**Exhibit 13**

 

CapitalCorp of the West

SelectedFinancial Data

 
| **(Amounts in  thousands,  except per share data)** |   | **2002** |       | **2001** |       | **2000** |       | **1999** |       | **1998** |       |
|-----------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| **Summary income data:**                            |   |     |       |     |       |     |       |     |       |     |       |
| Interest income                                     |   | $        | 58,811     |     | $          | 58,167   |       | $        | 50,888     |     | $          | 39,361 |   | $ | 34,614 |   |
| Interest expense                                    |   | 18,223   |       | 22,699   |       | 20,768   |       | 14,040   |       | 13,634   |       |
| Net interest income                                 |   | 40,588   |       | 35,468   |       | 30,120   |       | 25,321   |       | 20,980   |       |
| Provision for loan losses                           |   | 4,151    |       | 4,115    |       | 3,286    |       | 2,659    |       | 3,903    |       |
| Noninterest income                                  |   | 8,244    |       | 6,274    |       | 5,407    |       | 5,089    |       | 4,838    |       |
| Noninterest expense                                 |   | 31,798   |       | 26,897   |       | 22,774   |       | 20,538   |       | 18,244   |       |
| Income before provision for income taxes            |   | 12,883   |       | 10,730   |       | 9,467    |       | 7,213    |       | 3,671    |       |
| Provision for income taxes                          |   | 2,455    |       | 2,819    |       | 2,761    |       | 2,104    |       | 930      |       |
| Net income                                          |   | $        | 10,428     |     | $          | 7,911    |       | $        | 6,706      |     | $          | 5,109 |   | $ | 2,741 |   |
| **Share Data:**                                     |   |     |       |     |       |     |       |     |       |     |       |
| Average common shares outstanding(1)                |   | 5,538    |       | 5,345    |       | 5,244    |       | 5,280    |       | 5,328    |       |
| Basic earnings per share(1)                         |   | $        | 1.88       |     | $          | 1.48     |       | $        | 1.28       |     | $          | .97 |   | $ | 0.51 |   |
| Diluted earnings per share(1)                       |   | 1.83     |       | 1.44     |       | 1.25     |       | .94      |       | 0.50     |       |
| Book value per share                                |   | 14.49    |       | 12.39    |       | 10.65    |       | 8.81     |       | 8.43     |       |
| Tangible book value per share                       |   | $        | 13.87      |     | $          | 11.72    |       | $        | 9.80       |     | $          | 7.79 |   | $ | 7.28 |   |
| **Balance Sheet Data:**                             |   |     |       |     |       |     |       |     |       |     |       |
| Total assets                                        |   | $        | 1,034,210  |     | $          | 894,327  |       | $        | 683,021    |     | $          | 563,550 |   | $ | 499,859 |   |
| Total securities                                    |   | 287,020  |       | 271,411  |       | 191,052  |       | 147,368  |       | 154,867  |       |
| Total loans                                         |   | 633,773  |       | 532,420  |       | 412,664  |       | 331,268  |       | 268,933  |       |
| Total deposits                                      |   | 834,379  |       | 732,641  |       | 601,498  |       | 494,901  |       | 444,210  |       |
| Shareholders’ equity                           |   | $        | 77,169     |     | $          | 64,120   |       | $        | 53,451     |     | $          | 43,677 |   | $ | 42,804 |   |
| **Operating Ratios:**                               |   |     |       |     |       |     |       |     |       |     |       |
| Return on average equity                            |   | 14.94    | %          | 13.40    | %          | 14.33    | %          | 11.86    | %          | 6.48     | %          |
| Return on average assets                            |   | 1.09     |       | 1.03     |       | 1.09     |       | .99      |       | .60      |       |
| Average equity to average assets ratio              |   | 7.29     |       | 7.69     |       | 7.64     |       | 8.35     |       | 9.06     |       |
| Net interest margin                                 |   | 4.64     |       | 5.09     |       | 5.46     |       | 5.55     |       | 5.19     |       |
| **Credit Quality Ratios:**                          |   |     |       |     |       |     |       |     |       |     |       |
| Nonperforming loans to total loans(2)               |   | 0.38     | %          | 0.91     | %          | 0.57     | %          | 0.60     | %          | 0.54     | %          |
| Allowance for loan losses to total loans            |   | 1.91     |       | 1.83     |       | 1.99     |       | 1.97     |       | 1.78     |       |
| Allowance for loan losses to nonperforming loans    |   | 509.15   |       | 200.65   |       | 350.66   |       | 328.83   |       | 310.87   |       |
| **Capital Ratios:**                                 |   |     |       |     |       |     |       |     |       |     |       |
| Risk-based tier 1 capital                           |   | 9.49     | %          | 9.49     | %          | 9.66     | %          | 9.99     | %          | 10.69    | %          |
| Total risk-based capital                            |   | 10.74    |       | 10.74    |       | 10.92    |       | 11.24    |       | 11.94    |       |
| Leverage ratio                                      |   | 7.68     |       | 7.72     |       | 7.56     |       | 7.50     |       | 7.58     |       |

 

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*(1)**                               Adjusted for 5% stock dividend declaredFebruary 25, 2003.*

 

*(2)**                               Nonperforming loans consist of loans onnonaccrual, loans past due 90 days or more and restructured loans.*

 

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Management’s Discussion andAnalysis of Financial Condition and Results of Operations

 

Thefollowing discussion and analysis is designed to provide a better understandingof the significant changes and trends related to Capital Corp of the West (the“Company”). The following discussion should be read in conjunction with theconsolidated financial statements of the Company and the notes thereto. Theconsolidated financial statements of the Company include its subsidiaries,County Bank (the “Bank”), Capital West Group (“CWG”) and Regency InvestmentAdvisors (“RIA”). It also includes the Bank’s subsidiaries, Merced AreaInvestment Development, Inc. (“MAID”), County Asset Advisor, Inc. (“CAA”) andCounty Investment Trust (“REIT”).

 

Inaddition to historical information, this discussion and analysis includescertain forward-looking statements that are subject to risks and uncertaintiesand include information about possible or assumed future results of operations.Many possible events or factors could affect the future financial results andperformance of the Company. This could cause results or performance to differmaterially from those expressed in our forward-looking statements. Words suchas “expects”, “anticipates”, “believes”, “estimates”, variations of such wordsand other similar expressions are intended to identify such forward-lookingstatements. These statements are not guarantees of future performance andinvolve certain risks, uncertainties and assumptions which are difficult topredict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in, or implied by, such forward-looking statements.

 

Readersof the Company’s Annual Report and Form 10-K should not rely solely on forwardlooking statements and should consider all uncertainties and risks discussedthroughout this report. These statements are representative only on the datehereof, and the Company undertakes no obligation to update any forward-lookingstatements made. Some possible events or factors that could occur that maycause differences from expected results include the following: the Company’sloan growth is dependent on economic conditions, as well as variousdiscretionary factors, such as decisions to sell, or purchase certain loans orloan portfolios; participations of loans and the management of borrower,industry, product and geographic concentrations and the mix of the loanportfolio. The rate of charge-offs and provision expense can be affected bylocal, regional and international economic and market conditions,concentrations of borrowers, industries, products and geographical conditions,the mix of the loan portfolio and management’s judgements regarding thecollectibility of loans. Liquidity requirements may change as a result offluctuations in assets and liabilities and off-balance sheet exposures, whichwill impact the capital and debt financing needs of the Company and the mix offunding sources. Decisions to purchase, hold, or sell securities are alsodependent on liquidity requirements and market volatility, as well as on andoff-balance sheet positions. Factors that may impact interest rate risk includelocal, regional and international economic conditions, levels, mix, maturities,yields or rates of assets and liabilities and the wholesale and retail fundingsources of the Company. The Company is also exposed to the potential of lossesarising from adverse changes in market rates and prices which can adverselyimpact the value of financial products, including securities, loans, anddeposits. In addition, the banking industry in general is subject to variousmonetary and fiscal policies and regulations, which include those determined bythe Federal Reserve Board, the Federal Deposit Insurance Corporation and stateregulators, whose policies and regulations could affect the Company’s results.

