**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

**FORM 10-K**

 

| **ý** | **ANNUAL REPORT PURSUANT TO SECTION  13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|
|       | For the Fiscal Year  Ended December 31, 2001                                              |
|       | Commission File Number:  0-27384                                                          |

 

| **o**  | **TRANSITION REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | For the Transition  Period From                    to                    |

 

 

**CAPITALCORP OF THE WEST**

(Exact name ofregistrant as specified in its charter)

** **

| **California**                                                  |   | **77-0405791**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **550 West Main Street, Merced,  California**                   |   | **95340**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |
| **(209) 725-2269**                                              |
| (Registrant’s  telephone number, including area code)      |

 

Securities registeredunder Section 12(b) of the Act:

**None**

 

Securities registeredunder Section 12(g) of the Act (Title of Class):

**Common Stock, no par value;**

**Preferred Share Purchase Rights**

 

The Registrant has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Company was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

**ý** Yes    o   No

 

Disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.      o

 

Aggregate market value ofthe voting stock held by nonaffiliates of the Registrant was approximately  $88,882,163 (based on the $17.87 average ofbid and ask prices per common share on March 15, 2002).  The number of shares outstanding of theRegistrant’s common stock, no par value, as of March 15, 2002 was 4,973,820.

 

Documents incorporated byreference:

Portions of thedefinitive proxy statement for the 2002 Annual Meeting of Shareholders to befiled with the Securities and Exchange Commission pursuant to Regulation 14Aare incorporated by reference in Part III, Items 10 through 13 and portions ofthe Annual Report to Shareholders for 2001 are incorporated by reference inPart II, Item 5 through 8.

 

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**Capital Corp of the West**

Table of Contents

 
|   |   | **Reference** |
|--------|--------|---------------|

 

**PART I**

 
| ITEM  1. | BUSINESS                                             |   |
|----------|------------------------------------------------------|--------|
| ITEM  2. | PROPERTIES                                           |   |
| ITEM 3.  | LEGAL  PROCEEDINGS                                   |   |
| ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |   |

** **

**PART II**

 
| ITEM  5. | MARKET  FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS          | Page  19 of 2001 Annual Report             |
|----------|---------------------------------------------------------------------------------------------|--------------------------------------------|
| ITEM 6.  | SELECTED FINANCIAL DATA                                                                     | Page 9 of 2001 Annual  Report              |
| ITEM  7. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | Pages  10 through 20 of 2001 Annual Report |
| ITEM  8. | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                | Pages  22 through 46 of 2001 Annual Report |
| ITEM  9. | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |                                       |

** **

**PART III**

 
| ITEM  10. | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT             | Proxy  Statement for 2002 Annual Meeting |
|-----------|-----------------------------------------------------------------|------------------------------------------|
| ITEM 11.  | EXECUTIVE COMPENSATION                                          | Proxy Statement for  2002 Annual Meeting |
| ITEM  12. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | Proxy  Statement for 2002 Annual Meeting |
| ITEM  13. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                 | Proxy  Statement for 2002 Annual Meeting |

 

**PARTIV**

 
| ITEM  14.      | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |   |
|----------------|-------------------------------------------------------------------|--------|
| SIGNATURES     |                                                              |   |
| EXHIBIT  INDEX |                                                              |   |

 

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**PART I**

 

**ITEM1.                                  BUSINESS**

 

***General Development of the Company***

 

General

Capital Corp of the West(the “Company” or “Capital Corp”) is a bank holding company incorporated underthe laws of the State of California on April 26, 1995.  On November 1, 1995, the Company becameregistered as a bank holding company and is the holder of all of the capitalstock of County Bank (the “Bank”). During 1999, Town and Country Finance and Thrift (the “Thrift”) wasmerged into County Bank.  The Company’sprimary asset is the Bank****and the Bank is the Company’s primarysource of income.  As of December 31,2001, the Company’s securities consist of 4,927,465 shares of Common Stock, nopar value, and no shares of Preferred Stock. As of March 15, 2002 there were 4,973,820 common shares outstanding,held by approximately 1,700 shareholders. There were no preferred shares outstanding at March 15, 2002.  The Company has one wholly owned inactivenonbank subsidiary, Capital West Group (“CWG”) at December 31, 2001.  The Bank has four wholly owned subsidiaries,Merced Area Investment & Development, Inc. (“MAID”), County Asset Advisors(“CAA”), County Investment Trust (“REIT”), and County Investment II (“REIT2”).  During January 2002, the boardapproved the dissolution of REIT 2.  Itis anticipated that REIT 2 will be completely liquidated and dissolved by theend of the second quarter of 2002.  CAAis currently inactive.  All referencesherein to the “Company” include the Bank and the Bank’s subsidiaries, unlessthe context otherwise requires.

 

***Information about Commercial Banking & General Businessof the Company and its Subsidiaries***

 

The Bank was organized onAugust 1, 1977, as County Bank of Merced, a California state bankingcorporation.  The Bank commencedoperations in 1977.  In November 1992,the Bank changed its legal name to County Bank.  The Bank’s deposits are insured by the Federal Deposit InsuranceCorporation (“FDIC”), up to applicable limits. The Bank is a member of the Federal Reserve System.

 

Industry & MarketArea

The Bank engages ingeneral commercial banking business primarily in Fresno, Madera, Mariposa,Merced, San Francisco, San Joaquin, Stanislaus, Tulare and Tuolomnecounties.  The Bank has eighteen fullservice branch offices; two of which are located in Merced with the branchlocated in downtown Merced currently serving as both a branch and asadministrative headquarters.  There areoffices in Atwater, Hilmar, Los Banos, Sonora, Stockton, two offices in Modestoand two offices in Turlock.  In 1997,the Bank also opened an office in Madera and purchased three branch officesfrom Bank of America in Livingston, Dos Palos and Mariposa.  During 1999, the Bank opened its firstoffice in Fresno, and in 2000 expanded our presence in Fresno by adding anadditional office.  On January 18, 2001the Bank opened a loan production office in San Francisco that during 2001 wasconverted into a full service branch. The Bank’s administrative headquartersalso provides accommodations for the activities of Merced Area Investment &Development (“MAID”), the Bank’s wholly owned real estate subsidiary.  (See “**ITEM 2. PROPERTIES**”)

 

Competition

The Company’s primarymarket area consists of Fresno, Madera, Mariposa, Merced, San Francisco, Stanislaus,Tulare, Tuolomne and Stanislaus Counties and nearby communities.  The banking business in Californiagenerally, and specifically in the Company’s primary market area, is highlycompetitive with respect to both loans and deposits.  The banking business is dominated by a relatively small number ofmajor banks which have many offices operating over wide geographic areas.  Many of the major commercial banks offercertain services (such as international, trust and securities brokerageservices) which are not offered directly by the Company or through itscorrespondent banks.  By virtue of theirgreater total capitalization, such banks have substantially higher lendinglimits than the Company and substantial advertising and promotional budgets.

 

Smaller independentfinancial institutions, savings and loans and credit unions also serve ascompetition in our service area.  AtJune 30, 2001, the Bank maintained a market share of 33% of total FDIC insureddeposits in the County of Merced, California. The Bank’s market share of FDIC insured deposits in the

 

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counties of Fresno,Madera, Mariposa, Stanislaus, and Tuolumne, California was approximately 1%,3%, 41%, 4%, and 3% respectively.  TheBank’s market share of total FDIC insured deposits in the counties of SanFrancisco and San Joaquin, California were less than 1% of the total FDICinsured deposits in those counties.

 

In the past, the Bank’sprincipal competitors for deposits and loans have been other banks (particu­larlymajor banks), savings and loan associations and credit unions.  To a lesser extent, competition was alsoprovided by thrift and loans, mortgage brokerage companies and insurancecompanies.  Other institutions, such asbrokerage houses, credit card companies, and even retail establish­ments haveoffered new investment vehicles, such as money-market funds, which also competewith banks.  The direction of federallegislation in recent years seems to favor competition between different typesof financial institu­tions and to foster new entrants into the financialservices market, and it is anticipated that this trend will continue.

 

To compete effectively inour service area, the Bank relies upon specialized services, responsivehandling of customer needs, local promotional activity, and personal contactsby its officers, directors and staff. For customers whose loan demands exceed the Bank’s lending limits, theBank seeks to arrange funding for such loans on a par­tici­pation basis withits correspondent banks or other independent commercial banks.  The Bank also assists customers requiringservices not offered by the Bank to obtain such services from its correspondentbanks.

 

See also the discussionunder “Regulation and Supervision – Financial ServicesModernization Legislation.”

 

***Bank’s Services and Markets***

 

Bank

The Bank conducts ageneral commercial banking business including the acceptance of demand(includes interest bearing), savings and time deposits.  The Bank also offers commercial,agriculture, real estate, personal, home improvement, home mortgage,automobile, credit card and other installment and term loans.  The Bank offers travelers’ checks, safedeposit boxes, banking-by-mail, drive-up facilities, 24-hour automated tellermachines, and other customary banking services to its customers.  The Bank does not operate a trust departmentnor does it offer these services through a correspondent banking relationshipto its customers.

 

The five general areas inwhich the Bank has directed its lendable assets are (i) real estate mortgageloans, (ii) commercial loans,  (iii)agricultural loans,  (iv) consumerloans, and (v) real estate construction loans. As of December 31, 2001, these five categories accounted forapproximately 35%, 22%, 18%, 14% and 11%, respectively, of the Bank’s loanportfolio.

 

In 1994, the Bankorganized a department to originate loans within the underwriting standards ofthe Small Business Administration (“SBA”). The Bank originates packages and subsequently sells these loans in thesecondary market and retains servicing rights on these loans.

 

The Bank’s deposits areattracted primarily from individuals and small and medium-sizedbusiness-related sources.  The Bank alsoattracts some deposits from municipalities and other governmental agencies andentities.  In connection with thedeposits of municipalities or other governmental agencies, the Bank isgenerally required to pledge securities to secure such deposits, except whenthe depositor signs a waiver with respect to the first $100,000 of suchdeposits, which amount is insured by the FDIC.

 

The principal sources ofthe Bank’s revenues are (i) interest and fees on loans, (ii) interest oninvestment securities (principally U.S. Government securities, mortgage-backedsecurities, collateralized mortgage obligations, corporate bonds and municipalbonds), and (iii) service charges on deposit accounts.  For the year ended December 31, 2001, thesesources comprised approximately 67%, 22%, and 6% respectively, of the Bank’stotal interest and noninterest income.

 

Most of the Bank’sbusiness originates from individuals, businesses and professional firms locatedin its service area. The Bank is not dependent upon a single customer or groupof related customers for a material portion of its deposits, nor is a materialportion of the Bank’s loans concentrated within a single industry or

 

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group of relatedindustries.  The quality of Bank assetsand Bank earnings could be adversely affected by a downturn in the localeconomy, including the agricultural sector.

