Westamerica Bancorporation
Executive Office A-2M
P.O. Box 1200
Suisun City, CA 94585
August 23, 2007
Mr. Donald Walker, Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Mail Stop 4561
Washington, DC 20549
Re: Westamerica Bancorporation
Form 10-K for the Fiscal Year Ended December 31, 2006
Filed February 27, 2007
File No. 001-9383
Dear Mr. Walker,
We have received your letter dated August 6, 2007 in which you provided
comments following your review of Westamerica Bancorporation's (the Company's)
Form 10-K filing for the year ended December 31, 2006 (the 10-K). We would
like to assure you that we are committed to achieving the best possible
disclosure in this and all our filings in order to fairly communicate our
financial results to our shareholders and the investing community.
As you requested, the following responses are numbered to correspond to your
comments. In addition, to add further readability to this letter as a stand-
alone document, each response is also preceded by a restatement of your
remarks. Comments 1 and 2 are closely related so we have provided a single
response applicable to both.
Composition of Allowance for Loan Losses, page 29:
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1. Comment: The unallocated allowance represented approximately 44% and
32% of your total allowance for loan losses at December 31, 2006 and
2005, respectively. Please tell us in more detail the specific
quantitative and qualitative factors you considered when you increased
the unallocated allowance during 2005 and 2006.
2. Comment: You disclose that the unallocated reserve based on relevant
economic conditions and available data. Please tell us in more detail
the specific quantitative and qualitative factors you used in
determining the unallocated allowance.
Page 2
Response to Comments 1 and 2: The Company prepares a detailed analysis
of the allowance for credit losses monthly using a consistent
methodology. The Company's management strives to maintain this
analytical process in accordance with current authoritative guidance.
The federal financial regulatory agencies issued on December 13, 2006
the Interagency Policy Statement on the Allowance for Loan Losses
(Policy Statement). Subsequent to the issuance of this Policy
Statement, the Company's process for analyzing the adequacy of its
allowance for loan losses has been reviewed and accepted by the Federal
Deposit Insurance Corporation, the California Department of Financial
Institutions and the Federal Reserve. Westamerica's most recent joint
regulatory examination with an as of date of December 31, 2006, was
concluded on May 8, 2007.
Due to the exercise of management judgment in analyzing and estimating
the adequacy of the overall allowance, the Company discloses in Note 1
to the audited financial statements included in the Form 10-K a
statement that "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 Credit Losses."
As a brief background, the first step in analyzing the adequacy of the
allowance for loan losses is to allocate amounts based on specific
quantitative estimates of loss. These estimates are developed using
historical loss information, discounted cash flow, market value of
collateral, and management judgment applied to current impaired loans,
internally graded loans and all other non-graded loans.
* The allowance for impaired loans is identified on a loan-by-loan
basis, and loss allowance determinations are assigned based on input
from senior loan administration managers based on discounted cash
flows or market value of collateral, if collateral dependent.
* Large and medium-sized loans are graded for credit risk by
independent loan review personnel using guidelines approved by bank
regulators. Loss rates based on the Company's historical loss rates
for the various types of loans by grade are applied to the higher
risk graded ("criticized and classified") loan totals to determine
allowance amounts for those groups of loans.
* The allowance for delinquent smaller-balance, homogeneous loans are
made based on the Company's historical loss rates by delinquency
category.
* The allowance for non-criticized/classified large and medium-sized
loans and non-delinquent smaller-balance, homogeneous loans are made
based on historical loss rates.
Page 3
The unallocated allowance is established to provide for probable losses
that have been incurred as of the reporting date but not reflected in
the allocated reserve. It addresses additional qualitative factors
consistent with our analysis of the level of risks inherent in the loan
portfolio, which are related to the risks of the Company's general
lending activity. Included is the risk of losses that are attributable
to national or local economic or industry trends which have occurred but
have yet been recognized in past loan charge-off history. Also included
is the risk of losses that are attributable to general attributes of the
Company's loan portfolio and credit administration. By their nature,
these risks are not readily allocable to any specific category in a
statistically meaningful manner and are difficult to quantify with a
specific number.
The Company's quarterly process to estimate the appropriate level of the
unallocated allowance includes the following eleven risk categories,
which cover the risk of losses that are attributable to qualitative
factors. Management assigns a range of estimated risk to each category
based on assessed risk levels to determine the appropriate level of the
unallocated portion of the allowance.
1) Concentration of Credit
2) Loan Delinquency Trends
3) Developing Economic and Business Conditions
4) Adequacy of Lending Management and Staff
5) Lending Policies and Procedures
6) Loss and Recovery Trends
7) Nature and Volume of Portfolio
8) Nonaccrual Trends
9) Problem Loan Trends
10)Quality of Loan Review System
11)External Competitive Issues
The unallocated allowance represented approximately 32% and 31% of the
total allowance for loan losses at December 31, 2005 and 2004,
respectively. We note, however, the total allowance for loan losses grew
in dollar amount between December 31, 2004 and December 31, 2005 due to
growth in the dollar amount and related credit risk of the loan
portfolio. Our overall risk assessment between these two dates as it
relates to the unallocated allowance did not change by a meaningful
amount. As such, the percentage of the total allowance represented by
the unallocated portion did not change significantly.
