Westamerica Bancorporation
Annual Report 2015

Plain-text annual report

1108 Fifth Avenue • San Rafael, CA 94901 • Westamerica.com Westamerica 2 0 1 5 A n n u a l R e p o r t • 2 0 1 6 P r o x y S t a t e m e n t • N o t i c e o f A n n u a l M e e t i n g 1108 Fifth Avenue San Rafael, California 94901 March 14, 2016 To Our Shareholders: You are cordially invited to attend the Annual Meeting of Shareholders of Westamerica Bancorporation. It will be held at 11:00 a.m. Pacific Time on Thursday, April 28, 2016, at the Hilton Garden Inn, 2200 Gateway Court, Fairfield, California as stated in the formal notice accompanying this letter. We hope you will plan to attend. At the Annual Meeting, the shareholders will be asked to (i) elect nine Directors; (ii) approve a non-binding advisory vote on the compensation of our named executive officers; (iii) ratify the selection of the independent auditor; (iv) consider and vote upon a shareholder proposal regarding an independent board chairman; and (v) conduct other business that may properly come before the Annual Meeting. In order to ensure your shares are voted at the Annual Meeting, you can vote through the internet, by telephone or by mail. Instructions regarding internet and telephone voting are included on the Proxy Card. If you elect to vote by mail, please sign, date and return the Proxy Card in the accompanying postage-paid envelope. The Proxy Statement explains more about voting in the section entitled “Voting Information – How You Can Vote.” We look forward to seeing you at the Annual Meeting on Thursday, April 28, 2016, at the Hilton Garden Inn in Fairfield, California. Sincerely, David L. Payne Chairman of the Board, President and Chief Executive Officer 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y WESTAMERICA BANCORPORATION 1108 Fifth Avenue San Rafael, California 94901 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS Date: Thursday, April 28, 2016 Time: 11:00 a.m. Pacific Time Place: Hilton Garden Inn, 2200 Gateway Court, Fairfield, California. Items of Business 1. To elect nine Directors to serve until the 2017 Annual Meeting of Shareholders; 2. To approve a non-binding advisory vote on the compensation of our named executive officers; 3. To ratify selection of independent auditor; 4. To consider and vote upon shareholder proposal; and 5. To conduct other business that may properly come before the Annual Meeting and any adjournments or postponements. Who Can Vote? Shareholders of Record at the close of business on February 29, 2016 are entitled to notice of, and to vote at the Annual Meeting or any postponement or adjournment thereof. Admission to the Annual Meeting No ticket will be necessary for admission to the Annual Meeting. However, to facilitate the admission process, Shareholders of Record (“registered holder”) planning to attend the Annual Meeting should check the appropriate box on the Proxy Card. Your name will be added to a list of attendees. If you hold shares through an intermediary, such as a bank or broker (“beneficial holder”), you may need to register at the desk in the lobby. Please bring the following as evidence of ownership: 1) a legal proxy, which you can obtain from your bank or broker or other intermediary, or your brokerage statement dated on or after February 29, 2016, evidencing your ownership on February 29, 2016, the record date; and 2) photo identification. Annual Report Westamerica Bancorporation’s Annual Report on Form 10-K (“Annual Report”) to shareholders for the fiscal year ended December 31, 2015 is enclosed or is available for viewing as indicated on the Shareholder Meeting Notice and on the Company’s website at: www.westamerica.com, under “Shareholders.” The Annual Report contains financial and other information about the activities of Westamerica Bancorporation, but does not constitute a part of the proxy soliciting materials. BY ORDER OF THE BOARD OF DIRECTORS March 14, 2016 Kris Irvine VP/Corporate Secretary IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING BEING HELD ON THURSDAY, APRIL 28, 2016. THE PROXY STATEMENT AND ANNUAL REPORT ON FORM 10-K TO SHAREHOLDERS ARE AVAILABLE AT: www.westamerica.com. YOUR VOTE IS IMPORTANT PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY, OR VOTE BY TELEPHONE OR ONLINE USING THE PROCEDURES DESCRIBED IN THE PROXY STATEMENT. Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 TABLE OF CONTENTS GENERAL Voting Information ...........................................................................................................................................................1 Additional Information .....................................................................................................................................................3 Stock Ownership ...............................................................................................................................................................4 Section 16(a) Beneficial Ownership Reporting Compliance ............................................................................................6 BOARD OF DIRECTORS PROPOSAL 1: ELECTION OF DIRECTORS .............................................................................................................. 6 Nominees .........................................................................................................................................................................6 Name of Nominees, Principal Occupations, and Qualifications .....................................................................................6 Board of Directors and Committees .................................................................................................................................9 Director Compensation .................................................................................................................................................. 13 Director Compensation Table for Fiscal Year 2015 ...................................................................................................... 13 EXECUTIVE COMPENSATION Compensation Discussion and Analysis ........................................................................................................................ 13 Employee Benefits Compensation Committee Report .................................................................................................. 23 Compensation Committee Interlocks and Insider Participation .................................................................................... 24 Summary Compensation ................................................................................................................................................ 24 Summary Compensation Table for Fiscal Year 2015 ................................................................................................... 24 Grants of Plan-Based Awards Table for Fiscal Year 2015 ............................................................................................ 25 Outstanding Equity Awards Table at Fiscal Year End 2015 ......................................................................................... 26 Option Exercises and Stock Vested Table for Fiscal Year 2015 ................................................................................... 27 Pension Benefits for Fiscal Year 2015 ........................................................................................................................... 27 Nonqualified Deferred Compensation Table for Fiscal Year 2015 ............................................................................... 27 Potential Payments Upon Termination or Change in Control ....................................................................................... 28 Certain Relationships and Related Party Transactions ................................................................................................. 29 PROPOSAL 2: APPROVE A NON-BINDING ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS ......................................................................... 29 PROPOSAL 3: RATIFY SELECTION OF INDEPENDENT AUDITOR ............................................................. 30 AUDIT COMMITTEE REPORT ................................................................................................................................... 32 PROPOSAL 4: REQUIRE INDEPENDENT BOARD CHAIRMAN ....................................................................... 33 SHAREHOLDER PROPOSAL GUIDELINES ............................................................................................................ 35 SHAREHOLDER COMMUNICATION TO BOARD OF DIRECTORS ................................................................. 36 OTHER MATTERS .......................................................................................................................................................... 36 EXHIBIT A - AUDIT COMMITTEE CHARTER ..................................................................................................... A-1 EXHIBIT B - NOMINATING COMMITTEE CHARTER ....................................................................................... B-1 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y WESTAMERICA BANCORPORATION 1108 Fifth Avenue San Rafael, California 94901 ___________ PROXY STATEMENT March 14, 2016 ___________ GENERAL The Westamerica Board of Directors is soliciting proxies to be used at the 2016 Annual Meeting of Shareholders of Westamerica Bancorporation (the “Company”), which will be held at 11:00 a.m. Pacific Time, Thursday, April 28, 2016, or at any adjournment or postponement of the Annual Meeting. Proxies are solicited to give all Shareholders of Record (“registered holder”) an opportunity to vote on matters to be presented at the Annual Meeting. In the following pages of this Proxy Statement, you will find information on matters to be voted at the Annual Meeting. Voting Information Internet Availability of Proxy Materials. We are providing proxy materials to our shareholders primarily via the internet, instead of mailing printed copies of those materials to each shareholder. By doing so, we save costs and reduce the environmental impact of our Annual Meeting. On or about March 14, 2016, we mailed a Notice of Internet Availability of Proxy Materials (“Notice”) to certain of our shareholders. The Notice contains instructions about how to access our proxy materials and vote online or vote by telephone. If you would like to receive a paper copy of our proxy materials, please follow the instructions included in the Notice. If you previously chose to receive our proxy materials electronically, you will continue to receive access to these materials via email unless you elect otherwise. Proof of Ownership May Be Required for Attending Annual Meeting in Person. You are entitled to attend the Annual Meeting only if you are a shareholder as of the close of business on February 29, 2016, the record date, or hold a valid proxy for the meeting. In order to be admitted to the Annual Meeting, the Company reserves the right to request proof of ownership of Westamerica Bancorporation common stock on the record date. This can be:  A brokerage statement or letter from a bank or broker indicating ownership on February 29, 2016;  The Notice of Internet Availability of Proxy Materials;  A printout of proxy distribution email (if you received your materials electronically);  A Proxy Card;  A voting instruction form; or  A legal proxy provided by your broker, bank or nominee. Any holder of a proxy from a shareholder must present the Proxy Card properly executed, and a copy of the proof of ownership. The Company reserves the right to ask shareholders and proxy holders to present a form of photo identification such as a driver’s license. Proxy Card. The Board has designated Arthur C. Latno, Jr., Ronald A. Nelson and Edward B. Sylvester to serve as Proxies for the Annual Meeting. As Proxies, they will vote the shares represented by proxies at the Annual Meeting. If you sign, date and return your Proxy Card but do not specify how to vote your shares, the Proxies will vote FOR the election of all of the Director nominees, FOR approval of the advisory vote on the compensation of our named executive officers, FOR ratifying the selection of independent auditor, and AGAINST the shareholder proposal regarding an independent board chairman. The Proxies will also have discretionary authority to vote in accordance with their judgment on any other matter that may properly come before the Annual Meeting that we did not have notice of by January 22, 2016. 1 1 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Quorum and Shares Outstanding. A quorum, which is a majority of the total shares outstanding as of the record date, must be present to hold the Annual Meeting. A quorum is calculated based on the number of shares represented by shareholders attending in person or by proxy. On February 29, 2016, 25,400,207 shares of Westamerica Bancorporation common stock were outstanding. We also count broker non-votes, which we describe below, as shares present or represented at the Annual Meeting for the purpose of determining whether a quorum exists. Election of Director Nominees. Each share is entitled to one vote, except in the election of Directors where a shareholder may cumulate votes as to candidates nominated prior to voting, but only when a shareholder gives notice of intent to cumulate votes prior to the voting at the Annual Meeting. If any shareholder gives such notice, all shareholders may cumulate their votes for nominees. Under cumulative voting, each share carries as many votes as the number of Directors to be elected, and the shareholder may cast all of such votes for a single nominee or distribute them in any manner among as many nominees as desired. This Proxy Statement solicits the discretionary authority to cumulate votes and allocate them in the Proxy Holders’ discretion if any shareholder requests cumulative voting. In the election of Directors, the nine nominees receiving the highest number of votes will be elected. If your proxy is marked “Withhold” with regard to the election of any nominee, your shares will be counted toward a quorum and for other nominees but they will not be voted for the election of that nominee. If you attend the Annual Meeting and have already voted, you may vote in person in order to rescind your previous vote. Vote Required; Effect of Abstentions and Broker Non-Votes. The shares of a shareholder whose ballot on any or all proposals is marked as “abstain” will be included in the number of shares present at the Annual Meeting to determine whether a quorum is present. If you are the beneficial holder of shares held by a broker or other custodian, you may instruct your broker how to vote your shares through the voting instruction form included with this Proxy Statement. If you wish to vote the shares you own beneficially at the meeting, you must first request and obtain a legal proxy from your broker or other custodian. If you choose not to provide instructions or a legal proxy, your shares are referred to as “uninstructed shares.” Whether your broker or custodian has the discretion to vote these shares on your behalf depends on the ballot item. The following table summarizes the votes required for passage of each proposal and the effect of abstentions and uninstructed shares held by brokers. Brokers and custodians cannot vote uninstructed shares on your behalf in director elections or advisory votes on executive compensation. For your vote to be counted, you must submit your voting instruction form to your broker or custodian. Abstentions Uninstructed Shares Management Vote Recommendation Proposal Number Proposals 1 2 3 4 Election of directors Advisory vote on executive compensation "Say on Pay" Ratification of independent auditor Shareholder proposal - independent board chairman Votes Required for Approval Nine nominees receiving the most votes Majority of shares voted Majority of shares voted Majority of shares voted Not voted Not voted Not voted Not voted Not voted Broker discretionary vote FOR FOR FOR Not voted Not voted AGAINST Other Matters. Approval of any other matter considered at the Annual Meeting will require the affirmative vote of a majority of the shares present or represented by proxy and voting at the Annual Meeting. How You Can Vote. Your vote is very important and we hope that you will attend the Annual Meeting. However, whether or not you plan to attend the Annual Meeting, please vote by proxy. 2 2 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Registered Holders. If your shares are registered directly in your name with the Company’s transfer agent, Computershare Investor Services, LLC, you are considered a registered holder of those shares. Please vote by proxy in accordance with the instructions on your Proxy Card, or the instruction you received by email. A registered holder can vote in one of the following four ways:  Via the Internet. Go to the website noted on your Proxy Card in order to vote via the internet. Internet voting is available 24 hours a day. We encourage you to vote via the internet, as it is the most cost-effective way to vote. When voting via the internet, you do not need to return your Proxy Card.  By Telephone. Call the toll-free telephone number indicated on your Proxy Card and follow the voice prompt instructions to vote by telephone. Telephone voting is available 24 hours a day. When voting by telephone, you do not need to return your Proxy Card.  By Mail. Mark your Proxy Card, sign and date it, and return it in the enclosed postage-paid envelope. If you elected to electronically access the Proxy Statement and Annual Report, you will not be receiving a Proxy Card and must vote via the internet or by telephone.  In person. You may vote your shares at the Annual Meeting if you attend in person, even if you previously submitted a Proxy Card or voted via internet or telephone. Whether or not you plan to attend the Annual Meeting, however, we strongly encourage you to vote your shares by proxy before the meeting. We have been advised by counsel that these telephone and internet voting procedures comply with California law. Beneficial Shareholders. If your shares are held in a brokerage account in the name of your bank, broker, or other holder of record (“beneficial holder” or “street name”), you are not a registered holder, but rather are considered a beneficial holder of those shares. Your bank, broker, or other holder of record will send you instructions on how to vote your shares. If you are a beneficial holder, you must obtain a legal proxy, executed in your favor, from the holder of record to be able to vote in person at the Annual Meeting. Voting Deadlines. If you are a participant in the Westamerica Bancorporation Tax Deferred Savings/Retirement Plan (ESOP) your vote must be received by 11:59 p.m. Central Time, on April 25, 2016. All other shareholders voting by telephone or internet must vote by 12:01 a.m. Central Time, on April 28, 2016 to ensure that their vote is counted. Revocation of Proxy. Registered Holders who vote by proxy, whether by telephone, internet or mail, may revoke that proxy at any time before it is voted at the Annual Meeting. You may do this by: (a) signing another Proxy Card with a later date and delivering it to us prior to the Annual Meeting or sending a notice of revocation to the Corporate Secretary of Westamerica at 1108 Fifth Avenue, San Rafael, CA 94901; (b) voting at a later time by telephone or on the internet prior to 12:01 a.m. Central Time, on April 28, 2016 (prior to 11:59 p.m. Central Time, on April 25, 2016 for ESOP participants); or (c) attending the annual Meeting in person and casting a ballot. If you are a beneficial holder, you may change your vote by submitting new voting instructions to your broker or other nominee. Additional Information Householding. As permitted by the Securities Exchange Act of 1934 (the “Exchange Act”) only one envelope containing two or more Notices of Internet Availability of Proxy Materials is being delivered to shareholders residing at the same address, unless such shareholders have notified their bank, broker, Computershare Investor Services, or other holder of record that they wish to receive separate mailings. If you are a beneficial holder and own your shares in street name, contact your broker, bank or other holder of record to discontinue householding and receive your own separate copy of the Notice in future years. If you are a registered holder and own your shares through Computershare Investor 3 3 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Services, contact Computershare toll-free at 877-588-4258 or in writing directed to Computershare Investor Services, 250 Royall Street, Mail Stop 1A, Canton, MA 02021 to discontinue householding and receive multiple Notices in future years. To receive an additional Annual Report or Proxy Statement this year, contact Shareholder Relations at 707-863- 6992 or follow the instructions on the Notice. Mailing of dividends, dividend reinvestment statements, and special notices will not be affected by your election to discontinue duplicate mailings of the Notice. Electronic Access to Proxy Materials and Annual Reports. Whether you received the Notice of Internet Availability of Proxy Materials or paper copies of proxy materials, this Proxy Statement and the 2015 Annual Report are available on the Company’s website at: www.westamerica.com. If you hold your Westamerica Bancorporation common stock in street name through a broker, a bank or other nominee, you may have the option of securing your Proxy Statement and Annual Report via the internet. If you vote this year’s proxy electronically, you may also elect to receive future Proxy Statements, Annual Reports and other materials electronically by following the instructions given by your bank, broker, or other holder of record when you vote. Our website is available for information purposes only and should not be relied upon for investment purposes, nor is it incorporated by reference into this Proxy Statement. Stock Ownership Security Ownership of Certain Beneficial Holders. Based on Schedule 13G filings, shareholders beneficially holding more than 5% of Westamerica Bancorporation common stock outstanding as of December 31, 2015, in addition to those disclosed in the Security Ownership of Directors and Management section below, were: Name and Address of Beneficial Owner T. Rowe Price Associates, Inc 100 East Pratt Street, Baltimore, MD 21202-1009 BlackRock, Inc. 55 East 52nd Street, New York, NY 10055 American Century Investment Management, Inc. 4500 Main Street, Kansas City, MO 64111 The Vanguard Group, Inc. 100 Vanguard Boulevard, Malvern, PA 19355 _________________________ Title of Class Number of Shares Beneficially Owned Percent of Class Common Common Common Common 2,600,278 2,414,734 2,391,015 1,934,241 (1) (2) (3) (4) 10.10% 9.50% 9.37% 7.57% (1) The Schedule 13G was filed with the SEC on February 9, 2016. These securities are owned by various individual and institutional investors, which T. Rowe Price Associates, Inc. (Price Associates) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial holder of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial holder of such securities. (2) The Schedule 13G filed with the SEC on January 27, 2016 disclosed that the reporting entity, BlackRock, Inc., held sole voting power over 2,339,807 shares and sole dispositive power over 2,414,734 shares. (3) The Schedule 13G filed with the SEC on February 11, 2016 disclosed that the reporting entity, American Century Investment Management, Inc., held sole voting power over 2,343,275 shares and shared dispositive power over 2,391,015 shares. (4) The Schedule 13G filed with the SEC on February 11, 2016 disclosed that the reporting entity, The Vanguard Group, Inc., held sole voting power over 33,967 shares and sole dispositive power over 1,899,574 shares, and shared dispositive power over 33,667 shares. In addition, on February 24, 2016, Eaton Vance Management, an institutional investor, through a representative, advised the Company that since December 31, 2015, its affiliates had collectively increased their ownership of the Company's common stock to approximately 9.5% of the outstanding shares. The Company has no additional information on the subject at this time. Security Ownership of Directors and Management. The following table shows the number of common shares and the percentage of the common shares beneficially owned (as defined below) by each of the current Directors, by the Chief Executive Officer (“CEO”), by the Chief Financial Officer (“CFO”), and by the three other most highly compensated executive officers, and by all Directors and Officers of the Company as a group as of February 29, 2016. As of February 29, 2016, there were 25,400,207 outstanding shares of Westamerica Bancorporation’s common stock. For the purpose 4 4 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y of the disclosure of ownership of shares by Directors and Officers below, shares are considered to be beneficially owned if a person, directly or indirectly, has or shares the power to vote or direct the voting of the shares, the power to dispose of or direct the disposition of the shares, or the right to acquire beneficial ownership of shares within 60 days of December 31, 2015. Amount And Nature Of Beneficial Ownership Shared Voting and Investment Power Right to Acquire Within 60 days of December 31, 2015 Name and Address** Etta Allen Louis E. Bartolini E. Joseph Bowler Arthur C. Latno, Jr. Patrick D. Lynch Catherine Cope MacMillan Ronald A. Nelson David L. Payne Edward B. Sylvester John "Robert" A. Thorson David L. Robinson Dennis R. Hansen Russell W. Rizzardi Sole Voting and Investment Power 10,867 (3) 1,800 - 3,460 1,000 8,600 44,000 (5) (6) - - 25,887 (4) - - - - 1,453 (7) 885,570 (8) 73,750 (9) 415 36 30 - (10) - 8,926 1,767 28,038 - Total(1) 10,867 1,800 25,887 3,460 1,000 8,600 44,000 887,023 73,750 101,984 170,634 206,257 - Percent of Class(2) * * 0.1% * * * 0.2% 3.5% 0.3% 0.4% 0.7% 0.8% - - - - - - - - - - 92,643 168,831 178,189 (11) (11) - Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 All 14 Directors and Executives Officers as a Group 145,851 950,478 490,597 1,586,926 6.1% ____________________ * Indicates beneficial ownership of less than one-tenth of one percent (0.1%) of the Company’s common shares. ** The address of all persons listed is 1108 Fifth Avenue, San Rafael, CA 94901. (1) None of the shares held by the Directors and Officers listed above have been pledged. (2) In calculating the percentage of ownership, all shares which the identified person or persons have the right to acquire by exercise of options are deemed to be outstanding for the purpose of computing the percentage of the class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. (3) Includes 10,350 shares held in a trust as to which Mrs. Allen is trustee. (4) Includes 25,887 shares held in trust as to which Mr. Bowler is co-trustee with shared voting and investment power. (5) Includes 1,115 shares owned by Mr. Latno’s wife as to which Mr. Latno disclaims beneficial ownership. (6) Includes 6,000 shares held in a trust as to which Ms. MacMillan is trustee and 400 shares held in trust under the California Uniform Gift to Minors Act as to which Ms. MacMillan is custodian. (7) Includes 462 shares held in a trust under the California Uniform Gift to Minors Act as to which Mr. Payne is custodian. (8) Includes 528,837 shares owned by Gibson Radio and Publishing Company, of which Mr. Payne is President and Chief Executive Officer, as to which Mr. Payne disclaims beneficial ownership, and 345,808 shares held in a trust as to which Mr. Payne is co-trustee with shared voting and investment power. (9) Includes 415 shares held in trusts under the California Uniform Gift to Minors Act as to which Mr. Thorson is custodian. (10) Includes 7,152 shares held in a trust as to which Mr. Thorson is co-trustee with shared voting and investment power. (11) During 1996, the Company adopted the Westamerica Bancorporation Deferral Plan (the “Deferral Plan”) that allows recipients of Restricted Performance Shares (“RPS”) to defer receipt of vested RPS shares into succeeding years. Amounts shown include RPS shares that have been deferred into the Deferral Plan for the following accounts in amounts of: Messrs. Hansen - 14,780 shares; and Robinson - 19,140 shares. 5 5 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities and Exchange Act requires the Company’s directors and executive officers and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Our employees generally prepare these reports on the basis of information received from each director and officer. Based on the review of copies of the forms filed, the Company believes that, during the last fiscal year, all filing requirements under Section 16(a) applicable to its directors, officers, and 10% stockholders were timely, except for a report by Mr. Rizzardi with respect to the sale of 66 shares, for a voluntary distribution from his retirement account. With the Company’s assistance, the report was filed in the month following the distribution. PROPOSAL 1 – ELECTION OF DIRECTORS Board of Directors Nine Directors have been nominated for election at the Annual Meeting to hold office until the next Annual Meeting or until their successors are elected and qualified. The Proxies will vote for the nine nominees named below unless you give different voting instructions on your Proxy Card. Each nominee is presently a Director of the Company and has consented to serve a new term. The Board does not anticipate that any of the nominees will be unavailable to serve as a Director, but if that should occur before the Annual Meeting, the Board reserves the right to substitute another person as nominee. The Proxies will vote for any substitute nominated by the Board of Directors. The Proxies may use their discretion to cumulate votes for election of Directors and cast all of such votes for any one or more of the nominees, to the exclusion of the others, and in such order of preference as they may determine at their discretion. Nominees The nominees for election as Directors are named and certain information with respect to them is given below. Our nominees are seasoned leaders who bring to the Board an array of financial services, public and private company, non-profit, and other business experience. As a group they possess experience in leadership, consumer banking, commercial and small business banking, investment banking, capital markets, financial advisory services, finance and accounting, risk management and real estate. Many of the Board Members have seen the company through a variety of economic conditions which was especially beneficial during the current economic environment. The information below has been furnished to the Company by the respective nominees. All of the nominees have engaged in their indicated principal occupation for more than five years, unless otherwise indicated and no nominee has served on the Board of Directors of another public company during the past five years. Name of Nominees, Principal Occupations, and Qualifications Etta Allen – Director since 1988 Etta Allen (86) is President and CEO of Allen Heating and Sheet Metal and President and CEO of Sunny Slope Vineyard in Sonoma County, California. She is a member of the Employee Benefits and Compensation Committee and the Loan and Investment Committee. Mrs. Allen is also a Director of Westamerica Bank. In 1972, she became the second woman in the state of California to become a licensed contractor in heating, ventilation, air conditioning and sheet metal, and in 1974 she became President and CEO of Allen Heating and Sheet Metal. Under her leadership the company became recognized throughout California. She was the first woman president of Marin Builders Exchange and during her time on the executive committee she also served as a trustee and later as chairman of their successful insurance trust. She was the first woman contractor on the Executive Committee of the California Association of Builders Exchanges. Etta Allen is one of the pioneers for women in non-traditional careers. As an entrepreneur, businesswoman and an involved community leader, she brings independence, operations management and executive experience to the Board. 6 6 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Louis E. Bartolini – Director since 1991 Louis E. Bartolini (83) retired from Merrill Lynch, Pierce, Fenner & Smith, Inc. (now Merrill Lynch and Co.) as a financial consultant. He currently serves on the Audit Committee and is also a Director of Westamerica Bank. Mr. Bartolini has 34 years of experience in the financial industry serving as a financial consultant and branch manager for Merrill Lynch and Co. and has been active for over 36 years in the non-profit community in Marin County. He has served on the boards of many non-profit organizations, including a five-year term as president of the Marin Symphony, a Board member of the Association of California Symphony Orchestras, and a past District Governor of Rotary International. Mr. Bartolini’s continuing interest in the financial industry, his leadership skills, and financial and investment expertise are of great value to the Board. His extensive ties to local community and business leaders through his long-term volunteer involvement provide the Board with a broad prospective and insights into key segments of our markets and customer base. E. Joseph Bowler – Director since 2003 E. Joseph Bowler (79) retired as Senior Vice President and Treasurer of the Company in 2002. He currently serves as a member of the Audit Committee and is also a Director of Westamerica Bank. Mr. Bowler holds a Masters of Business Administration from Stanford University. With many years of direct banking experience, Mr. Bowler brings strong financial and investment expertise important to the oversight of our financial reporting and interest rate risk management. In addition, Mr. Bowler’s experience as a director and trustee of various non-profit community and educational organizations brings strategic planning and corporate governance skills to the Board. Arthur C. Latno, Jr. – Director since 1985 Arthur C. Latno, Jr. (86) retired from Pacific Telesis Group (now Pacific Bell Telephone Company) as an Executive Vice President. He currently serves on the Company’s Executive Committee, the Employee Benefits and Compensation Committee, and the Loan and Investment Committee and is Chairman of the Nominating Committee. Mr. Latno is also a Director of Westamerica Bank. His expertise stems from his wide-ranging responsibilities at Pacific Bell, which included operations, regulatory responsibilities, and public and governmental relations. His proficiency in strategic planning was recognized by the City of San Francisco when he was selected to serve on the City’s Port of San Francisco Strategic Planning Advisory Panel. He has also been involved with the Marin General Hospital Foundation, the Fine Arts Museum of San Francisco and numerous other community organizations in the locations where the Company has a significant presence. Mr. Latno is also a former U.S. Ambassador and Chairman of the U.S. Delegation Treaty Conference (rank accorded by President Reagan) in Melbourne, Australia, and a former Chairman of the Board of Trustees and Past President of Board of Regents of St. Mary’s College in California. He was a recipient of the Anti-Defamation League’s Americanism Award and the Friends of the Human Rights Commission’s Human Rights Award. Mr. Latno’s most important contributions to the Board are his executive leadership, strategic planning skills, and regulatory and public relations experience. Patrick D. Lynch – Director since 1986 Patrick D. Lynch (82) retired as Vice President and General Manager of the U.S. Semiconductor Division of Motorola. He currently serves as Chairman of the Employee Benefits and Compensation Committee, is a member of the Executive Committee and the Nominating Committee, and is also a Director of Westamerica Bank. Mr. Lynch has held executive positions at Nicolet Instrument Company and several venture capital high-tech start-up companies. Mr. Lynch brings to the Board operations, financial and marketing expertise as well as a valued historical perspective. 7 7 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Catherine Cope MacMillan – Director since 1985 Catherine Cope MacMillan (68) is a former owner of the Huntington Hotel in San Francisco and La Playa Hotel in Carmel-by-the-Sea. She is a member of the Loan and Investment Committee and the Audit Committee. She is also a Director of Westamerica Bank. Ms. MacMillan previously operated a prominent restaurant for nearly 20 years. She is a graduate of the University of California at Davis and Pacific McGeorge School of Law. She has also served in numerous leadership capacities for community organizations. Ms. MacMillan’s experience in administration and operational aspects of various businesses and organizations provides the Board with sound leadership. Ronald A. Nelson – Director since 1988 Ronald A. Nelson (73) was Executive Vice President of Charles M. Schulz Creative Associates through 1995. He serves as the Chairman of the Audit Committee and is a member of the Employee Benefits and Compensation Committee. He is also a Director of Westamerica Bank. Mr. Nelson has a background as a Certified Public Accountant and has been designated as the Audit Committee’s “financial expert.” He has been a resident of Sonoma County since 1970, which is one of the bank’s primary markets and where he has been involved in business management, investment management, and the development of commercial real estate. He also served as a board member and chairman of Santa Rosa Memorial Hospital, which is the area’s primary acute care hospital. Mr. Nelson’s extensive business and financial expertise provides important oversight of our financial reporting and risk management. David L. Payne – Director since 1984 David L. Payne (60) is Chairman, President & CEO of Westamerica Bancorporation. He was appointed Chairman in 1988 and Chief Executive Officer in 1989 and is Chairman of the Executive Committee. Mr. Payne is also Chairman, President & CEO of Westamerica Bank. He brings to the Board strong leadership and a vision for the future. He has a thorough knowledge of the banking industry, manages regulatory and business development issues, and has extensive financial and accounting expertise. Mr. Payne possesses excellent management, strategic development and business skills. Since Mr. Payne’s appointment to the Board, Westamerica’s dividends per share have risen eleven-fold and capital levels have increased eight-fold. Total assets have quadrupled during his tenure and net income has risen by a multiple of 12. Return on equity was 11.32% for the year ended December 31, 2015. Mr. Payne has successfully negotiated and led the Company through many mergers including: John Muir National Bank, Napa Valley Bancorporation, PV Financial, CapitolBank – Sacramento, North Bay Bancorp, ValliCorp Holdings, First Counties Bank, Kerman State Bank, Redwood Empire Bancorp, County Bank, and Sonoma Valley Bank. Mr. Payne also manages his family printing, publishing and cable television business. Edward B. Sylvester – Director since 1979 Edward Sylvester (79) is a licensed civil engineer and the founder of SCO Planning and Engineering. He retired from the day-to-day engineering profession in 2007, but continues as a private consultant. Mr. Sylvester is currently a member of the Executive Committee, the Nominating Committee, Chairman of the Loan and Investment Committee, and serves as Lead Independent Director of Westamerica Bancorporation. He was a founding Director of Gold Country Bank headquartered in Grass Valley until the bank merged with Westamerica’s predecessor, Independent Bankshares, at which time he was nominated to serve on the corporate Board by his peers. Mr. Sylvester is the Chairman of the Board of Nevada County Broadcasters and serves as Vice Chairman of the Nevada County Business Association. He is Vice Chairman of the Board of Sierra Nevada Memorial Hospital where he is a member of their Finance Committee, chairs the hospital’s Citizen Outreach Committee and is Chairman of the Strategy Committee. Mr. Sylvester has previously served as a member and Chairman of the California Transportation Commission that prioritizes state transportation projects and allocates funding. He is a past President of the Rotary Club of Grass Valley and past Chairman of the Grass Valley Chamber of Commerce. Mr. Sylvester has run 23 marathons to date and was the 14th person in the world to complete a 8 8 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y full marathon on all seven continents including Antarctica. The depth of Mr. Sylvester’s experience gives him first-hand understanding of all the nuances of development and development funding, a current knowledge of the retail economy, and a state-wide perspective and experience in funding allocation. His long tenure on the Board brings a historical and long-term perspective while he remains current on financial issues with his continuing leadership role in the community and active management positions. THE BOARD OF DIRECTORS RECOMMEND ELECTION OF ALL NOMINEES Board of Directors and Committees Director Independence and Leadership Structure The Board of Directors has considered whether any relationships or transactions related to a Director were inconsistent with a Director’s independence. Based on this review, the Board has determined that E. Allen, L.E. Bartolini, E.J. Bowler, A.C. Latno, Jr., P.D. Lynch, C.C. MacMillan, R.A. Nelson, and E.B. Sylvester are “independent” Directors as defined in Nasdaq rules. Our Board has carefully considered the critical issue of Board leadership. In the context of risk management, the leadership of each Board committee primarily responsible for risk management is vested in an independent committee chair. With regard to the leadership of the meetings of the full Board, our Board of Directors has carefully evaluated whether the positions of chairman and CEO should be separate or combined. Our Board believes that the most effective leadership structure for the Company at this time is to combine the responsibilities of the Chairman and CEO, a structure that has been successful since 1989. The combined positions avoid a duplication of efforts, enable decisive leadership, ensure a clear accountability for the performance of the Company, a more rapid implementation of decisions, and a consistent vision. Given the size of our employee base and our level of assets relative to larger, more complex banking structures, our Company is particularly well suited to combine the Chairman and CEO functions. Furthermore, our management team has an average tenure of 23 years and does not require the substantial oversight needed by a less experienced team, which has allowed our Chairman and CEO to lead the Company through eleven acquisitions since 1992. To ensure strong Board oversight eight of our nine Directors are, as noted above, independent as defined by Nasdaq. Only non-management directors sit on Board committees, with the exception of the Executive Committee, and every non-management director sits on one or more of these Committees. All non-management directors meet at least four times a year outside the presence of the Chairman and CEO. The Board completes an annual board evaluation that is discussed by the Nominating Committee and presented to the full Board. Although the Board believes that it is more effective to have one person serve as the chairman and CEO at this time, it also recognizes the importance of strong independent leadership on the Board, accordingly, the Board has established a strong, independent Lead Director, Mr. Sylvester, who must serve at least one year and has the following clearly delineated and comprehensive duties:  Presides at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent Directors;  Serves as liaison between the Chairman and the independent Directors;  Approves information sent to the Board;  Approves meeting agendas for the Board;  Approves meeting schedules to assure that there is sufficient time for discussion of all agenda items;  Has the authority to call meetings of the independent Directors; and  If requested by major shareholders, ensures that he or she is available for consultation and direct communication. 9 9 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 The Board does not believe that the fact an independent lead director does not preside over the normal Board meeting business sessions limits the ability of the Board to have open exchanges of views, or to address any issues the Board chooses, independently of the chairman. The Board of Directors of the Company also serve as the Board of Directors of Westamerica Bank, and as such are well informed of Bank operations through regular reports and discussions on the operations of the Bank. The Directors’ longevity with the Company has exposed them to a wide range of business cycles, which plays a critical role in managing the risk profile and profitability of the Company through the current economic environment. Role of the Board of Directors in Risk Oversight The Board is also responsible for overseeing all aspects of management of the Company, including risk oversight, which is effected through all Board committees, but primarily through the Board’s Audit Committee. The Internal Audit Department reports directly to the Board’s Audit Committee. It presents its independently prepared company-wide annual risk assessment, its evaluation of Management’s prepared risk assessment and its audit plan incorporating the risk assessment, including the policies and procedures utilized to monitor and control such exposures, to the Board’s Audit Committee. The internal loan review function reports directly to the Board’s Loan and Investment Committee. It reports ongoing evaluations of loan portfolios and the risk rating of individual loans using guidelines established by bank regulatory authorities, to the Board’s Loan and Investment Committee. Meetings The Company expects all Board members to attend all meetings, including the Annual Meeting of Shareholders, except for reasons of health or special circumstances. The Board held a total of ten meetings during 2015. Every Director attended at least 75%, with the exception of Mr. Latno who attended 60% due to health reasons, of the aggregate of: (i) the Board meetings held during that period in which they served; and (ii) the total number of meetings of any Committee of the Board on which the Director served. Each individual who served on the Board of the Company on the date of the 2015 Annual Meeting of Shareholders attended the meeting, except for Mr. Latno. Committees of the Board Director Name Etta Allen Louis E. Bartolini E. Joseph Bowler Arthur C. Latno, Jr. Patrick D. Lynch Catherine Cope MacMillan Ronald A. Nelson David L. Payne Edward B. Sylvester Number of Meetings in 2015 Executive Committee Executive Committee Audit Committee Employee Benefits and Compensation Committee Loan and Investment Committee Nominating Committee X X X Chair 5 X X Chair X 9 X X Chair X 5 X X X Chair X Chair 9 X 1 Functions: The Board delegates to the Executive Committee all powers and authority of the Board in the management of the business affairs of the Company between board meetings, which the Board is allowed to delegate under California law. 10 10 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Audit Committee The Board of Directors has determined that all members are independent, as that term is defined by applicable rules of NASDAQ for Audit Committee purposes. The Board has also designated Mr. Nelson as the “Audit Committee financial expert” as defined by the rules of the SEC and has determined that he is “financially sophisticated” under NASDAQ rules. In concluding that Mr. Nelson is the Audit Committee financial expert, the Board determined that he has:  an understanding of generally accepted accounting principles and financial statements;  the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;  experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities;  an understanding of internal control over financial reporting; and  an understanding of Audit Committee functions. Designation of a person as an Audit Committee financial expert does not result in the person being deemed an expert for any purpose, including under Section 11 of the Securities Act of 1933. The designation does not impose on the person any duties, obligations or liability greater than those imposed on any other Audit Committee member or any other Director and does not affect the duties, obligations or liability of any other member of the Audit Committee or Board of Directors. Functions: The Audit Committee provides independent, objective oversight of the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the independence and performance of the Company’s independent auditor as it performs audit, review or attest services, and the Company’s internal audit and control function. It selects and retains the independent registered public accounting firm, and reviews the plan and the results of the auditing engagement. It acts pursuant to a written charter that was reaffirmed by the Board of Directors in April 2015 and is attached as Exhibit A to the Proxy Statement for this 2016 Annual Meeting of Shareholders. Employee Benefits and Compensation Committee The Employee Benefits and Compensation Committee of the Board of Directors (the “Compensation Committee”) is comprised solely of Directors who are not current or former employees of Westamerica or any of its affiliates. They are independent as defined by NASDAQ rules. Functions: The Compensation Committee administers Westamerica Bancorporation’s 2012 Amended and Restated Stock Option Plan of 1995, Tax Deferred Savings and Retirement Plan, Deferred Profit Sharing Plan, Deferred Compensation Plan, and the Westamerica Bancorporation Deferral Plan. It administers the Company’s compensation programs and reviews and reports to the Board the compensation level for executive officers, including the CEO, of the Company and its subsidiaries and determines that compensation plans are balanced between financial results and prudent risk taking. The Compensation Committee determines annual corporate performance objectives for equity compensation and cash bonuses and their related corporate, divisional and individual goals. Based on the CEO’s assessment of the extent to which each executive officer met those objectives and goals, the Committee determines each executive officer’s annual equity compensation and cash bonus. The Compensation Committee also establishes the individual goals and targets for the CEO. All compensation approved by the Compensation Committee is reported to the full Board of Directors. The role of the Compensation Committee is described in greater detail under the section entitled “Compensation Discussion and Analysis.” The Compensation Committee is governed by a written charter as required by NASDAQ rules. The charter was adopted April 24, 2013 and attached as Exhibit B to the Proxy Statement for the 2014 Annual Meeting of Shareholders. The 11 11 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Compensation Committee has the authority to seek assistance from officers and employees of the Company as well as external legal, accounting and other advisors. It has not retained outside consultants for compensation advice, but can request assistance on an as-needed basis. It does not delegate authority to anyone outside of the Compensation Committee. The Payroll and Employee Benefits Department supports the Compensation Committee by fulfilling certain administrative duties regarding the compensation programs. Nominating Committee The Board of Directors has determined that all members of the Nominating Committee are independent, as defined in NASDAQ rules. Functions: The Nominating Committee screens and recommends qualified candidates for Board membership. This Committee recommends a slate of nominees for each Annual Meeting. As part of that process, it evaluates and considers all candidates submitted by shareholders in accordance with the Company’s Bylaws, and considers each existing Board member’s contributions. The Committee applies the same evaluation standards whether the candidate was recommended by a shareholder or the Board. The Nominating Committee is governed by a written charter, which was reaffirmed January 27, 2016 and attached as Exhibit B to the Proxy Statement for this 2016 Annual Meeting of Shareholders. While the Board does not have a formal diversity policy, it believes that the Board broadly defines diversity to encompass a diverse range of skills and expertise sufficient to provide prudent guidance to the Company. In addition to the qualifications and characteristics described below, it considers whether the potential Director assists in achieving a mix of Board members that represents a diversity of background, perspective, and experience. Our Board includes Directors with experience in public corporations and non-profit organizations, as well as entrepreneurial individuals who have successfully run their own private enterprise. Our Board also has a broad set of skills necessary for providing oversight to a financial institution, which includes proven leadership, and expertise in capital management, finance, accounting, regulatory affairs, and investment management. Nominating Directors. The Nominating Committee will consider shareholder nominations submitted in accordance with Section 2.14 of the Bylaws of the Company. That section requires, among other things, that nominations be submitted in writing and must be received by the Corporate Secretary at least 45 days before the anniversary of the date on which the Company first mailed its proxy materials for the prior year’s Annual Meeting of Shareholders. If the date for the current year’s Annual Meeting changes more than 30 days from the date on which the prior year’s meeting was held, the Company must receive notice with a reasonable amount of time before the Company mails its proxy materials for the current year. Nominations must include the following information:  The principal occupation of the nominee;  The total number of shares of capital stock of the Company that the shareholder expects will be voted for the nominee;  The name and address of the nominating shareholder; and  The number of shares of capital stock of the Company owned by the nominating shareholder. The Committee has specified the following minimum qualifications it believes must be met by a nominee for a position on the Board:  Appropriate personal and professional attributes to meet the Company’s needs;  Highest ethical standards and absolute personal integrity;  Physical and mental ability to contribute effectively as a Director;  Willingness and ability to participate actively in Board activities and deliberations;  Ability to approach problems objectively, rationally and realistically;  Ability to respond well and to function under pressure; 12 12 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y  Willingness to respect the confidences of the Board and the Company;  Willingness to devote the time necessary to function effectively as a Board member;  Possess independence necessary to make unbiased evaluation of Management performance;  Be free of any conflict of interest that would violate applicable law or regulation or interfere with ability to perform duties;  Broad experience, wisdom, vision and integrity;  Understanding of the Company’s business environment; and  Significant business experience relevant to the operations of the Company. Loan and Investment Committee Functions: This Committee reviews major loans and investment policies. Director Compensation The following table and footnotes provide information regarding the compensation paid to the Company’s non- employee members of the Board of Directors in the fiscal year 2015. Directors who are employees of the Company receive no compensation for their services as Directors. Director Compensation Table For Fiscal Year 2015 Name(1) Etta Allen Louis E. Bartolini E. Joseph Bowler Arthur C. Latno, Jr. Patrick D. Lynch Catherine Cope MacMillan Ronald A. Nelson Fees Earned Paid in Cash ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings(2)($) $38,400 33,000 33,000 35,650 40,250 38,400 37,250 $62,061 624 - - - - - Total ($) $100,461 33,624 33,000 35,650 40,250 38,400 37,250 Edward B. Sylvester _________________________ (1) Non-employee Directors did not receive options or stock awards. During 2015, non-employee Directors of the Company each received an annual retainer of $18,000. Each non-employee Director received $1,200 for each meeting of the Board attended and $600 for each Committee meeting attended. The Chairman of each Committee received an additional $250 for each Committee meeting attended. All non-employee Directors are reimbursed for expenses incurred in attending Board and Committee meetings. The Chairman of the Board, David L. Payne, is compensated as an employee and did not receive any compensation as a Director. 