compensation expense and tax deductions associated with share based compensation fluctuates with changes in and the volatility of the Company's common stock price.

Market Risk - Other

Market values of loan collateral can directly impact the level of loan chargeoffs and the provision for loan losses. The financial condition and liquidity of debtors issuing bonds and debtors whose mortgages or other obligations are securitized can directly impact the credit quality of the Company’s investment securities portfolio requiring the Company to recognize other than temporary impairment charges. Other types of market risk, such as foreign currency exchange risk, are not significant in the normal course of the Company's business activities.

Liquidity and Funding

The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.

In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 98% of funding for average total assets in the twelve months ended December 31, 2019 and December 31, 2018. The stability of the Company’s funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity.

Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary source of liquidity. The Company held $3.8 billion in total investment securities at December 31, 2019. Under certain deposit, borrowing and other arrangements, the Company must hold and pledge investment securities as collateral. At December 31, 2019, such collateral requirements totaled approximately $760 million.

Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Company performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Company assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Company’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The Company evaluates its stock of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from other banks from daily transaction settlements, reduced by branch cash needs and Federal Reserve Bank reserve requirements, and investment securities based on regulatory risk-weighting guidelines. Based on the results of the most recent liquidity stress test, Management is satisfied with the liquidity condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced liquidity.

Management continually monitors the Company’s cash levels. Loan demand from credit worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, liquidity management and a variety of other conditions, deposit growth may be used to fund loans or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

39 -

Westamerica Bancorporation ("Parent Company") is a separate entity apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on any outstanding debt. The Parent Company currently has no debt. Substantially all of the Parent Company's revenues are obtained from subsidiary dividends and service fees.

The Bank’s dividends paid to the Parent Company, proceeds from the exercise of stock options, and Parent Company cash balances provided adequate cash for the Parent Company to pay shareholder dividends of $44 million and $43 million in the years ended December 31, 2019 and December 31, 2018, respectively, and retire common stock in the amount of $488 thousand and $524 thousand, respectively. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations.

Contractual Obligations

Deposits and sort-term borrowings are detailed on pages 42, 43 and 44. The following table sets forth the known contractual obligations, except deposits, short-term borrowing arrangements and post-retirement benefit plans, of the Company:

	At December 31, 2019
	Within One<br> Year		Over One to<br> Three Years		Over Three<br> to Five<br> Years		After Five<br> Years		Total
	(In thousands)
Operating Lease Obligations	$	6,048	$	7,683	$	3,838	$	637	$	18,206
Purchase Obligations		8,457		8,584		-		-		17,041
Total	$	14,505	$	16,267	$	3,838	$	637	$	35,247

Operating lease obligations have not been reduced by minimum sublease rentals of $1.5 million due in the future under noncancelable subleases. Operating lease obligations may be retired prior to the contractual maturity as discussed in the notes to the consolidated financial statements. The purchase obligation consists of the Company’s minimum liabilities under contracts with third-party automation services providers.

Capital Resources

The Company has historically generated high levels of earnings, which provide a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been 11.9% in the year ended December 31, 2019 and 11.3% in the year ended December 31, 2018. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $14 million in the year ended December 31, 2019 and $13 million in the year ended December 31, 2018.

The Company paid common dividends totaling $44 million in the year ended December 31, 2019 and $43 million in the year ended December 31, 2018, which represent dividends per common share of $1.63 and $1.60, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has at times repurchased and retired its common stock as another means to return earnings to shareholders. The Company repurchased and retired 8 thousand shares valued at $488 thousand in the year ended December 31, 2019 and 9 thousand shares valued at $524 thousand in the year ended December 31, 2018.

The Company's primary capital resource is shareholders' equity, which was $731 million at December 31, 2019 compared with $616 million at December 31, 2018. The Company's ratio of equity to total assets was 13.0% at December 31, 2019 and 11.1% at December 31, 2018.

40 -

The Company performs capital stress tests on a periodic basis to evaluate the sustainability of its capital. Under the stress testing, the Company assumes various scenarios such as deteriorating economic and operating conditions, unanticipated asset devaluations, and significant operational lapses. The Company measures the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances.

Capital to Risk-Adjusted Assets

On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which most affected the regulatory capital requirements of the Company and the Bank:

●	Introduced a new “Common Equity Tier 1” capital measurement,
●	Established higher minimum levels of capital,
---	---
●	Introduced a “capital conservation buffer,”
---	---
●	Increased the risk-weighting of certain assets, and
---	---
●	Established limits on the amount of deferred tax assets with any excess treated as a deduction from Tier 1 capital.
---	---

Under the final rule, a banking organization that is not subject to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive Income, including net-of-tax unrealized gains and losses on debt securities available for sale, in regulatory capital. Neither the Company nor the Bank is subject to the “advanced approaches rule” and both made the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital.

Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations began on January 1, 2016 and ended January 1, 2019, when the 2.5% capital conservation buffer was fully implemented. Any banking organization subject to the rule which is unable to maintain its “capital conservation buffer” above the minimum regulatory capital ratios will be restricted in the payment of discretionary executive compensation and shareholder distributions, such as dividends and share repurchases.

The final rule did not supersede provisions of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve problems of insured depository institutions. The final rule revised the PCA thresholds to incorporate the higher minimum levels of capital, including the “common equity tier 1” ratio.

The capital ratios for the Company and the Bank under the new capital framework are presented in the tables below, on the dates indicated.

										To Be
										Well-capitalized
							Required for			Under Prompt
	At December 31, 2019						Capital Adequacy			Corrective Action
	Company			Bank			Purposes			Regulations (Bank)
Common Equity Tier I Capital		16.22	%		11.80	%		7.00%	^(1)^		6.50	%
Tier I Capital		16.22	%		11.80	%		8.50%	^(1)^		8.00	%
Total Capital		16.83	%		12.58	%		10.50%	^(1)^		10.00	%
Leverage Ratio		10.50	%		7.60	%		4.00%			5.00	%

^(1)^Includes 2.5% capital conservation buffer.

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41 -

													To Be
							Required for						Well-capitalized
							Capital Adequacy Purposes						Under Prompt
	At December 31, 2018						Effective			Effective			Corrective Action
	Company			Bank			January 1, 2018			January 1, 2019			Regulations (Bank)
Common Equity Tier I Capital		16.30	%		13.01	%		6.375%	^(1)^		7.00%	^(2)^		6.50	%
Tier I Capital		16.30	%		13.01	%		7.875%	^(1)^		8.50%	^(2)^		8.00	%
Total Capital		17.03	%		13.94	%		9.875%	^(1)^		10.50%	^(2)^		10.00	%
Leverage Ratio		9.51	%		7.55	%		4.000%			4.00%			5.00	%

^(1)^ Includes 1.875% capital conservation buffer.

^(2)^ Includes 2.5% capital conservation buffer.

In June 2016, the Financial Accounting Standards Board issued an update to the accounting standards for credit losses known as the "Current Expected Credit Losses" (CECL) methodology, which replaces the existing incurred loss methodology for certain financial assets. The Company will adopt the CECL methodology effective January 1, 2020, which involves an implementing accounting entry to retained earnings on a net-of-tax basis. In December 2018, the federal bank regulatory agencies approved a final rule which became effective April 1, 2019, modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of implementing the CECL methodology. The Company does not expect the adoption of the CECL methodology to have a material adverse day-one impact to capital ratios and does not plan to adopt the phase in regulatory capital relief. See Note 1 to the consolidated financial statements, “Recently Issued Accounting Standards” for more information on the CECL methodology.

The Company and the Bank routinely project capital levels by analyzing forecasted earnings, credit quality, shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels exceeding the highest effective regulatory standard and pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur.

Deposit Categories

The Company primarily attracts deposits from local businesses and professionals, as well as through retail savings and checking accounts, and, to a more limited extent, certificates of deposit.

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


							2018								2017
	Percentage of<br> Total<br> Deposits			Rate			Average<br> Balance		Percentage of<br> Total<br> Deposits			Rate			Average<br> Balance		Percentage of<br> Total<br> Deposits			Rate

Noninterest-bearing demand		46.3	%		-	%	$	2,209,924		45.4	%		-	%	$	2,095,522		44.4	%		-	%
Interest bearing:
Transaction		19.4	%		0.05	%		928,277		19.0	%		0.04	%		888,116		18.8	%		0.03	%
Savings		30.5	%		0.06	%		1,519,375		31.2	%		0.06	%		1,492,725		31.6	%		0.02	%
Time less than 100 thousand		2.2	%		0.25	%		119,586		2.5	%		0.23	%		136,324		2.9	%		0.17	%
Time 100 thousand or more		1.6	%		0.41	%		94,919		1.9	%		0.39	%		109,563		2.3	%		0.38	%
Total (1)		100.0	%		0.07	%	$	4,872,081		100.0	%		0.04	%	$	4,722,250		100.0	%		0.04	%

All values are in US Dollars.

^(1)^ The rates for total deposits reflect the value of noninterest-bearing deposits.

The Company’s strategy includes building the value of its deposit base by building balances of lower-costing deposits and avoiding reliance on higher-costing time deposits. Average balances of higher costing time deposits declined 26% to $182 million from 2017 to 2019. The Company’s average balances of checking and savings accounts represented 96% of average balances of total deposits in 2019 compared with 96% in 2018 and 95% in 2017.

42 -

Total time deposits were $169 million and $195 million at December 31, 2019 and 2018, respectively. The following table sets forth, by time remaining to maturity, the Company’s total domestic time deposits. The Company has no foreign time deposits.

Time Deposits Maturity Distribution

	At December 31, 2019
	(In thousands)
2020	$	126,859
2021		20,375
2022		9,300
2023		5,871
2024		6,892
Thereafter		40
Total	$	169,337

The following sets forth, by time remaining to maturity, the Company’s domestic time deposits in amounts of $100 thousand or more:

Time Deposits $100,000 or more Maturity Distribution

	At December 31, 2019
	(In thousands)
Three months or less	$	26,739
Over three through six months		14,263
Over six through twelve months		17,257
Over twelve months		22,723
Total	$	80,982

Short-term Borrowings

The following table sets forth the short-term borrowings of the Company:

Short-Term Borrowings Distribution

	At December 31,
	2019		2018		2017
	(In thousands)
Securities sold under agreements to repurchase the securities	$	30,928	$	51,247	$	58,471
Total short-term borrowings	$	30,928	$	51,247	$	58,471

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43 -

Further detail of federal funds purchased and other borrowed funds is as follows:

	For the Years Ended December 31,
	2019		2018			2017
	( in thousands)
Federal funds purchased balances and rates paid on outstanding amount:
Average balance for the year			$	1		$	5
Maximum month-end balance during the year				-			-
Average interest rate for the year		%		2.56	%		1.53	%
Average interest rate at period end		%		-	%		-	%
Securities sold under agreements to repurchase the securities balances and rates paid on outstanding amount:
Average balance for the year			$	59,991		$	69,666
Maximum month-end balance during the year				68,894			82,126
Average interest rate for the year		%		0.06	%		0.06	%
Average interest rate at period end		%		0.06	%		0.06	%

All values are in US Dollars.

Financial Ratios

The following table shows key financial ratios for the periods indicated:

	At and For the Years Ended December 31,
	2019			2018			2017
Return on average total assets		1.44	%		1.27	%		0.92	%
Return on average common shareholders' equity		11.90	%		11.35	%		8.39	%
Average shareholders' equity as a percentage of:
Average total assets		12.07	%		11.22	%		10.96	%
Average total loans		58.14	%		52.16	%		45.34	%
Average total deposits		14.07	%		12.95	%		12.63	%
Common dividend payout ratio		55	%		60	%		83	%

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44 -

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.

Credit risk and interest rate risk are the most significant market risks affecting the Company, and equity price risk can also affect the Company’s financial results. These risks are described in the preceding sections regarding “Loan Portfolio Credit Risk,” and “Asset/Liability and Market Risk Management.” Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company’s business activities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

	Page
Management’s Report on Internal Control Over Financial Reporting	46
Consolidated Balance Sheets as of December 31, 2019 and 2018	47
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017	48
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017	49
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017	50
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017	51
Notes to the Consolidated Financial Statements	52
Report of Independent Registered Public Accounting Firm	88

-45-

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, 2019. 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, 2019 based upon criteria in Internal Control — Integrated Framework (2013) 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, 2019 based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO.

The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting. Their opinion and attestation on internal control over financial reporting appear on page 88.

Dated: February 27, 2020

-46-

WESTAMERICA BANCORPORATION
CONSOLIDATED BALANCE SHEETS

---	---	---	---	---	---
			2018

Assets:	****	****	****	****	****
Cash and due from banks	373,421		$	420,284
Equity securities	-			1,747
Debt securities available for sale	3,078,846			2,654,670
Debt securities held to maturity, with fair values of: 744,296 at December 31, 2019 and 971,445 at December 31, 2018	738,072			984,609
Loans	1,126,664			1,207,202
Allowance for loan losses	(19,484	)		(21,351	)
Loans, net of allowance for loan losses	1,107,180			1,185,851
Other real estate owned	43			350
Premises and equipment, net	34,597			34,507
Identifiable intangibles, net	1,391			1,929
Goodwill	121,673			121,673
Other assets	164,332			162,906
Total Assets	5,619,555		$	5,568,526
Liabilities:	****	****	****	****	****
Noninterest-bearing deposits	2,240,112		$	2,243,251
Interest-bearing deposits	2,572,509			2,623,588
Total deposits	4,812,621			4,866,839
Short-term borrowed funds	30,928			51,247
Other liabilities	44,589			34,849
Total Liabilities	4,888,138			4,952,935
Contingencies (Note 12)		****	****		****
Shareholders' Equity:	****	****	****	****	****
Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 27,062 at December 31, 2019 and 26,730 at December 31, 2018	465,460			448,351
Deferred compensation	771			1,395
Accumulated other comprehensive income (loss)	26,051			(39,996	)
Retained earnings	239,135			205,841
Total Shareholders' Equity	731,417			615,591
Total Liabilities and Shareholders' Equity	5,619,555		$	5,568,526

All values are in US Dollars.

See accompanying notes to consolidated financial statements.

