Westamerica Bancorporation
Executive Office A-2M
P.O. Box 1200
Suisun City, CA 94585
September 19, 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 September 6, 2007 in which you provided
comments following your review of Westamerica Bancorporation's supplemental
response letter dated August 22, 2007. As you requested, the following is our
response to your comment, which is restated for your convenience.
Form 10-K for the Fiscal Year Ended December 31, 2006
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Composition of Allowance for Loan Losses, page 29:
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1. Comment: In your response you explain 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 five categories.
Please tell us the following so that we may better understand your unallocated
allowance:
* The amounts allocated to each of the eleven categories at December 31, 2006;
* The process you have in place to determine the quantitative impact of a change
in each of the risk categories, and;
* What the quantitative impact was for each of the changes in the five risk
categories discussed in your response.
Page 2
Response: The amounts allocated to each of the eleven categories at December 31,
2006 are shown on page 6 of this letter following discussion of the company's
process.
The process Westamerica follows to determine the quantitative impact of a change
in each of the qualitative risk categories used to determine the unallocated
allowance has been consistently applied for four years. A review is performed
quarterly by a standing committee of senior credit officers ("the Committee").
The voting members of the Committee have broad-based credit experience in
commercial, real estate and consumer lending disciplines, as well as loan
workout experience. Also, each voting member has over twenty years banking
experience within the geographic markets in which Westamerica operates. Each
Committee member has worked through full business, credit and interest rate
cycles.
This Committee meets quarterly to review and discuss internal and external
environmental conditions impacting risk for each of the eleven qualitative risk
categories. These risk categories are attributable to national or local economic
or industry trends which have occurred, but have not yet been recognized in past
loan charge-off history. While environmental conditions continually evolve
causing discussions to vary over time, such environmental conditions considered
during 2006 for each of the risk categories included:
1. Concentration of credit: new guidelines issued by banking regulators
regarding concentration of loans secured by real estate, the Company's
existing concentration of loans secured by real estate, the trend in real estate
valuations, the impact of acquired real estate secured loans, concentrations of
loans by industry, geographic concentrations of loans, and concentrations to
individual borrowers.
2. Loan delinquency trends: historical delinquent loan trends and our current
expectations for delinquencies for the current loan portfolio.
3. Developing economic and business conditions: (1) the emergence of a
substantial correction in the real estate market in the Company's primary
Northern California markets and specifically California's Central Valley, and
the potential impact on the general economy and businesses directly and
indirectly linked to the real estate market; (2) agricultural production and
related commodity prices in the California Central Valley; (3) the Federal
Reserve's monetary policy, indications regarding future monetary policy based
Page 3
on the futures market for federal funds, and appointment of a new Federal
Reserve Chairman; (4) the impact of rising and highly volatile energy prices
on consumer spending and commercial borrower cost structures and resulting
debt service capacity; and (5) other factors such as inflation, employment
conditions, the federal deficit, the trade deficit, state and local economic
conditions, California's debt position and recently passed infrastructure bonds,
and the outlook for economic growth.
4. Adequacy of lending management and staff: number of open loan underwriter
and support staff positions, current labor market conditions for experienced
commercial loan underwriters, and industry trends related to recruiting,
training, and retaining commercial loan underwriters. Lending management,
underwriter and support staff positions have experienced historically high
turnover and vacancy conditions over the last two years, which could
adversely affect loss rates on portfolio loans originated during these recent
years.
5. Lending policies and procedures: magnitude of changes in underwriting
guidelines and resulting expectations regarding levels of classified and
criticized loans for the current loan portfolio.
6. Loss and recovery trends: historical trends in loss and recovery rates,
actual loss and recovery amounts compared to projections, impact on loss
projections for the current portfolio as interest rates change on adjustable
loans, debt service capacity of consumers given prevalence of adjustable rate
mortgages, and expectation for rising losses on the current portfolio of
commercial loans.
7. Nature and volume of portfolio: recent growth rate of loan portfolio
segments, nature of recent growth - "organic" or through acquisition, and
factors impacting growth trends.
8. Nonaccrual trends: historical trends in nonperforming loan volumes, types of
loans on nonaccrual status, and projections for nonperforming loan volumes.
9. Problem loan trends: trends in classified loan volumes and types of loans
classified.
Page 4
10. Quality of loan review system: experience of Loan Review staff, staff
turnover within the department, the duration of open staff positions, and
assigned functional responsibilities relative to resource levels within the
department. (Westamerica's Loan Review function is responsible for
independently risk-grading individual loans as "criticized" and "classified" in
accordance with regulatory guidelines. The Loan Review Manager reports
directly to the Company's Board of Directors.)
11. External competitive issues: trends in competitive underwriting practices
and Management's response to competitive underwriting practices. The impact of
loans in the portfolio underwritten with the "moderate underwriting program"
which commenced in 2004.