 

Otherfactors that may cause actual results to differ from the forward-lookingstatements include the following: competition with other local and regionalbanks, savings and loan associations, credit unions and other non-bankfinancial institutions, such as investment banking firms, investment advisoryfirms, brokerage firms, mutual funds and insurance companies, as well as otherentities which offer financial services; interest rate, market and monetaryfluctuations; inflation; market volatility; general economic conditions;introduction and acceptance of new banking-related products, services andenhancements; fee pricing strategies, mergers and acquisitions and theirintegration into the Company and management’s ability to manage these and otherrisks.

 

**Critical Accounting Policies and Estimates** The company’s discussion and analysis of itsfinancial condition and results of operations are based upon the Company’sconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, the Company evaluates its estimates, including those related tothe adequacy of the allowance for loan losses, investments, and intangibleassets. The Company bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. The one accounting estimate that materially affectsthe financial statements is the allowance for loan losses. The policies relatedto the adequacy of the allowance for loan losses and the determination ofimpairment of investments and intangible assets that govern the Company’saccounting in these areas can be found in footnote 1, the sections titled“Allowance for Loan Losses”, “Investment Securities”, “Intangible Assets” and“Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of” aswell as in footnote 3, titled “Loans”, within the Company’s 2002 AnnualReport.

 

**Overview**During 2002, earnings increased $2,517,000 or 32% to $10,428,000 which comparesfavorably to earnings of $7,911,000 and $6,706,000 achieved in 2001 and 2000.Basic earnings per share were $1.88 in 2002 compared to $1.48 and $1.28 in 2001and 2000. 

 

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Dilutedearnings per share were $1.83 in 2002 compared to $1.44 and $1.25 in 2001 and2000. The Company’s return on average total assets was 1.09% in 2002 comparedwith 1.03% and 1.09% in 2001 and 2000. The $2,517,000 earnings improvement in2002 was primarily the result of an increase of growth in interest-earningassets which resulted in net interest income growth of 5,120,000 or 14%, anincrease in noninterest income of 1,970,000 or 31% and a lower effective taxrate when compared to the prior year. The earnings improvement in 2001 whencompared to 2000 was primarily the result of growth in interest-earning assetswhich created growth in interest income and improvement in noninterest incomethat was partially offset by an increase in loan loss provisions. The Companyachieved strong asset growth in 2002, reaching total assets atDecember 31, 2002 of $1,034,210,000, up $139,883,000 or 16% from$894,327,000 at December 31, 2001. Net loans grew to $621,639,000 atDecember 31, 2002, an increase of $98,962,000 or 19% from the $522,677,000outstanding at December 31, 2001. Deposits grew to $834,379,000 atDecember 31, 2002, an increase of $101,738,000 or 14% over the$732,641,000 outstanding as of December 31, 2001. Total shareholder’sequity grew to $77,169,000 at December 31, 2002, an increase of$13,049,000 or 20% over the year-end 2001 total of $64,120,000 and the Companycontinues to be well capitalized by regulatory definitions. The Company’sreturn on average equity was 14.94%, 13.40%, and 14.33% in 2002, 2001, and2000.

 

**Results of Operations** Capital Corp of the West’s earnings were a record$10,428,000 during 2002, driven primarily by an improvement in net interestincome, an increase in noninterest income of $1,970,000 or 31% and a lowereffective tax rate. Net interest income increased by $5,120,000, or 14%, to$40,588,000 during 2002 as compared to an increase in net interest income of$5,348,000 in 2001 over 2000 levels. The improvement in earnings during 2002compared to 2001 and during 2000 was driven primarily by an increase in averageearning asset balances.

 

TheCompany’s primary source of revenue is net interest income, which is thedifference between interest income and fees derived from earning assets andinterest paid on liabilities obtained to fund those assets. Total interest andfee income on earning assets increased from $58,167,000 in 2001 to $58,811,000,a $644,000 or 1% increase in 2002. During 2001, there was an increase of$7,279,000 or 14% to $58,167,000 compared to $50,888,000 in 2000. The level ofinterest income is affected by changes in the volume and the rates earned oninterest-earning assets. During 2002, the increase in interest income is due togrowth in interest-earning assets and partially offset by lower yields on thoseassets. Average interest-earning assets in 2002 were $884,885,000 as comparedwith $703,388,000 in 2001, an increase of $181,497,000 or 26%. The average rateearned on interest-earning assets was 6.70% in 2002, a decrease of 1.50% overthe 8.20% earned in 2001.

 

Interestexpense is a function of the volume and rates paid for interest-bearingliabilities. Interest-bearing liabilities consist primarily of certain depositsand borrowed funds. Average interest-bearing liabilities in 2002 were$743,322,000 as compared with $592,533,000 in 2001, an increase of $150,789,000or 25%. Total interest expense decreased $4,476,000 or 20% to $18,223,000 in2002 as compared to $22,699,000 for 2001. Total interest expense in 2000totaled $20,768,000. Total cost of interest-bearing funds were 2.45%, 3.83%,and 4.39% in 2002, 2001, and 2000. If the current rate environment holds during2003, it is anticipated that the average interest paid on certificates ofdeposit should continue to modestly decline as these accounts reprice at theirmaturities to a prevailing lower interest rate level.

 

TheCompany’s net interest margin, the ratio of net interest income to averageinterest-earning assets for 2002 was 4.64%. This is a decrease of 45 basispoints compared to the 2001 margin of 5.09%. The decrease in net interestmargin during 2002 was primarily the result of a larger decrease in the yieldson interest-earning assets than the decrease in the cost of interest bearingfunds. If the current interest rate environment continues throughout 2003, itis anticipated the Company’s overall net interest margin will continue todecline modestly during 2003. A modest increase in rates should cause theCompany’s net interest margin to slightly increase. The net interest margindecrease of 37 basis points during 2001 from the 5.46% achieved in 2000 wasprimarily the result of an overall decline in prevailing interest rates duringthe period. In 2002, loans comprised 65% of average interest-earning assets ascompared with 64% and 67% in 2001 and 2000. Securities comprised 32% of averageinterest-earning in 2002 compared with 33% and 30% in 2001 and 2000.

 

TheCompany’s net interest income is affected by changes in the amount and mix ofinterest-earning assets and interest-bearing liabilities. It is also affectedby changes in yields earned on interest-earning assets and rates paid oninterest-bearing deposits and other borrowed funds. The changes due to bothrate and volume have been allocated to rate and volume in proportion to therelationship of the absolute dollar amount of the change in each.

 

Theincrease in taxable equivalent interest income of $780,000 in 2002 is comprisedof a $13,666,000 volume increase attributable to an increase ininterest-earning assets of $181,497,000 between 2002 and 2001 which ispartially offset by a $12,924,000 rate decrease during this same period. Thedecrease in total interest expense of $4,476,000 in 2002 related to a$5,648,000 volume increase attributable to an increase in averageinterest-bearing liabilities of $150,789,000 during 2002 when compared to 2001which was more than offset by a $10,124,000 rate decrease during this sameperiod.

 

Theincrease in taxable equivalent interest income of $7,395,000 in 2001 iscomprised of a $12,232,000 volume increase primarily attributable to anincrease in interest-earning assets of $14,796,000 between 2001 and 2000 whichis partially offset by a $4,837,000 rate decrease during this same period. Theincrease in total interest expense of $1,931,000 in 2001 related to a$118,952,000 increase in 

 

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averageinterest-bearing liabilities between 2001 and 2000 coupled with a $3,713,000rate decrease during this same period.