-47-

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
	For the Years Ended December 31,
---	---	---	---	---	---	---	---	---
	2019		2018			2017
	(In thousands, except per share data)
Interest and Loan Fee Income:	****	****	****	****	****	****	****	****
Loans	$	58,153	$	59,030		$	61,740
Equity securities		392		354			293
Debt securities available for sale		74,147		60,383			44,371
Debt securities held to maturity		18,997		24,031			27,432
Interest-bearing cash		6,993		7,925			4,476
Total Interest and Loan Fee Income		158,682		151,723			138,312
Interest Expense:	****	****	****	****	****	****	****	****
Deposits		1,854		1,922			1,856
Short-term borrowed funds		34		37			44
Total Interest Expense		1,888		1,959			1,900
Net Interest and Loan Fee Income		156,794		149,764			136,412
Reversal of Provision for Loan Losses		-		-			(1,900	)
Net Interest and Loan Fee Income After Reversal of Provision For Loan Losses		156,794		149,764			138,312
Noninterest Income:	****	****	****	****	****	****	****	****
Service charges on deposit accounts		17,882		18,508			19,612
Merchant processing services		10,132		9,630			8,426
Debit card fees		6,357		6,643			6,421
Trust fees		2,963		2,938			2,875
ATM processing fees		2,776		2,752			2,610
Other service fees		2,255		2,567			2,584
Life insurance gains		433		585			-
Financial services commissions		392		499			639
Securities gains (losses)		217		(52	)		7,955
Other noninterest income		4,001		4,079			5,506
Total Noninterest Income		47,408		48,149			56,628
Noninterest Expense:	****	****	****	****	****	****	****	****
Salaries and related benefits		51,054		53,007			51,519
Occupancy and equipment		20,240		19,679			19,430
Outsourced data processing services		9,471		9,229			9,035
Professional fees		2,465		2,842			2,161
Courier service		1,878		1,779			1,732
Loss contingency		553		3,500			5,542
Amortization of identifiable intangibles		538		1,921			3,077
Impairment of tax credit investments		-		-			625
Other noninterest expense		12,787		14,959			14,647
Total Noninterest Expense		98,986		106,916			107,768
Income Before Income Taxes		105,216		90,997			87,172
Provision for income taxes		24,827		19,433			37,147
Net Income	$	80,389	$	71,564		$	50,025
Average Common Shares Outstanding		26,956		26,649			26,291
Diluted Average Common Shares Outstanding		27,006		26,756			26,419
Per Common Share Data:	****	****	****	****	****	****	****	****
Basic earnings	$	2.98	$	2.69		$	1.90
Diluted earnings		2.98		2.67			1.89
Dividends paid		1.63		1.60			1.57

See accompanying notes to consolidated financial statements.

-48-

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	For the Years Ended December 31,
---	---	---	---	---	---	---	---	---	---
	2019			2018			2017
	(In thousands)
Net Income	$	80,389		$	71,564		$	50,025
Other comprehensive income (loss):
Changes in net unrealized gains (losses) on debt securities available for sale		93,936			(27,939	)		(3,767	)
Deferred tax (expense) benefit		(27,771	)		8,258			1,585
Reclassification of gains included in net income		(167	)		-			(7,955	)
Deferred tax expense on gains included in net income		49			-			3,345
Changes in unrealized gains (losses) on debt securities available for sale, net of tax		66,047			(19,681	)		(6,792	)
Post-retirement benefit transition obligation amortization		-			-			59
Deferred tax expense		-			-			(25	)
Post-retirement benefit transition obligation amortization, net of tax		-			-			34
Total Other Comprehensive Income (Loss)		66,047			(19,681	)		(6,758	)
Total Comprehensive Income	$	146,436		$	51,883		$	43,267

See accompanying notes to consolidated financial statements.

-49-

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
									Accumulated
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
									Other
			Common			Deferred			Comprehensive			Retained
			Stock			Compensation			Income (Loss)			Earnings			Total

Balance, December 31, 2016	25,907		$	404,606		$	1,533		$	(10,074	)	$	165,302		$	561,367
Net income for the year 2017													50,025			50,025
Other comprehensive loss										(6,758	)					(6,758	)
Exercise of stock options	509			24,583												24,583
Restricted stock activity	13			707												707
Stock based compensation				1,824												1,824
Stock awarded to employees	2			104												104
Retirement of common stock	(6	)		(90	)								(224	)		(314	)
Dividends (1.57 per share)													(41,299	)		(41,299	)
Balance, December 31, 2017	26,425			431,734			1,533			(16,832	)		173,804			590,239
Cumulative effect of equity securities losses reclassified										142			(142	)		-
Adjusted Balance, January 1, 2018	26,425			431,734			1,533			(16,690	)		173,662			590,239
Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017										(3,625	)		3,625			-
Net income for the year 2018													71,564			71,564
Other comprehensive loss										(19,681	)					(19,681	)
Exercise of stock options	292			13,373												13,373
Restricted stock activity	20			1,281			(138	)								1,143
Stock based compensation				1,988												1,988
Stock awarded to employees	2			124												124
Retirement of common stock	(9	)		(149	)								(375	)		(524	)
Dividends (1.60 per share)													(42,635	)		(42,635	)
Balance, December 31, 2018	26,730			448,351			1,395			(39,996	)		205,841			615,591
Cumulative effect of bond premium amortization adjustment, net of tax													(2,801	)		(2,801	)
Adjusted Balance, January 1, 2019	26,730			448,351			1,395			(39,996	)		203,040			612,790
Net income for the year 2019													80,389			80,389
Other comprehensive income										66,047						66,047
Shares issued from stock warrant exercise, net of repurchase	51			-												-
Exercise of stock options	269			13,699												13,699
Restricted stock activity	18			1,697			(624	)								1,073
Stock based compensation	-			1,744												1,744
Stock awarded to employees	2			105												105
Retirement of common stock	(8	)		(136	)								(352	)		(488	)
Dividends (1.63 per share)													(43,942	)		(43,942	)
Balance, December 31, 2019	27,062		$	465,460		$	771		$	26,051		$	239,135		$	731,417

All values are in US Dollars.

See accompanying notes to consolidated financial statements.

-50-

WESTAMERICA BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
	For the Years Ended December 31,
---	---	---	---	---	---	---	---	---	---
	2019			2018			2017
Operating Activities:	(In thousands)
Net income	$	80,389		$	71,564		$	50,025
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization/accretion		20,626			24,402			26,082
Reversal of provision for loan losses		-			-			(1,900	)
Net amortization of deferred loan fees		(260	)		(203	)		(46	)
Increase in interest income receivable		(2,963	)		(2,277	)		(2,068	)
Decrease (increase) in net deferred tax asset		3,662			(943	)		27,018
Increase in other assets		(14,806	)		(4,017	)		(1,732	)
Stock option compensation expense		1,744			1,988			1,824
(Decrease) increase in income taxes payable		(1,733	)		7,554			(6,650	)
Decrease in interest expense payable		(9	)		(27	)		(31	)
(Decrease) increase in other liabilities		(5,298	)		(580	)		(3,016	)
Life insurance gains		(433	)		(585	)		-
Securities (gains) losses		(217	)		52			(7,955	)
Gain on sale of other assets		-			-			(1,004	)
(Gain) loss on disposal of premises and equipment		-			(216	)		60
Net (gain) loss on sale of or write-down of foreclosed assets		-			(83	)		147
Net Cash Provided by Operating Activities		80,702			96,629			80,754
Investing Activities:	****	****	****	****	****	****	****	****	****
Net repayments of loans		79,396			80,985			66,065
Net payments under FDIC^(1)^ indemnification agreements		-			-			(63	)
Proceeds from life insurance policies		1,273			1,169			-
Purchases of debt securities available for sale		(970,542	)		(854,555	)		(635,814	)
Proceeds from sale/maturity/calls of debt securities available for sale		631,016			353,327			319,324
Proceeds from maturity/calls of debt securities held to maturity		238,450			167,029			178,429
Proceeds from sale of equity securities		1,797			-			-
Purchases of premises and equipment		(3,994	)		(3,123	)		(2,720	)
Proceeds from sale of premises and equipment		-			446			-
Proceeds from sale of foreclosed assets		307			1,159			1,521
Net Cash Used in Investing Activities		(22,297	)		(253,563	)		(73,258	)
Financing Activities:	****	****	****	****	****	****	****	****	****
Net change in deposits		(54,218	)		39,226			122,872
Net change in short-term borrowings		(20,319	)		(7,224	)		(607	)
Exercise of stock options		13,699			13,373			24,583
Retirement of common stock		(488	)		(524	)		(314	)
Common stock dividends paid		(43,942	)		(42,635	)		(41,299	)
Net Cash (Used in) Provided by Financing Activities		(105,268	)		2,216			105,235
Net Change In Cash and Due from Banks		(46,863	)		(154,718	)		112,731
Cash and Due from Banks at Beginning of Period		420,284			575,002			462,271
Cash and Due from Banks at End of Period	$	373,421		$	420,284		$	575,002
Supplemental Cash Flow Disclosures:	****	****	****	****	****	****	****	****	****
Supplemental disclosure of noncash activities:
Right-of-use assets acquired in exchange for operating lease liabilities	$	23,587		$	-		$	-
Amount recognized upon initial adoption of ASU 2016-02		15,325			-			-
Supplemental disclosure of cash flow activities:
Cash paid for amounts included in operating lease liabilities		5,123			-			-
Interest paid for the period		1,898			1,932			1,931
Income tax payments for the period		24,491			13,627			17,351
See accompanying notes to consolidated financial statements.
---
^(1)^ Federal Deposit Insurance Corporation ("FDIC")

-51-

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 corporate and individual customers in Northern and Central California through its wholly-owned 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. All of the financial service operations are considered by management to be aggregated in one reportable operating segment.

The Company has evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in its consolidated financial statements. Certain amounts in prior periods have been reclassified to conform to the current presentation.

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, 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 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 fair 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. The allowance for loan losses accounting is an area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting the accounting for the allowance for loan losses is included in the following “Loans” and “Allowance for Credit Losses” sections. Carrying assets and liabilities at fair value inherently results in 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. The “Securities” section discusses the factors that may affect the valuation of the Company’s securities. Although the estimates contemplate current conditions and how Management expects them to change in the future, it is reasonably possible that in 2020 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition.

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.

Cash. Cash includes Due From Banks balances which are readily convertible to known amounts of cash and are generally 90 days or less from maturity at the time of initiation, presenting insignificant risk of changes in value due to interest rate changes.

Equity Securities. Equity securities consist of marketable equity securities and mutual funds which are recorded at fair value. Unrealized gains and losses are included in net income effective January 1, 2018. Prior to such date unrealized gains and losses were included in other comprehensive income.

Debt Securities. Debt securities consist of securities of the U.S. Treasury, government sponsored entities, states, counties, municipalities, corporations, agency and non-agency mortgage-backed securities and asset-backed securities. Securities transactions are recorded on a trade date basis. The Company classifies its debt securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at fair value with unrealized gains and losses included in net income. Held to maturity debt securities are those securities which the Company has the ability and intent to hold until maturity. Held to maturity debt securities are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. Securities not included in trading or held to maturity are classified as available for sale debt securities. Available for sale debt securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale debt securities are included in accumulated other comprehensive income.

- 52-

The Company utilizes third-party sources to value its investment securities; securities individually valued using quoted prices in active markets are classified as Level 1 assets in the fair value hierarchy, and securities valued using quoted prices in active markets for similar securities (commonly referred to as “matrix” pricing) are classified as Level 2 assets in the fair value hierarchy. The Company validates the reliability of third-party provided values by comparing individual security pricing for securities between more than one third-party source. When third-party information is not available, valuation adjustments are estimated in good faith by Management and classified as Level 3 in the fair value hierarchy.

A decline in the market value of any available for sale or held to maturity security below amortized 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 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 risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell or be required to sell the securities before recovery of its amortized cost. An unrealized loss in the value of an equity security is generally considered temporary when the fair value of the security declined primarily due to current market conditions and not deterioration in the financial condition of the issuer, the Company expects the fair value of the security to recover in the near term and the Company does not intend to sell or be required to sell the securities before recovery of its cost basis. 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.

The Company follows the guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance when performing investment security pre-purchase analysis or evaluating investment securities for impairment. Credit ratings issued by recognized rating agencies are considered in the Company’s analysis only as a guide to the historical default rate associated with similarly-rated bonds.

Purchase premiums are amortized to the earliest call date and purchase discounts are amortized to maturity as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized as a component of gain or loss on sale upon disposition of the related security. Interest and dividend 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.

Nonmarketable Equity Securities. Nonmarketable equity securities include securities that are not publicly traded, such as Visa Class B common stock, and securities acquired to meet regulatory requirements, such as Federal Reserve Bank stock, which are restricted. These restricted securities are accounted for under the cost method and are included in other assets. The Company reviews those assets accounted for under the cost method at least quarterly for possible declines in value that are considered “other than temporary”. The Company’s review typically includes an analysis of the facts and circumstances of each investment, the expectations for the investment’s cash flows and capital needs, the viability of its business model and any exit strategy. The asset value is reduced when a decline in value is considered to be other than temporary. The Company recognizes the estimated loss in noninterest income.

Loans. Loans are stated at the principal amount outstanding, net of unearned discount and unamortized deferred fees and costs. Interest is accrued daily on the outstanding principal 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 (“performing nonaccrual loans”) even though the borrowers continue to repay the loans as scheduled. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans on a cost-recovery method 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 collectability of both interest and principal. Certain consumer loans or auto receivables are charged off against the allowance for credit losses when they become 120 days past due.

The Company evaluates all classified loans and nonaccrual loans with outstanding principal balances in excess of $500 thousand, and all “troubled debt restructured” loans for impairment. The Company recognizes a loan as impaired when, based on current information and events, it is probable that it will be unable to collect both the contractual interest and principal payments as scheduled in the loan agreement. Income recognition on impaired loans conforms to that used on nonaccrual loans. In certain circumstances, the Company might agree to restructured loan terms with borrowers experiencing financial difficulties; such restructured loans are evaluated under ASC 310-40, “Troubled Debt Restructurings by Creditors.” In general, a restructuring constitutes a troubled debt restructuring when the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower it would not otherwise consider. Loans are evaluated on an individual basis. The Company follows its general nonaccrual policy for troubled debt restructurings. Performing troubled debt restructurings are reinstated to accrual status when improvements in credit quality eliminate the doubt as to full collectability of both principal and interest.

- 53-

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, net of costs, 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 aggregate loan basis.