 

***Bank’s Real Estate Subsidiary (MAID)***

 

General

Californiastate-chartered banks previously were allowed, under state law, to engage inreal estate development activities either directly or through investment in awholly-owned subsidiary.  Pursuant tothis authorization, the Bank established MAID, its wholly-owned subsidiary, asa California corporation on February 18, 1987.  MAID engaged in real estate development activities forapproximately seven years.

 

Federal law now precludesbanks from engaging in real estate development.  At December 31, 2001, MAID held no real estate investments.  The last remaining real estate parcel heldby MAID was sold during 2000.  MAID doesnot currently intend to purchase or develop any new investment properties.  In the future, MAID may be used to own,operate, and maintain branch premises property.

 

***Employees***

 

As of December 31,2001, the Company employed a total of 267 full-time equivalent employees.  The Company believes that employee relationsare excellent.

 

***Seasonal Trends in the Company’s Business***

 

Although the Company doesexperience some immaterial seasonal trends in deposit growth and funding of itsagricultural and construction loan portfolios, in general the Company’sbusiness is not seasonal.

 

***Operations in Foreign Countries***

 

The Company conducts nooperations in any foreign country.

 

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**REGULATION AND SUPERVISION**

 

REGULATORY ENVIRONMENT

The banking andfinancial services industry is heavily regulated.  Regulations, statutes and policies affecting the industry arefrequently under review by Congress and state legislatures, and by the federaland state agencies charged with supervisory and examination authority overbanking institutions.  Changes in thebanking and financial services industry can be expected to occur in thefuture.  Some of the changes may createopportunities for the Company and the Bank to compete in financial markets withless regulation.  However, these changesalso may create new competitors in geographic and product markets which havehistorically been limited by law to bank institutions, such as the Bank.Changes in the regulation, statutes or policies that impact the Company and theBank cannot necessarily be predicted and may have a material effect on theirbusiness and earnings.

 

The operations ofbank holding companies and their subsidiaries are affected by the credit andmonetary policies of the Federal Reserve Bank (FRB).  An important function of the FRB is to regulate the nationalsupply of bank credit.  Among theinstruments of monetary policy used by the FRB to implement its objectives areopen market operations in U.S. government securities, changes in the discountrate on bank borrowings and changes in reserve requirements on bankdeposits.  These instruments of monetarypolicy are used in varying combinations to influence the overall level of bankloans, investments and deposits, the interest rates charged on loans and paidfor deposits, the price of the dollar in foreign exchange markets, and thelevel of inflation. The credit and monetary policies of the FRB will continueto have a significant effect on the Bank and on the Company.

 

Set forth below isa summary of significant statutes, regulations and policies that apply to theoperation of banking institutions.  Thissummary is qualified in its entirety by reference to the full text of suchstatutes, regulations and policies.

 

BANK HOLDINGCOMPANY ACT

As a bank holdingcompany, Capital Corp is subject to regulation under the BHC Act, and isregistered as such with, and subject to examination by, the FRB.  Pursuant to the BHC Act, Capital Corp issubject to limitations on the kinds of businesses in which it can engagedirectly or through subsidiaries.  Itmay of course manage or control banks. Generally, however, it is prohibited, with certain exceptions, fromacquiring direct or indirect ownership or control of more than five (5) percentof any class of voting shares of an entity engaged in nonbanking activities,unless the FRB finds such activities to be “so closely related to banking” asto be deemed “a proper incident thereto” within the meaning of the BHCAct.  Removal of many of the activitylimitations is currently under review by Congress, but whether any legislationliberalizing permitted bank holding company activities will be enacted is notknown.  As a bank holding company, theCompany may not acquire more than (5) percent of the voting shares of anydomestic bank without the prior approval of (or, for “well managed” companies,prior written notice to) the FRB.

 

The BHC Actsubjects bank holding companies to minimum capital requirements.  See “—Regulatory Capital Requirements.”Regulations and policies of the FRB also require a bank holding company toserve as a source of financial and managerial strength to its subsidiarybanks.  It is the FRB’s policy that abank holding company should stand ready to use available resources to provideadequate capital funds to a subsidiary bank during periods of financial stressor adversity and should maintain the financial flexibility and capital-raisingcapacity to obtain additional resources for assisting a subsidiary bank.  Under certain conditions, the FRB mayconclude that certain actions of a bank holding company, such as a payment of acash dividend, would constitute an unsafe and unsound banking practice.

 

COUNTY BANK

County Bank is aCalifornia state-licensed bank.  TheBank is a member of the Federal Reserve Bank (FRB) and maintains depositsinsured by the Federal Deposit Insurance Corporation (FDIC) and thus is subjectto the rules and regulations of the FDIC pertaining to deposit insurance,including deposit insurance assessments. The Bank is subject to regulation and supervision by the FRB and theCalifornia Department of Financial Institutions (the “Department” or“DFI”).  Applicable federal and stateregulations address many aspects of the Bank’s business and activities,including investments, loans, borrowings, transactions with affiliates,

 

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branching,reporting and other areas.  County Bankmay acquire other banks or branches of other banks with approval of the FRB,FDIC and the Department.  County Bank issubject to examination by both the FRB and the Department.

 

DIVIDENDS

The Company maymake a distribution to its shareholders if the corporation’s retained earningsequal at least the amount of the proposed distribution.  In the event sufficient retained earningsare not available for the proposed distribution, such a corporation maynevertheless make a distribution to its shareholders if, after giving effect tothe distribution, the corporation’s assets equal at least 125% of its liabilitiesand certain other conditions are met. Since the 125% ratio translates into a minimum capital ratio of 20%,most bank holding companies, including the Company based on its current capitalratios, are unable to meet this last test.

 

The primary sourceof funds for payment of dividends by the Company to its shareholders is thereceipt of dividends from the Bank.  TheCompany’s ability to receive dividends from the Bank is limited by applicablestate and federal law.  A Californiastate-licensed bank may not make a cash distribution to its shareholders inexcess of the lesser of the following: (i) the bank’s retained earnings, or (ii) the bank’s net income for itslast three fiscal years, less the amount of any distributions made by the bankto its shareholders during such period. However, with the approval of the Commissioner of Financial Institutions(the “Commissioner”), a bank may pay dividends in an amount not to exceed thegreater of (i) a bank’s retained earnings, (ii) its net income for its last fiscalyear, or (iii) its net income for the current fiscal year.

 

The FRB, FDIC andthe Commissioner have authority to prohibit a bank from engaging in practiceswhich are considered to be unsafe and unsound. Depending on the financial condition of the Bank and upon other factors,the FRB or the Commissioner could determine that payment of dividends or otherpayments by the Bank might constitute an unsafe or unsound practice. Finally,any dividend that would cause a bank to fall below required capital levelscould also be prohibited.

 

REGULATORY CAPITALREQUIREMENTS

The Company andthe Bank are required to maintain a minimum risk-based capital ratio of 8% (atleast 4% in the form of Tier 1 capital) of risk-weighted assets and off-balancesheet items.  “Tier 1” capital consistsof common equity, non-cumulative perpetual preferred stock and minorityinterests in the equity accounts of consolidated subsidiaries and excludesgoodwill. “Tier 2” capital consists of cumulative perpetual preferred stock,limited-life preferred stock, mandatory convertible securities, subordinateddebt and (subject to a limit of 1.25% of risk-weighted assets) general loanloss reserves.  In calculating therelevant ratio, a bank’s assets and off-balance sheet commitments arerisk-weighted:  thus, for example, loansare included at 100% of their book value while assets considered less risky areincluded at a percentage of their book value (20%, for example, for interbankobligations, and 0% for vault cash and U.S. Government securities).

 

The Company andthe Bank are also subject to leverage ratio guidelines.  The leverage ratio guidelines requiremaintenance of a minimum ratio of 3% Tier 1 capital to total assets for themost highly rated organizations. Institutions that are less highly rated, anticipating significant growthor subject to other significant risks will be required to maintain capitallevels ranging from 1% to 2% above the 3% minimum.

 

Federal regulationhas established five tiers of capital measurement ranging from “well capitalized”to “critically undercapitalized.” Federal bank regulatory authorities are required to take promptcorrective action with respect to inadequately capitalized banks.  If a bank does not meet the minimum capitalrequirements set by its regulators, the regulators are compelled to takecertain actions, which may include a prohibition on payment of dividends to aparent holding company and requiring adoption of an acceptable plan to restorecapital to an acceptable level.  Failureto comply will result in further sanctions, which may include orders to raisecapital, merge with another institution, restrict transactions with affiliates,limit asset growth or reduce asset size, divest certain investments and /orelect new directors.  It is CapitalCorp’s intention to maintain risk-based capital ratios for itself and for theBank at above the minimum for the “well capitalized” level (6% Tier 1risk-based; 10% total risk-based) and to maintain the leverage capital ratiofor County Bank above the 5% minimum for “well-capitalized” banks.  At December 31, 2001, the Company’sleverage, Tier 1 risk-based and total risk-based capital ratios were 7.72%,9.49% and 10.74%, and the Bank’s leverage, Tier 1 risk-based and total risk-basedcapital ratios were 7.33%, 9.03% and 10.28%. No assurance can be given that the Company or the Bank will be able tomaintain capital ratios in the “well capitalized” level in the future.

 

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CROSS-INSTITUTIONASSESSMENTS

Any insured depositoryinstitution owned by the Company can be assessed for losses incurred by theFDIC in connection with assistance provided to, or the failure of, any otherdepository institution owned by the Company.

 

INSURANCE PREMIUMSAND ASSESSMENTS

The FDIC hasauthority to impose a special assessment on members of the Bank Insurance Fund(the “BIF”) to ensure that there will be sufficient assessment income forrepayment of BIF obligations and for any other purpose which it deemsnecessary.  The FDIC is authorized toset semi-annual assessment rates for BIF members at levels sufficient toincrease the BIF’s reserve ratio to a designated level of 1.25% of insureddeposits.  The BIF achieved this levelin mid-1995.  Congress is consideringvarious proposals to merge the BIF with the Savings Association Insurance Fund(“SAIF”) or otherwise to require banks to contribute to the insurance funds forsavings associations.  Adoption of anyof these proposals might increase the cost of deposit insurance for all banks,including the Bank.