 

**Provision for Loan Losses** The Company maintains an allowance for loanlosses at a level considered by management to be adequate to cover the inherentrisks of loss associated with its loan portfolio under prevailing andanticipated economic conditions. The provision for loan losses is chargedagainst income and increases the allowance for loan losses. The provision forloan losses for the year ended December 31, 2002 was $4,151,000 comparedto $4,115,000 in 2001 and $3,286,000 in 2000. The increased level of provisionfor loan losses in 2002 when compared to 2001 was primarily the result of anoverall increase in the size of the portfolio. The increased level of provisionfor loan losses in 2001 when compared to 2000 was primarily the result of anincrease in nonperforming loans and an overall increase in the size of theportfolio. The methodology used to determine the level of provision for loanlosses includes an analysis of relevant risk factors within the entire loanportfolio, including nonperforming loans. The methodology is based, in part, onmanagement’s use of a loan grading and classification system. The Bank’smanagement grades its loans through internal reviews and periodically subjectsloans to external reviews. These external reviews are presented to and assessedby the Bank’s audit committee. Credit reviews are performed quarterly and thequality grading process occurs on a monthly basis. The level of provision forloan losses in 2002, 2001, and 2000 also supports the general loan growth ofthe Company, as gross loans increased 19% in 2002 and 29% in 2001.

 

**Other Income** The following table summarizes other income for the years endedDecember 31,

 
| **(Dollars in thousands)**                           |   | **2002** |       | **2001** |       | **2000** |       |
|------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                 |   |     | ** ** |     | ** ** |     | ** ** |
| **Other Income:**                                    |   |     |       |     |       |     |       |
| Deposit service charges                              |   | $        | 5,076      |     | $          | 3,981    |       | $ | 3,527 |   |
| Income from real estate held for sale or development |   | 33       |       | —   |       | 390      |       |
| Earnings on bank owned insurance                     |   | 994      |       | 662      |       | 311      |       |
| Loan packaging fees                                  |   | 206      |       | 236      |       | 116      |       |
| Gain on sale of loans                                |   | 141      |       | 166      |       | 82       |       |
| Retail investment income                             |   | 538      |       | 222      |       | 78       |       |
| Other                                                |   | 1,256    |       | 1,007    |       | 903      |       |
| Total other income                                   |   | $        | 8,244      |     | $          | 6,274    |       | $ | 5,407 |   |

 

Totalother income increased by $1,970,000 or 31% to $8,244,000 in 2002 whichcompares with $6,274,000 and $5,407,000 earned in 2001 and 2000. Depositservice charges increased by $1,095,000 or 28% during 2002. The 2002, 2001, and2000 increase in deposit service charges was primarily the result of anincrease in demand deposit and NOW accounts in each of these years as well asservice charge increases on certain products and services**.** Earnings on bank owned life insuranceincreased by $372,000 or 60% and this was due to additional investments made inlate 2001 and 2002. Retail investment income grew by $316,000 or 142% which isprimarily due to the acquisition of RIA. Other income increased by $249,000 or25% to $1,256,000 in 2002, compared to $1,007,000 and $903,000 in 2001 and2000.

 

**Other Expense** Total noninterest expense increased $4,901,000 or 18% to $31,798,000 in2002 as compared with an increase of $4,123,000 or 18% to $26,897,000 in 2001.Noninterest expense totaled $22,774,000 in 2000.

 

Salariesand related benefits increased by $3,059,000 or 22% to $16,674,000 in 2002,compared with an increase of $2,549,000 or 23% to $13,615,000 in 2001. Salariesand related benefits totaled $11,066,000 in 2000. The salary increases wereprimarily due to staff additions to support growth, the acquisition of RIA in2002 and normal salary progression.

 

Premisesand occupancy expenses increased 393,000 or 18% to $2,526,000 in 2002 comparedwith an increase of $419,000 or 24% to $2,133,000 in 2001. Premises andoccupancy expense totaled $1,714,000 in 2000. The increases in 2002 and 2001were caused primarily by the addition of new branch facilities and expansionfor general company growth.

 

Equipmentexpenses increased $215,000, or 8% to $2,954,000 in 2002 compared with anincrease of $181,000 or 7% to $2,739,000 in 2001. Equipment expenses were$2,558,000 in 2000. The increase in 2002 and 2001 was primarily due toequipment purchases relating to branch expansion and general growth of thecompany.

 

TheCompany’s professional fees include legal, consulting, audit and accountingfees. These expenses increased by $710,000 or 152% to $1,177,000 in 2002 ascompared with a decrease of $634,000 or 58% to $467,000 in 2001. Totalprofessional fees were $1,101,00 in 2000. The increase in 2002 is attributableto increased use of consulting services used to identify new businessopportunities, tax saving

 

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strategiesand fees related to the RIA acquisition. The decrease in 2001 was due to adecreased use of consulting firms for the Company.

 

Suppliesdecreased by $105,000 or 12% to $780,000 in 2002 as compared with an increaseof $225,000 or 34% to $885,000 in 2001. Supplies expense totaled $660,000 in2000. The increase in 2001 was primarily related to increased volumes caused bybranch expansion and general growth of the company.

 

Marketingexpenses decreased by $49,000 or 5% to $900,000 in 2002 as compared with anincrease of $59,000 or 7% to $949,000 in 2001. Marketing expenses totaled$890,000 in 2000. Marketing expenses have been fairly stable over the past fewyears as the Company has actively promoted various deposit and loan productsusing television, newspaper, and other media sources to assist in attractingnew and retaining existing customers.

 

Otherexpenses increased $790,000 or 15% to $6,107,000 in 2002. During 2001, otherexpenses increased $1,324,000 or 33% to $5,317,000 in 2001. Other expenses were$3,993,000 in 2000. These expense increases are generally the result of companygrowth.

 

**Provision for Income Taxes** The Company’s provision for income taxes was$2,455,000 in 2002 compared to a provision for income taxes of $2,819,000 and$2,761,000 in 2001 and 2000. The effective income tax rates (computed as incometaxes as a percentage of income before income taxes) were 19%, 26%, and 29% for2002, 2001, and 2000. During 2002 and 2001, the effective tax rate was loweredby the implementation of new tax strategies designed to reduce state incometaxes. These strategies lowered taxable state income by approximately$16,000,000, $3,100,000 and $0 in 2002, 2001 and 2000, respectively. During2002, 2001 and 2000 the tax rate was lower than the statutory rate due also inpart, to tax credits earned from the investment of low-income housingpartnerships that qualify for housing tax credits. Total housing tax creditsfor 2002, 2001, and 2000 were approximately $750,000, $600,000, and $550,000.In addition, during 2002, 2001, and 2000, the Company realized tax benefits of$407,000, $386,000, and $390,000 from nontaxable interest income received frombank qualified municipal securities.

 

**Financial Condition** Total assets increased 139,883,000 or 16% to $1,034,210,000 atDecember 31, 2002, compared to $894,327,000 at December 31, 2001. Netloans increased to $621,639,000 at year end 2002, a 19% increase from thebalance of $522,677,000 at December 31, 2001. Deposits grew by$101,738,000 or 14% in 2002 to $834,379,000 which compares to $732,641,000 atDecember 31, 2001.

 

**Securities**The following table sets forth the carrying amount (fair value) of availablefor sale securities at December 31,

 
| **(Dollars in thousands)**                   |   | **2002** |       | **2001** |       | **2000** |       |
|----------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                         |   |     | ** ** |     | ** ** |     | ** ** |
| U.S. Treasury & U.S. Government agencies |   | $        | 66,130     |     | $          | 78,712   |       | $ | 35,939 |   |
| State and political subdivisions             |   | 25,619   |       | 24,269   |       | 24,170   |       |
| Mortgage-backed securities                   |   | 64,655   |       | 54,797   |       | 54,409   |       |
| Collateralized mortgage obligations          |   | 40,952   |       | 33,346   |       | 29,015   |       |
| Corporate securities                         |   | 3,559    |       | 13,560   |       | 9,833    |       |
| Total debt securities                        |   | 200,915  |       | 204,684  |       | 153,366  |       |
| Agency preferred stock                       |   | 14,613   |       | 15,012   |       | —   |       |
| Trust preferred stock                        |   | 4,927    |       | 4,897    |       | —   |       |
| Equity securities                            |   | 10,937   |       | 5,259    |       | 2,464    |       |
| Total carrying value and fair value          |   | $        | 231,392    |     | $          | 229,852  |       | $ | 155,830 |   |