Purchased Loans. Purchased loans are recorded at estimated fair value on the date of purchase. Impaired purchased loans are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include attributes such as past due and nonaccural status. Generally, purchased loans that meet the Company’s definition for nonaccrual status fall within the scope of FASB ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income on a prospective basis. Any excess of expected cash flows over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. For covered purchased loans with an accretable difference, the corresponding FDIC receivable is amortized over the shorter of the contractual term of the indemnification asset or the remaining life of the loan. Further, the Company elected to analogize to ASC 310-30 and account for all other loans that had a discount due in part to credit not within the scope of ASC 310-30 using the same methodology.

Covered Loans. **** Loans covered under loss-sharing or similar credit protection agreements with the FDIC are reported in loans exclusive of the expected reimbursement cash flows from the FDIC. Covered loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount expected to be collected results in a provision for loan losses and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss impacting earnings. Interest previously accrued on covered loans placed on nonaccrual status is charged against interest income, net of estimated FDIC reimbursements of such accrued interest. The FDIC reimburses the Company up to 80% of 90 days interest on covered loans. The indemnification expired February 6, 2019.

Allowance for Credit Losses. The Company extends loans to commercial and consumer customers primarily in Northern and Central California. These lending activities expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans.

The preparation of these financial statements requires Management to estimate the amount of probable incurred losses inherent in the loan portfolio and establish an allowance for credit losses. In estimating credit losses, Management must exercise significant judgment in evaluating information deemed relevant. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.

- 54-

The allowance for credit losses is established through provisions for credit losses charged to income. Losses on loans, including impaired loans, are charged to the allowance for loan losses when all or a portion of the recorded amount 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 credit 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, FDIC loss-sharing or similar credit protection agreements and other factors. A portion of the allowance is specifically allocated to impaired loans whose full collectability is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. The Company evaluates all classified loans and nonaccrual loans with outstanding principal balances in excess of $500 thousand, and all “troubled debt restructured” loans for impairment. A second allocation is based in part on quantitative analyses of historical credit loss experience. The results of this analysis are applied to current loan balances to allocate the reserve to the respective segments of the loan portfolio exclusive of loans individually evaluated for impairment. In addition, consumer installment loans which have similar characteristics and are not usually criticized using regulatory guidelines are analyzed and reserves established based on the historical loss rates and delinquency trends, grouped by the number of days the payments on these loans are delinquent. The remainder of the reserve is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. It addresses additional qualitative factors consistent with Management’s analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company’s general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in past loan charge-off history (external factors). The external factors evaluated by the Company include: economic and business conditions, external competitive issues, and other factors. Also included in the unallocated allowance is the risk of losses that are attributable to general attributes of the Company’s loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company include: loan review system, adequacy of lending Management and staff, loan policies and procedures, problem loan trends, concentrations of credit, and other factors. By their nature, these risks are not readily allocable to any specific segment of the loan portfolio in a statistically meaningful manner.

Liability for Off-Balance Sheet Credit Exposures. A liability for off-balance sheet credit exposures is established through expense recognition. Off-balance sheet credit exposures relate to letters of credit and unfunded loan commitments for commercial, construction and consumer loans. Historical credit loss factors for commercial, construction and consumer loans are applied to the amount of these off-balance sheet credit exposures to estimate inherent losses.

Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and, if applicable, vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses. Other real estate owned is recorded at the fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Losses incurred subsequent to acquisition due to any decline in annual independent property appraisals are recognized as noninterest expense. Routine holding costs, such as property taxes, insurance and 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.

Revenue Recognition. The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. In certain circumstances, noninterest income is reported net of associated expenses that are directly related to variable volume-based sales or revenue sharing arrangements or when the Company acts on an agency basis for others.

Life Insurance Cash Surrender Value. The Company has purchased life insurance policies on certain directors and officers as well as acquired such assets as part of the acquisition of other banks. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. These assets are included in other assets on the consolidated balance sheets.

Intangible Assets. Intangible assets are comprised of goodwill, core deposit intangibles and other identifiable intangibles acquired in business combinations. Intangible assets with definite useful lives are amortized on an accelerated basis over their respective estimated useful lives not exceeding 15 years. 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 acquired in a purchase business combination determined to have an indefinite useful life is not amortized, but is evaluated for impairment annually. The Company has the option to first assess qualitative factors to determine the likelihood of impairment pursuant to FASB ASU 2011-08, Testing for Goodwill Impairment. Although the Company has the option to first assess qualitative factors when determining if impairment exists, the Company has opted to perform a quantitative analysis to determine if impairment exists.

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Impairment of Long-Lived Assets. The Company reviews its long-lived and certain intangible assets 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. The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to Management’s judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. Interest and penalties are recognized as a component of income tax expense.

Stock Options. The Company applies FASB ASC 718 – Compensation – Stock Compensation, to account for stock based awards granted to employees using the fair value method. The Company recognizes compensation expense for restricted performance share grants over the relevant attribution period. Restricted performance share grants have no exercise price, therefore, the intrinsic value is measured using an estimated per share price at the vesting date for each restricted performance share. The estimated per share price is adjusted during the attribution period to reflect actual stock price performance. The Company’s obligation for unvested outstanding restricted performance share grants is classified as a liability until the vesting date due to a cash settlement feature, at which time the issued shares become classified as shareholders’ equity.

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.

Postretirement Benefits. The Company uses an actuarial-based accrual method of accounting for post-retirement benefits.

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.

Recently Adopted Accounting Standards

In 2019, the Company adopted the following new accounting guidance:

FASB ASU 2016-02, Leases (Topic 842), was issued February 25, 2016. The provisions of the new standard require lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP.

The Company adopted the ASU provisions effective January 1, 2019, and elected the modified retrospective transition approach. The Company elected the package of practical expedients provided in the ASU, which allowed the Company to rely on lease classification determinations made under prior accounting guidance and forego reevaluation of (i) whether any existing contracts are or contain a lease, (ii) whether existing leases are operating or finance leases, and (iii) the initial direct cost for any existing leases. The Company also elected to combine lease and non-lease components and exempt short-term leases with an original term of one year or less from on-balance sheet recognition. The implementing entry recognized a lease liability of $15.3 million and right-of-use asset of $15.3 million for facilities leases. The change in occupancy and equipment expense was not material.

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

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The Company adopted the ASU provisions on January 1, 2019. The implementing entry reduced the carrying value of investment securities, specifically obligations of states and political subdivisions, by $3.1 million and reduced retained earnings by $2.8 million, net of tax. The change in premium amortization method was not material to revenue recognition.

FASB ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was issued August 2017. The ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The ASU also provides for a one-time reclassification of prepayable assets from held-to-maturity (HTM) to available for sale (AFS) regardless of derivative use.

The Company adopted the ASU provisions on January 1, 2019. 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. The Company evaluated the prepayable assets in the HTM portfolio and did not affect a one-time reclassification of prepayable assets from HTM to the AFS upon implementation.

Recently Issued Accounting Standards

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changes estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with the current expected credit loss (CECL) model, which will accelerate recognition of credit losses. Additionally, credit losses relating to debt securities available-for-sale will be recorded through an allowance for credit losses under the new standard. The Company will also be required to provide additional disclosures related to the financial assets within the scope of the new standard.

The Company will adopt the ASU provisions effective January 1, 2020. Management has evaluated available data, defined portfolio segments of loans with similar attributes, and selected loss estimate models for each identified loan portfolio segment. Management has measured historical loss rates for each portfolio segment. Management has also segmented debt securities held to maturity, selected methods to estimate losses for each segment, and preliminarily measured a loss estimate. Internal controls over financial reporting have been designed but have not completely operated. The company is reviewing and validating the most recent loss estimates and is completing the formal governance and approval processes. The Company expects the cumulative effect adjustment to have an immaterial impact on the allowance for loan losses, other liabilities, shareholders’ equity, deferred taxes, and debt securities held to maturity.

FASB ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The ASU is part of the disclosure framework project, where the primary focus is to improve the effectiveness of disclosures in the financial statements. The ASU removes, modifies and adds disclosure requirements related to Fair Value Measurements.

The provisions of the ASU are effective January 1, 2020 with the option to early adopt any removed or modified disclosures upon issuance of the ASU. The Company early adopted the provisions to remove and/or modify relevant disclosures in the “Fair Value Measurements” note to the unaudited consolidated financial statements. The requirement to include additional disclosures will be adopted by the Company effective January 1, 2020. The additional disclosures will not affect the financial results upon adoption.

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Note 2 : Investment Securities

Effective January 1, 2018, upon adoption of ASU 2016-01, equity securities included in the Company’s available for sale portfolio of $1,800 thousand were reclassified to equity securities. The reclassification of equity securities resulted in recording a cumulative effect adjustment to decrease retained earnings by $142 thousand, net of tax.

The Company had no equity securities at December 31, 2019 due to the sales of such securities during the third quarter 2019. The market value of equity securities was $1,747 thousand at December 31, 2018. During the twelve months ended December 31, 2019, the Company recognized gross unrealized holding gains of $50 thousand in earnings. During the twelve months ended December 31, 2018, the Company recognized gross unrealized holding losses of $52 thousand in earnings.

An analysis of the amortized cost and fair value by major categories of debt securities available for sale, which are carried at fair value with net unrealized gains (losses) reported on an after-tax basis as a component of cumulative other comprehensive income, and debt securities held to maturity, which are carried at amortized cost, follows:

	At December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Debt securities available for sale
U.S. Treasury securities	$	19,999	$	1	$	-		$	20,000
Securities of U.S. Government sponsored entities		111,251		14		(98	)		111,167
Agency residential mortgage-backed securities (MBS)		934,592		10,996		(5,838	)		939,750
Agency commercial MBS		3,711		-		(3	)		3,708
Securities of U.S. Government entities		553		-		(9	)		544
Obligations of states and political subdivisions		159,527		3,656		(44	)		163,139
Corporate securities		1,805,479		29,183		(879	)		1,833,783
Collateralized Loan Obligations		6,748		7		-			6,755
Total debt securities available for sale		3,041,860		43,857		(6,871	)		3,078,846
Debt securities held to maturity
Agency residential MBS		353,937		766		(2,235	)		352,468
Non-agency residential MBS		2,354		22		-			2,376
Obligations of states and political subdivisions		381,781		7,672		(1	)		389,452
Total debt securities held to maturity		738,072		8,460		(2,236	)		744,296
Total	$	3,779,932	$	52,317	$	(9,107	)	$	3,823,142

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	At December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Debt securities available for sale
U.S. Treasury securities	$	139,572	$	5	$	(3	)	$	139,574
Securities of U.S. Government sponsored entities		167,228		65		(3,275	)		164,018
Agency residential MBS		883,715		595		(30,439	)		853,871
Non-agency residential MBS		113		1		-			114
Agency commercial MBS		1,869		-		(27	)		1,842
Securities of U.S. Government entities		1,128		-		(9	)		1,119
Obligations of states and political subdivisions		180,220		1,856		(2,985	)		179,091
Corporate securities		1,337,608		1,075		(23,642	)		1,315,041
Total debt securities available for sale		2,711,453		3,597		(60,380	)		2,654,670
Debt securities held to maturity
Agency residential MBS		447,332		249		(14,129	)		433,452
Non-agency residential MBS		3,387		40		-			3,427
Obligations of states and political subdivisions		533,890		3,403		(2,727	)		534,566
Total debt securities held to maturity		984,609		3,692		(16,856	)		971,445
Total	$	3,696,062	$	7,289	$	(77,236	)	$	3,626,115

The amortized cost and fair value of debt securities by contractual maturity are shown in the following tables at the dates indicated:

	At December 31, 2019
	Debt Securities Available				Debt Securities Held
	for Sale				to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)
Maturity in years:
1 year or less	$	294,698	$	295,255	$	70,378	$	70,602
Over 1 to 5 years		1,104,775		1,122,391		161,911		165,126
Over 5 to 10 years		670,595		683,277		149,492		153,724
Over 10 years		33,489		34,465		-		-
Subtotal		2,103,557		2,135,388		381,781		389,452
MBS		938,303		943,458		356,291		354,844
Total	$	3,041,860	$	3,078,846	$	738,072	$	744,296

	At December 31, 2018
	Debt Securities Available				Debt Securities Held
	for Sale				to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)
Maturity in years:
1 year or less	$	262,418	$	261,976	$	86,172	$	86,148
Over 1 to 5 years		1,438,849		1,414,020		214,137		213,829
Over 5 to 10 years		85,817		85,877		232,544		233,515
Over 10 years		38,672		36,970		1,037		1,074
Subtotal		1,825,756		1,798,843		533,890		534,566
MBS		885,697		855,827		450,719		436,879
Total	$	2,711,453	$	2,654,670	$	984,609	$	971,445

Expected maturities of mortgage-related 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-related securities. At December 31, 2019 and December 31, 2018, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

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An analysis of the gross unrealized losses of the debt securities available for sale portfolio follows:

	Debt Securities Available for Sale
	At December 31, 2019
	No. of	Less than 12 months					No. of		12 months or longer					No. of		Total
	Investment			Unrealized			Investment				Unrealized			Investment				Unrealized
	Positions	Fair Value		Losses			Positions		Fair Value		Losses			Positions		Fair Value		Losses
	( in thousands)
Securities of U.S.<br> Government<br> sponsored entities		$	9,951	$	(49	)		3	$	45,877	$	(49	)		4	$	55,828	$	(98	)
Agency residential MBS			11,674		(100	)		47		347,384		(5,738	)		53		359,058		(5,838	)
Agency commercial MBS			3,708		(3	)		-		-		-			1		3,708		(3	)
Securities of U.S.<br> Government entities			-		-			2		544		(9	)		2		544		(9	)
Obligations of states<br> and political<br> subdivisions			-		-			7		4,163		(44	)		7		4,163		(44	)
Corporate securities			71,577		(162	)		11		64,380		(717	)		19		135,957		(879	)
Total		$	96,910	$	(314	)		70	$	462,348	$	(6,557	)		86	$	559,258	$	(6,871	)

All values are in US Dollars.

An analysis of gross unrecognized losses of the debt securities held to maturity portfolio follows:

	Debt Securities Held to Maturity
	At December 31, 2019
	No. of	Less than 12 months					No. of		12 months or longer					No. of		Total
	Investment			Unrecognized			Investment				Unrecognized			Investment				Unrecognized
	Positions	Fair Value		Losses			Positions		Fair Value		Losses			Positions		Fair Value		Losses
	( in thousands)
Agency residential MBS		$	12,098	$	(87	)		54	$	277,203	$	(2,148	)		60	$	289,301	$	(2,235	)
Obligations of states<br> and political<br> subdivisions			-		-			1		251		(1	)		1		251		(1	)
Total		$	12,098	$	(87	)		55	$	277,454	$	(2,149	)		61	$	289,552	$	(2,236	)

All values are in US Dollars.