 

The FDIC hasdeveloped a risk-based assessment system, under which the assessment rate foran insured depository institution will vary according to the level of riskincurred in its activities.  Aninstitution’s risk category is based upon whether the institution is wellcapitalized, adequately capitalized or less than adequately capitalized.  Each insured depository institution is alsoto be assigned to one of the following “supervisory subgroups”:  Subgroup A, B or C.  Subgroup A institutions are financiallysound institutions with few minor weaknesses; Subgroup B institutions areinstitutions that demonstrate weaknesses which, if not corrected, could resultin significant deterioration; and Subgroup C institutions are institutions forwhich there is a substantial probability that the FDIC will suffer a loss inconnection with the institution unless effective action is taken to correct theareas of weakness.  The FDIC assignseach member institution an annual FDIC assessment rate which, as of the date ofthis report, varies between 0.0% per annum with a $2,000 minimum (for wellcapitalized Subgroup A institutions) and 0.27% per annum (for undercapitalizedSubgroup C institutions).  Insuredinstitutions are not permitted to disclose their risk assessmentclassification.

 

The cost ofcarrying bonds issued by the Financing Corporation (“FICO”) to cover losses offailed savings associations is allocated equally between BIF-insuredinstitutions and SAIF— insured institutions. The Bank’s premiums during 2002 are being assessed at a rate of $.0182per $100 of insured deposits.

 

AUDIT REQUIREMENTS

All depositoryinstitutions are required to have an annual, full-scope on-siteexamination.  Those depositoryinstitutions with assets greater than $500 million are required to have annualindependent audits, prepare financial statements in accordance with generallyaccepted accounting principles, and develop a management assertion letteraddressing internal controls over financial reporting.  Each institution is required to have anindependent audit committee comprised entirely of outside directors.

 

COMMUNITYREINVESTMENT ACT

The CommunityReinvestment Act (“CRA”) requires each bank to identify the communities servedby the bank’s offices and to identify the types of credit the bank is preparedto extend within such communities.  Italso requires the bank’s regulators to assess the bank’s performance in meetingthe credit needs of its community and to take such assessment intoconsideration in reviewing application for mergers, acquisitions and othertransactions, such as the Branch Acquisition. An unsatisfactory rating may be the basis for denying such anapplication.  The Bank completed a CRAexamination as of January 2001, and received a “low satisfactory” rating.  During February 2002, a CRA and Complianceexamination was begun, but not yet completed as of March 15, 2002.

 

POTENTIALENFORCEMENT ACTIONS

Banks and theirinstitution-affiliated parties may be subject to potential enforcement actionsby the bank regulatory agencies for unsafe or unsound practices in conductingtheir businesses, or for violations of any law, rule or regulation orprovision, any consent order with any agency, any condition imposed in writingby the agency or any written agreement with the agency. Enforcement actions mayinclude the imposition of a conservator or receiver, cease-and-desist ordersand written agreements, the termination of insurance of 

 

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deposits, theimposition of civil money penalties and removal and prohibition orders againstinstitution-affiliated parties. See “ — County Bank”.

 

INTERSTATE BANKING

Riegle-NealInterstate Banking and Branching Efficiency Act.  The Riegle-Neal Interstate Banking and Branching Efficiency Act(the “Riegle-Neal Act”) was enacted in 1994. Generally, provisions of the Riegle-Neal Act authorize interstatebanking and interstate branching, subject to certain state options.  The following is a summary of itsprovisions:

 

INTERSTATEBANKING AND BRANCHING

• Interstate acquisition of banks byholding companies was permitted in all states on and after September 29, 1995.However, states may continue to prohibit acquisition of banks that have been inexistence less than five years and interstate chartering of new banks.

• Interstate mergers of banks werepermitted as of June 1, 1997, unless a state adopted legislation before June 1,1997 to “opt out” of interstate merger authority.  Individual states were permitted to enact legislation to permitinterstate mergers earlier than that date.

• Interstate acquisition of branchesis permitted to a bank only if the law of the state where the branch is locatedexpressly permits interstate acquisition of a branch without acquiring theentire bank.

• Interstate de novo branching ispermitted to a bank only if a state adopts legislation to “opt in” tointerstate de novo branching authority.

LIMITATIONS ONCONCENTRATIONS.  An interstatebanking application may not be approved if the applicant and its depositoryinstitution affiliates would control more than 10% of insured depositsnationwide or more than 30% of insured deposits in the state in which the bankto be acquired in located.  These limitsdo not apply to mergers solely between affiliates. States may waive the 30% capon a nondiscriminatory basis. Nondiscriminatory state caps on deposit market share of a depositoryinstitution and its affiliates are not affected.

AGENCYAUTHORITY.  A bank subsidiary of a bankholding company is authorized to receive deposits, renew time deposits, closeloans, service loans and receive payments on loans as an agent for a depositoryinstitution affiliate without being deemed a branch of the affiliate.  A bank is not permitted to engage, as agentfor an affiliate, in any activity as agent that it could not conduct as aprincipal, or to have an affiliate, as its agent, conduct any activity that itcould not conduct directly, under federal or state law.

HOSTSTATE REGULATION.  Out-of-state banksseeking to acquire or establish a branch are required to comply with anynondiscriminatory filing requirements of the host state where the branch islocated.  The host state may setnotification and reporting requirements for a branch of an out-of-statebank.  A branch of an out-of-state bankis subject to all of the laws of the host state regarding intrastate branching,consumer protection, fair lending and community reinvestment.  A branch of an out-of-state bank is notpermitted to conduct any activities at the branch that are not permissible fora bank chartered by the host state.

MEETINGLOCAL CREDIT NEEDS.  CRA evaluations arerequired for each state in which an interstate bank has a branch. Interstatebanks are prohibited from using out-of-state branches “primarily for the purposeof deposit production.”  Federal bankingagencies have adopted regulations to ensure that interstate branches are beingoperated with a view to the needs of the host communities.

CALIFORNIALAW.  In October 1995, Californiaenacted state legislation in accordance with authority under the Riegle-NealAct.  This law permits banksheadquartered outside California to acquire or merge with California banks thathave been in existence for at least five years, and thereby establish one ormore California branch offices.  Anout-of-state bank may not enter California by acquiring one or more branches ofa California bank or other operations constituting less than the wholebank.  The law authorizes waiver of the30% limit on state-wide market share for deposits as permitted by theRiegle-Neal Act.  This law alsoauthorizes California state-licensed banks to conduct certain bankingactivities (including receipt of deposits and loan payments and conducting loanclosings) on an agency basis on behalf of out-of-state banks and to haveout-of-state banks conduct similar agency activities on their behalf.

 

It is impossible topredict with any degree of accuracy the competitive impact the laws andregulations described above will have on commercial banking in general and onthe business of the Company in particular, or to predict whether or when any ofthe proposed legislation and regulations will be adopted.  It is anticipated that the banking industrywill continue to be a highly regulated industry.  Additionally, if experience is any indication, there appears tobe a continued lessening of the historical distinction between the servicesoffered by financial institutions and other businesses offering financialservices.  Finally, the trend

 

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toward nationwideinterstate banking is expected to continue. As a result of these factors, it is anticipated banks will experienceincreased competition for deposits and loans and, possibly, further increasesin their cost of doing business.

 

FINANCIAL SERVICESMODERNIZATION LEGISLATION

TheGramm-Leach-Bliley Act of 1999 (the “Modernization Act”).  The Modernization Act repeals two provisionsof the Glass-Steagall Act:  Section 20,which became effective March 11, 2000 restricts the affiliation of FederalReserve member banks with firms “engaged principally” in specified securitiesactivities; and Section 32, which restricts officer, director, or employeeinterlocks between a member bank and any company or person “primarily engaged”in specified securities activities.  Inaddition, the Modernization Act also expressly preempts any state lawrestricting the establishment of financial affiliations, primarily related toinsurance.  The law establishes acomprehensive framework to permit affiliations among commercial banks,insurance companies, securities firms, and other financial service providers byrevising and expanding the BHC Act framework to permit a holding company systemto engage in a full range of financial activities through a new entity known asa Financial Holding Company.  “Financialactivities” is broadly defined to include not only banking, insurance, andsecurities activities, but also merchant banking and additional activities thatthe Federal Reserve, in conjunction with the Secretary of the Treasury,determine to be financial in nature, incidental to such financial activities,or complementary activities that do not pose a substantial risk to the safetyand soundness of depository institutions or the financial system generally.

 

In order for theCompany to take advantage of the ability provided by the modernization Act toaffiliate with other financial service providers, it must become a “FinancialHolding Company.”  To do so, the Companywould file a declaration with the Federal Reserve, electing to engage inactivities permissible for Financial Holding companies and certifying that itis eligible to do so because its insured depository institution subsidiary (theBank) is well-capitalized and well-managed. In addition, the Federal Reserve must also determine that an insureddepository institution subsidiary has at least a “satisfactory” rating underthe Community Reinvestment Act.  TheCompany currently meets the requirements for Financial Holding Companystatus.  The Company will continue tomonitor its strategic business plan to determine whether, based on marketconditions and other factors, the Company wishes to utilize any of its expandedpowers provided in the modernization Act.

 

The ModernizationAct also includes a new section of the Federal Deposit Insurance Act governingsubsidiaries of state banks that engage in “activities as principal that wouldonly be permissible” for a national bank to conduct in a financialsubsidiary.  It expressly preserves theability of a state bank to retain all existing subsidiaries.  Because California permits commercial bankschartered by the state to engage in any activity permissible for nationalbanks, the Bank will be permitted to form subsidiaries to engage in theactivities authorized by the Modernization Act to the same extent as a nationalbank.  In order to form a financialsubsidiary, the Bank must be well-capitalized, and the Bank would be subject tothe same capital deduction, risk management and affiliate transaction rules asapplicable to national banks.  [the Bankcurrently meets those requirements.]

 

Under the Modernization Act, securities firms andinsurance companies that elect to become Financial Holding Companies mayacquire banks and other financial institutions.  The Company does not believe that the Modernization Act will havea material adverse effect on its operations in the near-term.  However, to the extent that it permits banks,securities firms, and insurance companies to affiliate, the financial servicesindustry may experience further consolidation. The Modernization Act is intended to grant to community banks certainpowers as a matter of right that larger institutions have accumulated on an adhoc basis.  Nevertheless, this act mayhave the result of increasing the amount of competition that the Company andthe Bank face from larger institutions and other types of companies offeringfinancial products, many of which may have substantially more financialresources than the Company and the Bank.

 

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INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIALANTI-TERRORISM ACT OF 2001

 

The terrorist attacks in September, 2001, haveimpacted the financial services industry and have already led to federal legislationthat attempts to address certain issues involving financial institutions.  On October 26, 2001, President Bush signedinto law the Uniting and Strengthening America by Providing Appropriate ToolsRequired to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOTAct”).