Based on the Committee's review and discussion of internal and external
environmental conditions, a qualitative risk assessment of "low" risk,
"moderate" risk, or "high" risk is concluded for each risk category. To then
estimate losses for the loan portfolio based on this qualitative review, the
Committee exercises management judgement in estimating a quantitative risk
factor from the following table. The ranges reflect an allocation which
Management believes is a reasonable range of loss attributable to each risk
category. The range of quantitative factors differs among the qualitative risk
categories based on Management's judgement regarding the relative level of risk
for each qualitative risk category. As an example, economic and business
conditions are judged to have a greater bearing on credit risk, and therefore on
the level of the unallocated portion of the allowance, than loan delinquency
trends. In estimating quantitative risk factors, Management is not attempting to
compute an exact estimate of loss. Rather, Management recognizes that the
exercise of judgement is required to determine whether the amount of
the unallocated allowance as reflected in the general ledger reasonably
estimates losses inherent in the loan portfolio after taking the allocated
portion of the allowance into account.
Page 5
Quantitative Risk Factors (in basis points)
- -------------------------------------------
Qualitative Risk Assessment
---------------------------
Qualitative Risk Category Low Moderate High
- ------------------------- --- -------- ----
1) Concentration of Credit 1 2 3
2) Loan Delinquency Trends 1 2 3
3) Developing Economic
and Business Conditions 6-8 9-11 12-15
4) Adequacy of Lending
Management and Staff 6-8 9-13 14-17
5) Lending Policies and Procedures 3-4 5-7 8-9
6) Loss and Recovery Trends 3-4 5-6 7-8
7) Nature and Volume of Portfolio 3-4 5-6 7-8
8) Nonaccrual Trends 3-4 5-6 7
9) Problem Loan Trends 3-4 5-6 7-8
10)Quality of Loan Review System 3-4 5-6 7-8
11)External Competitive Issues 3-4 5-6 7-8
Based on the Committee's deliberations and judgment, the following qualitative
risk assessments and assigned quantitative risk factors were used to evaluate
the unallocated allowance at December 31, 2006 (dollars in thousands):
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Qualitative Risk Quantitative Risk
Assessment Factor Amount
---------- ------ ------
Qualitative Risk Category
- -------------------------
1) Concentration of Credit High 3 $ 914
2) Loan Delinquency Trends Low 1 305
3) Developing Economic
and Business Conditions High 15 4,569
4) Adequacy of Lending
Management and Staff High 17 5,178
5) Lending Policies and Procedures Mod/High 7 2,132
6) Loss and Recovery Trends Low/Mod 4 1,218
7) Nature and Volume of Portfolio Low 4 1,218
8) Nonaccrual Trends Low 4 1,218
9) Problem Loan Trends Moderate 5 1,523
10) Quality of Loan Review System Moderate 5 1,523
11) External Competitive Issues High 8 2,437
Management adjustment based on overall risk
assessment / estimated range of probable loss (a) 4,278
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Total unallocated allowance $26,513
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(a) Management views the result derived from applying the above quantitative
risk factors as an estimate of loss rather than an exact amount. Management
considers this estimate to be a guideline in determining if the overall
unallocated allowance is a reasonable estimate. Management recognizes that
unbalanced economic, credit, and capital market conditions can result in losses
greater than those predicted by quantitative models. The adjustment at
December 31, 2006, was based on Management's review and deliberations of
qualitative risk factors, which had acknowledged a higher overall risk of loss
in the current portfolio relative to environmental conditions existing at
December 31, 2005.
The quantitative impact for each of the changes in the five qualitative risk
categories during 2006, as discussed in our response of August 22, 2007, was as
follows (dollars in thousands):
Page 7
Unallocated as of December 31, 2005 $19,232
Concentration of Credit 291
Developing Economic and Business Conditions 2,075
Loss and Recovery Trends 283
Problem Loan Trends 276
External Competitive Issues 567
-------
Sub-total $3,492
All others (b) $1,287
Management adjustment based on overall risk
assessment / estimated range of probable loss (c) 2,502
-------
Unallocated allowance as of December 31, 2006 $26,513
=======
(b) All others include the remaining six qualitative risk categories. Risk
categories "adequacy of lending management and staff," "nonaccrual trends" and
"quality of loan review system" did not have a qualitative risk assessment
change during 2006, however, the quantitative risk factors were increased
within their ranges in 2006 based upon the Committee's review of current
internal and external conditions. These changes in quantitative risk factors
resulted in an increase in the unallocated allowance of approximately $1.4
million. Risk categories "delinquency trends," "lending policies and
procedures" and "nature and volume of portfolio" did not have a change in
qualitative risk assessment or quantitative risk factor in 2006, however, a
slight decline in credit exposure resulted in a nominal decrease in the
unallocated allowance for these qualitative factors.
(c) The adjustment was based on Management's review and conclusion that the
overall risk of loss in the current portfolio was higher at December 31, 2006
relative to environmental conditions existing at December 31, 2005.
In summary, Management has consistently adhered to a formal process and
structure for reviewing the appropriate level for the unallocated allowance.
This review of external and internal environmental factors recognizes that
recent loss history may not be indicative of losses to be recognized in the
current portfolio. In addition, Management's belief is that turmoil in
economic, credit and capital markets increasingly results in economic losses far
greater than those predicted by quantitative models. Based on Management's
review, the unallocated allowance was increased in 2006, in substantial part
because of Management's reasoned
Page 8
judgement that developing economic and business conditions would result in
increasing loan losses not reflected in the portions of the allowance derived
from quantitative factors.
Thank you for raising these matters with us. We hope you will find this
discussion responsive to your requests. Should you have any further 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