The unrealized losses on the Company’s debt securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. One corporate bond with an amortized cost of $15.0 million and a fair value of $14.5 million at December 31, 2019, is rated below investment grade. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

The Company does not intend to sell any debt securities and has concluded that it is more likely than not that it will not be required to sell the debt securities prior to recovery of the amortized cost basis. Therefore, the Company does not consider these debt securities to be other-than-temporarily impaired as of December 31, 2019.

The fair values of the debt securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for debt securities declines. As a result, other than temporary impairments may occur in the future.

As of December 31, 2019 and December 31, 2018, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $760,365 thousand and $728,161 thousand, respectively.

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An analysis of the gross unrealized losses of the debt securities available for sale portfolio follows:

	Debt Securities Available for Sale
	At December 31, 2018
	No. of	Less than 12 months					No. of		12 months or longer					No. of		Total
	Investment			Unrealized			Investment				Unrealized			Investment				Unrealized
	Positions	Fair Value		Losses			Positions		Fair Value		Losses			Positions		Fair Value		Losses
	( in thousands)
U.S. Treasury securities		$	54,805	$	(3	)		-	$	-	$	-			2	$	54,805	$	(3	)
Securities of U.S.<br> Government<br> sponsored entities			990		(5	)		9		117,963		(3,270	)		10		118,953		(3,275	)
Agency residential MBS			107,497		(507	)		58		640,210		(29,932	)		66		747,707		(30,439	)
Agency commercial<br> MBS			1,842		(27	)		-		-		-			1		1,842		(27	)
Securities of U.S.<br> Government entities			-		-			2		1,119		(9	)		2		1,119		(9	)
Obligations of states<br> and political<br> subdivisions			26,452		(166	)		71		67,121		(2,819	)		103		93,573		(2,985	)
Corporate securities			308,157		(3,403	)		79		722,740		(20,239	)		117		1,030,897		(23,642	)
Total		$	499,743	$	(4,111	)		219	$	1,549,153	$	(56,269	)		301	$	2,048,896	$	(60,380	)

All values are in US Dollars.

An analysis of gross unrecognized losses of the debt securities held to maturity portfolio follows:

	Debt Securities Held to Maturity
	At December 31, 2018
	No. of	Less than 12 months					No. of		12 months or longer					No. of		Total
	Investment			Unrecognized			Investment				Unrecognized			Investment				Unrecognized
	Positions	Fair Value		Losses			Positions		Fair Value		Losses			Positions		Fair Value		Losses
	( in thousands)
Agency residential MBS		$	8,495	$	(34	)		78	$	412,574	$	(14,095	)		94	$	421,069	$	(14,129	)
Non-agency residential<br> MBS			26		-			-		-		-			1		26		-
Obligations of states<br> and political<br> subdivisions			83,633		(271	)		142		151,546		(2,456	)		239		235,179		(2,727	)
Total		$	92,154	$	(305	)		220	$	564,120	$	(16,551	)		334	$	656,274	$	(16,856	)

All values are in US Dollars.

The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from federal income tax:

	For the Years Ended December 31,
	2019		2018		2017
	(In thousands)
Taxable	$	77,800	$	65,330	$	51,445
Tax-exempt from regular federal income tax		15,736		19,438		20,651
Total interest income from investment securities	$	93,536	$	84,768	$	72,096

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Note 3 : Loans and Allowance for Credit Losses ****

At December 31, 2018, the Company had $5,713 thousand in loans secured by residential real estate which are indemnified from loss by the FDIC up to 80% of principal; the indemnification expired February 6, 2019.

A summary of the major categories of loans outstanding is shown in the following tables at the dates indicated.

	At December 31,
	2019		2018
	(In thousands)
Commercial	$	222,085	$	275,080
Commercial Real Estate		578,758		580,480
Construction		1,618		3,982
Residential Real Estate		32,748		44,866
Consumer Installment & Other		291,455		302,794
Total	$	1,126,664	$	1,207,202

Changes in the accretable yield for purchased loans were as follows:

	For the twelve months ended December 31,
	2019			2018
Accretable yield:	(In thousands)
Balance at the beginning of the period	$	182		$	738
Reclassification from nonaccretable difference		1,103			1,119
Accretion		(472	)		(1,675	)
Balance at the end of the period	$	813		$	182
Accretion	$	(472	)	$	(1,675	)
Change in FDIC indemnification		-			2
(Increase) in interest income	$	(472	)	$	(1,673	)

The following summarizes activity in the allowance for loan losses:

	Allowance for Loan Losses
	For the Twelve Months Ended December 31, 2019
													Consumer
				Commercial						Residential			Installment
	Commercial			Real Estate			Construction			Real Estate			and Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	6,311		$	3,884		$	1,465		$	869		$	5,645		$	3,177	$	21,351
(Reversal) provision		(2,023	)		(16	)		(1,356	)		(663	)		3,534			524		-
Chargeoffs		(97	)		-			-			-			(4,473	)		-		(4,570	)
Recoveries		768			196			-			-			1,739			-		2,703
Total allowance for loan losses	$	4,959		$	4,064		$	109		$	206		$	6,445		$	3,701	$	19,484
	Allowance for Loan Losses
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	For the Twelve Months Ended December 31, 2018
												Consumer
				Commercial					Residential			Installment
	Commercial			Real Estate			Construction		Real Estate			and Other			Unallocated			Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	7,746		$	3,849		$	335	$	995		$	6,418		$	3,666		$	23,009
(Reversal) provision		(2,369	)		275			1,130		(126	)		1,579			(489	)		-
Chargeoffs		(513	)		(240	)		-		-			(4,124	)		-			(4,877	)
Recoveries		1,447			-			-		-			1,772			-			3,219
Total allowance for loan losses	$	6,311		$	3,884		$	1,465	$	869		$	5,645		$	3,177		$	21,351

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	Allowance for Loan Losses
	For the Twelve Months Ended December 31, 2017
												Consumer
				Commercial					Residential			Installment
	Commercial			Real Estate		Construction			Real Estate			and Other			Unallocated			Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	8,327		$	3,330	$	152		$	1,330		$	7,980		$	4,835		$	25,954
(Reversal) provision		(382	)		431		(1,716	)		(335	)		1,271			(1,169	)		(1,900	)
Chargeoffs		(961	)		-		-			-			(4,957	)		-			(5,918	)
Recoveries		762			88		1,899			-			2,124			-			4,873
Total allowance for loan losses	$	7,746		$	3,849	$	335		$	995		$	6,418		$	3,666		$	23,009

The allowance for loan losses and recorded investment in loans evaluated for impairment were as follows:

	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
	At December 31, 2019
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	2,413	$	-	$	-	$	-	$	-	$	-	$	2,413
Collectively evaluated for impairment		2,546		4,064		109		206		6,445		3,701		17,071
Total	$	4,959	$	4,064	$	109	$	206	$	6,445	$	3,701	$	19,484
Carrying value of loans:
Individually evaluated for impairment	$	8,182	$	7,409	$	-	$	190	$	43	$	-	$	15,824
Collectively evaluated for impairment		213,903		571,349		1,618		32,558		291,412		-		1,110,840
Total	$	222,085	$	578,758	$	1,618	$	32,748	$	291,455	$	-	$	1,126,664
	Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	At December 31, 2018
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	2,752	$	-	$	-	$	-	$	-	$	-	$	2,752
Collectively evaluated for impairment		3,559		3,884		1,465		869		5,645		3,177		18,599
Total	$	6,311	$	3,884	$	1,465	$	869	$	5,645	$	3,177	$	21,351
Carrying value of loans:
Individually evaluated for impairment	$	9,944	$	8,438	$	-	$	717	$	143	$	-	$	19,242
Collectively evaluated for impairment		265,136		572,042		3,982		44,149		302,651		-		1,187,960
Total	$	275,080	$	580,480	$	3,982	$	44,866	$	302,794	$	-	$	1,207,202

The Company’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Company’s subsidiary, Westamerica Bank (the “Bank”) maintains a Loan Review Department which reports directly to the Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and validates management assigned credit risk grades on evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department performs continuous evaluations throughout the year. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by management and validated by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