 

Part of the USA Patriot Act is the International MoneyLaundering Abatement and Financial Anti-Terrorism Act of 2001(“IMLAFATA”).  IMLAFATA authorizes theSecretary of the Treasury, in consultation with the heads of other governmentagencies, to adopt special measures applicable to banks, bank holdingcompanies, and/or other financial institutions. These measures may includeenhanced recordkeeping and reporting requirements for certain financialtransactions that are of primary money laundering concern, due diligencerequirements concerning the beneficial ownership of certain types of accounts,and restrictions or prohibitions on certain types of accounts with foreignfinancial institutions.

 

Among its other provisions, IMLAFATA requires eachfinancial institution to:  (i) establishan anti-money laundering program; (ii) establish due diligence policies,procedures and controls with respect to its private banking accounts andcorrespondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering, ormanaging correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country.  In addition, IMLAFATA contains a provisionencouraging cooperation among financial institutions, regulatory authoritiesand law enforcement authorities with respect to individuals, entities andorganizations engaged in, or reasonably suspected of engaging in, terroristacts or money laundering activities. IMLAFATA expands the circumstances under which funds in a bank accountmay be forfeited and requires covered financial institutions to respond undercertain circumstances to requests for information from federal banking agencieswithin 120 hours.  IMLAFATA also amendsthe Bank Holding Company Act and the Bank Merger Act to require the federalbanking agencies to consider the effectiveness of a financial institution’santi-money laundering activities when reviewing an application under theseacts.

 

Treasury regulations implementing the due diligencerequirements must be issued no later than April 24, 2002.  Whether or not regulations are adopted,IMLAFATA becomes effective July 23, 2002. Additional regulations are to be adopted during 2002 to implementminimum standards to verify customer identity, to encourage cooperation amongfinancial institutions, federal banking agencies, and law enforcementauthorities regarding possible money laundering or terrorist activities, toprohibit the anonymous use of “concentration accounts,” and to require allcovered financial institutions to have in place a Bank Secrecy Act complianceprogram.

 

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***Selected Statistical Information***

 

The following tables onpages 12 through 18 present certain statistical information concerning thebusiness of the Company.  Thisinformation should be read in conjunction with “MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” at ITEM 7,pages 10 through 20 of the Company’s 2001 Annual Report to Shareholdersincorporated herein by reference, and with the Company’s Consolidated FinancialStatements and the Notes thereto included in Item 8, pages 22 through 46 of theCompany’s 2001 Annual Report to Shareholders incorporated herein byreference.  The statistical informationthat follows is generally based on average daily amounts.

 

**Interest Rates and Margins:**

Managing interest ratesand margins is essential to the Company in order to maintainprofitability.  The following tablepresents, for the periods indicated, the distribution of average assets,liabilities and shareholder’s equity, as well as the total dollar amount ofinterest income from average interest-earning assets and resultant yields andthe dollar amounts of interest expense and average interest-bearingliabilities, expressed both in dollars and rates.

 
|                                                  |   | **For the  years ended December 31,** |       |
|-------------------------------------------------------|--------|---------------------------------------|------------|
|                                                  |   | **2001**                              |       | **2000** |   | **1999** |   |
|                                                  |   | **Average  Balance**                  |       | **Interest** |   | **Rate** |   | **Average  Balance** |   | **Interest** |   | **Rate** |   | **Average  Balance** |   | **Interest** |   | **Rate** |   |
|                                                  |   | **(Dollars  in thousands)**           |       |
| Assets                                                |   |                                  | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Federal funds  sold                                   |   | $                                     | 19,280     |   | $ | 791 |   | 4.10 | % | $ | 10,208 |   | $ | 650 |   | 6.37 | % | $ | 9,140 |   | $ | 443 |   | 4.85 | % |
| Time deposits at  other financial institutions        |   | 385                                   |       | 16 |   | 4.16 |   | 635 |   | 39 |   | 6.14 |   | 2,691 |   | 156 |   | 5.80 |   |
| Nontaxable  investment securities(1)                  |   | 28,983                                |       | 1,522 |   | 5.25 |   | 29,511 |   | 1,537 |   | 5.21 |   | 30,057 |   | 1,566 |   | 5.21 |   |
| Taxable  investment securities(2)                     |   | 201,237                               |       | 12,649 |   | 6.29 |   | 145,707 |   | 10,209 |   | 7.01 |   | 114,402 |   | 7,129 |   | 6.23 |   |
| Loans, gross(3)                                       |   | 453,503                               |       | 43,495 |   | 9.59 |   | 369,367 |   | 38,643 |   | 10.46 |   | 303,463 |   | 30,255 |   | 9.97 |   |
| Total  interest-earning assets                        |   | 703,388                               |       | 58,473 |   | 8.31 |   | 555,428 |   | 51,078 |   | 9.16 |   | 459,753 |   | 39,549 |   | 8.60 |   |
| Allowance for  loan losses                            |   | (8,770                                | )          |   |   |   |   | (7,121 | ) |   |   |   |   | (5,902 | ) |   |   |   |   |
| Cash and  noninterest-bearing deposits at other banks |   | 28,498                                |       |   |   |   |   | 23,753 |   |   |   |   |   | 24,579 |   |   |   |   |   |
| Premises and  equipment, net                          |   | 13,358                                |       |   |   |   |   | 13,036 |   |   |   |   |   | 13,146 |   |   |   |   |   |
| Interest  receivable and other assets                 |   | 31,759                                |       |   |   |   |   | 27,786 |   |   |   |   |   | 24,310 |   |   |   |   |   |
| Total assets                                          |   | $                                     | 768,233    |   |   |   |   |   | $ | 612,882 |   |   |   |   |   | $ | 515,886 |   |   |   |   |   |
|                                                  |   |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and  shareholders’ equity            |   |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Negotiable  orders of withdrawal                      |   | $                                     | 86,011     |   | 254 |   | .30 | % | $ | 74,663 |   | 503 |   | .67 | % | 68,134 |   | 458 |   | .67 | % |
| Savings deposits                                      |   | 196,838                               |       | 5,856 |   | 2.98 |   | 178,279 |   | 7,095 |   | 3.98 |   | 174,301 |   | 5,752 |   | 3.30 |   |
| Time deposits                                         |   | 265,912                               |       | 14,281 |   | 5.37 |   | 198,183 |   | 11,642 |   | 5.87 |   | 141,497 |   | 7,074 |   | 5.00 |   |
| Other borrowings                                      |   | 43,772                                |       | 2,308 |   | 6.47 |   | 22,456 |   | 1,528 |   | 6.80 |   | 10,772 |   | 756 |   | 7.02 |   |
| Total  interest-bearing liabilities                   |   | 592,533                               |       | 22,699 |   | 3.92 |   | 473,581 |   | 20,768 |   | 4.39 |   | 394,704 |   | 14,040 |   | 3.56 |   |
| Noninterest-bearing  deposits                         |   | 105,888                               |       |   |   |   |   | 86,706 |   |   |   |   |   | 74,979 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities        |   | 5,620                                 |       |   |   |   |   | 5,787 |   |   |   |   |   | 3,118 |   |   |   |   |   |
| Total  liabilities                                    |   | 704,041                               |       |   |   |   |   | 566,074 |   |   |   |   |   | 472,801 |   |   |   |   |   |
|                                                  |   |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity                      |   | 59,047                                |       |   |   |   |   | 46,808 |   |   |   |   |   | 43,085 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity      |   | $                                     | 768,233    |   |   |   |   |   | $ | 612,882 |   |   |   |   |   | $ | 515,886 |   |   |   |   |   |
|                                                  |   |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net interest income and margin(4)**                 |   |                                  |       | $ | 35,774 |   | 5.01 | % |   |   | $ | 30,310 |   | 5.46 | % |   |   | $ | 25,509 |   | 5.55 | % |
|                                                       |        |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*(1)**         Intereston tax advantaged such as municipal securities is computed on ataxable-equivalent basis.*

*(2)**         Taxadvantaged corporate dividends received are computed on a taxable-equivalentbasis.*

*(3)**         Intereston non-accrual loans is recognized into income on a cash received basis.*

*(4)**         Netinterest margin is computed by dividing net interest income by total averageinterest-earning assets.*

The Company’s netinterest income is affected by changes in the amount and mix ofinterest-earning assets and interest-bearing liabilities.  It is also affected by changes in yieldsearned on interest-earning assets and rates paid on interest-bearing depositsand borrowed funds.  The following tablesets forth changes in interest 

 

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income and interestexpense for each major category of interest-earning asset and interest-bearingliability and the amount of change attributable to volume and rate changes forthe years indicated.  The changes due toboth rate and volume have been allocated to rate and volume in proportion tothe relationship of the absolute dollar amount of the change in each.

 
|                                            |   | **2001  Compared to 2000**  |   | **2000  Compared to 1999** |   |
|-------------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                                            |   | **Volume**                  |   | **Rate**                   |   | **Total** |   | **Volume** |   | **Rate** |   | **Total** |   |
|                                            |   | **(Dollars  in thousands)** |   |
| **Net Interest Income Variance  Analysis**      |   |                        |   |                       |   |   |   |   |   |   |   |   |   |
| **Increase (decrease) in interest  income:**    |   |                        |   |                       |   |   |   |   |   |   |   |   |   |
| Loans                                           |   | $                           | 8,266  |                       | $      | (3,414 | ) | $ | 4,852 |   | $ | 6,835 |   | $ | 1,553 |   | $ | 8,388 |   |
| Taxable investment securities                   |   | 3,576                       |   | (1,136                     | )      | 2,440 |   | 2,118 |   | 962 |   | 3,080 |   |
| Nontaxable investment securities                |   | (28                         | )      | 13                         |   | (15 | ) | (25 | ) | (4 | ) | (29 | ) |
| Federal funds  sold                             |   | 431                         |   | (290                       | )      | 141 |   | 56 |   | 151 |   | 207 |   |
| Time deposit at  other institutions             |   | (13                         | )      | (10                        | )      | (23 | ) | (126 | ) | 9 |   | (117 | ) |
| Total                                           |   | 12,232                      |   | (4,837                     | )      | 7,395 |   | 8,858 |   | 2,671 |   | 11,529 |   |
| **Increase (decrease) in interest expense:**    |   |                        |   |                       |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand deposits               |   | 67                          |   | (316                       | )      | (249 | ) | 44 |   | 1 |   | 45 |   |
| Savings deposits                                |   | 685                         |   | (1,924                     | )      | (1,239 | ) | 134 |   | 1,209 |   | 1,343 |   |
| Time deposits                                   |   | 3,706                       |   | (1,067                     | )      | 2,639 |   | 3,179 |   | 1,389 |   | 4,568 |   |
| Other borrowings                                |   | 1,187                       |   | (407                       | )      | 780 |   | 796 |   | (24 | ) | 772 |   |
| Total                                           |   | 5,645                       |   | (3,714                     | )      | 1,931 |   | 4,153 |   | 2,575 |   | 6,728 |   |
| **Increase (decrease) in net interest  income** |   | $                           | 6,587  |                       | $      | (1,123 | ) | $ | 5,464 |   | $ | 4,705 |   | $ | 96 |   | $ | 4,801 |   |

