This Annual Report on Form 10-K contains forward-looking statements about Westamerica Bancorporation for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) a slowdown in the national and California economies; (2) economic uncertainty created by terrorist threats and attacks on the United States and the actions taken in response; (3) the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; (4) changes in the interest rate environment; (5) changes in the regulatory environment; (6) ~~significantly~~ increasing competitive pressure in the banking ~~industry ;~~industry; (7) operational risks including data processing system failures or fraud; (8) the effect of acquisitions and integration of acquired businesses; (9) volatility of rate sensitive deposits; (10) asset/liability matching risks and liquidity risks; and (11) changes in the securities markets. See also “Certain Additional Business Risks” in Item 1. and other risk factors discussed elsewhere in this Report.

WESTAMERICA BANCORPORATION (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC”)~~, as amended.~~. Its legal headquarters are located at 1108 Fifth Avenue, San Rafael, California 94901. Principal administrative offices are located at 4550 Mangels Boulevard in Fairfield, California 94534 and its telephone number is (707) ~~863-8000.~~863-6000. The Company provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary bank, Westamerica Bank (“WAB” or the “Bank”). The principal communities served are ~~located in Northern and Central California, from Mendocino, Lake, Colusa 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 Company also owns 100% of the capital stock of Community Banker Services Corporation, a company engaged in providing the Company and its subsidiaries data processing services and other support functions.

The Company was incorporated under the laws of the State of California in 1972 as “Independent Bankshares Corporation” pursuant to a plan of reorganization among three previously unaffiliated Northern California banks. The Company operated as a multi-bank holding company until mid-1983, at which time the then six subsidiary banks were merged into a single bank named Westamerica Bank and the name of the holding company was changed to Westamerica Bancorporation.

The Company acquired five additional banks within its immediate market area during the early to mid 1990’s. In April, 1997, the Company acquired ValliCorp Holdings, Inc., parent company of ValliWide Bank, the largest independent bank holding company headquartered in Central California. Under the terms of all of the merger agreements, the Company issued shares of its common stock in exchange for all of the outstanding shares of the acquired institutions. The subsidiary banks acquired were merged with and into WAB. These business combinations were accounted for as poolings-of-interests.

In August, 2000, the Company acquired First Counties Bank. The acquisition was valued at approximately $19.7 million and was accounted for using the purchase accounting method. The assets and liabilities of First Counties Bank were fully merged into WAB in September 2000. First Counties Bank had $91 million in assets and offices in Lake, Napa, and Colusa counties.

In June of 2002 the Company acquired Kerman State Bank. The acquisition was valued at approximately $14.6 million and was accounted for using the purchase accounting method. The assets and liabilities of Kerman State Bank were fully merged into WAB immediately upon consummation of the merger. Kerman State Bank had $95 million in assets and three offices in Fresno county.

On March 1, 2005, the Company acquired Santa Rosa based Redwood Empire Bancorp, the parent company of National Bank of the Redwoods (NBR). Based on the Company’s closing stock price on March 1, 2005, the cash and stock consideration, including the value of converted stock options and certain transaction costs, paid in the acquisition was valued at approximately $153 million. As of December 31, 2004, Redwood Empire had $511 million in assets and National Bank of the Redwoods had $436 million in loans and $391 million in deposits at seven banking offices located in Sonoma (5), Lake (1) and Mendocino (1) counties.

As of the close of business on March 11, 2005, NBR was merged with and into Westamerica Bank. Three former NBR branches were consolidated into existing nearby Westamerica Bank branches and a fourth is expected to be consolidated during the second quarter of 2005. Westamerica has entered into an agreement to sell the former NBR branch in Lake County. This transaction is expected to be consummated during the summer of 2005. Two other branches located in Sonoma County will continue as Westamerica branches.

At December 31, ~~2003,~~2004, the Company had consolidated assets of approximately ~~$4.6~~$4.7 billion, deposits of approximately ~~$3.5~~$3.6 billion and shareholders’ equity of approximately ~~$340.4~~$358.6 million. The Company and its subsidiaries employed ~~1,003~~957 full-time equivalent staff.

The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as beneficial ownership reports on Forms 3, 4 and 5 as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) through its website (http://www.westamerica.com). Such documents are also available through the SEC’s website (http://www.sec.gov). Requests for the Form 10-K annual report, as well as the Company’s employee Code of Conduct and Ethics, can also be submitted to:

The Company’s business, financial condition and operating results can be impacted by a number of factors including, but not limited to, those set forth below, any one of which could cause the Company’s actual results to vary materially from recent results or from the Company’s anticipated future results.

A portion of the loan portfolio of the Company is dependent on real estate. At December 31, ~~2003,~~2004, real estate served as the principal source of collateral with respect to approximately ~~51%~~50% of the Company’s loan portfolio. A worsening of current economic conditions, increased economic uncertainty created by concerns regarding terrorist attacks and geo-political risks, or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available for sale securities portfolio, as well as the Company’s financial condition and results of operations in general and the market value of the Company’s common stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company’s financial condition and results of operations.

The earnings and growth of the Company are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. Such policies influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Company cannot be predicted. Additionally, state and federal tax policies can impact banking organizations.

As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company.

The Company is also subject to certain operations risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls and procedures to mitigate against such occurrences and maintains insurance coverage for certain of such risks, but should such an event occur that is not prevented or detected by the Company’s internal controls, is not insured or is in excess of applicable insurance limits, it could have an adverse impact on the Company’s business, financial condition or results of operations.

Shares of Company common stock eligible for future sale could have a dilutive effect on the market for Company common stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 150 million shares of common stock (and two additional classes of 1 million shares each, denominated “Class B Common Stock” and “Preferred Stock”, respectively) of which approximately ~~32.3~~31.6 million were outstanding at December 31, ~~2003.~~2004. Pursuant to its stock option plans, at December 31, ~~2003,~~2004, the Company had exercisable options outstanding of ~~1.90~~2.0 million. As of December 31, ~~2003, 7.6~~

The following is not intended to be an exhaustive description of the statutes and regulations applicable to the Company’s or the Bank’s business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions. Moreover, major new legislation and other regulatory changes affecting the Company, the Bank, banking, and the financial services industry in general have occurred in the last several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted.

3

The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company reports to, is registered with, and may be examined by, the Board of Governors of the Federal Reserve System (“FRB”). The FRB also has the authority to examine the Company’s subsidiaries. The costs of any examination by the FRB are payable by the Company. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and the Bank are subject to examination by, and may be required to file reports with, the California Commissioner of Financial Institutions (the “Commissioner”).

The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See “Capital Standards.” The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. ~~See “Prompt Corrective Action and Other Enforcement Mechanisms.”~~ 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 ~~the~~any class of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. However, a bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be closely related to banking or managing or controlling banks. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity.

The FRB generally prohibits a bank holding company from declaring or paying a cash dividend that would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements which might adversely affect a bank holding company’s financial position. Under the FRB policy, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. See the section entitled “Restrictions on Dividends and Other Distributions” for additional restrictions on the ability of the Company and the Bank to pay dividends.

Transactions between the Company and the Bank are restricted under Regulation W, which became effective on April 1, 2003. The regulation codifies prior interpretations of the FRB and its staff under Sections 23A and 23B of the Federal ~~reserve~~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.

On March 11, 2000, the Gramm-Leach-Bliley Act (the “GLBA”), or the Financial Services Act of 1999 became effective. The GLBA repealed provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses.

4

Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated.

The BHCA was also amended by the GLBA to allow new “financial holding companies” (“FHCs”) to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLBA amended section 4 of the BHCA in order to provide for a framework for the engagement in new financial activities. A bank holding company (“BHC”) may elect to become a FHC if all its subsidiary depository institutions are well capitalized and well managed. If these requirements are met, a BHC may file a certification to that effect with the FRB and declare that it elects to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or though an acquisition in any activity that has been determined by the FRB to be financial in nature or incidental to such financial activity. BHCs may engage in financial activities without prior notice to the FRB if those activities qualify under the new list of permissible activities in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after a FHC has commenced one or more of the financial activities. The Company has not elected to become a FHC.

Under the GLBA, Federal Reserve member banks, subject to various requirements, as well as national banks, are permitted to engage through “financial subsidiaries” in certain financial activities permissible for affiliates of FHCs. However, to be able to engage in such activities the Bank must also be well capitalized and well managed and have received at least a “satisfactory” rating in its most recent CRA examination. The Company cannot be certain of the effect of the foregoing recently enacted legislation on its business, although there is likely to be consolidation among financial services institutions and increased competition for the Company.


	*Regulation and Supervision of Banks*

The Bank is a California state-chartered bank, is insured by the Federal Deposit Insurance Corporation (the “FDIC”) and is a member bank of the Federal Reserve System. As such, the Bank is subject to regulation, supervision and regular examination by the California Department of Financial Institutions (“DFI”) and the FRB. As a member bank of the Federal Reserve System, the Bank’s primary federal regulator is the FRB. The regulations of these agencies affect most aspects of the Bank’s business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of its activities and various other requirements.

In addition to federal banking law, the Bank is also subject to applicable provisions of California law. Under California law, the Bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital requirements, deposits and borrowings, stockholder rights and duties, and investment and lending activities.

California law permits a state chartered bank to invest in the stock and securities of other corporations, subject to a state-chartered bank receiving either general authorization or, depending on the amount of the proposed investment, specific authorization from the Commissioner. However, because the Bank is a member of the Federal Reserve System, its investment authority is limited by regulations promulgated by the FRB. In addition, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes limitations on

5

the activities and equity investments of state chartered, federally insured banks. FDICIA also prohibits a state bank from making an investment or engaging in any activity as a principal that is not permissible for a national bank, unless the Bank is adequately capitalized and the FDIC approves the investment or activity after determining that such investment or activity does not pose a significant risk to the deposit insurance fund.


	*Capital Standards*

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk

5

adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items.

The federal banking agencies take into consideration concentrations of credit risk and risks from nontraditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. The federal banking agencies also consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off balance sheet position) in evaluation of a bank’s capital adequacy.

As of December 31, ~~2003,~~2004, the Company’s and the Bank’s respective ratios exceeded applicable regulatory requirements. See Note 8 to the consolidated financial statements for capital ratios of the Company and the Bank, compared to the standards for well capitalized depository institutions and for minimum capital requirements.


	*Prompt Corrective Action and Other Enforcement Mechanisms*

FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios.

An institution that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.


	*Safety and Soundness Standards*

FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or

6

effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.

Federal banking agencies require banks to maintain adequate valuation allowances for potential credit losses. The Company has an internal staff that continually reviews loan quality and ultimately reports to the Board of Directors. This analysis includes a detailed review of the classification and categorization of problem loans, assessment of the overall quality and collectibility of the loan portfolio, consideration of loan loss experience, trends in problem loans, concentration of credit risk, and current economic conditions, particularly in the Bank’s market areas. Based on this analysis, management, with the review and approval of the Board, determines the adequate level of allowance required. The allowance is allocated to different segments of the loan portfolio, but the entire allowance is available for the loan portfolio in its entirety.

6


	*Restrictions on Dividends and Other Distributions*

The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.

In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank’s net income for its last three fiscal years (less any distributions to shareholders during this period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner in an amount not exceeding the greatest of the bank’s retained earnings, the bank’s net income for its last fiscal year or the bank’s net income for its current fiscal year.

The federal banking agencies also have the authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute.


	*Premiums for Deposit Insurance and Assessments for Examinations*

The Bank’s deposits are insured by the Bank Insurance Fund (BIF) administered by the FDIC. FDICIA established several mechanisms to increase funds to protect deposits insured by the BIF administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions which are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of insurance premiums will be.


	*Community Reinvestment Act and Fair Lending Developments*

The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.

7


	*Financial Privacy Legislation*

The GLBA, in addition to the previously described changes in permissible nonbanking activities permitted to banks, BHCs and FHCs, also required the federal banking agencies, among other federal regulatory agencies, to adopt regulations governing the privacy of consumer financial information. The FRB adopted such regulations with an effective date of November 13, 2000, and a date of full compliance with the regulations on July 1, 2001. The Bank is subject to the ~~FRB,s~~FRB’s regulations.


	*~~U.S. Patriot Act~~Customer Information Security*

The federal bank regulatory agencies have established standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.


	*U.S.A. PATRIOT Act*

On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 or the “USA Patriot Act.” Title III of the Act is the International Money Laundering Abatement and Anti-Terrorist Financing Act of

7

2001. It includes numerous provisions for fighting international money laundering and blocking terrorist access to the U.S. financial system. The goal of Title III is to prevent the U.S. financial system and the U.S. clearing mechanisms from being used by parties suspected of terrorism, terrorist financing and money laundering.

The provisions of Title III of the USA Patriot Act which affect banking organizations, including the Bank, are generally set forth as amendments to the Bank Secrecy Act. These provisions relate principally to U.S. banking organizations’ relationships with foreign banks and with persons who are resident outside the United States. The USA Patriot Act does not immediately impose any new filing or reporting obligations for banking organizations, but does require certain additional due diligence and recordkeeping practices. Some requirements take effect without the issuance of regulations. Other provisions were implemented through regulations promulgated by the U.S. Department of the Treasury, in consultation with the FRB and other federal financial institutions regulators.


	*Sarbanes-Oxley Act of 2002*

On July 30, 2002, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). The stated goals of Sarbanes-Oxley are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. Sarbanes-Oxley generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports under the Securities Exchange Act of 1934 (the “Exchange Act”).

Sarbanes-Oxley includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues. Sarbanes-Oxley represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees and public company shareholders.

Sarbanes-Oxley addresses, among other matters: (i) independent audit committees for reporting companies whose securities are listed on national exchanges or automated quotation systems (the “Exchanges”) and expanded duties and responsibilities for audit committees; (ii) certification of financial statements by the chief executive officer and the chief financial officer; (iii) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers

8

in the twelve month period following initial publication of any financial statements that later require restatement; (iv) a prohibition on insider trading during pension plan black out periods; (v) disclosure of off-balance sheet transactions; (vi) a prohibition on personal loans to directors and officers under most circumstances; (vii) expedited electronic filing requirements related to trading by insiders in an issuer’s securities on Form 4; (viii) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (ix) accelerated filing of periodic reports; (x) the formation of the Public Company Accounting Oversight Board (“PCAOB”) to oversee public accounting firms and the audit of public companies that are subject to the securities laws; (xi) auditor independence; (xii) internal control evaluation and reporting; and (xiii) various increased criminal penalties for violations of securities laws.

Given the extensive role of the SEC, the PCAOB and the Exchanges in implementing rules relating to Sarbanes-Oxley’s new requirements, the federalization of certain elements traditionally within the sphere of state corporate law, the impact of Sarbanes-Oxley on reporting companies have been and will continue to be significant. Many of the new rules promulgated by the SEC, PCAOB and Exchanges became final during 2003 and will be implemented during 2004. As a result, it is impossible to predict with any precision how these new rules, regulations and changes in corporate law and governance will finally impact public companies including the Company.


	*Pending Legislation*

~~Certain pending~~

Changes to state laws and regulations (including changes in interpretation or enforcement) can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals include bills to permit banks to pay interest on business checking accounts, to cap consumer liability for stolen debit cards, to end certain predatory lending practices, to allow the payment of interest on reserves that financial institutions must keep with FRBare introduced. These proposals, if codified, may change banking statutes and ~~to give judges the~~

8

~~authority to force high-income borrowers to repay their debts rather than cancel them through bankruptcy. A proposal to merge the FDIC’s two funds, the BIF~~regulations and the ~~Savings Association Insurance Fund, has also been discussed.~~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 ~~effect of such pending legislation on the business of the~~ Company cannot be accurately ~~predicted at this time.~~predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon our financial condition or results of operations. It is likely, however, that the current high level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase.

Competition

In the past, WAB’s principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and certain retail establishments have offered investment vehicles which also compete with banks for deposit business. Federal legislation in recent years has encouraged competition between different types of financial institutions and fostered new entrants into the financial services market, and it is anticipated that this trend will continue.

The enactment of the Interstate Banking and Branching Act in 1994 and the California Interstate Banking and Branching Act of 1995 have increased competition within California. Regulatory reform, as well as other changes in federal and California law will also affect competition. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive.

Legislative changes, as well as technological and economic factors, can be expected to have an ongoing impact on competitive conditions within the financial services industry. As an active participant in the financial markets, the Company believes that it continually adapts to these changing competitive conditions.

According to information obtained through an independent market research firm, WAB was the eighth largest commercial banking company headquartered in California in terms of total assets in the third quarter of 2003. In the individual markets in which it has branch offices, WAB was the third largest financial institution. The share of individual markets within the overall market varies, with the most dominant continuing to be in the San Rafael area of Marin County where WAB ranked first in core deposits among federally-insured depository institutions.


Item 2.	Properties

Branch Offices and Facilities


	*~~Branch Offices and Facilities~~*

WAB is engaged in the banking business through 8887 offices in 22 counties in Northern and Central California including thirteen offices in Fresno County, ~~twelve~~eleven in Marin County, nine in Sonoma County, seven in Napa County, six ~~each~~ in Kern ~~and Stanislaus Counties,~~County, five each in Stanislaus, Lake, Contra Costa and Solano Counties, three each in Alameda and Sacramento Counties, two each in Mendocino, Nevada, Placer and Tulare Counties, and one each in Colusa, Merced, San Francisco, Tuolumne, Kings, Madera, and Yolo Counties. WAB believes all of its offices are constructed and equipped to meet prescribed security requirements.

9

The Company owns 3029 branch office locations and one administrative facility and leases 6866 facilities. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance.


Item 3.	Legal Proceedings

Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, except ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, financial position or results of operations.

9


Item 4.	Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of the shareholders during the fourth quarter of ~~2003.~~

2004.

~~PART II~~

PART II


Item 5.	Market for Registrant’s Common Equity and Related Stockholders Matters and Issuer Purchases of Equity Securities

The Company’s common stock is traded on the NASDAQ National Market System (“NASDAQ”) under the symbol “WABC”. The following table shows the high and the low bid prices for the common stock, for each quarter, as reported by NASDAQ:


							High		Low

2004:						2004:
						First quarter	$	51.63	$	47.85
						Second quarter		52.99		47.58
		High		Low		Third quarter		55.80		49.04
						Fourth quarter		61.05		54.43
2003:	2003:					2003:
	First quarter	$	41.94	$	38.07	First quarter	$	41.94	$	38.07
	Second quarter	$	44.66	$	39.24	Second quarter		44.66		39.24
	Third quarter	$	42.67	$	45.76	Third quarter		42.67		45.76
	Fourth quarter	$	53.55	$	44.45	Fourth quarter		53.55		44.45
2002:
	First quarter	$	42.95	$	35.22
	Second quarter	$	45.27	$	38.70
	Third quarter	$	42.65	$	34.11
	Fourth quarter	$	43.59	$	35.46

As of February 28, ~~2004,~~2005, there were approximately ~~8,900~~8,600 shareholders of record of the Company’s common stock.

The Company has paid cash dividends on its common stock in every quarter since its formation in 1972, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries as well as policies of the Federal Reserve Board pursuant to the BHCA. See Item 1, “Business, Supervision and Regulation”. As of December 31, ~~2003, $174.2~~2004, $179.1 million was available for payment of dividends by the Company to its shareholders, under applicable laws and regulations.

See Note 17 to the consolidated financial statements included in this report for additional information regarding the amount of cash dividends declared and paid on common stock for the three most recent fiscal years.

As discussed in Note 7 to the consolidated financial statements, in December 1986, the Company declared a dividend distribution of one common share purchase right (the “Right”) for each outstanding share of common stock. The terms of the Rights were most recently amended and restated ~~on October 28, 1999 and became effective on November 19, 1999.~~in 2004. The new amended plan is very similar in purpose and effect to the plan as it existed prior to this amendment, aimed at helping the Board of Directors to maximize shareholder value in the event of a change of control of the Company and otherwise resist actions that the Board considers likely to injure the Company or its shareholders. In addition to extending the maturity date of the plan to December 31, 2004, the other material changes included: (1) an increase in the exercise price to $75.00 per share; (2) a decrease in the redemption price of each Right to $.001; and (3) a reduction in the amount of securities required to be acquired for a person or entity to become an Acquiring Person, thus triggering the Rights, from 15% to 10%.

10

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes the status of the Company’s equity compensation plans as of December 31, 2004 (in thousands, except exercise price):

(a)

(b)

(c)

Number of Securities

Remaining Available for

Number of Securities

Future Issuance under

to be Issued upon

Weighted-Average

Equity Compensation

Exercise of

Exercise Price of

Plans (Excluding

Outstanding Options,

Securities Reflected in

Plan Category

Warrants and Rights

Column (a))

Equity compensation plans approved by security holders

3,058

$

36

1,745*

Equity compensation plans not approved by security holders

0

N/A

0

Total

3,058

$

36

1,745

~~Item 5(d).~~*

~~Equity Compensation~~The Amended and Restated Stock Option Plan, ~~Information~~Article III, provides that the number of shares reserved for Awards under the plan may increase on the first day of each fiscal year by an amount equal to the least of 1) 2% of the shares outstanding as of the last day of the prior fiscal year, 2) 675,000 shares, or 3) such lesser amount as determined by the Board.

Issuer Purchases of Equity Securities

The ~~information required by this Item 5 of this Annual Report on Form 10-K from Regulation S-K, Item 201(d), is incorporated by reference from~~table below sets forth the information ~~contained~~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 caption “Early Compensation Plan Information” on pages 16 and 17 of the Company’s definitive Proxy Statement for its 2003 Annual Meeting of Shareholders which was filed pursuant to Regulation 14A of the Securities Exchange Act of ~~1934.~~1934), of common stock during the quarter ended December 31, 2004 (in thousands, except per share data).

(a)

(b)

(c)

(d)

Total Number of

Total

Shares Purchased

Maximum Number of

Number of

Average Price

as Part of Publicly

Shares that May Yet

Shares

Paid per

Announced Plans

Be Purchased Under

Period

Purchased

Share

or Programs*

the Plans or Programs

October 1 through October 31

2

55.55

2

1,996

November 1 through November 30

108

59.77

108

1,888

December 1 through December 31

132

58.02

132

1,756

Total

242

58.80

242

1,756

*

Includes 2 thousand, 5 thousand and 1 thousand shares purchased in October, November and December, respectively, by the Company in private transactions with the independent administrator of the Company’s Tax Deferred Savings/ Retirement Plan (ESOP). The Company includes the shares purchased in such transactions within the total number of shares authorized for purchase pursuant to the currently existing publicly announced program.

The Company repurchases shares of its common stock in the open market to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares to meet stock performance, option plans, and other ongoing requirements.

Shares were repurchased during the fourth quarter of 2004 pursuant to a program approved by the Board of Directors on August 27, 2004 authorizing the purchase of up to 2 million shares of the Company’s common stock from time to time prior to September 1, 2005. The new 2004 approved amount included 645,429 remaining shares available to be repurchased under the 2003 plan.

11


Item 6.	Selected Financial Data

The following financial information for the five years ended December 31, ~~2003~~2004 has been derived from the Company’s Consolidated Financial Statements. This information should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere herein.

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY



		Year Ended December 31,
																		Year Ended December 31
		2003			2002			2001			2000			1999
																		2004			2003			2002			2001			2000

		(In thousands, except per share data)																(In thousands, except per share data)
Interest income	Interest income	$	223,493		$	237,633		$	257,056		$	269,516		$	257,656		Interest income	$	216,337		$	223,493		$	237,633		$	257,056		$	269,516
Interest expense	Interest expense		27,197			39,182			68,887			88,614			78,456		Interest expense		21,106			27,197			39,182			68,887			88,614

Net interest income	Net interest income		196,296			198,451			188,169			180,902			179,200		Net interest income		195,231			196,296			198,451			188,169			180,902
Provision for loan losses	Provision for loan losses		3,300			3,600			3,600			3,675			4,780		Provision for loan losses		2,700			3,300			3,600			3,600			3,675
Noninterest income:	Noninterest income:																Noninterest income:
	Securities gains (impairment)		2,443			(4,278	)		0			0			0		Securities (impairment) gains, net		(5,011	)		2,443			(4,278	)		0			0
	Loss on extinguishment of debt		(2,166	)		0			0			0			0		Loss on extinguishment of debt		(2,204	)		(2,166	)		0			0			0
	Deposit services charges and other		42,639			40,829			42,655			41,130			40,174		Deposit service charges and other		45,798			42,639			40,829			42,655			41,130
Total noninterest income	Total noninterest income		42,916			36,551			42,655			41,130			40,174		Total noninterest income		38,583			42,916			36,551			42,655			41,130
Noninterest expense	Noninterest expense		101,703			103,323			102,651			100,198			100,133		Noninterest expense		98,751			101,703			103,323			102,651			100,198

Income before income taxes	Income before income taxes		134,209			128,079			124,573			118,159			114,461		Income before income taxes		132,363			134,209			128,079			124,573			118,159
Provision for income taxes	Provision for income taxes		39,146			40,941			40,294			38,380			38,373		Provision for income taxes		37,145			39,146			40,941			40,294			38,380

Net income	Net income	$	95,063		$	87,138		$	84,279		$	79,779		$	76,088		Net income	$	95,218		$	95,063		$	87,138		$	84,279		$	79,779

Earnings per share:	Earnings per share:																Earnings per share:
	Basic	$	2.89		$	2.59		$	2.39		$	2.19		$	1.97		Basic	$	2.99		$	2.89		$	2.59		$	2.39		$	2.19
	Diluted		2.85			2.55			2.36			2.16			1.94		Diluted		2.93			2.85			2.55			2.36			2.16
Per share:	Per share:																Per share:
	Dividends paid	$	1.00		$	0.90		$	0.82		$	0.74		$	0.66		Dividends paid	$	1.10		$	1.00		$	0.90		$	0.82		$	0.74
	Book value at December 31		10.54			10.22			9.19			9.32			8.10		Book value at December 31		11.33			10.54			10.22			9.19			9.32
Average common shares outstanding	Average common shares outstanding		32,849			33,686			35,213			36,410			38,588		Average common shares outstanding		31,821			32,849			33,686			35,213			36,410
Average diluted common shares outstanding	Average diluted common shares outstanding		33,369			34,225			35,748			36,936			39,194		Average diluted common shares outstanding		32,461			33,369			34,225			35,748			36,936
Shares outstanding at December 31	Shares outstanding at December 31		32,287			33,411			34,220			36,251			37,125		Shares outstanding at December 31		31,640			32,287			33,411			34,220			36,251
At December 31	At December 31																At December 31
Loans, net	Loans, net	$	2,269,420		$	2,440,411		$	2,432,371		$	2,429,880		$	2,269,272		Loans, net	$	2,246,078		$	2,269,420		$	2,440,411		$	2,432,371		$	2,429,880
Investments	Investments		1,949,288			1,386,833			1,158,139			1,149,310			1,219,491		Investments		2,192,542			1,949,288			1,386,833			1,158,139			1,149,310
Total assets	Total assets		4,576,385			4,224,867			3,927,967			4,031,381			3,893,187		Total assets		4,737,268			4,576,385			4,224,867			3,927,967			4,031,381
Total deposits	Total deposits		3,463,991			3,294,065			3,234,635			3,236,744			3,065,344		Total deposits		3,583,619			3,463,991			3,294,065			3,234,635			3,236,744
Short-term borrowed funds	Short-term borrowed funds		590,646			349,736			271,911			386,942			462,345		Short-term borrowed funds		735,423			590,646			349,736			271,911			386,942
Federal Home Loan Bank advances	Federal Home Loan Bank advances		105,000			170,000			40,000			0			0		Federal Home Loan Bank advances		0			105,000			170,000			40,000			0
Debt financing and notes payable	Debt financing and notes payable		24,643			24,607			27,821			31,036			41,500		Debt financing and notes payable		21,429			24,643			24,607			27,821			31,036
Intangible assets	Intangible assets		22,433			23,176			19,013			20,376			10,200		Intangible assets		21,890			22,433			23,176			19,013			20,376
Shareholders’ equity	Shareholders’ equity		340,371			341,499			314,359			337,747			300,592		Shareholders’ equity		358,609			340,371			341,499			314,359			337,747
Financial Ratios:	Financial Ratios:																Financial Ratios:
For the year:	For the year:																For the year:
	Return on assets		2.19	%		2.17	%		2.18	%		2.06	%		1.99	%	Return on assets		2.10	%		2.19	%		2.17	%		2.18	%		2.06	%
	Return on equity		29.38	%		28.70	%		27.17	%		25.78	%		23.31	%	Return on equity		28.83	%		29.38	%		28.70	%		27.17	%		25.78	%
	Net interest margin*		5.39	%		5.76	%		5.71	%		5.48	%		5.46	%	Net interest margin*		5.14	%		5.39	%		5.76	%		5.71	%		5.48	%
	Net loan losses to average loans		0.15	%		0.14	%		0.15	%		0.17	%		0.20	%	Net loan losses to average loans		0.11	%		0.15	%		0.14	%		0.15	%		0.17	%
	Efficiency ratio*		39.07	%		40.96	%		41.67	%		42.45	%		43.19	%	Efficiency ratio*		38.49	%		39.07	%		40.96	%		41.67	%		42.45	%
At December 31:	At December 31:																At December 31:
	Equity to assets		7.44	%		8.08	%		8.00	%		8.38	%		7.72	%	Equity to assets		7.57	%		7.44	%		8.08	%		8.00	%		8.38	%
	Total capital to risk-adjusted assets		11.39	%		10.97	%		10.63	%		11.61	%		11.75	%	Total capital to risk-adjusted assets		12.46	%		11.39	%		10.97	%		10.63	%		11.61	%
	Allowance for loan losses to loans		2.32	%		2.17	%		2.10	%		2.11	%		2.22	%	Allowance for loan losses to loans		2.35	%		2.32	%		2.17	%		2.10	%		2.11	%


*	Fully taxable equivalent

12


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 4042 through ~~68,~~74, as well as with the other information presented throughout the ~~report.~~

Report.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the banking industry. Application of these principles requires management to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. ~~Approximately one-half of the~~The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the Allowance for Loan Losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The Allowance for Loan Losses represents management’s estimate of the amount of ~~inherent losses~~loss in the loan portfolio that can be reasonably estimated as of the balance sheet date. Determining the amount of the Allowance for Loan Losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, uncertainties and conditions, all of which may be susceptible to significant change. A discussion of the factors driving changes in the amount of the Allowance for Loan losses is included in the “Credit Quality” discussion below.