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 *63*-
```

The following summarizes the credit risk profile by internally assigned grade:

	Credit Risk Profile by Internally Assigned Grade
	At December 31, 2019
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)
Grade:
Pass	$	213,542	$	567,525	$	1,618	$	31,055	$	289,424	$	1,103,164
Substandard		8,543		11,233		-		1,693		1,329		22,798
Doubtful		-		-		-		-		308		308
Loss		-		-		-		-		394		394
Total	$	222,085	$	578,758	$	1,618	$	32,748	$	291,455	$	1,126,664
	Credit Risk Profile by Internally Assigned Grade
---	---	---	---	---	---	---	---	---	---	---	---	---
	At December 31, 2018
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Total
	(In thousands)
Grade:
Pass	$	264,634	$	567,578	$	3,982	$	43,112	$	300,553	$	1,179,859
Substandard		10,446		12,902		-		1,754		1,556		26,658
Doubtful		-		-		-		-		135		135
Loss		-		-		-		-		550		550
Total	$	275,080	$	580,480	$	3,982	$	44,866	$	302,794	$	1,207,202

Credit risk profile reflects internally assigned grades of purchased covered loans without regard to FDIC indemnification on $5,713 thousand in loans secured by residential real estate at December 31, 2018. The indemnification expired February 6, 2019.

The following tables summarize loans by delinquency and nonaccrual status:

	Summary of Loans by Delinquency and Nonaccrual Status
	At December 31, 2019
	Current and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Loans
	(In thousands)
Commercial	$	221,199	$	531	$	158	$	-	$	197	$	222,085
Commercial real estate		573,809		432		421		-		4,096		578,758
Construction		1,618		-		-		-		-		1,618
Residential real estate		31,934		274		540		-		-		32,748
Consumer installment and other		286,391		2,960		1,517		440		147		291,455
Total	$	1,114,951	$	4,197	$	2,636	$	440	$	4,440	$	1,126,664
	Summary of Loans by Delinquency and Nonaccrual Status
---	---	---	---	---	---	---	---	---	---	---	---	---
	At December 31, 2018
	Current and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Loans
	(In thousands)
Commercial	$	274,045	$	781	$	254	$	-	$	-	$	275,080
Commercial real estate		574,853		617		785		-		4,225		580,480
Construction		3,982		-		-		-		-		3,982
Residential real estate		43,372		789		189		-		516		44,866
Consumer installment and other		297,601		3,408		1,107		551		127		302,794
Total	$	1,193,853	$	5,595	$	2,335	$	551	$	4,868	$	1,207,202

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2019 and December 31, 2018.

- 64-

The following summarizes impaired loans:

	Impaired Loans
	At December 31,
	2019						2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Commercial	$	21	$	21	$	-	$	755	$	759	$	-
Commercial real estate		7,408		8,856		-		8,438		10,373		-
Residential real estate		190		220		-		717		747		-
Consumer installment and other		43		43		-		270		377		-
Total with no related allowance recorded		7,662		9,140		-		10,180		12,256		-
With an allowance recorded:
Commercial		8,160		8,160		2,413		9,189		9,189		2,752
Total with an allowance recorded		8,160		8,160		2,413		9,189		9,189		2,752
Total	$	15,822	$	17,300	$	2,413	$	19,369	$	21,445	$	2,752

Impaired loans include troubled debt restructured loans. Impaired loans at December 31, 2019, included $6,713 thousand of restructured loans, $3,670 thousand of which were on nonaccrual status. Impaired loans at December 31, 2018, included $8,579 thousand of restructured loans, $4,225 thousand of which were on nonaccrual status.

	Impaired Loans
	For the Twelve Months Ended December 31,
	2019				2018				2017
	Average		Recognized		Average		Recognized		Average		Recognized
	Recorded		Interest		Recorded		Interest		Recorded		Interest
	Investment		Income		Investment		Income		Investment		Income
	(In thousands)
Commercial	$	8,412	$	140	$	10,532	$	667	$	11,156	$	508
Commercial real estate		7,428		139		11,703		758		14,806		884
Residential real estate		191		3		269		19		423		17
Consumer installment and other		44		1		254		14		415		20
Total	$	16,075	$	283	$	22,758	$	1,458	$	26,800	$	1,429

The following tables provide information on troubled debt restructurings:

	Troubled Debt Restructurings
	At December 31, 2019
						Period-End
						Individual
	Number of	Pre-Modification		Period-End		Impairment
	Contracts	Carrying Value		Carrying Value		Allowance
	( in thousands)
Commercial		$	278	$	32	$	11
Commercial real estate			8,367		6,492		-
Residential real estate			241		189		-
Total		$	8,886	$	6,713	$	11

All values are in US Dollars.

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- 65-

	Troubled Debt Restructurings
	At December 31, 2018
						Period-End
						Individual
	Number of	Pre-Modification		Period-End		Impairment
	Contracts	Carrying Value		Carrying Value		Allowance
	( in thousands)
Commercial		$	2,274	$	811	$	19
Commercial real estate			9,237		7,568		-
Residential real estate			241		200		-
Total		$	11,752	$	8,579	$	19

All values are in US Dollars.

During the twelve months ended December 31, 2019 and December 31, 2018, the Company did not modify any loans that were considered troubled debt restructurings.

During the year ended December 31, 2017, the Company modified four loans with a carrying value of $699 thousand that were considered troubled debt restructurings. The four concessions granted in 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms.

There were no chargeoffs related to troubled debt restructurings made during the year ended December 31, 2019. During the year ended December 31, 2018, one troubled debt restructured loan with a carrying value of $41 thousand was charged off. During the year ended December 31, 2017, one troubled debt restructured loan with a carrying value of $58 thousand was charged off. During the years ended December 31, 2019, 2018 and 2017, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

There were no loans restricted due to collateral requirements at December 31, 2019 and December 31, 2018.

There were no loans held for sale at December 31, 2019 and December 31, 2018.

At December 31, 2019 and December 31, 2018, the Company held total other real estate owned (OREO) of $43 thousand and $350 thousand, respectively. There was no reserve applied against OREO at December 31, 2019 and December 31, 2018. There were no foreclosed residential real estate properties at December 31, 2019 and December 31, 2018. There was no covered OREO at December 31, 2018. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $124 thousand at December 31, 2019 and $516 thousand at December 31, 2018.

Note 4 : Concentration of Credit Risk

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At December 31, 2019, the Bank did not have credit extended to any one entity exceeding these limits. At December 31, 2019, the Bank had 34 lending relationships each with aggregate amounts of $5 million or more. 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 related to real estate loans of $43,129 thousand and $53,891 thousand at December 31, 2019 and December 31, 2018, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At December 31, 2019, the Bank held corporate bonds in 92 issuing entities that exceeded $5 million for each issuer.

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Note 5 : Premises , Equipment , Other Assets and Other Liabilities

Premises and equipment consisted of the following:

	At December 31,
	Cost		Accumulated Depreciation and Amortization			Net Book Value
	(In thousands)
2019
Land	$	11,691	$	-		$	11,691
Building and improvements		42,529		(28,353	)		14,176
Leasehold improvements		6,219		(5,405	)		814
Furniture and equipment		26,793		(18,877	)		7,916
Total	$	87,232	$	(52,635	)	$	34,597
2018
Land	$	11,691	$	-		$	11,691
Building and improvements		41,912		(27,178	)		14,734
Leasehold improvements		6,174		(4,968	)		1,206
Furniture and equipment		23,845		(16,969	)		6,876
Total	$	83,622	$	(49,115	)	$	34,507

Depreciation and amortization of premises and equipment included in noninterest expense amounted to $3,879 thousand in 2019, $3,677 thousand in 2018 and $3,925 thousand in 2017.

Other assets consisted of the following:

	At December 31,
	2019		2018
	(In thousands)
Cost method equity investments:
Federal Reserve Bank stock ^(1)^	$	14,069	$	14,069
Other investments		158		158
Total cost method equity investments		14,227		14,227
Life insurance cash surrender value		57,810		56,083
Net deferred tax asset		11,085		42,256
Right-of-use asset		17,136		-
Limited partnership investments		20,773		10,219
Interest receivable		28,797		25,834
Prepaid assets		3,737		4,658
Other assets		10,767		9,629
Total other assets	$	164,332	$	162,906
^(1)^	A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank (FRB) in its district in a sum equal to six percent of the bank’s paid-up capital stock and surplus. One-half of the amount of the bank's subscription shall be paid to the FRB and the remaining half will be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System.
---	---

The net deferred tax asset at December 31, 2019 of $11,085 thousand was net of deferred tax obligations of $10,934 thousand related to available for sale debt securities unrealized gains. The net deferred tax asset at December 31, 2018 of $42,256 thousand included deferred tax benefits of $16,787 thousand related to available for sale debt securities unrealized losses.

The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. On September 30, 2019, Visa Inc. announced a revised conversion rate applicable to its class B common stock resulting from its September 27, 2019 deposit of funds into its litigation escrow account. This funding reduced the conversion rate of class B common stock into class A common stock, which is unrestricted and trades actively on the New York Stock Exchange, from 1.6298 to 1.6228 per share, effective as of September 27, 2019. Visa Inc. class A common stock had a closing price of $187.90 per share on December 31, 2019, the last day of stock market trading for the fourth quarter 2019. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings, the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.

- 67-

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At December 31, 2019, this investment totaled $20,773 thousand and $16,231 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2018, this investment totaled $10,219 thousand and $4,799 thousand of this amount represented outstanding equity capital commitments. At December 31, 2019, the $16,231 thousand of outstanding equity capital commitments are expected to be paid as follows, $5,009 thousand in 2020, $4,075 thousand in 2021, $5,980 thousand in 2022, $295 thousand in 2023, $24 thousand in 2024, $301 thousand in 2025 and $547 thousand in 2026 or thereafter.

The amounts recognized in net income for these investments include:

	For the Years Ended December 31,
	2019		2018		2017
	(In thousands)
Investment loss included in pre-tax income	$	2,400	$	2,900	$	1,800
Valuation impairment included in pre-tax income		-		-		625
Tax credits recognized in provision for income taxes		875		1,121		1,850

The $625 thousand valuation impairment recognized in 2017 was due to a decline in future expected federal tax benefits due to the reduction in the federal corporate tax rate upon enactment of the Tax Cuts and Jobs Act of 2017.

Other liabilities consisted of the following:

	At December 31,
	2019		2018
	(In thousands)
Operating lease liability	$	17,136	$	-
Other liabilities		27,453		34,849
Total other liabilities	$	44,589	$	34,849

The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of 5 years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional 5 year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of December 31, 2019.

As of December 31, 2019, the Company recorded a lease liability of $17,136 thousand and a right-of-use asset of $17,136 thousand, respectively. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 3.9 years and 2.92%, respectively, at December 31, 2019. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of December 31, 2019.

Total lease costs during the twelve months ended December 31, 2019, of $6,880 thousand was recorded within occupancy and equipment expense. The Company did not have any material short-term or variable leases costs or sublease income during the twelve months ended December 31, 2019.

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The following table summarizes the remaining lease payments of operating lease liabilities:

	Minimum<br> future lease<br> payments
	At December 31,
	2019
	(In thousands)
2020	$	6,048
2021		4,317
2022		3,366
2023		2,633
2024		1,205
Thereafter		637
Total minimum lease payments		18,206
Less: discount		(1,070	)
Present value of lease liability	$	17,136

Note 6 : Goodwill and Identifiable Intangible Assets

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the twelve months ended December 31, 2019 and December 31, 2018. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the twelve months ended December 31, 2019 and year ended December 31, 2018 no such adjustments were recorded.

The carrying values of goodwill were:

	At December 31,
	2019		2018
	(In thousands)
Goodwill	$	121,673	$	121,673

The gross carrying amount of identifiable intangible assets and accumulated amortization was:

	At December 31,
	2019					2018
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
	(In thousands)
Core deposit intangibles	$	56,808	$	(55,417	)	$	56,808	$	(54,879	)

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- 69-

As of December 31, 2019, the current period and estimated future amortization expense for identifiable intangible assets was:

	Total
	Core
	Deposit
	Intangibles
	(In thousands)
For the Twelve months ended December 31, 2019 (actual)	$	538
Estimate for year ending December 31, 2020		287
2021		269
2022		252
2023		236
2024		222

Note 7 : Deposits and Borrowed Funds

The following table provides additional detail regarding deposits.



		2018

Noninterest-bearing	2,240,112	$	2,243,251
Interest-bearing:
Transaction	931,888		929,346
Savings	1,471,284		1,498,991
Time deposits less than 100 thousand	88,355		102,654
Time deposits 100 thousand through 250 thousand	54,874		64,512
Time deposits more than 250 thousand	26,108		28,085
Total deposits	4,812,621	$	4,866,839

All values are in US Dollars.

Demand deposit overdrafts of $1,055 thousand and $980 thousand were included as loan balances at December 31, 2019 and December 31, 2018, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $326 thousand in 2019, $368 thousand in 2018 and $415 thousand in 2017.

The following table provides additional detail regarding short-term borrowed funds.

	Repurchase Agreements (Sweep)<br> Accounted for as Secured Borrowings
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous
	At December 31,
	2019		2018
Repurchase agreements:	(In thousands)
Collateral securing borrowings:
Securities of U.S. Government sponsored entities	$	65,833	$	73,803
Agency residential MBS		52,485		58,380
Corporate securities		146,253		91,837
Total collateral carrying value	$	264,571	$	224,020
Total short-term borrowed funds	$	30,928	$	51,247
	For the Years Ended December 31,
---	---	---	---	---
	2019		2018
	Highest Balance at Any Month-end
	(In thousands)
Securities sold under repurchase agreements	$	61,411	$	68,894

- 70-

Note 8 : Shareholders’ Equity

The Company grants stock options and restricted performance shares to employees in exchange for employee services, pursuant to the shareholder-approved 1995 Stock Option Plan, which was last amended and restated in 2012. Nonqualified stock option grants (“NQSO”) are granted with an exercise price equal to the fair market value of the related common stock on the grant date. NQSO generally become exercisable in equal annual installments over a three-year period with each installment vesting on the anniversary date of the grant. Each NQSO has a maximum ten-year term. A restricted performance share grant becomes vested after three years of being awarded, provided the Company has attained its performance goals for such three-year period. 2019 Omnibus Equity Incentive Plan was approved by the Company’s shareholders on April 25, 2019 and became effective for grants and stock issuance on or after January 1, 2020.

The following table summarizes information about stock options granted under the Plan as of December 31, 2019. The intrinsic value is calculated as the difference between the market value as of December 31, 2019 and the exercise price of the shares. The market value as of December 31, 2019 was $67.77 as reported by the NASDAQ Global Select Market:

			Options Outstanding								Options Exercisable
			At December 31, 2019						For the Twelve Months Ended December 31, 2019		At December 31, 2019						For the Twelve Months Ended December 31, 2019
Range of Exercise Price			Number Outstanding		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
			(In thousands)				(Years)				(In thousands)				(Years)
$40	-	45		60	$	1,512		5.7	$	42		60	$	1,512		5.7	$	42
45	-	50		-		-		-		-		-		-		-		-
50	-	55		28		428		3.1		53		28		428		3.1		53
55	-	60		113		1,203		7.1		57		54		568		7.1		57
60	-	65		360		1,921		8.6		62		48		270		8.1		62
$40	-	65		561	$	5,064		7.7		59		190	$	2,778		6.3		53

The Company applies the Roll-Geske option pricing model (Modified Roll) to determine grant date fair value of stock option grants. This model modifies the Black-Scholes Model to take into account dividends and American options. During the twelve months ended December 31, 2019, 2018 and 2017, the Company granted 250 thousand, 249 thousand and 266 thousand stock options, respectively. The following weighted average assumptions were used in the option pricing to value stock options granted in the periods indicated:

	For the Years Ended December 31,
	2019			2018			2017
Expected volatility ^(1)^		20	%		20	%		20	%
Expected life in years ^(2)^		4.7			4.8			4.8
Risk-free interest rate ^(3)^		2.67	%		2.50	%		1.97	%
Expected dividend yield		2.55	%		2.65	%		3.28	%
Fair value per award	$	10.19		$	9.98		$	8.27
^(1)^	Measured using daily price changes of Company’s stock over respective expected term of the option and the implied volatility derived from the market prices of the Company’s stock and traded options.
---	---
^(2)^	The number of years that the Company estimates that the options will be outstanding prior to exercise.
---	---
^(3)^	The risk-free rate over the expected life based on the US Treasury yield curve in effect at the time of the grant.
---	---

Employee stock option grants are being expensed by the Company over the grants’ three year vesting period. The Company issues new shares upon the exercise of options. The number of shares authorized to be issued for options at December 31, 2019 is 1,327 thousand.

- 71-

A summary of option activity during the year ended December 31, 2019 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
	(In thousands)					(Years)
Outstanding at January 1, 2018		946		$	53.78
Granted		250			62.67
Exercised		(516	)		50.88
Forfeited or expired		(119	)		61.65
Outstanding at December 31, 2018		561			58.75		7.7
Exercisable at December 31, 2018		190			53.11		6.3

A summary of the Company’s nonvested option activity during the twelve months ended December 31, 2019 is presented below:

	Shares			Weighted Average Grant Date Fair Value
	(In thousands)
Nonvested at January 1, 2019		489		$	8.71
Granted		250			10.19
Vested		(247	)		8.01
Forfeited		(120	)		9.82
Nonvested at December 31, 2019		372		$	9.81

The weighted average estimated grant date fair value for options granted under the Company’s stock option plan during the twelve months ended December 31, 2019, 2018 and 2017 was $10.19, $9.98 and $8.27 per share, respectively. The total remaining unrecognized compensation cost related to nonvested awards as of December 31, 2019 is $2,842 thousand and the weighted average period over which the cost is expected to be recognized is 1.7 years.

The total intrinsic value of options exercised during the twelve months ended December 31, 2019, 2018 and 2017 was $3,398 thousand, $4,264 thousand and $4,642 thousand, respectively. The total fair value of Restricted Performance Shares (“RPSs”) that vested during the twelve months ended December 31, 2019, 2018 and 2017 was $1,073 thousand, $1,143 thousand and $708 thousand, respectively. The total fair value of options vested during the twelve months ended December 31, 2019, 2018 and 2017 was $1,980 thousand, $1,835 thousand and $1,493 thousand, respectively. The Company adopted the ASU 2016-09 provisions effective January 1, 2017, which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the twelve months of 2019, 516 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1,485 thousand. During the twelve months of 2018, 292 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $2,516 thousand. During the twelve months of 2017, 509 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1,667 thousand. The income tax provision was $435 thousand lower in 2019 and $737 thousand lower in 2018 lower than would have been under accounting standards prior to the adoption of ASU 2016-09.

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A summary of the status of the Company’s restricted performance shares as of December 31, 2019 and 2018 and changes during the twelve months ended on those dates, follows:

	2019
	(In thousands)
Outstanding at January 1,		39		49
Granted		10		11
Issued upon vesting		(17	)	(19	)
Forfeited		(5	)	(2	)
Outstanding at December 31,		27		39