** **

**InvestmentPortfolio Maturities**

The following table setsforth the maturities of debt securities at December 31, 2001 and the weightedaverage yields of such securities calculated on a book value basis using theweighted average yield within each scheduled maturity grouping.  Maturities of mortgage-backed securities andcollateralized mortgage obligations are stipulated in their respectivecontracts, however, actual maturities may differ from contractual maturitiesbecause borrowers may have the right to call or prepay obligations with orwithout call prepayment penalties.  Yields on municipal securities have not been calculated on atax-equivalent basis.

 
|                                        |   | **Within One  Year**        |   | **One to  Five Years** |   | **Five to  Ten Years** |   | **Over Ten  Years** |   |       |   |
|---------------------------------------------|--------|-----------------------------|--------|------------------------|--------|------------------------|--------|---------------------|--------|------------|--------|
|                                        |   | **Amount**                  |   | **Yield**              |   | **Amount**             |   | **Yield**           |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Total** |   |
|                                        |   | **(Dollars  in thousands)** |   |
| Available for  sale debt securities:        |   |                        |   |                   |   |                   |   |                |   |       |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  and U.S. government agencies |   | $                           | — |                   | — | %                      | $      | 68,313              |   | 4.71       | %      | $ | 10,399 |   | 7.15 | % | $ | — |   | — | % | $ | 78,712 |   |
| State and  political subdivisions           |   | —                      |   | —                 |   | —                 |   | —              |   | 12,371     |   | 4.35 |   | 11,898 |   | 4.51 |   | 24,269 |   |
| Mortgage-backed  securities                 |   | 1                           |   | 8.50                   |   | 277                    |   | 7.02                |   | 5,527      |   | 5.83 |   | 48,992 |   | 6.59 |   | 54,797 |   |
| Collateralized  mortgage obligations        |   | —                      |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 33,346 |   | 5.09 |   | 33,346 |   |
| Corporate debt  securities                  |   | 1,691                       |   | 6.09                   |   | 11,869                 |   | 5.75                |   | —     |   | — |   | — |   | — |   | 13,560 |   |
| Held to maturity  debt securities:          |   |                        |   |                   |   |                   |   |                |   |       |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  and U.S. government agencies |   | —                      |   | —                 |   | —                 |   | —              |   | 4,611      |   | 6.70 |   | — |   | — |   | 4,611 |   |
| State and  political subdivisions           |   | —                      |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 4,361 |   | 5.14 |   | 4,361 |   |
| Mortgage-backed  securities                 |   | —                      |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 31,900 |   | 6.80 |   | 31,900 |   |
| Collateralized  mortgage obligations        |   | —                      |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 687 |   | 7.23 |   | 687 |   |
| Total debt  securities                      |   | $                           | 1,692  |                   | 6.09   | %                      | $      | 80,459              |   | 4.87       | %      | $ | 32,908 |   | 5.81 | % | $ | 131,184 |   | 6.03 | % | $ | 246,243 |   |
|                                             |        |                             |        |                        |        |                        |        |                     |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The Company does not ownsecurities of a single issuer whose aggregate book value is in excess of 10% ofits total equity.

 

**Asset / Liability Repricing**

The interest rate gapsreported in the table below arise when assets are funded with liabilitieshaving different repricing intervals. Since these gaps are actively managed and change daily as adjustmentsare made in interest rate views and market outlook, positions at the end of anyperiod may not reflect the Company’s interest rate sensitivity in subsequentperiods.  Active management dictatesthat longer-term economic views are balanced against prospects for short-terminterest rate changes in all repricing intervals.  For purposes of the analysis below, repricing of fixed-rateinstruments is based upon the contractual maturity of the applicableinstruments.  Actual payment patternsmay differ from contractual payment patterns.

 
|                                                      |   | **By  Repricing Interval**  |     |
|-----------------------------------------------------------|--------|-----------------------------|----------|
|                                                      |   | **Within  three months**    |     | **After  three months, Within one year** |   | **After  one  year, within five years** |   | **After five  years** |   | **Noninterest-bearing  Funds** |   | **Total** |   |
|                                                      |   | **(Dollars  in thousands)** |     |
| **Assets**                                                |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                                       |   | $                           | 11,285   |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 11,285 |   |
| Time deposits at  other institutions                      |   | 250                         |     | 250 |   | — |   | — |   | — |   | 500 |   |
| Investment  securities                                    |   | 6,447                       |     | 19,125 |   | 96,321 |   | 144,259 |   | 5,259 |   | 271,411 |   |
| Loans                                                     |   | 292,728                     |     | 48,975 |   | 128,275 |   | 62,442 |   | — |   | 532,420 |   |
| Noninterest-earning  assets and allowance for loan losses |   | —                      |     | — |   | — |   | — |   | 78,711 |   | 78,711 |   |
| Total assets                                              |   | $                           | 310,710  |   | $ | 68,350 |   | $ | 224,596 |   | $ | 206,701 |   | $ | 83,970 |   | $ | 894,327 |   |
|                                                      |   |                        |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and shareholders’ equity**            |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                           |   | $                           | —   |   | $ | — |   | $ | — |   | $ | — |   | $ | 132,496 |   | $ | 132,496 |   |
| Savings, money  market & NOW deposits                 |   | 305,776                     |     | — |   | — |   | — |   | — |   | 305,776 |   |
| Time deposits                                             |   | 140,440                     |     | 133,679 |   | 20,250 |   | — |   | — |   | 294,369 |   |
| Other  interest-bearing liabilities                       |   | 30,510                      |     | 47,059 |   | — |   | 3,116 |   | — |   | 80,685 |   |
| Trust Preferred  Securities                               |   | —                      |     | — |   | — |   | 6,000 |   | — |   | 6,000 |   |
| Other  liabilities and shareholders’ equity          |   | —                      |     | — |   | — |   | — |   | 75,001 |   | 75,001 |   |
| Total  liabilities and shareholders’ equity          |   | $                           | 476,726  |   | $ | 180,738 |   | $ | 20,250 |   | $ | 9,116 |   | $ | 207,497 |   | $ | 894,327 |   |
|                                                      |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| Interest rate  sensitivity gap                            |   | $                           | (166,016 | ) | $ | (112,388 | ) | $ | 204,346 |   | $ | 197,585 |   | $ | (123,527 | ) | $ | — |   |
|                                                      |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| Cumulative  interest rate sensitivity gap                 |   | $                           | (166,016 | ) | $ | (278,404 | ) | $ | (74,058 | ) | $ | 123,527 |   | $ | — |   | — |   |

 

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**LoanPortfolio**

At December 31, 2001, theCompany had approximately $188,802,000 in undisbursed loan commitments.  This compares with $144,480,000 at December31, 2000.  Standby letters of creditwere $3,852,000 and $1,320,000, at December 31, 2001 and 2000.  For further information about thecomposition of the Company’s loan portfolio see  “ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS” section entitled “Credit Risk Managementand Asset Quality,” pages 15 through 17 of the Company’s 2001 Annual Report toShareholders incorporated herein by reference.

 

The following table showsthe composition of the loan portfolio of the Company by type of loan on thedates indicated:

 
|                                   |   | **December 31,**            |    |
|----------------------------------------|--------|-----------------------------|---------|
|                                   |   | **2001**                    |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                   |   | **Amount**                  |    | **Amount** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amount** | ** ** |
|                                   |   | **(Dollars  in thousands)** |    |
| Commercial, financial and agricultural |   | $                           | 215,115 |   | $ | 155,952 |   | $ | 112,179 |   | $ | 87,245 |   | $ | 78,550 |   |
| Real estate – construction        |   | 57,989                      |    | 30,133 |   | 11,926 |   | 13,840 |   | 12,657 |   |
| Real estate – mortgage            |   | 187,586                     |    | 141,575 |   | 120,978 |   | 96,957 |   | 70,802 |   |
| Consumer installment                   |   | 71,730                      |    | 85,004 |   | 86,185 |   | 70,891 |   | 55,968 |   |
| Total                                  |   | $                           | 532,420 |   | $ | 412,664 |   | $ | 331,268 |   | $ | 268,933 |   | $ | 217,977 |   |

 

The table that followsshows the maturity distribution of the portfolio of commercial andagricultural, real estate construction, real estate mortgage and installmentloans on December 31, 2001 by fixed and floating rate attributes:

 
|                             |   | **December  31, 2001**     |       |
|----------------------------------|--------|----------------------------|------------|
|                             |   | **Within  One Year**       | ** ** | **One to  Five Years** | ** ** | **Over  Five Years** | ** ** | **Total** | ** ** |
|                             |   | **(Dollars in thousands)** |       |
| *Commercial and agricultural*    |   |                       |       |   |   |   |   |   |   |
| Loans with floating rates        |   | $                          | 96,421     |   | $ | 31,791 |   | $ | 25,032 |   | $ | 153,244 |   |
| Loans with predetermined rates   |   | 14,160                     |       | 31,012 |   | 16,669 |   | 61,871 |   |
| Subtotal                         |   | 110,581                    |       | 62,803 |   | 41,731 |   | 215,115 |   |
|                             |   |                       |       |   |   |   |   |   |   |
| *Real  Estate—Construction* |   |                       |       |   |   |   |   |   |   |
| Loans with floating rates        |   | 25,934                     |       | 14,855 |   | 11,931 |   | 52,720 |   |
| Loans with predetermined rates   |   | 1,869                      |       | 362 |   | 3,038 |   | 5,269 |   |
| Subtotal                         |   | 27,803                     |       | 15,217 |   | 14,969 |   | 57,989 |   |
|                             |   |                       |       |   |   |   |   |   |   |
| *Real  Estate—Mortgage*     |   |                       |       |   |   |   |   |   |   |
| Loans with floating rates        |   | 11,830                     |       | 18,562 |   | 88,060 |   | 118,452 |   |
| Loans with predetermined rates   |   | 358                        |       | 21,362 |   | 47,414 |   | 69,134 |   |
| Subtotal                         |   | 12,188                     |       | 39,924 |   | 135,474 |   | 187,586 |   |
|                             |   |                       |       |   |   |   |   |   |   |
| *Consumer installment*           |   |                       |       |   |   |   |   |   |   |
| Loans with floating rates        |   | 16,615                     |       | 7,713 |   | — |   | 24,328 |   |
| Loans with predetermined rates   |   | 3,356                      |       | 41,162 |   | 2,884 |   | 47,402 |   |
| Subtotal                         |   | 19,971                     |       | 48,875 |   | 2,884 |   | 71,730 |   |
|                             |   |                       |       |   |   |   |   |   |   |
| Total                            |   | $                          | 170,543    |   | $ | 166,819 |   | $ | 195,058 |   | $ | 532,420 |   |

 

The Company seeks tomitigate the risks inherent in its loan portfolio by adhering to certainunderwriting practices.  They includeanalysis of prior credit histories, financial statements, tax returns and cashflow 

 

15

----

 

projections of itspotential borrowers as well as obtaining independent appraisals on real andpersonal property taken as collateral and audits of accounts receivable orinventory pledged as security.