 

Thefollowing table sets forth the carrying amount (amortized cost) and fair valueof held to maturity securities at December 31,

 
| **(Dollars in thousands)**                 |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                       |   |     | ** ** |     | ** ** |     | ** ** |
| U.S. Treasury and U.S. Government agencies |   | $        | 4,629      |     | $          | 4,611    |       | $ | 4,595 |   |
| State and political subdivisions           |   | 4,347    |       | 4,361    |       | 4,375    |       |
| Mortgage-backed securities                 |   | 46,652   |       | 31,900   |       | 22,736   |       |
| Collateralized mortgage obligations        |   | —   |       | 687      |       | 3,516    |       |
| Carrying amount (amortized cost)           |   | $        | 55,628     |     | $          | 41,559   |       | $ | 35,222 |   |
| Fair value                                 |   | $        | 57,905     |     | $          | 42,185   |       | $ | 35,412 |   |

 

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Available for sale securities increased $1,540,000 or 0.7% atDecember 31, 2002 over the comparable year-end in 2001. Held to maturitysecurities increased $14,069,000 or 34% to $55,628,000 at December 31,2002 compared to $41,559,000 outstanding at December 31, 2001. Theincreases achieved within both segments of the securities portfolio were madepossible by increased deposit liabilities and increased borrowings. The singlelargest component of the Company’s investment portfolio during the last threeyears has been mortgage-backed securities. At December 31, 2002 and 2001the Company did not hold any structured notes. See Note 1 and 3 to theCompany’s Consolidated Financial Statements for further information concerningthe securities portfolio.

 

**Loans**Total loans increased $101,353,000 or 19% to $633,773,000 at December 31,2002, compared to the $532,420,000 outstanding at December 31, 2001. Theincrease in loan volumes in 2002 were due to increased penetration intoexisting geographic markets.

 

TheCompany concentrates its lending activities in five principal areas:commercial, agricultural, real estate construction, real estate mortgage, andconsumer loans. Interest rates charged for loans made by the Company vary withthe degree of risk, the size and term of the loan, and borrowers’ depositoryrelationships with the Company and prevailing market rates.

 

As aresult of the Company’s loan portfolio mix, the future quality of these assetscould be affected by adverse trends in its region or in the broader community.These trends are beyond the control of the Company.

 

**Credit Risk Management and Asset Quality** The Company closely monitors the markets in whichit conducts its lending operations and adjusts its strategy to control exposureto loans with higher credit risk. Asset reviews are performed using gradingstandards and criteria similar to those employed by bank regulatory agencies.Assets receiving lesser grades become “classified assets” which include allnonperforming assets and potential problem loans and receive an elevated levelof attention to improve the likelihood of collection. The policy of the Companyis to review each loan in the portfolio to identify problem credits. There arethree classifications for problem loans: “substandard,” “doubtful” and “loss.”Substandard loans have one or more defined weaknesses and are characterized bythe distinct possibility that the Company will sustain some loss if thedeficiencies are not corrected. Doubtful loans have the weaknesses ofsubstandard loans with the additional characteristic that the weaknesses makecollection or liquidation in full on the basis of currently existing facts,conditions and values questionable, and there is a high possibility of loss. Aloan classified as loss is considered uncollectible and its continuance as anasset is not warranted. The level of nonperforming loans and real estateacquired through foreclosure are two indicators of asset quality. Nonperformingloans are those in which the borrower fails to perform under the original termsof the obligation and are categorized as loans past due 90 days or more butstill accruing, loans on nonaccrual status and restructured loans. Loans aregenerally placed on nonaccrual status and accrued but unpaid interest isreversed against current year income when interest or principal payments become90 days past due unless the outstanding principal and interest is adequatelysecured and, in the opinion of management, are deemed to be in the process ofcollection. Loans that are not 90 days past due may also be placed onnonaccrual status if management reasonably believes the borrower will not beable to comply to the contractual loan repayment terms and the collection ofprincipal or interest is in question.

 

Managementdefines impaired loans as those loans, regardless of past due status, in whichprincipal and interest are not expected to be collected under the originalcontractual loan repayment terms. An impaired loan is charged off at the timemanagement believes the collection of principal and interest process has beenexhausted. Partial charge-offs are recorded when portions of impaired loans aredeemed uncollectable. At December 31, 2002 and 2001, impaired loans weremeasured based upon the present value of future cash flows discounted at theloan’s effective rate, the loan’s observable market price, or the fair value ofcollateral if the loan is collateral dependent.

 

TheCompany had impaired loans at December 31, 2002 of $2,383,000 as comparedwith $4,856,000 at December 31, 2001. The 2002 and 2001 totals contain noloans secured by first deeds of trust on real property. Impaired loans as ofDecember 31, 2002 were $2,383,000 which had specific allowances for loanloss of $406,000 as compared with impaired loans of $4,856,000 as ofDecember 31, 2001, which had specific allowance for loan losses of$644,000. Other forms of collateral, such as inventory, chattel, and equipmentsecure the remaining nonperforming loans as of each date.

 

AtDecember 31, 2002 the Bank had $60,000 of real estate acquired throughforeclosure. This compares with a balance of $472,000 at December 31,2001. At December 31, 2002 the Company owned one residential foreclosureproperty. At December 31, 2001 the Company owned one residential, onecommercial, and one agricultural foreclosure property.

 

**Allowance for Loan Losses** In determining the adequacy of the allowance forloan losses, management takes into consideration the growth trend in theportfolio, examinations by financial institution supervisory authorities,internal and external credit reviews, prior loan loss experience of theCompany, concentrations of credit risk, delinquency trends, general economicconditions and the interest rate environment. The allowance for loan losses isbased on estimates and ultimate future losses may vary from current estimates.It is always possible that future economic or other factors may adversely affectthe Company’s borrowers, and thereby cause loan losses to exceed the

 

6

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currentallowance for loan losses.

 

Thebalance in the allowance for loan losses was affected by the amounts providedfrom operations, amounts charged-off and recoveries of loans previously chargedoff. The Company had provisions to the allowance in 2002 of $4,151,000 ascompared to $4,115,000 and $3,286,000 in 2001 and 2000. See “Results ofOperations - Provision for Loan Losses.”

 

7

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Thefollowing table summarizes the loan loss experience of the Company for theyears ended December 31,

 

 
| **(Dollars in thousands)**       |   | **2002** |       | **2001** |       | **2000** |       | **1999** |       | **1998** |       |
|----------------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                             |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| Allowance for loan losses:       |   |     |       |     |       |     |       |     |       |     |       |
| Balance at beginning of year     |   | $        | 9,743      |     | $          | 8,207    |       | $        | 6,542      |     | $          | 4,775 |   | $ | 3,833 |   |
| Provision for loan losses        |   | 4,151    |       | 4,115    |       | 3,286    |       | 2,659    |       | 3,903    |       |
| Charge-offs:                     |   |     |       |     |       |     |       |     |       |     |       |
| Commercial and agricultural      |   | 1,504    |       | 864      |       | 423      |       | 531      |       | 2,539    |       |
| Real-estate - mortgage      |   | —   |       | —   |       | —   |       | —   |       | 4        |       |
| Consumer                         |   | 1,085    |       | 2,288    |       | 1,971    |       | 1,323    |       | 983      |       |
| Total charge-offs                |   | 2,589    |       | 3,152    |       | 2,394    |       | 1,854    |       | 3,526    |       |
| Recoveries:                      |   |     |       |     |       |     |       |     |       |     |       |
| Commercial and agricultural      |   | 233      |       | 159      |       | 410      |       | 715      |       | 135      |       |
| Real-estate - mortgage      |   | —   |       | —   |       | —   |       | —   |       | 100      |       |
| Consumer                         |   | 596      |       | 414      |       | 363      |       | 247      |       | 330      |       |
| Total recoveries                 |   | 829      |       | 573      |       | 773      |       | 962      |       | 565      |       |
| Net charge-offs                  |   | 1,760    |       | 2,579    |       | 1,621    |       | 892      |       | 2,961    |       |
| Balance at end of year           |   | $        | 12,134     |     | $          | 9,743    |       | $        | 8,207      |     | $          | 6,542 |   | $ | 4,775 |   |
|                             |   |     |       |     |       |     |       |     |       |     |       |
| Loans outstanding at year-end    |   | $        | 633,773    |     | $          | 532,420  |       | $        | 412,664    |     | $          | 331,268 |   | $ | 268,993 |   |
| Average loans outstanding        |   | 576,156  |       | 453,503  |       | $        | 369,367    |     | $          | 303,463  |       | $ | 242,989 |   |
| Net charge-offs to average loans |   | .31      | %          | .57      | %          | 0.44     | %          | 0.29     | %          | 1.22     | %          |
| Allowance for loan losses        |   |     |       |     |       |     |       |     |       |     |       |
| To total loans                   |   | 1.91     | %          | 1.83     | %          | 1.99     | %          | 1.97     | %          | 1.78     | %          |
| To nonperforming loans           |   | 509.15   | %          | 200.65   | %          | 350.66   | %          | 328.83   | %          | 310.87   | %          |
| To nonperforming assets          |   | 496.56   | %          | 182.85   | %          | 317.12   | %          | 292.45   | %          | 291.69   | %          |