OVERVIEW OF FINANCIAL RESULTS

Acquisition

On August 25, 2004, the Company signed a definitive agreement to acquire Redwood Empire Bancorp, parent company of National Bank of the Redwoods. On January 26, 2005, the Federal Reserve System (“FRB”) approved the Company’s merger application subject to a divestiture of approximately $43 million in

13

deposits in Lake County. The acquisition was completed on March 1, 2005. After adjusting for the divestiture the transaction was valued at approximately $153 million, including approximately $57 million paid in cash and issuance of the Company’s common stock valued at approximately $85 million, conversion of Redwood Empire stock options into Company stock options with a fair value of about $6 million and certain transaction related costs. During the second half of 2004, the Company reduced the allocation of its operating cash flow toward the repurchase and retirement of its common stock in order to meet the cash payment for the transaction. Further information related to the acquisition, including unaudited pro forma combined financial data, can be found in the Company’s Registration Statement on Form S-4 that was filed with the Securities and Exchange Commission on October 15, 2004.

Net Income

In the fourth quarter of 2004, the Company recognized a $7.2 million securities impairment writedown to market value of Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock held in the available for sale investment portfolio. The writedown was recorded as a reduction in noninterest income. The after-tax effect was $4.2 million, net of tax benefits of $3.0 million. The decision to record the charge was made because an analysis by management indicated that current market declines in the value of this preferred stock would not recover within a conservative definition of a reasonable period of time. At December 31, 2004, the Company held FNMA and FHLMC preferred stock with an adjusted book value of $63.9 million and a tax-equivalent dividend yield of 7.65%.

The Company reported net income of ~~$95.1~~$95.2 million in ~~2003,~~2004, reflecting a $4.2 million after-tax writedown in the value of FNMA and FHLMC preferred stock, representing a ~~9.1%~~0.2% increase from the ~~$87.1~~$95.1 million earned in ~~2002,~~2003, which was ~~3.4%~~up 9.1% over ~~2001~~2002 earnings of ~~$84.3~~$87.1 million.


	Components of Net Income



		Year Ended December 31,
												Year ended December 31,
		2003			2002			2001
												2004			2003			2002

		(In thousands)										(In thousands)
Net interest and fee income*	Net interest and fee income*	$	217,407		$	215,708		$	203,687		Net interest and fee income*	$	217,993		$	217,407		$	215,708
Provision for loan losses	Provision for loan losses		(3,300	)		(3,600	)		(3,600	)	Provision for loan losses		(2,700	)		(3,300	)		(3,600	)
Noninterest income	Noninterest income		42,916			36,551			42,655		Noninterest income		38,583			42,916			36,551
Noninterest expense	Noninterest expense		(101,703	)		(103,323	)		(102,651	)	Noninterest expense		(98,751	)		(101,703	)		(103,323	)
Taxes*	Taxes*		(60,257	)		(58,198	)		(55,812	)	Taxes*		(59,907	)		(60,257	)		(58,198	)

	Net income	$	95,063		$	87,138		$	84,279		Net income	$	95,218		$	95,063		$	87,138

Net income per average fully-diluted share	Net income per average fully-diluted share	$	2.85		$	2.55		$	2.36		Net income per average fully-diluted share	$	2.93		$	2.85		$	2.55
Net income as a percentage of average shareholders’ equity	Net income as a percentage of average shareholders’ equity		29.38	%		28.70	%		27.17	%	Net income as a percentage of average shareholders’ equity		28.83	%		29.38	%		28.70	%
Net income as a percentage of average total assets	Net income as a percentage of average total assets		2.19	%		2.17	%		2.18	%	Net income as a percentage of average total assets		2.10	%		2.19	%		2.17	%


*	Fully taxable equivalent (FTE)

Net income in 2004 was $155 thousand or 0.2% more than in 2003, after including a $4.2 million after-tax government sponsored entity (FNMA and FHLMC) preferred stock impairment charge in 2004. Net interest income (FTE) increased $586 thousand, the net result of higher average earning assets and lower funding costs, partially offset by declining earning asset yields and lower fee income. The loan loss provision declined $600 thousand, year over year, in accordance with Management’s assessment of credit risk for the loan portfolio. Noninterest income fell $4.3 million primarily due to the above impairment charge, partially offset by growth in deposit fee income. Noninterest expense declined $2.9 million because of lower personnel and other operational costs. The lower tax provision (FTE) (down $350 thousand) was due to the $3.0 million tax

14

benefit of the impairment charge and higher low-income housing investment tax credits, offset in part by increased pretax income.

Much of the growth in 2003 earnings was attributable to a $6.4 million increase in noninterest income, the result of greater service charge income, and because the 2002 total was reduced by a securities impairment charge of $4.3 million. Net interest income (FTE) increased $1.7 million, the net result of higher average earning assets and lower funding costs, partially offset by declining earning asset yields. The loan loss provision was reduced slightly and noninterest expense declined $1.6 million. The 2002 noninterest expense included $400 thousand in severance costs relating to the acquisition of Kerman State Bank (“KSB”). A $2.0 million increase in the tax provision (FTE) resulted mostly from higher earnings.

Earnings in 2002 increased $2.8 million or 3.4% compared to 2001, primarily due to higher net interest and fee income (FTE), which grew by $12.0 million or 5.9%. Approximately eighty-seven percent of that increase was due to growth of earning assets and the remainder to a higher net interest margin. The increase in net interest income exceeded a significant decline in noninterest income and a slight increase in noninterest expense. Noninterest income reflected a $4.3 million charge for the impairment of investment securities. The provision for income taxes (FTE) increased $2.4 million or 4.3% primarily due to higher pretax income.

The Company’s return on average total assets was 2.10% in 2004, compared to 2.19% and 2.17% in 2003 ~~compared to 2.17%~~ and ~~2.18% in~~ 2002, ~~and 2001,~~ respectively. Return on average equity in ~~2003~~2004 was ~~29.38%~~28.83%, compared to 29.38% and 28.70% in 2003 and ~~27.17% in the two previous years.~~

14

2002, respectively.

Net Interest Income

The Company’s primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) in 2004 increased $586 thousand or 0.3% from 2003, to $218.0 million. Comparing 2003 to 2002, net interest income (FTE) increased $1.7 million or 0.8% ~~from 2002, to $217.4 million. Comparing 2002 to 2001, net interest income (FTE) increased $12.0 million or 5.9%~~.


	Components of Net Interest Income



		Year Ended December 31,
												Year ended December 31,
		2003			2002			2001
												2004			2003			2002

		(In thousands)										(In thousands)
Interest and fee income	Interest and fee income	$	223,493		$	237,633		$	257,056		Interest and fee income	$	216,337		$	223,493		$	237,633
Interest expense	Interest expense		(27,197	)		(39,182	)		(68,887	)	Interest expense		(21,106	)		(27,197	)		(39,182	)
FTE adjustment	FTE adjustment		21,111			17,257			15,518		FTE adjustment		22,762			21,111			17,257

	Net interest income (FTE)	$	217,407		$	215,708		$	203,687		Net interest income (FTE)	$	217,993		$	217,407		$	215,708

Net interest margin (FTE)	Net interest margin (FTE)		5.39	%		5.76	%		5.71	%	Net interest margin (FTE)		5.14	%		5.39	%		5.76	%

Interest and fee income (FTE) declined $5.5 million or 2.3% from 2003 to 2004, the net result of declining yields on earning assets and lower loan fee income, partially offset by the effect of higher volume of earning assets. The total yield on earning assets, excluding loan fee income, declined from 5.99% in 2003 to 5.61% in 2004, following the general trend in interest rates within capital markets. The most significant yield declines in the loan portfolio were indirect consumer loans (down 92 basis points (“bp”)), commercial real estate loans (down 37 bp) and residential real estate loans (down 64 bp). Loan fee income, primarily prepayment fees, declined from $3.1 million in 2003 to $1.6 million in 2004, lowering the total earning asset yield an additional 4 bp from 2003. The investment portfolio yield declined 9 bp to 5.07% with declines occurring in U.S. government sponsored entity obligations (down from 3.83% to 3.41%, or 42 bp) and municipal securities (down from 7.14% to 6.80%, or 34 bp). The decline in investment yields was partly mitigated by increases in yields on collateralized mortgage obligations (up 79 bp) and other securities (up 101 bp). The lower yields caused interest income (excluding fees) to decline by $9.2 million, which was offset by the $5.2 million effect of growth in average earning assets (up $202.9 million to $4,236.9 million in 2004). The investment portfolio increased by $298.7 million, primarily the net result of increases in collateralized mortgage obligations (up $247.4 million), municipal securities (up $80.1 million) and U.S. government sponsored entity obligations (up $39.1 million), partially offset by a $60.5 million decline in other securities. The loan portfolio was reduced by $95.8 million with the largest decrease occurring in commercial real estate loans (down $119.5 million).

15

Interest expense fell $6.1 million or 22.4% from 2003 to 2004 due to declining rates paid on average interest-bearing liabilities and a change in mix of those liabilities. The average rate paid on interest-bearing liabilities dropped 24 bp to 0.73%. Notable decreases were on money market saving accounts (down 30 bp), CDs over $100 thousand (down 8 bp), retail CDs (down 19 bp) and customer sweep accounts (down 25 bp). Yields on overnight funds purchased increased 26 bp after a series of increases in the target rate for federal funds in the second half of 2004. Interest-bearing liabilities shifted from higher-rate to lower-rate categories. Federal Home Loan Bank (“FHLB”) advances were paid off entirely during 2004, reducing the average balance by $118.1 million. Retail CDs and CDs over $100 thousand fell by $35.8 million and $20.1 million, respectively. Overnight funds purchased and money market accounts rose by $138.5 million and $60.0 million, respectively. A $107.5 million increase in noninterest-bearing balances resulted in the reduction of expense by $1.3 million.

Interest and fee income (FTE) decreased $10.3 million or 4.0% in 2003 from the previous year, due to the net effect of lower earning asset yields, partially offset by higher average balances of those assets. The total yield on earning assets dropped from 6.81% in 2002 to 6.06% in 2003, reflecting the declining trend in average market rates of interest and a reduction in higher yielding loan totals. The loan portfolio yield declined 65 bp to 6.58%, affected by declines in commercial ~~loans~~loan yields (down 39 bp to 6.11%), commercial real estate ~~loans~~loan yields (down 34 bp to 7.63%), residential real estate ~~loans~~loan yields (down 117 bp to 5.09%), and indirect consumer ~~loans~~loan yields (down 110 bp to 6.09%). The investment portfolio yield also fell 72 bp to 5.16%, mainly due to declines in U.S. Treasury securities yields (down 150 bp to 4.13%), U.S. ~~Agency obligations~~government sponsored entity obligation yields (down 114 bp to 3.83%), mortgage backed securities and collateralized mortgage ~~obligations~~obligation yields (down 108 bp to 3.33%) and municipal securities yields (down 44 bp to 7.14%).

Interest expense decreased $12.0 million or 30.6% in 2003 compared to 2002, due to lower interest rates, partly offset by higher average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 0.97% in 2003, 53 basis points lower than in 2002. Notable declines included money market savings accounts (down 54 bp to 0.75%), Public CDs (down 133 bp to 1.21%), Jumbo CDs (down 69 bp to 1.47%) and short-term borrowings (down 52 bp to 0.89%). Total interest-bearing liabilities grew $190 million or 7.3%, causing a ~~small~~$1.4 million increase in interest expense, mainly due to increases in short-term borrowings (up $129 million or 51.7%) and money market savings accounts (up $101 million or 19.4%). In addition, as a result of continuing marketing efforts to acquire commercial relationships, noninterest-bearing balances increased 9.1%, indirectly causing interest expense to decline an additional $1.0 million.

Interest and fee income (FTE) fell $17.7 million or 6.5% from 2001 to 2002, the net result of declining yields on earning assets and the effect of volume growth of earning assets. The total yield on earning assets fell from 7.63% in 2001 to 6.81% in 2002, following the general trend in interest markets in which short-term rates decreased an average of over 50 basis points and medium-term rates by more than 100 basis points. The most significant yield declines in the loan portfolio were as follows: commercial loans (down from 8.11% to 6.50%, or 161 basis points), construction loans (down from 9.19% to 7.12%, or 207 basis points) and personal lines of credit (down from 9.26% to 6.88% or 238 basis points). The investment portfolio yield fell 75 basis points to 5.88% with the largest decline occurring in mortgage backed securities and collateralized mortgage obligations (down from 6.10% to 4.41% or 169 basis points). The lower yields caused interest income to decline by $28.2 million, which was offset by the $10.5 million effect of growth in average earning assets (up $166.2 million to $3,737.8 million in 2002).

Interest expense fell $29.7 million or 43.1% from 2001 to 2002 primarily due to a lower cost of funds. The average rate paid on interest-bearing liabilities dropped 123 basis points to 1.50%. Notable decreases were on overnight funds purchased (down from 4.27% to 1.61%), Jumbo CDs (down from 4.32% to 2.16%), Public

15

CDs (down from 4.41% to 2.54%) and preferred money market deposits (down from 3.28% to 1.42%). Interest expense decreased by a net $51 thousand due to volume-related factors. Volume-related expense was reduced due to a change in mix to lower-rate deposits, including an 8.4% increase in noninterest bearing balances.

The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual status only to the extent cash payments

16

have been received and applied as interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate.

16


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



			Year Ended December 31, 2003
												Year Ended December 31, 2004
			Average		Interest		Rates
			Balance		Income/Expense		Earned/Paid					Average		Interest		Rates
												Balance		Income/Expense		Earned/Paid

			(Dollars in thousands)									(Dollars in thousands)
Assets	Assets									Assets
Money market assets and funds sold	Money market assets and funds sold		$	875	$	8		0.91	%	Money market assets and funds sold		$	784	$	1		0.13	%
Trading account securities	Trading account securities			—		—		—		Trading account securities			—		—		—
Investment securities:	Investment securities:									Investment securities:
	Available for sale
		Taxable		822,662		34,336		4.17	%	Available for sale
		Tax-exempt		315,333		23,115		7.33	%		Taxable		803,722		33,230		4.13	%
	Held to maturity										Tax-exempt		293,067		21,619		7.38	%
		Taxable		212,891		6,387		3.00	%	Held to maturity Taxable			451,635		17,209		3.81	%
		Tax-exempt		327,933		22,814		6.96	%		Tax-exempt		429,213		28,281		6.59	%
Loans:	Loans:									Loans:
	Commercial									Commercial
		Taxable		1,253,514		91,191		7.27	%		Taxable		1,115,148		77,278		6.93	%
		Tax-exempt		209,911		15,095		7.19	%		Tax-exempt		239,495		16,045		6.70	%
	Real estate construction			42,362		3,049		7.20	%	Real estate construction			36,148		2,517		6.96	%
	Real estate residential			342,118		17,409		5.09	%	Real estate residential			360,208		16,049		4.46	%
	Consumer			506,365		31,200		6.16	%	Consumer			507,483		26,870		5.29	%

Earning assets	Earning assets			4,033,964		244,604		6.06	%	Earning assets			4,236,903		239,099		5.64	%
Other assets	Other assets			298,743						Other assets			299,549

		Total assets	$	4,332,707							Total assets	$	4,536,452


Liabilities and shareholders’ equity	Liabilities and shareholders’ equity									Liabilities and shareholders’ equity
Deposits:	Deposits:									Deposits:
	Noninterest bearing demand		$	1,173,853	$	—		—		Noninterest bearing demand		$	1,281,349		—		—
	Savings and interest-bearing transaction			1,578,721		6,818		0.43	%	Savings and interest-bearing transaction			1,662,347		4,543		0.27	%
	Time less than $100,000			307,054		5,147		1.68	%	Time less than $100,000			271,212		4,038		1.49	%
	Time $100,000 or more			370,549		5,020		1.35	%	Time $100,000 or more			350,400		4,466		1.27	%

		Total interest-bearing deposits		2,256,324		16,985		0.75	%		Total interest-bearing deposits		2,283,959		13,047		0.57	%
Short-term borrowed funds	Short-term borrowed funds			378,362		3,415		0.90	%	Short-term borrowed funds			556,415		5,878		1.06	%
Federal Home Loan Bank advances	Federal Home Loan Bank advances			142,271		5,318		3.74	%	Federal Home Loan Bank advances			24,153		897		3.65	%
Debt financing and notes payable	Debt financing and notes payable			21,222		1,479		6.97	%	Debt financing and notes payable			21,706		1,284		5.91	%

		Total interest-bearing liabilities		2,798,179		27,197		0.97	%	Total interest-bearing liabilities			2,886,233		21,106		0.73	%
Other liabilities	Other liabilities			37,120						Other liabilities			38,540
Shareholders’ equity	Shareholders’ equity			323,555						Shareholders’ equity			330,330

		Total liabilities and shareholders’ equity	$	4,332,707						Total liabilities and shareholders’ equity		$	4,536,452

Net interest spread(1)	Net interest spread(1)							5.09	%	Net interest spread(1)							4.91	%
Net interest income and interest margin(2)	Net interest income and interest margin(2)				$	217,407		5.39	%	Net interest income and interest margin(2)				$	217,993		5.14	%


(1)	Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

17


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



			Year Ended December 31, 2002									?Year Ended December 31, 2003

			Average		Interest		Rates					Average		Interest		Rates
			Balance		Income/Expense		Earned/Paid					Balance		Income/Expense		Earned/Paid

												(Dollars in thousands)
			(Dollars in thousands)
Assets	Assets									Assets
Money market assets and funds sold	Money market assets and funds sold		$	1,143	$	12		1.05	%	Money market assets and funds sold		$	875	$	8		0.91	%
Trading account securities	Trading account securities			—		—		—		Trading account securities			—		—		—
Investment securities:	Investment securities:									Investment securities:
	Available for sale									Available for sale
		Taxable		656,284		32,426		4.94	%		Taxable		842,729		35,385		4.20	%
		Tax-exempt		309,931		23,343		7.53	%		Tax-exempt		310,200		23,415		7.55	%
	Held to maturity									Held to maturity
		Taxable		137,529		6,810		4.95	%		Taxable		197,957		5,038		2.54	%
		Tax-exempt		167,001		12,398		7.42	%		Tax-exempt		327,933		22,814		6.96	%
Loans:	Loans:									Loans:
	Commercial									Commercial
		Taxable		1,376,262		103,690		7.53	%		Taxable		1,253,514		91,191		7.27	%
		Tax-exempt		196,900		14,959		7.60	%		Tax-exempt		209,911		15,095		7.19	%
	Real estate construction			55,457		4,105		7.40	%	Real estate construction			42,362		3,049		7.20	%
	Real estate residential			331,822		20,763		6.26	%	Real estate residential			342,118		17,409		5.09	%
	Consumer			505,435		36,384		7.20	%	Consumer			506,365		31,200		6.16	%

Earning assets	Earning assets			3,737,764		254,890		6.81	%	Earning assets			4,033,964		244,604		6.06	%
Other assets	Other assets			284,763						Other assets			298,743

		Total assets	$	4,022,527							Total assets	$	4,332,707


Liabilities and shareholders’ equity	Liabilities and shareholders’ equity									Liabilities and shareholders’ equity
Deposits:	Deposits:									Deposits:
	Noninterest bearing demand		$	1,075,845		—		—		Noninterest bearing demand		$	1,173,853		—		—
	Savings and interest-bearing transaction			1,492,611		11,942		0.80	%	Savings and interest-bearing transaction			1,578,721		6,818		0.43	%
	Time less than $100,000			334,601		8,289		2.48	%	Time less than $100,000			307,054		5,147		1.68	%
	Time $100,000 or more			368,456		8,414		2.28	%	Time $100,000 or more			370,549		5,020		1.35	%

		Total interest-bearing deposits		2,195,668		28,645		1.30	%		Total interest-bearing deposits		2,256,324		16,985		0.75	%
Short-term borrowed funds	Short-term borrowed funds			249,439		3,524		1.41	%	Short-term borrowed funds			378,362		3,415		0.90	%
Federal Home Loan Bank advances	Federal Home Loan Bank advances			138,615		5,225		3.72	%	Federal Home Loan Bank advances			142,271		5,318		3.74	%
Debt financing and notes payable	Debt financing and notes payable			24,875		1,788		7.19	%	Debt financing and notes payable			21,222		1,479		6.97	%

	Total interest-bearing liabilities									Total interest-bearing liabilities			2,798,179		27,197		0.97	%
Other liabilities	Other liabilities			2,608,597		39,182		1.50	%	Other liabilities			37,120
Shareholders’ equity	Shareholders’ equity			34,512						Shareholders’ equity			323,555
				303,573
										Total liabilities and shareholders’ equity		$	4,332,707
	Total liabilities and shareholders’ equity		$	4,022,527

Net interest spread (1)
Net interest spread(1)										Net interest spread(1)							5.09	%
Net interest income and interest margin(2)	Net interest income and interest margin(2)							5.31	%	Net interest income and interest margin(2)				$	217,407		5.39	%
					$	215,708		5.76	%


(1)	Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

18


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



			Year Ended December 31, 2001
													Year Ended December 31, 2002
			Average		Interest		Rates
			Balance		Income/Expense		Earned/Paid						Average		Interest		Rates
													Balance		Income/Expense		Earned/Paid

			(Dollars in thousands)										(Dollars in thousands)
Assets	Assets									Assets
Money market assets and funds sold	Money market assets and funds sold		$	1,040	$	24		2.31	%	Money market assets and funds sold			$	1,143	$	12		1.05	%
Trading account securities	Trading account securities			—		—		—		Trading account securities				—		—		—
Investment securities:	Investment securities:									Investment securities:
	Available for sale									Available for sale
		Taxable		616,954		36,813		5.97	%		Taxable			656,284		32,426		4.94	%
		Tax-exempt		268,348		20,257		7.55	%		Tax-exempt			309,931		23,343		7.53	%
	Held to maturity									Held to maturity
		Taxable		74,325		4,572		6.15	%		Taxable			137,529		6,810		4.95	%
		Tax-exempt		145,269		11,560		7.96	%		Tax-exempt			167,001		12,398		7.42	%
Loans:	Loans:									Loans:
	Commercial									Commercial
		Taxable		1,370,663		113,433		8.28	%		Taxable			1,376,262		103,690		7.53	%
		Tax-exempt		189,808		14,784		7.79	%		Tax-exempt			196,900		14,959		7.60	%
	Real estate construction			68,910		6,441		9.35	%	Real estate construction				55,457		4,105		7.40	%
	Real estate residential			353,438		24,499		6.93	%	Real estate residential				331,822		20,763		6.26	%
	Consumer			482,797		40,191		8.32	%	Consumer				505,435		36,384		7.20	%

Earning assets	Earning assets			3,571,552		272,574		7.63	%	Earning assets				3,737,764		254,890		6.81	%
Other assets	Other assets			286,267						Other assets				284,763

		Total assets	$	3,857,819							Total assets		$	4,022,527


Liabilities and shareholders’ equity	Liabilities and shareholders’ equity									Liabilities and shareholders’ equity
Deposits:	Deposits:									Deposits:
	Noninterest bearing demand		$	992,182		—		—		Noninterest bearing demand			$	1,075,845		—		—
	Savings and interest-bearing transaction			1,360,978		19,896		1.46	%	Savings and interest-bearing transaction				1,492,611		11,942		0.80	%
	Time less than $100,000			387,407		16,898		4.36	%	Time less than $100,000				334,601		8,289		2.48	%
	Time $100,000 or more			477,035		20,794		4.36	%	Time $100,000 or more				368,456		8,414		2.28	%

		Total interest-bearing deposits		2,225,420		57,588		2.59	%			Total interest-bearing deposits		2,195,668		28,645		1.30	%
Short-term borrowed funds	Short-term borrowed funds			265,474		9,283		3.50	%	Short-term borrowed funds				249,439		3,524		1.41	%
Federal Home Loan Bank advances	Federal Home Loan Bank advances			0		0		0.00	%	Federal Home Loan Bank advances				138,615		5,225		3.72	%
Debt financing and notes payable	Debt financing and notes payable			28,089		2,016		7.18	%	Debt financing and notes payable				24,875		1,788		7.19	%