 

The Company also has aninternal loan review process as well as periodic external reviews.  The results of these reviews are assessed bythe Company’s audit committee. Collection of delinquent loans is generally the responsibility of theCompany’s credit administration staff. However, certain problem loans may be dealt with by the originating loanofficer.  The Directors Loan Committeereviews the status of delinquent and problem loans on a monthly basis. TheCompany’s underwriting and review practices notwithstanding, in the normal courseof business, the Company expects to incur loan losses in the future.

 

**Nonaccrual, Past Due and Restructured Loans**

 

The following table summarizes nonperforming loans of the Company as ofthe dates indicated:

 
|                                    |   | **December  31,**                 |       |
|-----------------------------------------|--------|-----------------------------------|------------|
|                                    |   | **2001  Amount**                  |       | **2000  Amount** | ** ** | **1999  Amount** | ** ** | **1998  Amount** | ** ** | **1997  Amount** | ** ** |
|                                    |   | **(Dollars  in thousands) ** | ** ** |
| Nonaccrual loans                        |   | $                                 | 4,247      |   | $ | 2,243 |   | $ | 1,984 |   | $ | 1,164 |   | $ | 2,611 |   |
| Accruing loans past due 90 days or more |   | 609                               |       | 97 |   | 6 |   | 413 |   | 131 |   |
| Total nonperforming loans               |   | 4,856                             |       | 2,340 |   | 1,990 |   | 1,577 |   | 2,742 |   |
| Other real estate owned                 |   | 472                               |       | 248 |   | 247 |   | 60 |   | 60 |   |
| Total nonperforming assets              |   | $                                 | 5,328      |   | $ | 2,588 |   | $ | 2,237 |   | $ | 1,637 |   | $ | 2,802 |   |
|                                    |   |                              |       |   |   |   |   |   |   |   |   |
| Nonperforming loans to total loans      |   | 0.91                              | %          | 0.57 | % | 0.60 | % | 0.59 | % | 1.26 | % |
| Nonperforming assets to total assets    |   | 1.00                              | %          | 0.38 | % | 0.40 | % | 0.33 | % | 0.66 | % |

 

Loans with significantpotential problems or impaired loans are placed on nonaccrual status.  Management defines impaired loans as thoseloans, regardless of past due status, in which management believes thecollection of principal and interest is in doubt.  The balance of impaired loans was $4,856,000, $2,340,000,$1,990,000, $1,577,000 and $2,742,000 in 2001, 2000, 1999, 1998 and 1997respectively.  Nonaccrual loans totaled$4,247,000, $2,243,000, $1,984,000, $1,164,000 and $2,611,000 in 2001, 2000,1999, 1998 and 1997 respectively.  Theamount of gross interest income that would have been recorded on nonaccrualloans in the periods then ended if the loans had been current in accordance withthe original terms and had been outstanding throughout the period or sinceorigination, if held for part of the period, was $170,000, $224,000, $143,000,$91,000, and $189,000 in 2001, 2000, 1999, 1998, and 1997.  The amount of interest income on nonaccrualloans that was included in net income was $105,000**,**$79,000, $126,000,$134,000, and $471,000 in 2001, 2000, 1999, 1998, and 1997.

 

**Allocation of the Allowance for Loan Losses**

The following tablesummarizes a breakdown of the allowance for loan losses by loan category andthe percentage by loan category of total loans for the dates indicated:

 
|                                   |   | **December  31,**           |   |
|----------------------------------------|--------|-----------------------------|--------|
|                                   |   | **2001**                    |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                   |   | **Amount**                  |   | **Loans % to  total loans** |   | **Amount** |   | **Loans % to  Total loans** |   | **Amount** |   | **Loans % to  total loans** |   | **Amount** |   | **Loans % to  total loans** |   | **Amount** |   | **Loans % to  Total loans** |   |
|                                   |   | **(Dollars  in thousands)** |   |
| Commercial, financial and agricultural |   | $                           | 6,029  |   | 40 | % | $ | 4,186 |   | 38 | % | $ | 3,365 |   | 34 | % | $ | 2,618 |   | 33 | % | $ | 1,868 |   | 36 | % |
| Real estate – construction        |   | 676                         |   | 11 |   | 451 |   | 7 |   | 358 |   | 4 |   | 376 |   | 5 |   | 640 |   | 6 |   |
| Real estate – mortgage            |   | 2,187                       |   | 35 |   | 2,076 |   | 34 |   | 1,815 |   | 36 |   | 1,260 |   | 36 |   | 1,058 |   | 32 |   |
| Installment                            |   | 851                         |   | 14 |   | 1,494 |   | 21 |   | 1,004 |   | 26 |   | 521 |   | 26 |   | 267 |   | 26 |   |
| Total                                  |   | $                           | 9,743  |   | 100 | % | $ | 8,207 |   | 100 | % | $ | 6,542 |   | 100 | % | $ | 4,775 |   | 100 | % | $ | 3,833 |   | 100 | % |
|                                        |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

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**Other Interest-Bearing Assets**

The following tablerelates to other interest bearing assets not disclosed above for the datesindicated.  This item consists of asalary continuation plan for the Company’s executive management and a deferredcompensation plan for participating board members.  The plans are informally linked with universal life insurancepolicies containing cash surrender values as listed in the following table:

 
|                                   |   | **December  31**           |   |
|----------------------------------------|--------|----------------------------|--------|
|                                   |   | **2001**                   |   | **2000** |   | **1999** |   |
|                                   |   | **(Dollars in thousands)** |   |
| Cash surrender value of life insurance |   | $                          | 16,160 |   | $ | 6,075 |   | $ | 5,792 |   |
|                                        |        |                            |        |  |  |  |  |  |  |  |

** **

**               **During 2001, the Bank purchased $9,595,000 inbank owned life insurance.  Thisadditional life insurance is in the form of single premium life policiescovering bank officers.  These policieshave a variable rate of return that is reset annually by each insurer.  The Bank is the owner of these policies andalso the named beneficiary.

** **

**Deposits**

 

The following table setsforth the average balance and the average rate paid for the major categories ofdeposits for the years indicated:

 
| **Deposits**                        |       | **For the  Year Ended December 31,** |      |
|-------------------------------------|------------|--------------------------------------|-----------|
|                                | **2001**   |                                 | **2000**  |   | **1999** |   |
|                                | **Amount** |                                 | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
|                                |       | **(Dollars  in thousands)**          |      |
| Noninterest-bearing demand deposits |       | $                                    | 105,888   |   | — | % | $ | 86,706 |   | — | % | $ | 74,979 |   | — | % |
| Interest-bearing demand deposits    |       | 86,011                               |      | 0.30 |   | 74,663 |   | 0.67 |   | 68,134 |   | 0.67 |   |
| Savings deposits                    |       | 196,838                              |      | 2.98 |   | 178,279 |   | 3.98 |   | 174,301 |   | 3.30 |   |
| Time deposits under $100,000        |       | 154,883                              |      | 5.33 |   | 114,422 |   | 5.78 |   | 90,586 |   | 4.73 |   |
| Time deposits $100,000 and over     |       | 111,029                              |      | 5.42 |   | 83,761 |   | 6.00 |   | 50,911 |   | 5.48 |   |
|                                     |            |                                      |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Maturities of Time Certificates of Deposits of $100,000 orMore**

 

Maturities of timecertificates of deposits of $100,000 or more outstanding at December 31,2001 are summarized as follows:

 
|                           |   | **(Dollars  in thousands)** |    |
|--------------------------------|--------|-----------------------------|---------|
| Remaining Maturity:            |   |                        |    |
| Three months or less           |   | $                           | 59,094  |   |
| Over three through six months  |   | 52,728                      |    |
| Over six through twelve months |   | 42,212                      |    |
| Over twelve months             |   | 9,161                       |    |
| Total                          |   | $                           | 163,195 |   |

 

17

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**Return on Equity and Assets**

 

The following table setsforth certain financial ratios for the periods indicated (averages are computedusing actual daily figures):

 

**Return on Average Equity and Assets**

** **
|                             |   | **For the  year ended  December 31,** |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **2001**                              |   | **2000** | ** ** | **1999** | ** ** |
| Return on average assets         |   | 1.03                                  | %      | 1.09 | % | 0.99 | % |
| Return on average equity         |   | 13.40                                 |   | 14.33 |   | 11.86 |   |
| Dividend payout ratio            |   | —                                |   | — |   | — |   |
| Average equity to average assets |   | 7.69                                  | %      | 7.64 | % | 8.35 | % |

 

**Market for Company’s Common Stock and Related Stock Matters**

 

The Company’s stock is included for quotation on the Nasdaq NationalMarket System with a stock quotation symbol of CCOW.  The following table indicates the range of high and low bidprices for the period shown, based upon information provided by the NasdaqNational Market System.  Suchover-the-counter market quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission and may not necessarily reflect actualtransactions.  There were approximately1,700 CCOW shareholders as of December 31, 2001.

 
| **2001**     |   | **High** |   | **Low** |   |
|--------------|--------|----------|--------|---------|--------|
| 4th  quarter |   | $        | 16.25  |    | $      | 13.01 |   |
| 3rd  quarter |   | 17.00    |   | 14.05   |   |
| 2nd  quarter |   | 16.29    |   | 12.25   |   |
| 1st  quarter |   | 13.75    |   | 11.41   |   |
|              |        |          |        |         |        |  |  |

 
| **2000**     |   | **High** | ** ** | **Low** | ** ** |
|--------------|--------|----------|------------|---------|------------|
| 4th  quarter |   | $        | 12.00      |    | $          | 10.63 |   |
| 3rd  quarter |   | 11.88    |       | 10.38   |       |
| 2nd  quarter |   | 10.75    |       | 8.13    |       |
| 1st  quarter |   | $        | 10.75      |    | $          | 7.75 |   |

 

18

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**ITEM 2.                                  PROPERTIES**

 

***The Bank***

 

(1)           North Merced Office

The Bank’s north Mercedoffice is located at 490 West Olive Avenue in Merced with approximately 5,600square feet of interior floor space. This building was constructed in 1978 at a cost of approximately$400,000 and is situated on a lot of approximately 47,000 square feet, whichthe Bank purchased in 1977 for approximately $186,000.  Management believes that this facility willbe adequate to accommodate the operations of this branch for the foreseeablefuture.