 

TheCompany’s charge-offs, net of recoveries, were $1,760,000 in 2002 as comparedwith $2,579,000 and $1,621,000 in 2001 and 2000. This represents loan lossexperience ratios of 0.31%, 0.57% and 0.44% in those respective years stated asa percentage of average loans outstanding for each year. The decrease in netcharge-offs in 2002 when compared to 2001 is due to decreased net charge offswithin the consumer portfolio. As of December 31, 2002 the allowance forloan losses was $12,134,000 or 1.91% of total loans outstanding. This compareswith an allowance for loan losses of $9,743,000 or 1.83% in 2001 and $8,207,000or 1.99% in 2000. The increase in net charge-offs in 2001 compared to 2000 wasdue to increased net charge-offs within the consumer portfolio coupled withincreased net charge-offs on agricultural and commercial loans.

 

**Liquidity**To maintain adequate liquidity requires that sufficient resources be availableat all times to meet cash flow requirements of the Company. The need forliquidity in a banking institution arises principally to provide for depositwithdrawals, the credit needs of its customers and to take advantage ofinvestment opportunities as they arise. A company may achieve desired liquidityfrom both assets and liabilities. The Company considers cash and deposits heldin other banks, federal funds sold, other short term investments, maturingloans and investments, receipts of principal and interest on loans, availablefor sale investments and potential loan sales as sources of asset liquidity.Deposit growth and access to credit lines established with correspondent banksand market sources of funds are considered by the Company as sources ofliquidity. The Holding Company’s primary source of liquidity is from dividendsreceived from the Bank. Dividends from the Bank are subject to certainregulatory limitations.

 

TheCompany reviews its liquidity position on a regular basis based upon itscurrent position and expected trends of loans and deposits. Management believesthat the Company maintains adequate amounts of liquid assets to meet itsliquidity needs. These assets include cash and deposits in other banks,available for sale securities and federal funds sold. The Company’s liquidassets totaled $305,075,000 and $279,640,000 at December 31, 2002 and 2001and were 29% and 31% of total assets on December 31, 2002 and 2001. Cashand noninterest-bearing deposits in other banks increased $8,625,000 or 23% to$46,628,000 at December 31, 2002, compared to $38,003,000 atDecember 31, 2001. The increase in the 2002 cash position when compared to2001 was the result of increased in-transit cash items at December 31,2002 when compared to December 31, 2001. Liquidity is also affected bycollateral requirements of its public agency deposits and certain borrowings.Total pledged securities were $193,962,000 and $141,386,000 at December 31,2002 and 2001.

 

Althoughthe Company’s primary sources of liquidity include liquid assets and a stabledeposit base, the Company maintains lines of credit

 

8

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withcertain correspondent banks, the Federal Reserve Bank, and the Federal HomeLoan Bank aggregating $160,546,000 of which $100,841,000 was outstanding as ofDecember 31, 2002. This compares with lines of credit of $87,719,000 ofwhich $73,759,000 was outstanding as of December 31, 2001.

 

**Market and Interest Rate Risk Management** In the normal course of business, the Company isexposed to market risk which includes both price and liquidity risk. Price riskis created from fluctuations in interest rates and the mismatch in repricingcharacteristics of assets, liabilities, and off-balance sheet instruments at aspecified point in time. Mismatches in interest rate repricing among assets andliabilities arise primarily through the interaction of the various types ofloans versus the types of deposits that are maintained as well as frommanagement’s discretionary investment and funds gathering activities. Liquidityrisk arises from the possibility that the Company may not be able to satisfycurrent and future financial commitments or that the Company may not be able toliquidate financial instruments at market prices. Risk management policies andprocedures have been established and are utilized to manage the Company’sexposure to market risk. Quarterly testing of the Company’s assets andliabilities under both increasing and decreasing interest rate environments areperformed to insure the Company does not assume a magnitude of risk that isoutside approved policy limits.

 

TheCompany’s success is largely dependent upon its ability to manage interest raterisk. Interest rate risk can be defined as the exposure of the Company’s netinterest income to adverse movements in interest rates. Although the Companymanages other risks, such as credit and liquidity risk in the normal course ofits business, management considers interest rate risk to be its mostsignificant market risk and could potentially have the largest material effecton the Company’s financial condition and results of operations.Correspondingly, the overall strategy of the Company is to manage interest raterisk, primarily through balance sheet structure, to be interest rate neutral.The Company does engage in the use derivative instruments to control interestrate risk. During the third quarter of 2001, the Company entered into a$20,000,000 hedge transaction exchanging a fixed interest rate for a variablerate tied to the prime rate. This hedge transaction was designed to give someinterest income protection in a falling rate environment. This type of hedgingactivity is permitted subject to the approval of the Board of Directors.

 

TheCompany’s interest rate risk management is the responsibility of theAsset/Liability Management Committee (ALCO), which reports to the Board ofDirectors. ALCO establishes policies that monitor and coordinate the Company’ssources, uses and pricing of funds. ALCO is also involved in formulating theeconomic projections for the Company’s budget and strategic plan. ALCO setsspecific rate sensitivity limits for the Company. ALCO monitors and adjusts theCompany’s exposure to changes in interest rates to achieve predetermined risktargets that it believes are consistent with current and expected marketconditions. Balance sheet management personnel monitor the asset and liabilitychanges on an ongoing basis and provide report information and recommendationsto the ALCO committee in regards to those changes.

 

**Earnings Sensitivity** The Company’s net income is dependent on its net interest income. Netinterest income is susceptible to interest rate risk to the degree thatinterest-bearing liabilities mature or reprice on a different basis thaninterest-earning assets. When interest-bearing liabilities mature or repricemore quickly than interest-earning assets in a given period, a significantincrease in market rates of interest could adversely affect net interestincome. Similarly, when interest-earning assets mature or reprice more quicklythan interest-bearing liabilities, falling interest rates could result in adecrease in net interest income.

 

Theprimary analytical tool used by the Company to gauge interest rate sensitivityis a net interest income simulation model used by many other financialinstitutions. The model, which is updated quarterly, incorporates all of theCompany’s assets and liabilities and off-balance sheet funding commitments,together with assumptions that reflect the current interest rate environment.The Company does utilize off-balance sheet derivative financial instrumentssuch as interest rate swaps, futures contracts, or other financial hedginginstruments in managing interest rate risk. The model projects changes in cashflow of the various interest-earning assets and interest-bearing liabilities inboth rising and falling interest rate environments. Based on the currentportfolio mix, this model is used to estimate the effects of changes in marketrates on the Company’s net interest income under interest rate conditions thatsimulate an immediate and sustained shift in the yield curve of up 2 percentand down 1 percent, as well as the effect of immediate and sustained flatteningor steepening of the yield curve. This model’s estimate of interest ratesensitivity takes into account the differing time intervals and differing ratechange increments of each type of interest sensitive asset and liability.