	Total interest-bearing liabilities			2,518,983		68,887		2.73	%	Total interest-bearing liabilities
Other liabilities	Other liabilities			36,412						Other liabilities				2,608,597		39,182		1.50	%
Shareholders’ equity	Shareholders’ equity			310,242						Shareholders’ equity				34,512
														303,573
	Total liabilities and shareholders’ equity		$	3,857,819
										Total liabilities and shareholders’ equity			$	4,022,527

Net interest spread(1)	Net interest spread(1)							4.90	%	Net interest spread(1)								5.31	%
Net interest income and interest margin(2)	Net interest income and interest margin(2)				$	203,687		5.71	%	Net interest income and interest margin(2)					$	215,708		5.76	%


(1)	Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

19

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

Summary of Changes in Interest Income and Expense


				Years Ended December 31, 2004
				Compared with 2003

				Volume			Rate			Total

				(Dollars in thousands)
Increase (decrease) in interest and fee income:
	Money market assets and funds sold			$	(1	)	$	(6	)	$	(7	)
	Trading account securities				—			—			—
	Investment securities:
		Available for sale
			Taxable		(1,597	)		(558	)		(2,155	)
			Tax-exempt(1)		(1,255	)		(541	)		(1,796	)
		Held to maturity
			Taxable		8,787			3,384			12,171
			Tax-exempt(1)		6,739			(1,272	)		5,467
	Loans:
		Commercial:
			Taxable		(10,102	)		(3,811	)		(13,913	)
			Tax-exempt(1)		2,043			(1,093	)		950
		Real estate construction			(434	)		(98	)		(532	)
		Real estate residential			916			(2,276	)		(1,360	)
		Consumer			140			(4,470	)		(4,330	)

			Total loans(1)		(7,437	)		(11,748	)		(19,185	)

Total increase (decrease) in interest and fee income(1)					5,236			(10,741	)		(5,505	)

Increase (decrease) in interest expense:
	Deposits:
		Savings/interest-bearing			355			(2,630	)		(2,275	)
		Time less than $100,000			(561	)		(548	)		(1,109	)
		Time $100,000 or more			(259	)		(295	)		(554	)

	Total interest-bearing				(465	)		(3,473	)		(3,938	)
	Short-term borrowed funds				1,813			650			2,463
	Federal Home Loan Bank advances				(4,372	)		(49	)		(4,421	)
	Notes and mortgages payable				36			(231	)		(195	)

		Total increase (decrease) in interest expense			(2,988	)		(3,103	)		(6,091	)

	Increase (decrease) in net interest income(1)			$	8,224		$	(7,638	)	$	586


	~~Summary of Changes in Interest Income and Expense~~

Years Ended December 31, 2003
Compared with 2002
Volume Rate Total
(Dollars in thousands)
Increase (decrease) in interest and fee income:
Money market assets and funds sold $ (3 ) $ (1 ) $ (4 )
Trading account securities — — —
Investment securities:
Available for sale
Taxable 7,429 (5,519 ) 1,910
Tax-exempt(1) 403 (631 ) (228 )
Held to maturity
Taxable 2,876 (3,299 ) (423 )
Tax-exempt(1) 11,242 (826 ) 10,416
Loans:
Commercial:
Taxable (9,116 ) (3,383 ) (12,499 )
Tax-exempt(1) 959 (823 ) 136
Real estate construction (945 ) (111 ) (1,056 )
Real estate residential 627 (3,981 ) (3,354 )
Consumer 67 (5,251 ) (5,184 )

Total loans(1) (8,408 ) (13,549 ) (21,957 )

Total increase (decrease) in interest and fee income(1) 13,539 (23,825 ) (10,286 )

Increase (decrease) in interest expense:
Deposits:
Savings/interest-bearing 654 (5,778 ) (5,124 )
Time less than $100,000 (638 ) (2,504 ) (3,142 )
Time $100,000 or more 48 (3,442 ) (3,394 )

Total interest-bearing 64 (11,724 ) (11,660 )
Funds purchased 1,434 (1,544 ) (110 )
Federal Home Loan Bank advances 136 (43 ) 93
Notes and mortgages payable (256 ) (52 ) (308 )

Total increase (decrease) in interest expense 1,378 (13,363 ) (11,985 )

Increase (decrease) in net interest income(1) $ 12,161 $ (10,462 ) $ 1,699


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

20


	Summary of Changes in Interest Income and Expense



				Years Ended December 31, 2002
				Compared with 2001												2003 Compared with 2002

				Volume			Rate			Total						Volume			Rate			Total

																Years Ended December 31,
				(Dollars in thousands)												(Dollars in thousands)
Increase (decrease) in interest and fee income:	Increase (decrease) in interest and fee income:												Increase (decrease) in interest and fee income:
	Money market assets and funds sold			$	2		$	(14	)	$	(12	)	Money market assets and funds sold			$	(3	)	$	(1	)	$	(4	)
	Trading account securities				—			—			—		Trading account securities				—			—			—
	Investment securities:												Investment securities:
		Available for sale												Available for sale
			Taxable		2,238			(6,625	)		(4,387	)			Taxable		8,307			(5,348	)		2,959
			Tax-exempt(1)		3,132			(46	)		3,086				Tax-exempt(1)		20			52			72
		Held to maturity												Held to maturity
			Taxable		3,271			(1,033	)		2,238				Taxable		2,302			(4,074	)		(1,772	)
			Tax-exempt(1)		1,649			(811	)		838				Tax-exempt(1)		11,242			(826	)		10,416
	Loans:												Loans:
		Commercial:												Commercial:
			Taxable		486			(10,229	)		(9,743	)			Taxable		(9,116	)		(3,383	)		(12,499	)
			Tax-exempt(1)		544			(369	)		175				Tax-exempt(1)		959			(823	)		136
		Real estate construction			(1,131	)		(1,205	)		(2,336	)		Real estate construction			(945	)		(111	)		(1,056	)
		Real estate residential			(1,442	)		(2,294	)		(3,736	)		Real estate residential			627			(3,981	)		(3,354	)
		Consumer			1,819			(5,626	)		(3,807	)		Consumer			67			(5,251	)		(5,184	)

			Total loans(1)		276			(19,723	)		(19,447	)			Total loans(1)		(8,408	)		(13,549	)		(21,957	)

Total increase (decrease) in interest and fee income(1)	Total increase (decrease) in interest and fee income(1)				10,568			(28,252	)		(17,684	)	Total increase (decrease) in interest and fee income(1)				13,460			(23,746	)		(10,286	)

Increase (decrease) in interest expense:	Increase (decrease) in interest expense:												Increase (decrease) in interest expense:
	Deposits:												Deposits:
		Savings/interest-bearing			1,771			(9,725	)		(7,954	)		Savings/interest-bearing			654			(5,778	)		(5,124	)
		Time less than $100,000			(2,065	)		(6,544	)		(8,609	)		Time less than $100,000			(638	)		(2,504	)		(3,142	)
		Time $100,000 or more			(4,004	)		(8,376	)		(12,380	)		Time $100,000 or more			48			(3,442	)		(3,394	)

	Total interest-bearing				(4,298	)		(24,645	)		(28,943	)	Total interest-bearing				64			(11,724	)		(11,660	)
	Funds purchased				(517	)		(5,018	)		(5,535	)	Short-term borrowed funds				1,434			(1,544	)		(110	)
	Federal Home Loan Bank advances				4,995			7			5,002		Federal Home Loan Bank advances				136			(43	)		93
	Notes and mortgages payable				(231	)		2			(229	)	Notes and mortgages payable				(256	)		(52	)		(308	)

		Total decrease in interest expense			(51	)		(29,654	)		(29,705	)		Total increase (decrease) in interest expense			1,378			(13,363	)		(11,985	)

	Increase in net interest income(1)			$	10,619		$	1,402		$	12,021		Increase (decrease) in net interest income(1)			$	12,082		$	(10,383	)	$	1,699


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

Provision for Loan Losses

The provision for loan losses was $2.7 million for 2004, compared with $3.3 million for 2003 ~~compared to~~and $3.6 million for ~~2002 and 2001.~~2002. The ~~reduction~~reductions in the provision ~~primarily~~ reflects Management’s view of credit risk in the loan portfolio and the results of the Company’s continuing efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts. For further information regarding net credit losses and the allowance for loan losses, see the “Credit Quality” section of this report.

21

Investment Portfolio

The Company maintains a securities portfolio consisting of U.S. ~~Treasury, U.S.~~ Government ~~agencies and corporations,~~sponsored entities, state and political subdivisions, asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian.

The objective of the held to maturity portfolio is to maintain a prudent yield and provide collateral to pledge for federal, state and local government deposits and other borrowing facilities. The ~~investments~~ held to maturity investment portfolio had ~~an average term to maturity~~a duration of ~~98 months~~4.4 years at December 31, ~~2003~~2004 and, on the same date, those investments included ~~$534.8~~$1,118.3 million in fixed-rate and ~~$556 thousand~~$142.5 million in adjustable-rate securities.

Investment securities available for sale are generally used to supplement the Company’s ~~liquidity.~~liquidity, provide a prudent yield, and provide collateral for public deposits. Unrealized net gains and losses on these securities are recorded as an adjustment to equity, net of taxes, and are not reflected in the current earnings of the Company. If a security is sold, any gain or loss is recorded as a credit or charge to earnings and the equity adjustment is reversed. At December 31, ~~2003,~~2004, the Company held ~~$1,413.9~~$931.7 million in securities classified as investments available for ~~sale.~~sale with a duration of 3.4 years. At December 31, ~~2003,~~2004, an unrealized gain of ~~$13.2~~$9.6 million, net of taxes of ~~$9.6~~$7.0 million, related to these securities, was included in shareholders’ equity.

The Company had no trading securities at December 31, 2004, 2003 ~~2002~~ and ~~2001.~~

2002.

For more information on investment securities, see Notes 1 and 2 to the consolidated financial statements.

The following table shows the carrying amount (fair value) of the Company’s investment securities available for sale as of the dates indicated:


	Available for Sale Portfolio ~~Distribution~~



		At December 31,
									At December 31,
		2003		2002		2001
									2004		2003		2002

		(Dollars in thousands)							(Dollars in thousands)
U.S. Treasury	U.S. Treasury	$	0	$	21,088	$	135,086	U.S. Treasury	$	0	$	0	$	21,088
U.S. Government agencies and corporations			961,727		385,508		213,454
U.S. Government sponsored entities								U.S. Government sponsored entities		557,057		961,727		385,508
States and political subdivisions	States and political subdivisions		278,393		296,259		303,048	States and political subdivisions		247,731		278,393		296,259
Asset backed securities	Asset backed securities		12,990		42,075		33,283	Asset backed securities		3,257		12,990		42,075
Corporate securities	Corporate securities		73,425		144,497		172,991	Corporate securities		48,658		73,425		144,497
Other	Other		87,376		58,421		91,108	Other		75,007		87,376		58,421

	Total	$	1,413,911	$	947,848	$	948,970	Total	$	931,710	$	1,413,911	$	947,848

22

The following table sets forth the relative maturities and yields of the Company’s available for sale securities (stated at amortized cost) at December 31, ~~2003.~~2004. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the

22

amortized cost value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate.

Available for Sale Maturity Distribution


																										At December 31, 2004
			At December 31, 2003
																													After One			After Five
						After One			After Five																	Within			but Within			but Within			After Ten			Mortgage-
			Within			but Within			but Within			After Ten			Mortgage-											One Year			Five Years			Ten Years			Years			backed			Other			Total
			One Year			Five Years			Ten Years			Years			Backed			Other			Total
																										(Dollars in thousands)

			(Dollars in thousands)
U.S. Government agencies and corporations			$	40,398		$	415,789		$	40,051		$	—		$	—		$	—		$	496,238
U.S. Government sponsored entities																								U.S. Government sponsored entities		$	—		$	308,859		$	46		$	—		$	—		$	—		$	308,905
	Interest rate			5.91	%		3.43	%		3.20	%		—	%		—	%		—	%		3.61	%	Interest rate			—	%		3.30	%		7.95	%		—	%		—	%		—	%		3.30	%
States and political subdivisions	States and political subdivisions			5,509			36,722			144,469			74,090			—			—			260,790		States and political subdivisions			3,955			33,853			152,073			44,242			—			—			234,123
	Interest rate (FTE)			9.45	%		7.74	%		7.46	%		7.18	%		—			—			7.46	%	Interest rate (FTE)			7.32	%		7.67	%		7.33	%		7.06	%		—			—			7.33	%
Asset-backed				—			7,898			5,028			—			—			—			12,926
Asset-backed securities																								Asset-backed securities			—			3,256			—			—			—			—			3,256
	Interest rate			—			3.71	%		2.43	%		—			—			—			3.21	%	Interest rate			—			2.87	%		—			—			—			—			2.87	%
Other securities	Other securities			15,000			54,703			—			—			—			—			69,703		Other securities			22,187			25,130			—			—			—			—			47,317
	Interest rate			6.18	%		6.27	%		—			—			—			—			6.25	%	Interest rate			5.95	%		6.54	%		—			—			—			—			6.26	%

	Subtotal			60,907			515,112			189,548			74,090			—			—			839,657		Subtotal			26,142			371,098			152,119			44,242			—			—			593,601
	Interest rate			6.30	%		4.04	%		6.43	%		7.18	%		—			—			5.03	%	Interest rate			6.16	%		3.91	%		7.33	%		7.06	%		—			—			5.11	%
Mortgage Backed				—			—			—			—			467,684			—			467,684
Mortgage backed securities																								Mortgage backed securities			—			—			—			—			253,936			—			253,936
	Interest rate			—			—			—			—			4.24	%		—			4.24	%	Interest rate			—			—			—			—			4.22	%		—			4.22	%
Other without set maturities	Other without set maturities			—			—			—			—			—			83,809			83,809		Other without set maturities			—			—			—			—			—			67,541			67,541
	Interest rate			—			—			—			—			—			6.95	%		6.95	%	Interest rate			—			—			—			—			—			7.61	%		7.61	%

		Total	$	60,907		$	515,112		$	189,548		$	74,090		$	467,684		$	83,809		$	1,391,150			Total	$	26,142		$	371,098		$	152,119		$	44,242		$	253,936		$	67,541		$	915,078
	Interest rate			6.30	%		4.04	%		6.43	%		7.18	%		4.24	%		6.95	%		4.88	%	Interest rate			6.16	%		3.91	%		7.33	%		7.06	%		4.22	%		7.61	%		5.05	%

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

Held to Maturity Portfolio


		At December 31,

		2004		2003		2002

		(Dollars in thousands)
U.S. Government sponsored entities			736,137		98,287		201,486
States and political subdivisions			524,695		417,984		212,569
Asset backed securities			0		6,322		9,769
Other			0		12,784		15,161

	Total	$	1,260,832	$	535,377	$	438,985

Fair value		$	1,265,986	$	542,729	$	450,771


	~~Held to Maturity Portfolio Distribution~~

At December 31,
2003 2002 2001
(Dollars in thousands)
U.S. Government agencies and corporations 98,287 201,486 55,320
States and political subdivisions 417,984 212,569 141,712
Asset backed securities 6,322 9,769 0
Other 12,784 15,161 12,137

Total $ 535,377 $ 438,985 $ 209,169

Fair value $ 542,729 $ 450,771 $ 214,866

23

The following table sets forth the relative maturities and yields of the Company’s held to maturity securities at December 31, ~~2003.~~2004. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the amortized value of the related security. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current statutory rate.


	~~Held to Maturity Maturity Distribution~~

At December 31, 2003
After One After Five
Within but Within but Within After Ten Mortgage-
One Year Five Years Ten Years Years Backed Other Total
(Dollars in thousands)
States and political subdivisions 10,402 57,745 52,963 296,874 — — 417,984
Interest rate (FTE) 7.87 % 7.16 % 7.03 % 6.10 % — — 6.41 %
Asset backed — 6,322 — — — — 6,322
Interest rate — 3.60 % — — — — 3.60 %
Other securities — — — — — 12,784 12,784
Interest rate — — — — — 4.83 % 4.83 %

Subtotal 10,402 64,067 52,963 296,874 — 12,784 437,090
Interest rate 7.87 % 6.81 % 7.03 % 6.10 % — % 4.83 % 6.33 %
Mortgage backed — — — — 98,287 — 98,287
Interest rate — — — — 2.70 % — 2.70 %

Total $ 10,402 $ 64,067 $ 52,963 $ 296,874 $ 98,287 $ 12,784 $ 535,377
Interest rate 7.87 % 6.81 % 7.03 % 6.10 % 2.70 % 4.83 % 5.66 %

23

Held to Maturity Maturity Distribution


				At December 31, 2004

							After One			After Five
				Within			but Within			but Within			After Ten			Mortgage-
				One Year			Five Years			Ten Years			Years			Backed			Other			Total

				(Dollars in thousands)
U.S. Government sponsored entities				$	—		$	227,056		$	—		$	—		$	—		$	—		$	227,056
			Interest rate		—	%		3.43	%		—	%		—	%		—	%		—	%		3.43	%
States and political subdivisions					9,799			44,281			74,395			396,220			—			—			524,695
			Interest rate (FTE)		6.81	%		6.85	%		6.54	%		6.08	%		—			—			6.23	%
Asset backed					—			—			—			—			—			—			—
			Interest rate		—			—			—			—			—			—			—
Other securities					—			—			—			—			—			—			—
			Interest rate		—			—			—			—			—			—			—

	Subtotal				9,799			271,337			74,395			396,220			—			—			751,751
			Interest rate		6.81	%		3.99	%		6.54	%		6.08	%		—			—			5.38	%
Mortgage backed					—			—			—			—			509,081			—			509,081
			Interest rate		—			—			—			—			4.22	%		—			4.22	%

		Total		$	9,799		$	271,337		$	74,395		$	396,220		$	509,081		$	—		$	1,260,832
			Interest rate		6.81	%		3.99	%		6.54	%		6.08	%		4.22	%		—	%		4.91	%

Loan Portfolio

The following table shows the composition of the loan portfolio of the Company by type of loan and type of borrower, on the dates indicated:


	Loan Portfolio Distribution



	At December 31,
																At December 31,
	2003			2002			2001			2000			1999
																2004			2003			2002			2001			2000

	(Dollars in thousands)															(Dollars in thousands)
Commercial and commercial real estate	$	1,429,645		$	1,588,803		$	1,576,723		$	1,562,462		$	1,502,237		$	1,388,639		$	1,429,645		$	1,588,803		$	1,576,723		$	1,562,462
Real estate construction		38,019			45,547			69,658			64,195			50,928			29,724			38,019			45,547			69,658			64,195
Real estate residential		347,794			330,460			347,114			355,488			337,002			375,532			347,794			330,460			347,114			355,488
Consumer		507,911			530,054			491,793			502,367			434,803			506,338			507,911			530,054			491,793			502,367
Unearned income		(39	)		(226	)		(831	)		(2,353	)		(4,124	)		(3	)		(39	)		(226	)		(831	)		(2,353	)

Gross loans	$	2,323,330		$	2,494,638		$	2,484,457		$	2,482,159		$	2,320,846		$	2,300,230		$	2,323,330		$	2,494,638		$	2,484,457		$	2,482,159
Allowance for loan losses		(53,910	)		(54,227	)		(52,086	)		(52,279	)		(51,574	)		(54,152	)		(53,910	)		(54,227	)		(52,086	)		(52,279	)

Net loans	$	2,269,420		$	2,440,411		$	2,432,371		$	2,429,880		$	2,269,272		$	2,246,078		$	2,269,420		$	2,440,411		$	2,432,371		$	2,429,880

24

The following table shows the maturity distribution and interest rate sensitivity of commercial, ~~and~~commercial real estate, and construction loans at December 31, ~~2003.~~2004. Balances exclude loans to individuals and residential mortgages totaling ~~$855.7~~$881.9 million. These types of loans are typically paid in monthly installments over a number of years.

Loan Maturity Distribution


		At December 31, 2004

		Within		One to		After Five
		One Year		Five Years		Years		Total

		(Dollars in thousands)
Commercial and commercial real estate *		$	502,468	$	669,127	$	217,044	$	1,388,639
Real estate construction			29,724		0		0		29,724

	Total	$	532,192	$	669,127	$	217,044	$	1,418,363

Loans with fixed interest rates		$	91,602	$	321,000	$	217,044	$	629,646
Loans with floating or adjustable interest rates			440,590		348,127		0		788,717

	Total	$	532,192	$	669,127	$	217,044	$	1,418,363


	~~Loan Maturity Distribution~~

At December 31, 2003
Within One to After
One Year Five Years Five Years Total
(Dollars in thousands)
Commercial and commercial real estate * $ 770,834 $ 371,203 $ 287,608 $ 1,429,645
Real estate construction 38,019 0 0 38,019

Total $ 808,853 $ 371,203 $ 287,608 $ 1,467,664

Loans with fixed interest rates $ 107,305 $ 371,203 $ 287,608 $ 766,116
Loans with floating interest rates 701,548 0 0 701,548

Total $ 808,853 $ 371,203 $ 287,608 $ 1,467,664


*	Includes demand loans

Commitments and Letters of Credit

It is not the policy of the Company to issue formal commitments on lines of credit except to a limited number of well-established and financially responsible local commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of Letters of Credit to facilitate the customers’ particular business transactions. Commitment fees generally are not charged except where Letters of Credit are involved. Commitments and lines of credit typically mature within one year. For further information, see Note 12 to the consolidated financial statements.

Credit Quality

The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with higher credit risk and to increase diversification of the loan portfolio. Credit reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Loans receiving lesser grades fall under the “classified loans” category, which includes all nonperforming and potential problem loans, and receive an elevated level of ~~management~~Management attention to ensure collection.


	*Classified Loans and Other Real Estate Owned*

The following summarizes the Company’s classified loans for the periods indicated:


	Classified Loans and OREO



	At December 31,
					At December 31,
	2003		2002
					2004		2003

	(Dollars in thousands)				(Dollars in thousands)
Classified loans	$	23,460	$	34,001	$	19,225	$	23,316
Other real estate owned		90		381		0		90

Total	$	23,550	$	34,382	$	19,225	$	23,406

25

Classified loans at December 31, ~~2003~~2004 declined ~~$10.5~~$4.1 million or ~~31.0%~~17.5% to ~~$23.5~~$19.2 million from December 31, ~~2002,~~2003, mainly due to upgrades, payoffs, ~~and~~ principal reductions and chargeoffs, partially reduced by new downgrades and new loans. Other real estate owned decreased ~~$300~~$90 thousand from the prior year to none, due to sales ~~and writedowns~~ of ~~properties acquired in satisfaction of debt, partially offset by new foreclosures on real estate collateralizing loans.~~two small properties.


	Nonperforming Loans

Nonperforming credits include nonaccrual loans and loans 90 or more days past due and still accruing. Loans are placed on nonaccrual status upon becoming delinquent 90 days or more, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are classified by Management as “performing nonaccrual” and are included in total ~~nonperforming~~nonaccrual credits. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. ~~Performing nonaccrual~~Nonaccrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal.

The following table summarizes the nonperforming assets of the Company for the periods indicated:

Nonperforming Loans and OREO



		At December 31,
																			At December 31,
		2003			2002			2001			2000			1999
																			2004			2003			2002			2001			2000

		(Dollars in thousands)																	(Dollars in thousands)
Performing nonaccrual loans	Performing nonaccrual loans	$	1,658		$	3,464		$	3,055		$	3,499		$	3,460		Performing nonaccrual loans		$	4,072		$	1,658		$	3,464		$	3,055		$	3,499
Nonperforming nonaccrual loans	Nonperforming nonaccrual loans		5,759			5,717			5,058			4,525			5,501		Nonperforming nonaccrual loans			2,970			5,759			5,717			5,058			4,525

	Nonaccrual loans		7,417			9,181			8,113			8,024			8,961		Nonaccrual loans			7,042			7,417			9,181			8,113			8,024

Loans 90 or more days past due and still accruing	Loans 90 or more days past due and still accruing		199			738			550			650			584		Loans 90 or more days past due and still accruing			10			199			738			550			650
Other real estate owned	Other real estate owned		90			381			523			2,065			3,269		Other real estate owned			0			90			381			523			2,065

	Total Nonperforming loans and OREO	$	7,706		$	10,300		$	9,186		$	10,739		$	12,814			Total Nonperforming loans and OREO	$	7,052		$	7,706		$	10,300		$	9,186		$	10,739

Allowance for loan losses as a percentage of nonaccrual loans and loans 90 or more days past due and still accruing	Allowance for loan losses as a percentage of nonaccrual loans and loans 90 or more days past due and still accruing		708	%		547	%		601	%		603	%		540	%	Allowance for loan losses as a percentage of nonaccrual loans and loans 90 or more days past due and still accruing			768	%		708	%		547	%		601	%		603	%
Allowance for loan losses as a percentage of total nonperforming loans and OREO	Allowance for loan losses as a percentage of total nonperforming loans and OREO		700	%		526	%		567	%		487	%		402	%	Allowance for loan losses as a percentage of total nonperforming loans and OREO			768	%		700	%		526	%		567	%		487	%

Performing nonaccrual loans at December 31, 2004 were $2.4 million higher than the previous year, due to new loans placed on performing nonaccrual, partially offset by payoffs, chargeoffs, loans being returned to accrual status and loans being placed on nonperforming nonaccrual. Nonperforming nonaccrual loans at December 31, 2004 decreased $2.8 million from the same period a year ago, attributable to loans being returned to accrual status, transfers to repossessed collateral or being charged off or paid off, partially offset by loans being added to nonperforming nonaccrual. There was no OREO at December 31, 2004 as a result of sales of two small properties.

Performing nonaccrual loans at December 31, 2003 were $1.8 million below the previous year, while nonperforming loans remained at the same level. With the exception of four relationships totaling $477 thousand, all loans on nonaccrual status in 2002 were either paid off, charged off or brought current in 2003. Except for one property, all foreclosed property owned in 2002 was disposed of at a small total net gain during 2003; the $90 thousand in OREO at December 31, 2003 consisted of two small parcels.

Performing and nonperforming nonaccrual loans at December 31, 2002 were $409 thousand and $659 thousand above 2001 levels, respectively. Most performing nonaccrual loans from 2001 were either paid off or returned to accrual status in 2002 and other loans were downgraded. The increase in nonperforming loans was the net result of downgrades and $1.4 million of loans remaining on nonaccrual from 2001, partially reduced by payoffs and upgrades. The $142 thousand decline of other real estate owned balances at December 31, 2002 was due to sales of most properties from 2001, partially offset by an addition of one large property recorded at $261 thousand.

26

The Company had no restructured loans as of December 31, 2004, 2003 ~~2002~~ and ~~2001.~~2002.