54,611 43,650 10,961 (2) The Deferred Compensation Plan allows non-employee Directors to defer some or all of their Director compensation with interest earnings credited on deferred compensation accounts. The amount shown is the interest on nonqualified deferred compensation that exceeds 120% of the long-term Applicable Federal Rate, with compounding, on all cash compensation deferred in 2015 and in previous years. Westamerica Bancorporation does not have a charitable donations program for Directors nor does it make donations on behalf of any Director(s). The Company may make a nominal donation through its Community Relations program to non-profit organizations where a Director(s) may have an affiliation. EXECUTIVE COMPENSATION Compensation Discussion and Analysis The executive compensation practices described below have been followed consistently for twenty-four years. At 13 13 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 each Annual Meeting of Shareholders since 2010, a majority of our shareholders approved an advisory proposal on the Company’s executive compensation. The Compensation Committee governs the executive compensation program that combines three compensation elements: base salary, annual non-equity cash incentives, and long-term stock grants. Several compensation philosophies and practices underlie this program:  Base salaries for participants in this program should be limited to foster an environment where incentive compensation motivates and rewards corporate, divisional, and individual performance.  Incentive compensation (annual non-equity cash incentives and long-term stock grants) is based on measurement of performance against pre-established objective measurable goals. Specific criteria for each objective are established for “threshold,” “target,” and “outstanding” performance. On any one measure, performance below “threshold” results in no credit for that objective. “Threshold” performance results in 75% achievement, “target” performance results in 100% achievement, and “outstanding” performance results in 150% achievement. The performance achievement level determines the size of incentive compensation awards.  Long-term incentive stock grants will be awarded to senior management if the corporate performance level is rated “threshold” or better. The purpose of long-term incentive grants is to: – motivate senior management to focus on long-term performance; – avoid excessive risk-taking and instill conservative management practices; – build equity ownership among Westamerica’s senior management; – link shareholder interests to management incentives; and – create ownership mentality among senior management. In February 2013, the Board of Directors adopted a clawback policy that requires executive officers to forfeit previously awarded incentive compensation if the incentives were based on materially inaccurate financial statements or other performance measures that are later proven to be materially inaccurate or the achievement of which were due to fraud or other misconduct. Establishing Incentive Levels, Determining Objectives and Measuring Performance In administering the executive compensation program, the Compensation Committee determines “target” incentives for each position annually. The Compensation Committee exercises discretion in establishing “target” incentives in an effort to provide competitive pay practices while motivating and rewarding performance that benefits the Company’s long-term financial performance and shareholder interests, and avoiding excessive risk-taking. At the beginning of each calendar year, the Compensation Committee establishes annual corporate performance objectives. In establishing corporate performance objectives, the Compensation Committee takes into consideration the current operating environment for the commercial banking industry as well as internal management policies and practices which would, in the Compensation Committee’s opinion, benefit the long-term interests of the Company and its shareholders. Corporate performance measures include risk management elements considered to be responsive to the impact that current operating conditions could have on the long-term performance of the Company. The Compensation Committee monitors the economy and the banking industry’s operating environment throughout the ensuing year, and may exercise discretion in adjusting corporate performance objectives during the year. The operating environment for the commercial banking industry is impacted by a myriad of factors including, but not limited to, local, national and global economic conditions, interest rate levels and trends, monetary policies of the Federal Reserve Board and its counterparts in other countries, fiscal policies of the United States government and other global political conditions, regulations and legislation, liquidity in capital markets, the demand for capital by commercial enterprises and consumers, new financial products, competitive response to changing conditions within the industry, trade balances, the changing values of real estate, currencies, commodities and other assets, and other factors. 14 14 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Management policies and practices the Board considers in establishing corporate performance objectives include, but are not limited to, management of the Company’s balance sheet and product pricing in a manner which will benefit the long-term financial interests of shareholders, the type and variety of financial products offered by the Company, adherence to internal controls, management of the credit risk of the Company’s loan and investment portfolios, the results of internal, regulatory and external audits, service quality delivered to the Company’s customers, service quality of “back office” support departments provided to those offices and departments directly delivering products and services to the Company’s customers, maintenance of operating policies and procedures which remain appropriate for risk management in a dynamic environment, timely and efficient integration of acquired companies, operational efficiencies, and capital management practices. Restricted performance shares (“RPS”) represent awards of Westamerica Bancorporation’s common stock subject to achievement of performance objectives established by the Compensation Committee. The 2012 Amended and Restated Stock Option Plan of 1995 (the “2012 Amended Plan”), which was originally approved by shareholders in 1995, and amended with shareholder approval in 2003 and again in 2012, defines the performance factors the Board must use in administering RPS grants as one or more of the following: earnings, diluted earnings per share, revenue and revenue per diluted share, expenses, share price, return on equity, return on equity relative to the average return on equity for similarly sized institutions, return on assets, return on assets relative to the average return on assets for similarly sized institutions, efficiency ratio (operating expenses divided by operating revenues), net loan losses as a percentage of average loans outstanding, nonperforming assets, and nonperforming assets as a percentage of total assets. In addition to establishing corporate performance objectives, the Compensation Committee also establishes individual goals for the CEO. In regard to the other executives named in the accompanying tables, the CEO recommends divisional and individual performance objectives to the Compensation Committee, which considers, discusses, adjusts as necessary, and adopts such performance objectives. Upon the closure of each calendar year, the Compensation Committee reviews corporate, divisional, and individual performance against the performance objectives for the year just completed. After thorough review and deliberation, the Compensation Committee determines the recommended amount of individual non-equity cash incentives and stock-based incentive awards. The Compensation Committee reports such incentives to the Board of Directors. Meetings of the Compensation Committee and Board of Directors routinely occur in January, immediately following the closure of the calendar year for which performance is measured for incentive compensation purposes. Stock Grants Long-term stock grants may only be awarded under shareholder approved stock-based incentive compensation plans. The Company’s Proxy Statement dated March 12, 2012, as filed with the SEC on March 13, 2012, summarizes the 2012 Amended Plan’s changes from the predecessor plan. Such changes included:  reducing the issuable shares to 1,500,000 (plus shares that become available if awards under prior plans expire unexercised or are cancelled, forfeited or terminated before being exercised);  any additional authorization of shares available for issuance must be approved by shareholders; and  establishing a plan expiration date of April 26, 2022 after which shareholder approval is again required to extend the term or approve a new stock option plan. The 2012 Amended Plan allows four types of stock-based compensation awards: Incentive Stock Options (“ISO”) allow the optionee to buy a certain number of shares of Westamerica Bancorporation common stock at a fixed price, which is established on the date of the option grant. ISOs are intended to meet the requirements of Section 422 of the Internal Revenue Code which provide advantages if certain conditions are met. If the optionee holds the acquired stock for the designated holding period, the optionee defers the timing of recognizing taxable income related to exercising the ISO. If the optionee complies with the ISO requirements, the Company does 15 15 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 not receive a corporate tax deduction related to the shares issued. Nonqualified Stock Options (“NQSO”) also give the optionee the option to buy a certain number of shares of Westamerica Bancorporation common stock at a fixed price, which is established on the date of grant. Unlike ISOs, NQSOs do not allow deferral of taxable income for the optionee. At the time NQSOs are exercised, the optionee incurs taxable income equal to the spread between the exercise price and the market price of the stock, and the Company receives a corporate tax deduction in the same amount. Stock Appreciation Rights (“SAR”) provide the holder a cash payment equal to the difference between the fair market value of the Westamerica Bancorporation’s common stock on the date the SAR is surrendered and the fair market value of the Company’s common stock on the date the SAR was granted. The optionee incurs taxable income at the time the SAR is settled and the Company receives a corporate tax deduction in the same amount. Restricted Performance Share Grants, as noted above, are awards of the Westamerica Bancorporation’s common stock that are subject to the achievement of performance objectives. Award recipients receive shares at the end of the performance measurement period only if performance objectives are achieved. The award recipient incurs taxable income at the time any RPS vests and the Company receives a corporate tax deduction in the same amount. Determination of Awards to Grant In determining which type of stock-based compensation awards to grant, the Compensation Committee considers the attributes of each form of incentive. Examples include the ability to motivate management to make decisions based on the long-term interests of shareholders, the desire to compensate with shares rather than cash, and the tax consequences of each type of award. The Compensation Committee retains the latitude to utilize all forms of incentives provided under the 2012 Amended Plan. In the current and preceding years, the Compensation Committee has utilized NQSO and RPS based on the motivational aspects of stock price appreciation, the settlement in shares rather than cash, and the preservation of tax deductions for the Company. As of February 29, 2016, the Company had no ISO or SAR awards outstanding. Determination of Option Exercise Price The 2012 Amended Plan also requires the exercise price of each NQSO or ISO to be no less than one hundred percent (100%) of the fair market value of the Company’s common stock on the date of grant. The 2012 Amended Plan does not allow re-pricing stock options for poor stock price performance. Stock-based compensation awards are submitted by the Compensation Committee to the full Board of Directors for review. As described above, these meetings have routinely occurred in January immediately following the closure of the calendar year for which performance is measured for incentive compensation purposes. The Compensation Committee meeting has routinely been held during the same week as the related Board of Directors meeting. These January meetings follow by no more than ten business days the Company’s public disclosure of its financial results for the preceding year. As a result, stock option grants are awarded, and the exercise price of such grants are determined at a time when the Company has broadly disseminated its financial condition and current operating results to the public. The Company’s outstanding stock option grants are dated, and related stock option exercise prices are determined, on the January date the Compensation Committee meets to approve such grants.(1) Long-Term Incentive Attributes The Board of Directors has designated the Compensation Committee as the administrator of the 2012 Amended Plan. The Compensation Committee reports to the Board the terms and conditions of stock option awards. In carrying out (1) Due to merger and acquisition activity, the Corporation converts stock option grants outstanding for acquired companies based on the terms and conditions of related merger agreements. The dating of such converted stock options generally remains as originally dated by the acquired company. As a result, the Corporation at times has options outstanding related to acquisitions with grant dates different from its routine stock option granting practices. 16 16 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y this responsibility, the Compensation Committee designs such awards as long-term incentives. The terms and conditions of currently outstanding awards include:  NQSO grants vest one-third (1/3) on each anniversary of the grant date. As such, NQSO grants become fully vested over a three-year period. NQSO grants expire on the tenth anniversary of the grant date. The Company does not pay dividends on shares underlying NQSO grants until the optionee exercises the option and the shares are outstanding on a dividend record date.  RPS awards vest three years following the grant date, only if corporate performance objectives are achieved over the three-year period. The Company does not pay dividends on RPS shares until vesting occurs and shares awarded become outstanding on a dividend record date. Compensation for the Chairman, President & CEO Mr. Payne performs two functions for the Company. These two functions tend to be compensated separately at similarly sized banking institutions. Mr. Payne serves as Chairman of the Board and Chief Executive Officer with responsibilities including oversight of the organization and external strategic initiatives. Mr. Payne also serves as President and Chief Operating Officer with responsibilities including daily management of internal operations. Mr. Payne’s total compensation reflects these broad responsibilities. Consistent with the overall compensation philosophy for senior executives, Mr. Payne’s compensation has a greater amount of pay at risk through incentives than through base salary. Since Mr. Payne is compensated as an executive, he is not eligible to receive compensation as a Director. As noted on page 27 of the Proxy under the Pension Benefits Table, during 1997 the Company entered into a nonqualified pension agreement (“Pension Agreement”) with Mr. Payne in consideration of Mr. Payne’s agreement that RPS granted in 1995, 1996 and 1997 would be cancelled.(2) In entering the Pension Agreement, the Board of Directors considered the following:  Mr. Payne had a significant beneficial interest in Westamerica Bancorporation common stock, which was more than adequate to continue to provide motivation for Mr. Payne to continue managing the Company in the best interests of shareholders.  In 1997, the Company had consummated its largest acquisition, with significant total asset growth of approximately 51 percent. One of the Board’s objectives was to provide a compensation mechanism providing retention features for Mr. Payne. Retention of Mr. Payne as President and Chief Executive Officer was desired following the Company’s significant growth. The RPS shares surrendered for the Pension Agreement were scheduled to vest on dates in 1998, 1999 and 2000, while the Pension Agreement was not fully vested until December 31, 2002. Additionally, the 20-year certain pension provided under the Pension Agreement was to commence upon Mr. Payne’s attainment of age 55. Mr. Payne was age 42 at the time of entering the Pension Agreement. Compensation Awarded to Named Executive Officers Base salaries for participants in the executive compensation program are generally limited to foster an environment where incentive compensation motivates and rewards corporate, divisional, and individual performance. As such, base pay increases are generally infrequent and limited to “control points” assigned to each position. The non-equity cash incentive formula has the following components: "Target" Cash Incentive X Composite Corporate, Divisional and Individual Performance Level = Cash Incentive Award In structuring performance goals for the named executive officers, the Compensation Committee emphasizes goals, which if achieved, will benefit the overall Company. As such, senior management level positions have high relative weighting on corporate objectives, and divisional leadership positions also have significant weighting on divisional (2) The value of the surrendered RPS shares and the Pension Agreement were considered equivalent based on actuarial assumptions. 17 17 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 objectives. The “target” cash incentive and the weighting of goals for the named executive officers for 2015 performance were as follows: “Target” Cash Incentive $371,000 100,000 73,900 82,500 60,500 Corporate 80% 55% 55% 50% 55% Goal Weighting Divisional – 25% 25% 40% 35% Individual 20% 20% 20% 10% 10% Mr. Payne Mr. Thorson Mr. Hansen Mr. Robinson Mr. Rizzardi The Compensation Committee establishes corporate goals with the intent to balance current profitability with long-term stability of the Company and its future earnings potential. The 2015 corporate performance goals related to current year “profitability” included return on equity, return on assets and diluted earnings per share. The performance goals designed to maintain the long-term stability of the Company include “quality” and “control” components. The “quality” measures include loan portfolio quality measures (originated classified loans and other real estate owned, originated non- performing loans and originated other real estate owned, and net loan losses to average originated loans) and service quality measures (external service quality to customers and internal service quality of support departments and branches). The “control” measures include non-interest expense to revenues (efficiency ratio), the level of non-interest expenses, and internal audit results. By maintaining both current year “profitability” goals and longer-term “quality” and “control” goals, Management has a disincentive to maximize current earnings at the expense of longer-term results. For 2015, the Compensation Committee expected nominal economic growth within the markets the Corporation operates given the slow pace of recovery from the severe recession of 2008 and 2009. As a result, the Committee reserved the ability to exercise a certain degree of judgment in adjusting target goals based on the resulting operating environment. The Compensation Committee determined the 2015 operating environment was generally characterized as follows:  Growth in the United States’ gross domestic product was positive, but generally below potential;  Inflation remained below targets established by the Federal Open Market Committee in spite of continuing high levels of monetary policy accommodation;  Interest rates remained low;  Employment trends continued to improve;  Interest rates on loans and investment securities remain relatively low compared to interest rates which would exist with moderated economic conditions. Market interest rates remained below the yields on the Company’s overall loan portfolio throughout 2015;  Competitive pricing of loans was aggressive;  Regulations imposed on financial institutions continued to pressure compliance costs, revenue opportunities, and operational risks; and  Credit risk in the banking industry continued to improve. The Compensation Committee considered Management’s response to the current operating environment including:  Management avoided long-duration, low-yielding loans that would constrain revenue in a rising interest rate environment;  Management increased the volume of interest-sensitive investment securities and shortened the duration of the securities portfolio to prepare for rising interest rates on a forward basis;  Management consistently maintained conservative loan underwriting practices to appropriately manage the Company’s exposure to credit risk;  Management focused its marketing efforts on loan products that would provide improved revenue opportunities in a rising interest rate environment; 18 18 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y  Management controlled operating costs to offset the effect of environmental pressures on revenues;  Management continued to lower the cost of funding the loan and investment securities portfolios; and  Adequate capital levels were maintained to position the Company for future growth. The Compensation Committee chose to make adjustments to actual results to take into account the impact of the operating environment. Adjusted actual results against “target” performance goals were: Performance “Target” Adjusted Actual Results Profitability Goals: Return on average shareholders’ equity Return on average assets Diluted earnings per share 11.2% 1.14% $2.26 11.3% 1.14% $2.28 Quality Goals: Classified originated loans and other real estate owned Non-performing originated loans and other real estate owned Net loan losses to average originated loans Service quality Control Goals: Non-interest expense to revenues (efficiency ratio) Non-interest expenses Below satisfactory internal audits $56 million $48 million $11.0 million 0.25% Improving $13.2 million 0.11% Improving 54.3% $107.1 million none 53.7% $105.3 million none Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 In reviewing the operating environment, Management’s response to the operating environment, and adjusted results compared to “target” performance goals, the Compensation Committee determined corporate performance to be 110.8% of target goals. As described above, divisional and individual goals are used in conjunction with corporate performance goals to determine cash bonus awards. In addition to daily management responsibilities, Mr. Payne’s individual goals included:  Maintaining prudent credit underwriting and pricing practices within the current operating environment;  Avoiding duration extension in the loan and investment portfolios to position the Company for a rising interest rate environment;  Credit quality improvement;  Satisfactory regulatory examination results;  Achievement of financial goals;  Managing operating expenses to lower levels;  Maintaining appropriate internal controls and risk management practices;  Effective leadership and management through divisional managers and other points of control;  Pursuing mergers and acquisitions;  Completing routine visits to branches and credit underwriting offices;  Conducting quality shareholder relations activities; and  Maintaining quality customer relations activities. Based on individual performance against these goals, the Committee exercised its discretion and assigned Mr. Payne a composite corporate and individual performance level of 61%. 19 19 In addition to routine on-going divisional responsibilities, Mr. Thorson managed the Finance Division toward functional goals, which included:  Manage the investment securities portfolio to maximize economic value, generate revenue without taking undue risk, and maintain high credit quality;  Manage the balance sheet to maintain an appropriate asset-sensitive condition to position the Bank for a rising interest rate environment.  Manage the Bank’s liquidity position through enhanced monitoring and reporting.  Manage the Trust Department toward achieving fee growth goals and maintaining satisfactory audit results;  Advancing documentation of the internal control structure to adopt the COSO 2013 framework;  Management of the regulatory compliance function; and  Capital management, including new regulatory capital standards. Based on the Finance Division’s results, the Committee determined divisional performance to be 118%. In addition to daily management responsibilities, Mr. Thorson’s individual goals included:  Assume responsibility for managing the Treasury function, including the investment securities portfolios, funding, liquidity, and balance sheet management;  Assume responsibility for managing the Trust Department;  Manage the process of changing the independent auditor relationship; and  Manage cross-divisional projects. Based on individual performance against these goals, the Committee determined Mr. Thorson’s individual performance to be 138%. In considering all elements of performance, the Committee exercised its discretion and assigned Mr. Thorson a composite corporate, divisional and individual performance level of 142%. In addition to routine on-going divisional responsibilities, Mr. Robinson managed the Banking Division toward functional goals, which included:  Achievement of loan and deposit goals;  Meeting divisional staff development objectives;  Manage improvement in non-interest income generated through the branch system;  Manage non-interest expenses to levels at or below budgeted amounts; and  Meeting community development lending and services objectives. Based on the Banking Division’s results, the Committee determined divisional performance to be 100%. In addition to daily management responsibilities, Mr. Robinson’s individual goals included:  Personnel training, development, and succession planning;  Regional sales management responsibilities; and  Hiring sales personnel to meet consumer sales initiatives. Based on individual performance against these goals, the Committee determined Mr. Robinson’s individual performance to be 138%. As a result, Mr. Robinson’s composite corporate, divisional and individual performance level was 109%. In considering all elements of performance, the Committee exercised its discretion and assigned Mr. Robinson a composite corporate, divisional and individual performance level of 133%. In addition to routine on-going divisional responsibilities, Mr. Hansen managed the Operations and Systems Division toward functional goals, which included:  Maintaining and improving customer service quality; 20 20 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y  Meeting or exceeding non-interest expense goals;  Implementation of staff development plans;  Management and satisfactory completion of information technology and compliance projects; and  Satisfactory risk management as measured by the results of internal, third-party and regulatory examinations. Based on the Operations and Systems Division’s results, the Committee determined divisional performance to be 118%. In addition to daily management responsibilities, Mr. Hansen’s individual goals included:  Assume responsibility for managing merchant processing services;  Development of staff development plans; and  Management of the information technology environment. Based on individual performance against these goals, the Committee determined Mr. Hansen’s individual performance to be 125%. As a result, Mr. Hansen’s composite corporate, divisional and individual performance level was 115%. In addition to routine on-going divisional responsibilities, Mr. Rizzardi managed the Credit Division toward functional goals, which included:  Maintain high quality loan underwriting standards;  Maintain credit quality as measured by classified loan, non-performing loan and other real estate owned volumes;  Updating loan policies and procedures; and  Maintaining appropriate credit monitoring practices. Based on the Credit Division’s results, the Committee determined divisional performance to be 114%. In addition to daily management responsibilities, Mr. Rizzardi’s individual goals included:  Management of staff toward completion of assigned projects; and  Staff development and succession planning. Based on individual performance against these goals, the Committee determined Mr. Rizzardi’s individual performance to be 100%. As a result, Mr. Rizzardi’s composite corporate, divisional and individual performance level was 111%. Based on the above described performance against objectives, the Committee determined cash incentive awards as follows: “Target” Cash Incentive $371,000 100,000 82,500 73,900 60,500 Mr. Payne Mr. Thorson Mr. Robinson Mr. Hansen Mr. Rizzardi X Composite Corporate Divisional and Individual Performance Level = 61% 142% 133% 115% 111% Cash Incentive Award $225,000 141,600 110,000 85,200 67,000 The size of stock grants is determined by corporate performance using stated formulas. The formulas used to determine “target” NQSO and RPS grant sizes adjust for changes in the underlying value of one share of Westamerica Bancorporation common stock. For achievement of corporate performance in 2015, the following stock grants were awarded in January 2016: 21 21 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 “Target” Nonqualified Stock Option Grant – 24,800 24,900 22,300 20,100 “Target” RPS Grant – 2,640 2,650 2,380 2,140 X X Corporate Performance Level 110.8% 110.8% 110.8% 110.8% 110.8% Corporate Performance Level 110.8% 110.8% 110.8% 110.8% 110.8% = Nonqualified Stock Option Award – 27,500 27,600 24,700 22,300 = RPS Award – 2,930 2,940 2,640 2,370 Mr. Payne Mr. Thorson Mr. Robinson Mr. Hansen Mr. Rizzardi Mr. Payne Mr. Thorson Mr. Robinson Mr. Hansen Mr. Rizzardi RPS awards vest three years following the grant date, only if certain corporate performance objectives are achieved over the three-year period. In January 2016, the Compensation Committee evaluated whether the three year corporate performance objectives were met for RPS awards granted in January 2013. The performance objectives for the RPS granted in January 2013 included:  3 year cumulative diluted earnings per share (EPS);  3 year average of annual return on average total assets (ROA);  3 year average of annual return on average shareholders’ equity relative to industry average ROE (ROE differential);  Ending originated non-performing assets to total originated assets (NPA); and  Efficiency ratio over three years. The RPS would vest if any one of the following performance results were achieved:  4 of 5 objectives reaching “threshold” performance level;  3 of 5 objectives reaching “target” performance level; or  2 of 5 objectives reaching “outstanding” performance level. The goals and achieved results were: EPS ROA ROE differential NPA Efficiency Ratio Threshold $7.85 1.35% 2.50% 0.65% 50.00% Target $8.07 1.45% 3.00% 0.55% 48.00% Outstanding $8.15 1.50% 3.50% 0.50% 47.00% Result Below Threshold Below Threshold Outstanding Outstanding Below Threshold With two of the five goals achieved at the “outstanding” performance level, the Compensation Committee determined the RPS shares awarded in 2013 vested upon achievement of three year goals. Nonqualified Deferred Compensation Programs The Company maintains nonqualified deferred compensation programs to provide senior and mid-level executives the ability to defer compensation in excess of the annual limits imposed on the Company’s “401(k)” plan. The Company 22 22 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y believes these tax deferral programs enhance loyalty and motivate retention of executives. These programs allow executives to defer cash pay and RPS shares upon vesting. The programs also allow Directors to defer Director fees.  Cash pay deferred in the program accumulates in accounts in the names of the participating Directors and executives. The Company credits the balance of these accounts with interest using an interest rate that approximates the crediting rate on corporate-owned life insurance policies, under which Directors and executives are the named insured. Deferrals and interest credits represent general obligations of the Company.  The common stock the Company issues to executives upon the vesting of RPS grants may be deferred into the program and deposited into a “Rabbi Trust.” Since these shares are outstanding shares of the Company’s common stock, the Company pays dividends on these shares at the same rate paid to all shareholders. The shares held in the “Rabbi Trust” are subject to claims by the Company’s creditors. Employment Contracts None of the executives named in the accompanying tables have employment contracts with the Company. Compensation in the Event of a Change in Control The banking industry has significant merger and acquisition activity. To promote retention of senior executives, unvested NQSO and RPS grants contain a “change in control” provision, which trigger full vesting upon a change in control. The Compensation Committee determined these provisions were appropriate in order to retain executives to continue managing the Company after any “change in control” was announced through its ultimate consummation. Since none of the named executive officers have entered employment contracts with the Company, they serve in an “at-will” capacity and could terminate their employment at any time. The Compensation Committee felt it would be in the best interests of shareholders to have a retention mechanism in place to provide continuity of management during a “change in control” process. Further, the Committee expects the named executive officers would be terminated by an acquiring institution rather than retained in a similar functional capacity. The Company also maintains a Severance Payment Plan covering all employees to promote employee retention. The Severance Payment Plan provides salary continuation benefits for employees in the event of a “change in control.” The amount of salary continuation benefits is based on years of service and corporate title, but in no event exceed the equivalent of one times annual salary. All named executive officers are eligible for one year’s salary under the plan. Other Internal Revenue Code (“IRC”) Section 162(m) places a limit on the amount of compensation that may be deducted by the Company in any year with respect to certain of the Company’s highest-paid executives. Certain “performance- based compensation” is not counted toward this limit. The Company intends generally to qualify compensation paid to executive officers for deductibility under the IRC, including Section 162(m), but reserves the right to pay compensation that is not deductible. Employee Benefits Compensation Committee Report We, the Compensation Committee of the Board of Directors of the Company, have reviewed and discussed the Compensation Discussion and Analysis with Management. Based on that review and discussion, we have recommended to the Board of Directors inclusion of the Compensation Discussion and Analysis in this Proxy Statement and the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Submitted by the Employee Benefits and Compensation Committee Patrick D. Lynch, Chairman Etta Allen Arthur C. Latno, Jr. Ronald A. Nelson 23 23 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee is a current or former officer or employee of the Company or any of its subsidiaries, or entered into (or agreed to enter into) any transaction or series of transactions with the Company or any of its subsidiaries with a value in excess of $120,000. None of the executive officers of the Company has served on the Board of Directors or on the Compensation Committee of any other entity, where one of that entity’s executive officers served either on the Board of Directors or on the Compensation Committee of the Company. Summary Compensation The following table sets forth summary compensation information for the chief executive officer, chief financial officer and each of the other three most highly compensated executive officers for the fiscal years ending December 31, 2015, 2014, and 2013. These persons are referred to as named executive officers elsewhere in this Proxy Statement. Summary Compensation Table For Fiscal Year 2015 Name / Position Year Salary Awards(1) Stock Option Awards(2) Non-Stock Incentive Plan Compensation(3) David L. Payne 2015 $371,000 Chairman, President & CEO John "Robert" A. Thorson SVP & Chief Financial Officer David L. Robinson SVP/Banking Division Manager Dennis R. Hansen SVP/Operations & Systems Division Manager Russell W. Rizzardi(6) SVP/Credit Administrator 2014 2013 2015 2014 2013 2015 2014 2013 2015 2014 2013 2015 2014 2013 ___________________ 371,000 371,000 $- - - $- - - 149,000 124,669 144,144 149,000 122,705 128,838 149,000 122,825 112,945 150,000 125,523 145,236 150,000 123,772 130,611 150,000 123,699 114,328 130,008 112,288 129,948 130,008 110,968 116,427 130,008 110,586 101,881 120,960 101,187 116,844 120,960 99,765 105,198 120,960 99,659 61,465 Change in Pension Value and Nonqualified Deferred Compensation Earnings(4) $- - - 38,786 25,287 38,953 33,782 21,734 32,100 26,485 17,018 25,226 - - All Other Compensation(5) TOTAL $19,557 $615,557 15,471 611,471 15,437 636,437 27,788 625,987 25,117 583,047 17,471 562,894 16,027 580,568 18,587 535,004 18,579 528,406 33,140 517,069 30,028 490,849 35,054 486,755 7,466 6,817 413,457 398,940 1,150 16,428 366,062 $225,000 225,000 250,000 141,600 132,100 121,700 110,000 90,300 89,700 85,200 86,400 84,000 67,000 66,200 66,400 (1) Stock Awards represent RPS shares as described in the Compensation Discussion & Analysis. The amounts shown represent the aggregate grant date fair market value. (2) Option awards represent Nonqualified Stock Options as described in the Compensation Discussion & Analysis. The amounts shown represent the aggregate grant date fair market value. (3) The amounts shown are non-equity incentive compensation only. No interest or other form of earnings was paid on the compensation. (4) The amounts include interest paid on deferred cash compensation to the extent the interest exceeds 120% of the long-term Applicable Federal Rates with compounding. The Company has no defined benefit pension plan. Mr. Payne has a pension agreement, which is discussed under “Pension Benefits for Fiscal Year 2015.” (5) Each of the above-named executive officers received less than $10,000 of aggregate perquisites and personal benefits, except for Mr. Hansen who received a car allowance of $12,000. All other compensation includes Company contributions to defined contribution plans (401(k) and Profit Sharing), and amounts added to taxable wages using IRS tables for the cost of providing group term life insurance coverage that is more than the cost of $50,000 of coverage. It also includes the dollar value of the benefit to Mr. Payne for the portion of the premium payable by the Company with respect to a split dollar life insurance policy (projected on an actuarial basis), and a bonus paid to Mr. Payne in the amount of his portion of the split dollar life insurance premium. (6) Mr. Rizzardi's compensation is subject to garnishments and liens pursuant to certain domestic relations orders. 24 24 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Based on the compensation disclosed in the Summary Compensation Table, approximately 35% of total compensation comes from base salaries. See Compensation Discussion and Analysis for more details. Grants of Plan-Based Awards Table For Fiscal Year 2015 Estimated Future Payouts Under Non-Equity Incentive Plan Awards Target Threshold Maximum $- $371,000 $556,500 - - - - - - - - - - - - - - - - - - 100,000 150,000 - - - - 82,500 123,750 - - - - 73,900 110,850 - - - - 60,500 90,750 - - - - All Other Stock Awards: Number of Shares of Stock or Units(1) All Other Stock Awards: Number of Securities Underlying Options(2) Exercise or Base Price of Option Awards ($/Share)(2) Grant Date Fair Value(3) - - - - 2,920 - - 2,940 - - 2,630 - - 2,370 - - - - - - $- - 42.70 - - 26,400 42.70 - - - - 26,600 42.70 - - - - 23,800 42.70 - - - - 21,400 42.70 $- - - - 124,669 144,144 - 125,523 145,236 - 112,288 129,948 - 101,187 116,844 Name David L. Payne John "Robert" A. Thorson David L. Robinson Dennis R. Hansen Russell W. Rizzardi(4) Grant Date 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 1/22/15 _____________________ (1) Includes RPS grants. There is no dollar amount of consideration paid by any executive officer on the grant or vesting date of an award. The material terms of the RPS grants are as follows: • The performance and vesting period is three years; • Multiple performance goals are established by the Compensation Committee for each grant; • The Compensation Committee may revise the goals upon significant events; • Three-year performance criteria are limited to those provided in the 2012 Amended Plan, as described on page 15; • Accelerated vesting occurs upon a “change in control” as defined in the 2012 Amended Plan as described on page 23 of this Proxy statement; and • No dividends are paid or accrued prior to settlement or deferral delivery of shares which takes place approximately two months after vesting. (2) Includes NQSO grants with an exercise price of not less than 100% of fair market value as of the date of grant. The material terms of the NQSO’s listed in the table are as follows: • Options vest ratably over three years beginning one year from date of grant; • Options expire 10 years following grant date; • Exercise price is 100% of fair market value as defined in the 2012 Amended Plan; • Dividends are not paid on unexercised options; • Vesting ceases upon termination of employment, whatever the reason, except if vesting is accelerated as described below; • Vested options may be exercised within 90 days of termination of employment and within one year upon death or disability; and • Accelerated vesting occurs upon a “change in control” as defined in the 2012 Amended Plan as described on page 23 of this Proxy statement. (3) The amounts shown for NQSOs and RPS awards represent the aggregate grant date fair market value. (4) Mr. Rizzardi's compensation is subject to garnishments and liens pursuant to certain domestic relations orders. Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 25 25 Outstanding Equity Awards Table at Fiscal Year End 2015 Option Awards Stock Awards Number of Securities Underlying Unexercised Options (#) Exercisable(1) Number of Securities Underlying Unexercised Options (#) Unexercisable(1) - Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) valued at 12/31/15(2) - $- Option Exercise Price ($)(1) $- Option Expiration Date(1) - - - - 8,167 14,533 26,400 - - - - - - 8,267 14,733 26,600 - - - - - - - 7,367 13,133 23,800 - - 6,667 11,866 21,400 52.560 56.625 50.760 43.710 53.350 42.695 52.560 48.390 47.130 56.625 50.760 45.930 43.710 53.350 42.695 52.560 48.390 47.130 43.015 56.625 50.760 45.930 43.710 53.350 42.695 56.625 50.760 43.710 53.350 42.695 1/26/2016 1/28/2020 1/27/2021 1/24/2023 1/23/2024 1/22/2025 1/26/2016 1/25/2017 1/24/2018 1/28/2020 1/27/2021 1/26/2022 1/24/2023 1/23/2024 1/22/2025 1/26/2016 1/25/2017 1/24/2018 1/21/2019 1/28/2020 1/27/2021 1/26/2022 1/24/2023 1/23/2024 1/22/2025 1/28/2020 1/27/2021 1/24/2023 1/23/2024 1/22/2025 8,030 $375,403 8,090 $378,208 7,240 $338,470 6,520 $304,810 Name David L. Payne John "Robert" A. Thorson David L. Robinson Dennis R. Hansen Russell W. Rizzardi(3) _____________________ - 18,437 20,800 21,200 16,333 7,267 - 11,449 11,175 23,286 20,900 21,300 21,800 16,533 7,367 - 11,449 19,882 20,930 19,600 18,700 19,200 19,400 14,733 6,567 - 17,000 17,100 - 5,934 - (1) Option Awards vest ratably over three years beginning one year from date of grant. Options expiring in 2023 fully vested in January 2016. Options expiring in 2024 fully vest in January 2017. Options expiring in 2025 fully vest in January 2018. (2) RPS shares fully vest three years from date of grant if performance goals are met. RPS grants vest as follows: Messrs. Thorson - 2,810 vest in January 2016, 2,300 shares vest in January 2017 and 2,920 shares vest in January 2018; Robinson - 2,830 shares vest in January 2016, 2,320 shares vest in January 2017, and 2,940 shares vest in January 2018; Hansen - 2,530 shares vest in January 2016, 2,080 shares vest in January 2017, and 2,630 shares vest in January 2018; and Rizzardi - 2,280 shares vest in January 2016, 1,870 shares vest in January 2017, and 2,370 shares vest in January 2018. (3) Mr. Rizzardi's compensation is subject to garnishments and liens pursuant to certain domestic relations orders. 