 

Theestimated impact of immediate changes in interest rates at the specified levelsat December 31, 2002 and 2001 is presented in the following tables:

 

9

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*December 31,2002*

 

| **Change in********interest rates********(In basis points)** |   | **Change in********net interest********Income(1)** |       | **Percentage********change in********net interest********income** |       |
|--------------------------------------------------------------|--------|----------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                                         |   |                                               | ** ** |                                                              | ** ** |
| +200                                                         |   | $                                                  | 552,000    |                                                              | +1.4       | % |
| !100                                                         |   | $                                                  | (766,000   | )                                                                 | !1.8       | % |

 

----

*(1)**                               The amount in this column represents the change innet interest income for 12 months in a stable interest rate environment versusthe net interest income in the various rate scenarios.*

 

*December 31,2001*

 

| **Change in********interest rates********(In basis points)** |   | **Change in********net interest********Income(1)** |       | **Percentage********change in********net interest********income** |       |
|--------------------------------------------------------------|--------|----------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                                         |   |                                               | ** ** |                                                              | ** ** |
| +200                                                         |   | $                                                  | 535,000    |                                                              | +1.5       | % |
| !100                                                         |   | $                                                  | (639,000   | )                                                                 | !1.8       | % |

 

----

*(1)**                               The amount in this column represents the change innet interest income for 12 months in a stable interest rate environment versusthe net interest income in the various rate scenarios.*

 

Itshould be emphasized that the results are dependent on material assumptionssuch as those discussed above. For instance, asymmetrical interest rate behaviorcan have a material impact on the simulation results.

 

TheCompany’s primary objective in managing interest rate risk is to minimize theadverse impact of changes in interest rates on the Company’s net interestincome and capital, while structuring the Company’s asset-liability structureto obtain the maximum yield-cost spread on that structure. The Company reliesprimarily on its asset-liability structure to control interest rate risk.

 

Basedupon the December 31, 2002 mix of interest sensitive assets andliabilities, given sustained increase in the federal funds rate of 2.0%, thismodel estimated the Company’s cumulative net interest income over the next yearwould increase by $552,000. This compares with a cumulative one year expectedincrease in net interest income of $535,000 as of December 31, 2001. Ifprevailing market interest rates sustained a decrease of 1.0% atDecember 31, 2002, this model estimated the Company’s cumulative one yearexpected decrease in net interest income would be $766,000. This compares withan expected cumulative one year decrease in net interest income of $639,000 asof December 31, 2001. The model shows that at December 31, 2002 ifinterest rates increase or decrease, the Company has similar interest rate riskexposure as compared to December 31, 2001, with slightly more negativeresults in a decreasing rate environment. As the total measure of interest raterisk indicates, the Company is modestly asset sensitive.

 

**Off-Balance Sheet Arrangements** During 2001, the Company entered into an interestrate exchange agreement with the Federal Home Loan Bank (“FHLB”) of SanFrancisco that was recorded as a cash flow hedge transaction. The notionalamount of the swap is $20 million with a term of 3 years expiring on August 23,2004. This swap is subject to collateral requirements that are established bythe FHLB. For more information regarding this swap transaction, see Footnote 1,the section titled “Derivative Instruments and Hedging Activities” in theCompany’s 2002 annual report.

 

TheBank has also extended firm lending commitments in the form of unused creditlines to loan customers. These commitments may or may not ever be drawn upon,depending on the credit needs of the Bank’s loan customers. For moreinformation regarding these loan commitments, See Footnote 10, titled“Commitments and Financial Instruments With Off-Balance Sheet Credit Risk” inthe Company’s 2002 annual report.

 

10

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**Capital Resources** The Company is subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capitalrequirements can initiate mandatory and possibly additional discretionaryactions by the regulators that, if undertaken, could have a material effect onthe Company’s financial statements. Management believes, as ofDecember 31, 2002, that the Company and the Bank meet all capitalrequirements to which they are subject. The Company’s leverage capital ratio atDecember 31, 2002 was 7.68% as compared with 7.72% as of December 31,2001. The Company’s total risk-based capital ratio at December 31, 2002was 10.74% as compared to 10.74% as of December 31, 2001.

 

Capitalratios are reviewed on a regular basis to ensure that capital exceeds theprescribed regulatory minimums and is adequate to meet the Company’s futureneeds. All ratios are in excess of the regulatory definitions of “wellcapitalized”. Management believes that, under the current regulations, theCompany will continue to meet its minimum capital requirements in theforeseeable future.

 

TheCompany has no formal dividend policy, and dividends are issued solely at thediscretion of the Company’s Board of Directors, subject to compliance withregulatory requirements. In order to pay any cash dividend, the Company mustreceive payments of dividends or management fees from the Bank. There arecertain regulatory limitations on the payment of cash dividends by banks.Notwithstanding regulatory restrictions, in order for the Bank to maintain a 10%risk weighted capital ratio, the Company had the ability to pay cash dividendsat December 31, 2002 of $5,988,000. The Bank had the ability to pay cashdividends to the Company at December 31, 2002 of $4,047,000.

 

**Impact of Inflation** The primary impact of inflation on the Company is its effect oninterest rates. The Company’s primary source of income is net interest incomewhich is affected by changes in interest rates. The Company attempts to limitinflation’s impact on its net interest margin through management ofrate-sensitive assets and liabilities and the analysis of interest ratesensitivity. The effect of inflation on premises and equipment, as well asnoninterest expenses, has not been significant for the periods covered in thisreport.

 

**Market for Company’s Common Stock and Related Stock Matters** The Company’s stock is included for quotation onthe NASDAQ National Market System with a stock quotation symbol of CCOW.

 

Thefollowing table indicates the range of high and low sales prices for the periodshown, based upon information provided by the NASDAQ National Market System.

 
| **2002**    |   | **High** |       | **Low** |       |
|-------------|--------|----------|------------|---------|------------|
|        |   |     | ** ** |    | ** ** |
| 4th quarter |   | $        | 23.95      |    | $          | 17.11 |   |
| 3rd quarter |   | 20.05    |       | 16.85   |       |
| 2nd quarter |   | 22.00    |       | 17.68   |       |
| 1st quarter |   | $        | 19.15      |    | $          | 13.81 |   |

 
| **2001**    |   | **High** |   | **Low** |   |
|-------------|--------|----------|--------|---------|--------|
|        |   |     |   |    |   |
| 4th quarter |   | $        | 15.48  |    | $      | 12.39 |   |
| 3rd quarter |   | 16.19    |   | 13.38   |   |
| 2nd quarter |   | 15.51    |   | 11.67   |   |
| 1st quarter |   | $        | 13.10  |    | $      | 10.87 |   |

 

Generally,the Company has retained earnings to support the growth of the Company and hasnot paid regular cash dividends.

 

11

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IndependentAuditors’ Report

 

Tothe Board of Directors and Shareholders of Capital Corp of the West:

 

We have audited the accompanying consolidated balance sheets of CapitalCorp of the West and subsidiaries (the Company) as of December 31, 2002 and2001, and the related consolidated statements of income and comprehensiveincome, cash flows, and shareholders’ equity for each of the years in the threeyear period ended December 31, 2002. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of CapitalCorp of the West and subsidiaries as of December 31, 2002 and 2001 and theresults of their operations and their cash flows for each of the years in thethree year period ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States of America.

 
| /s/  KPMG          |
|-------------------------|
| Sacramento,  California |
| January  28, 2003       |

 