The unallocated allowance represented approximately 44% and 32% of the
total allowance for loan losses at December 31, 2006 and 2005,
respectively. The changes that occurred in the unallocated allowance
between December 31, 2005 and December 31, 2006, were primarily due to
changes in the qualitative risk assessment in the following five
categories:
Page 4
1) Concentration of Credit risk was increased due to increases in
commercial real estate (CRE) concentrations for certain of our
geographic areas, one area of which was related to a bank acquired in
May 2005 that had a substantial CRE portfolio concentrated in one
geographical location. Subsequent to the acquisition, weaknesses not
initially recognized in the acquired CRE portfolio became evident. In
addition, in 2006 recent market information indicated a softening in the
overall real estate market with a higher potential for loss if property
valuations declined or if loan-to-property value ratios began to exceed
regulatory guidelines. Real estate property valuations impact many
segments of our loan portfolio through loan collateral values (over 60%
of the loan portfolio) and general economic distress.
3) Developing Economic and Business Conditions risk was increased.
During 2006, the Company recognized one of our key lending areas, the
California Central Valley market, was beginning to experience a
substantial correction in the housing market (lower sales prices,
increased inventory of homes for sale, higher foreclosure and
delinquency rates). Additionally, agriculture production and pricing,
a critical economic factor in the California Central Valley, were at all
time highs over the past four years. Management did not expect this
trend to continue particularly due to a prolonged cold spell experienced
in Central and Southern California impacting citrus and crop production.
Further, appointment of a new Federal Reserve Chairman increased
uncertainty within the credit markets. The Federal Reserve tightened
monetary policy significantly throughout 2005 and 2006, completing 17
consecutive increases in the Federal Funds target rate to slow the
economy and attempt to reduce inflation.
6) Loss and Recovery Trends risk was increased. In 2006, there was
an increase in actual and expected auto loan charge-offs with the trend
toward higher charge-offs expected to continue. In addition, commercial
loan charge-offs were projected to increase due to a downturn in the
housing industry, especially sub-contractor loans. The higher expected
losses were affecting many segments of the loan portfolio, both consumer
and commercial. With reference to our Form 10-Q as of June 30, 2007,
filed July 31, 2007, net loan charge-offs have risen during the first
six months of 2007.
9) Problem Loan Trend evaluation was increased. The primary reason
for the changes was due to the downturn in the housing industry in our
geographic markets, as corroborated by a recent downgrade in our
construction loan portfolio at year-end 2006. Our exposure to the
housing industry impacts most of our loan portfolio (which includes
construction, commercial, residential real estate, home equity and auto
loans).
11) External Competitive Issues risk was increased in 2006. This
increase was made because it was recognized that competitive loan
underwriting practices over the past three years and anticipated into
2007 were resulting in less than prudent loan underwriting practices.
These practices have caused the Company to be less restrictive in
underwriting in order to retain loans considered to be of lower quality
than desired.
Page 5
Management's evaluation determined that the level of risk in the other
six qualitative risk categories used to establish the unallocated
portion of the allowance for loan losses remained stable from December
31, 2005 to December 31, 2006.
Management determined that these trends supported the increase in the
unallocated allowance between December 31, 2005 and December 31, 2006.
Exhibits 31.1 and 31.2 Section 302 Certifications
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3. Comment: We note that identification of the certifying individual at
the beginning of the certification required by Exchange Act Rule 13a-
14(a) also includes the title of the certifying individual.
Furthermore, we note that paragraphs 2, 3 and 4 of your certifications
reference this "annual report" or "quarterly report" rather than
referring to only the "report" on Form 10-K or "report" on Form 10-Q.
The certifications should be in the exact form as set forth in Item
601(b)(31) of Regulation S-K, except as otherwise indicated in
Commission statements or staff interpretations. In future filings please
revise the identification of the certifying individual at the beginning
of the certification so as not to include the individual's title and to
exclude the word "annual" or "quarterly" from paragraphs 2, 3, 4 and 5
of your certifications.
Response: We assure you that in future filings, we will revise the
identification of the certifying individual at the beginning of the
certification so as not to include the individual's title and to exclude the
word "annual" or "quarterly" from paragraphs 2, 3, 4 and 5 of the
certifications.
The Company acknowledges that:
* the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosures in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
* the Company may not assert staff comments as defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Page 6
Thank you for raising these matters with us. Should you have any questions,
please feel free to contact me at (707) 863-6840.
Sincerely,
/s/ JOHN "ROBERT" THORSON
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John "Robert" Thorson
SVP & Chief Financial Officer
RT:ki
c: David L. Payne - Chairman, President & CEO - Westamerica Bancorporation
Tom Reddy - Bingham McCutchen, LLP
Michael Roffler - Partner - KPMG LLP
Frank Zbacnik - SVP/Chief Credit Administration - Westamerica Bancorporation