 

(2)           Downtown Merced Branch andAdministrative Headquarters

On September 2, 1997, theBank relocated its downtown Merced branch to 550 West Main Street in Mercedwhere it serves as the main branch of the Bank.  The facility is a three story facility with a two story attachedparking facility and is approximately 29,000 square feet.  Approximately 19,800 square feet is occupiedby the administrative and central support functions.  The facility cost was approximately $5.1 million.  Management believes that this facility willbe adequate to accommodate the operations of Company for the foreseeablefuture.

 

(3)           Atwater Branch

On October 5, 1981,the Bank opened a branch office at 735 Bellevue Road, Atwater.  The building contains approximately 6,000square feet of interior floor space, and was built at a total cost ofapproximately $500,000.  In 1994, theBank purchased the lot at a cost of $316,000. Manage­ment of the Bank believes that this facility will be adequate toaccommodate the operations of this branch for the foreseeable future.  ­The data processing and central servicesupport personnel and related equipment were relocated to the new facility indowntown Merced, as discussed above in late 1997.

 

 (4)          LosBanos Branch

In October of 1994, theBank opened a full service banking facility relocated at 953 W. PachecoBoulevard, Los Banos.  The Bank enteredinto a ten-year lease with a non-affiliated third party on the facility.  The new facility contains 4,928 square feetof interior floor space.  Remodeling andredecorating expenses were approximately $355,000.  Management believes that this facility will be adequate toaccommodate the operation of the branch for the foreseeable future.

 

(5)           Hilmar Branch

On November 15, 1993, theBank opened a branch office at 8019 N. Lander Avenue, Hilmar.  The building was purchased at a cost of$328,000 and consists of a single story building of approximately 4,456 squarefeet of interior floor space. Remodeling and redecorating expenses were approximately $53,000.  Management believes that this facility willbe adequate to accommodate the operation of this branch for the foreseeablefuture.

 

(6)           Sonora Branch

On January 12, 1996, theBank received approval to open a full service banking facility at theCrossroads Shopping Center and entered into a five-year lease with a non-affiliatedthird party on January 12, 1996 for a 2,500 square foot facility.  On August 28, 1998, the Bank relocated fromthe Crossroads Shopping Center to a larger facility of 3,131 square feet in anearby shopping center.  As part of themove the Bank entered into a ten-year lease with a non-affiliated thirdparty.  Management believes that thisfacility will be adequate to accommodate the operation of this branch for theforeseeable future.

 

(7)           Turlock Branches

On September 1, 1995, theBank opened a branch in Turlock, California. In May 1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road,Turlock.  The Bank completed theconstruction of a permanent facility in February 1997 at a cost ofapproximately $694,000 and the facility is approximately 3,300 squarefeet.  Management believes that thisfacility will be adequate to accommodate the operation of this branch for theforeseeable future.

 

19

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In November, 1999, theBank received approval to convert the Turlock Town and Country branch into afull service County Bank branch.  Thereis no current lease on this facility and current rents are paid on a month tomonth basis.  The facility includesapproximately 2,160 square feet located at 410 East Olive Avenue inTurlock.  Management is reviewingpossible alternative sites for a downtown Turlock office.  It is anticipated that either a new leasewill be executed or a relocation to a new site will occur during the secondquarter of 2002.

 

(8)           Modesto Branches

On January 24, 1996, theBank received approval to open a full service banking facility in Modesto andentered into a ten-year lease with a non-affiliated third party on December 2,1996 for an approximately 5,413 square foot building at 3508 McHenry Avenue,Modesto.  The branch opened for businesson December 10, 1996.  Managementbelieves that this facility will be adequate to accommodate the branch for theforeseeable future.

 

On June 1, 2000, the Bankrenewed the lease on the branch in downtown Modesto and entered into a ten-yearlease with a non-affiliated third party for an approximately 8,208 square footbuilding at 1003 12th Street, Modesto. The branch opened for business on December 31, 1996.  Management believes that this facility willbe adequate to accommodate the banking operation for the foreseeable future.

 

(9)           Acquired Branches – Dos Palos,Livingston, and Mariposa

On December 11, 1997, theBank purchased the sites of three former branches of Bank of America.  These facilities are located at 640 MainStreet, Livingston, 1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa.The branch in Livingston was purchased at a cost of $251,000 and is a 5,699square feet facility.  The Dos Palosbranch was purchased at a cost of $296,000 and is an 8,274 square feetfacility.  The Mariposa branch waspurchased for a cost of $313,000 and is a 4,200 square feet facility.  Management believes that these facilitieswill be adequate to accommodate the banking operation for the foreseeablefuture.

 

(10)         Madera Branch

In October, 1999, theBank entered into a 3 year lease with a nonaffiliated third party for anapproximate 4,000 square foot facility located at 413 Yosemite Avenue, Suite101, Madera, California.  The branchrelocated to this larger facility on October 29, 1999 from a temporary facilitythat was rented on a month to month basis. Management believes the new facility will be adequate to accommodate thebanking operation for the foreseeable future.

 

(11)                            FresnoBranches

In November, 1999, the Bankreceived approval to convert the Fresno Town and County branch into a fullservice County Bank office.  The Bankrelocated the previous Thrift office to a larger facility, entering into a 4year lease with a nonaffiliated party for an approximate 5,200 square footfacility located at 2150 West Shaw Avenue, Fresno, California.  The new lease agreement was entered into inAugust, 1999.  Management believes thefacility will be adequate to accommodate the banking operation for theforeseeable future.

 

In September, 2000, theBank opened a second full service office. The Bank entered into a 10 year lease with a nonaffiliated party forapproximately a 4,755 square foot facility located at 1330 Ease Shaw Avenue,Fresno, California.  The new leasebecame effective July 1, 2000. Management believes the facility will be adequate to accommodate thebanking operation for the foreseeable future.

 

(12)         San Francisco Branch

In April, 2001, the Bankopened a full service office in San Francisco, California.  The current facility is located at 130Battery Street in San Francisco. Effective March 1, 2001, the Bank entered into a 5 year lease with anonaffiliated party for approximately 2,880 square feet of office space.  Management believes the facility will beadequate to accommodate the operation of the branch in San Francisco for theforeseeable future.

20

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(13)         Stockton Branch

In July, 2001, the Bankopened a full service banking facility located in Stockton, California.  The Bank entered into a five-year lease witha nonaffiliated third party for approximately 1,740 square feet of officespace.  Management believes that thisfacility will be adequate to accommodate the operation of this branch for theforeseeable future.

 

**ITEM 3.                                  LEGALPROCEEDINGS**

 

As of December 31, 2001,the Company, is not a party to, nor is any of it’s property the subject of, anymaterial pending legal proceedings, nor are any such proceedings known to becontemplated by government authorities.

 

The Company is, however,exposed to certain potential claims encountered in the normal course ofbusiness.  In the opinion of Management,the resolution of these matters will not have a material adverse effect on theCompany’s consolidated financial position or results of operations in theforeseeable future.

 

**ITEM 4.                                  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

The Company did notsubmit any matters to a vote of security holders in the quarter ended December31, 2001.

 

21

----

 

**PARTII**

 
| **ITEM  5.** |   | **MARKET FOR REGISTRANT’S COMMON  EQUITY AND RELATED SHAREHOLDER MATTERS** |
|--------------|--------|---------------------------------------------------------------------------------|

 

For informationconcerning the market for the Company’s common stock and related shareholdermatters, see page 19 of the Company’s 2001 Annual Report to Shareholdersincorporated herein by reference.

 
| **ITEM  6** |   | **SELECTED FINANCIAL DATA** |
|-------------|--------|-----------------------------|

 

For selected consolidatedfinancial data concerning the Company, see page 9 of the Company’s 2001 AnnualReport to Shareholders incorporated herein by reference.

 
| **ITEM 7.** |   | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|--------|-------------------------------------------------------------------------------------------------|

 

For management’sdiscussion and analysis of financial condition and results of operations, seepages 10 through 20 of the Company’s 2001 Annual Report to Shareholdersincorporated herein by reference.

 
| **ITEM 7A.** |   | **MARKET  RISK** |
|--------------|--------|------------------|

 

For management’sdiscussion and analysis of market risk and interest rate risk management, seepages 17 through 19 of the Company’s 2001 Annual Report to Shareholdersincorporated herein by reference.

 
| **ITEM 8.** |   | **FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA** |
|-------------|--------|--------------------------------------------------|

 

Audited ConsolidatedBalance Sheets as of December 31, 2001 and 2000 and Audited ConsolidatedStatements of Income and Comprehensive Income, Shareholders’ Equity and CashFlows for the fiscal years ending December 31, 2001, 2000, and 1999 appear onpages 22 through 25 of the Company’s 2001 Annual Report to Shareholdersincorporated herein by reference.  Notesto the Consolidated Financial Statements appear on pages 26 through 46 of theCompany’s 2001 Annual Report to Shareholders incorporated herein byreference.  The Independent Auditors’Report appears on page 21 of the Company’s 2001 Annual Report to Shareholdersincorporated herein by reference.

 
| **ITEM 9.** |   | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|--------|-------------------------------------------------------------------------------------------|

 

There were no changes inand there were no disagreements with accountants on accounting and financialdisclosure.

 

**PARTIII**

 
| **ITEM 10.** |   | **DIRECTORS AND EXECUTIVE OFFICERS OF  THE REGISTRANT** |
|--------------|--------|---------------------------------------------------------|

 

As permitted bySecurities and Exchange Commission’s rules relating to Form 10-K, theinformation called for by this item is incorporated by reference from thesection of the Company’s 2001 Proxy Statement titled “Election of Directors,”which is to be filed on or about March 14, 2002.

 

**ITEM11.****                                                                                              EXECUTIVECOMPENSATION**

 

As permitted bySecurities and Exchange Commission, the information called for by this item isincorporated by reference from the section of the Company’s 2001 ProxyStatement titled “Information Pertaining to Election of Directors,” which is tobe filed on or about March 14, 2002.

 

22

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**ITEM12.****                                                                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT**

 

As permitted bySecurities and Exchange Commission’s rules relating to Form 10-K, theinformation called for by this item is incorporated by reference from theCompany’s Proxy Statement, which is to be filed on or about March 14, 2002.

 

**ITEM13.****                                                                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

As permitted bySecurities and Exchange Commission’s rules relating to Form 10-K, theinformation called for by this item is incorporated by reference from theCompany’s Proxy Statement, which was filed on or about March 14, 2002.