26

The amount of gross interest income that would have been recorded if all nonaccrual loans had been current in accordance with their original terms while outstanding during the period was $462 thousand in 2004, $527 thousand in 2003 and $629 thousand in ~~2002 and $673 thousand in 2001.~~2002. The amount of interest income that was recognized on nonaccrual loans from cash payments made in 2004, 2003 and 2002 ~~and 2001~~ was $439 thousand, $592 thousand ~~$489 thousand~~ and ~~$632~~$489 thousand, respectively. Cash payments received, which were applied against the book balance of performing and nonperforming nonaccrual loans outstanding at December 31, ~~2003,~~2004, totaled approximately ~~$330~~$135 thousand, compared with $330 thousand in 2003 and $281 thousand in ~~2002 and $161 thousand in 2001.~~

2002. Management believes the overall credit quality of the loan portfolio continues to be strong; however, total nonperforming assets could fluctuate from year to year. The performance of any individual loan can be impacted by external factors such as the interest rate environment or factors particular to the borrower. The Company expects to maintain nonperforming loans and OREO at their current levels; however, no assurance can be given that additional increases in nonaccrual loans will not occur in future periods.

Loan Loss Experience


	*~~Loan Loss Experience~~*

The Company’s allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall loan loss experience, the amount of past due, nonperforming loans and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is specifically allocated to impaired and other identified loans whose full collectibility is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. A second allocation is based in part on quantitative analyses of historical loan loss experience, in which criticized and classified loan balances identified through an internal loan review process are analyzed using a linear regression model to determine standard loss rates. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines are analyzed based on the historical loss rates and delinquency trends, grouped by the number of days the payments on these loans are delinquent. Last, allocations are made to general loan categories based on commercial office vacancy rates, mortgage loan foreclosure trends, agriculture commodity prices, and levels of government funding. The remainder of the reserve is considered to be unallocated and is established at a level considered necessary based on relevant economic conditions and available data, including unemployment statistics, unidentified economic and business conditions; the quality of lending management and staff; credit quality trends; concentrations of credit; and changing underwriting standards due to external competitive ~~issues.~~factors. Management considers the ~~$53.9~~$54.2 million allowance for loan losses, which is equivalent to ~~2.32%~~2.35% of total loans at December 31, ~~2003,~~2004, to be adequate as a reserve against ~~inherent losses. However, while the Company’s policy is to charge off in the current period those loans on which the loss is considered probable, the risk exists~~losses as of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Management continues to evaluate the loan portfolio and assess current economic conditions that will dictate future allowance levels.

December 31, 2004.

During 2003, Management refined its allowance methodology for commercial real estate loans, agricultural loans and certain municipal loans. This ~~Refinement~~refinement had the effect of increasing the allowance allocation for commercial loans with a corresponding decrease in the unallocated ~~allowance.~~allowance as of December 31, 2003.

27

The following table summarizes the loan loss experience of the Company for the periods indicated:

Loan Loss Allowance, Chargeoffs & Recoveries


	~~Loan Loss Allowance, Chargeoffs & Recoveries~~



		Year Ended December 31,
																		Year Ended December 31,
		2003			2002			2001			2000			1999
																		2004			2003			2002			2001			2000

		(Dollars in thousands)																(dollars in thousands)
Total loans outstanding	Total loans outstanding	$	2,323,330		$	2,494,638		$	2,484,457		$	2,482,159		$	2,320,846		Total loans outstanding	$	2,300,230		$	2,323,330		$	2,494,638		$	2,484,457		$	2,482,159
Average loans outstanding during the period	Average loans outstanding during the period		2,354,270			2,465,876			2,465,616		$	2,369,065			2,292,386		Average loans outstanding during the period		2,258,482			2,354,270			2,465,876			2,465,616		$	2,369,065
Analysis of the Allowance	Analysis of the Allowance																Analysis of the Allowance
Balance, beginning of period	Balance, beginning of period	$	54,227		$	52,086		$	52,279		$	51,574		$	51,304		Balance, beginning of period	$	53,910		$	54,227		$	52,086		$	52,279		$	51,574
Additions to the allowance charged to operating expense	Additions to the allowance charged to operating expense		3,300			3,600			3,600			3,675			4,780		Additions to the allowance charged to operating expense		2,700			3,300			3,600			3,600			3,675
Allowance acquired through merger	Allowance acquired through merger		0			2,050			0			1,036			0		Allowance acquired through merger		0			0			2,050			0			1,036
Loans charged off:	Loans charged off:																Loans charged off:
	Commercial and commercial real estate		(2,455	)		(1,885	)		(2,475	)		(4,148	)		(5,071	)	Commercial and commercial real estate		(2,154	)		(2,455	)		(1,885	)		(2,475	)		(4,148	)
	Real estate construction		0			0			(10	)		0			(94	)	Real estate construction		0			0			0			(10	)		0
	Real estate residential		(26	)		0			0			(16	)		(18	)	Real estate residential		0			(26	)		0			0			(16	)
	Consumer		(4,352	)		(4,340	)		(4,968	)		(3,818	)		(2,754	)	Consumer		(3,439	)		(4,352	)		(4,340	)		(4,968	)		(3,818	)

Total chargeoffs	Total chargeoffs		(6,833	)		(6,225	)		(7,453	)		(7,982	)		(7,937	)	Total chargeoffs		(5,593	)		(6,833	)		(6,225	)		(7,453	)		(7,982	)

Recoveries of loans previously charged off:	Recoveries of loans previously charged off:																Recoveries of loans previously charged off:
	Commercial and commercial real estate		1,234			950			1,577			2,333			2,052		Commercial and commercial real estate		1,623			1,234			950			1,577			2,333
	Real estate construction		0			0			0			0			0		Real estate construction		0			0			0			0			0
	Real estate residential		0			0			243			0			0		Real estate residential		0			0			0			243			0
	Consumer		1,982			1,766			1,840			1,643			1,375		Consumer		1,512			1,982			1,766			1,840			1,643

Total recoveries	Total recoveries		3,216			2,716			3,660			3,976			3,427		Total recoveries		3,135			3,216			2,716			3,660			3,976

Net loan losses	Net loan losses		(3,617	)		(3,509	)		(3,793	)		(4,006	)		(4,510	)	Net loan losses		(2,458	)		(3,617	)		(3,509	)		(3,793	)		(4,006	)

Balance, end of period	Balance, end of period	$	53,910		$	54,227		$	52,086		$	52,279		$	51,574		Balance, end of period	$	54,152		$	53,910		$	54,227		$	52,086		$	52,279

Net loan losses to average loans	Net loan losses to average loans		0.15	%		0.14	%		0.15	%		0.17	%		0.20	%	Net loan losses to average loans		0.11	%		0.15	%		0.14	%		0.15	%		0.17	%
Allowance for loan losses as a percentage of loans outstanding	Allowance for loan losses as a percentage of loans outstanding		2.32	%		2.17	%		2.10	%		2.11	%		2.22	%	Allowance for loan losses as a percentage of loans outstanding		2.35	%		2.32	%		2.17	%		2.10	%		2.11	%

28

Allocation of the Allowance for Loan Losses


	*~~Allocation of the Allowance for Loan Losses~~*

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

Allocation of the Allowance for Loan Losses


	At December 31,

	2004					2003					2002					2001					2000

	Allocation		Loans as			Allocation		Loans as			Allocation		Loans as			Allocation		Loans as			Allocation		Loans as
	of the		Percent			of the		Percent			of the		Percent			of the		Percent			of the		Percent
	Allowance		of Total			Allowance		of Total			Allowance		of Total			Allowance		of Total			Allowance		of Total
	Balance		Loans			Balance		Loans			Balance		Loans			Balance		Loans			Balance		Loans

	(Dollars in thousands)
Commercial	$	29,857		60	%	$	31,875		61	%	$	23,692		64	%	$	21,206		63	%	$	21,632		63	%
Real estate construction		1,441		1	%		1,827		2	%		2,370		2	%		4,860		3	%		4,344		3	%
Real estate residential		917		16	%		870		15	%		893		13	%		417		14	%		427		14	%
Consumer		5,140		22	%		6,423		22	%		7,862		21	%		4,986		20	%		5,648		20	%
Unallocated portion		16,797		—			12,915		—			19,410		—			20,617		—			20,228		—

Total	$	54,152		100	%	$	53,910		100	%	$	54,227		100	%	$	52,086		100	%	$	52,279		100	%

Impaired Loans


	~~Allocation of the Allowance for Loan Losses~~

At December 31,
2003 2002 2001 2000 1999
Allocation Loans as Allocation Loans as Allocation Loans as Allocation Loans as Allocation Loans as
of the Percent of the Percent of the Percent of the Percent of the Percent
Allowance of Total Allowance of Total Allowance of Total Allowance of Total Allowance of Total
Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans
(Dollars in thousands)
Commercial $ 31,875 61 % $ 23,692 64 % $ 21,206 63 % $ 21,632 63 % $ 23,523 65 %
Real estate construction 1,827 2 % 2,370 2 % 4,860 3 % 4,344 3 % 2,042 2 %
Real estate residential 870 15 % 893 13 % 417 14 % 427 14 % 877 14 %
Consumer 6,423 22 % 7,862 21 % 4,986 20 % 5,648 20 % 4,670 19 %
Unallocated portion 12,915 — 19,410 — 20,617 — 20,228 — 20,462 —

Total $ 53,910 100 % $ 54,227 100 % $ 52,086 100 % $ 52,279 100 % $ 51,574 100 %


	*~~Impaired Loans~~*

�� The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan’s original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans that are collectively evaluated for impairment. In measuring impairment, the Company reviews all commercial and construction loans classified “Substandard” and “Doubtful” that meet materiality thresholds of $250 thousand and $100 thousand, respectively. The Company considers classified loans below the established thresholds to represent immaterial credit risk. All loans classified as “Loss” are considered impaired.

Commercial and construction loans that are not classified, and large groups of smaller-balance homogeneous loans such as installment, personal revolving credit, residential real estate and student loans, are evaluated collectively for impairment under the Company’s standard loan loss reserve methodology. The Company generally identifies loans to be reported as impaired when such loans are in nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan.

The following summarizes the Company’s impaired loans for the periods indicated:

Impaired Loans


	~~Impaired Loans~~



	Year Ended
	December 31,				Year Ended
					December 31,
	2003		2002
					2004		2003

	(Dollars in thousands)				(Dollars in thousands)
Total impaired loans	$	1,664	$	1,095	$	0	$	1,664

Specific reserves	$	623	$	1,087	$	0	$	623

The average balance of the Company’s impaired loans for the year ended December 31, ~~2003~~2004 was $731 thousand compared to $1.8 million ~~compared to $1.3 million~~ in ~~2002.~~2003. Portions of the Company’s allowance for loan losses were

29

allocated to each of these impaired loans. In general, the Company does not recognize any interest income on troubled debt restructuring or loans that are classified as nonaccrual. For other impaired loans, interest income may be recorded as cash is received, provided that the Company’s recorded investment in such loans is deemed collectible.

Asset and Liability Management

The fundamental objective of the Company’s management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk.

In adjusting the Company’s asset/liability position, Management attempts to manage interest rate risk while enhancing net interest ~~margin.~~margin and net interest income. At times, depending on expected increases or decreases in general interest rates, the relationship between long and short term interest rates, market conditions and competitive factors, Management may adjust the Company’s interest rate risk position in order to manage its net interest ~~margin.~~margin and net interest income. The Company’s results of operations and net portfolio values remain subject to changes in interest rates and to fluctuations in the difference between long and short term interest rates.

The primary analytical tool used by the Company to quantify interest rate risk is a simulation model to project changes in net interest income (“NII”) that result from forecast changes in interest rates. ~~In 2003, this~~This analysis calculated the difference between a NII forecast over a 12-month period using a ~~flat~~stable interest rate scenario and a NII forecast using a rising or falling interest rate scenario ~~where~~with the Federal Funds rate serving as a ~~“driver.~~“primary indicator.” Based on economic conditions, interest rate levels, anticipated monetary policy and Management judgment, at December 31, 2004, simulations were conducted with the Federal Funds rate rising by 200 basis points or declining by 100 basis points over the 12-month forecast interval triggering a response in the other rates. Similarly, at December 31, 2003, simulations were conducted with the Federal Funds rate rising by 200 basis points or declining by 50 basis points over the 12-month forecast interval triggering a response in the other rates. Similarly, at December 31, 2002, simulations were conducted with the Federal Funds rate rising by 100 basis points or declining by 100 basis points over the 12-month forecast interval triggering a response in the other rates. Company policy requires that such simulated changes in NII should ~~always~~ be within certain specified ranges or steps must be taken to reduce interest rate risk.

The following tables summarize the simulated change in NII (FTE), based on the 12-month period ending December 31, ~~2003~~2005 and ~~2002:~~2004:

Simulated Changes to Net Interest Income


				Estimated Increase
				(Decrease) in NII

2005		Estimated
Changes in Interest Rates (Basis Points)		NII Amount		Amount			Percent

		(Dollars in millions)
	+200	$	215.5	$	(7.5	)		-3.5	%
	—		223.0		—			—
	-100		223.5		0.5			0.2	%


				Estimated Increase
				(Decrease) in NII

2004		Estimated
Changes in Interest Rates (Basis Points)		NII Amount		Amount			Percent

		(Dollars in millions)
	+200	$	215.8	$	(3.9	)		-1.8	%
	—		219.7		—			—
	-50		219.9		0.2			0.1	%

Management reviewed its interest rate risk position, taking into account the acquisition of Redwood Empire Bancorp. In Management’s judgment, the Company’s interest rate risk exposure would be reduced through the sale of investment securities available for sale, with the proceeds from sale applied to reduce short-term borrowed funds. During the first quarter 2005, the Company sold $170.0 million of investment


	~~Simulated Changes to Net Interest Income~~

Estimated Increase
(Decrease) in NII
2003 Estimated
Changes in Interest Rates (Basis Points) NII Amount Amount Percent
(Dollars in millions)
+200 $ 215.8 $ (3.9 ) -1.8 %
— 219.7 — —
-50 219.9 0.2 0.1 %

Estimated Increase
(Decrease) in NII
2002 Estimated
Changes in Interest Rates (Basis Points) NII Amount Amount Percent
(Dollars in millions)
+100 $ 217.1 $ (2.2 ) -1.0 %
— 219.3 — —
100 221.1 1.8 0.8 %

30

securities available for sale with a duration of 3.2 years and book yield of 3.29% at a realized loss of $4.9 million, net of tax.

The following table summarizes the interest rate sensitivity gaps inherent in the Company’s asset and liability portfolios at December 31, ~~2003:~~2004:


	Interest Rate Sensitivity Analysis



			Repricing within (days)
														Non-							Repricing within (days)
			0-90			91-180			181-365			Over 365		Repricing			Total															Non-
																					0-90			91-180			181-365			Over 365		Repricing			Total

			(Dollars in thousands)																		(Dollars in thousands)
Assets	Assets																		Assets
	Investment securities		$	74,949		$	63,697		$	48,826		$	1,761,816		—		$	1,949,288	Investment securities		$	49,066		$	49,942		$	89,846		$	2,003,688		—		$	2,192,542
	Loans		$	904,878		$	87,840		$	162,350		$	1,168,262		—			2,323,330	Loans		$	593,809		$	109,935		$	208,037		$	1,388,449		—			2,300,230
	Other assets			—			—			—			—		303,767			303,767	Other assets			—			—			—			—		244,496			244,496

		Total assets	$	979,827		$	151,537		$	211,176		$	2,930,078	$	303,767		$	4,576,385		Total assets	$	642,875		$	159,877		$	297,883		$	3,392,137	$	244,496		$	4,737,268

Liabilities	Liabilities																		Liabilities
	Noninterest bearing		$	—		$	—		$	—		$	—	$	1,240,379		$	1,240,379	Noninterest bearing		$	—			—			—		$	—	$	1,273,825		$	1,273,825
	Interest-bearing:																		Interest-bearing:
		Transaction		168,809			168,809			224,078			0		—			561,696		Transaction		591,593			0			0			0		—			591,593
		Money market savings		225,274			225,274			300,364			0		—			750,912		Money market savings		764,373			0			0			0		—			764,373
		Passbook savings		92,151			92,151			122,868			0		—			307,170		Passbook savings		327,608			0			0			0		—			327,608
		Time		377,205			96,236			64,998			65,395		—			603,834		Time		403,271			89,524			70,687			62,738		—			626,220
Short-term borrowings	Short-term borrowings			590,646			0			0			0		—			590,646	Short-term borrowings
Federal Home Loan Bank advances				0			0			70,000			35,000		—			105,000
Debt financing and notes payable				3,214			0			0			21,429		—			24,643
Other liabilities				—			—			—			—		51,734			51,734
																			Federal funds purchased			568,275			0			0			0		—			568,275
																			Other			167,148			0			0			0		—			167,148
																			Debt financing and notes payable			3,214			0			0			18,215		—			21,429
																			Other liabilities			—			—			—			—		38,188			38,188
Shareholders’ equity	Shareholders’ equity			—			—			—			—		340,371			340,371	Shareholders’ equity			—			—			—			—		358,609			358,609

		Total liabilities and shareholders’ equity	$	1,457,299		$	582,470		$	782,308		$	121,824	$	1,632,484		$	4,576,385		Total liabilities and shareholders’ equity	$	2,825,482		$	89,524		$	70,687		$	80,953	$	1,670,622		$	4,737,268

Net (liabilities) assets subject to repricing	Net (liabilities) assets subject to repricing			(477,472	)		(430,933	)		(571,132	)		2,808,254		(1,328,717	)			Net (liabilities) assets subject to repricing			(2,182,607	)		70,353			227,196			3,311,184		(1,426,126	)

Cumulative net (liabilities) assets subject to repricing	Cumulative net (liabilities) assets subject to repricing			(477,472	)		(908,405	)		(1,479,537	)		1,328,717		0				Cumulative net (liabilities) assets subject to repricing			(2,182,607	)		(2,112,254	)		(1,885,058	)		1,426,126		0

The repricing terms of the table above do not represent contractual principal maturities, but rather principal cash flows and balances available for repricing. The interest rate sensitivity report shown above categorizes interest-bearing transaction deposits, ~~and~~ savings deposits and other short-term borrowings as repricing within 3090 days. However, it is the experience of Management that the historical interest rate volatility of these ~~interest-bearing transaction and savings deposits~~funding sources can be similar to liabilities with longer repricing dates, depending on market conditions. Moreover, the degree to which these deposits respond to changes in money market rates usually is less than the response of interest-rate sensitivity loans. These factors cause Management to believe the cumulative net liability position shown above to indicate a much greater degree of liability sensitivity than ~~Management believes~~ reasonably exists based on the additional analysis previously discussed.

Liquidity

The Company’s principal source of asset liquidity is investment securities available for ~~sale.~~sale and principal payments from consumer loans. At December 31, ~~2003,~~2004, investment securities available for sale totaled ~~$1.4 billion, representing an increase of~~

31

$~~466 million from~~932 million. At December 31, ~~2002.~~2004, residential real estate loans and indirect auto loans totaled $796 million, which were experiencing stable monthly principal payments of approximately $20 million. In addition, at December 31, ~~2003,~~2004, the Company had customary lines for overnight borrowings from other financial institutions in excess of $500 million and a ~~$10~~$35 million line of credit, under which no amount was outstanding at December 31, ~~2003.~~2004. As a member of the Federal Reserve System, the Company also has the ability to borrow from the Federal Reserve. The Company may also borrow from the Federal Home Loan Bank (“FHLB”). Such advances are collateralized with residential real estate loans and securities. At December 31, 2003, the Company had excess collateral providing available borrowing capacity from the FHLB of approximately $144 million. The FHLB is changing capital requirements of member institutions in 2004. Based on these new capital requirements, the Company intends to withdraw as a member of the FHLB. The Company’s short-term debt rating from Fitch Ratings is F1 with a stable outlook. Management expects the Company can access short-term debt financing if desired. The Company’s long-term debt rating from Fitch Ratings is A with a stable outlook. Management expects the Company can access additional long-term debt financing if desired.

The Company generates significant liquidity from its operating activities. The Company’s profitability during 2004, 2003 and 2002 ~~and 2001 generated~~contributed to substantial operating cash flows ~~which are included in the totals provided from operations~~ of $113.5 million, $115.4 million ~~$90.6 million~~ and ~~$99.7~~$90.6 million, respectively. The operating cash flow in ~~2003~~2004 was more than sufficient to pay $35.1 million in shareholder dividends, retire $55.4 million of the Company’s common stock, and accumulate approximately $39 million in cash and cash equivalents which were used to satisfy the cash consideration for the Company’s acquisition of Redwood Empire Bancorp. In 2003, operating activities provided a substantial portion of cash for $32.9 million in shareholder dividends and $70.8 million of stock ~~repurchases. In~~repurchase. Similarly, in 2002, the operating activities provided a substantial portion of cash for $30.3 million in shareholder dividends and $64.0 million for the Company’s stock repurchase programs. ~~Similarly,~~

During 2004, financing activities included a $119.6 million increase in ~~2001, the operating activities provided~~deposits and a ~~substantial portion~~$144.8 million increase in short-term borrowings, offset in part by a $107.2 million payment of ~~cash for $29.1 million in shareholder dividends~~FHLB advances and ~~$101.3 million for the Company’s stock repurchase programs.~~

prepayment fees. In 2003, other financing activities included the net result of a $169.9 million increase in deposits and a $240.9 million ~~proceeds from~~increase in short-term borrowings, reduced by a $67.2 million payment of FHLB advances including a loss on extinguishment of debt. During 2002, other financing activities included a $88.1 million ~~proceeds from~~increase in short-term borrowings and $130.0 million from FHLB advances, reduced by a $24.1 million decrease in deposits. ~~During 2001, other financing activities included $75.0 million in net repayments of short-term borrowings.~~

The Company had net cash outflows in its investing activities in all three fiscal years. In ~~2003,~~2004, purchases, net of sales and maturities, of investment securities were $270.3 million, which was generally financed by a $119.6 million increase in deposits and a $144.8 million increase in short-term borrowings. In 2003, purchases, net of maturities, of investment securities were $560.4 million, which was in part offset by net repayments of loans of $164.5 million. The investment securities portfolio increase was generally financed by a $169.9 million increase in deposits, and a $240.9 million increase in short-term borrowings. During 2002 purchases net of sales and maturities of investment securities of $201.6 million were reduced by net repayments of loans of $45.3 million and $5.4 million cash obtained in the KSB acquisition, resulting in net cash used of $152.1 million.

In ~~2001~~ the ~~Company’s investing activities were~~first quarter of 2005, the Company used approximately $57 million in cash as a ~~net~~partial payment for the acquisition of Redwood Empire Bancorp, which use had been largely facilitated in 2004 by adjusting the allocation of operating cash flow from repurchases and retirement of $9.2 million. Substantial proceeds from maturing investment securities of $449.8 million were all reinvested, for a net use of cash of $1.3 million. In addition, net disbursements of loans amounted to $7.2 million. Other investing activities used $600 thousand.

common stock. The Company anticipates maintaining its cash levels through the end of ~~2004~~2005 mainly due to increased profitability and retained earnings. It is anticipated that ~~the~~ loan demand will increase ~~moderately. Demand for loans~~moderately, although such demand will be dictated by economic conditions. The growth of deposit balances is expected to exceed the anticipated growth in loan demand through the end of ~~2004. The~~2005, resulting in an increase in the investment securities portfolio, ~~is expected to increase.~~a reduction of time deposits and borrowed funds, or a combination of both. However, due to concerns regarding consumer confidence, possible terrorist attacks, ~~aftermath of~~ the war in ~~the Middle East,~~Iraq, and uncertainty in the general economic environment, loan demand and levels of customer deposits are not certain. Shareholder dividends and share repurchases are expected to continue ~~from time to time~~ in ~~2004.~~

2005.

The Parent Company’s primary source of liquidity is dividends from ~~the Bank.~~Westamerica Bank (the “Bank”). Dividends from the Bank are subject to certain regulatory limitations. During 2004, 2003 and 2002, ~~and 2001, WAB~~the Bank declared dividends to the Company of $95, $88 ~~$84~~ and ~~$81~~$84 million, respectively. See Note 15 to the consolidated financial statements.

32

The following table sets forth the known contractual obligations of the Company at December 31, ~~2003:~~2004:


	Contractual Obligations



		At December 31, 2003
													At December 31, 2004
		Within		One to		Three to		After
		One Year		Three Years		Five Years		Five Years		Total			Within		One to		Three to		After
													One Year		Three Years		Five Years		Five Years		Total

		(Dollars in thousands)											(Dollars in thousands)
Long-Term Debt Obligations	Long-Term Debt Obligations	$	3,214	$	6,429	$	0	$	15,000	$	24,643	Long-Term Debt Obligations	$	3,214	$	3,215	$	0	$	15,000	$	21,429
Operating Lease Obligations	Operating Lease Obligations		5,228		7,306		4,873		1,134		18,541	Operating Lease Obligations		4,590		7,020		3,772		6,075		21,457
Purchase Obligations	Purchase Obligations		5,386		10,771		0		0		16,157	Purchase Obligations		5,562		11,124		0		0		16,686

	Total	$	13,828	$	24,506	$	4,873	$	16,134	$	59,341	Total	$	13,366	$	21,359	$	3,772	$	21,075	$	59,572

Long-Term Debt Obligations and Operating Lease Obligations are discussed in the consolidated financial statements at Notes 6 and 11, respectively. The Purchase Obligation consists of the Company’s minimum liability under a contract with a third-party automated services provider.

Capital Resources

The current and projected capital position of the Company, and the impact of capital plans and long-term strategies is reviewed regularly by Management. The Company’s capital position represents the level of capital available to support continued operations and expansion.

The Company ~~annually~~ repurchases ~~approximately 1.2 to 1.4 million of~~ its ~~shares of~~ Common Stock in the open market with the intention of supporting shareholder returns and mitigating the dilutive impact of issuing new shares ~~to meet~~for employee stock awards, and option ~~plans, and other ongoing requirements.~~plans. In addition to these systematic repurchases, other programs have been implemented to optimize the Company’s use of equity capital and enhance shareholder value. ~~In total,~~Pursuant to these programs, the Company repurchased 1.1 million shares in 2004, 1.6 million shares in 2003 and ~~2002 and 2.7~~1.6 million shares in ~~2001.~~

2002. As in 2004, the Company retains the flexibility to reduce share repurchase activity to conserve cash for strategic acquisitions or other purposes. At December 31, 2004, the Company had accumulated $39 million in cash and cash equivalents toward Redwood Empire Bancorp cash merger consideration of approximately $57 million.

In the first quarter of 2005, the Company issued approximately 1.6 million new shares in connection with the Redwood Empire Bancorp acquisition. It is the Company’s intention to continue its repurchase programs from time to time subsequent to the acquisition, subject to market conditions.

The Company’s primary capital resource is shareholders’ equity, which ~~decreased $1.1~~increased $18.2 million or ~~0.3%~~5.4% from the previous year, the net result of ~~a $6.0 million decline in unrealized gains on securities, $32.9 million in dividends paid and $70.8 million in stock repurchases, substantially mitigated by $95.1~~$95.2 million in profits earned during the year and a ~~$13.5~~$16.3 million in issuance of stock in connection with exercises of employee stock ~~options.~~

options substantially reduced by a $3.6 million decline in unrealized gains on securities available-for-sale, $35.1 million in dividends paid and $55.4 million in stock repurchases.

The ratio of total risk-based capital to risk-adjusted assets rose ~~0.42% compared with 2002, primarily~~from 11.39% at the end of 2003 to 12.46% at the end of 2004, due to the combination of higher common stock and retained earnings and growth in lower risk-adjusted assets. Similarly, tier I risk-based capital to risk-adjusted assets also increased ~~0.42% compared with 2002.~~to 11.09% at December 31, 2004 from 10.13% a year ago.