As of December 31, 2019 and 2018, the restricted performance shares had a weighted-average contractual life of 1.0 year and 1.2 years, respectively. The compensation cost that was charged against income for the Company’s restricted performance shares granted was $758 thousand, $660 thousand and $827 thousand for the year ended December 31, 2019, 2018 and 2017, respectively. There were no stock appreciation rights or incentive stock options granted in the year ended December 31, 2019 and 2018.

On February 13, 2009, the Company issued a warrant to purchase 246,640 shares of the Company’s common stock at an exercise price of $50.92 per share. The warrants may be exercised in a manner wherein the Company withholds shares of common stock issuable upon exercise of the warrant equal in value to the aggregate exercise price, in which case the warrant holder would not deliver cash for the aggregate exercise price and the Company would issue a number of shares equal to the intrinsic value on the exercise date. On January 29, 2019, the warrants were exercised in a cashless transaction resulting in the issuance of 50,788 shares of the Company’s common stock.

The Company repurchases and retires its common stock in accordance with Board of Directors approved share repurchase programs. At December 31, 2019, approximately 1,750 thousand shares remained available to repurchase under such plans.

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, 2019, no shares of Class B Common Stock or Preferred Stock were outstanding.

Note 9 : Regulatory Capital ****

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019. The capital conservation buffer was 2.5% for 2019 and 1.875% for 2018. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2019, the Company and Bank met all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2019 and 2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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The capital ratios for the Company and the Bank under the new capital framework as of the dates indicated are presented in the table below.

	At December 31, 2019				Required<br> for Capital<br> Adequacy Purposes<br> Effective January 1, 2019					To Be Well-capitalized<br> Under Prompt Corrective<br> Action Regulations
	Amount	Ratio			Amount		Ratio			Amount		Ratio
	( in thousands)
Common Equity Tier 1 Capital
Company			16.22	%	$	249,976		7.000%	^(1)^		N/A		N/A
Bank			11.80	%		246,671		7.000%	^(1)^	$	229,052		6.50	%
Tier 1 Capital
Company			16.22	%		303,542		8.500%	^(1)^		N/A		N/A
Bank			11.80	%		299,529		8.500%	^(1)^		281,910		8.00	%
Total Capital
Company			16.83	%		374,964		10.500%	^(1)^		N/A		N/A
Bank			12.58	%		370,007		10.500%	^(1)^		352,388		10.00	%
Leverage Ratio ^(2)^
Company			10.50	%		220,755		4.000	%		N/A		N/A
Bank			7.60	%		218,851		4.000	%		273,564		5.00	%

All values are in US Dollars.

^(1)^ Includes 2.5% capital conservation buffer.

^(2)^ The leverage ratio consists of Tier 1capital divided by the most recent quarterly average total assets, excluding certain intangible assets.^^

	At December 31, 2018				Required<br> for Capital<br> Adequacy Purposes<br> Effective January 1, 2018					To Be Well-capitalized<br> Under Prompt Corrective<br> Action Regulations
	Amount	Ratio			Amount		Ratio			Amount		Ratio
	( in thousands)
Common Equity Tier 1 Capital
Company			16.30	%	$	206,576		6.375%	^(3)^		N/A		N/A
Bank			13.01	%		203,664		6.375%	^(3)^	$	207,658		6.50	%
Tier 1 Capital
Company			16.30	%		255,182		7.875%	^(3)^		N/A		N/A
Bank			13.01	%		251,585		7.875%	^(3)^		255,579		8.00	%
Total Capital
Company			17.03	%		319,990		9.875%	^(3)^		N/A		N/A
Bank			13.94	%		315,480		9.875%	^(3)^		319,474		10.00	%
Leverage Ratio ^(2)^
Company			9.51	%		222,111		4.000	%		N/A		N/A
Bank			7.55	%		220,312		4.000	%		275,390		5.00	%

All values are in US Dollars.

^(2)^ The leverage ratio consists of Tier 1capital divided by the most recent quarterly average total assets, excluding certain intangible assets.

^(3)^ Includes 1.875% capital conservation buffer.

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Note 1 0 : 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 basis 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. Net deferred tax assets are included with other assets in the consolidated balance sheets.

The components of the net deferred tax asset are as follows:

	At December 31,
	2019			2018
	(In thousands)
Deferred tax asset
Allowance for credit losses	$	6,326		$	6,868
State franchise taxes		1,948			3,026
Securities available for sale		-			16,787
Deferred compensation		5,118			5,229
Real estate owned		400			553
Purchased assets and assumed liabilities		406			935
Post-retirement benefits		517			555
Employee benefit accruals		1,875			2,104
VISA Class B shares		263			167
Limited partnership investments		1,228			708
Impaired capital assets		2,875			3,070
Accrued liabilities		1,606			2,554
Premises and equipment		261			31
Other		377			721
Sub total deferred tax asset		23,200			43,308
Tax valuation		(269	)		-
Total deferred tax asset		22,931			43,308
Deferred tax liability
Net deferred loan fees		239			291
Securities available for sale		10,934			-
Intangible assets		673			761
Total deferred tax liability		11,846			1,052
Net deferred tax asset	$	11,085		$	42,256

At December 31, 2019 and December 31, 2018, the Company had $2,875 thousand and $3,070 thousand, respectively, deferred tax asset related to California capital loss carryforwards which will expire if unutilized within five years of the year incurred. In the second quarter 2019, the Company re-assessed its ability to realize benefits from California capital loss carryforwards. The Company established a $269 thousand valuation allowance to reflect the expiring California capital loss carryforwards of $1,607 thousand for 2014, $916 thousand for 2015 and $821 thousand for 2016, for a total of $3,344 thousand.

In the second quarter 2019, the Company decreased unrecognized tax benefits by $909 thousand related to settlements with taxing authorities. The settlements incorporated amended tax returns for which the Company had recognized a deferred tax asset in the amount of $1,003 thousand.

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The provision for federal and state income taxes consists of amounts currently payable and amounts deferred are as follows:

	For the Years Ended December 31,
	2019		2018			2017
	(In thousands)
Current income tax expense:
Federal	$	11,570	$	10,560		$	1,778
State		9,595		9,816			7,810
Total current		21,165		20,376			9,588
Deferred income tax (benefit) expense:
Federal		2,340		(206	)		14,461
State		1,322		(737	)		783
Total deferred		3,662		(943	)		15,244
Adjustment of net deferred tax asset for enacted changes in tax rates:
Federal		-		-			12,315
State		-		-			-
Total adjustments		-		-			12,315
Provision for income taxes	$	24,827	$	19,433		$	37,147

The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate to income before taxes, as follows:

	For the Years Ended December 31,
	2019			2018			2017
	(In thousands)
Federal income taxes due at statutory rate	$	22,095		$	19,109		$	30,509
Additions (reductions) in income taxes resulting from:
Interest on state and municipal securities and loans not taxable for federal income tax purposes		(3,584	)		(4,375	)		(7,794	)
State franchise taxes, net of federal income tax benefit		8,625			7,173			5,586
Re-measurement of net deferred tax asset due to enactment of new federal tax rate		-			-			12,315
Stock compensation deduction in excess of book expense		(312	)		(528	)		(583	)
Tax credits		(1,040	)		(1,291	)		(1,850	)
Dividend received deduction		(38	)		(32	)		(60	)
Cash value life insurance		(464	)		(490	)		(603	)
Other		(455	)		(133	)		(373	)
Provision for income taxes	$	24,827		$	19,433		$	37,147

The 2017 income tax provision includes a $12.3 million dollar charge to re-measure the Company’s net deferred tax asset as a result of the enactment of the Tax Cuts and Jobs Act of 2017.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits follow:

	2019			2018
	(In thousands)
Balance at January 1,	$	909		$	909
Additions for tax positions taken in the current period		-			-
Reductions for tax positions taken in the current period		-			-
Additions for tax positions taken in prior years		-			-
Reductions for tax positions taken in prior years		-			-
Decrease related to settlements with taxing authorities		(909	)		-
Decrease as a result of a lapse in statute of limitations		-			-
Balance at December 31,	$	-		$	909

In 2019 the Company settled in full by signed agreement with the state taxing authorities and had no uncertain tax positions at December 31, 2019, related to positions taken on tax returns which were previously under examination.

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The Company classifies interest and penalties as a component of the provision for income taxes. At December 31, 2019, the tax years ended December 31, 2018, 2017 and

2016

remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2018, 2017 and

2016

remain subject to examination by the California Franchise Tax Board.

Note 1 1 : Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, impaired loans, certain loans held for investment, debt securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

In accordance with the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and equity securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mutual funds, federal agency securities, mortgage-backed securities, corporate securities, asset-backed securities, and municipal bonds.

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company relies on independent vendor pricing services to measure fair value for equity securities, debt securities available for sale and debt securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote most closely reflecting the market generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysis on a quarterly basis; debt securities selected for OTTI analysis include all debt securities at a market price below 95% of par value. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities.

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3.

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Assets Recorded at Fair Value on a Recurring Basis

The tables below present assets measured at fair value on a recurring basis on the dates indicated.

	At December 31, 2019
	Fair Value		Quoted Prices in Active Markets for Identical Assets<br> (Level 1)		Significant Other Observable Inputs<br> (Level 2)		Significant Unobservable Inputs<br> (Level 3) ^(1)^
	(In thousands)
Debt securities available for sale
U.S. Treasury securities	$	20,000	$	20,000	$	-	$	-
Securities of U.S. Government sponsored entities		111,167		-		111,167		-
Agency residential mortgage-backed securities (MBS)		939,750		-		939,750		-
Agency commercial MBS		3,708		-		3,708		-
Securities of U.S. Government entities		544		-		544		-
Obligations of states and political subdivisions		163,139		-		163,139		-
Corporate securities		1,833,783		-		1,833,783		-
Collateralized Loan Obligations		6,755		-		6,755		-
Total debt securities available for sale	$	3,078,846	$	20,000	$	3,058,846	$	-

^(1)^There were no transfers in to or out of level 3 during the twelve months ended December 31, 2019.

	At December 31, 2018
	Fair Value		Quoted Prices in Active Markets for Identical Assets<br> (Level 1)		Significant Other Observable Inputs<br> (Level 2)		Significant Unobservable Inputs<br> (Level 3) ^(1)^
	(In thousands)
Equity securities
Mutual funds	$	1,747	$	-	$	1,747	$	-
Total equity securities		1,747		-		1,747		-
Debt securities available for sale
U.S. Treasury securities		139,574		139,574		-		-
Securities of U.S. Government sponsored entities		164,018		-		164,018		-
Agency residential MBS		853,871		-		853,871		-
Non-agency residential MBS		114		-		114		-
Agency commercial MBS		1,842		-		1,842		-
Securities of U.S. Government entities		1,119		-		1,119		-
Obligations of states and political subdivisions		179,091		-		179,091		-
Corporate securities		1,315,041		-		1,315,041		-
Total debt securities available for sale		2,654,670		139,574		2,515,096		-
Total	$	2,656,417	$	139,574	$	2,516,843	$	-

^(1)^There were no transfers in to or out of level 3 during the twelve months ended December 31, 2018.

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Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at December 31, 2019 and December 31, 2018, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

									For the
									Twelve Months Ended
	At December 31, 2019								December 31, 2019
	Carrying Value		Level 1		Level 2		Level 3		Total Losses
	(In thousands)
Other real estate owned	$	43	$	-	$	-	$	43	$	-
Impaired loans:
Commercial		5,747		-		-		5,747		-
Commercial real estate		4,091		-		-		4,091		-
Residential real estate		190		-		-		190		-
Total assets measured at fair value on a nonrecurring basis	$	10,071	$	-	$	-	$	10,071	$	-

									For the
									Twelve Months Ended
	At December 31, 2018								December 31, 2018
	Carrying Value		Level 1		Level 2		Level 3		Total Losses
	(In thousands)
Other real estate owned	$	350	$	-	$	-	$	350	$	-
Impaired loans:
Commercial		6,437		-		-		6,437		-
Commercial real estate		3,870		-		-		3,870		(240	)
Total assets measured at fair value on a nonrecurring basis	$	10,657	$	-	$	-	$	10,657	$	(240	)

Level 3 – Valuation is based upon present value of expected future cash flows, independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. The unobservable inputs and qualitative information about the unobservable inputs are not presented as the inputs were not developed by the Company.

Disclosures about Fair Value of Financial Instruments

The tables below are a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities. The carrying amounts in the following tables are recorded in the balance sheet under the indicated captions.

The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.

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	At December 31, 2019
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets<br> (Level 1)		Significant Other Observable Inputs<br> (Level 2 )		Significant Unobservable Inputs<br> (Level 3 )
Financial Assets:	(In thousands)
Cash and due from banks	$	373,421	$	373,421	$	373,421	$	-	$	-
Debt securities held to maturity		738,072		744,296		-		744,296		-
Loans		1,107,180		1,152,949		-		-		1,152,949
Financial Liabilities:	****	****	****	****	****	****	****	****	****	****
Deposits	$	4,812,621	$	4,810,934	$	-	$	4,643,284	$	167,650
Short-term borrowed funds		30,928		30,928		-		30,928		-
	At December 31, 2018
---	---	---	---	---	---	---	---	---	---	---
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets<br> (Level 1)		Significant Other Observable Inputs<br> (Level 2 )		Significant Unobservable Inputs<br> (Level 3 )
Financial Assets:	(In thousands)
Cash and due from banks	$	420,284	$	420,284	$	420,284	$	-	$	-
Debt securities held to maturity		984,609		971,445		-		971,445		-
Loans		1,185,851		1,184,770		-		-		1,184,770
Financial Liabilities:	****	****	****	****	****	****	****	****	****	****
Deposits	$	4,866,839	$	4,862,668	$	-	$	4,671,588	$	191,080
Short-term borrowed funds		51,247		51,247		-		51,247		-

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.

Note 1 2 : 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 $265,311 thousand at December 31, 2019 and $278,598 thousand at December 31, 2018. 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. Financial and performance standby letters of credit outstanding totaled $3,099 thousand at December 31, 2019 and $2,772 thousand at December 31, 2018. The Company had no commitments outstanding for commercial and similar letters of credit at December 31, 2019 and December 31, 2018. The Company had $550 thousand and $75 thousand in outstanding full recourse guarantees to a 3^rd^ party credit card company at December 31, 2019 and December 31, 2018, respectively. The Company had a reserve for unfunded commitments of $2,160 thousand at December 31, 2019 and $2,308 thousand at December 31, 2018, included in other liabilities.

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. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated. In the second quarter 2019, the Company achieved a mediated settlement to dismiss a lawsuit and paid the resulting liability of $252 thousand.

The Company determined that it will be obligated to provide refunds of revenue recognized in years prior to 2018 to some customers. The Company initially estimated the probable amount of these obligations to be $5,542 thousand and accrued a liability for such amount in 2017; based on additional information received in the second quarter 2019, the Company increased such liability to $5,843 thousand by recognizing an expense of $301 thousand.

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Note 1 3 : Retirement Benefit Plans

The Company sponsors a qualified defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. The costs charged to noninterest expense related to discretionary Company contributions to the Deferred Profit-Sharing Plan were $1,000 thousand in 2019, $1,057 thousand in 2018 and $944 thousand in 2017.

The Company also sponsors a qualified defined contribution Tax Deferred Savings/Retirement Plan (ESOP) covering salaried employees who become eligible to participate upon completion of a 90-day introductory period. The Tax Deferred Savings/ Retirement Plan (ESOP) allows employees to defer, on a pretax or after-tax basis, a portion of their salaries as contributions to this Plan. Participants may invest in several funds, including one fund that invests primarily in Westamerica Bancorporation common stock. The Company funds contributions to match participating employees’ contributions, subject to certain limits. The matching contributions charged to compensation expense were $986 thousand in 2019, $1,052 thousand in 2018 and $1,098 thousand in 2017.

The Company offers a continuation of group insurance coverage to eligible employees electing early retirement, for the period from the date of retirement until age 65. For eligible employees the Company pays a portion of these early retirees’ group insurance premiums. The Company also reimburses a portion of Medicare Part B premiums for all qualifying retirees over age 65 and, if eligible, their spouses. Eligibility for post-retirement medical benefits is based on age and years of service, and restricted to employees hired prior to February 1, 2006 who elect early retirement prior to January 1, 2021. The Company uses an actuarial-based accrual method of accounting for post-retirement benefits. The Company used a December 31 measurement date for determining post-retirement medical benefit calculations.

The following tables set forth the net periodic post-retirement benefit cost and the change in the benefit obligation for the year ended December 31 and the funded status of the post-retirement benefit plan as of December 31:

Net Periodic Benefit Cost ****

	At December 31,
	2019			2018		2017
	(In thousands)
Service ( benefit) cost	$	(57	)	$	24	$	(311	)
Interest cost		72			72		95
Amortization of unrecognized transition obligation		-			-		61
Net periodic cost (benefit)	$	15		$	96	$	(155	)

Other Changes in Benefit Obligations Recognized in Other Comprehensive Income ****

Amortization of unrecognized transition obligation, net of tax		-		-		(34	)
Total recognized in net periodic cost (benefit) and accumulated other comprehensive income	$	15	$	96	$	(189	)

The transition obligation for this post-retirement benefit plan became fully amortized during the year ended December 31, 2017.

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Obligation and Funded Status ****

	At December 31,
	2019			2018			2017
Change in benefit obligation	(In thousands)
Benefit obligation at beginning of year	$	1,913		$	1,958		$	2,319
Service (benefit) cost		(57	)		24			(311	)
Interest cost		72			72			95
Benefits paid		(146	)		(141	)		(145	)
Benefit obligation at end of year	$	1,782		$	1,913		$	1,958
Accumulated post-retirement benefit obligation attributable to:
Retirees	$	1,782		$	1,913		$	1,575
Fully eligible participants		-			-			382
Other		-			-			1
Total	$	1,782		$	1,913		$	1,958
Fair value of plan assets		-			-			-
Accumulated post-retirement benefit obligation in excess of plan assets	$	1,782		$	1,913		$	1,958

Additional Information

Assumptions

	At December 31,
	2019			2018			2017
Weighted-average assumptions used to determine benefit obligations
Discount rate		2.90	%		3.76	%		3.70	%
Weighted-average assumptions used to determine net periodic benefit cost
Discount rate		3.76	%		3.70	%		4.10	%

The above discount rate is based on the expected return of a portfolio of Corporate Aa debt, the term of which approximates the term of the benefit obligations. The Company reserves the right to terminate or alter post-employment health benefits. Post-retirement medical benefits are currently fixed amounts without provision for future increases; as a result, the assumed annual average rate of inflation used to measure the expected cost of benefits covered by this program is zero percent for 2020 and beyond.

Assumed benefit inflation rates are not applicable for this program.

	Estimated future benefit payments
	(In thousands)
2020	$	152
2021		152
2022		150
2023		149
2024		145
Years 2025-2029		604

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```
 *82*-
```