26 26 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Option Exercises And Stock Vested Table For Fiscal Year 2015 Option Awards Stock Awards Name David L. Payne John "Robert" A. Thorson David L. Robinson Dennis R. Hansen Russell W. Rizzardi(2) _____________________ Number of Shares Acquired on Exercise Value Realized on Exercise($) Number of Shares Acquired on Vesting Value Realized on Vesting($)(1) - 21,700 - - $- 120,873 - - 15,366 86,975 - 2,680 2,690 2,410 2,170 $- 115,897 116,329 104,220 93,842 (1) Amounts represent value upon vesting of RPS shares. Dividends are paid in cash during deferral period and distributions are paid in stock. (2) Mr. Rizzardi’s compensation is subject to garnishments and liens pursuant to certain domestic relations orders. Pension Benefits For Fiscal Year 2015 Name Plan Name Present Value of Accumulated Benefit Payments during Last Fiscal Year David L. Payne Non-Qualified Pension Agreement $5,366,778 $511,950 During 1997, the Company entered into a nonqualified pension agreement with Mr. Payne in consideration of Mr. Payne’s agreement that RPS awards granted in 1995, 1996 and 1997 would be cancelled. In January 2000, the Compensation Committee, based on the Company’s achievement of certain performance goals which had first been established for Mr. Payne’s 1995, 1996 and 1997 RPS awards, determined Mr. Payne’s annual pension would be $511,950. The pension commenced in 2010 and will be paid to Mr. Payne for 20 years. The discount rate used to determine the present value is 4.30%, as used by the Company in determining benefit obligations for its post-employment retirement benefits as of December 31, 2015. The obligation is an unfunded general obligation of the Company. Nonqualified Deferred Compensation Table For Fiscal Year 2015 Name David L. Payne John "Robert" A. Thorson David L. Robinson Dennis R. Hansen Russell W. Rizzardi _____________________ Executive Contributions in Last Fiscal Year(1) Aggregate Earnings in Last Fiscal Year(2) Aggregate Withdrawls/ Distributions(3) Aggregate Balance at Last Fiscal Year End(4) $- 55,000 62,000 50,000 - $- 92,034 65,996 51,908 - $- - (29,284) (22,613) - $- 1,696,526 2,378,923 1,850,501 - (1) No RPS shares were deferred upon vesting in 2015. Non-equity incentive plan compensation deferred in 2015 was earned in 2014 and disclosed as compensation in the Summary Compensation Table for 2014 and is therefore excluded from the Summary Compensation Table for Fiscal Year 2015. (2) Includes change in value of deferred RPS shares, dividends earned on deferred RPS shares, and interest earned on deferred cash compensation. The amounts included in the Summary Compensation Table for Fiscal Year 2015 on page 24 are as follows: Messrs. Thorson - $38,786; Robinson - $33,782; Hansen - $26,485. (3) Includes dividends paid on deferred RPS shares. (4) Aggregate balance of deferred compensation reported as compensation prior to 2015 is as follows: Messrs. Thorson - $1,604,492; Robinson - $2,330,211; Hansen - $1,821,206. 27 27 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Under the Westamerica Bancorporation and Subsidiaries Deferred Compensation Plan (the “Deferred Compensation Plan”), Directors and Officers may defer up to 100% of their Director’s compensation, salary and/or non-equity incentive compensation (cash bonus) into a non-qualified, unfunded deferred compensation program. The interest rate paid during 2015 was 5.60%. The interest rate may be changed annually. Interest is compounded semi-monthly. Participants choose in advance from the following distribution commencement dates: termination of employment, January 1 following termination of employment, or a specific date at least five years from date of deferral. Payment is made in a lump sum unless the participant chooses a four year, five year or ten year annual installment. Under the Westamerica Bancorporation Deferral Plan, 100% of vested RPS grants may be deferred. Dividends paid on such issued and outstanding shares are paid in cash to the deferral participants, and are paid at the same rate as is paid to all other shareholders. The distribution of deferred RPS shares occurs at least two years after deferral, one month following termination, or the January 1 immediately following termination as elected by the participant at the time of deferral. If the participant is one of the named executive officers, benefit distributions that are made upon termination of employment may not start earlier than six months after the date of termination. Potential Payments Upon Termination or Change in Control Payments to be made to the named executive officers in the event of termination of employment or change in control are described below. Termination Vested NQSOs may be exercised within 90 days of termination and within one year of death or disability. RPS shares vest if the Compensation Committee determines performance goals are met. Terminated employees will receive vested RPS shares if the settlement date of the RPS grant occurs within 90 days of termination. Employees separating from service due to death, disability or retirement are eligible to receive a pro rata portion of granted RPS shares if the Compensation Committee determines that the performance goals are likely to be met for the grant period. The pro rata basis is determined by the number of full years of the vesting period completed before date of death, disability or retirement. Deferred compensation account balances are distributed on January 1 following termination, or a specific date at least five years from the date of deferral in the form of annual payments over four years. Payment may also be made in a lump sum or in annual payments for five or 10 years as elected by the participant at the time of deferral. If the participant is one of the named executive officers, benefit distributions that are made upon termination of employment may not start earlier than six months after the date of termination. Change in Control A change in control is defined under the 2012 Amended Plan as shareholder approval of a dissolution or liquidation of the Company or a sale of substantially all of the Company’s assets to another company, or a tender offer for 5% or more of the Company’s outstanding common stock or a merger in which the Company’s shareholders before the merger hold less than 50% of the voting power of the surviving company after the merger. In the event of a change in control, unvested NQSOs and RPS shares immediately vest. The value of in-the-money options and RPS shares subject to accelerated vesting for each of the named executive officers is as follows: Messrs. Payne: $0; Thorson: $507,282; Robinson: $511,202; Hansen: $457,374; and Rizzardi(3) $411,855. The value is computed by multiplying the difference between the market value on December 31, 2015, the last business day of 2015, and the exercise price of each option by the number of shares subject to accelerated vesting. Under the Company’s Severance Payment Plan, executive officers receive six weeks pay for every year or partial year (3) Mr. Rizzardi’s compensation is subject to garnishments and liens pursuant to certain domestic relations orders. 28 28 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y of service up to one year’s base salary (see Summary Compensation Table for Fiscal Year 2015 for annual base salary for all named executive officers). All named executive officers have met the service requirement for one year’s base salary. Severance pay is paid in a lump sum or on a semi-monthly basis at the discretion of the Company. The Severance Payment Plan is subject to Section 409A of the Internal Revenue Code. Certain Relationships and Related Party Transactions In accordance with the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving or disapproving all related party transactions required to be disclosed by Item 404 of Regulation S-K for potential conflicts of interest. Additionally, the Company’s Code of Conduct and Ethics provides rules that restrict transactions with affiliated persons. Certain of the Directors, executive officers and their associates have had banking transactions with subsidiaries of the Company in the ordinary course of business. With the exception of the Company’s Employee Loan Program, all outstanding loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company, did not involve more than a normal risk of collectability, and did not present other favorable features. As part of the Employee Loan Program, all employees, including executive officers, are eligible to receive mortgage loans with interest rates one percent (1%) below Westamerica Bank’s prevailing interest rate at the time of loan origination. Westamerica Bank makes all loans to executive officers under the Employee Loan Program in compliance with the applicable restrictions of Section 22(h) of the Federal Reserve Act. Messrs. Payne, Thorson, and Hansen have mortgage loans through this Program. The largest aggregate amount of principal during 2015 was $423,287, $299,280, and $234,596, respectively. The principal amount outstanding at December 31, 2015 was $404,058, $282,451, and $224,274, respectively. The amount of principal paid during 2015 was $19,229, $16,829, and $10,322, respectively. The amount of interest paid during 2015 was $7,985, $5,450, and $4,310, respectively. The rate of interest payable on the loan is 2.00%, 2.00%, and 1.875%, respectively. PROPOSAL 2 – APPROVE A NON-BINDING ADVISORY VOTE ON THE COMPEN- SATION OF OUR NAMED EXECUTIVE OFFICERS Background The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires that shareholders cast a non-binding advisory vote on the executive compensation paid to the executive officers listed in the Summary Compensation Table (a so-called “say on pay” vote) as well as an advisory vote with respect to whether future say on pay votes will be held every one, two or three years. The result of the shareholder vote on the proposal to determine the frequency of future say on pay proposals was that shareholders should review executive compensation annually. Therefore, Proposal 2 requests that shareholders again approve the compensation paid to our named executive officers. Last year 98% of the shares voting on this proposal voted to support our Corporation’s executive compensation strategy. The proposal to determine how often the say on pay proposal should be voted on by shareholders will again be brought to a shareholder vote in 2017, six years after the first frequency vote. We believe that our compensation policies and procedures are centered on a pay-for-performance culture and are strongly aligned with the long-term interests of our shareholders. Our incentive compensation plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and restricted performance shares. The Summary Compensation Table shows very stable base salaries indicative of our greater emphasis on performance-based stock and non-stock awards. Our stock and option awards are based on a minimum achievement of meeting the “threshold” level for each pre-established objective. Both awards have a three-year vesting period. Our annual incentive plan incorporates at least four financial and/or strategic performance metrics in order to properly balance risk with the incentives to drive our key annual financial and/or strategic initiatives; in addition, the annual incentive program incorporates a 150% maximum payout to further manage risk and the possibility of excessive payments. 29 29 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 In 2003, shareholders approved the Company’s 2003 Amended Plan to include the following changes:  Disallowing re-pricing stock options for poor stock performance;  Limiting the number of shares that may be awarded; and  Requiring the Compensation Committee to meet the definition of independence to enable any award intended to qualify as “performance-based compensation” to meet Section 162(m) of the Internal Revenue Code. In 2009, shareholders re-approved the performance criteria for performance-based awards under the 2003 Amended Plan. In 2012, shareholders approved the Company’s 2012 Amended and Restated Stock Option Plan of 1995. The 2012 Plan includes the following changes:  Reduced the number of shares available for future issuance from 4,307,593 to 1,500,000 (plus shares that become available if awards under prior plans expire unexercised or are cancelled, forfeited or terminated before being exercised; and  Extended the term of the 2012 Plan to April 26, 2022 from April 24, 2013. Vote Required The “say on pay” proposal gives you as a shareholder the opportunity to endorse or not endorse our executive pay program through the following resolution: “Resolved, that the shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, which disclosure includes the compensation discussion and analysis, the compensation tables and any related footnotes and narratives in the Company’s proxy statement for the Annual Meeting of Shareholders.” Because your vote is advisory, it will not be binding on the Board or create or imply any additional fiduciary duty by the Board. However, the Compensation Committee may take into account the outcome of the vote when considering future executive compensation arrangements. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SECURITIES AND EXCHANGE COMMISSION. PROPOSAL 3 – RATIFY SELECTION OF INDEPENDENT AUDITOR Change in Certified Accountant Dismissal of Previous Independent Accounting Firm On February 25, 2015, the Audit Committee of the Board of Directors of the Company, dismissed KPMG LLP as the Company’s principal independent accounting firm upon completion of the audit of the consolidated financial statements as of and for the year ended December 31, 2014. During the Company’s two most recent fiscal years ended December 31, 2014, there were no disagreements between the Company and KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures that, if not resolved to KPMG LLP’s satisfaction, would have caused it to make reference to the matter in conjunction with its report on the Company’s consolidated financial statements for the relevant year, and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. 30 30 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y The audit report of KPMG LLP on the consolidated financial statements of the Company as of December 31, 2014 and 2013, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The Company furnished a copy of the above disclosure to KPMG LLP and requested that KPMG LLP provide a letter addressed to the U.S. Securities and Exchange Commission (SEC) stating whether or not it agrees with the statements made above. A copy of the letter from KPMG LLP dated March 3, 2015 is filed as Exhibit 16.1 to the Company’s Form 8-K filed with the SEC on March 3, 2015. Engagement of New Independent Accounting Firm On February 25, 2015, the Audit Committee of the Board of Directors of the Company approved the engagement of Crowe Horwath LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2015. During the Company’s two fiscal years ended December 31, 2014 and 2013 neither the Company, nor anyone on its behalf, consulted with Crowe regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements; and as such, no written report or oral advice was provided, and none was an important factor considered by the Company in reaching a decision as to the accounting, auditing, financial reporting issues; or (ii) or any matter that was either the subject of a disagreement or a reportable event. Ratify Selection of Independent Auditor Action by the shareholders is not required by law in the appointment of independent auditors, but their appointment is submitted by the Audit Committee and the Board of Directors in order to give the shareholders an opportunity to present their views. If the proposal is approved, the Audit Committee, in its discretion, may direct the appointment of different independent auditors at any time during the year if it determines that such a change would be in the best interests of the Company and its shareholders. If the proposal to ratify the selection of Crowe Horwath LLP as the Company’s independent auditors is rejected by the shareholders then the Audit Committee will reconsider its choice of independent auditors. A representative of Crowe Horwath LLP is expected to be present at the Annual Meeting and will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. Audit Fees The aggregate fees billed to the Company by Crowe Horwath LLP, the independent audit firm for fiscal year 2015 and the aggregate fees billed to the Company by KPMG LLP, the independent audit firm for fiscal year 2014, with respect to services performed are as follows: Audit Fees (1) Audit related fees (2) Tax fees (3) All other fees Total _____________________ 2015 $510,000 33,875 38,050 - $581,925 2014 $900,000 - - - $900,000 (1) Audit fees consisted of fees billed by Crowe Horwath LLP and KPMG LLP for professional services rendered for the audit of the Company’s consolidated financial statements, reviews of the consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, and the audit of the Company’s internal controls over financial reporting. The audit fees also relate to services such as consents and audits of mortgage banking subsidiaries. (2) Audit-related fees for 2015 consisted of fees billed by Crowe Horwath LLP for audits of certain employee benefits plans. (3) Tax fees for 2015 consisted of fees billed by Crowe Horwath LLP for the compilation and review of 2014 tax returns. 31 31 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Preapproval Policies and Procedures The Audit Committee is responsible for the appointment, compensation, retention and oversight of the work of any public accounting firm engaged by the Company for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. Any accounting firm appointed by the Company reports directly to the Audit Committee. The Audit Committee must preapprove all auditing services and permitted non-audit services by its independent auditors and the fees to be paid by the Company for these services, except for those fees qualifying for the “de minimis exception” which provides that the preapproval requirement for certain non-audit services may be waived if certain express standards and requirements are satisfied prior to completion of the audit under certain conditions. This exception requires that the aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenue paid to the audit firm by the Company during the fiscal year in which the services are provided. This exception also requires that at the time of the engagement, the Company did not recognize such services to be non-audit services, and such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee. During fiscal year 2015, there were no non-audit services that were provided using this exception. The Audit Committee may delegate to one or more members of the Audit Committee the authority to grant preapprovals of non-audit services and fees. In such event, the decisions of the member or members of the Committee regarding preapprovals are presented to the full Audit Committee at its next meeting. The Audit Committee preapproved 100% of all services performed on behalf of the Company by Crowe Horwath LLP during fiscal year 2015. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE SELECTION OF CROWE HORWATH LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. AUDIT COMMITTEE REPORT The material in this report is not soliciting material and is not deemed filed with the SEC. It is not incorporated by reference in any of the Company’s filings under the Securities Act of 1933 or the Exchange Act, whether made in the past or in the future even if any of those filings contain any general incorporation language. The Audit Committee is composed of four Directors who are neither officers nor employees of the Company, and who meet the NASDAQ independence requirements for Audit Committee members. The Audit Committee selects, appoints and retains the Company’s independent auditors and is responsible for their compensation and oversight. In performing its functions, the Audit Committee acts only in an oversight capacity and necessarily relies on the work and assurances of the Company’s management, which has the primary responsibility for financial statements and reports, and of the independent auditors. The auditors express an opinion on the conformity of the Company’s annual financial statements to generally accepted accounting principles. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements for the fiscal year 2015 and discussed them with Management and with Crowe Horwath, LLP, the Corporation’s independent auditors. Management represented to the Audit Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles. Management also represented that it performed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2015, and that internal control over financial reporting was effective. The independent auditor discussed with the Audit Committee matters required to be discussed by Auditing Standard No. 16 (Communications with Audit Committees), including certain matters related to the conduct of an audit and to obtain certain information from the Audit Committee relevant to the audit. 32 32 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y The auditors also provided to the Audit Committee the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). The Audit Committee discussed with auditors the firm’s independence. Based on the Audit Committee’s discussion with Management and the independent auditors, the Audit Committee’s review of the representations of Management and the Report of the Independent Auditors to the Audit Committee, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for filing with the SEC. Submitted by the Audit Committee Ronald A. Nelson, Chairman Louis E. Bartolini E. Joseph Bowler Catherine C. MacMillan PROPOSAL 4 – REQUIRE INDEPENDENT BOARD CHAIRMAN The Board unanimously recommends you vote “AGAINST” the shareholder proposal set forth below. Shareholder Proposal Gerald R. Armstrong, 621 Seventeenth Street, No. 2000, Denver, Colorado 80293-2001, (303) 355-1199, the owner of 3,455 shares of our common stock, has advised us that he plans to introduce the following resolution at the annual meeting. In accordance with rules of the SEC, the text of the proponent’s resolution and supporting statement is printed verbatim from his submission. That the shareholder of Westamerica Bancorporation request its Board of Directors to adopt a policy and amend the by-laws as necessary, to require the Chairman of the Board of Directors be an independent member of the Board of Directors. This policy should not be implemented to violate any contractual obligation and should specify: (a) how to select a new ‘‘independent’’ chairman if the current chairman ceases to be independent during the time between annual meetings of shareholders; and, (b) that compliance is excused if no independent director is available and willing to serve as Chairman. The reasons given by the proponent for the resolution are as follows: This proposal’s proponent is a long-term shareholder of Westamerica Bancorporation owning shares since 1989 and owned shares in most of the banks acquired by Westamerica. As a shareholder, I am concerned about the wilting performance of Westamerica which, after analysis, I believe to be caused by the entrenchment of David Payne as Chairman, Executive Officer, and President and members of the Board of Directors whose average tenure was 27.5 years and an average age of 75 years (based on the proxy statement for the 2015 annual meeting). Let’s look at some numbers of the “Five Year Return Performance” graphs contained in 10-K reports of Westamerica and two other bank holding companies. (Cumulative Return on investment and re-investment of all dividends): Westamerica Bancorporation Bank of Marin Bancorp FNB Bancorp (South San Francisco) 12/31/2009 $ 100.00 100.00 100.00 12/31/2014 $ 103.08 177.00 495.04 The greatest difference in the governance practices of Bank of Marin Bancorp and FNB Bancorp is that each has an “independent chairman” of the Board of Directors while Westamerica has one person, David Payne, serving in both capacities. In other words, he, as President accounts to himself as Chairman. I believe that this is why Westamerica 33 33 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 is the underachiever. Moreover, I believe Mr. Payne’s dual positions at Westamerica are only part-time as the proxy statement discloses he “also manages his family printing, publishing and cable television business.” DuPont’s failures were placed upon its Board Chair and Chief Executive Officer who was ousted by its board in the same manner that Target Company’s board ousted its Chairman/Chief Executive Officer a year earlier. Studies have confirmed that underperforming companies lack an independent chairman and companies, worldwide, are routinely separating the positions of Chairman and CEO (CEO Succession 2000-2009: A Decade of Convergence and Compression, Booz & Co., Summer, 2010). A 2007 Booz & Co. study found that in 2006, all of the underperforming North American companies with long- tenured CEO’s lacked an independent Chairman (The ERA of the Inclusive Leader; Summer, 2007). Norges Bank Investment Management, has stated in support of a similar proposal: ‘‘The roles of Chairman of the Board and CEO are fundamentally different and should not be held by the same person. There should be a clear division of responsibilities between these positions to insure a balance of power and authority on the Board.” If you agree, please vote ‘‘FOR’’ this proposal. Board of Directors’ Recommendation The proposal's comparison of Westamerica’s stock performance to two peers is misleading in regard to stock performance and Westamerica’s leadership. The five-year stock performance evaluation provided in the shareholder’s proposal begins with December 31, 2009, a point in time when publicly traded bank stock values reflected significant declines due to the “Financial Recession” of 2008 and 2009. Contrary to the banking industry’s negative stock performance as a result of the recession, Westamerica’s stock price rose in 2008 and 2009, as depicted in the ten-year performance chart on page 15 of the enclosed Form 10-K, Annual Report. During this period, shareholders recognized the value of Westamerica’s leadership and its conservative, value-oriented, and long-term strategies. Westamerica’s exceptional credit quality and strong financial condition leading into the recession positioned the Company to grow by acquiring two failed banks from the FDIC. Westamerica’s current leadership was established in 1989, coincidentally the same year the proposing shareholder became an investor in Westamerica Bancorporation common stock. The company’s current leadership has followed consistent low-risk value-oriented strategies which have provided superior long-term stock performance through three business cycles: Total Return with Dividends Reinvested December 29, 1989 through December 31, 2015(4) Westamerica Bancorporation (WABC) S&P 500 Index (SPX) NASDAQ Bank Index (CBNK) 1,039% 902% 630% Westamerica’s shareholders are best served by our current leadership structure. In light of the current environment for the banking industry and Westamerica’s business strategies, the Board believes that the most effective leadership structure for Westamerica at the present time is for our CEO, David L. Payne, to serve as chairman of the Board. Combining the positions of chairman and CEO most effectively utilizes Mr. Payne’s extensive experience and knowledge regarding our company. Chairman Payne was appointed CEO in 1989 and since his appointment identified, negotiated and executed eleven acquisitions to fuel Westamerica’s growth. Each of the acquisitions resulted in higher levels of earnings per share within one or two quarters following the acquisition. Mr. Payne has the knowledge, expertise and experience to continue implementing Westamerica’s long-term strategies. The Board believes that Mr. Payne has the requisite talent, foresight, and leadership skills to perform at a high-level (4) Source: Bloomberg 34 34 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y in the roles of CEO and chairman. By combining the positions, the Board can respond quickly and effectively to the many business, market and regulatory challenges facing banks in the rapidly changing banking industry. The Board should retain the flexibility to determine the most effective leadership structure for Westamerica. The Board's leadership structure should be determined in light of all relevant facts and circumstances at a given time. This approach allows the Board flexibility to determine whether the roles of CEO and chairman should be separate or combined based upon Westamerica’s needs and the Board's assessment of our company's leadership from time to time. The Board has deep knowledge of our strategic goals and the various strengths and capabilities of our senior management. Thus, the Board is best positioned to determine the most effective leadership structure for Westamerica at any given time. Westamerica’s corporate governance practices provide for strong independent leadership and effective independent oversight of our company. The Board is committed to maintaining high corporate governance standards, and has implemented a structure to provide for Board independence and effective oversight of management. With the exception of Mr. Payne, the Board is composed entirely of independent directors, and key committees are fully comprised of independent directors. Further, in accordance with widely accepted corporate governance guidelines, the Board has established a strong, independent lead director who must serve at least one year and has the following clearly delineated and comprehensive duties:  Presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors;  Serves as liaison between the chairman and the independent directors;  Approves information sent to the Board;  Approves meeting agendas for the Board;  Approves meeting schedules to assure that there is sufficient time for discussion of all agenda items;  Has the authority to call meetings of the independent directors; and  If requested by major shareholders, ensures that he or she is available for consultation and direct communication. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “AGAINST” THE SHAREHOLDER PROPOSAL REQUIRING THAT THE CHAIRMAN OF THE BOARD BE AN INDEPENDENT DIRECTOR SHAREHOLDER PROPOSAL GUIDELINES To be considered for inclusion in the Company’s Proxy Statement and form of proxy for next year’s Annual Meeting, shareholder proposals must be delivered to the Corporate Secretary, Westamerica Bancorporation A-2M, P.O. Box 1200, Suisun City, CA 94585, no later than 5:00 p.m. on November 14, 2016. However, if the date of next year’s Annual Meeting is changed by more than 30 days from the date of this year’s meeting, the notice must be received by the Corporate Secretary a reasonable time before we begin to produce and distribute our Proxy Statement. All such proposals must meet the requirements of Rule 14a-8 under the Exchange Act. In order for business, other than a shareholder proposal submitted for the Company’s Proxy Statement, to be properly brought before next year’s Annual Meeting by a shareholder, the shareholder must give timely written notice to the Corporate Secretary. To be timely, written notice must be received by the Corporate Secretary at least 45 days before the anniversary of the day our Proxy Statement was mailed to shareholders in connection with the previous year’s Annual Meeting or January 27, 2017, for the 2017 Annual Meeting. If the date of the Annual Meeting is changed by more than 30 days, the deadline is a reasonable time before we begin to produce and distribute our Proxy Statement. A shareholder’s notice must set forth a brief description of the proposed business, the name and residence address of the 35 35 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 shareholder, the number of shares of the Company’s common stock that the shareholder owns and any material interest the shareholder has in the proposed business. Westamerica reserves the right to reject, to rule out of order, or to take other appropriate action with respect to any proposal that does not comply with these and other applicable legal requirements. SHAREHOLDER COMMUNICATION TO BOARD OF DIRECTORS Shareholders and other interested parties who wish to communicate with the Board may do so by writing to: Kris Irvine, VP/Corporate Secretary, Westamerica Bancorporation A-2M, P.O. Box 1200, Suisun City, CA 94585. The Directors have established procedures for the handling of communications from shareholders and other interested parties and have directed the Corporate Secretary to act as their agent in processing any communications received. All communications that relate to matters that are within the responsibility of one of the Board Committees are to be forwarded to the Chair of the appropriate Committee. Communications that relate to ordinary business matters that are not within the scope of the Board’s responsibilities, such as customer complaints, are to be sent to Management. Solicitations, junk mail and obviously frivolous or inappropriate communications are not to be forwarded, but will be made available to any Director who wishes to review them. OTHER MATTERS The Board of Directors does not know of any matters to be presented at the Annual Meeting other than those specifically referred to in this Proxy Statement. If any other matters should properly come before the meeting or any postponement or adjournment of the meeting, the persons named in the enclosed proxy intend to vote thereon in accordance with their best business judgment. If a nominee for Director becomes unavailable to serve as a Director, the Proxies will vote for any substitute nominated by the Board of Directors. The Company will pay the cost of proxy solicitation. The Company has retained the services of Georgeson to assist in the proxy distribution at a cost not to exceed $2,000 plus reasonable out-of-pocket expenses. The Company will reimburse banks, brokers and others holding stock in their names or names of nominees or otherwise, for reasonable out-of-pocket expenses incurred in sending proxies and proxy materials to the holders of such stock. BY ORDER OF THE BOARD OF DIRECTORS March 14, 2016 Fairfield, California Kris Irvine VP/Corporate Secretary 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y 36 36 EXHIBIT A Westamerica Bancorporation Audit Committee Charter – Reaffirmed April, 2015 The Audit Committee is appointed by the Board to assist the Board in monitoring (1) the integrity of Westamerica Bancorporation’s (“Company”) financial statements, (2) the compliance by the Company with legal and regulatory requirements, (3) the independence, qualifications and performance of the Company’s registered public accounting firms (“independent auditor” or “independent auditors”) preparing or issuing an audit report or performing other audit, review or attest services for the Company and (4) the Company’s internal audit and control function. The Audit Committee shall prepare the report that the Securities and Exchange Commission (“SEC”) rules require be included in the Company’s annual proxy statement. While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits, or to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor. The function of the Audit Committee is oversight. Management is responsible for the preparation and integrity of the Company’s financial statements. Management is responsible for maintaining appropriate accounting and financial reporting policies and an appropriate internal control environment. Subject to appointment, review and oversight by the Audit Committee, the independent auditor is responsible for planning and conducting a proper audit of the Company’s internal control environment and of its annual financial statements, reviewing the Company’s quarterly financial statements prior to the filing of each quarterly report on Form 10-Q, and other procedures. The members of the Audit Committee shall meet the independence requirements of The Nasdaq Stock Market (“Nasdaq”) and the rules and regulations of the SEC. No member shall be an affiliated person (as defined in relevant SEC or Nasdaq rules) of the Company or any of its subsidiaries or have participated at any time in the preparation of financial statements of the Company or any current subsidiary during the prior three years, and each member shall be free of any relationship that would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a member of the Audit Committee. The Audit Committee shall include members with banking or related financial management expertise who are able to read and understand fundamental financial statements, including the Company’s balance sheet, statement of income and comprehensive income, statement of changes in shareholders’ equity and statement of cash flows and at least one member must have the additional financial sophistication as required by and as defined in Nasdaq rules. The Committee shall be subject to the provisions of the Company’s bylaws relating to committees of the Board, including those provisions relating to removing committee members and filling vacancies. The members of the Audit Committee and its Chairman shall be appointed and may be removed by the Board on its own initiative or at the recommendation of the Nominating Committee. The Audit Committee shall have no fewer than three members. If not designated by the Board, the Audit Committee may designate a member as its Chair. The Audit Committee, in its capacity as a committee of the Board, shall be directly responsible for the appointment, compensation, retention, termination and oversight of the work of any independent auditors, and each independent auditor must report directly to the Audit Committee. The Audit Committee, or its designee, will sign the independent auditor engagement letter. The Audit Committee shall be directly responsible for the resolution of disagreements between management and the independent auditor regarding financial reporting. The Audit Committee shall have the authority to retain independent legal, accounting or other advisors as it deems necessary to carry out its duties. The Company shall provide for appropriate funding, as determined by the Audit A-1 A-1 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 Committee, for payment of compensation to any independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services, compensation to any advisors employed by the Audit Committee, and ordinary administrative expenses that the Audit Committee deems to be necessary or appropriate in carrying out its duties. The Audit Committee may request any officer or employee of the Company or the Company’s outside counsel or independent auditor to attend a meeting of the Audit Committee. The Audit Committee shall pre-approve all auditing services and permitted non-audit services and fees to be paid for such services to be performed for the Company by its independent auditor, subject to the limited de minimis exceptions for non-audit services described in Section 10A of the Securities Exchange Act of 1934, provided that compliance with the limitations and procedural requirements of Section 10A is fulfilled. The Audit Committee may delegate to one or more designated members of the committee the authority to grant pre-approvals of non-audit services and fees. Any such pre-approval shall be presented to the full Audit Committee at its next scheduled meeting. The Audit Committee shall make regular reports to the Board. The Audit Committee shall have the authority to conduct investigations that are related to its responsibilities under this Charter or otherwise assigned to it by the Board. In addition, the Audit Committee, to the extent that it deems necessary or appropriate shall: Financial Statement and Disclosure Matters 1. Prepare the report required by the rules of the SEC to be included in the Company’s annual proxy statement. 2. Review the annual audited financial statements with management and the independent auditor, including disclosures made in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and recommend to the Board whether the audited financial statements should be included in the Company’s Form 10-K. 3. Review with management and the independent auditor any significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements, including any significant changes in the Company’s selection or application of accounting policies, practices and estimates, significant unusual transactions, any major issues as to the adequacy of the Company’s internal controls and any special steps adopted in light of material control deficiencies; and review any reports prepared by or for management or the auditor with respect to these matters. 4. Review with the independent auditor their views regarding significant accounting or auditing matters when the independent auditor is aware that management consulted with other accountants about such matters and the independent auditor has identified a concern regarding these matters. 5. Obtain from the independent auditor information about significant aspects of the annual audit, including: (a) an overview of the overall audit strategy, particularly the timing of the audit, significant risks the auditor identified and significant changes to the planned audit strategy or identified risk; (b) information about the nature and extent of specialized skill or knowledge needed in the audit; the extent of the planned use of internal auditors; company personnel or other third parties; and other independent public accounting firms or other persons not employed by the auditor who are involved in the audit; (c) the basis for the auditor’s determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors; (d) situations in which the auditor identified a concern regarding management’s anticipated application of accounting pronouncements that have been issued but are not yet effective and might have a significant effect on future financial reporting; A-2 A-2 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y (e) difficult or contentious matters for which the auditor consulted outside the engagement team; the auditor’s evaluation of going concern; (f) (g) departure from the auditor’s standard report; (h) other matters arising from the audit that are significant to the oversight of the Company’s financial reporting process, including complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention during the audit; (i) any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information; (j) any significant disagreements with management. 6. Annually review with the independent auditor the quality of the Company’s financial reporting, internal accounting and financial control, the auditor’s report or opinion thereon and any recommendations the auditor may have for improving or changing the Company’s internal controls, as well as management’s letter in response thereto and any other matters required to be discussed under relevant Statements of Auditing Standards and PCAOB Auditing Standard No. 16 (as they may be modified or supplemented). 7. Review management’s proposed annual report on internal control over financial reporting which is required to be included in the Company’s 10-K pursuant to rules of the SEC. 8. Review with management and the independent auditor the Company’s quarterly financial statements prior to the filing of its Form 10-Q, including the results of the independent auditor’s review of the quarterly financial statements. 9. Review and discuss quarterly reports from the independent auditors on: (a) all critical accounting policies and practices to be used; (b) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative treatments, and the treatment preferred by the independent auditor; (c) the matters required to be discussed by Statements on Auditing Standards, as may be amended or supplemented, relating to the audit of the Company’s periodic reports; and (d) other material written communications between the independent auditor and management. 10. Meet periodically with management to review the Company’s major financial risk exposures and the policies and procedures that management utilizes to monitor and control such exposures. 11. Discuss, prior to release by the Company, the earnings press releases (paying particular attention to any use of “pro forma,” or “adjusted” or other non-GAAP information) as well as financial information and earnings guidance provided to analysts and rating agencies, if any, as well as any financial information which the Company proposes to provide to financial analysts and rating agencies (being mindful of the need to avoid violations of SEC Regulation FD, which prohibits the selective disclosure of material information). 12. Discuss the quarterly and annual financial statements with the appropriate officers and/or employees of the Company and with the independent auditor, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 13. Review the schedule of unrecorded adjustments to the Company’s financial statements and the reasons underlying the Company’s assessment of the immateriality of such adjustments. 14. Review prior to publication or filing and approve such other Company financial information, including appropriate regulatory filings and releases that include financial information, as the Audit Committee deems desirable. 15. Review the adequacy of the Company’s system of internal accounting and financial control, including its “disclosure controls and procedures” and “internal control over financial reporting,” as defined in SEC Rules 13a-15(e) and 13a-15(f) under the Securities Exchange Act of 1934, and the Chief Executive Officer’s (“CEO”) and Chief Financial Officer’s (“CFO”) proposed disclosures and certifications with respect to these matters which are required to be included in the Company’s annual and quarterly reports to the SEC on Form 10-K and Form 10-Q. 16. Review disclosures made to the Audit Committee by the Company’s CEO and CFO during their certification A-3 A-3 Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 process for the Form 10-K and Form 10-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company’s internal controls. 17. Review the effect of regulatory and accounting initiatives on the financial statements of the Company. Oversight of the Company’s Relationship with its Independent Auditors 18. Review and evaluate the experience and qualifications of the lead members of each independent auditor’s team. 19. Evaluate the performance and independence of each independent auditor, including considering whether the auditor’s quality controls are adequate and the provision of permitted non-audit services is compatible with maintaining the auditor’s independence. The opinions of management and the internal auditor shall be taken into consideration as part of this review. 20. Receive and review a report from each independent auditor at least annually regarding the independent auditor’s independence and discuss such reports with the auditor. Ensure that each independent auditor submits a formal written statement, as required by PCAOB Rule 3526, as it may be amended or supplemented, describing all relationships between the independent auditor and any of its affiliates and the Company that might bear on the independent auditor’s independence. The independent auditor must also discuss with the Audit Committee the potential effects of any such relationships on the firm’s independence. Receive and review a formal written statement of the fees billed by the independent auditor for each of the categories of services requiring separate disclosure in the annual proxy statement. 21. Obtain and review a report from each independent auditor at least annually regarding the independent auditor’s internal quality control procedures. The report should include any material issues raised by the most recent internal quality control review or peer review of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues. Obtain auditor and review inspection reports issued by the PCAOB under Section 104 of the Sarbanes-Oxley Act. 22. Meet with each independent auditor prior to the audit to review the planning and staffing of the audit. 23. Advise the Board of its determinations regarding the qualification, independence and performance of each independent auditor. 24. Annually require the independent auditor to confirm in writing its understanding of the fact that it is ultimately accountable to the Audit Committee. 25. Require the independent auditor to rotate every five years the lead audit partner in charge of the Company’s audit and the concurring audit partner responsible for reviewing the audit. 26. Periodically consider the advisability of rotating the independent audit firm to be selected as the Company’s independent auditors. The Audit Committee should present its conclusions to the full Board. Oversight of the Company’s Internal Audit Function 27. Review and, at its option, recommend the appointment and replacement of the senior internal auditing executive. 28. Review any reports to management prepared by the internal auditing department and management’s responses. 29. Review with each independent auditor, management and the senior internal auditing executive the internal audit department responsibilities, budget, structure and staffing and any recommended changes in the planned scope of the internal audit at least annually. Compliance Oversight Responsibilities 30. Obtain reports from management and the Company’s senior internal auditing executive that the Company’s subsidiary affiliated entities are in conformity with applicable regulatory and legal requirements and the A-4 A-4 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y Company’s code of ethics. 31. Advise the Board with respect to the Company’s compliance with the Company’s Code of Ethics for Chief Executive Officer and Senior Financial Officers. 32. Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. 33. Discuss with management and each independent auditor any correspondence with regulators or governmental agencies and any published reports that raise material issues regarding the Company’s financial statements or accounting policies. 34. Review with appropriate members of management or appropriate legal counsel the Company’s compliance policies, legal matters that may have a material impact on the financial statements and any material reports or inquiries received from regulators or governmental agencies. 35. Review for approval or disapproval all related-party transactions required to be disclosed by Item 404 of Regulation S-K for potential conflicts of interests. 