Capital to Risk-Adjusted Assets


	~~Capital to Risk-Adjusted Assets~~



	At December 31,									At December 31,

							Minimum									Minimum
							Regulatory									Regulatory
	2003			2002			Requirement			2004			2003			Requirement

Tier I Capital		10.13	%		9.71	%		4.00	%		11.09	%		10.13	%		4.00	%
Total Capital		11.39	%		10.97	%		8.00	%		12.46	%		11.39	%		8.00	%
Leverage ratio		6.85	%		7.27	%		4.00	%		7.06	%		6.85	%		4.00	%

33

Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company’s future needs. All ratios are in excess of the regulatory definition of “well capitalized,” which the Company intends to meet.

33

The Company’s acquisition of Redwood Empire Bancorp on March 1, 2005 will result in the addition of approximately $91 million of additional common equity and the assumption of $20 million subordinated debt which qualifies as regulatory capital. However, the transaction will also cause the creation of goodwill and other intangible assets of approximately $128 million, so that the effect will be to reduce Tier 1 and Total Capital. The Company’s Tier 1 Capital and Total Capital Ratios will each decrease accordingly. However, as of March 31, 2005, the Company anticipates it will still be considered “well-Capitalized”.

Financial Ratios

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



		At December 31,										At December 31,

		2003			2002			2001				2004			2003			2002

Return on average total assets	Return on average total assets		2.19	%		2.17	%		2.18	%	Return on average total assets		2.10	%		2.19	%		2.17	%
Return on average shareholders’ equity	Return on average shareholders’ equity		29.38	%		28.70	%		27.17	%	Return on average shareholders’ equity		28.83	%		29.38	%		28.70	%
Average shareholders’ equity as a percentage of:	Average shareholders’ equity as a percentage of:										Average shareholders’ equity as a percentage of:
	Average total assets		7.47	%		7.55	%		8.04	%	Average total assets		7.28	%		7.47	%		7.55	%
	Average total loans		13.74	%		12.31	%		12.58	%	Average total loans		14.63	%		13.74	%		12.31	%
	Average total deposits		9.43	%		9.28	%		9.64	%	Average total deposits		9.27	%		9.43	%		9.28	%
Dividend payout ratio (diluted EPS)	Dividend payout ratio (diluted EPS)		35	%		35	%		35	%	Dividend payout ratio (diluted EPS)		38	%		35	%		35	%


	*Deposit categories*

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

The following table summarizes the Company’s average daily amount of deposits and the rates paid for the periods indicated:


	Deposit Distribution and Average Rates Paid



		Years Ended December 31,

																							Years Ended December 31,
		2003						2002							2001
																							2004								2003								2002
				Percentage						Percentage							Percentage
		Average		of Total				Average		of Total					Average		of Total								Percentage								Percentage								Percentage
		Balance		Deposits		Rate*		Balance		Deposits		Rate*			Balance		Deposits		Rate*				Average		of Total						Average		of Total						Average		of Total
																							Balance		Deposits			Rate*			Balance		Deposits			Rate*			Balance		Deposits			Rate*

		(Dollars in thousands)																					(Dollars in thousands)
Noninterest bearing demand	Noninterest bearing demand	$	1,173,853		34.2%		—%	$	1,075,845		32.9%		—	%	$	992,182		30.8%		—	%	Noninterest bearing demand	$	1,281,349		35.9	%		—	%	$	1,173,853		34.2	%		—	%	$	1,075,845		32.9	%		—	%
Interest bearing:	Interest bearing:																					Interest bearing:
	Transaction		563,022		16.4%		0.13%		534,190		16.3%		0.29	%		514,235		16.0%		0.54	%	Transaction		577,296		16.2	%		0.11	%		563,022		16.4	%		0.13	%		534,190		16.3	%		0.29	%
	Savings		1,015,699		29.6%		0.60%		958,421		29.3%		1.09	%		846,743		26.3%		2.02	%	Savings		1,085,051		30.4	%		0.36	%		1,015,699		29.6	%		0.60	%		958,421		29.3	%		1.09	%
	Time less than $100 thousand		307,054		9.0%		1.68%		334,601		10.2%		2.48	%		387,407		12.0%		4.36	%	Time less than $100 thousand		271,212		7.6	%		1.49	%		307,054		9.0	%		1.68	%		334,601		10.2	%		2.48	%
	Time $100 thousand or more		370,549		10.8%		1.35%		368,456		11.3%		2.28	%		477,035		14.8%		4.36	%	Time $100 thousand or more		350,400		9.8	%		1.27	%		370,549		10.8	%		1.35	%		368,456		11.3	%		2.28	%

Total	Total	$	3,430,177		100.0%		0.75%	$	3,271,513		100.0%		1.30	%	$	3,217,602		100.0%		2.59	%	Total	$	3,565,308		100.0	%		0.57	%	$	3,430,177		100.0	%		0.75	%	$	3,271,513		100.0	%		1.30	%


*	Rate is computed based on interest-bearing deposits

During 2004, total average deposits increased by $135.1 million or 3.9% from 2003 due to an inflow of $107.5 million of noninterest bearing deposits, a $14.3 million increase in interest bearing demand deposits and a $69.4 million increase in savings deposits, partially offset by declines in consumer CDs (down $35.8 million) and public and jumbo CDs (down $20.1 million).

34

During 2003, total average deposits increased by $139 million or 4.2% from 2002 primarily due to an inflow of $98 million of noninterest bearing deposits, increases in interest bearing demand (up $29 million) and savings deposits (up $37 million), partly offset by a $28 million decline in consumer CDs.

During 2002, total average deposits increased by $5.39 million or 1.7% from 2001 due to an inflow of $83.7 million of noninterest bearing deposits, a $20 million increase in interest bearing demand deposits and a $11.7 million increase in savings deposits, partially offset by declines in consumer CDs (down $52.8 million) and public and jumbo CDs (down $108.6 million).

34

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


	Deposit Over $100,000 Maturity Distribution


	December 31,		December 31,
	2003		2004

	(In thousands)		(In thousands)
Three months or less	$	238,533	$	287,582
Over three through six months		34,055		34,410
Over six through twelve months		24,934		28,828
Over twelve months		17,731		14,479

Total	$	315,253	$	365,299

~~Short-Term~~Short-term Borrowings

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


	Short-Term Borrowings Distribution



		At December 31,
									At December 31,
		2003		2002		2001
									2004		2003		2002

		(In thousands)							(In thousands)
Federal funds purchased	Federal funds purchased	$	438,500	$	146,425	$	62,675	Federal funds purchased	$	568,275	$	438,500	$	146,425
Other borrowed funds:	Other borrowed funds:							Other borrowed funds:
	Retail repurchase agreements		152,146		203,311		209,236	Retail repurchase agreements		167,148		152,146		203,311

	Total short term borrowings	$	590,646	$	349,736	$	271,911	Total short term borrowings	$	735,423	$	590,646	$	349,736

Further detail of other borrowed funds is as follows:


	Other Borrowed Funds Balances and Rates Paid



		Years Ended December 31,
												Years Ended December 31,
		2003			2002			2001
												2004			2003			2002

		(Dollars in thousands)										(Dollars in thousands)
Outstanding amount:	Outstanding amount:										Outstanding amount:
	Average for the year	$	156,137		$	184,942		$	181,483		Average for the year	$	195,118		$	156,137		$	184,942
	Maximum during the year		199,276			239,130			210,927		Maximum during the year		400,372			199,276			239,130
Interest rates:	Interest rates:										Interest rates:
	Average for the year		0.58	%		1.34	%		3.14	%	Average for the year		0.45	%		0.58	%		1.34	%
	Average at period end		0.43	%		0.77	%		1.93	%	Average at period end		0.27	%		0.43	%		0.77	%

35

Noninterest Income


	Components of Noninterest Income



		Years Ended December 31,
											Years Ended December 31,
		2003			2002			2001
											2004			2003			2002

		(Dollars in thousands)									(Dollars in thousands)
Service charges on deposit accounts	Service charges on deposit accounts	$	26,381		$	24,447		$	23,114	Service charges on deposit accounts	$	28,621		$	26,381		$	24,447
Merchant credit card fees	Merchant credit card fees		3,619			3,730			3,993	Merchant credit card fees		3,509			3,619			3,730
ATM fees & interchange	ATM fees & interchange		2,378			2,396			2,282	ATM fees & interchange		2,487			2,378			2,396
Debit card fees	Debit card fees		2,125			1,879			1,515	Debit card fees		2,541			2,125			1,879
Trust fees	Trust fees		995			1,020			966	Trust fees		1,027			995			1,020
Financial services commissions	Financial services commissions		893			1,315			1,375	Financial services commissions		1,250			893			1,315
Mortgage banking income	Mortgage banking income		851			985			918	Mortgage banking income		386			851			985
Official check sales fees	Official check sales fees		505			637			1,102	Official check sales fees		631			505			637
Gains on sale of foreclosed property	Gains on sale of foreclosed property		122			108			156	Gains on sale of foreclosed property		231			122			108
Investment securities gains (impairment)			2,443			(4,260	)		0
Investment securities gains (losses)										Investment securities gains (losses)		2,169			2,443			(18	)
Investment securities impairment										Investment securities impairment		(7,180	)		0			(4,260	)
Loss on extinguishment of debt	Loss on extinguishment of debt		(2,166	)		0			0	Loss on extinguishment of debt		(2,204	)		(2,166	)		0
Other noninterest income	Other noninterest income		4,770			4,294			7,234	Other noninterest income		5,115			4,770			4,312

	Total	$	42,916		$	36,551		$	42,655	Total	$	38,583		$	42,916		$	36,551

Noninterest income for 2004 was $4.3 million or 10.1% lower than 2003 mainly due to the $7.2 million writedown of FNMA and FHLMC preferred stock and loss on extinguishment of debt to repay the remaining $105 million in FHLB advances, partially mitigated by $2.2 million in gain on sale of securities and growth in deposit fee income. Higher deposit service charge income was attributable to higher service fees on transaction accounts and repricing of checking account fees (effective in February 2004), partially reduced by lower income from account analysis deficit fees and a reduction in fees collected on deposited items returned. Debit card fees rose $416 thousand due to increased usage. A $357 thousand increase in financial services commission income was largely due to higher sales of fixed and variable annuities and mutual funds. Other noninterest income was higher by $345 thousand mostly due to increases in wire service fee income (up $270 thousand), official check charges (up $126 thousand), gains on sale of OREO (up $109 thousand), and ATM related fees (up $109 thousand), partially offset by income unique to 2003 such as a $118 thousand gain on sale of the former branch building and $115 thousand gain realized from an insurance company demutualization. Mortgage banking service fee income declined $465 thousand due to reduced mortgage loan activity, lower investor loan fees and net losses on sale of those loans. Merchant credit card income fell $110 thousand mostly due to higher interchange costs.

Noninterest income increased $6.4 million or 17.4% in 2003 compared to 2002, principally due to higher service charges on deposit accounts and because the 2002 total was reduced by a securities impairment charge of $4.3 million. A $1.9 million increase in service charges resulted from a $2.6 million contribution from a new deposit overdraft program which was introduced in January of 2003, partially offset by a $435 thousand decline in account analysis income and a $130 thousand decrease in checking account activity charges. In 2003, $2.4 million in gains on securities sales were recorded, offsetting a $2.2 million loss on extinguishment of debt to reduce FHLB advances by $65 million. A $1.9 million increase in service charges resulted from a $2.6 million increase from service fees on transaction accounts which were introduced in January of 2003, partially offset by a $435 thousand decline in account analysis income and a $130 thousand decrease in checking account activity charges. Debit card income grew $246 thousand due to increased usage partially offset by lower debit card processing rates mandated in August. Other noninterest income rose $476 thousand primarily due to $288 thousand in gains on asset sales and a $97 thousand increase in limited partnership distribution, partially reduced by a $90 thousand decrease in interest recoveries on charged-off loans. Decreases in noninterest income included a $422 thousand decline in financial services income due to lower sales of investment products, a $111 thousand decrease in merchant credit card service income due to lower volumes and a higher ~~average~~ interchange ~~rate,~~costs, a $134 thousand decrease in mortgage banking service fees due to

36

lower investor loan fees and a $132 thousand decrease in official check income due to lower earnings on outstanding checks.

Noninterest income for 2002 was $6.1 million or 14.3% lower than 2001 primarily due to a $4.3 million charge for the other-than-temporary impairment of corporate bonds of an issuer in the telecom industry which declared bankruptcy. Additionally, other noninterest income in 2002 was lower because 2001 benefited from $1.5 million additional gains on sales of other assets and a gain on sale of four branches. Merchant credit card income fell $263 thousand for 2002 primarily due to a lower average discount rate of 2.16% compared with 2.19% the prior year. Official check income declined $465 thousand for 2002 or 42.2% due to lower earnings on outstanding checks. The largest offset to the decrease in 2002 was service charges on deposits. Specifically, deficit fees charged on analyzed accounts increased $1.8 million, or 23.4%. Fees generated from users of the Company’s debit card product grew $364 thousand (24.0%) to $1.9 million, as card usage continued to increase.

36

Noninterest Expense


	Components of Noninterest Expense



		Years Ended December 31,
												Years Ended December 31,
		2003			2002			2001
												2004			2003			2002

		(Dollars in thousands)										(Dollars in thousands)
Salaries and wages	Salaries and wages	$	36,631		$	37,877		$	36,513		Salaries and wages	$	36,278		$	36,631		$	37,877
Incentive compensation	Incentive compensation		5,438			6,068			5,404		Incentive compensation		4,905			5,438			6,068
Other personnel benefits	Other personnel benefits		11,905			11,415			10,973		Other personnel benefits		11,324			11,905			11,415
Occupancy	Occupancy		12,152			11,971			11,943		Occupancy		11,935			12,152			11,971
Data processing	Data processing		6,121			6,078			6,034		Data processing		6,057			6,121			6,078
Equipment	Equipment		5,364			5,873			6,171		Equipment		4,794			5,364			5,873
Contract courier			3,695			3,642			3,650
Courier service											Courier service		3,605			3,695			3,642
Telephone	Telephone		1,898			1,700			1,917		Telephone		2,112			1,898			1,700
Professional fees	Professional fees		1,886			1,770			1,626		Professional fees		1,869			1,886			1,770
Postage	Postage		1,624			1,601			1,711		Postage		1,407			1,624			1,601
Loan expenses	Loan expenses		1,322			1,324			1,107		Loan expenses		1,077			1,322			1,324
Stationery and supplies	Stationery and supplies		1,301			1,451			1,479		Stationery and supplies		1,280			1,301			1,451
Merchant credit card processing	Merchant credit card processing		1,183			1,412			1,465		Merchant credit card processing		1,104			1,183			1,412
Advertising and public relations	Advertising and public relations		1,066			1,190			1,406		Advertising and public relations		1,037			1,066			1,190
Operational losses	Operational losses		936			916			986		Operational losses		964			936			916
Amortization of deposit intangibles	Amortization of deposit intangibles		743			1,003			1,364		Amortization of deposit intangibles		543			743			1,003
Amortization of goodwill	Amortization of goodwill		—			—			1,176		Amortization of goodwill		—			—			—
Other	Other		8,438			8,032			7,726		Other		8,460			8,438			8,032

	Total	$	101,703		$	103,323		$	102,651		Total	$	98,751		$	101,703		$	103,323

Noninterest expense to revenues (“efficiency ratio”)(FTE)	Noninterest expense to revenues (“efficiency ratio”)(FTE)		39.1	%		41.0	%		41.7	%	Noninterest expense to revenues (“efficiency ratio”)(FTE)		38.5	%		39.1	%		41.0	%
Average full-time equivalent staff	Average full-time equivalent staff		1,026			1,072			1,082		Average full-time equivalent staff		984			1,026			1,072
Total average assets per full-time staff	Total average assets per full-time staff	$	4,223		$	3,752		$	3,565		Total average assets per full-time staff	$	4,610		$	4,223		$	3,752

Noninterest expense decreased by $2.9 million in 2004 compared to 2003, led by a $1.4 million decline in personnel-related costs. Salaries and wages declined $353 thousand largely due to a fewer number of employees, partly offset by merit increases granted to continuing staff. Incentive compensation fell $533 thousand as a result of a $404 thousand reduction in executive bonus costs. Other personnel benefits decreased $581 thousand primarily due to a $600 thousand decline in accruals for restricted performance shares. Equipment expense dropped $570 thousand, with lower depreciation and repair and maintenance costs. Occupancy expense fell $217 thousand mainly due to lower utility costs. Loan expense decreased $245 thousand due to lower loan activity. Postage declined $217 thousand from lower usage and a refund received in connection with changing mail handling vendors. Amortization of intangible assets decreased $200 thousand. Telephone expense rose $214 thousand mostly due to costs associated with the new branch network system.

Noninterest expense decreased $1.6 million or 1.6% in 2003 compared to 2002. Much of the decrease was due to lower salaries and wages expense, which was down $1.2 million or 3.3%. The cost savings resulted primarily from a 4.3% ~~reduction of work force,~~fewer employees, partially offset by merit increases granted to continuing staff. Additionally, 2002 included $366 thousand in severance costs relating to the KSB acquisition. The $630 thousand or 10.4% decline in incentive pay was mainly attributable to lower incentives due to slower loan growth. Equipment expense decreased $509 thousand or 8.7% mostly due to lower depreciation. Amortization

37

of intangibles fell $260 thousand or 26.0% largely due to the expiration of the deposit intangibles from a prior acquisition. ~~Stationary~~Stationery and supplies expense declined $150 thousand or ~~10.4%~~10.3% as a result of bankwide cost reduction efforts and office consolidation. A $229 thousand or 16.2% decline in merchant credit card expense was realized mostly through contract re-negotiation. Advertising and public relations expense was lower by $124 thousand or 10.4% primarily due to lower spending on overall business development.

Other categories of expense increased from 2002, partially offsetting the decreases outlined above. Other personnel benefits expense rose $490 thousand or 4.3% mainly due to increases in expenses relating to workers compensation insurance, certain retirement benefits and health insurance. Occupancy increased $181 thousand or 1.5% mostly due to higher utility costs and lower sublease income. Telephone expense increased $198 thousand or 11.6% due to cost associated with teller network system upgrades. Professional expense increased $116 thousand or 6.6% and other expense rose $406 thousand or 5.1% mainly due to increases in the Company’s share of low-income housing operating losses (up $213 thousand), internet banking expense, and check card network expense.

37

Noninterest expense increased by $672 thousand in 2002 compared to 2001, proportionately less than the corresponding increase in total revenues. This resulted in an efficiency ratio of 41.0%. Personnel-related cost increased $2.5 million or 4.7%. The growth was attributable to merit increases for employees, severance costs incurred in connection with the Company’s acquisition of KSB in June 2002 and higher incentive payments. Professional fees increased $144 thousand (8.9%) primarily in connection with legal costs incurred as a result of the KSB acquisition. Loan expense rose $217 thousand or 19.6% due to growth in new loans and refinancings.

Offsetting these increases, equipment expense, which consists largely of depreciation charges, decreased $298 thousand (4.8%). Amortization of intangibles declined primarily because of the discontinuation of goodwill amortization in accordance with the implementation of Statement of Financial Accounting Standards No. 142 and, to a lesser extent, the expiration of intangibles associated with prior acquisitions. Telephone expense continued to drop (down $217 thousand or 11.3% from 2001). Advertising and public relations fell $216 thousand (15.4%) primarily due to decreases in promotional advertising.

The ratio of average assets per full-time equivalent staff was $4.61 million in 2004 compared to $4.22 million and $3.75 million in 2003 ~~compared to $3.75 million~~ and ~~$3.57 million in~~ 2002, ~~and 2001,~~ respectively.

Provision for Income Tax

The income tax provision (FTE) ~~increased~~decreased by ~~$2.0 million~~$350 thousand or ~~3.5%~~0.6% in ~~2003~~2004 compared to ~~2002,~~2003, primarily as a result of ~~a $3.9~~the $3.0 million tax benefit resulting from the impairment charge, partially offset by $1.7 million higher FTE adjustment for increased earnings on tax-advantaged investments and loans. The ~~2003~~2004 provision (FTE) of ~~$60.3~~$59.9 million reflects an effective tax rate of ~~38.8%~~38.6% compared to a provision of ~~$58.2~~$60.3 million in ~~2002,~~2003, representing an effective tax rate of ~~40.0%~~38.8%. The nominal tax rate declined from ~~32.0%~~29.2% to ~~29.2%. The decrease in the effective and nominal tax rates~~28.1% primarily ~~relates~~attributable to income tax credits on low income housing ~~investments~~investment and tax-exempt ~~loans.~~

interest.

The provision for income taxes (FTE) was higher by ~~$2.4~~$2.0 million or ~~4.3%~~3.5% in ~~2002~~2003 compared to ~~2001,~~2002. Income before taxes increased 6.9%, resulting in a ~~slight increase~~decrease in the effective tax rate from 40.0% to ~~40.0% from 39.8%~~38.8%. ~~On the other hand,~~Similarly, the nominal tax rate decreased from ~~32.3%~~32.0% to ~~32.0%~~29.2%, primarily the result of growth of tax-favored investments and loans.

~~Item 7A. Quantitative and Qualitative Disclosures About Market Risk~~

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk as discussed above is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange risk, equity price risk and commodity price risk, are not significant in the normal course of the Company’s business activities.

38


Item 8.	Financial Statements and Supplementary Data

INDEX ~~TO FINANCIAL STATEMENTS~~


	Page

Management’s Report on Internal Control Over Financial Reporting		40
Report of Independent Registered Public Accounting Firm		41
Consolidated Balance Sheets as of December 31, ~~2003~~2004 and ~~2002~~2003		4042
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2004, 2003 ~~2002~~ and ~~2001~~2002		4143
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 ~~2002~~ and ~~2001~~2002		4245
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 ~~2002~~ and ~~2001~~2002		4346
Notes to Consolidated Financial Statements		4448
Report of Independent ~~Auditors’ Report~~Registered Public Accounting Firm		69
~~Management’s Letter of Financial Responsibility~~		7075

39

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Westamerica Bancorporation and Subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2004. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 based upon criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, Management determined that the Company’s internal control over financial reporting was effective as of December 31, 2004 based on the criteria in Internal Control — Integrated Framework issued by COSO.

The Company’s independent registered public accounting firm have issued an attestation report on Management’s assessment of the Company’s internal control over financial reporting. This report is included below.

Dated March 4, 2005

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Westamerica Bancorporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Westamerica Bancorporation and Subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 4, 2005 expressed an unqualified opinion on those consolidated financial statements.


	/s/KPMG LLP

	KPMG LLP

San Francisco, California

March 4, 2005

41

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS



					Balances as of December 31,								Balances as of December 31,

					2003		2002						2004		2003

													(In thousands)
					(In thousands)
ASSETS	ASSETS								ASSETS
									Cash and cash equivalents (Note 15)				$	126,153	$	189,628
	Cash and cash equivalents (Note 15)				$	189,628	$	222,577	Money market assets					534		534
	Money market assets					534		633	Investment securities available for sale (Note 2)					931,710		1,413,911
	Investment securities available for sale (Note 2)					1,413,911		947,848	Investment securities held to maturity; market values of $1,265,986 in 2004 and $542,729 in 2003 (Note 2)					1,260,832		535,377
	Investment securities held to maturity; market values of $542,729 in 2003 and $450,771 in 2002 (Note 2)					535,377		438,985	Loans, net of an allowance for loan losses of:
	Loans, net of an allowance for loan losses of:									$54,152 in 2004 and $53,910 in 2003 (Notes 3, 4 and 14)				2,246,078		2,269,420
		$53,910 in 2003 and $54,227 in 2002 (Notes 3, 4 and 14)				2,269,420		2,440,411	Other real estate owned					0		90
	Other real estate owned					90		381	Premises and equipment, net (Note 5)					35,223		35,748
	Premises and equipment, net (Note 5)					35,748		37,396	Interest receivable and other assets (Note 9)					136,738		131,677
	Interest receivable and other assets (Note 9)					131,677		136,636
											Total Assets		$	4,737,268	$	4,576,385
			Total Assets		$	4,576,385	$	4,224,867

LIABILITIES	LIABILITIES								LIABILITIES
	Deposits:								Deposits:
		Noninterest bearing			$	1,240,379	$	1,146,828		Noninterest bearing			$	1,273,825	$	1,240,379
		Interest bearing:								Interest bearing:
			Transaction			561,696		559,875			Transaction			591,593		561,696
			Savings			1,058,082		952,319			Savings			1,091,981		1,058,082
			Time (Notes 2 and 6)			603,834		635,043			Time (Notes 2 and 6)			626,220		603,834
												Total deposits		3,583,619		3,463,991
				Total deposits		3,463,991		3,294,065
									Short-term borrowed funds (Notes 2 and 6)					735,423		590,646
	Short-term borrowed funds (Notes 2 and 6)					590,646		349,736	Federal Home Loan Bank advances (Note 6)					0		105,000
	Federal Home Loan Bank advances (Note 6)					105,000		170,000	Notes Payable (Note 6)					21,429		24,643
	Notes Payable (Note 6)					24,643		24,607	Liability for interest, taxes and other expenses (Note 9)					38,188		51,734
	Liability for interest, taxes and other expenses (Note 9)					51,734		44,960
												Total Liabilities		4,378,659		4,236,014
				Total Liabilities		4,236,014		3,883,368

Shareholders’ Equity (Notes 7, 8 and 15)	Shareholders’ Equity (Notes 7, 8 and 15)								Shareholders’ Equity (Notes 7, 8 and 15)
	Common Stock (no par value) Authorized — 150,000 shares Issued and outstanding — 32,287 in 2003 and 33,411 in 2002					220,285		217,198	Common Stock (no par value) Authorized — 150,000 shares Issued and outstanding — 31,640 in 2004 and 32,287 in 2003					227,829		218,461
	Accumulated other comprehensive income:								Deferred compensation					2,146		1,824
		Unrealized gain on securities available for sale, net				13,191		19,152	Accumulated other comprehensive income:
	Retained earnings					106,895		105,149		Unrealized gain on securities available for sale, net				9,638		13,191
									Retained earnings					118,996		106,895
				Total Shareholders’ Equity		340,371		341,499
												Total Shareholders’ Equity		358,609		340,371
				Total Liabilities and Shareholders’ Equity	$	4,576,385	$	4,224,867
												Total Liabilities and Shareholders’ Equity	$	4,737,268	$	4,576,385

See accompanying notes to consolidated financial statements.