Note 1 4 : Related Party Transactions

Certain of the Directors, executive officers and their associates have had banking transactions with subsidiaries of the Company in the ordinary course of business. The table below reflects information concerning loans to certain directors and executive officers and/or family members during 2019 and 2018:

	2019			2018
	(In thousands)
Balance at January 1,	$	577		$	622
Originations		-			-
Principal reductions		(44	)		(45	)
Balance at December 31,	$	533		$	577
Percent of total loans outstanding.		0.05	%		0.05	%

Note 1 5 : Regulatory Matters ****

Payment of dividends to the Company by the Bank is limited under regulations for state chartered 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 the preceding three calendar years less dividends paid. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972.

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 $374,572 thousand in 2019 and $473,250 thousand in 2018, which amounts exceed the Bank’s required reserves.

Note 1 6 : Other Comprehensive Income (loss) ****

The components of other comprehensive income (loss) and other related tax effects were:

	2019
	Before tax			Tax effect			Net of tax
	(In thousands)
Debt securities available for sale:
Net unrealized gains arising during the year	$	93,936		$	(27,771	)	$	66,165
Reclassification of gains included in net income		(167	)		49			(118	)
Net unrealized gains arising during the year		93,769			(27,722	)		66,047
Post-retirement benefit obligation		-			-			-
Other comprehensive income	$	93,769		$	(27,722	)	$	66,047
	2018
---	---	---	---	---	---	---	---	---
	Before tax			Tax effect		Net of tax
	(In thousands)
Debt securities available for sale:
Net unrealized losses arising during the year	$	(27,939	)	$	8,258	$	(19,681	)
Reclassification of losses included in net income		-			-		-
Net unrealized losses arising during the year		(27,939	)		8,258		(19,681	)
Post-retirement benefit obligation		-			-		-
Other comprehensive loss	$	(27,939	)	$	8,258	$	(19,681	)

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- 83-

	2017
	Before tax			Tax effect			Net of tax
	(In thousands)
Debt securities available for sale:
Net unrealized losses arising during the year	$	(3,767	)	$	1,585		$	(2,182	)
Reclassification of gains included in net income		(7,955	)		3,345			(4,610	)
Net unrealized losses arising during the year		(11,722	)		4,930			(6,792	)
Post-retirement benefit obligation		59			(25	)		34
Other comprehensive loss	$	(11,663	)	$	4,905		$	(6,758	)

Accumulated other comprehensive income (loss) balances were:

	Post-retirement Benefit Obligation			Net Unrealized (Losses) Gains on Securities			Accumulated Other Comprehensive (Loss) Income
	(In thousands)
Balance, December 31, 2016	$	(34	)	$	(10,040	)	$	(10,074	)
Net change		34			(6,792	)		(6,758	)
Balance, December 31, 2017		-			(16,832	)		(16,832	)
Cumulative effect of equity securities losses reclassified		-			142			142
Adjusted Balance, January 1, 2018		-			(16,690	)		(16,690	)
Reclass stranded tax effects resulting from the Tax Cuts and Jobs Act of2017		-			(3,625	)		(3,625	)
Net change		-			(19,681	)		(19,681	)
Balance, December 31, 2018		-			(39,996	)		(39,996	)
Net change		-			66,047			66,047
Balance, December 31, 2019	$	-			26,051		$	26,051

The transition obligation for this post-retirement benefit plan became fully amortized during the year ended December 31, 2017.

Note 17: Earnings Per Common Share ****

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

	For the Years Ended December 31,
	2019		2018		2017
	(In thousands, except per share data)
Net income (numerator)	$	80,389	$	71,564	$	50,025
Basic earnings per common share	****	****	****	****	****	****
Weighted average number of common shares outstanding - basic (denominator)		26,956		26,649		26,291
Basic earnings per common share	$	2.98	$	2.69	$	1.90
Diluted earnings per common share	****	****	****	****	****	****
Weighted average number of common shares outstanding - basic		26,956		26,649		26,291
Add common stock equivalents for options		50		107		128
Weighted average number of common shares outstanding - diluted (denominator)		27,006		26,756		26,419
Diluted earnings per common share	$	2.98	$	2.67	$	1.89

For the years ended December 31, 2019, 2018 and 2017, options to purchase 382 thousand, 423 thousand and 323 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

```
 *84*-
```

Note 1 8 : Westamerica Bancorporation (Parent Company Only Condensed Financial Information )

Statements of Income and Comprehensive Income

	For the Years Ended December 31,
	2019		2018			2017
	(In thousands)
Dividends from subsidiaries	$	80,067	$	43,892		$	12,728
Interest income		54		33			43
Other income		8,778		9,447			8,590
Total income		88,899		53,372			21,361
Salaries and benefits		6,978		7,575			7,163
Other expense		3,729		3,181			3,416
Total expense		10,707		10,756			10,579
Income before taxes and equity in undistributed income of subsidiaries		78,192		42,616			10,782
Income tax benefit		636		919			241
Earnings of subsidiaries greater than subsidiary dividends		1,561		28,029			39,002
Net income		80,389		71,564			50,025
Other comprehensive loss, net of tax		66,047		(19,681	)		(6,758	)
Comprehensive income	$	146,436	$	51,883		$	43,267

Balance Sheets

	At December 31,
	2019		2018
	(In thousands)
Assets	****	****	****	****
Cash	$	122,663	$	72,878
Investment in Westamerica Bank		573,931		509,125
Investment in non-bank subsidiaries		455		455
Premises and equipment, net		11,006		10,400
Accounts receivable from Westamerica Bank		231		580
Other assets		37,645		36,990
Total assets	$	745,931	$	630,428
Liabilities	****	****	****	****
Accounts payable to Westamerica Bank	$	33	$	46
Other liabilities		14,481		14,791
Total liabilities		14,514		14,837
Shareholders' equity		731,417		615,591
Total liabilities and shareholders' equity	$	745,931	$	630,428

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- 85-

Statements of Cash Flows

	For the Years Ended December 31,
	2019			2018			2017
	(In thousands)
Operating Activities	****	****	****	****	****	****	****	****	****
Net income	$	80,389		$	71,564		$	50,025
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		449			361			319
(Increase) decrease in accounts receivable from affiliates		80			(43	)		(16	)
Increase in other assets		(71	)		(2,638	)		(2,203	)
Stock option compensation expense		1,744			1,988			1,824
Provision (benefit) for deferred income tax		(315	)		5,028			(3,971	)
Increase in other liabilities		856			978			202
Earnings of subsidiaries greater than subsidiary dividends		(1,561	)		(28,029	)		(39,002	)
Life insurance gains		-			(585	)		-
Gain on sales of premises and equipment		(1,055	)		(538	)		(793	)
Net Cash Provided by Operating Activities		80,516			48,086			6,385
Investing Activities	****	****	****	****	****	****	****	****	****
Proceeds from life insurance		-			1,169			-
Net Cash Provided by Investing Activities		-			1,169			-
Financing Activities	****	****	****	****	****	****	****	****	****
Exercise of stock options/issuance of shares		13,699			13,373			24,583
Retirement of common stock		(488	)		(524	)		(314	)
Dividends		(43,942	)		(42,635	)		(41,299	)
Net Cash Used in Financing Activities		(30,731	)		(29,786	)		(17,030	)
Net change in cash		49,785			19,469			(10,645	)
Cash at Beginning of Period		72,878			53,409			64,054
Cash at End of Period	$	122,663		$	72,878		$	53,409
Supplemental Cash Flow Disclosures:
Supplemental disclosure of cash flow activities:
Interest paid for the period	$	-		$	-		$	-
Income tax payments for the period		24,491			13,627			17,351

- 86-

Note 19 : Quarterly Financial Information ****

(Unaudited)

	For the Three Months Ended
	March 31,				June 30,					September 30,				December 31,
	(In thousands, except per share data and
	price range of common stock)
2019	****	****			****	****			****	****	****			****	****
Interest and loan fee income	$	39,483			$	39,626				$	39,695			$	39,878
Net interest income		38,989				39,139					39,240				39,427
Provision for loan losses		-				-					-				-
Noninterest income		11,579				12,288					11,809				11,732
Noninterest expense		25,183				25,561					24,033				24,209
Income before taxes		25,385				25,866					27,016				26,950
Net income		19,646				19,625					20,390				20,728
Basic earnings per common share		0.73				0.73					0.76				0.77
Diluted earnings per common share		0.73				0.73					0.75				0.77
Dividends paid per common share		0.40				0.41					0.41				0.41
Price range, common stock		56.82	-	64.48		59.51	-	64.82			59.26	-	64.56		60.65	-	68.58
2018	****	****			****	****			****	****	****			****	****
Interest and loan fee income	$	36,315			$	37,346				$	38,614			$	39,448
Net interest income		35,856				36,887					38,087				38,934
Provision for loan losses		-				-					-				-
Noninterest income		11,955				11,769					12,528				11,897
Noninterest expense		26,022				25,741					29,366				25,787
Income before taxes		21,789				22,915					21,249				25,044
Net income		17,506				18,010					16,993				19,055
Basic earnings per common share		0.66				0.68					0.64				0.71
Diluted earnings per common share		0.66				0.67					0.63				0.71
Dividends paid per common share		0.40				0.40					0.40				0.40
Price range, common stock		55.72	-	62.52		55.81	-	60.68			57.56	-	64.52		52.75	-	63.20
2017	****	****			****	****			****	****	****			****	****
Interest and loan fee income	$	34,128			$	34,083				$	34,623			$	35,478
Net interest income		33,648				33,607					34,150				35,007
(Reversal of) provision for loan losses		-				(1,900			)		-				-
Noninterest income		11,657				12,123					12,548				20,300
Noninterest expense		25,419				25,316					25,592				31,441
Income before taxes		19,886				22,314					21,106				23,866
Net income		15,049				15,799					15,017				4,160
Basic earnings per common share		0.58				0.60					0.57				0.16
Diluted earnings per common share		0.57				0.60					0.57				0.16
Dividends paid per common share		0.39				0.39					0.39				0.40
Price range, common stock		54.12	-	64.07		51.31	-	57.78			49.54	-	59.54		53.96	-	63.03

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- 87-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of

Westamerica Bancorporation

San Rafael, California

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

(Continued)

-88-

Definition and Limitations of Internal Control Over Financial Reporting

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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Unallocated Allowance / Qualitative Factors

As disclosed in Note 1 (Business and Accounting Policies) and Note 3 (Loans and Allowance for Credit Losses) to the financial statements, the Company’s total allowance for loan losses balance was $19,484,000 at December 31, 2019, which consists of specific reserves for individually evaluated impaired loans, general reserves for loans collectively evaluated for impairment, and an unallocated allowance based on additional qualitative factors. The allowance for loan losses is the estimated amount of probable incurred losses inherent in the loan portfolio at the balance sheet date. The Company has established an unallocated allowance, which totals $3,701,000 at December 31, 2019, to provide for probable incurred losses not readily allocable to any specific segment of the loan portfolio. The unallocated allowance addresses additional qualitative factors consistent with management’s analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company’s general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in past loan charge-off history (external factors). The external factors evaluated by the Company include: economic and business conditions, external competitive issues, and other factors. Also included in the unallocated allowance is the risk of losses that are attributable to general attributes of the Company’s loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company include: loan review system, adequacy of lending management and staff, loan policies and procedures, problem loan trends, concentrations of credit, and other factors.

We identified auditing the estimate of the unallocated allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment. Auditing management’s unallocated allowance involved especially subjective auditor judgment because management’s estimate involves significant and subjective assumptions relating to establishing qualitative factors, which require a high degree of judgment relating to the Company’s loan portfolio, operations, and external operating environment and how those items impact probable incurred losses inherent within the loan portfolio.