36. In the event the Audit Committee is made aware of any allegation of fraud relating to the Company and/or any of its officers, directors or employees that the Audit Committee deems could be material to the Company’s business or operations, the Audit Committee shall (i) convene a meeting of the Audit Committee to review such allegation and (ii) if the Audit Committee deems it necessary or advisable, it shall engage independent counsel to assist in an investigation, including, if the Audit Committee and such counsel deem it necessary or advisable, an investigation to determine whether such allegation implicates any violation of Section 10A of the Exchange Act of 1934. If pursuant to such investigation the Audit Committee discovers that a material fraud has occurred, the Audit Committee shall (i) assess the Company’s internal controls and implement such remedial measures as it determines necessary or advisable, (ii) cause the Company to take appropriate action against the perpetrator(s) of such fraud and (iii) cause the Company to make appropriate disclosures relating to the matter in the Company’s periodic reports filed with the SEC or otherwise. 37. The Audit Committee shall also be designated as the committee of the Board of Directors that shall receive, review and take action with respect to any reports by attorneys, pursuant to Section 307 of the Sarbanes-Oxley Act of 2002, of evidence of material violations of securities laws or breaches of fiduciary duty or similar violations by the Company or one of its agents. 38. Meet at least four times each year. In addition, meet at least four times each year in separate executive sessions with each of the Company’s CEO, senior internal audit executive and the independent auditor; and each such person shall have free and direct access to the Audit Committee and any of its members. 39. Review and approve all related-party transactions (e.g. transactions with any director or executive officer of the Company or significant shareholder, or their immediate family members or affiliates), other than transactions which the Board has delegated to the Company’s Employee Benefits/Compensation Committee or Loan & Investment Committee. 40. Annually review and reassess the adequacy of this Charter and any bylaw of the Company which relates to the Audit Committee, and recommend any proposed changes to the Board for approval. The Chair of the Audit Committee shall draft a proposed schedule of the Audit Committee’s activities for the coming year and the times at which such activities shall occur, which shall be submitted to the Audit Committee for its review and approval, with such changes as the Audit Committee shall determine to be appropriate. Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 A-5 A-5 EXHIBIT B Westamerica Bancorporation Nominating Committee Charter – Reaffirmed January 27, 2016 Purpose This charter (“Charter”) governs the operations of the Nominating Committee (“Committee”) of the Board of Directors (“Board”) of Westamerica Bancorporation (“Company”). The Committee is responsible for exercising oversight with respect to the governance of the Board, including reviewing the qualifications of and recommending to the Board, proposed nominees for election to the Board, reviewing and reporting to the Board on matters of corporate governance and leading the Board in their annual evaluation. Composition The Committee shall be comprised of at least three directors. All members of the Committee shall meet the independence requirements of and satisfy any other requirements imposed on members of the Committee pursuant to the federal securities laws and the rules and regulations of the Securities and Exchange Commission, California state law and The Nasdaq Stock Market (“Nasdaq”). The other qualifications of individuals to serve on the Committee shall be determined by the Board, and all members shall be appointed annually by the Board. The Committee may form and delegate authority to subcommittees when appropriate. The Committee shall be subject to the provisions of the Company’s bylaws relating to committees of the Board, including those provisions relating to removing committee members and filing vacancies. Responsibilities The Committee shall be responsible for screening and recommending qualified candidates to the Board for membership. The Committee shall annually recommend a slate of director nominees to be submitted for election at each annual meeting of shareholders. The Committee will evaluate and consider all candidates submitted by shareholders in accordance with the Company’s bylaws. The Committee will consider persons recommended by shareholders in the same manner as Committee-recommended nominees. The Committee will carefully consider each existing Board member’s qualifications and contributions to evaluate his or her performance as a director prior to recommending an individual for re-nomination each year. In the case of a vacancy in the office of a director, including a vacancy created by an increase in the size of the Board, the Committee shall recommend to the Board an individual to fill such vacancy either through appointment by the Board or through election by shareholders. If not designated by the Board, the Committee may designate a member as its Chairman. For the purpose of identifying nominees for the Board, the Committee will rely on personal contacts, the expertise of management and the corporate staff, and other members of the Board as deemed appropriate, and may engage a professional search firm if the Committee deems it appropriate to do so. The Company shall provide appropriate funding, as determined by the Committee, for payment of compensation to any advisors employed by the Committee and ordinary administrative expenses that the Committee deems to be necessary or appropriate in carrying out its duties. The Committee or a member or members of the Committee designated by the Committee will interview all candidates. The Committee shall be responsible for assessing the appropriate balance of skills required of Board members. The Committee may also seek to recommend candidates with specific attributes that may assist the Board to comply with industry-specific requirements and other rules and regulations. The Committee may recommend to the Board directors believed qualified to serve on each standing committee of the Board. The Board shall approve all appointments to the standing committees of the Board. The Committee will perform other functions as may be assigned by the Board or required by federal securities laws, and rules and regulations of the SEC, the State of California or Nasdaq. B-1 B-1 2 0 1 6 W E S T A M E R I C A B A N C O R P O R A T I O N P R O X Y The Committee will periodically review and make recommendations regarding the appropriate size of the Board. The Committee will periodically review and make recommendations regarding the director retirement age policy. The Committee will also periodically make recommendations to the Board with respect to the compensation of Board members. The Committee shall annually administer and report results of the Board evaluation. The Committee shall periodically review and report to the Board on matters of corporate governance. The Committee will review and re-assess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. Meetings The Committee will meet at least once per year or on a more frequent basis as necessary to carry out its responsibilities. The Committee shall make regular reports to the Board summarizing the action taken at Committee meetings. Y X O R P N O I T A R O P R O C N A B A C I R E M A T S E W 6 1 0 2 B-2 B-2 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) (cid:53) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 or (cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to______________. Commission File Number: 001-09383 WESTAMERICA BANCORPORATION (Exact name of the registrant as specified in its charter) CALIFORNIA (State or Other Jurisdiction of Incorporation or Organization) 94-2156203 (I.R.S. Employer Identification Number) 1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901 (Address of principal executive offices) (zip code) Registrant’s telephone number, including area code: (707) 863-6000 Securities registered pursuant to Section 12(b) of the Act: Title of class: Common Stock, no par value Name of each exchange on which registered: The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:53) NO (cid:133) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES (cid:133) NO (cid:53) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (cid:53) NO (cid:133) Indicate by check mark if whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) YES (cid:53) NO (cid:133) Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:133) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer (cid:53) Accelerated filer (cid:133) Non-accelerated filer (cid:133) (Do not check if a smaller reporting company) Smaller reporting company (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:133) NO (cid:53) The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2015 as reported on the NASDAQ Global Select Market, was $1,103,045,781.58. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares outstanding of each of the registrant’s classes of common stock, as of the close of business on February 17, 2016 25,400,087 Shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Shareholders, to be held on April 28, 2016, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III to the extent described therein. K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 TABLE OF CONTENTS PART I Item 1 Business................................................................................................................................................................ Item 1A Risk Factors .......................................................................................................................................................... Item 1B Unresolved Staff Comments................................................................................................................................. Item 2 Properties .............................................................................................................................................................. Item 3 Legal Proceedings................................................................................................................................................. Item 4 Mine Safety Disclosures ....................................................................................................................................... PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ................................................................................................................... Item 6 Selected Financial Data ........................................................................................................................................ Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................... Item 7A Quantitative and Qualitative Disclosures About Market Risk.............................................................................. Item 8 Financial Statements and Supplementary Data..................................................................................................... Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................... Item 9A Controls and Procedures ....................................................................................................................................... Item 9B Other Information ................................................................................................................................................. PART III Item 10 Directors, Executive Officers and Corporate Governance.................................................................................... Item 11 Executive Compensation ...................................................................................................................................... Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............. Item 13 Certain Relationships, Related Transactions and Director Independence ............................................................ Item 14 Principal Accountant Fees and Services ............................................................................................................... PART IV Item 15 Exhibits, Financial Statement Schedules .............................................................................................................. Signatures ............................................................................................................................................................................. Exhibit Index ........................................................................................................................................................................ Page 2 9 13 13 13 13 14 18 19 46 46 92 92 92 93 93 94 94 94 94 95 96 1 - 1 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K FORWARD-LOOKING STATEMENTS This report on Form 10-K contains forward-looking statements about Westamerica Bancorporation for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward- looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", "projected", "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the national and regional economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, and other disasters, on the uninsured value of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values, and (13) changes in the securities markets. The Company undertakes no obligation to update any forward-looking statements in this report. See also “Risk Factors” in Item 1A and other risk factors discussed elsewhere in this Report. ITEM 1. BUSINESS PART I Westamerica Bancorporation (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Its legal headquarters are located at 1108 Fifth Avenue, San Rafael, California 94901. Principal administrative offices are located at 4550 Mangels Boulevard, Fairfield, California 94534 and its telephone number is (707) 863- 6000. The Company provides a full range of banking services to individual and 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 and Nevada Counties in the north to Kern County in the south. The Company’s strategic focus is on the banking needs of small businesses. In addition, the Bank owns 100% of the capital stock of Community Banker Services Corporation (“CBSC”), a company engaged in providing the Company and its subsidiaries with data processing services and other support functions. The Company was incorporated under the laws of the State of California in 1972 as “Independent Bankshares Corporation” pursuant to a plan of reorganization among three previously unaffiliated Northern California banks. The Company operated as a multi-bank holding company until mid-1983, at which time the then six subsidiary banks were merged into a single bank named Westamerica Bank and the name of the holding company was changed to Westamerica Bancorporation. The Company acquired five banks within its immediate market area during the early to mid 1990’s. In April 1997, the Company acquired ValliCorp Holdings, Inc., parent company of ValliWide Bank, the largest independent bank holding company headquartered in Central California. Under the terms of all of the merger agreements, the Company issued shares of its common stock in exchange for all of the outstanding shares of the acquired institutions. The subsidiary banks acquired were merged with and into WAB. These six aforementioned business combinations were accounted for as poolings-of-interests. During the period 2000 through 2005, the Company acquired three additional banks. These acquisitions were accounted for using the purchase accounting method. 2 - 2 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 On February 6, 2009, Westamerica Bank acquired the banking operations of County Bank (“County”) from the Federal Deposit Insurance Corporation (“FDIC”). On August 20, 2010, Westamerica Bank acquired assets and assumed liabilities of the former Sonoma Valley Bank (“Sonoma”) from the FDIC. The County and Sonoma acquired assets and assumed liabilities were measured at estimated fair values, as required by FASB ASC 805, Business Combinations. At December 31, 2015, the Company had consolidated assets of approximately $5.2 billion, deposits of approximately $4.5 billion and shareholders’ equity of approximately $532 million. The Company and its subsidiaries employed 813 full-time equivalent staff as of December 31, 2015. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as beneficial ownership reports on Forms 3, 4 and 5 are available through the SEC’s website (http://www.sec.gov). Such documents as well as the Company’s director, officer and employee Code of Conduct and Ethics are also available free of charge from the Company by request to: Westamerica Bancorporation Corporate Secretary A-2M Post Office Box 1200 Suisun City, California 94585-1200 Supervision and Regulation The following is not intended to be an exhaustive description of the statutes and regulations applicable to the Company’s or the Bank’s business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions. Moreover, major new legislation and other regulatory changes affecting the Company, the Bank, and the financial services industry in general have occurred in the last several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted. Regulation and Supervision of Bank Holding Companies The Company is a bank holding company subject to the BHCA. The Company reports to, is registered with, and may be examined by, the Board of Governors of the Federal Reserve System (“FRB”). The FRB also has the authority to examine the Company’s subsidiaries. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and the Bank are subject to examination by, and may be required to file reports with, the Commissioner of the California Department of Business Oversight (the “Commissioner”). The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See “Capital Standards.” The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. Under the BHCA, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company. Any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the prior approval of the FRB. The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of any class of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. However, a bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be closely related to banking or managing or controlling banks. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. The FRB generally prohibits a bank holding company from declaring or paying a cash dividend that would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements which might adversely affect a bank holding company’s financial position. Under the FRB policy, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. See the section entitled “Restrictions on Dividends and Other Distributions” for additional restrictions on the ability of the Company and the Bank to pay dividends. 3 - 3 - Transactions between the Company and the Bank are restricted under Regulation W. The regulation codifies prior interpretations of the FRB and its staff under Sections 23A and 23B of the Federal Reserve Act. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates: (a) to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and (b) to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates. The Company is considered to be an affiliate of the Bank. A “covered transaction” includes, among other things, a loan or extension of credit to an affiliate; a purchase of securities issued by an affiliate; a purchase of assets from an affiliate, with some exceptions; and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Federal regulations governing bank holding companies and change in bank control (Regulation Y) provide for a streamlined and expedited review process for bank acquisition proposals submitted by well-run bank holding companies. These provisions of Regulation Y are subject to numerous qualifications, limitations and restrictions. In order for a bank holding company to qualify as “well-run,” both it and the insured depository institutions which it controls must meet the “well capitalized” and “well managed” criteria set forth in Regulation Y. The Gramm-Leach-Bliley Act (the “GLBA”), or the Financial Services Act of 1999, repealed provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated. The BHCA was also amended by the GLBA to allow new “financial holding companies” (“FHCs”) to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLBA amended section 4 of the BHCA in order to provide for a framework for the engagement in new financial activities. A bank holding company (“BHC”) may elect to become an FHC if all its subsidiary depository institutions are well capitalized and well managed. If these requirements are met, a BHC may file a certification to that effect with the FRB and declare that it elects to become an FHC. After the certification and declaration is filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the FRB to be financial in nature or incidental to such financial activity. BHCs may engage in financial activities without prior notice to the FRB if those activities qualify under the list of permissible activities in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after an FHC has commenced one or more of the financial activities. The Company has not elected to become an FHC. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Regulation and Supervision of Banks The Bank is a California state-chartered Federal Reserve member bank and its deposits are insured by the FDIC. The Bank is subject to regulation, supervision and regular examination by the California Department of Business Oversight (“DBO”), and the FRB. The regulations of these agencies affect most aspects of the Bank’s business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of its activities and various other requirements. In addition to federal banking law, the Bank is also subject to applicable provisions of California law. Under California law, the Bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital requirements, deposits and borrowings, shareholder rights and duties, and investment and lending activities. In addition, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes limitations on the activities and equity investments of state chartered, federally insured banks. FDICIA also prohibits a state bank from making an investment or engaging in any activity as a principal that is not permissible for a national bank, unless the Bank is adequately capitalized and the FDIC approves the investment or activity after determining that such investment or activity does not pose a significant risk to the deposit insurance fund. On July 21, 2010, financial regulatory reform legislation entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things: • • Centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and (as to banks with $10 billion or more in assets) enforcing compliance with federal consumer financial laws. Restricted the preemption of state law by federal law and disallowed subsidiaries and affiliates of national banks from availing themselves of such preemption. 4 - 4 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 • Applied the same leverage and risk-based capital requirements that would apply to insured depository institutions to • • • • • most bank holding companies. Required bank regulatory agencies to seek to make their capital requirements for banks countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction. Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit Insurance Fund ("DIF") and increased the floor of the size of the DIF. Imposed comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself. Required large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management. Implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that would apply to all public companies, not just financial institutions. • Made permanent the $250 thousand limit for federal deposit insurance. • Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. • Amended the Electronic Fund Transfer Act ("EFTA") to, among other things, give the FRB the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. While the Company’s assets are currently less than $10 billion, interchange fees charged by larger institutions may dictate the level of fees smaller institutions will be able to charge to remain competitive. Many aspects of the Dodd-Frank Act are subject to rulemaking and implementation of new regulations and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees may increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Capital Standards The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions resulting in assets being recognized on the balance sheet as assets, and the extension of credit facilities such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 1250% for assets with relatively higher credit risk, such as certain securitizations. A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items. The federal banking agencies take into consideration concentrations of credit risk and risks from nontraditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. The federal banking agencies also consider interest rate risk (related to the interest rate sensitivity of an institution’s assets and liabilities, and its off balance sheet financial instruments) in the evaluation of a bank’s capital adequacy. As of December 31, 2015, the Company’s and the Bank’s respective ratios exceeded applicable regulatory requirements. See Note 9 to the consolidated financial statements for capital ratios of the Company and the Bank, compared to the standards for well capitalized depository institutions and for minimum capital requirements. On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations over a transitional period 2015 through 2018. See the sections entitled “Capital Resources and Capital to Risk-Adjusted Assets” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. - 5 - 5 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K 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 The Company’s ability to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (“CGCL”). The CGCL provides that a corporation may make a distribution to its shareholders if (i) the corporation’s retained earnings equal or exceed the amount of the proposed distribution plus unpaid accrued dividends, (if any) on securities with a dividend preference, or (ii) immediately after the dividend, the corporation’s total assets equal or exceed total liabilities plus unpaid accrued dividends (if any) on securities with a dividend preference. 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 an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards. Federal banking agencies require banks to maintain adequate valuation allowances for potential credit losses. The Company has an internal staff that continually reviews loan quality and reports to the Board of Directors. This analysis includes a detailed review of the classification and categorization of problem loans, assessment of the overall quality and collectability of the loan portfolio, consideration of loan loss experience, trends in problem loans, concentration of credit risk, and current economic conditions, particularly in the Bank’s market areas. Based on this analysis, Management, with the review and approval of the Board, determines the adequate level of allowance required. The allowance is allocated to different segments of the loan portfolio, but the entire allowance is available for the loan portfolio in its entirety. Restrictions on Dividends and Other Distributions The 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. 6 - 6 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Premiums for Deposit Insurance Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level, asset quality and supervisory rating ("CAMELS rating"). In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. In February 2011, the FDIC issued a final rule changing the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act, effective April 1, 2011. The FDIC also issued a final rule revising the deposit insurance assessment system for “large” institutions having more than $10 billion in assets and another for "highly complex" institutions that have over $50 billion in assets and are fully owned by a parent with over $500 billion in assets. The Bank is neither a “large” nor “highly complex” institution. Under the new assessment rules, the initial base assessment rates range from 5 to 35 basis points, and after potential adjustments for unsecured debt and brokered deposits, assessment rates range from 2.5 to 45 basis points. The Company cannot provide any assurance as to the effect of any future changes in its deposit insurance premium rates. Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities including merger applications. Financial Privacy Legislation and Customer Information Security The GLBA, in addition to the previously described changes in permissible nonbanking activities permitted to banks, BHCs and FHCs, also required the federal banking agencies, among other federal regulatory agencies, to adopt regulations governing the privacy of consumer financial information. The Bank is subject to the FRB’s regulations in this area. The federal bank regulatory agencies have established standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. U.S.A. PATRIOT Act Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) is the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. It includes numerous provisions for fighting international money laundering and blocking terrorist access to the U.S. financial system. The goal of Title III is to prevent the U.S. financial system and the U.S. clearing mechanisms from being used by parties suspected of terrorism, terrorist financing and money laundering. The provisions of Title III of the USA Patriot Act which affect the Bank are generally set forth as amendments to the Bank Secrecy Act. These provisions relate principally to U.S. banking organizations’ relationships with foreign banks and with persons who are resident outside the United States. The USA Patriot Act does not impose any filing or reporting obligations for banking organizations, but does require certain additional due diligence and recordkeeping practices. Sarbanes-Oxley Act of 2002 The stated goals of the Sarbanes-Oxley Act of 2002 (“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 7 - 7 - 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 corporate governance rules, required 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 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 blackout periods; (v) disclosure of off-balance sheet transactions; (vi) a prohibition on personal loans to directors and officers under most circumstances with exceptions for certain normal course transactions by regulated financial institutions; (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 regulate 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. Programs To Mitigate Identity Theft In November 2007, federal banking agencies together with the National Credit Union Administration and Federal Trade Commission adopted regulations under the Fair and Accurate Credit Transactions Act of 2003 to require financial institutions and other creditors to develop and implement a written identity theft prevention program to detect, prevent and mitigate identity theft in connection with certain new and existing accounts. Covered accounts generally include consumer accounts and other accounts that present a reasonably foreseeable risk of identity theft. Each institution’s program must include policies and procedures designed to: (i) identify indicators, or “red flags,” of possible risk of identity theft; (ii) detect the occurrence of red flags; (iii) respond appropriately to red flags that are detected; and (iv) ensure that the program is updated periodically as appropriate to address changing circumstances. The regulations include guidelines that each institution must consider and, to the extent appropriate, include in its program. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Pending Legislation Changes to state laws and regulations (including changes in interpretation or enforcement) can affect the operating environment of BHCs and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and the Company’s operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon our financial condition or results of operations. It is likely, however, that the current level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase. Competition In the past, the Bank’s principal competitors for deposits and loans have been major banks and smaller community 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 that also compete with banks for deposit business. Federal legislation in recent years has encouraged competition between different types of financial institutions and fostered new entrants into the financial services market. Legislative changes, as well as technological and economic factors, can be expected to have an ongoing impact on competitive conditions within the financial services industry. While the future impact of regulatory and legislative changes cannot be predicted with certainty, the business of banking will remain highly competitive. 8 - 8 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 ITEM 1A. RISK FACTORS Readers and prospective investors in the Company’s securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the company’s securities could decline significantly, and investors could lose all or part of their investment in the Company’s common stock. Market and Interest Rate Risk Changes in interest rates could reduce income and cash flow. The discussion in this report under “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset, Liability and Market Risk Management” and “- Liquidity and Funding” and “Item 7A Quantitative and Qualitative Disclosures About Market Risk” is incorporated by reference in this paragraph. The Company’s income and cash flow depend to a great extent on the difference between the interest earned on loans and investment securities and the interest paid on deposits and other borrowings, and the Company’s success in competing for loans and deposits. The Company cannot control or prevent changes in the level of interest rates which fluctuate in response to general economic conditions, the policies of various governmental and regulatory agencies, in particular, the Federal Open Market Committee of the FRB, and pricing practices of the Company’s competitors. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and other borrowings, and the rates received on loans and investment securities and paid on deposits and other liabilities. Changes in capital market conditions could reduce asset valuations. Capital market conditions, including liquidity, investor confidence, bond issuer credit worthiness, perceived counter-party risk, the supply of and demand for financial instruments, the financial strength of market participants, and other factors can materially impact the value of the Company’s assets. An impairment in the value of the Company’s assets could result in asset write-downs, reducing the Company’s asset values, earnings, and equity. The value of securities in the Company’s investment securities portfolio may be negatively affected by disruptions in securities markets The market for some of the investment securities held in the Company’s portfolio can be extremely volatile. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that the declines in market value will not result in other than temporary impairments of these assets, which would lead to loss recognition that could have a material adverse effect on the Company’s net income and capital levels. The weakness of other financial institutions could adversely affect the Company. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of default of the Company’s counterparty or client. In addition, the Company’s credit risk may be increased when the collateral the Company holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the secured obligation. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations or earnings. Shares of Company common stock eligible for future sale or grant of stock options 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 9 - 9 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K approximately 25.5 million shares of common stock were outstanding at December 31, 2015. Pursuant to its stock option plans, at December 31, 2015, the Company had outstanding options for 1.5 million shares of common stock, of which 1.1 million were currently exercisable. As of December 31, 2015, 1.5 million shares of Company common stock remained available for grants under the Company’s stock option plans. Sales of substantial amounts of Company common stock in the public market could adversely affect the market price of its common stock. The Company’s payment of dividends on common stock could be eliminated or reduced. Holders of the Company’s common stock are entitled to receive dividends only when, as and if declared by the Company’s Board of Directors. Although the Company has historically paid cash dividends on the Company’s common stock, the Company is not required to do so and the Company’s Board of Directors could reduce or eliminate the Company’s common stock dividend in the future. The Company could repurchase shares of its common stock at price levels considered excessive. The Company repurchases and retires its common stock in accordance with Board of Directors-approved share repurchase programs. At December 31, 2015, approximately 1.7 million shares remained available to repurchase under such plans. The Company has been active in repurchasing and retiring shares of its common stock when alternative uses of excess capital, such as acquisitions, have been limited. The Company could repurchase shares of its common stock at price levels considered excessive, thereby spending more cash on such repurchases as deemed reasonable and effectively retiring fewer shares than would be retired if repurchases were affected at lower prices. Risks Related to the Nature and Geographical Location of the Company’s Business The Company invests in loans that contain inherent credit risks that may cause the Company to incur losses. The Company can provide no assurance that the credit quality of the loan portfolio will not deteriorate in the future and that such deterioration will not adversely affect the Company. The Company’s operations are concentrated geographically in California, and poor economic conditions may cause the Company to incur losses. Substantially all of the Company’s business is located in California. A portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2015, real estate served as the principal source of collateral with respect to approximately 53% of the Company’s loan portfolio. The Company’s financial condition and operating results will be subject to changes in economic conditions in California. The California economy is recovering from a severe recession. Much of the California real estate market experienced a decline in values of varying degrees. This decline had an adverse impact on the business of some of the Company’s borrowers and on the value of the collateral for many of the Company’s loans. Generally, the counties surrounding and near San Francisco Bay have been recovering from the recent recession more soundly than counties in the California “Central Valley,” from Sacramento in the north to Bakersfield in the south. Approximately 25% of the Company’s loans are to borrowers in the California “Central Valley.” Economic conditions in California are subject to various uncertainties at this time, including the pace of recovery in construction and real estate sectors, the effect of drought on the agricultural sector and its infrastructure, and the California state government’s budgetary difficulties and fiscal condition. The Company can provide no assurance that conditions in the California economy will not deteriorate in the future and that such deterioration will not adversely affect the Company. The markets in which the Company operates are subject to the risk of earthquakes and other natural disasters. All of the properties of the Company are located in California. Also, most of the real and personal properties which currently secure a majority of the Company’s loans are located in California. California is prone to earthquakes, brush and forest fires, flooding, drought and other natural disasters. In addition to possibly sustaining uninsured damage to its own properties, if there is a major earthquake, flood, drought, fire or other natural disaster, the Company faces the risk that many of its borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. A major earthquake, flood, prolonged drought, fire or other natural disaster in California could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. 10 - 10 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Adverse changes in general business or economic conditions could have a material adverse effect on the Company’s financial condition and results of operations. A sustained or continuing weakness or weakening in business and economic conditions generally or specifically in the principal markets in which the Company does business could have one or more of the following adverse impacts on the Company’s business: • • • • • • • • • a decrease in the demand for loans and other products and services offered by the Company; an increase or decrease in the usage of unfunded credit commitments; a decrease in the amount of deposits; a decrease in non-depository funding available to the Company; an impairment of certain intangible assets, such as goodwill; an increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Company, which could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on assets; an impairment in the value of investment securities; an impairment in the value of life insurance policies owned by the Company; an impairment in the value of real estate owned by the Company. The recent financial crisis led to the failure or merger of a number of financial institutions. Financial institution failures can result in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. Weak economic conditions can significantly weaken the strength and liquidity of financial institutions. The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where the Company operates, in the State of California and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, healthy labor markets, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, high rates of unemployment, deflation, declines in business activity or consumer, investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors. Such business conditions could adversely affect the credit quality of the Company’s loans, the demand for loans, loan volumes and related revenue, securities valuations, amounts of deposits, availability of funding, results of operations and financial condition. Regulatory Risks Restrictions on dividends and other distributions could limit amounts payable to the Company. As a holding company, a substantial portion of the Company’s cash flow typically comes from dividends paid by the Bank. Various statutory provisions restrict the amount of dividends the Company’s subsidiaries can pay to the Company without regulatory approval. A reduction in subsidiary dividends paid to the Company could limit the capacity of the Company to pay dividends. In addition, if any of the Company’s subsidiaries were to liquidate, that subsidiary’s creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before the Company, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. Adverse effects of changes in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company. The Company is subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of the Company’s customers and not for the benefit of investors. In the past, the Company’s business has been materially affected by these regulations. As an example, the FRB amended Regulation E, which implements the Electronic Fund Transfer Act, in a manner that limits the ability of a financial institution to assess an overdraft fee for paying automated teller machine (ATM) and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents, or opts in, to the institution’s payment of overdrafts for these transactions. Implementation of the new provisions significantly reduced overdraft fees assessed by the Bank. 11 - 11 - Laws, regulations or policies, including accounting standards and interpretations currently affecting the Company and the Company’s subsidiaries, may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, the Company’s business may be adversely affected by any future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement including future acts of terrorism, major U.S. corporate bankruptcies and reports of accounting irregularities at U.S. public companies. Additionally, the Company’s business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States of America. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates of borrowings by depository institutions, (c) changing interest rates paid on balances financial institutions deposit with the FRB, and (d) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on the Company’s business, results of operations and financial condition. Under long- standing policy of the FRB, a BHC is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, the Company may be required to commit financial and other resources to its subsidiary bank in circumstances where the Company might not otherwise do so. Following the most recent recession, the FRB has been providing vast amounts of liquidity into the banking system. The FRB has been purchasing large quantities of U.S. government securities, including agency-backed mortgage securities, increasing the demand for such securities thereby reducing interest rates. The FRB began reducing these asset purchase activities in the fourth quarter 2013 and the Federal Open Market Committee increased the target range for the federal funds rate to 1/4 to 1/2 percent on December 16, 2015 which could reduce liquidity in the markets and cause interest rates to rise, thereby increasing funding costs to the Bank, reducing the availability of funds to the Bank to finance its existing operations, and causing fixed-rate investment securities and loans to decline in value. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Federal and state governments could pass legislation detrimental to the Company’s performance. As an example, the Company could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank's borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Company could experience higher credit losses because of federal or state legislation or regulatory action that limits or delays the Bank's ability to foreclose on property or other collateral or makes foreclosure less economically feasible. The FDIC insures deposits at insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. The FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund. The behavior of depositors in regard to the level of FDIC insurance could cause our existing customers to reduce the amount of deposits held at the Bank, and could cause new customers to open deposit accounts at the Bank. The level and composition of the Bank's deposit portfolio directly impacts the Bank's funding cost and net interest margin. Systems, Accounting and Internal Control Risks The accuracy of the Company’s judgments and estimates about financial and accounting matters will impact operating results and financial condition. The discussion under “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in this report and the information referred to in that discussion is incorporated by reference in this paragraph. The Company makes certain estimates and judgments in preparing its financial statements. The quality and accuracy of those estimates and judgments will have an impact on the Company’s operating results and financial condition. The Company’s information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems, including those of third party vendors and other service providers, to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s data processing, accounting, customer relationship management and other systems. Communication and information systems failures can result from a variety of risks including, but not limited to, events that are wholly or partially out of the Company’s control, such as telecommunication line integrity, weather, terrorist acts, natural disasters, accidental disasters, unauthorized breaches of security systems, energy delivery systems, cyber attacks, and other events. Although the 12 - 12 - Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Company’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the Company and its customers, there is no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately corrected by the Company or its vendors. The occurrence of any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. The Company maintains controls and procedures to mitigate against risks such as processing system failures and errors, and customer or employee fraud, and maintains insurance coverage for certain of these risks. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Events could occur which are not prevented or detected by the Company’s internal controls or are not insured against or are in excess of the Company’s insurance limits or insurance underwriters’ financial capacity. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition. K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 ITEM 1B. UNRESOLVED STAFF COMMENTS None ITEM 2. PROPERTIES Branch Offices and Facilities Westamerica Bank is engaged in the banking business through 88 branch offices in 21 counties in Northern and Central California. WAB believes all of its offices are constructed and equipped to meet prescribed security requirements. The Company owns 32 banking office locations and one centralized administrative service center facility and leases 64 facilities. Most of the leases contain renewal options and provisions for rental increases, principally for changes in the cost of living index, and for changes in other operating costs such as property taxes and maintenance. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, other than ordinary routine legal proceedings arising in the ordinary course of the Company’s business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, financial position or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable 13 - 13 - PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “WABC”. The following table shows the high and the low sales prices for the common stock, for each quarter, as reported by NASDAQ: High Low 2015: First quarter......................................................................................................... Second quarter .................................................................................................... Third quarter ....................................................................................................... Fourth quarter ..................................................................................................... $49.45 52.16 52.40 49.89 2014: First quarter......................................................................................................... Second quarter .................................................................................................... Third quarter ....................................................................................................... Fourth quarter ..................................................................................................... $56.51 55.34 53.93 51.24 $40.57 42.09 42.97 41.99 $48.36 47.85 46.12 42.71 As of January 31, 2016, there were approximately 6,100 shareholders of record of the Company’s common stock. The Company has paid cash dividends on its common stock in every quarter since its formation in 1972. See Item 8, Financial Statements and Supplementary Data, Note 20 to the Consolidated Financial Statements for recent quarterly dividend information. It is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, cash balances, financial condition and capital requirements of the Company and its subsidiaries as well as policies of the FRB pursuant to the BHCA. See Item 1, “Business - Supervision and Regulation.” The notes to the consolidated financial statements included in this report contain additional information regarding the Company’s capital levels, capital structure, regulations affecting subsidiary bank dividends paid to the Company, the Company’s earnings, financial condition and cash flows, and cash dividends declared and paid on common stock. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K [The remainder of this page intentionally left blank] 14 - 14 - Stock performance The following chart compares the cumulative return on the Company’s stock during the ten years ended December 31, 2015 with the cumulative return on the S&P 500 composite stock index and NASDAQ’S Bank Index. The comparison assumes $100 invested in each on December 31, 2005 and reinvestment of all dividends. K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 December 31, Westamerica Bancorporation (WABC) ...................................... S&P 500 (SPX)........................................................................... NASDAQ Bank Index (CBNK) ................................................. 2006 2005 2010 $100.00 $97.91 $88.64 $104.44 $116.37 $119.73 97.33 112.01 100.00 115.78 122.14 68.37 59.88 91.16 100.00 113.80 76.96 71.54 2008 2009 2007 Westamerica Bancorporation (WABC) ........................................................ S&P 500 (SPX)............................................................................................. NASDAQ Bank Index (CBNK) ................................................................... December 31, 2013 2011 2012 2015 $97.70 $97.92 $133.99 $119.96 $118.42 114.35 132.63 175.55 199.52 202.28 72.65 102.94 107.99 117.54 61.19 2014 [The remainder of this page intentionally left blank] 15 - 15 - The following chart compares the cumulative return on the Company’s stock during the five years ended December 31, 2015 with the cumulative return on the S&P 500 composite stock index and NASDAQ’S Bank Index. The comparison assumes $100 invested in each on December 31, 2010 and reinvestment of all dividends. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Westamerica Bancorporation (WABC) ...................................... S&P 500 (SPX)........................................................................... NASDAQ Bank Index (CBNK) ................................................. ISSUER PURCHASES OF EQUITY SECURITIES December 31, 2012 2011 2010 2015 $100.00 $81.60 $81.79 $111.91 $100.19 $98.91 100.00 102.09 118.41 156.73 178.13 180.59 89.49 106.26 150.56 157.95 171.92 100.00 2013 2014 The table below sets forth the information with respect to purchases made by or on behalf of Westamerica Bancorporation or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended December 31, 2015 (in thousands, except per share data). Period October 1 through October 31 November 1 through November 30 December 1 through December 31 Total 2015 (a) Total Number of shares Purchased (c) Number of Shares Purchased as Part of Publicly Announced Plans or Programs* (In thousands, except exercise price) (b) Average Price Paid per Share (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 2 - - 2 $43.01 - - 43.01 2 - - 2 1,727 1,727 1,727 1,727 * No shares were purchased during the fourth quarter 2015 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. 16 - 16 - The Company repurchases shares of its common stock in the open market to optimize the Company’s use of equity capital and enhance shareholder value and with the intention of lessening the dilutive impact of issuing new shares under stock option plans, and other ongoing requirements. Shares were repurchased during the fourth quarter 2015 pursuant to a program approved by the Board of Directors on July 23, 2015 authorizing the purchase of up to 1,750 thousand shares of the Company’s common stock from time to time prior to September 1, 2016. [The remainder of this page intentionally left blank] K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 17 - 17 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K ITEM 6. SELECTED FINANCIAL DATA The following financial information for the five years ended December 31, 2015 has been derived from the Company’s audited consolidated financial statements. This information should be read in conjunction with those statements, notes and other information included elsewhere herein. WESTAMERICA BANCORPORATION FINANCIAL SUMMARY Interest and loan fee income Interest expense Net interest and loan fee income Provision for loan losses Noninterest income: Net losses from securities Deposit service charges and other Total noninterest income Noninterest expense: Settlements Other noninterest expense Total noninterest expense Income before income taxes Income tax provision Net income Average common shares outstanding Average diluted common shares outstanding Common shares outstanding at December 31, Per common share: Basic earnings Diluted earnings Book value at December 31, Financial ratios: Return on assets Return on common equity Net interest margin (FTE)(1) Net loan losses to average loans (2) Efficiency ratio Equity to assets Period end balances: Assets Loans Allowance for loan losses Investment securities Deposits Identifiable intangible assets and goodwill Short-term borrowed funds Federal Home Loan Bank advances Term repurchase agreement Debt financing Shareholders' equity Capital ratios at period end: Total risk based capital Tangible equity to tangible assets Dividends paid per common share Common dividend payout ratio For the Years Ended December 31, 2013 2012 2014 (In thousands, except per share data and ratios) $140,209 3,444 136,765 2,800 $154,396 4,671 149,725 8,000 $183,364 5,744 177,620 11,200 2015 $136,529 2,424 134,105 - - 47,867 47,867 - 105,300 105,300 76,672 17,919 $58,753 25,555 25,577 25,528 $2.30 2.30 20.85 1.16% 11.32% 3.36% 0.11% 53.69% 10.30% - 51,787 51,787 - 106,799 106,799 78,953 18,307 $60,646 26,099 26,160 25,745 $2.32 2.32 20.45 1.22% 11.57% 3.70% 0.17% 52.24% 10.46% $5,168,875 1,533,396 29,771 2,886,291 4,540,659 132,104 53,028 - - - $5,035,724 1,700,290 31,485 2,639,439 4,349,191 135,960 89,784 20,015 - - 532,205 526,603 13.39% 7.94% $1.53 67% 14.54% 7.97% $1.52 66% 2011 $207,979 8,382 199,597 11,200 - 60,097 60,097 2,100 125,578 127,678 120,816 32,928 $87,888 28,628 28,742 28,150 $3.07 3.06 19.85 1.78% 16.14% 5.32% 0.52% 45.77% 11.08% $5,042,161 2,523,806 32,597 1,561,556 4,249,921 150,302 115,689 26,023 10,000 15,000 558,641 15.75% 8.35% $1.45 47% - 57,011 57,011 - 112,614 112,614 86,122 18,945 $67,177 26,826 26,877 26,510 $2.50 2.50 20.48 1.38% 12.48% 4.08% 0.33% 50.11% 11.20% $4,847,055 1,827,744 31,693 2,211,680 4,163,781 140,230 62,668 20,577 10,000 - 542,934 16.18% 8.56% $1.49 60% (1,287) 58,309 57,022 - 116,885 116,885 106,557 25,430 $81,127 27,654 27,699 27,213 $2.93 2.93 20.58 1.64% 14.93% 4.79% 0.59% 46.01% 11.31% $4,952,193 2,111,357 30,234 1,981,677 4,232,492 144,934 53,687 25,799 10,000 15,000 560,102 16.33% 8.64% $1.48 51% (1) Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis, which is a non-GAAP financial measure, in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate. (2) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis, which is a non-GAAP financial measure, and noninterest income). 18 - 18 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 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 48 through 89, as well as with the other information presented throughout this Report. Critical Accounting Policies The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the banking industry. Application of these principles requires the Company to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses and purchased loans is included in the “Loan Portfolio Credit Risk” discussion below. Net Income In response to the “great recession” of 2008 and early 2009, the Federal Reserve’s Federal Open Market Committee has maintained highly accommodative monetary policies to influence interest rates to low levels in order to provide stimulus to the economy following the “financial crisis” recession. The Company’s principal source of revenue is net interest income, which represents interest earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). The relatively low level of market interest rates during the five years ended December 31, 2015 has reduced the spread between interest rates on earning assets and interest bearing liabilities. The Company’s net interest margin and net interest income declined as market interest rates on newly originated loans remain below the yields earned on older-dated loans and on the overall loan portfolio. The Company has been reducing its exposure to rising interest rates by purchasing shorter-duration investment securities with lower yields than longer-duration securities. The Company’s credit quality continued to improve, as nonperforming loans at December 31, 2015 declined 15.5 percent compared with December 31, 2014 and net loan losses have also declined from $3.0 million in 2014 to $1.7 million in 2015. The improvement in credit quality has resulted in Management reducing the provision for loan losses to zero in 2015 from $2.8 million in 2014 and $8.0 million in 2013. Management is focused on controlling all noninterest expense levels, particularly due to market interest rate pressure on net interest income. The Company reported net income of $58.8 million or $2.30 diluted earnings per common share for the year ended December 31, 2015 compared with net income of $60.6 million or $2.32 diluted earnings per common share for the year ended December 31, 2014 and net income of $67.2 million or $2.50 diluted earnings per common share for the year ended December 31, 2013. 19 - 19 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Components of Net Income Net interest and loan fee income (FTE) Provision for loan losses Noninterest income Noninterest expense (1) Income before income taxes (FTE) (1) Income taxes (FTE) Net income (1) Net income per average fully-diluted common share Net income as a percentage of average shareholders' equity Net income as a percentage of average total assets (1) Fully taxable equivalent (FTE) For the Years Ended December 31, 2013 2014 2015 ($ in thousands, except per share data) $148,258 - 47,867 (105,300) 90,825 (32,072) $58,753 $2.30 11.32% 1.16% $152,656 (2,800) 51,787 (106,799) 94,844 (34,198) $60,646 $2.32 11.57% 1.22% $167,737 (8,000) 57,011 (112,614) 104,134 (36,957) $67,177 $2.50 12.48% 1.38% Comparing 2015 with 2014, net income decreased $1.9 million or 3.1%, primarily due to lower net interest and loan fee income (FTE) and lower noninterest income, partially offset by decreases in loan loss provision, noninterest expense and income tax provision (FTE). The lower net interest and loan fee income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest-earning assets, partially offset by higher average balances of investments and lower average balances of higher-costing interest-bearing liabilities. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio; net loan losses and nonperforming loan volumes have declined relative to earlier periods. Lower noninterest income was mostly attributable to lower merchant processing service fees and lower service charges on deposit accounts. Noninterest expense decreased primarily due to reduced personnel costs and other operational expenses. Comparing 2014 with 2013, net income decreased $6.5 million primarily due to lower net interest and fee income (FTE) and lower noninterest income, partially offset by decreases in the provision for loan losses, noninterest expense and income tax provision (FTE). The lower net interest and fee income (FTE) was primarily caused by a lower average volume of loans and lower yields on interest earning assets, partially offset by higher average balances of investments and lower average balances of higher-costing interest-bearing liabilities. The provision for loan losses was reduced, reflecting Management's evaluation of losses inherent in the loan portfolio. Lower noninterest income was mostly attributable to lower merchant processing service fees and lower service charges on deposit accounts. Noninterest expense decreased mostly due to reduced OREO expense net of disposition gains, lower personnel costs and other operational expenses. Net Interest and Loan Fee Income (FTE) The Company's primary source of revenue is net interest income, or the difference between interest income earned on loans and investment securities and interest expense paid on interest-bearing deposits and other borrowings. Components of Net Interest and Loan Fee Income (FTE) 2015 For the Years Ended December 31, 2014 ($ in thousands) 2013 Interest and loan fee income Interest expense FTE adjustment Net interest and loan fee income (FTE) (1) Net interest margin (FTE) (1) Fully taxable equivalent (FTE) (1) $136,529 (2,424) 14,153 $148,258 $140,209 (3,444) 15,891 $152,656 $154,396 (4,671) 18,012 $167,737 3.36% 3.70% 4.08% 20 - 20 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Comparing 2015 with 2014, net interest and fee income (FTE) decreased $4.4 million or 2.9% primarily due to a lower average volume of loans (down $155 million) and lower yields on interest-earning assets (FTE) (down 37 basis points “bp”), partially offset by higher average balances of investments (up $436 million) and lower average balances of higher-costing interest-bearing liabilities. Comparing 2014 with 2013, net interest and fee income (FTE) decreased $15.1 million or 9.0% primarily due to a lower average volume of loans (down $182 million) and lower yields on interest-earning assets (FTE) (down 41 basis points “bp”), partially offset by higher average balances of investments (up $206 million) and lower average balances of higher-costing interest-bearing liabilities. Loan volumes have declined due to problem loan workout activities (such as chargeoffs, collateral repossessions and principal payments), particularly with purchased loans, and reduced volumes of loan originations. In Management’s opinion, current levels of competitive loan pricing do not provide adequate forward earnings potential. As a result, the Company has not currently taken an aggressive posture relative to loan portfolio growth. Management has maintained relatively stable interest-earning asset volumes by increasing investment securities as loan volumes have declined. Yields on interest-earning assets have declined due to relatively low interest rates prevailing in the market. The net interest margin (FTE) was 3.36% in 2015, 3.70% in 2014 and 4.08% in 2013. During the three years ended December 31, 2015, the net interest margin (FTE) was affected by declining market interest rates. The volume of older-dated higher-yielding loans declined due to principal maturities and paydowns. Newly originated loans have lower yields. The Company, in anticipation of rising interest rates, has been purchasing floating rate and shorter-duration investment securities with lower yields than longer-duration securities to increase liquidity. The Company’s high levels of liquidity will provide an opportunity to obtain higher yielding assets assuming market interest rates start rising. The Company has been purchasing securities of U. S. government sponsored entities which have call options; the issuing entities have been exercising the call options, and the Company has re-invested the proceeds at prevailing market rates; interest rates in the two to five-year time horizon were volatile throughout 2015 providing some opportunity to re-invest cash flows at higher yields. The Company has been replacing higher-cost funding sources with low-cost deposits and interest expense has declined to offset some of the decline in interest income. Interest expense has been reduced by lowering rates paid on interest-bearing deposits and borrowings and by reducing the volume of higher-cost funding sources. A $15 million long-term note was repaid in October 2013 and a $10 million term repurchase agreement was repaid in August 2014. Federal Home Loan Bank (“FHLB”) advances were repaid in January 2015. Average balances of time deposits declined $100 million in 2015 compared with 2014. Lower-cost checking and savings deposits accounted for 92.5% of total average deposits in 2015 compared with 89.8% in 2014 and 86.3% in 2013. [The remainder of this page intentionally left blank] 21 - 21 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Summary of Average Balances, Yields/Rates and Interest Differential The following tables present information regarding the consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income earned from average interest earning assets and the resulting yields, and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates. Average loan balances include nonperforming loans. Interest income includes reversal of previously accrued interest on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts. Yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the current statutory tax rate. Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin For the Year Ended December 31, 2015 Interest Income/ Expense ($ in thousands) Yields/ Rates Average Balance Assets Investment securities: Taxable Tax-exempt (1) Total investments (1) Loans: Taxable Tax-exempt (1) Total loans (1) Total interest-earning assets (1) Other assets Total assets Liabilities and shareholders' equity Deposits: Noninterest-bearing demand Savings and interest-bearing transaction Time less than $100,000 Time $100,000 or more Total interest-bearing deposits Short-term borrowed funds Federal Home Loan Bank advances Total interest-bearing liabilities Other liabilities Shareholders' equity Total liabilities and shareholders' equity Net interest spread (1) (2) Net interest and fee income and interest margin (1) (3) $1,947,835 849,618 2,797,453 1,542,264 76,007 1,618,271 4,415,724 668,276 $5,084,000 $1,968,817 2,134,256 172,836 161,710 2,468,802 75,054 494 2,544,350 51,707 519,126 $5,084,000 $34,472 36,284 70,756 75,677 4,249 79,926 150,682 $- 1,112 571 687 2,370 53 1 2,424 $148,258 1.77% 4.27% 2.53% 4.91% 5.59% 4.94% 3.41% - % 0.05% 0.33% 0.42% 0.10% 0.07% 0.20% 0.10% 3.31% 3.36% (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. (2) Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities. (3) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits. 22 - 22 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin For the Year Ended December 31, 2014 Interest Income/ Expense ($ in thousands) Yields/ Rates Average Balance Assets Investment securities: Taxable Tax-exempt (1) Total investments (1) Loans: Taxable Tax-exempt (1) Total loans (1) Total interest-earning assets (1) Other assets Total assets Liabilities and shareholders' equity Deposits: Noninterest-bearing demand Savings and interest-bearing transaction Time less than $100,000 Time $100,000 or more Total interest-bearing deposits Short-term borrowed funds Federal Home Loan Bank advances Term repurchase agreement Total interest-bearing liabilities Other liabilities Shareholders' equity Total liabilities and shareholders' equity Net interest spread (1) (2) Net interest and fee income and interest margin (1) (3) $1,474,579 886,932 2,361,511 1,685,329 87,633 1,772,962 4,134,473 821,170 $4,955,643 $1,841,522 2,005,502 197,821 237,002 2,440,325 70,252 20,308 6,082 2,536,967 52,866 524,288 $4,955,643 $24,766 40,525 65,291 85,787 5,022 90,809 156,100 $- 1,174 820 893 2,887 90 407 60 3,444 $152,656 1.68% 4.57% 2.76% 5.09% 5.73% 5.12% 3.78% - % 0.06% 0.41% 0.38% 0.12% 0.13% 2.00% 0.99% 0.14% 3.64% 3.70% (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. (2) Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities. (3) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits. 23 - 23 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Distribution of Assets, Liabilities & Shareholders’ Equity and Yields, Rates & Interest Margin For the Year Ended December 31, 2013 Interest Income/ Expense ($ in thousands) Yields/ Rates Average Balance Assets Investment securities: Taxable Tax-exempt (1) Total investments (1) Loans: Taxable Tax-exempt (1) Total loans (1) Total interest-earning assets (1) Other assets Total assets Liabilities and shareholders' equity Deposits: Noninterest-bearing demand Savings and interest-bearing transaction Time less than $100,000 Time $100,000 or more Total interest-bearing deposits Short-term borrowed funds Federal Home Loan Bank advances Term repurchase agreement Debt financing Total interest-bearing liabilities Other liabilities Shareholders' equity Total liabilities and shareholders' equity Net interest spread (1) (2) Net interest and fee income and interest margin (1) (3) $1,254,474 900,616 2,155,090 1,847,710 106,871 1,954,581 4,109,671 754,191 $4,863,862 $1,683,447 1,910,131 228,061 341,184 2,479,376 57,454 25,499 10,000 12,452 2,584,781 57,469 538,165 $4,863,862 $22,201 45,396 67,597 98,547 6,264 104,811 172,408 $- 1,182 1,070 1,096 3,348 77 480 98 668 4,671 $167,737 1.77% 5.04% 3.13% 5.33% 5.86% 5.36% 4.19% - % 0.06% 0.47% 0.32% 0.14% 0.13% 1.88% 0.98% 5.37% 0.18% 4.01% 4.08% (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. (2) Net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities. (3) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. The net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits. 24 - 24 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances (volume) and changes in average interest yields/rates for the periods indicated. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components. Summary of Changes in Interest Income and Expense For the Year Ended December 31, 2015 Compared with For the Year Ended December 31, 2014 Yield/Rate (In thousands) Total Volume Increase (decrease) in interest and loan fee income: Investment securities: Taxable Tax-exempt (1) Total investments (1) Loans: Taxable Tax-exempt (1) Total loans (1) Total decrease in interest and loan fee income (1) Increase (decrease) in interest expense: Deposits: Savings and interest-bearing transaction Time less than $100,000 Time $100,000 or more Total interest-bearing deposits Short-term borrowed funds Federal Home Loan Bank advances Term repurchase agreement Total decrease in interest expense Decrease in net interest and loan fee income (1) Federal Home Loan Bank advances $7,948 (1,705) 6,243 (7,282) (666) (7,948) (1,705) 75 (104) (284) (313) 6 (397) (60) (764) ($941) $1,758 (2,536) (778) (2,828) (107) (2,935) (3,713) (137) (145) 78 (204) (43) (9) - (256) ($3,457) $9,706 (4,241) 5,465 (10,110) (773) (10,883) (5,418) (62) (249) (206) (517) (37) (406) (60) (1,020) ($4,398) (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. [The remainder of this page intentionally left blank] 25 - 25 - Summary of Changes in Interest Income and Expense Increase (decrease) in interest and loan fee income: Investment securities: Taxable Tax-exempt (1) Total investments (1) Loans: Taxable Tax-exempt (1) Total loans (1) Total decrease in interest and loan fee income (1) Increase (decrease) in interest expense: Deposits: Savings and interest-bearing transaction Time less than $100,000 Time $100,000 or more Total interest-bearing deposits Short-term borrowed funds Federal Home Loan Bank advances Term repurchase agreement Debt financing Total decrease in interest expense Decrease in net interest and loan fee income (1) Federal Home Loan Bank advances 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K For the Year Ended December 31, 2014 Compared with For the Year Ended December 31, 2013 Yield/Rate (In thousands) Total Volume $3,957 (770) 3,187 (7,846) (1,128) (8,974) (5,787) 59 (142) (335) (418) 17 (97) (38) (668) (1,204) ($4,583) ($1,392) (4,101) (5,493) (4,914) (114) (5,028) (10,521) (67) (108) 132 (43) (4) 24 - - (23) ($10,498) $2,565 (4,871) (2,306) (12,760) (1,242) (14,002) (16,308) (8) (250) (203) (461) 13 (73) (38) (668) (1,227) ($15,081) (1) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. Provision for Loan Losses The Company manages credit costs by consistently enforcing conservative underwriting and administration procedures and aggressively pursuing collection efforts with debtors experiencing financial difficulties. The provision for loan losses reflects Management's assessment of credit risk in the loan portfolio during each of the periods presented. The Company provided no provision for loan losses in 2015 compared with $2.8 million in 2014 and $8.0 million in 2013. The provision for loan losses is determined based on Management’s evaluation of credit quality for the loan portfolio. The reduction in the provision for loan losses in 2015 and 2014 reflects the decline in net losses and nonperforming loan volumes during the periods relative to earlier periods. The Company recorded purchased County Bank and Sonoma Valley Bank loans at estimated fair value upon the acquisition dates, February 6, 2009 and August 20, 2010, respectively. Such estimated fair values were recognized for individual loans, although small balance homogenous loans were pooled for valuation purposes. The valuation discounts recorded for purchased loans included Management’s assessment of the risk of principal loss under economic and borrower conditions prevailing on the dates of purchase. The purchased County Bank loans secured by single-family residential real estate are “covered” through February 6, 2019 by loss-sharing agreements the Company entered with the FDIC which mitigates losses during the term of the agreements. The FDIC indemnification of purchased County Bank non-single-family residential secured loans expired February 6, 2014. Any deterioration in estimated value related to principal loss subsequent to the acquisition dates requires additional loss recognition through a provision for loan losses. No assurance can be given future provisions for loan losses related to purchased loans will not be necessary. For further information regarding credit risk, the FDIC loss-sharing agreements, net credit losses and the allowance for loan losses, see the “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” sections of this report. 26 - 26 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Noninterest Income Components of Noninterest Income Service charges on deposit accounts Merchant processing services Debit card fees Other service charges Trust fees ATM processing fees Financial services commissions Other Total 2015 2013 For the Years Ended December 31, 2014 (In thousands) $24,191 7,219 5,960 2,717 2,582 2,473 757 5,888 $51,787 $22,241 6,339 6,084 2,689 2,732 2,397 695 4,690 $47,867 $25,693 9,031 5,829 2,846 2,313 2,758 831 7,710 $57,011 In 2015, noninterest income decreased $3.9 million or 7.6% compared with 2014. Service charges on deposits decreased $2.0 million compared with 2014 due to declines in fees charged on overdrawn and insufficient funds accounts (down $913 thousand), lower fees on analyzed accounts (down $661 thousand) and lower activity on checking accounts (down $325 thousand). Merchant processing services declined $880 thousand primarily due to lower transaction volumes. In 2014, noninterest income decreased $5.2 million or 9.2% compared with 2013. Merchant processing services fees decreased $1.8 million primarily due to lower transaction volumes. Service charges on deposits decreased $1.5 million compared with 2013 primarily due to declines in fees charged on overdrawn and insufficient funds accounts (down $1.0 million) and lower activity on checking accounts (down $410 thousand). ATM processing fees decreased $285 thousand mainly because the Bank customers had fewer transactions at non-Westamerica ATMs and other cash dispensing terminals. Other noninterest income decreased $1.8 million primarily due to the recognition in 2013 of a loan principal recovery exceeding the purchase date fair value. Trust fees increased $269 thousand mostly due to marketing efforts to increase customer accounts and higher court-approved fees. Debit card fees increased $131 thousand primarily due to higher transaction volumes. [The remainder of this page intentionally left blank] 27 - 27 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Noninterest Expense Components of Noninterest Expense Salaries and related benefits Occupancy Outsourced data processing services Furniture and equipment Amortization of intangible assets Professional fees Courier service Other real estate owned Other Total 2015 2013 For the Years Ended December 31, 2014 (In thousands) $54,777 14,992 8,411 4,174 4,270 2,346 2,624 (642) 15,847 $106,799 $52,192 14,960 8,441 4,434 3,856 2,490 2,329 504 16,094 $105,300 $56,633 15,137 8,548 3,869 4,704 3,057 2,868 1,035 16,763 $112,614 In 2015, noninterest expense decreased $1.5 million or 1.4% compared with 2014 primarily due to decreases in personnel costs and other operational expenses. Salaries and related benefits decreased $2.6 million primarily due to employee attrition. Amortization of identifiable intangibles decreased as assets are amortized on a declining balance method. Courier expense decreased primarily due to consolidating service runs. OREO expense in 2015 included net writedowns while in 2014 the Company realized net gains on disposition of foreclosed assets. Furniture and equipment expense increased primarily due to higher depreciation costs resulting from computer and software upgrades and higher software license fees. In 2014, noninterest expense decreased $5.8 million or 5.2% compared with 2013. Salaries and related benefits decreased $1.9 million primarily due to employee attrition. Expenses for other real estate owned, net of disposition gains, declined $1.7 million due to higher net gains on sale of repossessed loan collateral. Professional fees declined $711 thousand due to lower legal fees associated with nonperforming assets. Amortization of identifiable intangibles decreased $434 thousand as assets are amortized on a declining balance method. Other noninterest expense decreased $916 thousand primarily due to lower loan administration costs and lower limited partnership operating losses. Furniture and equipment expenses increased $305 thousand primarily due to increased depreciation costs associated with computer system and software upgrades. Provision for Income Tax The income tax provision (FTE) was $32.1 million in 2015 compared with $34.2 million in 2014 and $37.0 million in 2013. The 2015 effective tax rate (FTE) was 35.3% compared with 36.1% in 2014 and 35.5% in 2013. The effective tax rates without FTE adjustments were 23.4% for 2015 and 23.2% for 2014 and 22.0% for 2013. The 2015 tax provision included adjustments based on filing the 2014 federal and state tax returns and tax benefits from completing audits with the California Franchise Tax Board and recognizing California enterprise zone hiring credits for filed amended returns (2010). The 2014 tax provision reflected an adjustment based on filing 2013 federal tax return and tax benefits from completing audits with the California Franchise Tax Board. Effective January 1, 2014, the new legislation signed by California’s Governor Jerry Brown eliminated the net interest deduction for enterprise zone loans and the hiring credits were significantly altered. The Company did not incur a significant change in its tax provision due to the new laws; the state tax benefits recognized from the current enterprise zone tax incentive program for the years ended December 31, 2014 and 2013 were $47 thousand and $121 thousand, net of federal income tax consequences, respectively. Investment Portfolio The Company maintains a securities portfolio consisting of securities issued by U.S. Treasury, U.S. Government sponsored entities, agency and non-agency mortgage backed securities, state and political subdivisions, corporations, and asset-backed and other securities. Investment securities are held in safekeeping by an independent custodian. Management has increased the investment portfolio in response to deposit growth and loan volume declines. The carrying value of the Company’s investment securities portfolio was $2.9 billion as of December 31, 2015, an increase of $247 million compared to December 31, 2014. 28 - 28 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Management continually evaluates the Company’s investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, liquidity, and the level of interest rate risk to which the Company is exposed. These evaluations may cause Management to change the level of funds the Company deploys into investment securities, change the composition of the Company’s investment securities portfolio, and change the proportion of investments allocated into the available for sale and held to maturity investment categories. The Company’s positioning of the balance sheet for rising interest rates has resulted in the purchase of floating rate corporate bonds, federal agency bonds, mortgage-backed securities, and short-term state and municipal bonds. As of December 31, 2015, substantially all of the Company’s investment securities continue to be investment grade rated by one or more major rating agencies. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset-backed securities. The Company’s procedures for evaluating investments in securities are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies. The following table shows the fair value carrying amount of the Company’s investment securities available for sale as of the dates indicated: Available for Sale Portfolio U.S. Treasury securities Securities of U.S. Government sponsored entities Agency residential mortgage-backed securities (MBS) Non-agency commercial MBS Agency residential collateralized mortgage obligations (CMO) Non-agency residential CMO Obligations of states and political subdivisions Asset-backed securities FHLMC and FNMA stock Corporate securities Other securities Total 2015 $ - 301,882 18,874 2,379 183,670 370 157,509 2,003 4,329 896,369 2,831 $1,570,216 At December 31, 2014 (In thousands) $3,505 635,188 26,407 2,919 221,851 606 181,799 8,313 5,168 512,239 2,786 $1,600,781 2013 $3,506 130,492 34,176 3,425 251,440 1,456 191,386 14,555 13,372 432,431 3,142 $1,079,381 [The remainder of this page intentionally left blank] 29 - 29 - The following table sets forth the relative maturities and contractual yields of the Company’s available for sale securities (stated at fair value) at December 31, 2015. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years. Available for Sale Portfolio Maturity Distribution Within one year After one but within five years After five but within ten years At December 31, 2015 After ten years ($ in thousands) Mortgage- backed Other Total U.S. Government sponsored entities Interest rate Obligations of states and political subdivisions Interest rate Asset-backed securities Interest rate Corporate securities Interest rate Subtotal Interest rate MBS Interest rate Other securities without set maturities Interest rate Total Interest rate $ - - % 4,145 5.90% - - % 132,831 1.65% 136,976 1.78% - - % - - % $136,976 1.78% $265,922 1.74% 21,586 5.85% - - % 756,945 1.71% 1,044,453 1.80% - - % - - % $1,044,453 1.80% $35,960 2.20% 129,029 6.16% 2,003 0.61% 6,593 1.67% 173,585 5.10% - - % - - % $173,585 5.10% $ - - % 2,749 6.90% - - % - - % 2,749 6.90% - - % - - % $2,749 6.90% $ - - % - - % - - % - - % - - % 205,293 1.95% - - % $205,293 1.95% $ - - % - - % - - % - - % - - % - - % 7,160 1.99% $7,160 1.99% $301,882 1.79% 157,509 6.00% 2,003 0.61% 896,369 1.68% 1,357,763 2.20% 205,293 1.95% 7,160 1.99% $1,570,216 2.14% The following table shows the amortized cost carrying amount and fair value of the Company’s investment securities held to maturity as of the dates indicated: 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Held to Maturity Portfolio Securities of U.S. Government sponsored entities Agency residential MBS Agency commercial MBS Agency residential CMO Non-agency residential CMO Obligations of states and political subdivisions Total Fair value 2015 $764 400,384 16,258 195,119 9,667 693,883 $1,316,075 $1,325,699 At December 31, 2014 (In thousands) $1,066 59,078 - 247,047 11,278 720,189 $1,038,658 $1,048,562 2013 $1,601 65,076 - 296,312 12,603 756,707 $1,132,299 $1,112,676 [The remainder of this page intentionally left blank] 30 - 30 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 The following table sets forth the relative maturities and contractual yields of the Company’s held to maturity securities at December 31, 2015. Yields on state and political subdivision securities have been calculated on a fully taxable equivalent basis using the current federal statutory rate. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years. Held to Maturity Portfolio Maturity Distribution Securities of U.S. Government sponsored entities Interest rate Obligations of states and political subdivisions Interest rate Subtotal Interest rate MBS Interest rate Total Interest rate Within one year After one but within five years After five but within ten years After ten years Mortgage- backed At December 31, 2015 $ - - % 20,709 4.47% 20,709 4.47% - - % $20,709 4.47% $ - - % 259,556 3.09% 259,556 3.09% - - % $259,556 3.09% ($ in thousands) $764 1.73% 288,804 4.12% 289,568 4.11% - - % $289,568 4.11% $ - - % 124,814 4.58% 124,814 4.58% - - % $124,814 4.58% $ - - % - - % - - % 621,428 2.02% $621,428 2.02% Total $764 1.73% 693,883 3.71% 694,647 3.71% 621,428 2.02% $1,316,075 2.91% The following tables summarize the total general obligation and revenue bonds issued by states and political subdivisions held in the Company’s investment securities portfolios as of the dates indicated, identifying the state in which the issuing government municipality or agency operates. At December 31, 2015, the Company’s investment securities portfolios included securities issued by 725 state and local government municipalities and agencies located within 44 states with a fair value of $864.2 million. None of the Company’s investment securities were issued by Puerto Rican government entities. The largest exposure to any one municipality or agency was $10.3 million (fair value) represented by nine general obligation bonds. Obligations of states and political subdivisions: General obligation bonds: California Texas Pennsylvania New Jersey Minnesota Other (34 states) Total general obligation bonds Revenue bonds: California Pennsylvania Kentucky Iowa Colorado Other (31 states) Total revenue bonds Total obligations of states and political subdivisions At December 31, 2015 Amortized Cost Fair Value (In thousands) $117,968 62,030 51,547 38,651 32,588 243,488 $546,272 $49,095 29,446 19,825 18,156 16,161 163,633 $296,316 $842,588 $121,096 63,394 52,115 39,322 33,133 249,854 $558,914 $51,206 29,841 20,400 18,728 16,560 168,592 $305,327 $864,241 31 - 31 - At December 31, 2014, the Company’s investment securities portfolios included securities issued by 763 state and local government municipalities and agencies located within 45 states with a fair value of $911.0 million. The largest exposure to any one municipality or agency was $7.4 million (fair value) represented by three revenue bonds. Obligations of states and political subdivisions: General obligation bonds: California Texas Pennsylvania Minnesota New Jersey Arizona Other (34 states) Total general obligation bonds Revenue bonds: California Pennsylvania Kentucky Iowa Colorado Indiana Other (31 states) Total revenue bonds Total obligations of states and political subdivisions At December 31, 2014 Amortized Cost Fair Value (In thousands) $107,997 65,292 48,675 33,524 30,223 28,492 249,513 $563,716 $60,473 29,462 19,975 18,225 18,532 16,865 164,848 $328,380 $892,096 $110,563 66,162 49,546 33,840 30,598 29,378 254,043 $574,130 $62,788 30,101 20,370 18,898 18,862 16,859 168,972 $336,850 $910,980 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K At December 31, 2015, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 22 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table. Revenue bonds by revenue source: Water Sewer Sales tax Lease (renewal) College & University Lease (abatement) Other Total revenue bonds by revenue source At December 31, 2015 Amortized Cost Fair Value (In thousands) $62,661 45,912 31,680 21,673 17,967 17,017 99,406 $296,316 $65,412 47,242 32,945 22,227 18,215 17,769 101,517 $305,327 32 - 32 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 At December 31, 2014, the revenue bonds in the Company’s investment securities portfolios were issued by state and local government municipalities and agencies to fund public services such as water utility, sewer utility, recreational and school facilities, and general public and economic improvements. The revenue bonds were payable from 25 revenue sources. The revenue sources that represent 5% or more individually of the total revenue bonds are summarized in the following table. Revenue bonds by revenue source Water Sewer Sales tax Lease (renewal) Lease (abatement) College & University Other Total revenue bonds by revenue source At December 31, 2014 Amortized Cost Fair Value (In thousands) $66,305 48,461 35,045 21,789 19,002 17,655 120,123 $328,380 $68,885 49,773 36,289 22,091 19,710 17,849 122,253 $336,850 See Note 2 to the consolidated financial statements for additional information related to the investment securities. Loan Portfolio The Company originates loans with the intent to hold such assets until principal is repaid. Management follows written loan underwriting policies and procedures which are approved by the Bank’s Board of Directors. Loans are underwritten following approved underwriting standards and lending authorities within a formalized organizational structure. The Board of Directors also approves independent real estate appraisers to be used in obtaining estimated values for real property serving as loan collateral. Prevailing economic trends and conditions are also taken into consideration in loan underwriting practices. All loan applications must be for clearly defined legitimate purposes with a determinable primary source of repayment, and as appropriate, secondary sources of repayment. All loans are supported by appropriate documentation such as current financial statements, tax returns, credit reports, collateral information, guarantor asset verification, title reports, appraisals, and other relevant documentation. Commercial loans represent term loans used to acquire durable business assets or revolving lines of credit used to finance working capital. Underwriting practices evaluate each borrower’s cash flow as the principal source of loan repayment. Commercial loans are generally secured by the borrower’s business assets as a secondary source of repayment. Commercial loans are evaluated for credit-worthiness based on prior loan performance, borrower financial information including cash flow, borrower net worth and aggregate debt. Commercial real estate loans represent term loans used to acquire real estate to be operated by the borrower in a commercial capacity. Underwriting practices evaluate each borrower’s global cash flow as the principal source of loan repayment, independent appraisal of value of the property, and other relevant factors. Commercial real estate loans are generally secured by a first lien on the property as a secondary source of repayment. Real estate construction loans represent the financing of real estate development. Loan principal disbursements are controlled through the use of project budgets, and disbursements are approved based on construction progress, which is validated by project site inspections. The real estate serves as collateral, secured by a first lien position on the property. Residential real estate loans generally represent first lien mortgages used by the borrower to purchase or refinance a principal residence. For interest-rate risk purposes, the Company offers only fully-amortizing, adjustable-rate mortgages. In underwriting first lien mortgages, the Company evaluates each borrower’s ability to repay the loan, an independent appraisal of the value of the property, and other relevant factors. The Company does not offer riskier mortgage products, such as non-amortizing “interest- only” mortgages and “negative amortization” mortgages. For loans secured by real estate, the Bank requires title insurance to insure the status of its lien and each borrower is obligated to insure the real estate collateral, naming the Company as loss payee, in an amount sufficient to repay the principal amount outstanding in the event of a property casualty loss. 33 - 33 - Consumer installment and other loans are predominantly comprised of indirect automobile loans with underwriting based on credit history and scores, personal income, debt service capacity, and collateral values. For management purposes, the Company segregates its loan portfolio into three segments. Loans originated by the Company following its loan underwriting policies and procedures are separated from loans purchased from the FDIC. Loan volumes have declined due to problem loan workout activities, particularly with purchased loans, and reduced volumes of loan originations. In Management’s opinion, current levels of competitive loan pricing do not provide adequate forward earnings potential. As a result, the Company has not currently taken an aggressive posture relative to loan portfolio growth. 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 Commercial Commercial real estate Construction Residential real estate Consumer installment and other Total loans 2015 2014 At December 31, 2013 (In thousands) $364,159 799,019 13,896 185,057 465,613 $1,533,396 $1,700,290 $1,827,744 $391,815 718,604 13,872 149,827 426,172 $382,748 637,456 3,951 120,091 389,150 2012 2011 $401,331 916,594 16,515 234,035 542,882 $2,111,357 $513,362 1,114,496 34,437 286,727 574,784 $2,523,806 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K The following table shows the maturity distribution and interest rate sensitivity of commercial, commercial real estate, and construction loans at December 31, 2015. Balances exclude residential real estate loans and consumer loans totaling $509.2 million. These types of loans are typically paid in monthly installments over a number of years. Loan Maturity Distribution Commercial and Commercial real estate Construction Total Loans with fixed interest rates Loans with floating or adjustable interest rates Total Commitments and Letters of Credit Within One Year At December 31, 2015 After Five Years One to Five Years (In thousands) Total $211,914 3,951 $215,865 $88,441 127,424 $215,865 $200,373 - $200,373 $88,273 112,100 $200,373 $607,917 - $607,917 $104,131 503,786 $607,917 $1,020,204 3,951 $1,024,155 $280,845 743,310 $1,024,155 The Company issues formal commitments on lines of credit to well-established and financially responsible commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of letters of credit to facilitate the customers’ particular business transactions. Commitment fees are generally charged for commitments and letters of credit. Commitments on lines of credit and letters of credit typically mature within one year. For further information, see the accompanying notes to the consolidated financial statements. Loan Portfolio Credit Risk The Company extends loans to commercial and consumer customers which expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. 