4042

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Years Ended December 31,
2003 2002 2001
(In thousands, except per share
data)
Interest Income

Loans $ 152,758 $ 174,810 $ 194,432
Money market assets and funds sold 8 12 24
Investment securities:
Available for sale
Taxable 34,336 32,426 36,813
Tax-exempt 15,263 14,960 13,482
Held to maturity
Taxable 6,387 6,810 4,572
Tax-exempt 14,741 8,615 7,733

Total Interest Income
223,493 237,633 257,056

Interest Expense

Transaction deposits 727 1,533 2,769
Savings deposits 6,091 10,409 17,127
Time deposits (Note 6) 10,167 16,703 37,692
Short-term borrowed funds (Note 6) 3,415 3,524 9,060
Federal Home Loan Bank advances 5,318 5,225 223
Debt financing and notes payable (Note 6) 1,479 1,788 2,016

Total Interest Expense
27,197 39,182 68,887

Net Interest Income
196,296 198,451 188,169
Provision for loan losses (Note 3) 3,300 3,600 3,600

Net Interest Income After Provision for Loan Losses
192,996 194,851 184,569

Noninterest Income

Service charges on deposit accounts 26,381 24,446 23,114
Merchant credit card 3,619 3,730 3,993
Financial services commissions 893 1,315 1,375
Mortgage banking 851 985 918
Trust fees 995 1,020 966
Securities gains (impairment) 2,443 (4,278 ) 0
Loss on extinguishment of debt (2,166 ) 0 0
Other 9,900 9,333 12,289

Total Noninterest Income
42,916 36,551 42,655

Noninterest Expense

Salaries and related benefits (Note 13) 53,974 55,360 52,890
Occupancy (Notes 5 and 11) 12,152 11,971 11,943
Furniture and equipment (Notes 5 and 11) 5,364 5,873 6,171
Data processing 6,121 6,078 6,034
Contract courier 3,695 3,643 3,650
Professional fees 1,886 1,770 1,626
Other real estate owned 46 143 166
Other 18,465 18,485 20,171

Total Noninterest Expense
101,703 103,323 102,651

Income Before Income Taxes
134,209 128,079 124,573
Provision for income taxes (Note 9) 39,146 40,941 40,294

Net Income
$ 95,063 $ 87,138 $ 84,279

Comprehensive Income, net:

Change in unrealized gain on securities available for sale, net (5,961 ) 7,252 4,731

Comprehensive Income
$ 89,102 $ 94,390 $ 89,010

Average Shares Outstanding
32,849 33,686 35,213
Diluted Average Shares Outstanding
33,369 34,225 35,748
Per Share Data (Note 7)

Basic earnings $ 2.89 $ 2.59 $ 2.39
Diluted earnings 2.85 2.55 2.36
Dividends paid 1.00 0.90 0.82


				For the Years Ended December 31,

				2004			2003			2002

				(In thousands, except per share data)
Interest and Fee Income
	Loans			$	133,226		$	152,758		$	174,810
	Money market assets and funds sold				1			8			12
	Investment securities:
		Available for sale
			Taxable		33,230			35,385			32,426
			Tax-exempt		14,514			15,563			14,960
		Held to maturity
			Taxable		17,209			5,038			6,810
			Tax-exempt		18,157			14,741			8,615

			Total Interest and fee Income		216,337			223,493			237,633

Interest Expense
	Transaction deposits				612			727			1,533
	Savings deposits				3,931			6,091			10,409
	Time deposits (Note 6)				8,504			10,167			16,703
	Short-term borrowed funds (Note 6)				5,878			3,415			3,524
	Federal Home Loan Bank advances				897			5,318			5,225
	Debt financing and notes payable (Note 6)				1,284			1,479			1,788

		Total Interest Expense			21,106			27,197			39,182

Net Interest Income					195,231			196,296			198,451
	Provision for loan losses (Note 3)				2,700			3,300			3,600

Net Interest Income After Provision for Loan Losses					192,531			192,996			194,851

Noninterest Income
	Service charges on deposit accounts				28,621			26,381			24,446
	Merchant credit card				3,509			3,619			3,730
	Financial services commissions				1,250			893			1,315
	Mortgage banking				386			851			985
	Trust fees				1,027			995			1,020
	Securities (impairment) gains, net				(5,011	)		2,443			(4,278	)
	Loss on extinguishment of debt				(2,204	)		(2,166	)		0
	Other				11,005			9,900			9,333

		Total Noninterest Income			38,583			42,916			36,551

Noninterest Expense
	Salaries and related benefits (Note 13)				52,507			53,974			55,360
	Occupancy (Notes 5 and 11)				11,935			12,152			11,971
	Furniture and equipment (Notes 5 and 11)				4,794			5,364			5,873
	Data processing				6,057			6,121			6,078
	Courier Service				3,605			3,695			3,643
	Professional fees				1,869			1,886			1,770

43


			For the Years Ended December 31,

			2004			2003			2002

			(In thousands, except per share data)
	Other real estate owned			(7	)		46			143
	Other			17,991			18,465			18,485

		Total Noninterest Expense		98,751			101,703			103,323

Income Before Income Taxes				132,363			134,209			128,079
	Provision for income taxes (Note 9)			37,145			39,146			40,941

Net Income			$	95,218		$	95,063		$	87,138

Comprehensive Income, net:
	Change in unrealized gain on securities available for sale, net			(3,553	)		(5,961	)		7,252

Comprehensive Income			$	91,665		$	89,102		$	94,390

Average Shares Outstanding				31,821			32,849			33,686
Diluted Average Shares Outstanding				32,461			33,369			34,225
Per Share Data (Note 7)
	Basic earnings		$	2.99		$	2.89		$	2.59
	Diluted earnings			2.93			2.85			2.55
	Dividends paid			1.10			1.00			0.90

See accompanying notes to consolidated financial statements.

4144

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


					Accumulated
					Other
		Common			Comprehensive			Retained
		Stock			Income (Loss)			Earnings			Total


		(In thousands)
December 31, 2000		$	206,952		$	7,169		$	123,626		$	337,747
	Net income for the year 2001								84,279			84,279											Accumulated
	Stock issued, including stock option tax benefits		17,987									17,987											Other
	Purchase and retirement of stock		(15,865	)					(85,448	)		(101,313	)					Common			Deferred		Comprehensive			Retained
	Dividends								(29,072	)		(29,072	)		Shares			Stock			Compensation		Income (Loss)			Earnings			Total
	Unrealized gain on securities available for sale, net					4,731						4,731
															(In thousands)
December 31, 2001	December 31, 2001		209,074			11,900			93,385			314,359		December 31, 2001		34,220			208,033			1,041		11,900			93,385			314,359
	Net income for the year 2002								87,138			87,138		Net income for the year 2002													87,138			87,138
	Stock issued in connection with purchase of Kerman State Bank		14,620									14,620		Stock issued in connection with purchase of Kerman State Bank		355			14,620											14,620
	Other stock issued, including stock option tax benefits		12,425									12,425		Stock issued for stock options		366			8,652											8,652
	Purchase and retirement of stock		(18,921	)					(45,112	)		(64,033	)	Stock option tax benefits					2,985											2,985
	Dividends								(30,262	)		(30,262	)	Restricted stock activity		20			557			231								788
	Unrealized gain on securities available for sale, net					7,252						7,252		Purchase and retirement of stock		(1,550	)		(18,921	)							(45,112	)		(64,033	)
														Dividends													(30,262	)		(30,262	)
														Unrealized gain on securities available for sale, net										7,252						7,252

December 31, 2002	December 31, 2002		217,198			19,152			105,149			341,499		December 31, 2002		33,411			215,926			1,272		19,152			105,149			341,499
														Net income for the year 2003													95,063			95,063
														Stock issued for stock options		425			8,353											8,353
	Net income for the year 2003								95,063			95,063		Stock option tax benefits					4,162											4,162
	Other stock issued, including stock option tax benefits		13,474									13,474		Restricted stock activity		24			407			552								959
	Purchase and retirement of stock		(10,387	)					(60,382	)		(70,769	)	Purchase and retirement of stock		(1,573	)		(10,387	)							(60,382	)		(70,769	)
	Dividends								(32,935	)		(32,935	)	Dividends													(32,935	)		(32,935	)
	Unrealized loss on securities available for sale, net					(5,961	)					(5,961	)	Unrealized gain on securities available for sale, net										(5,961	)					(5,961	)

December 31, 2003	December 31, 2003	$	220,285		$	13,191		$	106,895		$	340,371		December 31, 2003		32,287			218,461			1,824		13,191			106,895			340,371
														Net income for the year 2004													95,218			95,218
														Stock issued for stock options		403			12,810											12,810
														Stock option tax benefits					3,508											3,508
														Restricted stock activity		16			467			322								789
														Purchase and retirement of stock		(1,066	)		(7,417	)							(48,027	)		(55,444	)
														Dividends													(35,090	)		(35,090	)
														Unrealized loss on securities available for sale, net										(3,553	)					(3,553	)

December 31, 2004														December 31, 2004		31,640		$	227,829		$	2,146	$	9,638		$	118,996		$	358,609

See accompanying notes to consolidated financial statements.

4245

WESTAMERICA BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



			For the Years Ended December 31,
														For the Years Ended December 31,
			2003			2002			2001
														2004			2003			2002

			(In thousands)											(In thousands)
Operating Activities:	Operating Activities:											Operating Activities:
Net income	Net income		$	95,063		$	87,138		$	84,279		Net income		$	95,218		$	95,063		$	87,138
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:											Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation of fixed assets			3,993			4,507			4,899		Depreciation and amortization of fixed assets			3,867			3,993			4,507
	Amortization of intangibles and other assets			1,944			1,989			3,343		Amortization of intangibles and other assets			2,296			1,944			1,989
	Loan loss provision			3,300			3,600			3,600		Loan loss provision			2,700			3,300			3,600
	Amortization of deferred net loan fees			249			420			1,330		Amortization of deferred net loan (cost) fees			(105	)		249			420
	(Increase) decrease in interest income receivable			(269	)		501			6,304		Decrease (increase) in interest income receivable			1,217			(269	)		501
	Decrease (increase) in other assets			57,671			(10,103	)		(5,028	)	(Increase) decrease in other assets			(1,547	)		57,671			(9,815	)
	Increase (decrease) in income taxes payable			6,550			(833	)		4,210		(Decrease) increase in income taxes payable			(3,779	)		6,550			(833	)
	Decrease in interest expense payable			(1,027	)		(1,724	)		(5,072	)	Increase (decrease) in interest expense payable			43			(1,027	)		(1,724	)
	(Decrease) increase in other liabilities			(53,279	)		71			2,751		Increase (decrease) in other liabilities			7,020			(53,279	)		71
	Gain on sale of securities			(2,443	)		(18	)		0		Gain on sale of securities			(2,169	)		(2,443	)		(18	)
	Loss on extinguishment of debt			2,166			0			0		Gain on other assets			(402	)		0			(288	)
	Net loss (gain)on sales/write-down of fixed assets			142			558			(330	)	Loss on extinguishment of debt			2,204			2,166			0
	Originations of loans for resale			(9,113	)		(12,431	)		(5,329	)	Net loss on sales/write-down of fixed assets			47			142			558
	Net proceeds from sale of loans originated for resale			10,233			12,605			4,848		Originations of loans for resale			(3,988	)		(9,113	)		(12,431	)
	Net gain on sale of property acquired in satisfaction of debt			(122	)		(108	)		(156	)	Net proceeds from sale of loans originated for resale			3,955			10,233			12,605
	Write-downs of other real estate owned			307			126			78		Net gain on sale of property acquired in satisfaction of debt			(231	)		(122	)		(108	)
	Impairment of investment securities			0			4,260			0		Write-downs of other real estate owned			0			307			126
												Impairment of investment securities			7,180			0			4,260
		Net Cash Provided by Operating Activities		115,365			90,558			99,727
													Net Cash Provided by Operating Activities		113,526			115,365			90,558

Investing Activities	Investing Activities											Investing Activities
Net cash obtained in mergers and acquisitions	Net cash obtained in mergers and acquisitions			0			5,368			0		Net cash obtained in mergers and acquisitions			0			0			5,368
Net repayments (disbursements) of loans				164,521			45,346			(7,245	)
Net repayments of loans												Net repayments of loans			20,778			164,521			45,346
Purchases of money market assets	Purchases of money market assets			0			0			(284	)	Purchases of money market assets			0			0			0
Purchases of investment securities available for sale	Purchases of investment securities available for sale			(1,072,090	)		(1,618,742	)		(447,295	)	Purchases of investment securities available for sale			(96,027	)		(1,072,090	)		(1,618,742	)
Purchases of investment securities held to maturity	Purchases of investment securities held to maturity			(371,037	)		(272,184	)		(3,861	)	Purchases of investment securities held to maturity			(890,836	)		(371,037	)		(272,184	)
Purchases of property, plant and equipment	Purchases of property, plant and equipment			(4,345	)		(2,103	)		(4,060	)	Purchases of property, plant and equipment			(3,390	)		(4,345	)		(2,103	)
Proceeds from maturity/calls of securities available for sale	Proceeds from maturity/calls of securities available for sale			496,011			1,629,286			427,114		Proceeds from maturity/calls of securities available for sale			348,027			496,011			1,629,286
Proceeds from maturity/calls of securities held to maturity	Proceeds from maturity/calls of securities held to maturity			233,580			58,993			22,727		Proceeds from maturity/calls of securities held to maturity			158,929			233,580			58,993
Proceeds from sale of securities available for sale	Proceeds from sale of securities available for sale			153,128			1,000			651		Proceeds from sale of securities available for sale			209,173			153,128			1,000
Proceeds from sale of property and equipment	Proceeds from sale of property and equipment			1,859			548			1,147		Proceeds from sale of property and equipment			0			1,859			548
Proceeds from sale of other real estate owned	Proceeds from sale of other real estate owned			1,882			391			1,941		Proceeds from sale of other real estate owned			321			1,882			391

		Net Cash Used In Investing Activities		(396,491	)		(152,097	)		(9,165	)		Net Cash Used In Investing Activities		(253,025	)		(396,491	)		(152,097	)

Financing Activities	Financing Activities											Financing Activities
Net increase (decrease) in deposits	Net increase (decrease) in deposits			169,925			(24,137	)		(1,406	)	Net increase (decrease) in deposits			119,628			169,925			(24,137	)
Net increase (decrease) in short-term borrowings				240,910			88,100			(75,031	)
Repayments to the FHLB				(67,166	)		0			0
Advances from the FHLB				0	��		130,000			0
Advances (repayments) of notes payable				36			(3,214	)		(3,215	)
Net increase in short-term borrowings												Net increase in short-term borrowings			144,776			240,910			88,100
Repayments to the Federal Home Loan Bank												Repayments to the Federal Home Loan Bank			(107,204	)		(67,166	)		0
Advances from the Federal Home Loan Bank												Advances from the Federal Home Loan Bank			0			0			130,000
(Repayments) advances of notes payable												(Repayments) advances of notes payable			(3,214	)		36			(3,214	)
Exercise of stock options/issuance of shares	Exercise of stock options/issuance of shares			8,176			8,480			12,175		Exercise of stock options/issuance of shares			12,572			8,176			8,480
Retirement of common stock including repurchases	Retirement of common stock including repurchases			(70,769	)		(64,033	)		(101,313	)	Retirement of common stock including repurchases			(55,444	)		(70,769	)		(64,033	)
Dividends paid	Dividends paid			(32,935	)		(30,262	)		(29,072	)	Dividends paid			(35,090	)		(32,935	)		(30,262	)

		Net Cash Provided By (Used In) Financing Activities		248,177			104,934			(197,862	)		Net Cash Provided By Financing Activities		76,024			248,177			104,934

Net (Decrease) Increase In Cash and Cash Equivalents	Net (Decrease) Increase In Cash and Cash Equivalents			(32,949	)		43,395			(107,300	)	Net (Decrease) Increase In Cash and Cash Equivalents			(63,475	)		(32,949	)		43,395
Cash and Cash Equivalents at Beginning of Year	Cash and Cash Equivalents at Beginning of Year			222,577			179,182			286,482		Cash and Cash Equivalents at Beginning of Year			189,628			222,577			179,182

Cash and Cash Equivalents at End of Year	Cash and Cash Equivalents at End of Year		$	189,628		$	222,577		$	179,182		Cash and Cash Equivalents at End of Year		$	126,153		$	189,628		$	222,577

Supplemental Disclosures:
Supplemental disclosure of noncash activities:
	Loans transferred to other real estate owned		$	1,800		$	375		$	321
	Unrealized (loss) gain on securities available for sale, net			(5,961	)		7,252			4,731
The acquisition of Kerman State Bank involved the following:
	Common Stock issued			0			14,620			0
	Liabilities assumed			0			85,085			0
	Fair value of assets acquired, other than cash and cash equivalents			0			(89,170	)		0
	Core deposit intangible			0			(2,500	)		0
	Goodwill			0			(2,667	)		0
	Net Cash and Cash Equivalents Received			0			5,368			0
Supplemental disclosure of cash flow activity:
	Interest paid for the period			26,547			40,858			73,959
	Income tax payments for the period			33,146			40,272			37,488

46


				For the Years Ended December 31,

				2004			2003			2002

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

See accompanying notes to consolidated financial statements.

4347

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1:	Business and Accounting Policies

Westamerica Bancorporation, a registered bank holding company (the “Company”), provides a full range of banking services to individual and corporate customers in Northern and Central California through its subsidiary bank, Westamerica Bank (the “Bank”). The Bank is subject to competition from both financial and nonfinancial institutions and to the regulations of certain agencies and undergoes periodic examinations by those regulatory authorities.


	*Summary of Significant Accounting Policies*

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The following is a summary of significant policies used in the preparation of the accompanying financial statements.

Accounting Estimates. Certain accounting policies underlying the preparation of these financial statements require management to make estimates and judgments. These estimates and judgments may affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. The most significant of these involve the Allowance for Loan Losses, as discussed below under “Allowance for Loan Losses”.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all the Company’s subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The Company does not maintain or conduct transactions with any unconsolidated special purpose ~~entities.~~

entities other than low income housing partnerships sponsored by third parties.

Business Combinations. In a business combination, the results of operations of the acquired entity are included in the consolidated financial statements from the date of acquisition. Assets and liabilities of the entity acquired are recorded at fair value on the date of acquisition and goodwill is recorded as the excess of the purchase price over the fair value of the net assets (including identifiable intangibles such as core deposits) acquired. See “Intangible Assets” below.

Cash Equivalents. Cash equivalents include Due From Banks balances and Federal Funds Sold which are both readily convertible to known amounts of cash and are generally 90 days or less from maturity, presenting insignificant risk of changes in value ~~because of~~due to interest rate ~~volatility.~~

changes.

Securities. Investment securities consist of debt securities of the U.S. Treasury, ~~federal agencies,~~government sponsored entities, states, counties and municipalities, corporations, mortgage-backed securities, and equity securities. The Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Securities transactions are recorded on a trade date basis. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. Securities not included in trading or held to maturity are classified as available for sale. Trading and available for sale securities are recorded at fair value. Held to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate component of shareholders’ equity until realized. The unrealized gains and losses included in the separate component of shareholders’ equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premiums or discounts on the associated security.

A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Unrealized investment securities losses are evaluated at least quarterly on ~~an individual-security basis~~pools of securities with similar attributes to determine whether such declines in value should be considered “other than temporary” and therefore be

44

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

subject to immediate loss recognition in income. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates, there

48

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

has not been significant deterioration in the financial condition of the issuer, and the Company has the intent and ability to hold the security for a sufficient time to recover the carrying value. An unrealized loss in the value of an equity security is generally considered temporary when the fair value of the security is below the carrying value primarily due to current market conditions and not deterioration in the financial condition of the issuer, and the Company has the intent and ability to hold the security for a sufficient time to recover the carrying value. Other factors that may be considered in determining whether a decline in the value of either a debt or an equity security is “other than temporary” include ratings by recognized rating agencies; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and near-term prospects of the issuer and recommendations of investment advisors or market analysts.

Purchase premiums and discounts are amortized or accreted over the estimated life of the related investment security as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized in interest income upon disposition of the related security. Dividend and interest income are recognized when earned. Realized gains and losses ~~for securities classified as~~from the sale of available for sale ~~or held to maturity~~securities are included in earnings ~~and are derived~~ using the specific identification ~~method for determining the cost of securities sold.~~

method.

Loans. Loans are stated at the principal amount outstanding, net of unearned discount and deferred ~~fees.~~fees (costs). Interest is accrued daily on the outstanding balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Performing nonaccrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectibility of both interest and principal. Certain consumer loans or auto and credit card receivables are charged to the allowance when they become 120 days past due. Nonrefundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the ~~estimated respective~~contractual loan lives. Upon prepayment, unamortized loan fees are immediately recognized in interest income. Other fees, including those collected upon principal prepayments, are included in interest income when received. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an individual loan basis. The Company recognizes a loan as impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. Income recognition on impaired loans conforms to that used on nonaccrual loans.

Allowance for Loan Losses. The allowance for loan losses is established through provisions for loan losses charged to income. Losses on loans, including impaired loans, are charged to the allowance for loan losses when all or a portion of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. The Company’s allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing

45

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

economic conditions and other factors. A portion of the allowance is specifically allocated to impaired and other identified loans whose full collectibility is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. A second allocation is based in part on quantitative analyses of historical

49

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

credit loss experience, in which criticized and classified loan balances identified through an internal loan review process are analyzed using a linear regression model to determine standard loss rates. The results of this analysis are applied to current criticized and classified loan balances to allocate the reserve to the respective segments of the loan portfolio. In addition, loans with similar characteristics not usually criticized using regulatory guidelines are analyzed based on the historical loss rates and delinquency trends, grouped by the number of days the payments on these loans are delinquent. Last, allocations are made to general loan categories based on commercial office vacancy rates, mortgage loan foreclosure trends, agriculture commodity prices, and levels of government funding. The remainder of the reserve is considered to be unallocated and is established at a level considered necessary based on relevant economic conditions and available data, including unemployment statistics, unidentified economic and business conditions; the quality of lending management and staff; credit quality trends; concentrations of credit; and changing underwriting standards due to external competitive ~~issues.~~

factors.

Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and some vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for loan losses. Other real estate owned is recorded at the lower of the related loan balance or fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Subsequently, other real estate owned is valued at the lower of the amount recorded at the date acquired or the then current fair value less estimated disposition costs. Subsequent losses incurred due to any decline in annual independent property appraisals are recognized as noninterest expense. Routine holding costs, such as property taxes, insurance, maintenance and losses from sales and dispositions, are recognized as noninterest expense.

Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter.

Intangible assets. Intangible assets (which are included in Other Assets) are comprised of goodwill and core deposit intangibles acquired in business combinations. In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized after 2001, but instead be periodically evaluated for impairment.

46

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~For comparison purposes, the following table reconciles the Company’s reported earnings to earnings adjusted to exclude goodwill amortization (dollars in thousands, except per share data):~~

2003 2002 2001
Net Income —
As reported $ 95,063 $ 87,138 $ 84,279
Goodwill Amortization 0 0 1,176

Adjusted $ 95,063 $ 87,138 $ 85,455

Basic Earnings Per Share —
As reported $ 2.89 $ 2.59 $ 2.39
Goodwill Amortization 0.00 0.00 0.03

Adjusted $ 2.89 $ 2.59 $ 2.42

Diluted Earnings Per Share —
As reported $ 2.85 $ 2.55 $ 2.36
Goodwill Amortization 0.00 0.00 0.03

Adjusted $ 2.85 $ 2.55 $ 2.39

Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual ~~values, and also reviewed~~values. If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, Management reviews the asset for impairment. ~~The Company was required to adopt the provisions of Statement 141 immediately upon issuance and Statement 142 effective January 1, 2002. Accordingly, any~~Any goodwill and any intangible asset determined to have an indefinite useful life acquired in a purchase business combination is ~~no longer~~not amortized, but is periodically evaluated for impairment in accordance with the appropriate accounting literature. The Company was also required to reassess the useful lives and residual values of all such intangible assets and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset was identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment within the first interim period and recognize any impairment loss measured as of the date of adoption as the cumulative effect of a change in accounting principle in the period. The Company did not have any transitional impairment losses.

The following table summarizes the Company’s goodwill and core deposit intangible assets as of January 1 and December 31 for 2004 and 2003 (dollars in thousands):


	At							At
	January 1,							December 31,
	2004			Additions		Reductions		2004

Goodwill	$	22,968		$	0	$	0	$	22,968
Accumulated Amortization		(3,972	)		0		0		(3,972	)

Net	$	18,996		$	0	$	0	$	18,996

Core Deposit Intangibles	$	7,783		$	0	$	0	$	7,783
Accumulated Amortization		(4,345	)		0		544		(4,889	)

Net	$	3,438		$	0	$	544	$	2,894

50

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	At							At
	January 1,							December 31,
	2003			Additions		Reductions		2003

Goodwill	$	22,968		$	0	$	0	$	22,968
Accumulated Amortization		(3,972	)		0		0		(3,972	)

Net	$	18,996		$	0	$	0	$	18,996

Core Deposit Intangibles	$	7,783		$	0	$	0	$	7,783
Accumulated Amortization		(3,603	)		0		742		(4,345	)

Net	$	4,180		$	0	$	742	$	3,438

At December 31, ~~2003,~~2004, the estimated amortization of core deposit intangibles, in thousands of dollars, annually through ~~2008~~2009 is ~~$543,~~ $469 ~~$427, $427~~in 2005 and $427 ~~respectively.~~per year thereafter. The weighted average amortization period for core deposit intangibles is ~~7.8~~6.8 years.

47

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Impairment of Long-Lived Assets. The Company reviews its long-lived assets and certain intangibles for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income taxes. The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Derivative Instruments and Hedging Activities. The Company’s accounting for derivative instruments, including certain derivative instruments embedded in other contracts, requires the Company to recognize those items as assets or liabilities in the statement of financial position and measure them at fair value.

Stock Options. As permitted by SFAS No. 123 “Accounting for Stock-Based Compensation”, the Company accounts for its stock option plans using the intrinsic value method. Accordingly, compensation expense is recorded on the grant date only if the current price of the underlying stock exceeds the exercise price of the option. Had compensation cost been determined based on the fair value method established by

51

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:


		2003		2002		2001
									2004		2003		2002

		(In thousands, except per share							(In thousands, except per share
		data)							data)
Compensation cost based on fair value method, net of tax effect	Compensation cost based on fair value method, net of tax effect	$	2,388	$	3,600	$	4,096	Compensation cost based on fair value method, net of tax effect	$	2,105	$	2,388	$	3,600
Net income:	Net income:							Net income:
	As reported	$	95,063	$	87,138	$	84,279	As reported	$	95,218	$	95,063	$	87,138
	Pro forma		92,675		83,538		80,183	Pro forma		93,113		92,675		83,538
Basic earnings per share:	Basic earnings per share:							Basic earnings per share:
	As reported	$	2.89	$	2.59	$	2.39	As reported	$	2.99	$	2.89	$	2.59
	Pro forma		2.82		2.48		2.28	Pro forma		2.93		2.82		2.48
Diluted earnings per share:	Diluted earnings per share:							Diluted earnings per share:
	As reported		2.85		2.55		2.36	As reported	$	2.93	$	2.85	$	2.55
	Pro forma		2.78		2.44		2.24	Pro forma		2.87		2.78		2.44

SFAS 123 was revised in December, 2004 to require that, effective for periods beginning after June 15, 2005, the Company begin using the fair market value method for valuing and accounting for stock options. As allowed by SFAS 123 (revised), the Company expects to apply the new requirements on a modified retrospective basis, in which prior period financial statements will be adjusted to give effect to the fair-value-based method consistent with the above pro-forma amounts.

Earnings Per Share. Basic earnings per share are computed by dividing net income by the average number of shares outstanding during the year. Diluted earnings per share are computed by dividing net income by the average number of shares outstanding during the year plus the impact of dilutive common stock equivalents (e.g. stock options outstanding).