12

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CapitalCorp of the West

ConsolidatedBalance Sheets

 
|                                                                                                                                          |   | **As of December 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|
| **(Dollars in thousands)**                                                                                                                    |   | **2002**               | ** ** | **2001** | ** ** |
|                                                                                                                                          |   |                   | ** ** |   | ** ** |
| **Assets**                                                                                                                                    |   |                   |       |   |   |
| Cash and noninterest-bearing deposits in other banks                                                                                          |   | $                      | 46,628     |   | $ | 38,003 |   |
| Federal funds sold                                                                                                                            |   | 26,555                 |       | 11,285 |   |
| Time deposits at other financial institutions                                                                                                 |   | 500                    |       | 500 |   |
| Investment securities available for sale, at fair value                                                                                       |   | 231,392                |       | 229,852 |   |
| Investment securities held to maturity, at cost; market  values of $57,905 and $42,185 in 2002 and 2001                                       |   | 55,628                 |       | 41,559 |   |
| Loans, net                                                                                                                                    |   | 621,639                |       | 522,677 |   |
| Interest receivable                                                                                                                           |   | 5,532                  |       | 5,757 |   |
| Premises and equipment, net                                                                                                                   |   | 13,942                 |       | 13,143 |   |
| Goodwill and other intangible assets                                                                                                          |   | 3,325                  |       | 3,493 |   |
| Other assets                                                                                                                                  |   | 29,069                 |       | 28,058 |   |
| Total assets                                                                                                                                  |   | $                      | 1,034,210  |   | $ | 894,327 |   |
|                                                                                                                                          |   |                   |       |   |   |   |   |
| **Liabilities**                                                                                                                               |   |                   |       |   |   |
| Deposits:                                                                                                                                     |   |                   |       |   |   |
| Noninterest-bearing demand                                                                                                                    |   | $                      | 164,852    |   | $ | 132,496 |   |
| Negotiable orders of withdrawal                                                                                                               |   | 120,449                |       | 102,055 |   |
| Savings                                                                                                                                       |   | 223,404                |       | 203,721 |   |
| Time, under $100,000                                                                                                                          |   | 164,959                |       | 163,195 |   |
| Time, $100,000 and over                                                                                                                       |   | 160,715                |       | 131,174 |   |
| Total deposits                                                                                                                                |   | 834,379                |       | 732,641 |   |
| Borrowed funds                                                                                                                                |   | 110,204                |       | 80,685 |   |
| Accrued interest, taxes and other liabilities                                                                                                 |   | 6,427                  |       | 10,881 |   |
| Total liabilities                                                                                                                             |   | 951,010                |       | 824,207 |   |
| **Trust Preferred Securities and  Minority Interests**                                                                                        |   | 6,031                  |       | 6,000 |   |
| **Shareholders’ Equity**                                                                                                                 |   |                   |       |   |   |
| Preferred stock, no par value; 10,000,000 shares  authorized; none outstanding none outstanding                                               |   |                   |       |   |   |
| Common stock, no par value; 20,000,000 shares  authorized; 5,325,082 and 5,173,838 issued and outstanding at  December 31, 2002 and 2001 |   | 46,436                 |       | 40,089 |   |
| Retained earnings                                                                                                                             |   | 27,824                 |       | 22,372 |   |
| Accumulated other comprehensive income, net                                                                                                   |   | 2,909                  |       | 1,659 |   |
| Total shareholders’ equity                                                                                                               |   | 77,169                 |       | 64,120 |   |
| Total Liabilities, Trust Preferred Securities, and  Shareholders’ Equity                                                                 |   | $                      | 1,034,210  |   | $ | 894,327 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

13

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CapitalCorp of the West

ConsolidatedStatements of Income and Comprehensive Income

 
|                                                          |   | **Years Ended December 31,** |       |
|---------------------------------------------------------------|--------|------------------------------|------------|
| **(Dollars in thousands, except per  share data)**            |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                          |   |                         | ** ** |   | ** ** |   | ** ** |
| **Interest income:**                                          |   |                         |       |   |   |   |   |
| Interest and fees on loans                                    |   | $                            | 43,503     |   | $ | 43,495 |   | $ | 38,643 |   |
| Interest on deposits with other financial institutions        |   | 10                           |       | 16 |   | 39 |   |
| Interest on investment securities held to maturity:           |   |                         |       |   |   |   |   |
| Taxable                                                       |   | 3,561                        |       | 2,524 |   | 2,055 |   |
| Non-taxable                                                   |   | 220                          |       | 223 |   | 223 |   |
| Interest on investment securities available for sale:         |   |                         |       |   |   |   |   |
| Taxable                                                       |   | 10,091                       |       | 10,030 |   | 8,154 |   |
| Non-taxable                                                   |   | 1,089                        |       | 1,088 |   | 1,124 |   |
| Interest on federal funds sold                                |   | 337                          |       | 791 |   | 650 |   |
| Total interest income                                         |   | 58,811                       |       | 58,167 |   | 50,888 |   |
| **Interest expense:**                                         |   |                         |       |   |   |   |   |
| **Deposits:**                                                 |   |                         |       |   |   |   |   |
| Negotiable orders of withdrawal                               |   | 189                          |       | 254 |   | 503 |   |
| Savings                                                       |   | 3,172                        |       | 5,856 |   | 7,095 |   |
| Time, under $100,000                                          |   | 5,560                        |       | 8,370 |   | 6,613 |   |
| Time, $100,000 and over                                       |   | 4,704                        |       | 5,911 |   | 5,029 |   |
| Total interest on deposits                                    |   | 13,625                       |       | 20,391 |   | 19,240 |   |
| Other borrowings                                              |   | 4,598                        |       | 2,308 |   | 1,528 |   |
| Total interest expense                                        |   | 18,223                       |       | 22,699 |   | 20,768 |   |
| **Net interest income**                                       |   | 40,588                       |       | 35,468 |   | 30,120 |   |
| Provision for loan losses                                     |   | 4,151                        |       | 4,115 |   | 3,286 |   |
| Net interest income after provision for loan losses           |   | 36,437                       |       | 31,353 |   | 26,834 |   |
| **Other income:**                                             |   |                         |       |   |   |   |   |
| Service charges on deposit accounts                           |   | 5,076                        |       | 3,981 |   | 3,527 |   |
| Income from sale of real estate                               |   | 33                           |       | — |   | 390 |   |
| Increase in cash surrender value of life insurance  policies  |   | 994                          |       | 662 |   | 311 |   |
| Other                                                         |   | 2,141                        |       | 1,631 |   | 1,179 |   |
| Total other income                                            |   | 8,244                        |       | 6,274 |   | 5,407 |   |
| **Other expenses:**                                           |   |                         |       |   |   |   |   |
| Salaries and related benefits                                 |   | 16,674                       |       | 13,615 |   | 11,066 |   |
| Premises and occupancy                                        |   | 2,526                        |       | 2,133 |   | 1,714 |   |
| Equipment                                                     |   | 2,954                        |       | 2,739 |   | 2,558 |   |
| Professional fees                                             |   | 1,177                        |       | 467 |   | 1,101 |   |
| Supplies                                                      |   | 780                          |       | 885 |   | 660 |   |
| Marketing                                                     |   | 900                          |       | 949 |   | 890 |   |
| Goodwill and intangible amortization                          |   | 680                          |       | 792 |   | 792 |   |
| Other                                                         |   | 6,107                        |       | 5,317 |   | 3,993 |   |
| Total other expenses                                          |   | 31,798                       |       | 26,897 |   | 22,774 |   |
| Income before provision for income taxes                      |   | 12,883                       |       | 10,730 |   | 9,467 |   |
| Provision for income taxes                                    |   | 2,455                        |       | 2,819 |   | 2,761 |   |
| Net income                                                    |   | $                            | 10,428     |   | $ | 7,911 |   | $ | 6,706 |   |
|                                                          |   |                         |       |   |   |   |   |
| **Comprehensive income:**                                     |   |                         |       |   |   |   |   |
| Unrealized gain on securities arising during the  period, net |   | 1,250                        |       | 1,575 |   | 2,743 |   |
| Comprehensive income                                          |   | $                            | 11,678     |   | $ | 9,486 |   | $ | 9,449 |   |
|                                                          |   |                         |       |   |   |   |   |
| Basic earnings per share                                      |   | $                            | 1.88       |   | $ | 1.48 |   | $ | 1.28 |   |
| Diluted earnings per share                                    |   | $                            | 1.83       |   | $ | 1.44 |   | $ | 1.25 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