 

**ITEM 14.****                                                                                           EXHIBITS****, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.**

 

(a)   **Financial Statements and Schedules**

An index of allfinancial statements and schedules filed as part of this Form 10-K appearsbelow and the material which begins on the pages of the Company’s Annual Reportto Shareholders for the year ended December 31, 2001 listed, are incorporatedherein by reference in response to Item 8 of this report.

 
| **Financial Statements:**                                                                            |   | **Page** |
|------------------------------------------------------------------------------------------------------|--------|----------|
| Independent Auditors’  Report                                                                   |   | 21       |
|                                                                                                 |   |     |
| Consolidated Balance  Sheets as of December 31, 2001 and 2000                                        |   | 22       |
|                                                                                                 |   |     |
| Consolidated Statements  of Income and Comprehensive Income for the Years Ended 2001, 2000, and 1999 |   | 23       |
|                                                                                                 |   |     |
| Consolidated Statements  of Shareholders’ Equity for the Years Ended 2001, 2000, and 1999       |   | 24       |
|                                                                                                 |   |     |
| Consolidated Statements  of Cash Flows for the Years Ended 2001, 2000, and 1999                      |   | 25       |
|                                                                                                 |   |     |
| Notes to Consolidated  Financials                                                                    |   | 26       |

 

(b)   **Reports on Form 8-K**

There were noreports on Form 8-K filed in the quarter ending December 31, 2001.

 

(c)   **Exhibits**

The following is alist of all exhibits required by Item 601 of Regulation S-K to be filed as partof this Form 10-K:

 
| **Exhibit Number** |   | **Exhibit**                                                                                                                                             |   |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1                |   | Articles of  Incorporation (filed as Exhibit 3.1 of the Company’s September 30, 1996 Form  10-Q filed with the SEC on or about November 14, 1996). |   |
|               |   |                                                                                                                                                    |   |
| 3.2                |   | Bylaws (filed as  Exhibit 3.2 of the Company’s September 30, 1996 Form 10-Q filed with the SEC  on or about November 14, 1996)                     |   |

 

23

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|   |   |                                                                                                                                                                                                                                                                                                               |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.3    |   | Rights Agreement between Capital Corp of the West  and Harris Trust Company of California dated as of September 26, 1997,  including Form of Right Certificate attached thereto as Exhibit B (filed as  Exhibit 4 to the Company’s Registration Statement on Form 8-A filed with the  SEC on October 1, 1997. |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10     |   | Employment Agreement  between Thomas T. Hawker and Capital Corp. of the West (filed as Exhibit 10  of the Company's 2000 Form 10-K filed with the SEC on or about March 30,  2001).                                                                                                                                | *      |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.1   |   | Administration  Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10-K  filed with the SEC on or about March 31, 1996).                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.2   |   | Stock Option Plan  (filed as Exhibit 10.6 of the Company’s 1995 Form 10-K filed with the SEC on  or about March 31, 1996).                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.3   |   | 401(k) Plan (filed as  Exhibit 10.7 of the Company’s 1995 Form 10-K filed with the SEC on or about  March 31, 1996).                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.4   |   | Employee Stock  Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10-K filed  with the SEC on or about March 31, 1996).                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.5   |   | Purchase Agreement for three  branches from Bank of America is incorporated herein by reference from  Exhibit 2.1 Registration Statement on Form S-2 filed July 14, 1997, File No.  333-31193.                                                                                                                     |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.6   |   | Change-in-Control  Agreement between R. Dale McKinney and Capital Corp of the West (filed as  Exhibit 10.6 of the Company’s 1999 Form   10-K with the SEC on or about March 17, 2000).                                                                                                                   | *      |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.7   |   | Deferred Compensation  Agreement between members of the board of directors and Capital Corp of the  West (filed as exhibit 10.7 of the Company’s 1999 Form 10-K with  the SEC on or about March 17, 2000).                                                                                          | *      |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.8   |   | Executive Salary  Continuation Agreement between certain members of executive management and  Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999 Form  10-K with the SEC in or about March 17, 2000).                                                                                 | *      |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.9   |   | Executive Salary  Continuation Agreement between senior executive management and Capital Corp  of the West .                                                                                                                                                                                                       | *      |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 11     |   | Statement Regarding the  Computation of Earnings Per Share is incorporated herein by reference from  Note 1 of the Company’s Consolidated Financial Statements.                                                                                                                                          |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 13     |   | Annual Report to Security Holders.                                                                                                                                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| 23     |   | Independent Auditors’  Consent Letter.                                                                                                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                                               |   |
| *      |   | Denotes management  contract or compensatory plan arrangement.                                                                                                                                                                                                                                                     |   |

 

(d)   **Financial Statement Schedules**

All othersupporting schedules are omitted because they are not applicable, not required,or the information required to be set forth therein is included in thefinancial statements or notes thereto incorporated herein by reference.

 

24

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 of the Securities Exchange Act of 1934, as amended,the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on the 15th day of March, 2002.

 
|   | **CAPITAL CORP OF THE WEST** |
|--------|------------------------------|
|   |                         |   |
|   | By:                          | /s/  THOMAS T. HAWKER |   |
|   |                         | THOMAS T. HAWKER |
|   |                         | (President and Chief  Executive Officer  of Capital Corp of the West) |
|   |                         |   |
|   |                         |   |
|   |                         |   |
|   | By:                          | /s/ R. DALE MCKINNEY |   |
|   |                         | R. DALE MCKINNEY |
|   |                         | (Executive Vice  President and Chief Financial Officer  of Capital Corp of the West) |
|   |                         |   |
|        |                              |  |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 
| **Signature**          |                          | **Capacity**     |           | **Date** |   |
|------------------------|-------------------------------|------------------|----------------|----------|--------|
|                   |                          |             |
| /s/ LLOYD H. ALHEM     |                          | Director         | March 15, 2002 |
| LLOYD H. ALHEM         |                          |             |
|                   |                          |             |
| /s/ DOROTHY L. BIZZINI |                          | Director         | March 15, 2002 |
| DOROTHY L. BIZZINI     |                          |             |
|                   |                          |             |
| /s/ JERRY E. CALLISTER |                          | Director         | March 15, 2002 |
| JERRY E. CALLISTER     |                          |             |
|                   |                          |             |
| /s/ JOHN FAWCETT       |                          | Director         | March 15, 2002 |
| JOHN FAWCETT           |                          |             |
|                   |                          |             |
| /s/ G MICHAEL GRAVES   |                          | Director         | March 15, 2002 |
| G MICHAEL GRAVES       |                          |             |
|                   |                          |             |
| /s/ THOMAS T. HAWKER   |                          | Director/CEO and | March 15, 2002 |
| THOMAS T. HAWKER       | Principal Operations  Officer |             |
|                   |                          |             |
| /s/ BERTYL W. JOHNSON  |                          | Director         | March 15, 2002 |
| BERTYL W. JOHNSON      |                          |             |
|                   |                          |             |
| /s/ CURTIS RIGGS       |                          | Director         | March 15, 2002 |
| CURTIS RIGGS           |                          |             |
|                        |                               |                  |                |          |        |  |  |  |  |  |

 

25

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| /s/ JERRY TAHAJIAN          |               | Director        | March 15, 2002 |
|-----------------------------|--------------------|-----------------|----------------|
| JERRY TAHAJIAN              |               |            |
|                        |               |            |
| /s/ JAMES W. TOLLADAY       |               | Chairman of the | March 15, 2002 |
| JAMES W. TOLLADAY           | Board of Directors |            |
|                        |               |            |
| /s/ TOM A.L. VAN  GRONINGEN |               | Director        | March 15, 2002 |
| TOM A.L. VAN GRONINGEN      |               |            |
|                             |                    |                 |                |  |  |

 

26

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| **Exhibit Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                              |   |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1                |   | Articles of  Incorporation (filed as Exhibit 3.1 of the Company’s September 30, 1996 Form  10-Q filed with the SEC on or about November 14, 1996).                                                                                                                                                                  |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 3.2                |   | Bylaws (filed as  Exhibit 3.2 of the Company’s September 30, 1996 Form 10-Q filed with the SEC  on or about November 14, 1996)                                                                                                                                                                                      |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 3.3                |   | Rights Agreement between Capital Corp of the West  and Harris Trust Company of California dated as of September 26, 1997,  including Form of Right Certificate attached thereto as Exhibit B (filed as  Exhibit 4 to the Company’s Registration Statement on Form 8-A filed with the  SEC on October 1, 1997.   E-1 |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10                 |   | Employment Agreement  between Thomas T. Hawker and Capital Corp. of the West   E-1 (filed as Exhibit 10 of the Company's 2000 Form 10-K filed with the SEC  on or about March 30, 2001).                                                                                                                                 | *      |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.1               |   | Administration  Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10-K  filed with the SEC on or about March 31, 1996).                                                                                                                                                                      |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.2               |   | Stock Option Plan  (filed as Exhibit 10.6 of the Company’s 1995 Form 10-K filed with the SEC on  or about March 31, 1996).                                                                                                                                                                                          |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.3               |   | 401(k) Plan (filed as  Exhibit 10.7 of the Company’s 1995 Form 10-K filed with the SEC on or about  March 31, 1996).                                                                                                                                                                                                |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.4               |   | Employee Stock  Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10-K filed  with the SEC on or about March 31, 1996).                                                                                                                                                                              |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.5               |   | Purchase Agreement for  three branches from Bank of America is incorporated herein by reference from  Exhibit 2.1 Registration Statement on Form S-2 filed July 14, 1997, File No.  333-31193.                                                                                                                           |   |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.6               |   | Change-in-Control  Agreement between R. Dale McKinney and Capital Corp of the West (filed as  Exhibit 10.6 of the Company’s 1999 Form   10-K with the SEC on or about March 17, 2000).                                                                                                                         | *      |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.7               |   | Deferred Compensation  Agreement between members of the board of directors and Capital Corp of the  West (filed as exhibit 10.7 of the Company’s 1999 Form 10-K with the SEC on  or about March 17, 2000).                                                                                                          | *      |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.8               |   | Executive Salary  Continuation Agreement between certain members of executive management and  Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999 Form  10-K with the SEC in or about March 17, 2000).                                                                                       | *      |
|               |   |                                                                                                                                                                                                                                                                                                                     |   |
| 10.9               |   | Executive Salary  Continuation Agreement between senior executive management and Capital Corp  of the West.                                                                                                                                                                                                              | *      |

 

27

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| 11     |   | Statement Regarding the  Computation of Earnings Per Share is incorporated herein by reference from  Note 1 of the Company’s Consolidated Financial Statements. |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                      |   |
| 13     |   | Annual Report to Security Holders.                                                                                                                                        |   |
|   |   |                                                                                                                                                                      |   |
| 23     |   | Independent Auditors’  Consent Letter.                                                                                                                               |   |
|   |   |                                                                                                                                                                      |   |
| *      |   | Denotes management  contract or compensatory plan arrangement.                                                                                                            |   |

 

----

 

28

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