Extinguishment of Debt. Gains and losses, including fees, incurred in connection with the early extinguishment of debt are charged to current earnings as reductions in noninterest income.

Other. Securities and other property held by the Bank in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries.

48

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~Note 2: Investment Securities~~
Note 2: Investment Securities

The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of December 31, 2004, follows:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value

	(In thousands)
Securities of U.S. Government sponsored entities	$	562,842	$	783	$	(6,568	)	$	557,057
Obligations of States and political subdivisions		234,123		13,622		(14	)		247,731
Asset-backed securities		3,256		1		0			3,257
Corporate bonds		47,316		1,342		0			48,658
Other securities		67,541		7,493		(27	)		75,007

Total	$	915,078	$	23,241	$	(6,609	)	$	931,710

52

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of December 31, 2004, follows:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value

	(In thousands)
Securities of U.S. Government sponsored entities	$	736,137	$	1,593	$	(4,627	)	$	733,103
Obligations of States and political subdivisions		524,695		10,840		(2,652	)		532,883
Asset-backed securities		0		0		0			0
Other securities		0		0		0			0

Total	$	1,260,832	$	12,433	$	(7,279	)	$	1,265,986

The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of December 31, 2003, follows:


			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market		Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

										(In thousands)
	(In thousands)
Securities of U.S. Government agencies and corporations	$	963,922	$	4,325	$	(6,520	)	$	961,727
Securities of U.S. Government sponsored entities										$	963,922	$	4,325	$	(6,520	)		961,727
Obligations of States and political subdivisions		260,790		17,655		(52	)		278,393		260,790		17,655		(52	)		278,393
Asset-backed securities		12,926		66		(2	)		12,990		12,926		66		(2	)		12,990
Corporate bonds		69,703		3,721		0			73,424		69,703		3,721		0			73,424
Other securities		83,809		6,697		(3,129	)		87,377		83,809		6,697		(3,129	)		87,377

Total	$	1,391,150	$	32,464	$	(9,703	)	$	1,413,911	$	1,391,150	$	32,464	$	(9,703	)	$	1,413,911

The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of December 31, 2003, follows:


			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market		Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

										(In thousands)
	(In thousands)
Securities of U.S. Government agencies and corporations	$	98,287	$	939	$	(1,112	)	$	98,114
Securities of U.S. Government sponsored entities										$	98,287	$	939	$	(1,112	)	$	98,114
Obligations of States and political subdivisions		417,984		10,642		(3,112	)		425,514		417,984		10,642		(3,112	)		425,514
Asset-backed securities		6,322		18		(23	)		6,317		6,322		18		(23	)		6,317
Other securities		12,784		0		0			12,784		12,784		0		0			12,784

Total	$	535,377	$	11,599	$	(4,247	)	$	542,729	$	535,377	$	11,599	$	(4,247	)	$	542,729

~~The amortized cost, unrealized gains and losses, and estimated market value of the available for sale investment securities portfolio as of December 31, 2002, follows:~~

Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In thousands)
U.S. Treasury securities $ 20,484 $ 603 $ 0 $ 21,087
Securities of U.S. Government agencies and corporations 377,727 7,793 (13 ) 385,507
Obligations of States and political subdivisions 278,834 17,540 (115 ) 296,259
Asset-backed securities 41,494 596 (15 ) 42,075
Corporate bonds 141,814 4,360 (1,677 ) 144,497
Other securities 54,448 4,771 (796 ) 58,423

Total $ 914,801 $ 35,663 $ (2,616 ) $ 947,848

4953

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The amortized cost, unrealized gains and losses, and estimated market value of the held to maturity investment securities portfolio as of December 31, 2002, follows:~~

Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In thousands)
Securities of U.S. Government agencies and corporations $ 201,486 $ 2,484 $ (611 ) $ 203,359
Obligations of States and political subdivisions 212,569 10,029 (236 ) 222,362
Asset-backed securities 9,769 119 0 9,888
Other securities 15,161 0 0 15,161

Total $ 438,985 $ 12,632 $ (847 ) $ 450,770

The amortized cost and estimated market value of securities at December 31, ~~2003,~~2004, by contractual maturity, are shown in the following table:



		Securities Available				Securities Held to
		for Sale				Maturity					Securities Available for
											Sale				Securities Held to Maturity
				Estimated				Estimated
		Amortized		Market		Amortized		Market					Estimated				Estimated
		Cost		Value		Cost		Value			Amortized		Market		Amortized		Market
											Cost		Value		Cost		Value

		(In thousands)									(In thousands)
Maturity in years:	Maturity in years:									Maturity in years:
	1 year or less	$	60,907	$	61,748	$	10,402	$	10,596	1 year or less	$	26,142	$	26,502	$	9,799	$	9,885
	1 to 5 years		515,112		519,932		64,067		66,240	1 to 5 years		371,098		370,048		271,337		272,239
	5 to 10 years		189,548		199,334		52,963		56,149	5 to 10 years		152,119		161,243		74,395		77,508
	Over 10 years		74,090		78,842		296,874		298,846	Over 10 years		44,242		46,942		396,220		399,992

Subtotal	Subtotal		839,657		859,856		424,306		431,831	Subtotal		593,601		604,735		751,751		759,624
Mortgage-backed	Mortgage-backed		467,684		466,678		98,287		98,114	Mortgage-backed		253,936		251,968		509,081		506,362
Other securities	Other securities		83,809		87,377		12,784		12,784	Other securities		67,541		75,007		0		0

Total	Total	$	1,391,150	$	1,413,911	$	535,377	$	542,729	Total	$	915,078	$	931,710	$	1,260,832	$	1,265,986

Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-backed securities. At December 31, ~~2003~~2004 and ~~2002,~~2003, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

50

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

An analysis of gross unrealized losses of the available for sale investment securities portfolio as of December 31, ~~2003,~~2004, follows:


																		Less than 12 Months					12 months or longer					Total
		Less Than 12 Months					12 Months or Longer					Total
																				Unrealized					Unrealized					Unrealized
				Unrealized					Unrealized					Unrealized				Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
		Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
																		(In thousands)

		(In thousands)
Securities of U.S. Government agencies and corporations		$	420,899	$	(6,520	)	$	23	$	0		$	420,922	$	(6,520	)
Securities of U.S. Government sponsored entities																	Securities of U.S. Government sponsored entities	$	418,488	$	(5,413	)	$	20,058	$	(1,155	)	$	438,546	$	(6,568	)
Obligations of States and political subdivisions	Obligations of States and political subdivisions		880		(5	)		1,711		(47	)		2,591		(52	)	Obligations of States and political subdivisions		703		(2	)		2,015		(12	)		2,718		(14	)
Asset-backed securities	Asset-backed securities		737		(2	)		0		0			737		(2	)	Asset-backed securities		0		0			0		0			0		0
Corporate bonds	Corporate bonds		0		0			0		0			0		0		Corporate bonds		0		0			0		0			0		0
Other securities	Other securities		55,503		(2,609	)		4,480		(520	)		59,983		(3,129	)	Other securities		1,974		(27	)		0		0			1,974		(27	)

	Subtotal, debt securities		478,019		(9,136	)		6,214		(567	)		484,233		(9,703	)	Subtotal, debt securities		421,165		(5,442	)		22,073		(1,167	)		443,238		(6,609	)
Common stock	Common stock		0		0			0		0			0		0		Common stock		0		0			0		0			0		0

Total	Total	$	478,019	$	(9,136	)	$	6,214	$	(567	)	$	484,233	$	(9,703	)	Total	$	421,165	$	(5,442	)	$	22,073	$	(1,167	)	$	443,238	$	(6,609	)

54

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

An analysis of gross unrealized losses of the held to maturity investment securities portfolio as of December 31, ~~2003,~~2004, follows:


																		Less than 12 Months					12 months or longer					Total
		Less Than 12 Months					12 Months or Longer					Total
																				Unrealized					Unrealized					Unrealized
				Unrealized					Unrealized					Unrealized				Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
		Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
																		(In thousands)

		(In thousands)
Securities of U.S. Government agencies and corporations		$	52,834	$	(936	)	$	5,045	$	(176	)	$	57,879	$	(1,112	)
Securities of U.S. Government sponsored entities																	Securities of U.S. Government sponsored entities	$	449,345	$	(4,010	)	$	23,018	$	(617	)	$	472,363	$	(4,627	)
Obligations of States and political subdivisions	Obligations of States and political subdivisions		131,397		(3,067	)		5,160		(45	)		136,557		(3,112	)	Obligations of States and political subdivisions		67,763		(548	)		101,554		(2,104	)		169,317		(2,652	)
Asset-backed securities	Asset-backed securities		3,603		(23	)		0		0			3,603		(23	)	Asset-backed securities		0		0			0		0			0		0
Corporate bonds	Corporate bonds		0		0			0		0			0		0		Corporate bonds		0		0			0		0			0		0
Other securities	Other securities		0		0			0		0			0		0		Other securities		0		0			0		0			0		0

	Subtotal, debt securities		187,834		(4,026	)		10,205		(221	)		198,039		(4,247	)	Subtotal, debt securities		517,108		(4,558	)		124,572		(2,721	)		641,680		(7,279	)
Common stock	Common stock		0		0			0		0			0		0		Common stock		0		0			0		0			0		0

Total	Total	$	187,834	$	(4,026	)	$	10,205	$	(221	)	$	198,039	$	(4,247	)	Total	$	517,108	$	(4,558	)	$	124,572	$	(2,721	)	$	641,680	$	(7,279	)

~~No declines~~

Substantially all of the securities set forth in the table above are investment-grade debt securities which have experienced a decline in fair value ~~were considered~~due to ~~be “other~~changes in market interest rates, not in estimated cash flows. Since the Company has the intent and ability to retain its investment in these securities for a period of time to allow for any anticipated recovery in market value, no other than ~~temporary” during 2003.~~

temporary impairment was recorded on these securities at December 31, 2004.

In the fourth quarter of 2004, the Company recognized a $7.2 million securities impairment writedown to market value of certain issues of Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock held in the available for sale investment portfolio. The writedown was recorded as a reduction in noninterest income. The after-tax effect was $4.2 million, net of tax benefits of $3.0 million. At December 31, 2004, the Company held FNMA and FHLMC preferred stock with an adjusted book value of $63.9 million and a tax-equivalent dividend yield of 7.65%.

As of December 31, ~~2003, $722.4~~2004, $814.8 million of investment securities were pledged to secure public deposits and short-term funding needs, compared to ~~$694.8~~$722.4 million in ~~2002.~~2003. The Bank is a member of the Federal Reserve Bank and holds Federal Reserve Bank stock stated at cost of $6.3 million for both ~~as of~~ December 31, 2004 and 2003. In 2003, ~~and 2002. The~~the Bank ~~is also~~was a member of the Federal Home Loan Bank (“FHLB”) and ~~holds~~held stock carried at cost of $6.3 million ~~and $8.7 million~~ at December 31, ~~2003~~2003. The same stock was sold in 2004 and ~~2002.~~the Bank is no longer a member of the FHLB.

5155

WESTAMERICA BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Note 3: Loans and Allowance for Loan Losses~~

Note 3: Loans and Allowance for Loan Losses

Loans at December 31 consisted of the following:


			2003			2002
											2004			2003

			(In thousands)								(In thousands)
Commercial	Commercial		$	619,317		$	631,405		Commercial		$	647,462		$	619,317
Real estate-commercial	Real estate-commercial			810,328			957,398		Real estate-commercial			741,177			810,328
Real estate-construction	Real estate-construction			38,019			45,547		Real estate-construction			29,724			38,019
Real estate-residential	Real estate-residential			347,794			330,460		Real estate-residential			375,532			347,794

	Total real estate loans			1,196,141			1,333,405		Total real estate loans			1,146,433			1,196,141
Installment and personal	Installment and personal			507,911			530,054		Installment and personal			506,338			507,911
Unearned income	Unearned income			(39	)		(226	)	Unearned income			(3	)		(39	)

	Gross loans			2,323,330			2,494,638		Gross loans			2,300,230			2,323,330
Allowance for loan losses	Allowance for loan losses			(53,910	)		(54,227	)	Allowance for loan losses			(54,152	)		(53,910	)

		Net loans	$	2,269,420		$	2,440,411			Net loans	$	2,246,078		$	2,269,420

There were no loans originated for resale at December 31, ~~2003 while there were loans of $443 thousand that were included in real estate-residential at December 31, 2002. The cost of the loans approximates market value.~~

2004 and 2003.

The following summarizes the allowance for loan losses of the Company for the periods indicated:


	2003			2002			2001
										2004			2003			2002

	(In thousands)									(In thousands)
Balance at January 1,	$	54,227		$	52,086		$	52,279		$	53,910		$	54,227		$	52,086
Provision for loan losses		3,300			3,600			3,600			2,700			3,300			3,600
Loans charged off		(6,833	)		(6,225	)		(7,453	)		(5,593	)		(6,833	)		(6,225	)
Recoveries of loans previously charged off		3,216			2,716			3,660			3,135			3,216			2,716
Acquisition		—			2,050			—			—			—			2,050

Balance at December 31,	$	53,910		$	54,227		$	52,086		$	54,152		$	53,910		$	54,227

At December 31, ~~2003, the recorded investment in~~2004, there were no specific impaired loans, ~~for which impairment was recognized totaled~~compared with $1.7 million ~~compared to $1.1 million at December 31, 2002.~~in 2003. Total reserves allocated to these loans ~~at December 31~~ were none for 2004 and $623 thousand in ~~2003 and $1.1 million in 2002.~~2003. For the year ended December 31, ~~2003,~~2004, the average recorded net investment in impaired loans was approximately $731 thousand compared to $1.8 million ~~compared to~~and $1.3 million, ~~and $4.9 million, respectively,~~ for the years ended December 31, 2003 and 2002, ~~and 2001.~~respectively. In general, the Company does not recognize any interest income on troubled debt restructuring or on loans that are classified as nonaccrual. The Company had no troubled debt restructurings at December 31, ~~2003.~~2004. For other impaired loans, interest income may be recorded as cash is received, provided that the Company’s recorded investment in such loans is deemed collectible.

52

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Nonaccrual loans at December 31, 2004 and 2003 ~~and 2002~~ were ~~$7.4~~$7.0 million and ~~$9.2~~$7.4 million, respectively. The following is a summary of the effect of nonaccrual loans on interest income for the years ended December 31:

The Company’s business activity is with customers in Northern and Central California. The loan portfolio is well diversified, although the Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments and standby letters of credit related to real estate loans of ~~$40.7~~$30.6 million and ~~$40.8~~$40.7 million at December 31, ~~2003~~2004 and ~~2002,~~2003, respectively. The Company requires collateral on all real estate loans and generally attempts to maintain loan-to-value ratios no greater than 75% on commercial real estate loans and no greater than 80% percent on residential real estate loans unless covered by mortgage insurance.

Premises and equipment as of December 31 consisted of the following:

Depreciation and amortization included in noninterest expense amounted to $3.9 million in 2004, $4.0 million in 2003, and $4.5 million in ~~2002, and $4.9 million in 2001.~~2002.

Notes payable, including the unsecured obligations of the Company, as of December 31, ~~2003~~2004 and ~~2002,~~2003, were as follows:

The senior notes are subject to financial covenants requiring the Company to maintain, at all times, certain minimum levels of consolidated tangible net worth and maximum levels of capital debt. The Company ~~has either obtained waivers or~~ is ~~currently~~ in compliance with all of the covenants in the senior notes ~~indenture.~~

indenture as of December 31, 2004.

Short-term borrowed funds include federal funds purchased, business customers’ sweep accounts, outstanding amounts under lines of credit, and securities sold with repurchase agreements and outstanding amounts under lines of credit. Federal funds purchased were $438.5 million and $146.4 million, respectively, at December 31, 2003 and 2002. Average outstanding balances were $222.2 million and $64.5 million, respectively, during 2003 and 2002. The weighted average interest rate paid was 1.13% in 2003 and 1.61% in 2002.

Sweep accounts totaled $149.5 million and $198.5 million at December 31, 2003 and 2002, respectively. Average outstanding balances were $150.3 million and $173.6 million, respectively, during 2003 and 2002. The weighted average interest rate paid was 0.56% in 2003 and 1.29% in 2002.

Securities sold with repurchase agreements were $2.7 million at December 31, 2003 and $3.0 million at December 31, 2002. Average outstanding balances were $5.8 million and $11.4 million, respectively, during 2003 and 2002. The weighted average interest rate paid was 1.32% in 2003 and 2.04% in 2002. Securities under these repurchase agreementswhich are held in the custody of independent securities brokers.

The ~~Company has a~~Company’s line of credit ~~amounting~~increased to ~~$10.0~~$35 million ~~under which no amount was outstanding at December 31, 2003. Outstanding advances totaled $1.8~~in 2004 from $10 million at December 31, 2002. Average outstanding advances were $2.6 million and $7.1 million, respectively, during 2003 and 2002. The weighted average interest rate paid was 1.88% in 2003 and 2.44% in 2002.a year ago. Compensating balance arrangements for such line are not significant to the operations of the Company.

~~Federal Home Loan Bank advances were $105.0 million and $170.0 million, respectively, at December 31, 2003 and 2002. Such~~ FHLB advances ranged in maturity from 0.8 years to 1.7 years at ~~a weighted average interest rate of 3.68% at~~ December 31, 2003. ~~Maturity ranged from 1.8 years to 2.8 years at a weighted average interest rate of 3.74% at December 31, 2002. Average outstanding balances were $138.6 million and~~

54

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~$142.3 million, respectively, during 2003 and 2002. The weighted average interest rate~~Interest paid ~~was 3.69% in 2003 and 3.72% in 2002.~~

~~At December 31, 2003 and 2002, the Bank had $315.3 million and $314.3 million, respectively, in~~on time ~~deposit accounts~~deposits in excess of $100 ~~thousand. Average outstanding balances were $205.0~~thousand was $4.5 million ~~and $228.8 million, respectively, during 2003 and 2002. The weighted average interest rate paid was 1.47%~~ in ~~2003~~2004 and ~~2.16% in 2002. Interest paid on these time deposit accounts in 2003, 2002 and 2001 was~~ $5.0 million ~~$8.4 million~~in 2003. The following table summarizes deposits and ~~$20.8 million, respectively.~~

borrowed funds of the Company for the periods indicated:

In 1995, the Company adopted the 1995 Stock Option Plan. Stock appreciation rights, restricted performance shares, incentive stock options and non-qualified stock options are available under this plan. Under the terms of the plan, on January 1 of each year beginning in 1995, 2% of the Company’s issued and outstanding shares of common stock will be reserved for granting. At December 31, 2004, 2003, ~~2002,~~ and ~~2001,~~ 2002,

Under the Stock Option Plan adopted by the Company in 1985, 2.3 million shares were reserved for issuance. Stock appreciation rights, incentive stock options and non-qualified stock options are available under this plan. Options are granted with an exercise price equal to fair market value of the related common stock and are generally exercisable in equal installments over a three-year period with the first installment exercisable one year after the date of the grant. Each incentive stock option has a maximum ten-year term while non-qualified stock options may have a longer term. The 1985 plan was amended in 1990 to provide for RPS grants. An RPS grant becomes fully vested after three years of being awarded, provided that the Company has attained its performance goals for such three-year period.

Separate stock option plans maintained by acquired companies were terminated following the effective dates of the mergers. All outstanding options were substituted for the Company’s options, adjusted for the exchange ratios as defined in the merger agreements.

Stock Options. A summary of the status of the Company’s stock options as of December 31, 2004, 2003 ~~2002~~ and ~~2001,~~2002, and changes during the years ended on those dates, follows:

Restricted Performance Shares. A summary of the status of the Company’s RPSs as of December 31, 2004, 2003, ~~2002,~~ and ~~2001,~~2002, and changes during the years ended on those dates, follows:

No compensation cost has been recognized for stock options. However, the fair value of each non-qualified stock option grant is estimated on the date of the grant using an option pricing model with the following assumptions used for calculating weighted-average non-qualified stock option grants in 2004, 2003, ~~2002,~~ and ~~2001:~~2002:

The weighted-average grant date fair values of non-qualified stock options granted during 2004, 2003, and 2002, were $6.93, $5.79, and ~~2001, were $5.79,~~ $8.62, ~~and $8.58,~~ respectively.

A reconciliation of the ~~diluted~~number of shares used in the basic EPS computation to the amounts used in the ~~basic~~diluted EPS computation for the years ended December 31, ~~are~~is as follows:

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, ~~2003,~~2004, no shares of Class B Common Stock or Preferred Stock had been issued.

In December 1986, the Company declared a dividend distribution of one common share purchase right (the “Right”) for each outstanding share of common stock. The Rights, which have been amended and restated in 1989, 1992, 1995, 1999 and ~~1999,~~2004, are exercisable only in the event of an acquisition of, or announcement of a tender offer to acquire, 10 percent or more of the Company’s stock without the prior consent of the Board of Directors. If the Rights become exercisable, the holder may purchase one share of the Company’s common stock for ~~$75.00,~~$110.00, subject to adjustment. In the event a person or a group has acquired, or obtained the right to acquire, beneficial ownership of securities having 10 percent or more of the voting power of all outstanding voting power of the Company, proper provision shall be made so that each holder of a Right will, for a 60-day period thereafter, have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right, to the extent available, and then a common stock equivalent having a market value of two times the exercise price of the Right. Under certain circumstances, the Rights may be redeemed by the Company at $.001 per Right prior to becoming exercisable and in certain circumstances thereafter. The Rights will expire on the earliest of (i) December 31, ~~2004,~~2009, (ii) consummation of a merger transaction meeting certain characteristics or (iii) redemption of the Rights by the Company.

The Company and the Bank are subject to various regulatory capital adequacy requirements administered by federal and state agencies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required that regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate discretionary actions by regulators that, if undertaken, could have a direct, material effect on the Company’s financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Bank maintain minimum ratios of capital to risk-weighted assets. There are two categories of capital under the guidelines: Tier 1 capital includes common shareholders’ equity and qualifying preferred stock less goodwill and other deductions including the unrealized net gains and losses, after taxes, of available for sale securities. Tier 2 capital includes preferred stock not qualifying for Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Company and the allowance for loan losses, subject to limitations by the guidelines. Under the guidelines, capital is compared to the relative risk of the balance sheet, derived from applying one of four risk weights (0%, 20%, 50% and 100%) to the different

As of December 31, ~~2003,~~2004, the Company and the Bank met all capital adequacy requirements to which they are subject.

The most recent notification from the Federal Reserve Board categorized the Company and the Bank as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. Since that notification, there are no conditions or events that Management believes have changed the risk-based capital category of the Company or the Bank.

The following table shows capital ratios for the Company and the Bank as of December 31, ~~2003~~2004 and ~~2002:~~2003:

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of these financial statements and could vary significantly from amounts shown on the tax returns as filed. Accordingly, variances from amounts previously reported are primarily as a result of adjustments to conform to tax returns as filed.

The components of the net deferred tax asset as of December 31 are as follows:

The Company believes a valuation allowance is not needed to reduce the gross deferred tax asset because it is more likely than not that the gross deferred tax asset will be realized through recoverable taxes or future

~~WESTAMERICA BANCORPORATION~~

The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate of 35% to income before taxes, as follows:

At December 31, 2004, the company had the following net operating loss and general tax credit carryforwards for tax return purposes.

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to

The fair values at December 31 of the following financial instruments were estimated using quoted market prices:

Loans were separated into two groups for valuation. Variable rate loans, except for those described below which reprice frequently with changes in market rates, were valued using historical data. Fixed rate loans and variable rate loans that have reached their maximum rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the ~~$53.9~~$54.2 million allowance for loan losses in ~~2003~~2004 and ~~$54.2~~$53.9 million in ~~2002~~2003 were applied against the estimated fair values to recognize future defaults of contractual cash flows. The book values and the estimated fair values of loans at December 31 were:

The fair values of time deposits and notes payable were estimated by discounting future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics. The book values and the estimated fair values at December 31 were:

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.

Twenty-nine banking offices and a centralized administrative service center are owned and ~~sixty-eight~~sixty-six facilities are leased. Substantially all the leases contain multiple renewal options and provisions for rental increases,

62

~~WESTAMERICA BANCORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

principally for cost of living index, property taxes and maintenance. The Company also leases certain pieces of equipment.

Minimum future rental payments, net of sublease income, at December 31, ~~2003,~~2004, are as follows:

Total rentals for premises and equipment, net of sublease income, included in noninterest expense were $4.8 million in 2004, $4.5 million in 2003 and $4.3 million in ~~2002 and $4.4 million in 2001.~~

2002.

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 ~~$393.4~~$410.0 million and ~~$411.8~~$393.4 million at December 31, ~~2003~~2004 and ~~2002,~~2003, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Standby letters of credit outstanding totaled ~~$24.1~~$22.5 million and ~~$18.8~~$24.1 million at December 31, 2004 and 2003, ~~and 2002,~~ respectively.

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

The Company sponsors a defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. Contributions ~~as determined by the Board of Directors and~~are subject to a five-year cliff vesting schedule; contributions charged to noninterest expense were $1.6 million in 2004, 2003 and ~~2002, and $1.5 million in 2001.~~

2002.

In addition to the Deferred Profit-Sharing Plan, all salaried employees are eligible to participate in the voluntary Tax Deferred Savings/ Retirement Plan (ESOP) upon completion of a 90-day introductory period. The Tax Deferred Savings/Retirement Plan allows employees to defer, on a pretax basis, a portion of their salaries as contributions to this Plan. Participants may invest in several funds, including one fund that invests exclusively in Westamerica Bancorporation common stock. The matching contributions by the Company vest immediately; such contributions charged to compensation expense were $1.5 million in 2004, 2003, ~~2002,~~ and ~~2001.~~2002.

The following table sets forth the net periodic post-retirement benefit cost for the years ended December 31 and the funded status of the Post-retirement Benefit Plan and the change in the benefit obligation as of December 31:

Assumptions

The assumed annual average rate of inflation used to measure the expected cost of benefits covered by the plan was 7.00 percent for ~~2004~~2005 and beyond.

64

~~WESTAMERICA BANCORPORATION~~

Certain directors and executive officers of the Company and/or its subsidiaries were loan customers of the Bank during ~~2003~~2004 and ~~2002.~~2003. All such loans were made in the ordinary course of business on normal credit terms, including interest rate and collateral requirements. In the opinion of Management, these credit transactions did not involve, at the time they were contracted, more than the normal risk of collectibility or present other unfavorable features. The table below reflects information concerning loans to certain directors and executive officers and/or family members during ~~2003~~2004 and ~~2002:~~2003:

Payment of dividends to the Company by the Bank is limited under regulations for Federal Reserve member banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for that year plus the net profits of the preceding two calendar years less dividends paid. Under this regulation, Westamerica Bank sought and obtained approval during 2004 to pay to the Company dividends of ~~$87.8~~$94.7 million in excess of net profits as defined. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972. As of December 31, ~~2003, $174.2~~2004, $179.1 million was available for payment of dividends by the Company to its shareholders.

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

We have audited the accompanying consolidated balance sheets of Westamerica Bancorporation and ~~subsidiaries~~Subsidiaries (the ~~“Company”)~~Company) as of December 31, ~~2003~~2004 and ~~2002,~~2003, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2003.~~2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with ~~auditing~~the standards ~~generally accepted in~~of the ~~United States of America.~~Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and ~~the~~ significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ~~the Company~~Westamerica Bancorporation and Subsidiaries as of December 31, ~~2003~~2004 and ~~2002,~~2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2003~~2004, in conformity with ~~accounting principles~~U.S. generally accepted accounting principles.