(Continued)

-89-

The primary procedures we performed to address this critical audit matter included:

●	Testing the effectiveness of controls over the evaluation of the qualitative factors used to estimate the unallocated allowance for loan losses, including controls addressing:
o	Management’s review controls over the completeness and accuracy of data used as the basis for the adjustments relating to qualitative factors.
---	---
o	Management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative factors and the resulting unallocated allowance for loan losses.
---	---
●	Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the unallocated allowance which included:
---	---
o	Evaluating the completeness and accuracy of data used as a basis for the adjustments relating to qualitative reserve factors by corroborating data obtained from external sources and reconciling and vouching internally generated data to system reports.
---	---
o	Evaluating that management’s assessment of the data used in the calculation of qualitative factors and the resulting reserves is supported by the data and is reasonable both in direction and magnitude.
---	---
o	Analytically evaluating the unallocated allowance for loan losses year over year and testing changes, or lack thereof, for reasonableness compared to credit quality and other relevant trends.
---	---

/s/ Crowe LLP

Crowe LLP

We have served as the Company's auditor since 2015.

Sacramento, California

February 27, 2020

-90-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company’s principal executive officer and 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, 2019.

Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2019 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 46 and 88, respectively.

ITEM 9B. OTHER INFORMATION

None.

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-91-

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information regarding Directors of the Registrant and compliance with Section 16(a) of the Exchange Act 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”, “Proposal 1 — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

Executive Officers

The executive officers of the Company 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.

Name of Executive	Position	Held<br> <br>Since
David L. Payne	Mr. Payne, born in 1955, is the Chairman of the Board, President and Chief Executive Officer of the Company. 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
Jesse Leavitt	Mr. Leavitt, born in 1985, is Senior Vice President and Chief Financial Officer of the Company. Mr. Leavitt joined Westamerica Bancorporation as Vice President and Controller in March 2019.	2020
John “Robert” Thorson	Mr. Thorson, born in 1960, is Senior Vice President and Treasury Division Manager of the Company. Mr. Thorson joined Westamerica Bancorporation in 1989, was Vice President and Manager of Human Resources from 1995 until 2001, Senior Vice President and Treasurer from 2002 until 2005, and Senior Vice President and Chief Financial Officer from 2005 until 2019.	2020
Russell W. Rizzardi	Mr. Rizzardi, born in 1955, is Senior Vice President and Chief Credit Administrator of Westamerica Bank. Mr. Rizzardi joined Westamerica Bank in 2007. He has been in the banking industry since 1979 and was previously with Wells Fargo Bank and U.S. Bank.	2008
Brian J. Donohoe	Mr. Donohoe, born in 1981, is Senior Vice President and Manager of the Operations & Systems Administration of Community Banker Services Corporation. Mr. Donohoe joined Westamerica Bancorporation in 1999 and has held a variety of positions in the Banking Division and the Operations & Systems Division, most recently, Vice President and Manager of Business Services until 2018.	2019

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.

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” in the Company’s Proxy Statement for its 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

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-92-

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 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

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, 2019:

	At December 31, 2019
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(In thousands, except exercise price)
	(a)		(b)		(c)
Equity compensation plans approved by security holders		561	$	59		1,327
Equity compensation plans not approved by security holders		-		N/A		-
Total		561	$	59		1,327

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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 “Certain Relationships and Related Party Transactions” in the Company’s Proxy Statement for its 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

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 “Proposal 3 – Ratification of Independent Auditor” in the Company’s Proxy Statement for its 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Exchange Act.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements:<br> <br><br> <br>See Index to Financial Statements on page 45. The consolidated 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:<br> <br><br> <br>The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this Report.

-93-

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/ JesseLeavitt

Jesse Leavitt

Senior Vice President

and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: February 27, 2020

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<br> <br>David L. Payne	Chairman of the Board and Directors<br> <br>President and Chief Executive Officer<br> <br>(Principal Executive Officer)	February 27, 2020
/s/ Jesse Leavitt<br> <br>Jesse Leavitt	Senior Vice President and Chief Financial Officer<br> <br>(Principal Financial and Accounting Officer)	February 27, 2020
/s/ Etta Allen<br> <br>Etta Allen	Director	February 27, 2020
/s/ Louis E. Bartolini<br> <br>Louis E. Bartolini	Director	February 27, 2020
/s/ E. Joseph Bowler<br> <br>E. Joseph Bowler	Director	February 27, 2020
/s/ Melanie Martella Chiesa<br> <br>Melanie Martella Chiesa	Director	February 27, 2020
/s/ Michele Hassid<br> <br>Michele Hassid	Director	February 27, 2020
/s/ Catherine C. MacMillan<br> <br>Catherine C. MacMillan	Director	February 27, 2020
/s/ Ronald A. Nelson<br> <br>Ronald A. Nelson	Director	February 27, 2020
/s/ Edward B. Sylvester<br> <br>Edward B. Sylvester	Lead Independent Director	February 27, 2020

-94-

EXHIBIT INDEX

Exhibit<br> <br>Number
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 3.2 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on March 26, 2018.
3(c)	Certificate of Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Westamerica Bancorporation dated February 10, 2009, incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 13, 2009.
4.1	Description of registered securities
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(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.
10(e)*	Description of Executive Cash Bonus Program incorporated by reference to Exhibit 10(e) to Exhibit 2.1 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 14, 2005.
10(f)*	Non-Qualified Annuity Performance Agreement with David L. Payne dated November 19, 1997 incorporated by reference to Exhibit 10(f) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.
10(g)*	Amended and Restated Westamerica Bancorporation Stock Option Plan of 1995 Nonstatutory Stock Option Agreement Form incorporated by reference to Exhibit 10(g) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.
10(h)*	Amended and Restated Westamerica Bancorporation Stock Option Plan of 1995 Restricted Performance Share Grant Agreement Form incorporated by reference to Exhibit 10(h) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.
10(i)*	Amended Westamerica Bancorporation and Subsidiaries Deferred Compensation Plan (As restated effective January 1, 2005) dated December 31, 2008 incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009.
10(j)*	Amended and Restated Westamerica Bancorporation Deferral Plan (Adopted October 26, 1995) dated December 31, 2008 incorporated by reference to Exhibit 10(j) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009.
10(k)*	Form of Restricted Performance Share Deferral Election pursuant to the Westamerica Bancorporation Deferral Plan incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 10, 2006.
10(l)	Purchase and Assumption Agreement by and between Federal Deposit Insurance Corporation and Westamerica Bank dated February 6, 2009, incorporated by reference to Exhibit 99.2 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 11, 2009.
10(s)*	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 13, 2012.
10(t)	Data Processing Agreement by and between Fidelity Information Services and Westamerica Bancorporation incorporated by reference to Exhibit 10(t) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on February 28, 2017.
10(u)*	Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan, incorporated by reference to Exhibit 4 to the Registrant’s Form S-8, filed with the Securities and Exchange Commission on September 27, 2019.

10(v)*	Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Stock Option Agreement Form, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q, filed with the Securities and Exchange Commission on November 4, 2019.
10(w)*	Westamerica Bancorporation 2019 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement Form, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q, filed with the Securities and Exchange Commission on November 4, 2019.
11.1	Statement re computation of per share earnings incorporated by reference to Note 17 of the notes to the consolidated financial statements of this Report.
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.
23.1	Consent of Crowe 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
101.INS	XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

____________

*	Indicates management contract or compensatory plan or arrangement.

The exhibits listed above are available through the SEC’s website (https://www.sec.gov). Alternatively, 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.

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ex_173691.htm

EXHIBIT 4.1

DESCRIPTION OF SECURITIES OF WESTAMERICA BANCORPORATION REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT

The authorized capital stock of Westamerica Bancorporation (the “Company”) consists of 150,000,000 shares of common stock, no par value per share; 1,000,000 shares of Class B Common Stock, no par value per share; and 1,000,000 undesignated shares of preferred stock, no par value per share.

Description of Common Stock

As of December 31, 2019, the Company had one class of securities registered under the Securities Exchange Act of 1934, as amended: common stock. The following description of the Company’s common stock is a summary and does not describe every right, term or condition of owning the common stock. The description is subject to and is qualified by reference to the Company’s articles of incorporation, the Company’s bylaws, and certain provisions of applicable law, including California law and certain federal laws governing bank holding companies.

Fully Paid and Nonassessable

All of the outstanding shares of common stock are fully-paid and non-assessable.

Voting Rights

The holders of common stock are entitled to one vote per share on all matters to be voted on by such holders; provided, however, that holders of common stock may have cumulative voting rights in the election of directors if the candidates’ names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder’s intention to cumulate votes.

Dividends

The holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s Board of Directors in its discretion from funds legally available therefor, subject to preferences that may be applicable to any outstanding preferred stock.

Right to Receive Liquidation Distributions

Upon liquidation, dissolution or winding-up, after payment of all debts and liabilities and after payment of the liquidation preferences of any shares of preferred stock then outstanding, the holders of common stock are entitled to receive pro rata all assets remaining available for distribution to holders of such shares.

No Preemptive or Similar Rights

Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to the common stock.

Anti-Takeover Provisions of the Articles of Incorporation and the Bylaws

Set forth below is a summary of the provisions of the Company’s articles of incorporation and bylaws that could have the effect of delaying or preventing a change in control of the Company. The following description is only a summary and it is qualified by reference to the articles of incorporation, the bylaws and applicable provisions of the California General Corporation Law.

Undesignated Stock

The Company’s articles of incorporation authorize the Company’s Board of Directors to issue preferred stock and Class B common stock in one more series. The Board of Directors may fix the number of shares of any series of preferred stock and Class B common stock and determine the rights, preferences, privileges and restrictions of any unissued series of preferred stock or Class B common stock. The issuance of such preferred stock or Class B common stock or rights to purchase such securities could delay or prevent a change of control of the Company. The Company’s Board of Directors could, for example, issue preferred stock or rights to purchase preferred stock in connection with implementing a shareholder rights plan that could impede the success of any attempt to change control of the Company. The Board of Directors could also issue preferred stock or Class B common stock with voting or conversion rights that could adversely affect the voting power of the holders of common stock. Furthermore, shares of preferred stock, if any are issued, may have other rights, including economic rights, senior to common stock, and, as a result, the issuance thereof could depress the market price of the common stock.

Advance Notice Requirements for Shareholder Proposals and Director Nominees

The Company’s bylaws provide that shareholders seeking to make nominations of candidates for election as directors or to bring other business before an annual meeting of shareholders, must provide timely notice of their intent in writing. To be timely, a shareholder’s notice must be delivered to the Company’s secretary not less than 45 days before the anniversary of the date on which the Company first mailed its proxy materials for the prior year’s annual meeting of shareholders; provided, however, that in the event the date for the current year’s annual meeting has changed more than 30 days from the date on which the prior year’s annual meeting was held, then notice must be received a reasonable time before the corporation mails its proxy materials for the current year. The bylaws also specify certain requirements as to the form and content of a shareholder’s notice. These provisions may restrict the ability of the Company’s shareholders to make nominations for directors at or to bring business before, a shareholder meeting.

Shareholder Approval Requirements for Transactions a Involving 10% Shareholder

The Company’s articles of incorporation require the affirmative vote of 80% of the outstanding shares of common stock to approve any of the following transactions between the Company and person or entity that beneficially owns 10% more of the Company’s outstanding shares of common stock (an “Interested Person”): (1) a merger or consolidation with an Interested Person; (2) the Company’s sale or other disposition of all or any substantial part of its assets to an Interested Person; (3) the Company’s purchase or other acquisition of all or any substantial part of the assets of an Interested Person; or (4) any other transaction with an Interested Person which requires the approval of the Company’s shareholders under the California Corporations Code. This provision does not apply, however, (a) to a transaction approved by the Company’s Board of Directors before the Interested Person became an Interested Person; or (b) if the Board of Directors approved the transaction after the time that the Interested Person became an Interested Person and both of the following conditions are fulfilled: (i) a majority of the directors at the time that the Interested Person became an Interested Person voted in favor of the transaction; and (ii) the cash or the fair market value of other consideration to be received by the Company’s shareholders, as valued by the Board of Directors as of the date of its approval, is not less per share than the highest price per share (including brokerage commissions and/or soliciting dealers' fees) paid by the Interested Person for any shares of the same class of stock in the Company from the time that the Interested Person beneficially owned in excess of 5% percent of the Company’s common stock.

Listing

The Company’s common stock is listed on the Nasdaq Global Select Market under the trading symbol “WABC.”

ex_173692.htm

EXHIBIT 21

WESTAMERICA BANCORPORATION

Subsidiaries as of December 31, 2019

	State of<br><br> <br>Incorporation
Westamerica Bank	California
Westamerica Mortgage Company — a subsidiary of Westamerica Bank	California
Community Banker Services Corporation — a subsidiary of Westamerica Bank	California
Weststar Mortgage Corporation — a subsidiary of Community Banker Services Corporation	California
Money Outlet, Inc.	California
Westamerica Commercial Credit, Inc.	California

ex_173693.htm

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-105537, 333-107329, 333-182433, and 333-233971 on Form S-8 of Westamerica Bancorporation of our report dated February 27, 2020 relating to the consolidated financial statements and effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K.

/s/ Crowe LLP

Crowe LLP

Sacramento, California

February 27, 2020

ex_173694.htm

EXHIBIT 31.1

CERTIFICATION UNDER

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, David L. Payne, certify that:

1. I have reviewed this report on Form 10-K of Westamerica Bancorporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ David L. Payne

David L. Payne

Chairman, President and Chief Executive Officer

Dated: February 27, 2020

ex_173695.htm

EXHIBIT 31.2

CERTIFICATION UNDER

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Jesse Leavitt, certify that:

1. I have reviewed this report on Form 10-K of Westamerica Bancorporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Jesse Leavitt

Jesse Leavitt

Senior Vice President and Chief Financial Officer

Dated: February 27, 2020

ex_173696.htm

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Westamerica Bancorporation (the “Company”) on Form 10-K for the period ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David L. Payne, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David L. Payne

David L. Payne

Chairman, President and Chief Executive Officer

Dated: February 27, 2020

ex_173697.htm

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Westamerica Bancorporation (the “Company”) on Form 10-K for the period ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jesse Leavitt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jesse Leavitt

Jesse Leavitt

Senior Vice President and Chief Financial Officer

Dated: February 27, 2020