34 - 34 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans. The preparation of the financial statements requires Management to estimate the amount of losses inherent in the loan portfolio and establish an allowance for credit losses. The allowance for credit losses is established by assessing a provision for loan losses against the Company’s earnings. In estimating credit losses, Management must exercise judgment in evaluating information deemed relevant, such as financial information regarding individual borrowers, overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses. The Company closely monitors the markets in which it conducts its lending operations and follows a strategy to control exposure to loans with high credit risk. The Bank’s organization structure separates the functions of business development and loan underwriting; Management believes this segregation of duties avoids inherent conflicts of combining business development and loan approval functions. In measuring and managing credit risk, the Company adheres to the following practices. • • The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Those loans judged to carry higher risk attributes are referred to as “classified loans.” Classified loans receive elevated management attention to maximize collection. The Bank maintains two loan administration offices whose sole responsibility is to manage and collect classified loans. Classified loans with higher levels of credit risk are further designated as “nonaccrual loans.” Management places classified loans on nonaccrual status when full collection of contractual interest and principal payments is in doubt. Uncollected interest previously accrued on loans placed on nonaccrual status is reversed as a charge against interest income. The Company does not accrue interest income on loans following placement on nonaccrual status. Interest payments received on nonaccrual loans are applied to reduce the carrying amount of the loan unless the carrying amount is well secured by loan collateral. “Nonperforming assets” include nonaccrual loans, loans 90 or more days past due and still accruing, and repossessed loan collateral (commonly referred to as “Other Real Estate Owned”). The former County Bank loans and repossessed loan collateral were purchased from the FDIC with indemnifying loss-sharing agreements. The loss-sharing agreement on single-family residential real estate assets expires February 6, 2019. The loss-sharing agreement on non-single-family residential real estate assets expired February 6, 2014 as to losses and expires February 6, 2017 as to loss recoveries. [The remainder of this page intentionally left blank] 35 - 35 - Nonperforming Assets Originated: Nonperforming nonaccrual loans Performing nonaccrual loans Total nonaccrual loans Accruing loans 90 or more days past due Total nonperforming loans Other real estate owned Total nonperforming assets Purchased covered: Nonperforming nonaccrual loans Performing nonaccrual loans Total nonaccrual loans Accruing loans 90 or more days past due Total nonperforming loans Other real estate owned Total nonperforming assets Purchased non-covered: Nonperforming nonaccrual loans Performing nonaccrual loans Total nonaccrual loans Accruing loans 90 or more days past due Total nonperforming loans Other real estate owned Total nonperforming assets 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K 2015 2014 At December 31, 2013 (In thousands) 2012 2011 $6,302 350 6,652 295 6,947 5,829 $12,776 $5,296 13 5,309 502 5,811 4,809 $10,620 $ - - - - - - $ - $297 - 297 - 297 - $297 $8,346 - 8,346 - 8,346 3,435 $11,781 $11,901 97 11,998 - 11,998 1,565 $13,563 $5,301 75 5,376 410 5,786 5,527 $11,313 $11,672 636 12,308 - 12,308 7,793 $20,101 $2,920 698 3,618 - 3,618 - $3,618 $10,016 1,759 11,775 455 12,230 9,295 $21,525 $11,698 1,323 13,021 155 13,176 13,691 $26,867 $7,038 461 7,499 4 7,503 3,366 $10,869 $10,291 5,256 15,547 2,047 17,594 14,868 $32,462 $9,388 4,924 14,312 241 14,553 19,135 $33,688 $16,170 7,037 23,207 34 23,241 11,632 $34,873 Total nonperforming assets $24,557 $24,480 $35,032 $59,261 $101,023 At December 31, 2015, two loans secured by commercial real estate totaling $10,990 thousand were on nonaccrual status. The remaining sixteen nonaccrual loans held at December 31, 2015 had an average carrying value of $251 thousand and the largest carrying value was $1,323 thousand. Management believes the overall credit quality of the loan portfolio is reasonably stable; however, classified and nonperforming assets could fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, and collateral values or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual and delinquent loans will not occur in the future. [The remainder of this page intentionally left blank] - 36 - 36 K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Allowance for Credit Losses The Company’s allowance for loan losses represents Management’s estimate of loan losses inherent in the loan portfolio. In evaluating credit risk for loans, Management measures loss potential of the carrying value of loans. As described above, payments received on nonaccrual loans may be applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Further, the carrying value of purchased loans includes fair value discounts assigned at the time of purchase under the provisions of FASB ASC 805, Business Combinations, and FASB ASC 310-30, Loans or Debt Securities with Deteriorated Credit Quality. The allowance for loan losses represents Management’s estimate of loan losses in excess of these reductions to the carrying value of loans within the loan portfolio. The following table summarizes the allowance for credit losses, chargeoffs and recoveries of the Company for the periods indicated: Analysis of the Allowance for Loan Losses Balance, beginning of period Provision for loan losses Loans charged off: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Purchased covered loans Purchased non-covered loans Total chargeoffs Recoveries of loans previously charged off: Commercial Commercial real estate Construction Consumer installment and other Purchased covered loans Purchased non-covered loans Total recoveries Net loan losses Balance, end of period Net loan losses: Originated loans Purchased covered loans Purchased non-covered loans Net loan losses as a percentage of average loans 2015 2014 For the Years Ended December 31, 2013 ($ in thousands) 2012 2011 $31,485 - $31,693 2,800 (756) (449) - - (3,493) - (431) (5,129) 1,153 72 45 1,906 - 239 3,415 (1,714) $29,771 (1,890) (762) - (30) (4,214) - (522) (7,418) 2,250 213 3 1,869 - 75 4,410 (3,008) $31,485 $30,234 8,000 (2,857) (997) - (109) (4,097) (2,286) (385) (10,731) 1,575 191 - 2,152 272 - 4,190 (6,541) $31,693 $32,597 11,200 (6,851) (1,202) (2,217) (1,156) (5,685) (953) (110) (18,174) 1,317 203 224 2,723 144 - 4,611 (13,563) $30,234 $35,636 11,200 (8,280) (1,332) (2,167) (739) (6,754) (987) - (20,259) 3,129 - 1 2,890 - - 6,020 (14,239) $32,597 ($1,522) ($2,561) - (192) 0.11% - (447) 0.17% ($4,142) (2,014) (385) 0.33% ($12,644) (809) (110) 0.59% ($13,252) (987) - 0.52% The Company's allowance for loan losses is maintained at a level considered appropriate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall loan loss experience, the amount of past due, nonperforming and classified loans, the amount of non-indemnified purchased loans, recommendations of regulatory authorities, prevailing economic conditions and other factors. A portion of the allowance is individually allocated to impaired loans whose full collectability of principal is uncertain. Such allocations are determined by Management based on loan-by-loan analyses. The Company evaluates all loans with outstanding principal balances in excess of $500 thousand which are classified or on nonaccrual status and all “troubled debt restructured” loans for impairment. The remainder of the loan portfolio is collectively evaluated for impairment based in part on quantitative analyses of historical loan loss experience of loan portfolio segments to determine standard loss rates for each segment. The loss rate for each loan portfolio segment reflects both the historical loss experience during a look-back period and the loss emergence period. During 2014, the Company refined its processes used to measure look-back periods and loss emergence periods. The loss rates are applied to segmented loan balances to allocate the allowance to the segments of the loan portfolio. Purchased loans were recorded on the date of purchase at estimated fair value; fair value discounts include a component for estimated loan losses. The Company evaluates all nonaccrual purchased loans with outstanding principal balances in excess of $500 thousand for impairment; the impaired loan value is compared to the recorded investment in the loan, which has been reduced by the loan default discount estimated on the date of purchase. If Management’s impairment analysis determines the impaired loan value is less than the recorded investment in the purchased loan, an allocation of the allowance for loan losses is established for the deficiency. For all other purchased loan portfolio segments, Management applies the standard loss rates to the 37 - 37 - purchased loan portfolio segments to determine initial allocations of the allowance. Further, liquidating purchased consumer installment loans are evaluated separately by applying historical loss rates to forecasted liquidating principal balances to initially measure losses inherent in this portfolio segment. The initial allocations of the allowance to purchased loan portfolio segments are compared to loan default discounts ascribed to each segment. Management establishes allocations of the allowance for loan losses for any estimated deficiency. The remainder of the allowance is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. The unallocated allowance addresses additional qualitative factors consistent with Management's analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company's general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in loan chargeoff history (external factors). The primary external factor evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management as of December 31, 2015 are economic and business conditions $1.0 million. Also included in the unallocated allowance is the risk of losses attributable to general attributes of the Company's loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company and the judgmental amount of unallocated reserve assigned by Management are: loan review system $1.2 million, adequacy of lending Management and staff $1.3 million, concentrations of credit $2.5 million, and other factors. The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated: 2015 2014 At December 31, 2013 2012 2011 Allocation of the Allowance Balance Loans as Percent of Total Loans Allocation of the Allowance Balance Loans as Percent of Total Loans Allocation of the Allowance Balance Loans as Percent of Total Loans Allocation of the Allowance Balance Loans as Percent of Total Loans Allocation of the Allowance Balance Loans as Percent of Total Loans Originated loans: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Purchased covered loans Purchased non-covered loans Unallocated portion Total $9,559 4,224 177 1,801 7,080 - 967 5,963 $29,771 24% 34% - % 8% 22% 1% 11% - % 100% $5,460 4,245 644 2,241 7,717 - 2,120 9,058 $31,485 22% 33% 1% 9% 22% 1% 12% - % 100% ($ In thousands) $4,005 12,070 602 405 3,198 1,561 - 9,852 $31,693 18% 33% - % 10% 22% 14% 3% - % 100% $6,445 10,063 484 380 3,194 1,005 - 8,663 $30,234 16% 30% - % 10% 22% 18% 4% - % 100% $6,012 10,611 2,342 781 3,072 - - 9,779 $32,597 16% 28% - % 11% 19% 21% 5% - % 100% 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Commercial Commercial Real Estate Construction Allowance for Loan Losses For the Year Ended December 31, 2015 Consumer Installment and Other (In thousands) Purchased Non-covered Loans Residential Real Estate Purchased Covered Loans Unallocated Total Allowance for loan losses: Balance at beginning of period Additions: Provision Deductions: Chargeoffs Recoveries Net loan recoveries (losses) Total allowance for loan losses $5,460 $4,245 $644 $2,241 $7,717 $2,120 3,702 356 (512) (440) 950 (756) 1,153 397 $9,559 (449) 72 (377) $4,224 - 45 45 $177 - - - $1,801 (3,493) 1,906 (1,587) $7,080 (961) (431) 239 (192) $967 $ - - - - - $ - $9,058 $31,485 (3,095) - - - - $5,963 (5,129) 3,415 (1,714) $29,771 [The remainder of this page intentionally left blank] 38 - 38 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Commercial Commercial Real Estate Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment At December 31, 2015 Consumer Installment and Other (In thousands) Purchased Non- covered Loans Residential Real Estate Construction Purchased Covered Loans Unallocated Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Purchased loans with evidence of credit deterioration Total Carrying value of loans: Individually evaluated for impairment Collectively evaluated for impairment Purchased loans with evidence of credit deterioration Total $4,942 4,617 - $9,559 $12,587 355,530 - $368,117 $585 3,639 - $4,224 $5,541 511,529 - $517,070 $- 177 - $177 $- 2,978 - $2,978 $- 1,801 - $1,801 $- 117,631 - $117,631 $- 7,080 - $7,080 $- 346,043 - $346,043 Total $5,527 24,244 - $29,771 $- 967 - $967 $- - - $- $- 5,963 - $5,963 $11,777 152,038 3,681 $167,496 $- 13,855 206 $14,061 $- - - $- $29,905 1,499,604 3,887 $1,533,396 The Company allocated more allowance for loan losses to the commercial loan category at December 31, 2015, due to more reserve being allocated to individually evaluated loans. At December r31, 2015, the decline in the unallocated was generally due to the overall improved credit quality metrics. Management considers the $29.8 million allowance for loan losses to be adequate as a reserve against loan losses inherent in the loan portfolio as of December 31, 2015. See Note 3 to the consolidated financial statements for additional information related to the loan portfolio, loan portfolio credit risk, and allowance for loan losses. Asset/Liability and Market Risk Management Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The fundamental objective of the Company's management of assets and liabilities is to maximize its economic value while maintaining adequate liquidity and a conservative level of interest rate risk. Interest Rate Risk Interest rate risk is a significant market risk affecting the Company. Many factors affect the Company’s exposure to interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Assets and liabilities may mature or re-price at different times. Assets and liabilities may re-price at the same time but by different amounts. Short-term and long-term market interest rates may change by different amounts. The timing and amount of cash flows of various assets or liabilities may shorten or lengthen as interest rates change. In addition, the changing levels of interest rates may have an impact on loan demand, demand for various deposit products, credit losses, and other elements of earnings such as account analysis fees on commercial deposit accounts and correspondent bank service charges. The Company’s earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Board (the “FRB”). The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities. The nature and impact of future changes in monetary policies are generally not predictable. The Federal Open Market Committee (“FOMC”) increased the target range for the federal funds rate to 1/4 to 1/2 percent on December 16, 2015. Interest rates on United States Treasury obligations declined from January 1, 2016 through January 27, 2016. The FOMC’s January 27, 2016 press release stated “Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year…Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months…The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook…Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.” In this context, Management expects a high level of uncertainty in regard to interest rate levels in the immediate term, and Management’s most likely earnings forecast for the twelve months ending December 31, 2016 assumes market interest rates will either remain at relatively low levels or short-term rates will rise gradually. - 39 - 39 In adjusting the Company's asset/liability position, Management attempts to manage interest rate risk while enhancing the net interest margin and net interest income. At times, depending on expected increases or decreases in general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, Management may adjust the Company's interest rate risk position in order to manage its net interest margin and net interest income. The Company's results of operations and net portfolio values remain subject to changes in interest rates and to fluctuations in the difference between long and short-term interest rates. The Company’s asset and liability position was slightly “asset sensitive” at December 31, 2015, depending on the interest rate assumptions applied to the simulation model employed by Management to measure interest rate risk. An “asset sensitive” position results in a slightly larger change in interest income than in interest expense resulting from application of assumed interest rate changes. Simulation estimates depend on, and will change with, the size and mix of the actual and projected balance sheet at the time of each simulation. Management’s interest rate risk management is currently biased toward stable or gradually increasing interest rates in the near-term and intermediate term. Management continues to monitor the interest rate environment as well as economic conditions and other factors it deems relevant in managing the Company's exposure to interest rate 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. Market Risk - Equity Markets Equity price risk can affect the Company. As an example, any preferred or common stock holdings, as permitted by banking regulations, can fluctuate in value. Management regularly assesses the extent and duration of any declines in market value, the causes of such declines, the likelihood of a recovery in market value, and its intent to hold securities until a recovery in value occurs. Declines in value of preferred or common stock holdings that are deemed “other than temporary” could result in loss recognition in the Company's income statement. Fluctuations in the Company's common stock price can impact the Company's financial results in several ways. First, the Company has regularly repurchased and retired its common stock; the market price paid to retire the Company's common stock can affect the level of the Company's shareholders' equity, cash flows and shares outstanding. Second, the Company's common stock price impacts the number of dilutive equivalent shares used to compute diluted earnings per share. Third, fluctuations in the Company's common stock price can motivate holders of options to purchase Company common stock through the exercise of such options thereby increasing the number of shares outstanding. Finally, the amount of compensation expense associated with share based compensation fluctuates with changes in and the volatility of the Company's common stock price. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Market Risk - Other Market values of loan collateral can directly impact the level of loan chargeoffs and the provision for loan losses. The financial condition and liquidity of debtors issuing bonds and debtors whose mortgages or other obligations are securitized can directly impact the credit quality of the Company’s investment portfolio requiring the Company to recognize other than temporary impairment charges. Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company's business activities. Liquidity and Funding The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets. In recent years, the Company's deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 97 percent of funding for average total assets in 2015 and 2014. The stability of the Company’s funding from customer deposits is in part reliant on the confidence clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining an appropriate level of liquidity reserves. Liquidity is further provided by assets such as balances held at the Federal Reserve Bank, investment securities, and amortizing loans. The Company's investment securities portfolio provides a substantial secondary liquidity reserve. The Company held $2.9 billion in total investment securities at December 31, 2015. Under certain deposit, borrowing and other arrangements, the 40 - 40 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Company must hold and pledge investment securities as collateral. At December 31, 2015, such collateral requirements totaled approximately $739 million. Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Company performs liquidity stress tests on a periodic basis to evaluate the sustainability of its liquidity. Under the stress testing, the Company assumes outflows of funds increase beyond expected levels. Measurement of such heightened outflows considers the composition of the Company’s deposit base, including any concentration of deposits, non-deposit funding such as short-term borrowings, and unfunded lending commitments. The Company evaluates its stock of highly liquid assets to meet the assumed higher levels of outflows. Highly liquid assets include cash and amounts due from other banks from daily transaction settlements, reduced by branch cash needs and Federal Reserve Bank reserve requirements, and investment securities based on regulatory risk- weighting guidelines. Based on the results of the most recent liquidity stress test, Management is satisfied with the liquidity condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced liquidity. Management will monitor the Company’s cash levels throughout 2016. Loan demand from credit-worthy borrowers will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to changes in interest rates. The growth of these deposit balances is subject to heightened competition, the success of the Company's sales efforts, delivery of superior customer service, new regulations and market conditions. The Company does not aggressively solicit higher-costing time deposits; as a result, Management anticipates such deposits will decline. Changes in interest rates, most notably rising interest rates, could impact deposit volumes. Depending on economic conditions, interest rate levels, and a variety of other conditions, deposit growth may be used to fund loans, reduce borrowings or purchase investment securities. However, due to possible volatility in economic conditions, competition and political uncertainty, loan demand and levels of customer deposits are not certain. Shareholder dividends are expected to continue subject to the Board's discretion and continuing evaluation of capital levels, earnings, asset quality and other factors. Westamerica Bancorporation ("Parent Company") is a separate entity apart from Westamerica Bank (“Bank”) and must provide for its own liquidity. In addition to its operating expenses, the Parent Company is responsible for the payment of dividends declared for its shareholders, and interest and principal on any outstanding debt. Substantially all of the Parent Company's revenues are obtained from subsidiary dividends and service fees. The Bank’s dividends paid to the Parent Company and proceeds from the exercise of stock options provided adequate cash flow for the Parent Company in 2015 and 2014 to pay shareholder dividends of $39 million and $40 million, respectively, and retire common stock in the amount of $15 million and $53 million, respectively. Payment of dividends to the Parent Company by the Bank is limited under California and Federal laws. The Company believes these regulatory dividend restrictions will not have an impact on the Parent Company's ability to meet its ongoing cash obligations. Contractual Obligations The following table sets forth the known contractual obligations, except short-term borrowing arrangements and post-retirement benefit plans, of the Company: Within One Year Over One to Three Years At December 31, 2015 Over Three to Five Years (In thousands) After Five Years Operating Lease Obligations Purchase Obligations Total $6,708 8,270 $14,978 $10,887 - $10,887 $5,549 - $5,549 $1,516 - $1,516 Total $24,660 8,270 $32,930 Operating lease obligations have not been reduced by minimum sublease rentals of $2 million due in the future under noncancelable subleases. Operating lease obligations may be retired prior to the contractual maturity as discussed in the notes to the consolidated financial statements. The purchase obligation consists of the Company’s minimum liabilities under contracts with third-party automation services providers. 41 - 41 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Capital Resources The Company has historically generated high levels of earnings, which provides a means of accumulating capital. The Company's net income as a percentage of average shareholders' equity (“return on equity” or “ROE”) has been 11.3% in 2015, 11.6% in 2014 and 12.5% in 2013. The Company also raises capital as employees exercise stock options. Capital raised through the exercise of stock options was $5 million in 2015 compared with $12 million in 2014 and $21 million in 2013. The Company paid common dividends totaling $39 million in 2015, $40 million in 2014 and $40 million in 2013, which represent dividends per common share of $1.53, $1.52 and $1.49, respectively. The Company's earnings have historically exceeded dividends paid to shareholders. The amount of earnings in excess of dividends provides the Company resources to finance growth and maintain appropriate levels of shareholders' equity. In the absence of profitable growth opportunities, the Company has repurchased and retired its common stock as another means to return earnings to shareholders. The Company repurchased and retired 344 thousand shares valued at $15 million in 2015, 1.0 million shares valued at $53 million in 2014 and 1.2 million shares valued at $57 million in 2013. The Company's primary capital resource is shareholders' equity, which was $532 million at December 31, 2015 compared with $527 million at December 31, 2014. The Company's ratio of equity to total assets was 10.30% at December 31, 2015 and 10.46% at December 31, 2014. The Company performs capital stress tests on a periodic basis to evaluate the sustainability of its capital. Under the stress testing, the Company assumes various scenarios such as deteriorating economic and operating conditions, unanticipated asset devaluations, and significant operational lapses. The Company measures the impact of these scenarios on its earnings and capital. Based on the results of the most recent stress tests, Management is satisfied with the capital condition of the Bank and the Company. However, no assurance can be given the Bank or Company will not experience a period of reduced earnings or a reduction in capital from unanticipated events and circumstances. Capital to Risk-Adjusted Assets On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which most affected the regulatory capital requirements of the Company and the Bank: • • • • • Introduced a new “Common Equity Tier 1” capital measurement, Established higher minimum levels of capital, Introduced a “capital conservation buffer,” Increased the risk-weighting of certain assets, and Established limits on the amount of deferred tax assets with any excess treated as a deduction from Tier 1 capital. Under the final rule, a banking organization that is not subject to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive Income, including net-of-tax unrealized gains and losses on available for sale investment securities, in regulatory capital. Neither the Company nor the Bank are subject to the “advanced approaches rule” and made the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital. Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations will begin on January 1, 2016 and end January 1, 2019. Any bank subject to the rule which is unable to maintain its “capital conservation buffer” will be restricted in the payment of discretionary executive compensation and shareholder distributions, such as dividends and share repurchases. The final rule did not supersede provisions of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve problems of insured depository institutions. The final rule revised the PCA thresholds to incorporate the higher minimum levels of capital, including the newly proposed “common equity tier 1” ratio. 42 - 42 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 The capital ratios for the Company and the Bank under the new capital framework are presented in the table below. Transitional Minimum Regulatory Requirement Effective January 1, 2015 Minimum Regulatory Requirement (1) Effective January 1, 2016 Minimum Regulatory Requirement (2) Effective January 1, 2019 Well-capitalized by Regulatory Definition Under FDICIA Effective January 1, 2015 At December 31, 2015 Company Bank Common Equity Tier I Capital Tier I Capital Total Capital Leverage Ratio 12.82% 12.82% 13.39% 7.99% 11.00% 11.00% 11.68% 6.82% 4.50% 6.00% 8.00% 4.00% 5.125% 6.625% 8.625% 4.000% 7.00% 8.50% 10.50% 4.00% 6.50% 8.00% 10.00% 5.00% (1) Includes 0.625% capital conservation buffer. (2) Includes 2.5% capital conservation buffer. The Company and the Bank intend to maintain regulatory capital in excess of the highest regulatory standard. The Company and the Bank routinely project capital levels by analyzing forecasted earnings, credit quality, securities valuations, shareholder dividends, asset volumes, share repurchase activity, stock option exercise proceeds, and other factors. Based on current capital projections, the Company and the Bank expect to maintain regulatory capital levels exceeding the highest effective regulatory standard and pay quarterly dividends to shareholders. No assurance can be given that changes in capital management plans will not occur. The following summarizes the ratios of regulatory capital to risk-adjusted assets under the superseded capital framework on the date indicated: At December 31, 2014 Company Bank Minimum Regulatory Requirement Well-capitalized by Regulatory Definition Tier I Capital Total Capital Leverage Ratio 13.30% 14.54% 7.95% 12.04% 13.49% 7.16% 4.00% 8.00% 4.00% 6.00% 10.00% 5.00% [The remainder of this page intentionally left blank] 43 - 43 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Deposit Categories The Company primarily attracts deposits from local businesses and professionals, as well as through retail savings and checking accounts, and, to a more limited extent, certificates of deposit. The following table summarizes the Company’s average daily amount of deposits and the rates paid for the periods indicated: Deposit Distribution and Average Rates Paid 2015 Percentage of Total Deposits Average Balance Rate For the Years Ended December 31, 2014 Percentage of Total Deposits ($ In thousands) Average Balance Rate 2013 Percentage of Total Deposits Average Balance Rate Noninterest-bearing demand Interest bearing: Transaction Savings Time less than $100 thousand Time $100 thousand or more Total (1) $1,968,817 44.4% - % $1,841,522 43.0% - % $1,683,447 40.4% - % 822,156 1,312,100 172,836 161,710 18.5% 29.6% 3.9% 3.6% $4,437,619 100.0% 0.03% 0.06% 0.33% 0.42% 0.10% 790,467 1,215,035 197,821 237,002 18.5% 28.4% 4.6% 5.5% $4,281,847 100.0% 0.03% 0.07% 0.41% 0.38% 0.07% 758,771 1,151,360 228,061 341,184 18.2% 27.7% 5.5% 8.2% $4,162,823 100.0% 0.03% 0.08% 0.47% 0.32% 0.08% (1) The rates for total deposits reflect value of noninterest-bearing deposits. The Company’s strategy includes building the value of its deposit base by building balances of lower-costing deposits and avoiding reliance on higher-costing time deposits. From 2013 to 2015 the deposit composition shifted from higher costing time deposits to lower costing checking and savings accounts. The Company’s average balances of checking and savings accounts represented 93% of average balances of total deposits in 2015 compared with 90% in 2014 and 86% in 2013. Total time deposits were $287 million and $385 million at December 31, 2015 and 2014, respectively. The following table sets forth, by time remaining to maturity, the Company’s total domestic time deposits. The Company has no foreign time deposits. Time Deposits Maturity Distribution 2016 2017 2018 2019 2020 Thereafter Total At December 31, 2015 (In thousands) $223,662 30,949 11,920 15,107 2,950 2,380 $286,968 The following sets forth, by time remaining to maturity, the Company’s domestic time deposits in amounts of $100 thousand or more: Time Deposits Over $100,000 Maturity Distribution Three months or less Over three through six months Over six through twelve months Over twelve months Total At December 31, 2015 (In thousands) $49,800 26,434 31,049 28,905 $136,188 44 - 44 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Short-term Borrowings The following table sets forth the short-term borrowings of the Company: Short-Term Borrowings Distribution Securities sold under agreements to repurchase the securities Total short-term borrowings Further detail of federal funds purchased and other borrowed funds is as follows: 2015 $53,028 $53,028 At December 31, 2014 (In thousands) $89,784 $89,784 2013 $62,668 $62,668 2015 For the Years Ended December 31, 2014 ($ in thousands) 2013 Federal funds purchased balances and rates paid on outstanding amount: Average balance for the year Maximum month-end balance during the year Average interest rate for the year Average interest rate at period end Securities sold under agreements to repurchase the securities balances and rates paid on outstanding amount: Average balance for the year Maximum month-end balance during the year Average interest rate for the year Average interest rate at period end FHLB advances balances and rates paid on outstanding amount: Average balance for the year Maximum month-end balance during the year Average interest rate for the year Average interest rate at period end Term repurchase agreement balances and rates paid on outstanding amount: Average balance for the year Maximum month-end balance during the year Average interest rate for the year Average interest rate at period end Financial Ratios The following table shows key financial ratios for the periods indicated: $8 - 0.48% - % $75,046 89,484 0.07% 0.06% $494 - 0.20% - % $ - - - % - % $8 - 0.48% - % $70,244 89,784 0.07% 0.06% $20,308 20,530 2.00% 2.04% $6,082 10,000 0.99% - % $8 - 0.60% - % $57,446 66,640 0.07% 0.07% $25,499 25,780 1.88% 1.96% $10,000 10,000 0.98% 0.97% Return on average total assets Return on average common shareholders' equity Average shareholders' equity as a percentage of: Average total assets Average total loans Average total deposits At and For the Years Ended December 31, 2014 1.22% 11.57% 2015 1.16% 11.32% 2013 1.38% 12.48% 10.21% 32.08% 11.70% 10.58% 29.57% 12.24% 11.06% 27.53% 12.93% 45 - 45 - ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company’s Board of Directors. Credit risk and interest rate risk are the most significant market risks affecting the Company, and equity price risk can also affect the Company’s financial results. These risks are described in the preceding sections regarding “Loan Portfolio Credit Risk,” and “Asset/Liability and Market Risk Management.” Other types of market risk, such as foreign currency exchange risk and commodity price risk, are not significant in the normal course of the Company’s business activities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Management’s Internal Control Over Financial Reporting...................................................................................... Consolidated Balance Sheets as of December 31, 2015 and 2014........................................................................... Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013................................ Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013...... Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013................................................................................................................................................................. Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013......................... Notes to the Consolidated Financial Statements...................................................................................................... Reports of Independent Registered Public Accounting Firms ................................................................................. Page 47 48 49 50 51 52 53 90 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K 46 - 46 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 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, 2015. 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, 2015 based upon criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, Management determined that the Company’s internal control over financial reporting was effective as of December 31, 2015 based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO. The Company’s independent registered public accounting firm has issued an attestation report on Management’s assessment of the Company’s internal control over financial reporting. Their opinion and attestation on internal control over financial reporting appear on page 90. Dated: February 26, 2016 47 - 47 - WESTAMERICA BANCORPORATION CONSOLIDATED BALANCE SHEETS Assets: Cash and due from banks Investment securities available for sale Investment securities held to maturity, with fair values of: $1,325,699 at December 31, 2015 and $1,048,562 at December 31, 2014 Loans Allowance for loan losses Loans, net of allowance for loan losses Other real estate owned Premises and equipment, net Identifiable intangibles, net Goodwill Other assets Total Assets Liabilities: Noninterest bearing deposits Interest bearing deposits Total deposits Short-term borrowed funds Federal Home Loan Bank advances Other liabilities Total Liabilities Shareholders' Equity: 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K At December 31, 2015 2014 (In thousands) $433,044 1,570,216 1,316,075 1,533,396 (29,771) 1,503,625 9,264 38,693 10,431 121,673 165,854 $5,168,875 $2,026,049 2,514,610 4,540,659 53,028 - 42,983 4,636,670 $380,836 1,600,781 1,038,658 1,700,290 (31,485) 1,668,805 6,374 37,852 14,287 121,673 166,458 $5,035,724 $1,910,781 2,438,410 4,349,191 89,784 20,015 50,131 4,509,121 Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 25,528 at December 31, 2015 and 25,745 at December 31, 2014 Deferred compensation Accumulated other comprehensive income Retained earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 378,858 378,132 2,578 675 150,094 532,205 $5,168,875 2,711 5,292 140,468 526,603 $5,035,724 See accompanying notes to consolidated financial statements. 48 - 48 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME 2015 For the Years Ended December 31, 2014 (In thousands, except per share data) 2013 Interest and Fee Income: Loans Investment securities available for sale Investment securities held to maturity Total Interest and Fee Income Interest Expense: Deposits Short-term borrowed funds Federal Home Loan Bank advances Term repurchase agreement Debt financing Total Interest Expense Net Interest Income Provision for Loan Losses Net Interest Income After Provision For Loan Losses Noninterest Income: Service charges on deposit accounts Merchant processing services Debit card fees Other service fees Trust fees ATM processing fees Financial services commissions Other Total Noninterest Income Noninterest Expense: Salaries and related benefits Occupancy Outsourced data processing services Amortization of identifiable intangibles Furniture and equipment Courier service Professional fees Other real estate owned Other Total Noninterest Expense Income Before Income Taxes Provision for income taxes Net Income Average Common Shares Outstanding Diluted Average Common Shares Outstanding Per Common Share Data: Basic earnings Diluted earnings Dividends paid See accompanying notes to consolidated financial statements. $78,441 31,263 26,825 136,529 2,370 53 1 - - 2,424 134,105 - 134,105 22,241 6,339 6,084 2,689 2,732 2,397 695 4,690 47,867 52,192 14,960 8,441 3,856 4,434 2,329 2,490 504 16,094 105,300 76,672 17,919 $58,753 25,555 25,577 $2.30 2.30 1.53 $89,056 24,740 26,413 140,209 2,887 90 407 60 - 3,444 136,765 2,800 133,965 24,191 7,219 5,960 2,717 2,582 2,473 757 5,888 51,787 54,777 14,992 8,411 4,270 4,174 2,624 2,346 (642) 15,847 106,799 78,953 18,307 $60,646 26,099 26,160 $2.32 2.32 1.52 $102,626 21,822 29,948 154,396 3,348 77 480 98 668 4,671 149,725 8,000 141,725 25,693 9,031 5,829 2,846 2,313 2,758 831 7,710 57,011 56,633 15,137 8,548 4,704 3,869 2,868 3,057 1,035 16,763 112,614 86,122 18,945 $67,177 28,826 26,877 $2.50 2.50 1.49 49 - 49 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2015 For the Years Ended December 31, 2014 (In thousands) $60,646 $58,753 2013 $67,177 (8,028) 3,375 (4,653) 61 (25) 36 (4,617) $54,136 1,627 (684) 943 61 (25) 36 979 $61,625 (17,855) 7,507 (10,348) 61 (25) 36 (10,312) $56,865 Net Income Other comprehensive (loss) income: (Decrease) increase in net unrealized gains on securities available for sale Deferred tax (expense) benefit (Decrease) increase in net unrealized gains on securities available for sale, net of tax Post-retirement benefit transition obligation amortization Deferred tax expense Post-retirement benefit transition obligation amortization, net of tax Total Other Comprehensive (Loss) Income Total Comprehensive Income See accompanying notes to consolidated financial statements. 50 - 50 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Common Shares Outstanding Common Stock Deferred Compensation Accumulated Other Comprehensive Income (loss) (In thousands) Retained Earnings Total Balance, December 31, 2012 27,213 $372,012 $3,101 $14,625 Net income for the year 2013 Other comprehensive loss Exercise of stock options Tax benefit decrease upon expiration/ exercise of stock options Restricted stock activity Stock based compensation Stock awarded to employees Retirement of common stock including repurchases Dividends 479 21,499 15 2 (298) 1,068 1,397 107 (1,199) (16,839) (390) Balance, December 31, 2013 26,510 378,946 2,711 Net income for the year 2014 Other comprehensive income Exercise of stock options Tax benefit decrease upon expiration/ exercise of stock options Restricted stock activity Stock based compensation Stock awarded to employees Retirement of common stock including repurchases Dividends 256 12,396 21 2 (447) 1,114 1,318 102 (1,044) (15,297) Balance, December 31, 2014 25,745 378,132 2,711 Net income for the year 2015 Other comprehensive loss Exercise of stock options Tax benefit decrease upon expiration/ exercise of stock options Restricted stock activity Stock based compensation Stock awarded to employees Retirement of common stock including repurchases Dividends 108 4,848 17 2 (1,284) 874 1,272 105 (344) (5,089) (133) (10,312) 4,313 979 5,292 (4,617) Balance, December 31, 2015 25,528 $378,858 $2,578 $675 See accompanying notes to consolidated financial statements. $170,364 67,177 (40,481) (40,096) 156,964 60,646 (37,381) (39,761) 140,468 58,753 $560,102 67,177 (10,312) 21,499 (298) 678 1,397 107 (57,320) (40,096) 542,934 60,646 979 12,396 (447) 1,114 1,318 102 (52,678) (39,761) 526,603 58,753 (4,617) 4,848 (1,284) 741 1,272 105 (10,003) (39,124) $150,094 (15,092) (39,124) $532,205 - 51 - 51 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K WESTAMERICA BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 2015 For the Years Ended December 31, 2014 (In thousands) 2013 Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: $58,753 $60,646 $67,177 16,402 - (310) (780) 830 (1,828) 1,272 1,284 265 (86) (5,754) - 109 - - 247 70,404 164,093 - (946,794) 967,118 (437,935) 153,014 (4,474) 940 1,774 (102,264) 191,476 (56,756) - - 4,848 (1,284) (15,092) (39,124) 84,068 52,208 380,836 $433,044 15,502 2,800 (279) (469) 1,417 (2,923) 1,318 447 478 (111) 4,474 (400) 76 - - (665) 82,311 126,414 6,703 (1,126,203) 604,475 (67,725) 153,405 (3,791) 3,248 8,212 (295,262) 185,508 26,741 - (10,000) 12,396 (447) (52,678) (39,761) 121,759 (91,192) 472,028 $380,836 18,015 8,000 (420) 1,249 (1,618) 5,814 1,397 298 (1,677) (274) (12,510) (548) 17 (501) 509 387 85,315 274,774 7,069 (418,745) 144,886 (196,536) 217,652 (1,693) 3,166 20,349 50,922 (68,357) 3,981 (15,000) - 21,499 (298) (57,320) (40,096) (155,591) (19,354) 491,382 $472,028 $4,911 2,885 2,533 17,666 $968 2,892 3,822 16,412 $8,643 3,769 5,452 22,562 Depreciation and amortization/accretion Loan loss provision Net amortization of deferred loan fees (Increase) decrease in interest income receivable Decrease (increase) in net deferred tax asset (Increase) decrease in other assets Stock option compensation expense Tax benefit decrease upon expiration/exercise of stock options Increase (decrease) in income taxes payable Decrease in interest expense payable (Decrease) increase in other liabilities Gain on sale of real estate and other assets Write-down/net loss on sale of premises and equipment Originations of mortgage loans for resale Proceeds from sale of mortgage loans originated for resale Net loss/write-down (gain) on sale of foreclosed assets Net Cash Provided by Operating Activities Investing Activities: Net repayments of loans Proceeds from FDIC(1) loss-sharing indemnification Purchases of investment securities available for sale Proceeds from sale/maturity/calls of securities available for sale Purchases of investment securities held to maturity Proceeds from maturity/calls of securities held to maturity Purchases of premises and equipment Net change in FRB(2)/FHLB(3) securities Proceeds from sale of foreclosed assets Net Cash (Used in) Provided by Investing Activities Financing Activities: Net change in deposits Net change in short-term borrowings and FHLB(3) advances Repayments of debt financing Repayments of term repurchase agreement Exercise of stock options/issuance of shares Tax benefit decrease upon expiration/exercise of stock options Retirement of common stock including repurchases Common stock dividends paid Net Cash Provided by (Used in) Financing Activities Net Change In Cash and Due from Banks Cash and Due from Banks at Beginning of Period Cash and Due from Banks at End of Period Supplemental Cash Flow Disclosures: Supplemental disclosure of noncash activities: Loan collateral transferred to other real estate owned Securities purchases pending settlement Supplemental disclosure of cash flow activities: Interest paid for the period Income tax payments for the period See accompanying notes to consolidated financial statements. (1) Federal Deposit Insurance Corporation ("FDIC") (2) Federal Reserve Bank ("FRB") (3) Federal Home Loan Bank ("FHLB") 52 - 52 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 WESTAMERICA BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Business and Accounting Policies Westamerica Bancorporation, a registered bank holding company (the “Company”), provides a full range of banking services to corporate and individual customers in Northern and Central California through its 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. The Company has evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in its consolidated financial statements. Certain amounts in prior periods have been reclassified to conform to the current presentation. Summary of Significant Accounting Policies The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The following is a summary of significant policies used in the preparation of the accompanying financial statements. Accounting Estimates. Certain accounting policies underlying the preparation of these financial statements require Management to make estimates and judgments about future economic and market conditions. These estimates and judgments may affect reported amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Although the estimates contemplate current conditions and how Management expects them to change in the future, it is reasonably possible that in 2016 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial conditions. The most significant of these involve the Allowance for Credit Losses, as discussed below under “Allowance for Credit 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. Cash. Cash include Due From Banks balances which are readily convertible to known amounts of cash and are generally 90 days or less from maturity at the time of initiation, presenting insignificant risk of changes in value due to interest rate changes. Securities. Investment securities consist of debt securities of the U.S. Treasury, government sponsored entities, states, counties, municipalities, corporations, agency and non-agency mortgage-backed securities, asset-backed securities and equity securities. Securities transactions are recorded on a trade date basis. The Company classifies its debt and marketable equity securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at fair value with unrealized gains and losses included in earnings. Held to maturity securities are those debt securities which the Company has the ability and intent to hold until maturity. Held to maturity securities are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. Securities not included in trading or held to maturity are classified as available for sale. Available for sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are included in other comprehensive income. The Company utilizes third-party sources to value its investment securities; securities individually valued using quoted prices in active markets are classified as Level 1 assets in the fair value hierarchy, and securities valued using quoted prices in active markets for similar securities (commonly referred to as “matrix” pricing) are classified as Level 2 assets in the fair value hierarchy. The Company validates the reliability of third-party provided values by comparing individual security pricing for securities between more than one third-party source. When third-party information is not available, valuation adjustments are estimated in good faith by Management and classified as Level 3 in the fair value hierarchy. A decline in the market value of any available for sale or held to maturity security below amortized cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Unrealized investment securities losses are evaluated at least quarterly to determine whether such declines in value should be considered “other than temporary” and therefore be subject to immediate loss recognition in income. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the 53 - 53 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell or be required to sell the securities before recovery of its amortized cost. An unrealized loss in the value of an equity security is generally considered temporary when the fair value of the security declined primarily due to current market conditions and not deterioration in the financial condition of the issuer, the Company expects the fair value of the security to recover in the near term and the Company does not intend to sell or be required to sell the securities before recovery of its amortized cost. Other factors that may be considered in determining whether a decline in the value of either a debt or an equity security is “other than temporary” include ratings by recognized rating agencies, actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security, the financial condition, capital strength and near-term prospects of the issuer, and recommendations of investment advisors or market analysts. The Company follows the guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance when performing investment security pre-purchase analysis or evaluating investment securities for impairment. Credit ratings issued by recognized rating agencies are considered in the Company’s analysis only as a guide to the historical default rate associated with similarly-rated bonds. Purchase premiums are amortized and purchase discounts are 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 as a component of gain or loss on sale upon disposition of the related security. Interest and dividend income are recognized when earned. Realized gains and losses from the sale of available for sale securities are included in earnings using the specific identification method. Nonmarketable Equity Securities. Nonmarketable equity securities include securities that are not publicly traded, such as Visa Class B common stock, and securities acquired to meet regulatory requirements, such as Federal Home Loan Bank and Federal Reserve Bank stock, which are restricted. These restricted securities are accounted for under the cost method and are included in other assets. The Company reviews those assets accounted for under the cost method at least quarterly for possible declines in value that are considered “other than temporary”. The Company’s review typically includes an analysis of the facts and circumstances of each investment, the expectations for the investment’s cash flows and capital needs, the viability of its business model and any exit strategy. The asset value is reduced when a decline in value is considered to be other than temporary. The Company recognizes the estimated loss in noninterest income. Loans. Loans are stated at the principal amount outstanding, net of unearned discount and unamortized deferred fees and costs. Interest is accrued daily on the outstanding principal balances. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some loans secured by real estate with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status (“performing nonaccrual loans”) even though the borrowers continue to repay the loans as scheduled. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans on a cost-recovery method until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Performing nonaccrual loans are reinstated to accrual status when improvements in credit quality eliminate the doubt as to the full collectability of both interest and principal. Certain consumer loans or auto receivables are charged off against the allowance for credit losses when they become 120 days past due. The Company evaluates all classified loans and nonaccrual loans with outstanding principal balances in excess of $500 thousand, and all “troubled debt restructured” loans for impairment. The Company recognizes a loan as impaired when, based on current information and events, it is probable that it will be unable to collect both the contractual interest and principal payments as scheduled in the loan agreement. Income recognition on impaired loans conforms to that used on nonaccrual loans. In certain circumstances, the Company might agree to restructured loan terms with borrowers experiencing financial difficulties; such restructured loans are evaluated under ASC 310-40, “Troubled Debt Restructurings by Creditors.” In general, a restructuring constitutes a troubled debt restructuring when the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower it would not otherwise consider. Loans are evaluated on an individual basis. The Company follows its general nonaccrual policy for troubled debt restructurings. Performing troubled debt restructurings are reinstated to accrual status when improvements in credit quality eliminate the doubt as to full collectability of both principal and interest. Nonrefundable fees and certain costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income over the contractual loan lives. Upon prepayment, unamortized loan fees, net of costs, are immediately recognized in interest income. Other fees, including those collected upon principal prepayments, are included in interest income 54 - 54 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 when received. Loans held for sale are identified upon origination and are reported at the lower of cost or market value on an aggregate loan basis. Purchased Loans. Purchased loans are recorded at estimated fair value on the date of purchase. Impaired purchased loans are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include attributes such as past due and nonaccural status. Generally, purchased loans that meet the Company’s definition for nonaccrual status fall within the scope of FASB ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income on a prospective basis. Any excess of expected cash flows over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. For covered purchased loans with an accretable difference, the corresponding FDIC receivable is amortized over the shorter of the contractual term of the indemnification asset or the remaining life of the loan. Further, the Company elected to analogize to ASC 310-30 and account for all other loans that had a discount due in part to credit not within the scope of ASC 310-30 using the same methodology. Covered Loans. Loans covered under loss-sharing or similar credit protection agreements with the FDIC are reported in loans exclusive of the expected reimbursement cash flows from the FDIC. Covered loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount expected to be collected results in a provision for loan losses and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss impacting earnings. Interest previously accrued on covered loans placed on nonaccrual status is charged against interest income, net of estimated FDIC reimbursements of such accrued interest. The FDIC reimburses the Company up to 80% of 90 days interest on covered loans. Allowance for Credit Losses. The Company extends loans to commercial and consumer customers in Northern and Central California. These lending activities expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans. The preparation of these financial statements requires Management to estimate the amount of probable incurred losses inherent in the loan portfolio and establish an allowance for credit losses. The allowance for credit losses is established by assessing a provision for loan losses against the Company’s earnings. In estimating credit losses, Management must exercise significant judgment in evaluating information deemed relevant, such as financial information regarding individual borrowers, overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions and other information. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses. The allowance for credit losses is established through provisions for credit losses charged to income. Losses on loans, including impaired loans, are charged to the allowance for loan losses when all or a portion of the recorded amount of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. The Company’s allowance for credit losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions, FDIC loss-sharing or similar credit protection agreements and other factors. A portion of the allowance is specifically allocated to impaired loans whose full collectability is uncertain. Such allocations are determined by Management based on loan- by-loan analyses. The Company evaluates all classified loans and nonaccrual loans with outstanding principal balances in excess of $500 thousand, and all “troubled debt restructured” loans for impairment. A second allocation is based in part on quantitative analyses of historical credit loss experience. The results of this analysis are applied to current loan balances to allocate the reserve to the respective segments of the loan portfolio exclusive of loans individually evaluated for impairment. In addition, consumer 55 - 55 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K installment loans which have similar characteristics and are not usually criticized using regulatory guidelines are analyzed and reserves established based on the historical loss rates and delinquency trends, grouped by the number of days the payments on these loans are delinquent. The remainder of the reserve is considered to be unallocated. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. It addresses additional qualitative factors consistent with Management’s analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company’s general lending activity. Included in the unallocated allowance is the risk of losses that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in past loan charge-off history (external factors). The external factors evaluated by the Company include: economic and business conditions, external competitive issues, and other factors. Also included in the unallocated allowance is the risk of losses that are attributable to general attributes of the Company’s loan portfolio and credit administration (internal factors). The internal factors evaluated by the Company include: loan review system, adequacy of lending Management and staff, loan policies and procedures, problem loan trends, concentrations of credit, and other factors. By their nature, these risks are not readily allocable to any specific segment of the loan portfolio in a statistically meaningful manner. Liability for Off-Balance Sheet Credit Exposures. A liability for off-balance sheet credit exposures is established through expense recognition. Off-balance sheet credit exposures relate to letters of credit and unfunded loan commitments for commercial, construction and consumer loans. Historical credit loss factors for commercial, construction and consumer loans are applied to the amount of these off-balance sheet credit exposures to estimate inherent losses. Other Real Estate Owned. Other real estate owned is comprised of property acquired through foreclosure proceedings, acceptances of deeds-in-lieu of foreclosure and, if applicable, vacated bank properties. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses. Other real estate owned is recorded at the fair value of the collateral, generally based upon an independent property appraisal, less estimated disposition costs. Losses incurred subsequent to acquisition due to any decline in annual independent property appraisals are recognized as noninterest expense. Routine holding costs, such as property taxes, insurance and maintenance, and losses from sales and dispositions, are recognized as noninterest expense. Covered Other Real Estate Owned. Other real estate owned covered under loss-sharing agreements with the FDIC is reported exclusive of expected reimbursement cash flows from the FDIC. Upon transferring covered loan collateral to covered other real estate owned status, the covered loan collateral is recorded at fair value, generally based upon an independent property appraisal, less estimated disposition costs with losses charged against acquisition date fair value discounts; the amount of losses exceeding acquisition date fair value discounts are recognized as noninterest expense inclusive of expected reimbursement cash flows from the FDIC. Subsequent losses incurred due to any decline in annual independent property appraisal valuations are recognized as noninterest expense inclusive of expected reimbursement cash flows from the FDIC. Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed substantially on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives of premises and equipment range from 20 to 50 years and from 3 to 20 years, respectively. Leasehold improvements are amortized over the terms of the lease or their estimated useful life, whichever is shorter. Revenue Recognition. The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. In certain circumstances, noninterest income is reported net of associated expenses that are directly related to variable volume-based sales or revenue sharing arrangements or when the Company acts on an agency basis for others. Intangible Assets. Intangible assets are comprised of goodwill, core deposit intangibles and other identifiable intangibles acquired in business combinations. Intangible assets with definite useful lives are amortized on an accelerated basis over their respective estimated useful lives not exceeding 15 years. If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, Management reviews the asset for impairment. Any goodwill and any intangible asset acquired in a purchase business combination determined to have an indefinite useful life is not amortized, but is evaluated for impairment annually. The Company has the option to first assess qualitative factors to determine the likelihood of impairment pursuant to FASB ASU 2011- 08, Testing for Goodwill Impairment. Although the Company has the option to first assess qualitative factors when determining if impairment exists, the Company has opted to perform a quantitative analysis to determine if an impairment exists. Impairment of Long-Lived Assets. The Company reviews its long-lived and certain intangible assets for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 56 - 56 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Income Taxes. The Company and its subsidiaries file consolidated tax returns. The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to Management’s judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. Interest and penalties are recognized as a component of income tax expense. Stock Options. The Company applies FASB ASC 718 – Compensation – Stock Compensation, to account for stock based awards granted to employees using the fair value method. The Company recognizes compensation expense for restricted performance share grants over the relevant attribution period. Restricted performance share grants have no exercise price, therefore, the intrinsic value is measured using an estimated per share price at the vesting date for each restricted performance share. The estimated per share price is adjusted during the attribution period to reflect actual stock price performance. The Company’s obligation for unvested outstanding restricted performance share grants is classified as a liability until the vesting date due to a cash settlement feature, at which time the issued shares become classified as shareholders’ equity. Extinguishment of Debt. Gains and losses, including fees, incurred in connection with the early extinguishment of debt are charged to current earnings as reductions in noninterest income. Postretirement Benefits. The Company uses an actuarial-based accrual method of accounting for post-retirement benefits. Other. Securities and other property held by the Bank in a fiduciary or agency capacity are not included in the financial statements since such items are not assets of the Company or its subsidiaries. Recently Issued Accounting Standards FASB Accounting Standards Update (ASU) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company will be required to adopt the ASU provisions on January 1, 2018. Management is evaluating the impact that the ASU will have on the Company’s financial statements. [The remainder of this page intentionally left blank] 57 - 57 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Note 2: Investment Securities An analysis of the amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio follows: Investment Securities Available for Sale At December 31, 2015 Gross Gross Unrealized Unrealized Losses Gains Amortized Cost Securities of U.S. Government sponsored entities Agency residential mortgage-backed securities (MBS) Non-agency residential MBS Non-agency commercial MBS Obligations of states and political subdivisions Asset-backed securities FHLMC(1) and FNMA(2) stock Corporate securities Other securities Total $302,292 208,046 354 2,383 148,705 2,025 775 902,308 2,039 $1,568,927 (1) Federal Home Loan Mortgage Corporation (2) Federal National Mortgage Association (In thousands) $255 1,407 16 5 8,861 - 3,554 882 952 $15,932 ($665) (6,909) - (9) (57) (22) - (6,821) (160) ($14,643) Fair Value $301,882 202,544 370 2,379 157,509 2,003 4,329 896,369 2,831 $1,570,216 An analysis of the amortized cost, gross unrecognized gains and losses, and fair value of the held to maturity investment securities portfolio follows: Securities of U.S. government sponsored entities Agency residential MBS Non-agency residential MBS Agency commercial MBS Obligations of states and political subdivisions Total Investment Securities Held to Maturity At December 31, 2015 Gross Gross Unrecognized Unrecognized Losses Gains (In thousands) $- 1,810 185 20 13,638 $15,653 $- (4,966) - (274) (789) ($6,029) Amortized Cost $764 595,503 9,667 16,258 693,883 $1,316,075 Fair Value $764 592,347 9,852 16,004 706,732 $1,325,699 [The remainder of this page intentionally left blank] 58 - 58 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 An analysis of the amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio follows: Investment Securities Available for Sale At December 31, 2014 Gross Gross Unrealized Unrealized Losses Gains (In thousands) Amortized Cost U.S. Treasury securities Securities of U.S. Government sponsored entities Residential MBS Commercial MBS Residential collateralized mortgage obligations (CMO) Obligations of states and political subdivisions Asset-backed securities FHLMC and FNMA stock Corporate securities Other securities Total $3,500 635,278 24,647 2,923 230,347 171,907 8,349 775 511,699 2,039 $1,591,464 $5 937 1,776 6 634 10,015 - 4,393 2,169 871 $20,806 $- (1,027) (16) (10) (8,524) (123) (36) - (1,629) (124) ($11,489) Fair Value $3,505 635,188 26,407 2,919 222,457 181,799 8,313 5,168 512,239 2,786 $1,600,781 An analysis of the amortized cost, gross unrecognized gains and losses, and fair value of the held to maturity investment securities portfolio follows: Securities of U.S. government sponsored entities Residential MBS Residential CMO Obligations of states and political subdivisions Total At December 31, 2014 Gross Gross Unrecognized Unrecognized Losses Gains (In thousands) $11 1,183 2,236 11,350 $14,780 $- (137) (2,381) (2,358) ($4,876) Amortized Cost $1,066 59,078 258,325 720,189 $1,038,658 Fair Value $1,077 60,124 258,180 729,181 $1,048,562 The amortized cost and fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated: Maturity in years: 1 year or less Over 1 to 5 years Over 5 to 10 years Over 10 years Subtotal MBS Other securities Total At December 31, 2015 Securities Available for Sale Amortized Cost Fair Value Securities Held to Maturity Amortized Cost Fair Value (In thousands) $136,717 1,049,786 166,352 2,475 1,355,330 210,783 2,814 $1,568,927 $136,976 1,044,453 173,585 2,749 1,357,763 205,293 7,160 $1,570,216 $20,709 259,556 289,568 124,814 694,647 621,428 - $1,316,075 $21,354 262,163 296,352 127,627 707,496 618,203 - $1,325,699 Securities available for sale at December 31, 2015 with maturity dates over one year but less than five years include $265,921 thousand (fair value) of securities of U.S. Government sponsored entities with call options on dates within one year or less, of which $28,020 thousand have interest coupons which will increase if the issuer does not exercise the call option. 59 - 59 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Maturity in years: 1 year or less Over 1 to 5 years Over 5 to 10 years Over 10 years Subtotal MBS and residential CMO Other securities Total At December 31, 2014 Securities Available for Sale Amortized Cost Fair Value Securities Held to Maturity Amortized Cost Fair Value (In thousands) $57,891 629,200 584,872 58,770 1,330,733 257,917 2,814 $1,591,464 $57,991 630,797 589,250 63,006 1,341,044 251,783 7,954 $1,600,781 $15,355 228,380 285,219 192,301 721,255 317,403 - $1,038,658 $15,855 230,248 288,631 195,524 730,258 318,304 - $1,048,562 Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At December 31, 2015 and December 31, 2014, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines. An analysis of the gross unrealized losses of the available for sale investment securities portfolio follows: Investment Securities Available for Sale At December 31, 2015 No. of Investment Positions Less than 12 months Fair Value Unrealized Losses No. of Investment Positions 12 months or longer Unrealized Losses Fair Value ($ in thousands) No. of Investment Positions Total Fair Value Unrealized Losses 8 2 1 3 - 97 - 111 $121,392 12,491 ($665) (366) 1,071 - 2,728 (18) - 548,177 - $685,859 - (5,442) - ($6,491) - 31 1 4 1 25 1 63 $ - 161,296 $ - (6,543) 855 (9) 1,644 (39) 2,003 86,762 1,840 $254,400 (22) (1,379) (160) ($8,152) 8 33 2 7 1 122 1 174 $121,392 173,787 ($665) (6,909) 1,926 4,372 2,003 634,939 1,840 $940,259 (9) (57) (22) (6,821) (160) ($14,643) Securities of U.S. Government sponsored entities Agency residential MBS Non-agency commercial MBS Obligations of states and political subdivisions Asset-backed securities Corporate securities Other securities Total An analysis of gross unrecognized losses of the held to maturity investment securities portfolio follows: Investment Securities Held to Maturity At December 31, 2015 No. of Investment Positions Less than 12 months Fair Value Unrecognized Losses No. of Investment Positions Agency residential MBS Agency commercial MBS Obligations of states and political subdivisions Total 41 - 55 96 $426,317 - ($3,490) - 44,585 $470,902 (249) ($3,739) 13 2 54 69 12 months or longer Unrecognized Losses Fair Value ($ in thousands) $62,041 13,951 ($1,476) (274) 42,081 $118,073 (540) ($2,290) No. of Investment Positions Total Fair Value Unrecognized Losses 54 2 109 165 $488,358 13,951 ($4,966) (274) 86,666 $588,975 (789) ($6,029) The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates securities on a quarterly basis including changes in security ratings issued by ratings agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset- backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of 60 - 60 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities. The Company does not intend to sell any investments and has concluded that it is more likely than not that it will not be required to sell the investments prior to recovery of the amortized cost basis. Therefore, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2015. The fair values of the investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future. As of December 31, 2015, $738,865 thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2014, $757,623 thousand of investment securities were pledged to secure public deposits, short-term borrowed funds and FHLB advances. An analysis of gross unrealized losses of investment securities available for sale follows: Investment Securities Available for Sale At December 31, 2014 No. of Investment Positions Less than 12 months Fair Value Unrealized Losses No. of Investment Positions 12 months or longer Unrealized Losses Fair Value ($ in thousands) No. of Investment Positions Total Fair Value Unrealized Losses Securities of U.S. Government sponsored entities Residential MBS Commercial MBS Residential CMO Obligations of states and political subdivisions Asset-backed securities Corporate securities Other securities Total 15 - 1 - 7 1 53 - 77 $253,632 - 942 - ($989) - (7) - 2,548 (18) 5,008 165,026 - $427,156 (7) (1,304) - ($2,325) 1 2 1 32 17 1 5 1 60 $9,963 822 803 205,074 ($38) (16) (3) (8,524) 5,518 (105) 3,305 34,222 1,876 $261,583 (29) (325) (124) ($9,164) 16 2 2 32 24 2 58 1 137 $263,595 822 1,745 205,074 ($1,027) (16) (10) (8,524) 8,066 (123) 8,313 199,248 1,876 $688,739 (36) (1,629) (124) ($11,489) An analysis of gross unrecognized losses of investment securities held to maturity follows: Investment Securities Held to Maturity At December 31, 2014 No. of Investment Positions Less than 12 months Fair Value Unrecognized Losses No. of Investment Positions Residential MBS Residential CMO Obligations of states and political subdivisions Total 4 5 $19,467 13,932 103 112 76,202 $109,601 ($132) (166) (439) ($737) 1 22 138 161 12 months or longer Unrecognized Losses Fair Value ($ in thousands) $201 119,513 ($5) (2,215) 123,370 $243,084 (1,919) ($4,139) No. of Investment Positions Total Fair Value Unrecognized Losses 5 27 241 273 $19,668 133,445 ($137) (2,381) 199,572 $352,685 (2,358) ($4,876) 61 - 61 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax: 2015 For the Years Ended December 31, 2014 (In thousands) 2013 Taxable Tax-exempt from regular federal income tax Total interest income from investment securities $34,472 23,616 $58,088 $24,766 26,387 $51,153 $22,201 29,569 $51,770 Note 3: Loans and Allowance for Credit Losses A summary of the major categories of loans outstanding is shown in the following tables. Originated loans Purchased covered loans: Gross purchased covered loans Purchased loan discount Purchased non-covered loans: Gross purchased non-covered loans Purchased loan discount Total Originated loans Purchased covered loans: Gross purchased covered loans Purchased loan discount Purchased non-covered loans: Gross purchased non-covered loans Purchased loan discount Total At December 31, 2015 Commercial Commercial Real Estate Construction Residential Real Estate (In thousands) Consumer Installment & Other Total $368,117 $517,070 $2,978 $117,631 $346,043 $1,351,839 - - - - 15,620 (989) $382,748 124,650 (4,264) $637,456 - - 973 - $3,951 2,385 (133) 11,828 (19) 14,213 (152) 231 (23) $120,091 32,454 (1,156) $389,150 173,928 (6,432) $1,533,396 At December 31, 2014 Commercial Commercial Real Estate Construction Residential Real Estate (In thousands) Consumer Installment & Other Total $374,005 $567,594 $11,003 $146,925 $370,842 $1,470,369 - - - - - - 2,626 (434) 14,920 (34) 17,546 (468) 19,166 (1,356) $391,815 157,502 (6,492) $718,604 2,919 (50) $13,872 972 (262) $149,827 41,656 (1,212) $426,172 222,215 (9,372) $1,700,290 Changes in the carrying amount of impaired purchased loans were as follows: Impaired purchased loans Carrying amount at the beginning of the period Reductions during the period Carrying amount at the end of the period For the Years Ended December 31, 2015 2014 (In thousands) $4,672 (785) $3,887 $4,936 (264) $4,672 - 62 - 62 K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Changes in the accretable yield for purchased loans were as follows: Accretable yield: Balance at the beginning of the period Reclassification from nonaccretable difference Accretion Balance at the end of the period Accretion Change in FDIC indemnification (Increase) in interest income For the Years Ended December 31, 2015 2014 (In thousands) $2,261 3,051 (4,053) $1,259 ($4,053) 698 ($3,355) $2,505 5,016 (5,260) $2,261 ($5,260) 1,110 ($4,150) The following summarizes activity in the allowance for loan losses: Commercial Commercial Real Estate Construction Allowance for Loan Losses For the Year Ended December 31, 2015 Consumer Installment and Other (In thousands) Purchased Non-covered Loans Residential Real Estate Purchased Covered Loans Unallocated Total Allowance for loan losses: Balance at beginning of period Additions: Provision Deductions: Chargeoffs Recoveries Net loan recoveries (losses) Total allowance for loan losses $5,460 $4,245 $644 $2,241 $7,717 $2,120 3,702 356 (512) (440) 950 (756) 1,153 397 $9,559 (449) 72 (377) $4,224 - 45 45 $177 - - - $1,801 (3,493) 1,906 (1,587) $7,080 (961) (431) 239 (192) $967 $ - - - - - $ - $9,058 $31,485 (3,095) - - - - $5,963 (5,129) 3,415 (1,714) $29,771 Commercial Commercial Real Estate Construction Allowance for Credit Losses For the Year Ended December 31, 2014 Consumer Installment and Other (In thousands) Purchased Non-covered Loans Residential Real Estate Purchased Covered Loans Unallocated Total Allowance for loan losses: Balance at beginning of period Additions: Provision Deductions: Chargeoffs Recoveries Net loan recoveries (losses) Indemnification expiration Balance at end of period Liability for off-balance sheet credit exposure Total allowance for credit losses $4,005 $12,070 1,095 (7,276) (1,890) 2,250 360 - 5,460 2,408 $7,868 (762) 213 (549) - 4,245 - $4,245 $602 39 - 3 3 - 644 344 $988 $405 $3,198 $- $1,561 $9,852 $31,693 1,866 6,864 1,006 - (794) 2,800 (30) - (30) - 2,241 - $2,241 (4,214) 1,869 (2,345) - 7,717 437 $8,154 (522) 75 (447) 1,561 2,120 - $2,120 - - - (1,561) - - $- - - - - 9,058 (496) $8,562 (7,418) 4,410 (3,008) - 31,485 2,693 $34,178 FDIC indemnification expired February 6, 2014 for County Bank non-single-family residential collateralized purchased loans; accordingly, such loans have been reclassified from purchased covered loans to purchased non-covered loans as well as the related allowance for credit losses. [The remainder of this page intentionally left blank] 63 - 63 - Commercial Commercial Real Estate Construction Allowance for Credit Losses For the Year Ended December 31, 2013 Consumer Installment and Other (In thousands) Purchased Non-covered Loans Residential Real Estate Purchased Covered Loans Unallocated Total Allowance for loan losses: Balance at beginning of period Additions: Provision Deductions: Chargeoffs Recoveries Net loan losses Balance at end of period Liability for off-balance sheet credit exposure Total allowance for credit losses $6,445 $10,063 (1,158) 2,813 (2,857) 1,575 (1,282) 4,005 1,658 $5,663 (997) 191 (806) 12,070 - $12,070 $484 118 - - - 602 37 $639 $380 134 (109) - (109) 405 - $405 $3,194 1,949 (4,097) 2,152 (1,945) 3,198 497 $3,695 $- $1,005 $8,663 $30,234 385 (385) - (385) - - $- 2,570 1,189 8,000 (2,286) 272 (2,014) 1,561 - $1,561 - - - 9,852 501 $10,353 (10,731) 4,190 (6,541) 31,693 2,693 $34,386 The allowance for credit losses and recorded investment in loans were evaluated for impairment as follows: Commercial Commercial Real Estate Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment At December 31, 2015 Consumer Installment and Other (In thousands) Purchased Non- covered Loans Residential Real Estate Construction Purchased Covered Loans Unallocated Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Purchased loans with evidence of credit deterioration Total Carrying value of loans: Individually evaluated for impairment Collectively evaluated for impairment Purchased loans with evidence of credit deterioration Total $4,942 4,617 - $9,559 $12,587 355,530 - $368,117 $585 3,639 - $4,224 $5,541 511,529 - $517,070 $- 177 - $177 $- 2,978 - $2,978 $- 1,801 - $1,801 $- 117,631 - $117,631 $- 7,080 - $7,080 $- 346,043 - $346,043 $- 967 - $967 $- - - $- $- 5,963 - $5,963 $11,777 152,038 3,681 $167,496 $- 13,855 206 $14,061 $- - - $- $29,905 1,499,604 3,887 $1,533,396 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Commercial Commercial Real Estate Allowance for Credit Losses and Recorded Investment in Loans Evaluated for Impairment At December 31, 2014 Consumer Installment and Other (In thousands) Purchased Non- covered Loans Residential Real Estate Construction Purchased Covered Loans Unallocated Allowance for credit losses: Individually evaluated for impairment Collectively evaluated for impairment Purchased loans with evidence of credit deterioration Total Carrying value of loans: Individually evaluated for impairment Collectively evaluated for impairment Purchased loans with evidence of credit deterioration Total $496 7,372 - $7,868 $11,811 362,194 - $374,005 $- 4,245 - $4,245 $2,970 564,624 - $567,594 $- 988 - $988 $- 11,003 - $11,003 $- 2,241 - $2,241 $574 146,351 - $146,925 $- 8,154 - $8,154 $599 370,243 - $370,842 $- 2,120 - $2,120 $12,364 196,034 4,445 $212,843 $- - - $- $- 8,562 - $8,562 $- 16,851 227 $17,078 $- - - $- $28,318 1,667,300 4,672 $1,700,290 The Bank’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department evaluations occur every calendar quarter. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations. 64 - 64 - Total $5,527 24,244 - $29,771 Total $496 33,682 - $34,178 K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 The following summarizes the credit risk profile by internally assigned grade: Credit Risk Profile by Internally Assigned Grade At December 31, 2015 Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non- covered Loans Purchased Covered Loans (1) Total (In thousands) $353,474 14,643 - - - $368,117 $496,744 20,326 - - - $517,070 $2,978 - - - - $2,978 $114,525 3,106 - - - $117,631 $344,876 781 12 374 - $346,043 $149,100 24,810 18 - (6,432) $167,496 $12,563 1,650 - - (152) $14,061 $1,474,260 65,316 30 374 (6,584) $1,533,396 Grade: Pass Substandard Doubtful Loss Purchased loan discount Total (1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification. Credit Risk Profile by Internally Assigned Grade At December 31, 2014 Commercial Commercial Real Estate Construction Residential Real Estate Consumer Installment and Other Purchased Non- covered Loans Purchased Covered Loans (1) Total (In thousands) $366,487 7,506 12 - - $374,005 $527,980 39,614 - - - $567,594 $11,003 - - - - $11,003 $144,902 2,023 - - - $146,925 $369,618 734 12 478 - $370,842 $182,644 39,473 77 21 (9,372) $212,843 $15,509 2,037 - - (468) $17,078 $1,618,143 91,387 101 499 (9,840) $1,700,290 Grade: Pass Substandard Doubtful Loss Purchased loan discount Total (1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification. The following tables summarize loans by delinquency and nonaccrual status: Summary of Loans by Delinquency and Nonaccrual Status At December 31, 2015 Current and Accruing 30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Past Due 90 Days or More and Accruing Nonaccrual Total Loans Commercial Commercial real estate Construction Residential real estate Consumer installment and other Total originated loans Purchased non-covered loans Purchased covered loans Total $365,450 504,970 2,978 115,575 341,566 1,330,539 158,554 13,929 $1,503,022 $1,777 5,930 - 1,202 3,263 12,172 589 132 $12,893 (In thousands) $122 726 - 414 919 2,181 7 - $2,188 $ - - - - 295 295 - - $295 $768 5,444 - 440 - 6,652 8,346 - $14,998 $368,117 517,070 2,978 117,631 346,043 1,351,839 167,496 14,061 $1,533,396 [The remainder of this page intentionally left blank] 65 - 65 - Summary of Loans by Delinquency and Nonaccrual Status At December 31, 2014 Current and Accruing 30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Past Due 90 Days or More and Accruing (In thousands) Nonaccrual Total Loans Commercial Commercial real estate Construction Residential real estate Consumer installment and other Total originated loans Purchased non-covered loans Purchased covered loans Total $372,235 557,041 11,003 144,021 365,753 1,450,053 196,150 16,389 $1,662,592 $1,704 6,500 - 1,513 3,310 13,027 4,204 389 $17,620 $36 - - 817 625 1,478 491 3 $1,972 $ - - - - 502 502 - - $502 $30 4,053 - 574 652 5,309 11,998 297 $17,604 $374,005 567,594 11,003 146,925 370,842 1,470,369 212,843 17,078 $1,700,290 The following is a summary of the effect of nonaccrual loans on interest income: Interest income that would have been recognized had the loans performed in accordance with their original terms Interest income recognized on nonaccrual loans Total reduction of interest income For the Years Ended December 31, 2015 2013 2014 (In thousands) $1,277 (362) $915 $1,146 (60) $1,086 $1,866 (402) $1,464 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2015 and December 31, 2014. The following summarizes impaired loans: Impaired loans with no related allowance recorded: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Impaired loans with an allowance recorded: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Total: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Impaired Loans At December 31, 2015 Unpaid Principal Balance (In thousands) Recorded Investment Related Allowance $2,979 21,168 271 697 456 10,170 5,109 - - - $13,149 26,277 271 697 456 $ - - - - - 4,942 585 - - - $4,942 585 - - - $2,917 16,309 271 666 350 10,170 4,660 - - - $13,087 20,969 271 666 350 66 - 66 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Impaired loans with no related allowance recorded: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Impaired loans with an allowance recorded: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Total: Commercial Commercial real estate Construction Residential real estate Consumer installment and other Impaired Loans At December 31, 2014 Unpaid Principal Balance (In thousands) Recorded Investment Related Allowance $2,031 19,478 1,834 574 1,518 9,910 - - - - $11,941 19,478 1,834 574 1,518 $2,095 25,519 1,884 574 1,628 9,910 - - - - $12,005 25,519 1,884 574 1,628 $ - - - - - 496 - - - - $496 - - - - Impaired loans include troubled debt restructured loans. Impaired loans at December 31, 2015, included $15,712 thousand of restructured loans, $7,464 thousand of which were on nonaccrual status. Impaired loans at December 31, 2014, included $4,837 thousand of restructured loans, none of which were on nonaccrual status. 2015 Average Recorded Investment Recognized Interest Income Impaired Loans For the Years Ended December 31, 2014 Average Recorded Investment Recognized Interest Income (In thousands) 2013 Average Recorded Investment Recognized Interest Income Commercial Commercial real estate Construction Residential real estate Consumer installment and other Total $12,631 20,307 263 643 739 $34,583 $584 674 - 31 25 $1,314 $5,240 19,880 2,015 153 1,399 $28,687 $325 469 - - 29 $823 $10,566 27,186 2,400 362 1,469 $41,983 $222 763 80 - 38 $1,103 The following table provides information on troubled debt restructurings: Commercial Commercial real estate Residential real estate Total Troubled Debt Restructurings At December 31, 2015 Number of Contracts Pre-Modification Carrying Value Period-End Carrying Value 6 10 1 17 (In thousands) $3,138 12,927 242 $16,307 $2,802 12,684 226 $15,712 Period-End Individual Impairment Allowance $194 - - $194 67 - 67 - Troubled Debt Restructurings At December 31, 2014 Number of Contracts Pre-Modification Carrying Value Period-End Carrying Value 3 4 1 8 (In thousands) $2,075 2,890 18 $4,983 $1,901 2,928 8 $4,837 Troubled Debt Restructurings At December 31, 2013 Number of Contracts Pre-Modification Carrying Value Period-End Carrying Value 4 2 6 (In thousands) $3,427 2,291 $5,718 $3,164 2,289 $5,453 Period-End Individual Impairment Allowance $ - - - $ - $- - $- Period-End Individual Impairment Allowance Commercial Commercial real estate Consumer installment and other Total Commercial Commercial real estate Total 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K During the year ended December 31, 2015, the Company modified ten loans with a carrying value of $11,026 thousand that were considered troubled debt restructurings. The concessions granted in the restructurings completed in 2015 consisted of four under- market terms and modification of payment terms to extend the maturity date to allow for deferred principal repayment and six court orders. During the year ended December 31, 2014, the Company modified five loans with a total carrying value of $713 thousand that were considered troubled debt restructurings. The concessions granted in the five restructurings completed in 2014 consisted of modification of payment terms to extend the maturity date to allow for deferred principal repayment. During the year ended December 31, 2013, the Company modified five loans with a total carrying value of $4,966 thousand that were considered troubled debt restructurings. The concessions granted in the five restructurings completed in 2013 consisted of modification of payment terms to lower the interest rate and extend the maturity date to allow for deferred principal repayment. During the years ended December 31, 2015 and 2014, no troubled debt restructured loans defaulted within 12 months of the modification date. During the year ended December 31, 2013 a commercial real estate loan with a carrying value of $3,954 thousand defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due. The Company repaid $20,015 thousand of Federal Home Loan Bank (“FHLB”) advances in January 2015, which had been collateralized by loans; the collateral requirements expired upon repayment of the debt. At December 31, 2014, the Company pledged loans to secure borrowings with a carrying value of $20,015 thousand from the FHLB. The loans restricted due to collateral requirements approximated $18,366 thousand at December 31, 2014. There were no loans held for sale at December 31, 2015 and December 31, 2014. At December 31, 2015 and December 31, 2014, the Company held total other real estate owned (OREO) of $9,264 thousand net of reserve of $1,986 thousand and $6,374 thousand net of reserve of $2,390 thousand, respectively, of which $-0- thousand and $- 0- thousand, respectively, were foreclosed residential real estate properties. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process totaled $-0- thousand and $967 thousand at December 31, 2015 and December 31, 2014, respectively. 68 - 68 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Note 4: Concentration of Credit Risk Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At December 31, 2015, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At December 31, 2015, Westamerica Bank had 38 lending relationships with aggregate loans exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 3, the Company had loan commitments related to real estate loans of $61,190 thousand and $66,086 thousand at December 31, 2015 and December 31, 2014, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At December 31, 2015, Westamerica Bank held corporate bonds in 47 issuing entities which exceeded $5 million of each issuer. Note 5: Premises, Equipment and Other Assets Premises and equipment consisted of the following: 2015 Land Building and improvements Leasehold improvements Furniture and equipment Total 2014 Land Building and improvements Leasehold improvements Furniture and equipment Total At December 31, Accumulated Depreciation and Amortization (In thousands) Net Book Value $ - (24,024) (4,628) (15,308) ($43,960) $ - (23,267) (4,664) (14,269) ($42,200) $11,896 16,771 1,068 8,958 $38,693 $11,933 17,672 1,078 7,169 $37,852 Cost $11,896 40,795 5,696 24,266 $82,653 $11,933 40,939 5,742 21,438 $80,052 Depreciation and amortization of premises and equipment included in noninterest expense amounted to $3,523 thousand in 2015, $3,177 thousand in 2014 and $3,001 thousand in 2013. Other assets consisted of the following: Cost method equity investments: Federal Reserve Bank stock (1) (2) Federal Home Loan Bank stock Other investments Total cost method equity investments Life insurance cash surrender value Net deferred tax asset Limited partnership investments Interest receivable Prepaid assets Other assets Total other assets At December 31, 2015 2014 (In thousands) $14,069 - 201 14,270 48,972 51,748 15,259 20,174 4,771 10,660 $165,854 $14,069 940 241 15,250 46,479 50,903 18,673 19,394 5,609 10,150 $166,458 69 - 69 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K (1) A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank (FRB) in its district in a sum equal to six percent of the bank’s paid-up capital stock and surplus. One-half of the amount of the bank's subscription shall be paid to the FRB and the remaining half will be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System. (2) Borrowings from the FHLB must be supported by capital stock holdings. The requirement may be adjusted from time to time by the FHLB within limits established in the FHLB's Capital Plan. The Company repaid the FHLB advances in full upon their maturity in January 2015 eliminating the requirement for FHLB capital stock holdings. The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At December 31, 2015, this investment totaled $15,259 thousand and $2,299 thousand of this amount represents outstanding equity capital commitments. At December 31, 2014, this investment totaled $18,673 thousand and $2,460 thousand of this amount represents outstanding equity capital commitments. At December 31, 2015, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $453 thousand in 2016, $763 thousand in 2017, and $1,083 thousand in 2018, or thereafter. The amounts recognized in net income for these investments include: For the Years Ended December 31, 2014 (In thousands) 2013 2015 Investment loss included in pre-tax income Tax credits recognized in provision for income taxes $2,850 2,650 $2,950 2,825 $3,450 3,425 Note 6: Goodwill and Identifiable Intangible Assets The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the years ended December 31, 2015 and December 31, 2014. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the years ended December 31, 2015 and December 31, 2014, no such adjustments were recorded. The carrying values of goodwill were: Goodwill At December 31, 2015 2014 (In thousands) $121,673 $121,673 The gross carrying amount of identifiable intangible assets and accumulated amortization was: At December 31, 2015 Gross Carrying Amount Accumulated Amortization At December 31, 2014 Gross Carrying Amount Accumulated Amortization (In thousands) Core Deposit Intangibles Merchant Draft Processing Intangible Total Identifiable Intangible Assets $56,808 10,300 $67,108 ($46,782) (9,895) ($56,677) $56,808 10,300 $67,108 ($43,188) (9,633) ($52,821) 70 - 70 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 As of December 31, 2015, the current year and estimated future amortization expense for identifiable intangible assets was: For the Year ended December 31, 2015 (actual) Estimate for year ended December 31, 2016 2017 2018 2019 2020 Core Deposit Intangibles $3,594 3,292 2,913 1,892 538 287 Merchant Draft Processing Intangible (In thousands) $262 212 164 29 - - Total $3,856 3,504 3,077 1,921 538 287 Note 7: Deposits and Borrowed Funds The following table provides additional detail regarding deposits. Noninterest-bearing Interest-bearing: Transaction Savings Time deposits less than $100 thousand Time deposits $100 thousand through $250 thousand Time deposits more than $250 thousand Total deposits Deposits At December 31, 2015 2014 (In thousands) $2,026,049 $1,910,781 860,706 1,366,936 150,780 96,971 39,217 $4,540,659 792,448 1,260,819 169,959 113,023 102,161 $4,349,191 Demand deposit overdrafts of $3,038 thousand and $3,173 thousand were included as loan balances at December 31, 2015 and December 31, 2014, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $687 thousand in 2015, $893 thousand in 2014 and $1,096 thousand in 2013. The following table provides additional detail regarding short-term borrowed funds. Repurchase agreements: Collateral securing borrowings: Securities of U.S. Government sponsored entities Obligations of states and political subdivisions Corporate securities Total collateral carrying value Total short-term borrowed funds Repurchase Agreements (Sweep) Accounted for as Secured Borrowings At December 31, 2015 2014 Remaining Contractual Maturity of the Agreements Overnight and Continuous (In thousands) $98,969 3,975 54,681 $157,625 $53,028 $80,827 14,251 52,936 $148,014 $89,784 FHLB advances matured and were repaid in full in January 2015. At December 31, 2014, FHLB advances with a carrying value of $20,015 thousand were secured by residential real estate loans and securities of approximately $26,484 thousand. The Company has a $35,000 thousand unsecured line of credit which had no outstanding balance at December 31, 2015 and December 31, 2014. The line of credit has a variable interest rate, which was 2.25% per annum at December 31, 2015, with interest payable monthly on outstanding advances. Advances may be made up to the unused credit limit through March 18, 2016. 71 - 71 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K The following table summarizes deposits and borrowed funds of the Company for the periods indicated: Average Balance For the Year Ended December 31, 2015 Weighted Average Rate For the Year Ended December 31, 2015 Average Balance For the Year Ended December 31, 2014 Weighted Average Rate For the Year Ended December 31, 2014 Balance at December 31, 2014 Balance at December 31, 2015 Time deposits over $100 thousand Securities sold under repurchase agreements Federal Home Loan Bank advances Term repurchase agreement Federal funds purchased $136,188 53,028 - - - $161,710 75,046 494 - 8 ($ in thousands) 0.42% 0.07% 0.20% - 0.48% $215,184 89,784 20,015 - - $237,002 70,244 20,308 6,082 8 0.38% 0.07% 2.00% 0.99% 0.48% For the Years Ended December 31, 2015 2014 Highest Balance at Any Month-end (In thousands) $89,484 - - $89,784 20,530 10,000 Securities sold under repurchase agreements Federal Home Loan Bank advances Term repurchase agreement Note 8: Shareholders’ Equity The Company grants stock options and restricted performance shares to employees in exchange for employee services, pursuant to the shareholder-approved 1995 Stock Option Plan, which was last amended and restated in 2012. Nonqualified stock option grants (“NQSO”) are granted with an exercise price equal to the fair market value of the related common stock on the grant date. NQSO generally become exercisable in equal annual installments over a three-year period with each installment vesting on the anniversary date of the grant. Each NQSO has a maximum ten-year term. A restricted performance share grant becomes vested after three years of being awarded, provided the Company has attained its performance goals for such three-year period. The following table summarizes information about stock options granted under the Plan as of December 31, 2015. The intrinsic value is calculated as the difference between the market value as of December 31, 2015 and the exercise price of the shares. The market value as of December 31, 2015 was $46.75 as reported by the NASDAQ Global Select Market: Options Outstanding Options Exercisable At December 31, 2015 Range of Exercise Price Number Outstanding Aggregate Intrinsic Value (In thousands) $40 - 45 45 - 50 50 - 55 55 - 60 $40 - 60 487 228 671 163 1,549 $1,792 86 - - $1,878 Weighted Average Remaining Contractual Life (Years) 7.9 3.7 4.8 4.1 5.5 For the Year Ended December 31, 2015 Weighted Average Exercise Price At December 31, 2015 Number Outstanding Aggregate Intrinsic Value (In thousands) $43 47 52 57 49 133 228 532 163 1,056 $432 85 - - $517 For the Year Ended December 31, 2015 Weighted Average Exercise Price $44 47 51 57 50 Weighted Average Remaining Contractual Life (Years) 5.8 3.7 4.0 4.1 4.2 The Company applies the Roll-Geske option pricing model (Modified Roll) to determine grant date fair value of stock option grants. This model modifies the Black-Scholes Model to take into account dividends and American options. During the twelve months ended December 31, 2015, 2014 and 2013, the Company granted 343 thousand, 294 thousand and 322 thousand stock options, respectively. The following weighted average assumptions were used in the option pricing to value stock options granted in the periods indicated: 72 - 72 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Expected volatility (1) Expected life in years (2) Risk-free interest rate Expected dividend yield (3) Fair value per award For the Years Ended December 31, 2015 20% 4.9 1.36% 3.64% $5.46 2014 16% 4.9 1.59% 3.32% $5.91 2013 17% 4.8 0.74% 3.57% $4.61 (1) Measured using daily price changes of Company’s stock over respective expected term of the option and the implied volatility derived from the market prices of the Company’s stock and traded options. (2) The number of years that the Company estimates that the options will be outstanding prior to exercise. (3) The risk-free rate over the expected life based on the US Treasury yield curve in effect at the time of the grant. Employee stock option grants are being expensed by the Company over the grants’ three year vesting period. The Company issues new shares upon the exercise of options. The number of shares authorized to be issued for options at December 31, 2015 is 1,453 thousand. A summary of option activity during the year ended December 31, 2015 is presented below: Weighted Average Exercise Price $50.31 42.70 45.09 50.71 48.83 50.23 Shares (In thousands) 1,889 343 (108) (575) 1,549 1,056 Weighted Average Remaining Contractual Term (Years) 5.5 4.2 Outstanding at January 1, 2015 Granted Exercised Forfeited or expired Outstanding at December 31, 2015 Exercisable at December 31, 2015 A summary of the Company’s nonvested option activity during the year ended December 31, 2015 is presented below: Nonvested at January 1, 2015 Granted Vested Forfeited Nonvested at December 31, 2015 Weighted Average Grant Date Fair Value $5.40 5.46 5.34 5.45 $5.45 Shares (In thousands) 499 343 (247) (102) 493 The weighted average estimated grant date fair value for options granted under the Company’s stock option plan during the twelve months ended December 31, 2015, 2014 and 2013 was $5.46, $5.91 and $4.61 per share, respectively. The total remaining unrecognized compensation cost related to nonvested awards as of December 31, 2015 is $1,422 thousand and the weighted average period over which the cost is expected to be recognized is 1.8 years. The total intrinsic value of options exercised during the twelve months ended December 31, 2015, 2014 and 2013 was $504 thousand, $1,309 thousand and $2,058 thousand, respectively. The total fair value of RPSs that vested during the twelve months ended December 31, 2015, 2014 and 2013 was $741 thousand, $1,115 thousand and $678 thousand, respectively. The total fair value of options vested during the twelve months ended December 31, 2015, 2014 and 2013 was $1,321 thousand, $1,397 thousand and $1,514 thousand, respectively. The decrease in tax benefits recognized for the tax deductions from the exercise of options totaled $1,284 thousand, $447 thousand and $298 thousand, respectively, for the twelve months ended December 31, 2015, 2014 and 2013. - 73 - 73 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K A summary of the status of the Company’s restricted performance shares as of December 31, 2015 and 2014 and changes during the twelve months ended on those dates, follows: Outstanding at January 1, Granted Issued upon vesting Forfeited Outstanding at December 31, 2015 2014 (In thousands) 50 21 (17) (9) 45 59 17 (21) (5) 50 As of December 31, 2015 and 2014, the restricted performance shares had a weighted-average contractual life of 1.3 years and 1.2 years, respectively. The compensation cost that was charged against income for the Company’s restricted performance shares granted was $535 thousand, $575 thousand and $1,338 thousand for the twelve months ended December 31, 2015, 2014 and 2013, respectively. There were no stock appreciation rights or incentive stock options granted in the twelve months ended December 31, 2015 and 2014. On February 13, 2009, the Company issued a warrant to purchase 246,640 shares of the Company’s common stock at an exercise price of $50.92 per share. The warrants remain outstanding at December 31, 2015. The Company repurchases and retires its common stock in accordance with Board of Directors approved share repurchase programs. At December 31, 2015, approximately 1,727 thousand shares remained available to repurchase under such plans. Shareholders have authorized two additional classes of stock of one million shares each, to be denominated “Class B Common Stock” and “Preferred Stock,” respectively, in addition to the 150 million shares of common stock presently authorized. At December 31, 2015, no shares of Class B Common Stock or Preferred Stock were outstanding. Note 9: Risk-Based Capital The Company and the Bank were well capitalized under the regulatory framework effective January 1, 2015. 