Westamerica Bank

Dear Fellow Shareholders,

Looking back on 2008, we recall the competitive banking environment of 2005, 2006 and 2007. Intense competition for loan growth resulted in reduced pricing and relaxed underwriting standards. To fund loan growth, banks became more and more reliant on higher-cost certificates of deposit, pressing funding costs higher. At the time, Westamerica chose a different path, although for us the path was familiar - the consistent application of our core operating principles.

Our over-arching objective is to deliver consistent operating results to our shareholders from a conservative risk posture. We maintain more conservative loan underwriting practices. We focus on gathering checking and savings deposits to achieve lower-cost funding for our Bank. We strive to maintain relatively low operating costs, delivering more revenue to the bottom line for you, our shareholders.

A Distinguishing Quality

You may recall our desire to maintain a healthy loan portfolio over the last several years. Consistent application of our relatively conservative loan underwriting practices distinguished Westamerica in 2008, a year characterized by revealing operating conditions for the banking industry. Aggressive loan underwriting practices over the past years were exposed by declining real estate values and a weakening economy.

• In 2008, our peers in the banking industry recognized losses on uncollectible loans equal to 0.89 percent of total loans, four times higher than the prior three years.
• At Westamerica, the high quality of our loan portfolio became apparent. Westamerica wrote-off uncollectible loans at less than one-half the level of our peers.

Looking ahead to 2009, Westamerica will continue to stand apart.

• At year-end 2008, our peers had problem loans on which they were not recording interest income equal to 2.55 percent of their loans. Our peers’ reserves to absorb losses on loans are less than their problem loan totals.
• At Westamerica, problem loans represented only 0.45 percent of total loans, and our loss reserves exceed our problem loans more than four-fold.

Westamerica is entering 2009 in a much healthier condition than our peers. We will continue to adhere to our conservative underwriting practices to maintain a relatively strong loan portfolio over the years to come.

We have always focused on building and maintaining a low-cost deposit base. We direct our sales force to develop customer relationships built on checking and savings deposits, not just loans. As a result, the lowest-costing deposit products represent almost 80 percent of our deposits, while our peers have only 57 percent. Westamerica’s low-cost funding supports our healthy net interest margin, so we do not need to rely on the higher yields of more risky loan products. Our 5.13 percent interest margin for 2008 was higher than 96 percent of our peers.

Our low-cost principles are also applied to management of our operating costs. We believe our duty to shareholders includes delivering as much income to the bottom line as possible. Over the past four years, Westamerica has consistently spent fewer revenue dollars on operating costs than almost 90 percent of our peers. By managing our operating costs to a low level, we provide higher levels of net income from which to pay shareholder dividends and invest in prudent growth opportunities.

Our focus on maintaining a high-quality loan portfolio, building a low-cost funding base, and managing to low operating costs generates earnings which are consistently stronger than our peers. While we are proud of our 2008 performance, we are disappointed our results included securities losses. As a Visa member bank, we also experienced one-time gains from Visa’s initial public stock offering. For 2008, Westamerica’s return on shareholders’ equity was 15 percent, compared to a net loss, or negative returns, for the banking industry. Importantly, our underlying earnings, loan portfolio and capital condition remain strong as we enter 2009.

Looking Outward

We expect to see our industry struggle with a weak economy throughout 2009. At Westamerica, our fundamental strengths allow us to look outward for opportunities. We expect to expand our position in the marketplace through bank acquisitions. We maintain a positive view of the longer-term prospects for the Northern and Central California markets in spite of current conditions. Our expansion activities will be well thought out, following the prudent decision making process we have applied to acquisitions over the past twenty years.

As you likely know, Westamerica acquired County Bank from the FDIC on February 6, 2009. County Bank had total loans of $1.3 billion and total deposits of $1.2 billion primarily in California’s Central Valley. This transaction clearly meets our long-standing acquisition principles of improving shareholder value through earnings per share expansion and market share improvement.

Our appetite for expansion will not delay product improvements and infrastructure building. We are currently expanding our products based on electronic delivery such as e-statements and web access. We have built our sales force numbers to be prepared for a period of economic expansion.

We are investing in technology upgrades to stay competitive for the long-term. We are moving forward.

We remain optimistic for the opportunities and challenges 2009 will present. My faith in our employees could not be stronger. We have endured an extremely competitive environment and unprecedented changes in the banking industry over the last four years. We remain resolute in our determination to succeed, and to serve you well. Thank you for your confidence.

Sincerely,

David L. Payne
Chairman, President, and Chief Executive Officer
February 26, 2009