We also have audited, in accordance with the ~~United States~~standards of ~~America.~~

the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

None.

The Company’s principal executive officer and the person performing the functions of the Company’s principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of December 31, ~~2003.~~2004. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. ~~There were no significant changes~~The evaluation did not identify any change in the Company’s internal ~~controls~~control over financial reporting that occurred during the quarter ended December 31, 2004 that has materially affected, or ~~in other factors that could significantly~~is reasonably likely to materially affect, ~~these controls since~~ the ~~date~~Company’s internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting and the ~~controls were evaluated.~~

attestation Report of Independent Registered Public Accounting Firm are found on pages 40-41, immediately preceding the financial statements.

~~PART III~~


Item 9B.	Other Information

None.

PART III


Item 10.	Directors and Executive Officers of the Registrant

The information regarding Directors of the Registrant and compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item 10 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the captions “Board of Directors and Committees — Audit Committee”, “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its ~~2004~~2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.

Executive Officers

The executive officers of the Corporation and Westamerica Bank serve at the pleasure of the Board of Directors and are subject to annual appointment by the Board at its first meeting following the Annual Meeting of Shareholders. It is anticipated that each of the executive officers listed below will be reappointed to serve in such capacities at that meeting.


		Held
Name of Executive	Position	Since

David L. Payne	Mr. Payne, born in 1955, is the Chairman of the Board, President and Chief Executive Officer of the Corporation. Mr. Payne is President and Chief Executive Officer of Gibson Printing and Publishing Company and Gibson Radio and Publishing Company which are newspaper, commercial printing and real estate investment companies headquartered in Vallejo, California.		1984
Robert W. Entwisle	Mr. Entwisle, born in 1947, is Senior Vice ~~President in charge of the Banking Division of Westamerica Bank.~~President.		1986
Jennifer J. Finger	Ms. Finger, born in 1954, is Senior Vice President and Chief Financial Officer for the Corporation.		1997

76

71


		~~Held~~
~~Name of Executive~~	~~Position~~	~~Since~~

Robert A. Thorson	Mr. Thorson, born in 1960, is Senior Vice President and Treasurer for the Corporation. Mr. Thorson joined Westamerica Bancorporation in 1989 and was Vice President and Manager of Human Resources from 1995 until 2001.		2002
Hans T. Y. Tjian	Mr. Tjian, born in 1939, is Senior Vice President and manager of the Operations and Systems Administration of Westamerica Bank.		1989
Frank R. Zbacnik	Mr. Zbacnik, born in 1947, is Senior Vice President and Chief Credit Administrator of Westamerica Bank. Mr. Zbacnik joined Westamerica Bank in 1984 and was Vice President and Manager of Retail Credit from 1995 until 2000.		2001

The Company has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K of the Securities Act of 1933) that is applicable to its senior financial officers including its chief executive officer, chief financial officer, and principal accounting officer & controller. This Code of Ethics has been filed as Exhibit 14 to this Annual Report on Form 10-K.


Item 11.	Executive Compensation

The information required by this Item 11 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the captions “Executive Compensation,” “Stock Options,” and “Other Compensation Arrangements” in the Company’s Proxy Statement for its ~~2004~~2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Stock Ownership” in the Company’s Proxy Statement for its ~~2004~~2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.


Item 13.	Certain Relationships and Related Transactions

The information required by this Item 13 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Corporation Transactions with Directors and Management” in the Company’s Proxy Statement for its ~~2004~~2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.


Item 14.	Principal Accountant Fees and Services

The information required by this Item 14 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Audit Fees” in the Company’s Proxy Statement for its ~~2004~~2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.

7277

PART IV


Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) 1. Financial ~~Statements~~:

Statements:

See Index to Financial Statements on page 39. The financial statements included in Item 8 are filed as part of this report.

(a) 2. Financial statement schedules required. No financial statement schedules are filed as part of this report since the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.

(a) 3. ~~Exhibits~~:

Exhibits:

The following documents are included or incorporated by reference in this Annual Report on Form 10-K:


Exhibit
Number

	2(b)	Agreement and Plan of Reorganization and Merger, dated March 14, 2000, by and among Westamerica Bancorporation, Westamerica Bank and First Counties Bank, incorporated by reference to Exhibit 2 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 17, ~~2000.~~2000
	2(c)	Agreement and Plan of Reorganization, dated February 25, 2002, among Westamerica Bancorporation, Westamerica Bank and Kerman State Bank, incorporated by reference to Exhibit 2 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 8, ~~2002.~~2002
	2(c)	Agreement and Plan of Reorganization, dated August 25, 2004, among Westamerica Bancorporation, Westamerica Bank and Redwood Empire Bancorp and National Bank of the Redwoods, incorporated by reference to Exhibit 2.1 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 27, 2004
	3(a)	Restated Articles of Incorporation (composite copy), incorporated by reference to Exhibit 3(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 30, ~~1998.~~1998
	3(b)	By-laws, as amended (composite copy), incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the third quarter ended September 30, 2003, filed with the Securities and Exchange Commission on November 13, ~~2003.~~2003
	4(a)	Amended and Restated Rights Agreement dated ~~November 19, 1999,~~as of December 31, 2004, incorporated by reference to Exhibit 99 to the Registrant’s Form 8-A/ A, Amendment No. 3,4, filed with the Securities and Exchange Commission on ~~November 19, 1999.~~December 22, 2004
	10(a)*	Amended and Restated Stock Option Plan of 1995, incorporated by reference to Exhibit A to the Registrant’s definitive Proxy Statement pursuant to Regulation 14(a) filed with the Securities and Exchange Commission on March 17, ~~2003.~~2003
	10(b)*	Employment Agreement with Robert W. Entwisle dated January 7, 1987, incorporated by reference to Exhibit 10(c) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities and Exchange Commission on March 31, ~~1999.~~1999
	10(c)	Note Purchase Agreement by and between Westamerica Bancorporation and The Northwestern Mutual Life Insurance Company dated as of October 30, 2003, pursuant to which registrant issued its 5.31% Senior Notes due October 31, 2013 in the principal amount of $15 million and form of 5.31% Senior Note due October 31, 2013 incorporated by reference to Exhibit 4 of Registrant’s Quarterly Report on Form 10-Q for the third quarter ended September 30, 2003, filed with the Securities and Exchange Commission on November 13, ~~2003.~~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 the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission on March 26, 2003.2000

7378


Exhibit	Exhibit			Exhibit
Number	Number			Number

	11		Computation of Earnings Per Share on common and common equivalent shares and on common shares assuming full dilution.	10(e)*		Description of Executive Cash Bonus Program incorporated by reference to Exhibit 10 of the Registrant’s Form 8-K filed with the Securities Exchange Commission on March 14, 2005
	14		Code of Ethics	10(f)*		Non-Qualified Annuity Performance Agreement with David L. Payne dated November 19, 1997
	21		Subsidiaries of the registrant.	10(g)*		Form of Nonstatutory Stock Option Agreement pursuant to the Westamerica Bancorporation Amended and Restated Stock Option Plan of 1995
	23(a)		Consent of KPMG LLP	10(h)*		Form of Restricted Performance Share Grant Agreement pursuant to the Westamerica Bancorporation Amended and Restated Stock Option Plan of 1995
	31	.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)	11		Computation of Earnings Per Share on common and common equivalent shares and on common shares assuming full dilution
	31	.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)	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
	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	21		Subsidiaries of the registrant
	32	.2	Certification pursuant to 18 U.S.C. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	23(a)		Consent of KPMG LLP
				31	.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
				31	.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
				32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
				32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*	Indicates management contract or compensatory plan or arrangement. The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary A-2M, Westamerica Bancorporation, P.O. Box 1200, Suisun City, California 94585-1200, and payment to the Company of $.25 per page.

The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to the Office of the Corporate Secretary A-2M, Westamerica Bancorporation, P.O. Box 1200, Suisun City, California 94585-1200, and payment to the Company of $.25 per page.

(b) 1. Reports on Form 8-K

On October ~~16, 2003,~~20, 2004, the Company filed a report on form 8-K with respect to item 12, therein, reporting third quarter, ~~2003~~2004 financial results. Included in the report was a press release dated October ~~14, 2003.~~19, 2004. On December 22, 2004, the Company filed a report on form 8-K with respect to Amended and Restated Rights Agreement dated as of December 31, 2004 between Westamerica Bancorporation and Computershare Investor Services, LLC.

7479

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	WESTAMERICA BANCORPORATION

	/s/ ~~DENNIS~~Dennis R. ~~HANSEN~~Hansen

	~~DENNIS~~Dennis R. ~~HANSEN~~Hansen
	Senior Vice President and Controller
	Principal Accounting Officer

Date: March ~~8, 2004~~

15, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.


Signature	Title			Date

~~Signature~~	~~Title~~		~~Date~~


/s/ ~~DAVID~~David L. ~~PAYNE~~Payne David L. Payne	Chairman of the Board and Director President and Chief Executive Officer			March ~~8, 2004~~15, 2005

/s/ ~~ETTA ALLEN~~ Etta Allen Etta Allen		Director		March ~~8, 2004~~15, 2005

/s/ ~~LOUIS E. BARTOLINI~~ Louis E. Bartolini Louis E. Bartolini		Director		March ~~8, 2004~~15, 2005

/s/ ~~E. JOSEPH BOWLER~~ E. Joseph Bowler E. Joseph Bowler		Director		March ~~8, 2004~~15, 2005

/s/ ~~ARTHUR C. LATNO~~ Arthur C. Latno, Jr. Arthur C. Latno, Jr.		Director		March ~~8, 2004~~15, 2005

/s/ ~~PATRICK D. LYNCH~~ Patrick D. Lynch Patrick D. Lynch		Director		March ~~8, 2004~~15, 2005

/s/ ~~CATHERINE COPE MACMILLAN~~Catherine C. MacMillan Catherine ~~Cope~~C. MacMillan		Director		March ~~8, 2004~~15, 2005

/s/ ~~RONALD A. NELSON~~ Ronald A. Nelson Ronald A. Nelson		Director		March ~~8, 2004~~15, 2005

/s/ ~~CARL OTTO~~ Carl Otto Carl Otto		Director		March ~~8, 2004~~15, 2005

/s/ ~~EDWARD B. SYLVESTER~~ Edward B. Sylvester Edward B. Sylvester		Director		March ~~8, 2004~~15, 2005

7580


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

		For the fiscal year ended December 31, ~~2003~~2004

or

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

		For the transition period from to


California		94-2156203
(State of incorporation)		(I.R.S. Employer Identification Number)


		Page

PART I
Item 1	Business		2
Item 2	Properties		9
Item 3	Legal Proceedings		910
Item 4	Submission of Matters to a Vote of Security Holders		10

PART II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		10
Item 6	Selected Financial Data		12
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		38
Item 8	Financial Statements and Supplementary Data		39
Item 9	Changes in and Disagreements on Accounting and Financial Disclosure		7176
Item 9A	Controls and Procedures		7176
Item 9B	Other Information		76

PART III
Item 10	Directors and Executive Officers of the Registrant		7176
Item 11	Executive Compensation		7277
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		7277
Item 13	Certain Relationships and Related Transactions		7277
Item 14	Principal Accountant Fees and Services		7277

PART IV
Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		7378
EXHIBIT 10.(F)
EXHIBIT 10.(G)
EXHIBIT 10.(H)
EXHIBIT 11
EXHIBIT 21
EXHIBIT 23.(A)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	Westamerica Bancorporation
	Corporate Secretary A-2M
	Post Office Box 1200
	Suisun City, California 94585-1200


	*~~Regulation~~Supervision and ~~Supervision of Bank Holding Companies~~*Regulation



				Years Ended December 31, 2003
				Compared with 2002

				Volume			Rate			Total


				(Dollars in thousands)
Increase (decrease) in interest and fee income:
	Money market assets and funds sold			$	(3	)	$	(1	)	$	(4	)
	Trading account securities				—			—			—
	Investment securities:
		Available for sale
			Taxable		7,429			(5,519	)		1,910
			Tax-exempt(1)		403			(631	)		(228	)
		Held to maturity
			Taxable		2,876			(3,299	)		(423	)
			Tax-exempt(1)		11,242			(826	)		10,416
	Loans:
		Commercial:
			Taxable		(9,116	)		(3,383	)		(12,499	)
			Tax-exempt(1)		959			(823	)		136
		Real estate construction			(945	)		(111	)		(1,056	)
		Real estate residential			627			(3,981	)		(3,354	)
		Consumer			67			(5,251	)		(5,184	)

			Total loans(1)		(8,408	)		(13,549	)		(21,957	)

Total increase (decrease) in interest and fee income(1)					13,539			(23,825	)		(10,286	)

Increase (decrease) in interest expense:
	Deposits:
		Savings/interest-bearing			654			(5,778	)		(5,124	)
		Time less than $100,000			(638	)		(2,504	)		(3,142	)
		Time $100,000 or more			48			(3,442	)		(3,394	)

	Total interest-bearing				64			(11,724	)		(11,660	)
	Funds purchased				1,434			(1,544	)		(110	)
	Federal Home Loan Bank advances				136			(43	)		93
	Notes and mortgages payable				(256	)		(52	)		(308	)

		Total increase (decrease) in interest expense			1,378			(13,363	)		(11,985	)

	Increase (decrease) in net interest income(1)			$	12,161		$	(10,462	)	$	1,699



				Estimated Increase
				(Decrease) in NII

2003		Estimated
Changes in Interest Rates (Basis Points)		NII Amount		Amount			Percent


		(Dollars in millions)
	+200	$	215.8	$	(3.9	)		-1.8	%
	—		219.7		—			—
	-50		219.9		0.2			0.1	%


Item 7A.	Quantitative and Qualitative Disclosures About Market Risk


				Accumulated								Accumulated
				Depreciation								Depreciation
				and			Net Book					and			Net Book
		Cost		Amortization			Value			Cost		Amortization			Value

										(In thousands)
2004									2004
Land									Land	$	8,834	$	—		$	8,834
Buildings and improvements									Buildings and improvements		33,875		(15,340	)		18,535
Leasehold improvements									Leasehold improvements		4,565		(2,840	)		1,725
Furniture and equipment									Furniture and equipment		11,715		(5,586	)		6,129

									Total	$	58,989	$	(23,766	)	$	35,223
		(In thousands)
2003	2003								2003
Land	Land	$	8,834	$	—		$	8,834	Land	$	8,834	$	—		$	8,834
Buildings and improvements	Buildings and improvements		32,634		(13,566	)		19,068	Buildings and improvements		32,634		(13,566	)		19,068
Leasehold improvements	Leasehold improvements		5,256		(3,280	)		1,976	Leasehold improvements		5,256		(3,280	)		1,976
Furniture and equipment	Furniture and equipment		10,432		(4,562	)		5,870	Furniture and equipment		10,432		(4,562	)		5,870

	Total	$	57,156	$	(21,408	)	$	35,748	Total	$	57,156	$	(21,408	)	$	35,748

2002
Land		$	9,486	$	—		$	9,486
Buildings and improvements			34,321		(12,944	)		21,377
Leasehold improvements			5,199		(3,190	)		2,009
Furniture and equipment			12,418		(7,894	)		4,524

	Total	$	61,424	$	(24,028	)	$	37,396


		2004							2003

						Weighted							Weighted
		Balance at		Average		Average			Balance at		Average		Average
		December 31,		Balance		Rate			December 31,		Balance		Rate

		(In thousands)							(In thousands)
Federal funds purchased		$	568,275	$	360,771		1.38	%	$	438,500	$	222,225		1.13	%
Sweep accounts			163,439		152,299		0.31			149,479		150,311		0.56
Securities sold under repurchase agreements			3,709		42,820		0.95			2,667		3,264		0.87
Line of credit			0		526		2.72			0		2,561		1.88
FHLB advances			0		24,153		3.65			105,000		142,272		3.69
Time deposits
	Over $100 thousand		365,299		350,400		1.27			315,253		370,549		1.35



	Options Outstanding										Options Outstanding
							Options Exercisable										Options Exercisable
			Weighted										Weighted
			Average		Weighted				Weighted				Average		Weighted				Weighted
Range of	Number		Remaining		Average		Number		Average		Number		Remaining		Average		Number		Average
Exercise	Outstanding		Contractual		Exercise		Exercisable at		Exercise		Outstanding		Contractual		Exercise		Exercisable at		Exercise
Price	at 12/31/2003		Life (yrs)		Price		12/31/2003		Price		at 12/31/2004		Life (yrs)		Price		12/31/2004		Price

2003
2004
$10 – 15		35,638		2.0	$	11		35,638	$	11		11,237		3.3	$	13		11,237	$	13
15 – 19		126,887		2.0		15		126,887		15		79,650		1.1		15		79,650		15
19 – 20		154,030		2.9		19		154,030		19		132,150		2.1		19		132,150		19
20 – 24		442,576		6.0		24		442,579		24		429,196		5.1		24		429,196		24
32 – 33		333,270		4.1		33		333,270		33		257,760		3.1		33		257,760		33
33 – 35		385,530		5.1		35		385,530		35		336,120		4.1		35		336,120		35
35 – 40		916,206		7.6		39		421,896		39		763,939		6.6		39		591,960		39
40 – 55		578,380		9.0		41		500		48
40 – 45												780,988		8.4		44		160,538		41
45 – 50												266,490		9.1		50		0		0

$10 – 55		2,972,517		6.4	$	33		1,900,330	$	30		3,057,530		6.1	$	36		1,998,611	$	32


		Net		Number		Per Share			Net		Number		Per Share
		Income		of Shares		Amount			Income		of Shares		Amount

									(In thousands,
		(In thousands,							except per share data)
		except per share data)
2003
2004								2004
Basic EPS:	Basic EPS:							Basic EPS:
	Income available to common shareholders	$	95,063		32,849	$	2.89	Income available to common shareholders	$	95,218		31,821	$	2.99
Effect of dilutive securities:	Effect of dilutive securities:							Effect of dilutive securities:
	Stock options outstanding		—		520		—	Stock options outstanding		—		640		—

Diluted EPS:	Diluted EPS:							Diluted EPS:
	Income available to common shareholders plus assumed conversions	$	95,063		33,369	$	2.85	Income available to common shareholders plus assumed conversions	$	95,218		32,461	$	2.93


2002
Basic EPS:
	Income available to common shareholders	$	87,138		33,686	$	2.59
Effect of dilutive securities:
	Stock options outstanding		—		539		—

Diluted EPS:
	Income available to common shareholders plus assumed conversions	$	87,138		34,225	$	2.55


Item 1.	Business


																												To Be Well
												To Be Well																Capitalized Under
												Capitalized Under																the FDICIA
												the FDICIA											For Capital					Prompt Corrective
							For Capital					Prompt Corrective											Adequacy Purposes					Action Provisions
							Adequacy Purposes					Action Provisions
																		Amount		Ratio			Amount		Ratio			Amount		Ratio
		Amount		Ratio			Amount		Ratio			Amount		Ratio
																		(Dollars in thousands)

		(Dollars in thousands)
2003
2004																	2004
Total Capital (to risk-weighted assets)	Total Capital (to risk-weighted assets)																Total Capital (to risk-weighted assets)
	Consolidated Company	$	342,627		11.39	%	$	240,604		8.00	%	$	300,755		10.00	%	Consolidated Company	$	367,333		12.46	%	$	235,904		8.00	%	$	294,880		10.00	%
	Westamerica Bank		332,643		11.18	%		237,921		8.00	%		297,401		10.00	%	Westamerica Bank		330,288		11.32	%		233,380		8.00	%		291,725		10.00	%
Tier 1 Capital (to risk-weighted assets)	Tier 1 Capital (to risk-weighted assets)																Tier 1 Capital (to risk-weighted assets)
	Consolidated Company		304,734		10.13	%		120,302		4.00	%		180,453		6.00	%	Consolidated Company		327,070		11.09	%		117,952		4.00	%		176,928		6.00	%
	Westamerica Bank		289,166		9.72	%		118,960		4.00	%		178,441		6.00	%	Westamerica Bank		287,497		9.86	%		116,690		4.00	%		175,035		6.00	%
Leverage Ratio *
Leverage Ratio*																	Leverage Ratio*
	Consolidated Company		304,734		6.66	%		178,057		4.00	%		222,571		5.00	%	Consolidated Company		327,070		7.06	%		185,282		4.00	%		231,602		5.00	%
	Westamerica Bank		289,166		6.54	%		176,898		4.00	%		221,122		5.00	%	Westamerica Bank		287,497		6.25	%		184,039		4.00	%		230,049		5.00	%

2002
Total Capital (to risk-weighted assets)
	Consolidated Company	$	339,115		10.97	%	$	247,286		8.00	%	$	309,108		10.00	%
	Westamerica Bank		328,518		10.73	%		244,829		8.00	%		306,036		10.00	%
Tier 1 Capital (to risk-weighted assets)
	Consolidated Company		300,159		9.71	%		123,643		4.00	%		185,465		6.00	%
	Westamerica Bank		283,944		9.28	%		122,414		4.00	%		183,622		6.00	%
Leverage Ratio *
	Consolidated Company		300,159		7.27	%		165,139		4.00	%		206,423		5.00	%
	Westamerica Bank		283,944		6.92	%		164,029		4.00	%		205,037		5.00	%


*	The leverage ratio consists of Tier 1 capital divided by quarterly average assets excluding certain intangible assets. The minimum leverage ratio guideline is 3.00% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations.


		Net Operating
		Loss		Tax Credit
Expires Dec. 31,		Carryforwards		Carryforwards

(In thousands)
2017		$	416	$	0

	Total	$	416	$	0



	2003				2002

	Book Value		Fair Value		Book Value		Fair Value


	(In thousands)
Loans	$	2,269,420	$	2,282,364	$	2,440,411	$	2,531,162


	2004				2003

	Book Value		Fair Value		Book Value		Fair Value

	(In thousands)
Loans	$	2,246,078	$	2,253,939	$	2,269,420	$	2,282,364


			(In
			thousands)
		2005	$	4,590
		2006		4,059
		2007		2,961
		2008		2,237
		2009		1,535
	Thereafter			6,075

Total minimum lease payments			$	21,457


	One		One			One		One
	Percentage		Percentage			Percentage		Percentage
	Point		Point			Point		Point
	Increase		Decrease			Increase		Decrease

						(In thousands)
	(In thousands)
Effect on total service and and interest cost components	$	172	$	(142	)
Effect on total service and interest cost components						$	223	$	(184	)
Effect on post-retirement benefit obligation		566		(453	)		721		(575	)


*	~~Other changes include loans to former directors and executive officers who are no longer related parties.~~


	March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,		December 31,

									(In thousands, except per share data and price range of common stock)
	(In thousands, except per share data and price range of common stock)
2004
Interest and fee income (FTE)									$	60,120	$	58,868	$	59,570	$	60,542
Net interest income (FTE)										54,605		54,271		54,528		54,589
Provision for loan losses										750		750		600		600
Noninterest income										10,866		11,661		11,788		4,268
Noninterest expense										24,992		24,990		24,491		24,278
Income before taxes (FTE)										39,729		40,192		41,225		33,979
Net income										24,314		24,644		25,095		21,165
Basic earnings per share										0.76		0.78		0.79		0.66
Diluted earnings per share										0.74		0.76		0.78		0.65
Dividends paid per share										0.26		0.28		0.28		0.28
Price range, common stock										47.85 – 51.63		47.58 – 52.99		49.04 – 55.80		54.43 – 61.05
2003
Interest and fee income (FTE)	$	61,799	$	61,733	$	60,552	$	60,520	$	61,799	$	61,733	$	60,552	$	60,520
Net interest income (FTE)		54,062		54,324		54,264		54,757		54,062		54,324		54,264		54,757
Provision for loan losses		900		900		750		750		900		900		750		750
Noninterest income		10,375		11,036		11,013		10,492		10,375		11,036		11,013		10,492
Noninterest expense		25,535		25,476		25,534		25,158		25,535		25,476		25,534		25,158
Income before taxes (FTE)		38,002		38,984		38,993		39,341		38,002		38,984		38,993		39,341
Net income		23,012		23,671		24,073		24,307		23,012		23,671		24,073		24,307
Basic earnings per share		0.70		0.72		0.73		0.74		0.70		0.72		0.73		0.74
Diluted earnings per share		0.69		0.71		0.72		0.73		0.69		0.71		0.72		0.73
Dividends paid per share		0.24		0.24		0.26		0.26		0.24		0.24		0.26		0.26
Price range, common stock		38.07 – 41.94		39.24 – 44.66		42.67 – 45.76		44.45 – 53.55		38.07 – 41.94		39.24 – 44.66		42.67 – 45.76		44.45 – 53.55
2002
Interest and fee income (FTE)	$	63,133	$	63,325	$	64,913	$	63,519	$	63,133	$	63,325	$	64,913	$	63,519
Net interest income (FTE)		52,712		53,096		54,914		54,985		52,712		53,096		54,914		54,985
Provision for loan losses		900		900		900		900		900		900		900		900
Noninterest income		9,999		5,884		10,455		10,213		9,999		5,884		10,455		10,213
Noninterest expense		25,693		25,909		25,964		25,757		25,693		25,909		25,964		25,757
Income before taxes (FTE)		36,118		32,171		38,505		38,541		36,118		32,171		38,505		38,541
Net income		21,659		19,347		22,877		23,255		21,659		19,347		22,877		23,255
Basic earnings per share		0.64		0.58		0.68		0.69		0.64		0.58		0.68		0.69
Diluted earnings per share		0.63		0.57		0.67		0.68		0.63		0.57		0.67		0.68
Dividends paid per share		0.22		0.22		0.22		0.24		0.22		0.22		0.22		0.24
Price range, common stock		35.22 – 42.95		38.70 – 45.27		34.11 – 42.65		35.46 – 43.59		35.22 – 42.95		38.70 – 45.27		34.11 – 42.65		35.46 – 43.59
2001
Interest and fee income (FTE)	$	70,756	$	68,765	$	67,643	$	65,410
Net interest income (FTE)		49,259		50,269		51,778		52,381
Provision for loan losses		900		900		900		900
Noninterest income		10,286		10,994		10,590		10,785
Noninterest expense		25,577		25,626		25,763		25,684
Income before taxes (FTE)		33,068		34,737		35,705		36,582
Net income		20,424		20,758		21,325		21,772
Basic earnings per share		0.57		0.59		0.61		0.63
Diluted earnings per share		0.56		0.58		0.60		0.62
Dividends paid per share		0.19		0.21		0.21		0.21
Price range, common stock		33.94 – 43.00		35.83 – 39.25		33.94 – 41.40		32.77 – 40.40


	~~/s/ DAVID L. PAYNE~~

	~~David L. Payne~~
	~~Chairman, President and Chief Executive Officer~~

	~~/s/ DENNIS R. HANSEN~~

	~~Dennis R. Hansen~~
	~~Senior Vice President and Controller~~


Item 9.	Changes in and Disagreements on Accounting and Financial Disclosure

Name of Executive

Dennis R. Hansen

Mr. Hansen, born in 1950, is Senior Vice President and Controller for the Corporation.