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. As of December 31, 2015, the Company and the Bank met all capital adequacy requirements to which they are subject. On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule’s provisions which most affected the regulatory capital requirements of the Company and the Bank: • • • • • Introduced a new “Common Equity Tier 1” capital measurement, Established higher minimum levels of capital, Introduced a “capital conservation buffer,” Increased the risk-weighting of certain assets, and Established limits on the amount of deferred tax assets with any excess treated as a deduction from Tier 1 capital. Under the final rule, a banking organization that is not subject to the “advanced approaches rule” may make a one-time election not to include most elements of Accumulated Other Comprehensive Income, including net-of-tax unrealized gains and losses on available for sale investment securities, in regulatory capital. Neither the Company nor the Bank are subject to the “advanced approaches rule” and made the election not to include most elements of Accumulated Other Comprehensive Income in regulatory capital. Banking organizations that are not subject to the “advanced approaches rule” began complying with the final rule on January 1, 2015; on such date, the Company and the Bank became subject to the revised definitions of regulatory capital, the new minimum regulatory capital ratios, and various regulatory capital adjustments and deductions according to transition provisions and timelines. All banking organizations began calculating standardized total risk-weighted assets on January 1, 2015. The transition period for the capital conservation buffer for all banking organizations will begin on January 1, 2016 and end January 1, 2019. Any bank subject to the rule which is unable to maintain its “capital conservation buffer” will be restricted in the payment of discretionary executive compensation and shareholder distributions, such as dividends and share repurchases. 74 - 74 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 The final rule did not supersede provisions of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) requiring federal banking agencies to take prompt corrective action (PCA) to resolve problems of insured depository institutions. The final rule revised the PCA thresholds to incorporate the higher minimum levels of capital, including the newly proposed “common equity tier 1” ratio. The capital ratios for the Company and the Bank under the new capital framework are presented in the table below. At December 31, 2015 Amount Ratio Transitional Minimum Regulatory Requirement Effective January 1, 2015 Ratio Amount ($ in thousands) Well-capitalized by Regulatory Definition Under FDICIA Effective January 1, 2015 Ratio Amount 402,876 340,918 402,876 340,918 420,731 361,880 402,876 340,918 12.82% 11.00% 12.82% 11.00% 13.39% 11.68% 7.99% 6.82% 141,417 139,412 188,557 185,883 251,409 247,844 201,606 199,919 4.50% 4.50% 6.00% 6.00% 8.00% 8.00% 4.00% 4.00% N/A 201,373 N/A 247,844 N/A 309,805 N/A 249,899 N/A 6.50% N/A 8.00% N/A 10.00% N/A 5.00% Common Equity Tier 1 Capital Company Bank Tier 1 Capital Company Bank Total Capital Company Bank Leverage Ratio 1 Company Bank 1 The leverage ratio consists of Tier 1capital divided by the most recent quarterly average total assets, excluding certain intangible assets. The following summarizes the ratios of regulatory capital to risk-adjusted assets under the superseded capital framework on the date indicated: Tier 1 Capital Company Bank Total Capital Company Bank Leverage Ratio 1 Company Bank At December 31, 2014 Amount Ratio Minimum Regulatory Requirement Ratio Amount ($ in thousands) Well-capitalized by Regulatory Definition Under FDICIA Amount Ratio 391,121 349,120 427,612 391,219 391,121 349,120 13.30% 12.04% 14.54% 13.49% 7.95% 7.16% 117,644 116,018 235,289 232,036 196,809 195,149 4.00% 4.00% 8.00% 8.00% 4.00% 4.00% 176,467 174,027 294,111 290,045 246,011 243,936 6.00% 6.00% 10.00% 10.00% 5.00% 5.00% 1 The leverage ratio consists of Tier 1capital divided by the most recent quarterly average total assets, excluding certain intangible assets. [The remainder of this page intentionally left blank] 75 - 75 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Note 10: Income Taxes Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amounts reported in the financial statements of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Amounts for the current year are based upon estimates and assumptions as of the date of these financial statements and could vary significantly from amounts shown on the tax returns as filed. The components of the net deferred tax asset are as follows: Deferred tax asset Allowance for credit losses State franchise taxes Deferred compensation Real estate owned Purchased assets and assumed liabilities Post-retirement benefits Employee benefit accruals VISA Class B shares Limited partnership investments Impaired capital assets Leases Premises and equipment Other Subtotal deferred tax asset Valuation allowance Total deferred tax asset Deferred tax liability Net deferred loan fees Intangible assets Securities available for sale Other Total deferred tax liability Net deferred tax asset At December 31, 2015 2014 (In thousands) $13,466 2,612 8,082 1,062 4,975 1,072 3,772 1,691 760 19,074 - 205 397 57,168 - 57,168 456 4,294 542 128 5,420 $51,748 $14,220 2,867 7,839 1,041 6,389 1,097 4,692 1,706 1,332 18,941 84 538 730 61,476 - 61,476 461 5,770 3,919 423 10,573 $50,903 Based on Management’s judgment, 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 taxable income. Net deferred tax assets are included with other assets in the Consolidated Balance Sheets. [The remainder of this page intentionally left blank] 76 - 76 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 The provision for federal and state income taxes consists of amounts currently payable and amounts deferred are as follows: 2015 For the Years Ended December 31, 2014 (In thousands) 2013 Current income tax expense: Federal State Total current Deferred income tax expense (benefit): Federal State Total deferred Provision for income taxes $9,647 6,738 16,385 1,643 (109) 1,534 $17,919 $11,950 7,802 19,752 (1,220) (225) (1,445) $18,307 $13,975 8,597 22,572 (2,518) (1,109) (3,627) $18,945 The provision for income taxes differs from the provision computed by applying the statutory federal income tax rate to income before taxes, as follows: Federal income taxes due at statutory rate Reductions in income taxes resulting from: Interest on state and municipal securities and loans not taxable for federal income tax purposes State franchise taxes, net of federal income tax benefit Tax credits Dividend received deduction Cash value life insurance Other Provision for income taxes 2015 For the Years Ended December 31, 2014 (In thousands) $27,634 $26,835 2013 $30,142 (9,046) 4,309 (2,600) (45) (599) (935) $17,919 (10,173) 4,925 (2,700) (39) (641) (699) $18,307 (11,565) 4,712 (3,190) (32) (747) (375) $18,945 At December 31, 2015, the company had no net operating loss and general tax credit carryforwards for tax return purposes. A reconciliation of the beginning and ending amounts of unrecognized tax benefits follow: Balance at January 1, Additions for tax positions taken in the current period Reductions for tax positions taken in the current period Additions for tax positions taken in prior years Reductions for tax positions taken in prior years Decrease related to settlements with taxing authorities Decrease as a result of a lapse in statute of limitations Balance at December 31, 2015 2014 (In thousands) $1,635 - - 55 (447) - - $1,243 $1,437 245 - - (47) - - $1,635 The Company does not anticipate any significant increase or decrease in unrecognized tax benefits during 2016. Unrecognized tax benefits at December 31, 2015 and 2014 include accrued interest and penalties of $88 thousand and $93 thousand, respectively. If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate. The Company classifies interest and penalties as a component of the provision for income taxes. The tax years ended December 31, 2015, 2014, 2013 and 2012 remain subject to examination by the Internal Revenue Service. The tax years ended December 31, 2015, 2014, 2013, 2012 and 2011 remain subject to examination by the California Franchise Tax Board. The deductibility of 77 - 77 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K these tax positions will be determined through examination by the appropriate tax jurisdictions or the expiration of the tax statute of limitations. Note 11: Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale investment securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, impaired loans, certain loans held for investment, investment securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost-or-fair value accounting of individual assets. In accordance with the Fair Value Measurement and Disclosure topic of the Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are: Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and equity securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes federal agency securities, mortgage-backed securities, corporate securities, asset- backed securities, municipal bonds and residential collateralized mortgage obligations. Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. The Company relies on independent vendor pricing services to measure fair value for investment securities available for sale and investment securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote closely affecting the market generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysis on a quarterly basis; securities selected for OTTI analysis include all securities at a market price below 95 percent of par value and with a market to book ratio below 95:100. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities. The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. During the quarter ended June 30, 2015, the Company reevaluated the valuation techniques and assumptions used by its vendors in valuing the Company’s available for sale securities, and based on the evaluation, transferred $437,715 thousand out of level 1 and transferred $437,715 thousand into level 2. There were no transfers into level 1 or into or out of level 3. Subsequent to June 30, 2015 and through the year ended December 31, 2015, and the year ended December 31, 2014, there were no transfers into or out of levels 1, 2 or 3. 78 - 78 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Assets Recorded at Fair Value on a Recurring Basis The tables below present assets measured at fair value on a recurring basis on the dates indicated. At December 31, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2 ) Significant Unobservable Inputs (Level 3 ) (In thousands) $ - - - - - 7 - 991 $998 $301,882 202,544 370 2,379 157,509 2,003 4,322 896,369 1,840 $1,569,218 $ - - - - - - - - - $ - At December 31, 2014 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2 ) Significant Unobservable Inputs (Level 3 ) (In thousands) $3,505 635,188 - - - - - 5,168 - 910 $644,771 $ - - 26,407 2,919 222,457 181,799 8,313 - 512,239 1,876 $956,010 $ - - - - - - - - - - $ - Fair Value $301,882 202,544 370 2,379 157,509 2,003 4,329 896,369 2,831 $1,570,216 Fair Value $3,505 635,188 26,407 2,919 222,457 181,799 8,313 5,168 512,239 2,786 $1,600,781 Securities of U.S. Government sponsored entities Agency residential MBS Non-agency residential MBS Agency commercial MBS Obligations of states and political subdivisions Asset-backed securities FHLMC and FNMA stock Corporate securities Other securities Total securities available for sale U.S. Treasury securities Securities of U.S. Government sponsored entities Residential MBS Commercial MBS Residential CMO Obligations of states and political subdivisions Asset-backed securities FHLMC and FNMA stock Corporate securities Other securities Total securities available for sale [The remainder of this page intentionally left blank] 79 - 79 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Assets Recorded at Fair Value on a Nonrecurring Basis The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at December 31, 2015 and December 31, 2014, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end. Other real estate owned Impaired loans Total assets measured at fair value on a nonrecurring basis $9,264 15,633 $24,897 $ - - $ - Carrying Value Level 1 Level 2 (In thousands) $ - - $ - Level 3 $9,264 15,633 $24,897 At December 31, 2015 For the Year Ended December 31, 2015 Total Losses ($320) (449) ($769) Level 3 – Valuation is based upon independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. The unobservable inputs and qualitative information about the unobservable inputs are not presented due to the unavailability from third party evaluators. Other real estate owned Impaired loans Total assets measured at fair value on a nonrecurring basis $6,374 17,085 $23,459 $ - - $ - Fair Value Level 1 Level 2 (In thousands) $6,374 7,670 $14,044 Level 3 $ - 9,415 $9,415 At December 31, 2014 For the Year Ended December 31, 2014 Total Losses ($358) (884) ($1,242) Level 2 – Valuation is based upon independent market prices or appraised value of the collateral, less 10% for selling costs, generally. Level 2 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. Level 3 – Valuation is based upon estimated liquidation values of loan collateral. The value of level 3 assets can also include a component of real estate, which is valued as described for level 2 inputs, when collateral for the impaired loan includes both business assets and real estate. Level 3 includes impaired loans where a specific reserve has been established or a chargeoff has been recorded. Disclosures about Fair Value of Financial Instruments The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value in the balance sheet. Cash and Due from Banks Cash and due from banks represent U.S. dollar denominated coin and currency, deposits at the Federal Reserve Bank and correspondent banks, and amounts being settled with other banks to complete the processing of customers’ daily transactions. Collectively, the Federal Reserve Bank and financial institutions operate in a market in which cash and due from banks transactions are processed continuously in significant daily volumes honoring the face value of the U.S. dollar. Investment Securities Held to Maturity The fair values of investment securities were estimated using quoted prices as described above for Level 1 and Level 2 valuation. Loans 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 cost. Fixed rate loans and variable rate loans that have 80 - 80 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 reached their minimum contractual interest 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 allowance for loan losses of $29,771 thousand at December 31, 2015 and $31,485 thousand at December 31, 2014 and the purchased loan discount associated with purchased covered and purchased non-covered loans of $152 thousand and $6,432 thousand, respectively at December 31, 2015 and of $468 thousand and $9,372 thousand, respectively at December 31, 2014 were applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans. Deposit Liabilities Deposits with no stated maturity such as checking accounts, savings accounts and money market accounts can be readily converted to cash or used to settle transactions at face value through the broad financial system operated by the Federal Reserve Bank and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair values of time deposits were estimated by discounting estimated future contractual cash flows using current market rates for financial instruments with similar characteristics. Short-Term Borrowed Funds The carrying amount of securities sold under agreement to repurchase and other short-term borrowed funds approximate fair value due to the relatively short period of time between their origination and their expected realization. Federal Home Loan Bank Advances The fair values of FHLB advances were estimated by using redemption amounts quoted by the Federal Home Loan Bank of San Francisco. The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions. The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company. Financial Assets: Cash and due from banks Investment securities held to maturity Loans Financial Liabilities: Deposits Short-term borrowed funds At December 31, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) $433,044 - - Significant Other Observable Inputs (Level 2 ) Significant Unobservable Inputs (Level 3 ) $ - 1,325,699 - $ - - 1,517,394 Carrying Amount $433,044 1,316,075 1,503,625 Estimated Fair Value $433,044 1,325,699 1,517,394 $4,540,659 53,028 $4,539,455 53,028 $ - - $4,253,691 53,028 $285,764 - [The remainder of this page intentionally left blank] 81 - 81 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K At December 31, 2014 Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) $380,836 1,077 - Significant Other Observable Inputs (Level 2 ) Significant Unobservable Inputs (Level 3 ) $ - 1,047,485 - $ - - 1,685,048 Carrying Amount $380,836 1,038,658 1,668,805 Estimated Fair Value $380,836 1,048,562 1,685,048 $4,349,191 89,784 20,015 $4,348,958 89,784 20,014 $ - - 20,014 $3,964,048 89,784 - $384,910 - - Financial Assets: Cash and due from banks Investment securities held to maturity Loans Financial Liabilities: Deposits Short-term borrowed funds Federal Home Loan Bank advances The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates. Note 12: Lease Commitments Thirty-two banking offices and a centralized administrative service center are owned and 64 facilities are leased. Substantially all the leases contain renewal options and provisions for rental increases, principally for cost of living index. The Company also leases certain pieces of equipment. Minimum future rental payments under noncancelable operating leases as of December 31, 2015 are as follows: 2016 2017 2018 2019 2020 Thereafter Total minimum lease payments (In thousands) $6,708 5,814 5,073 3,551 1,998 1,516 $24,660 The total minimum lease payments have not been reduced by minimum sublease rentals of $2,076 thousand due in the future under noncancelable subleases. Total rentals for premises were $8,359 thousand in 2015, $8,798 thousand in 2014 and $8,953 thousand in 2013. Total sublease rentals were $1,721 thousand in 2015, $1,833 thousand in 2014 and $1,852 thousand in 2013. Total rentals for premises, net of sublease income, included in noninterest expense were $6,638 thousand in 2015, $6,965 thousand in 2014 and $7,101 thousand in 2013. Note 13: Commitments and Contingent Liabilities Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $299,884 thousand and $312,694 thousand at December 31, 2015 and December 31, 2014, 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. Financial and performance standby letters of credit outstanding totaled $26,149 thousand and $29,002 thousand at December 31, 2015 and December 31, 2014, respectively. The Company also had commitments for commercial and similar letters of credit of $40 thousand at December 31, 2015 and December 31, 2014. At December 31, 2015 and December 31, 2014, the Company had a reserve for unfunded commitments of $2,593 thousand and $2,693 thousand, respectively, included in other liabilities. 82 - 82 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount is reasonably estimable. Note 14: Retirement Benefit Plans The Company sponsors a qualified defined contribution Deferred Profit-Sharing Plan covering substantially all of its salaried employees with one or more years of service. The costs charged to noninterest expense related to discretionary Company contributions to the Deferred Profit-Sharing Plan were $734 thousand in 2015, $1,002 thousand in 2014 and $1,200 thousand in 2013. The Company also sponsors a qualified defined contribution Tax Deferred Savings/Retirement Plan (ESOP) covering salaried employees who become eligible to participate upon completion of a 90-day introductory period. The Tax Deferred Savings/ Retirement Plan (ESOP) allows employees to defer, on a pretax or after-tax basis, a portion of their salaries as contributions to this Plan. Participants may invest in several funds, including one fund that invests primarily in Westamerica Bancorporation common stock. The Company funds contributions to match participating employees’ contributions, subject to certain limits. The matching contributions charged to compensation expense were $1,147 thousand in 2015, $1,159 thousand in 2014 and $1,214 thousand in 2013. The Company offers a continuation of group insurance coverage to eligible employees electing early retirement, for the period from the date of retirement until age 65. For eligible employees the Company pays a portion of these early retirees’ group insurance premiums. The Company also reimburses a portion of Medicare Part B premiums for all qualifying retirees over age 65 and, if eligible, their spouses. Eligibility for post-retirement medical benefits is based on age and years of service, and restricted to employees hired prior to February 1, 2006 who elect early retirement prior to January 1, 2018. The Company uses an actuarial- based accrual method of accounting for post-retirement benefits. The Company used a December 31 measurement date for determining post-retirement medical benefit calculations. The following tables set forth the net periodic post-retirement benefit cost and the change in the benefit obligation for the years ended December 31 and the funded status of the post-retirement benefit plan as of December 31: Net Periodic Benefit Cost Service (benefit) cost Interest cost Amortization of unrecognized transition obligation Net periodic (benefit) cost 2015 At December 31, 2014 (In thousands) $288 122 61 $471 ($202) 106 61 ($35) 2013 ($153) 110 61 $18 Other Changes in Benefit Obligations Recognized in Other Comprehensive Income Amortization of unrecognized transition obligation, net of tax Total recognized in net periodic (benefit) cost and accumulated other comprehensive income (36) ($71) (36) $435 (36) ($18) The remaining transition obligation cost for this post-retirement benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $61 thousand. 83 - 83 - Obligation and Funded Status Change in benefit obligation Benefit obligation at beginning of year Service (benefit) cost Interest cost Benefits paid Benefit obligation at end of year Accumulated post-retirement benefit obligation attributable to: Retirees Fully eligible participants Other Total Fair value of plan assets Accumulated post-retirement benefit obligation in excess of plan assets Additional Information Assumptions Weighted-average assumptions used to determine benefit obligations Discount rate Weighted-average assumptions used to determine net periodic benefit cost Discount rate 2015 $2,782 (202) 106 (164) $2,522 At December 31, 2014 (In thousands) $2,544 288 122 (172) $2,782 $1,695 809 18 $2,522 - $2,522 $1,732 998 52 $2,782 - $2,782 2013 $2,755 (153) 110 (168) $2,544 $1,443 983 118 $2,544 - $2,544 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K 2015 At December 31, 2014 (In thousands) 2013 4.30% 3.80% 4.80% 3.80% 4.80% 4.00% The above discount rate is based on the Corporate Aa 25-year rate, the term of which approximates the term of the benefit obligations. The Company reserves the right to terminate or alter post-employment health benefits. Post-retirement medical benefits are currently fixed amounts without provision for future increases; as a result, the assumed annual average rate of inflation used to measure the expected cost of benefits covered by this program is zero percent for 2016 and beyond. Assumed benefit inflation rates are not applicable for this program. 2016 2017 2018 2019 2020 Years 2021-2025 Estimated future benefit payments (In thousands) $165 165 160 156 152 700 Note 15: Related Party Transactions Certain of the Directors, executive officers and their associates have had banking transactions with subsidiaries of the Company in the ordinary course of business. In Management’s opinion, with the exception of the Company’s Employee Loan Program, all outstanding loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, did not involve more than a normal risk of collectability, and did not present other favorable features. As part of the Employee Loan Program, all employees, including executive officers, are eligible to receive mortgage loans at one percent below Westamerica Bank’s prevailing interest rate at the time of loan origination. In Management’s opinion, all loans to executive officers under the Employee Loan Program are made by Westamerica Bank in compliance with the applicable restrictions of Section 22(h) of the Federal Reserve Act. 84 - 84 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 The table below reflects information concerning loans to certain directors and executive officers and/or family members during 2015 and 2014: Balance at January 1, Originations Principal reductions Balance at December 31, Percent of total loans outstanding. Note 16: Regulatory Matters 2015 2014 (In thousands) $957 - (46) $911 0.06% $1,013 - (56) $957 0.06% Payment of dividends to the Company by the Bank is limited under regulations for state chartered banks. The amount that can be paid in any calendar year, without prior approval from regulatory agencies, cannot exceed the net profits (as defined) for the preceding three calendar years less dividends paid. Under this regulation, the Bank obtained approval for dividends paid to the Company during 2015. The Company consistently has paid quarterly dividends to its shareholders since its formation in 1972. The Bank is required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. The Bank’s daily average on deposit at the Federal Reserve Bank was $254,600 thousand in 2015 and $400,039 thousand in 2014, which amounts exceed the Bank’s required reserves. Note 17: Other Comprehensive Income The components of other comprehensive income (loss) and other related tax effects were: Securities available for sale: Net unrealized losses arising during the year Reclassification of gains (losses) included in net income Net unrealized losses arising during the year Post-retirement benefit obligation Other comprehensive loss Securities available for sale: Net unrealized gains arising during the year Reclassification of gains (losses) included in net income Net unrealized gains arising during the year Post-retirement benefit obligation Other comprehensive income Securities available for sale: Net unrealized losses arising during the year Reclassification of gains (losses) included in net income Net unrealized losses arising during the year Post-retirement benefit obligation Other comprehensive loss 85 - 85 - Before tax 2015 Tax effect (In thousands) Net of tax ($8,028) - (8,028) 61 ($7,967) $3,375 - 3,375 (25) $3,350 ($4,653) - (4,653) 36 ($4,617) Before tax 2014 Tax effect (In thousands) Net of tax $1,627 - 1,627 61 $1,688 ($684) - (684) (25) ($709) $943 - 943 36 $979 Before tax 2013 Tax effect (In thousands) Net of tax ($17,855) - (17,855) 61 ($17,794) $7,507 - 7,507 (25) $7,482 ($10,348) - (10,348) 36 ($10,312) Accumulated other comprehensive income (loss) balances were: Balance, December 31, 2012 Net change Balance, December 31, 2013 Net change Balance, December 31, 2014 Net change Balance, December 31, 2015 Post-retirement Benefit Obligation ($178) 36 (142) 36 (106) 36 ($70) Net Unrealized Gains (losses) on Securities (In thousands) $14,803 (10,348) 4,455 943 5,398 (4,653) $745 Accumulated Other Comprehensive Income (loss) $14,625 (10,312) 4,313 979 5,292 (4,617) $675 Note 18: Earnings Per Common Share The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period plus the impact of common stock equivalents. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K Net income (numerator) Basic earnings per common share Weighted average number of common shares outstanding - basic (denominator) Basic earnings per common share Diluted earnings per common share Weighted average number of common shares outstanding - basic Add common stock equivalents for options Weighted average number of common shares outstanding - diluted (denominator) Diluted earnings per common share For the Years Ended December 31, 2015 2013 2014 (In thousands, except per share data) $58,753 $60,646 $67,177 25,555 $2.30 25,555 22 25,577 $2.30 26,099 $2.32 26,099 61 26,160 $2.32 26,826 $2.50 26,826 51 26,877 $2.50 For the years ended December 31, 2015, 2014, and 2013, options to purchase 1,313 thousand, 1,133 thousand and 1,575 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti- dilutive effect. [The remainder of this page intentionally left blank] 86 - 86 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Note 19: Westamerica Bancorporation (Parent Company Only Condensed Financial Information) Statements of Income and Comprehensive Income Dividends from subsidiaries Interest income Other income Total income Interest on borrowings Salaries and benefits Other expense Total expense Income before taxes and equity in undistributed income of subsidiaries Income tax benefit Earnings of subsidiaries less than subsidiary dividends Net income Other comprehensive (loss) income, net of tax Comprehensive income Balance Sheets Assets Cash Investment securities available for sale Investment in Westamerica Bank Investment in non-bank subsidiaries Premises and equipment, net Accounts receivable from Westamerica Bank Other assets Total assets Liabilities Accounts payable to Westamerica Bank Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity For the Years Ended December 31, 2014 2015 2013 (In thousands) $75,369 7 7,182 82,558 42 6,587 1,704 8,333 74,225 742 (14,321) 60,646 979 $61,625 $68,981 10 8,411 77,402 1 6,291 3,424 9,716 67,686 803 (9,736) 58,753 (4,617) $54,136 $88,754 14 8,684 97,452 707 7,120 2,174 10,001 87,451 732 (21,006) 67,177 (10,312) $56,865 At December 31, 2015 2014 (In thousands) $26,453 991 475,697 455 9,391 552 33,850 $547,389 $737 14,447 15,184 532,205 $547,389 $7,451 910 490,098 456 9,679 323 32,974 $541,891 $790 14,498 15,288 526,603 $541,891 [The remainder of this page intentionally left blank] 87 - 87 - Statements of Cash Flows Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (Increase) decrease in accounts receivable from affiliates Increase in other assets Stock option compensation expense Tax benefit decrease upon exercise of stock options (Benefit) provision for deferred income tax Increase (decrease) in other liabilities Earnings of subsidiaries less than subsidiary dividends Gain on sales of property and equipment Net Cash Provided by Operating Activities Investing Activities Purchases of premises and equipment Net Cash Provided by Investing Activities Financing Activities Net reductions in debt financing Exercise of stock options/issuance of shares Tax benefit decrease upon exercise of stock options Retirement of common stock including repurchases Dividends Net Cash Used in Financing Activities Net change in cash Cash at Beginning of Period Cash at End of Period Supplemental Cash Flow Disclosures: Supplemental disclosure of cash flow activities: Interest paid for the period Income tax payments for the period 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K For the Years Ended December 31, 2015 2013 2014 (In thousands) $58,753 $60,646 $67,177 326 (217) (1,713) 1,272 1,284 (491) 743 9,736 (39) 69,654 - - - 4,848 (1,284) (15,092) (39,124) (50,652) 19,002 7,451 $26,453 341 (17) (1,668) 1,318 447 616 (814) 14,321 (88) 75,102 - - - 12,396 (447) (52,678) (39,761) (80,490) (5,388) 12,839 $7,451 312 26 (926) 1,397 298 (769) 2,573 21,006 (259) 90,835 - - (15,000) 21,499 (298) (57,320) (40,096) (91,215) (380) 13,219 $12,839 $1 17,666 $42 16,412 $840 22,562 [The remainder of this page intentionally left blank] 88 - 88 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 Note 20: Quarterly Financial Information (Unaudited) 2015 Interest and loan fee income Net interest income Provision fro credit losses Noninterest income Noninterest expense Income before taxes Net income Basic earnings per common share Diluted earnings per common share Dividends paid per common share Price range, common stock 2014 Interest and loan fee income Net interest income Provision fro credit losses Noninterest income Noninterest expense Income before taxes Net income Basic earnings per common share Diluted earnings per common share Dividends paid per common share Price range, common stock 2013 Interest and loan fee income Net interest income Provision fro credit losses Noninterest income Noninterest expense Income before taxes Net income Basic earnings per common share Diluted earnings per common share Dividends paid per common share Price range, common stock March 31, For the Three Months Ended June 30, September 30, December 31, (In thousands, expect per share data and price range of common stock) $33,917 33,258 - 12,300 26,727 18,831 14,557 0.57 0.57 0.38 40.57 - 49.45 $35,564 34,666 1,000 12,990 26,873 19,783 15,307 0.58 0.58 0.38 48.36 - 56.51 $40,465 39,213 2,800 14,278 28,677 22,014 17,271 0.64 0.64 0.37 42.59 - 45.80 $34,425 33,808 - 12,269 26,896 19,181 14,761 0.58 0.58 0.38 42.09 - 52.16 $35,403 34,503 1,000 13,198 26,957 19,744 15,157 0.58 0.58 0.38 47.85 - 55.34 $39,269 38,050 1,800 14,284 28,192 22,342 17,112 0.64 0.64 0.37 41.76 - 46.56 $34,299 33,714 - 11,993 26,173 19,534 14,857 0.58 0.58 0.38 42.97 - 52.40 $34,900 34,054 600 13,054 26,616 19,892 15,154 0.58 0.58 0.38 46.12 - 53.93 $37,956 36,780 1,800 14,419 27,758 21,641 16,738 0.63 0.63 0.37 45.73 - 50.78 $33,888 33,325 - 11,305 25,504 19,126 14,578 0.57 0.57 0.39 41.99 - 49.89 $34,342 33,542 200 12,545 26,353 19,534 15,028 0.58 0.58 0.38 42.71 - 51.24 $36,706 35,682 1,600 14,030 27,987 20,125 16,056 0.60 0.60 0.38 48.29 - 57.59 [The remainder of this page intentionally left blank] 89 - 89 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Westamerica Bancorporation San Rafael, California We have audited the accompanying consolidated balance sheet of Westamerica Bancorporation (the “Company”) as of December 31, 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended. We also have audited the Company's internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/ Crowe Horwath LLP Crowe Horwath LLP Sacramento, California February 26, 2016 90 - 90 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Westamerica Bancorporation: We have audited the accompanying consolidated balance sheet of Westamerica Bancorporation and subsidiaries (the Company) as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westamerica Bancorporation and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP KPMG LLP San Francisco, California February 27, 2015 91 - 91 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As previously reported in the Company’s current report on Form 8-K filed March 3, 2015, the Company engaged a new independent accounting firm for the fiscal year ending December 31, 2015. There have been no disagreements between the Company and the previous independent accounting firm or current independent accounting firm. ITEM 9A. CONTROLS AND PROCEDURES The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of December 31, 2015. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is communicated to the Company’s management, including the principal executive officer and the principal financial officer, to allow for timely decisions regarding required disclosures. The evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting and the attestation Report of Independent Registered Public Accounting Firm are found on page 47 and 90, respectively. 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K ITEM 9B. OTHER INFORMATION None. [The remainder of this page intentionally left blank] 92 - 92 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE The information regarding Directors of the Registrant and compliance with Section 16(a) of the 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”, “Proposal 1 — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2016 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 Company and Westamerica Bank serve at the pleasure of the Board of Directors and are subject to annual appointment by the Board at its first meeting following the Annual Meeting of Shareholders. It is anticipated that each of the executive officers listed below will be reappointed to serve in such capacities at that meeting. Name of Executive David L. Payne Position Mr. Payne, born in 1955, is the Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Payne is President and Chief Executive Officer of Gibson Printing and Publishing Company and Gibson Radio and Publishing Company which are newspaper, commercial printing and real estate investment companies headquartered in Vallejo, California. Dennis R. Hansen John “Robert” Thorson Mr. Thorson, born in 1960, is Senior Vice President and Chief Financial Officer for the Company. Mr. Thorson joined Westamerica Bancorporation in 1989, was Vice President and Manager of Human Resources from 1995 until 2001 and was Senior Vice President and Treasurer from 2002 until 2005. Mr. Hansen, born in 1950, is Senior Vice President and Manager of the Operations and Systems Administration of Community Banker Services Corporation. Mr. Hansen joined Westamerica Bancorporation in 1978 and was Senior Vice President and Controller for the Company until 2005. Mr. Robinson, born in 1959, is Senior Vice President and Banking Division Manager of Westamerica Bank. Mr. Robinson joined Westamerica Bancorporation in 1993 and has held several banking positions, most recently, Senior Vice President and Southern Banking Division Manager until 2007. Mr. Rizzardi, born in 1955, is Senior Vice President and Chief Credit Administrator of Westamerica Bank. Mr. Rizzardi joined Westamerica Bank in 2007. He has been in the banking industry since 1979 and was previously with Wells Fargo Bank and U.S. Bank. Russell W. Rizzardi David L. Robinson Held Since 1984 2005 2005 2007 2008 The Company has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K of the Securities Act of 1933) that is applicable to its senior financial officers including its chief executive officer, chief financial officer, and principal accounting officer. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the captions “Executive Compensation” in the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. [The remainder of this page intentionally left blank] 93 - 93 - 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 2016 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. 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, 2015: Plan category At December 31, 2015 Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights (In thousands, except exercise price) (b) (a) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 1,453 - 1,453 Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total 1,549 - 1,549 $49 N/A $49 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this Item 13 of this Annual Report on Form 10-K is incorporated by reference from the information contained under the caption “Certain Relationships and Related Party Transactions” in the Company’s Proxy Statement for its 2016 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 “Proposal 3 – Ratify Selection of Independent Auditor” in the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements: PART IV See Index to Financial Statements on page 46. The financial statements included in Item 8 are filed as part of this report. (a) 2. Financial statement schedules required. No financial statement schedules are filed as part of this report since the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present. (a) 3. Exhibits: The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report. 94 - 94 - K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 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. SIGNATURES WESTAMERICA BANCORPORATION /s/ John “Robert” Thorson John “Robert” Thorson Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 26, 2016 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 /s/ David L. Payne David L. Payne Chairman of the Board and Directors President and Chief Executive Officer (Principal Executive Officer) /s/ John “Robert” Thorson John “Robert” Thorson Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Etta Allen Etta Allen /s/ Louis E. Bartolini Louis E. Bartolini /s/ E. Joseph Bowler E. Joseph Bowler /s/ Arthur C. Latno, Jr. Arthur C. Latno, Jr. /s/ Patrick D. Lynch Patrick D. Lynch /s/ Catherine C. MacMillan Catherine C. MacMillan /s/ Ronald A. Nelson Ronald A. Nelson /s/ Edward B. Sylvester Edward B. Sylvester Director Director Director Director Director Director Director Director Date February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 February 26, 2016 95 - 95 - 2 0 1 5 W E S T A M E R I C A B A N C O R P O R A T O N I F O R M 1 0 - K EXHIBIT INDEX Exhibit Number 3(a) 3(b) 3(c) 4(c) 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. By-laws, as amended (composite copy), incorporated by reference to Exhibit 3(b) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission on February 26, 2010. Certificate of Determination of Fixed Rate Cumulative Perpetual preferred Stock, Series A of Westamerica Bancorporation dated February 10, 2009, incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 13, 2009. Warrant to Purchase Common Stock pursuant to the Letter Agreement between the Company and the United States Department of the Treasury dated February 13, 2009 incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 19, 2009. 10(a)* Amended and Restated Stock Option Plan of 1995, incorporated by reference to Exhibit A to the Registrant’s definitive Proxy Statement pursuant to Regulation 14(a) filed with the Securities and Exchange Commission on March 17, 2003. 10(d)* Westamerica Bancorporation Chief Executive Officer Deferred Compensation Agreement by and between Westamerica Bancorporation and David L. Payne, dated December 18, 1998 incorporated by reference to Exhibit 10(e) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the Securities and Exchange Commission on March 29, 2000. 10(e)* Description of Executive Cash Bonus Program incorporated by reference to Exhibit 10(e) to Exhibit 2.1 of 10(f)* Registrant’s Form 8-K filed with the Securities and Exchange Commission on March 11, 2005. Non-Qualified Annuity Performance Agreement with David L. Payne dated November 19, 1997 incorporated by reference to Exhibit 10(f) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005. 10(g)* Amended and Restated Westamerica Bancorporation Stock Option Plan of 1995 Nonstatutory Stock Option Agreement Form incorporated by reference to Exhibit 10(g) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005. 10(i)* 10(j)* 10(k)* 10(h)* Amended and Restated Westamerica Bancorporation Stock Option Plan of 1995 Restricted Performance Share Grant Agreement Form incorporated by reference to Exhibit 10(h) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005. Amended Westamerica Bancorporation and Subsidiaries Deferred Compensation Plan (As restated effective January 1, 2005) dated December 31, 2008 incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009. Amended and Restated Westamerica Bancorporation Deferral Plan (Adopted October 26, 1995) dated December 31, 2008 incorporated by reference to Exhibit 10(j) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009. Form of Restricted Performance Share Deferral Election pursuant to the Westamerica Bancorporation Deferral Plan incorporated by reference to Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 10, 2006. Purchase and Assumption Agreement by and between Federal Deposit Insurance Corporation and Westamerica Bank dated February 6, 2009, incorporated by reference to Exhibit 99.2 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 11, 2009. Letter Agreement between the Company and the United States Department of the Treasury dated February 13, 2009 incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 19, 2009. Data Processing Agreement by and between Fidelity Information Services and Westamerica Bancorporation incorporated by reference to Exhibit 10(r) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on February 27, 2012. 10(m) 10(r) 10(l) 11.1 10(s)* Amended and Restated Stock Option Plan of 1995, incorporated by reference to Exhibit A to the Registrant’s definitive Proxy Statement pursuant to Regulation 14(a) filed with the Securities and Exchange Commission on March 13, 2012. Statement re computation of per share earnings incorporated by reference to Note 18 of the Notes to the Consolidated Financial Statements of this report. 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. Subsidiaries of the registrant. 14 21 23(a).1 Consent of Crowe Horwath LLP 23(a).2 Consent of KPMG LLP 31.1 31.2 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) 96 32.1 32.2 101** 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 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 Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the period ended December 31, 2015, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2015; (ii) Consolidated Balance Sheets at December 31, 2015, and December 31, 2014; (iii) Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2015, (iv) Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2015; (v) Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2015 and (vi) Notes to Consolidated Financial Statements. ____________ * ** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 Indicates management contract or compensatory plan or arrangement. of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. 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 remainder of this page intentionally left blank] K - 0 1 M R O F I N O T A R O P R O C N A B A C I R E M A T S E W 5 1 0 2 97 Corporate Information Corporate Profile Westamerica Bancorporation (Nasdaq:WABC) operates as a holding company for Westamerica Bank, a community bank serving 21 Northern and Central California counties. Westamerica Bancorporation Headquarters 1108 Fifth Avenue, San Rafael, CA 94901 Telephone (415) 257-8000 www.westamerica.com Subsidiary Bank Westamerica Bank 1108 Fifth Avenue, San Rafael, CA 94901 Telephone (415) 257-8000 Notice of Annual Meeting Thursday, April 28, 2016 at 11:00 a.m. PT Hilton Garden Inn 2200 Gateway Court, Fairfield, CA 94533 Transfer Agent Computershare Investor Services LLC Telephone (877) 588-4258 (Toll-free) www.computershare.com/investor Stock Listing The NASDAQ Global Select Market, Symbol: WABC Dividend Reinvestment and Stock Purchase Plan Westamerica Bancorporation offers a dividend reinvestment and stock purchase program whereby registered shareholders may reinvest their dividends in and/or purchase additional shares of the Company’s stock. Information concerning this optional program is available from: Computershare Investor Services LLC Telephone (877) 588-4258 (Toll-free) Annual Report Copies Westamerica Bancorporation will provide its security holders, without charge, a copy of its 2015 Annual Report on Form 10-K, including the financial statements and schedules thereto, as filed with the Securities and Exchange Commission. Requests for copies of this annual report should be directed to: Westamerica Bancorporation, Investor Relations, A-2B Post Office Box 1250, Suisun City, CA 94585-1250 Telephone (707) 863-6992 E-mail: investments@westamerica.com www.westamerica.com Westamerica Bancorporation and Westamerica Bank Board of Directors David L. Payne, Chairman, President and Chief Executive Officer, Westamerica Bancorporation; President and General Manager, Gibson Publications Etta Allen, President, Allen Heating and Sheet Metal Louis E. Bartolini, Retired Merrill Lynch Executive E. Joseph Bowler, Retired Senior Vice President and Treasurer, Westamerica Bancorporation Arthur C. Latno, Jr., Retired Executive Vice President, Pacific Telesis Company Patrick D. Lynch, Consultant, High Technology Companies Catherine C. MacMillan, Retired Attorney Ronald A. Nelson, Investments Edward B. Sylvester, Consulting Civil Engineer Westamerica Bancorporation Corporate Officers David L. Payne, Chairman, President and Chief Executive Officer Dennis R. Hansen, Senior Vice President Operations and Systems Russell Rizzardi, Senior Vice President Credit Administration David L. Robinson, Senior Vice President Banking Division James J. Schneck, Vice President and General Auditor Robert A. Thorson, Senior Vice President and Chief Financial Officer Westamerica Bank Management Officers David L. Payne, Chairman, President and Chief Executive Officer Dennis R. Hansen, Senior Vice President Operations and Systems Russell Rizzardi, Senior Vice President Credit Administration David L. Robinson, Senior Vice President Banking Division Robert A. Thorson, Senior Vice President and Chief Financial Officer 1108 Fifth Avenue • San Rafael, CA 94901 • Westamerica.com 2 0 1 5 A n n u a l R e p o r t • 2 0 1 6 P r o x y S t a t e m e n t • N o t i c e o f A n n u a l M e e t i n g Westamerica 

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