14

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CapitalCorp of the West

ConsolidatedStatements of Shareholders’ Equity

 
| **(In thousands)**                                                                                        |       |        | ** ** | **Retained********Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss,  Net)** |       | **Total**  | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| **Common Stock**                                                                                          |
| **Number********of shares**                                                                               | ** ** | **Amounts** |
|                                                                                                      |       |        | ** ** |                         | ** ** |                                                       | ** ** |       | ** ** |   | ** ** |
| **Balance, December 31, 1999**                                                                            |       | **4,496**   | ** ** | **$**                        | **35,593** | ** **                                                 | **$**      | **10,743** | ** ** | **$** | **(2,659** | **)** | **$** | **43,677** | ** ** |
|                                                                                                      |       |        |       |                         |       |                                                       |       |       |       |   |   |
| Exercise of stock options                                                                                 |       | 50          |       | 253                          |       | —                                                     |       | —     |       | 253 |   |
| Issuance of shares pursuant to 401K and ESOP plans                                                        |       | 6           |       | 72                           |       | —                                                     |       | —     |       | 72 |   |
| Net change in fair market value of available for sale  investment securities, net of tax effect of $1,768 |       | —      |       | —                       |       | —                                                     |       | 2,743      |       | 2,743 |   |
| Net income                                                                                                |       | —      |       | —                       |       | 6,706                                                      |       | —     |       | 6,706 |   |
|                                                                                                      |       |        |       |                         |       |                                                       |       |       |       |   |   |
| **Balance, December 31, 2000**                                                                            |       | **4,552**   | ** ** | **$**                        | **35,918** | ** **                                                 | **$**      | **17,449** | ** ** | **$** | **84** | ** ** | **$** | **53,451** | ** ** |
|                                                                                                      |       |        |       |                         |       |                                                       |       |       |       |   |   |
| 5% stock dividend, including cash payment for  fractional shares                                          |       | 228         |       | 2,981                        |       | (2,988                                                     | )          | —     |       | (7 | ) |
| Exercise of stock options                                                                                 |       | 98          |       | 595                          |       | —                                                     |       | —     |       | 595 |   |
| Issuance of shares pursuant to 401K and ESOP plans                                                        |       | 49          |       | 595                          |       | —                                                     |       | —     |       | 595 |   |
| Net change in fair market value of investment  securities, net of tax effect of $1,060                    |       | —      |       | —                       |       | —                                                     |       | 1,575      |       | 1,575 |   |
| Net income                                                                                                |       | —      |       | —                       |       | 7,911                                                      |       | —     |       | 7,911 |   |
|                                                                                                      |       |        |       |                         |       |                                                       |       |       |       |   |   |
| **Balance, December 31, 2001**                                                                            |       | **4,927**   | ** ** | **$**                        | **40,089** | ** **                                                 | **$**      | **22,372** | ** ** | **$** | **1,659** | ** ** | **$** | **64,120** | ** ** |
|                                                                                                      |       |        |       |                         |       |                                                       |       |       |       |   |   |
| Exercise of stock options, including tax benefit                                                          |       | 116         |       | 846                          |       | —                                                     |       | —     |       | 846 |   |
| Issuance of shares pursuant to 401K and ESOP plans                                                        |       | 35          |       | 537                          |       | —                                                     |       | —     |       | 537 |   |
| Net change in fair market value of investment  securities, net of tax effect of $840                      |       | —      |       | —                       |       | —                                                     |       | 1,250      |       | 1,250 |   |
| 5% stock dividend, including cash payment for  fractional shares                                          |       | 247         |       | 4,964                        |       | (4,976                                                     | )          | —     |       | (12 | ) |
| Net income                                                                                                |       | —      |       | —                       |       | 10,428                                                     |       | —     |       | 10,428 |   |
|                                                                                                      |       |        |       |                         |       |                                                       |       |       |       |   |   |
| **Balance, December 31, 2002**                                                                            |       | **5,325**   | ** ** | **$**                        | **46,436** | ** **                                                 | **$**      | **27,824** | ** ** | **$** | **2,909** | ** ** | **$** | **77,169** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements*

 

15

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CapitalCorp of the West

ConsolidatedStatements of Cash Flows

 
|                                                                                                                             |   | **Years Ended December 31,** |         |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------------|
| **(Dollars in thousands)**                                                                                                       |   | **2002**                     | ** **   | **2001** | ** ** | **2000** | ** ** |
|                                                                                                                             |   |                         | ** **   |   | ** ** |   | ** ** |
| **Operating activities:**                                                                                                        |   |                         |         |   |   |   |   |
| Net income                                                                                                                       |   | $                            | 10,428       |   | $ | 7,911 |   | $ | 6,706 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                               |   |                         |         |   |   |   |   |
| Provision for loan losses                                                                                                        |   | 4,151                        |         | 4,115 |   | 3,286 |   |
| Depreciation, amortization and accretion, net                                                                                    |   | 3,851                        |         | 3,142 |   | 2,291 |   |
| Benefit for deferred income taxes                                                                                                |   | (2,097                       | )            | (902 | ) | (405 | ) |
| Gain (loss) on sale of available for sale investment  securities                                                                 |   | 180                          |         | — |   | (235 | ) |
| Gain on sale of real estate                                                                                                      |   | (33                          | )            | — |   | (390 | ) |
| Net increase in interest receivable & other assets                                                                           |   | (1,150                       | )            | (10,939 | ) | (1,167 | ) |
| Net (increase) decrease in accrued interest payable  & other liabilities                                                     |   | (2,179                       | )            | 5,236 |   | 1,539 |   |
|                                                                                                                             |   |                         |         |   |   |   |   |
| Net cash provided by operating activities                                                                                        |   | **$**                        | **13,151**   | ** ** | **$** | **8,563** | ** ** | **$** | **11,625** | ** ** |
|                                                                                                                             |   |                         |         |   |   |   |   |
| **Investing activities:**                                                                                                        |   |                         |         |   |   |   |   |
| Investment security purchases - available for sale  securities                                                              |   | $                            | (15,625      | ) | $ | (73,329 | ) | $ | (25,062 | ) |
| Investment security purchases - held to maturity  securities                                                                |   | —                       |         | — |   | (4,594 | ) |
| Investment security purchases - mortgage-backed  securities and collaterized mortgage obligations-available for sale        |   | (57,500                      | )            | (25,974 | ) | (36,312 | ) |
| Investment security purchases - mortgage-backed  securities and collateralized mortgage obligations - held to maturity |   | (28,029                      | )            | (18,303 | ) | (5,989 | ) |
| Proceeds from maturities of available for sale  investment securities                                                            |   | 23,736                       |         | 3,958 |   | 869 |   |
| Proceeds from maturities of held to maturity investment  securities                                                              |   | —                       |         | — |   | 1,017 |   |
| Proceeds from maturities of mortgage-backed securities  and collateralized mortgage obligations - available for sale        |   | 32,921                       |         | 22,995 |   | 8,035 |   |
| Proceeds from maturities of mortgage-backed securities  and collateralized mortgage obligations - held to maturity          |   | 13,961                       |         | 11,968 |   | 3,898 |   |
| Proceeds from sales of available for sale investment  securities                                                                 |   | 7,952                        |         | — |   | 8,423 |   |
| Proceeds from sales of mortgage-backed securities and  collateralized mortgage obligations - available for sale             |   | 8,048                        |         | — |   | 10,623 |   |
| Net (increase) decrease in time deposits in other  financial institutions                                                        |   | —                       |         | (400 | ) | 750 |   |
| Proceeds from sales of commercial and real estate loans                                                                          |   | 2,246                        |         | 3,094 |   | 3,397 |   |
| Origination of loans                                                                                                             |   | (445,741                     | )            | (319,958 | ) | (224,921 | ) |
| Proceeds from repayment of loans                                                                                                 |   | 339,242                      |         | 194,350 |   | 138,727 |   |
| Purchases of premises and equipment                                                                                              |   | (2,702                       | )            | (2,028 | ) | (1,804 | ) |
| Proceeds from sales of real estate                                                                                               |   | 275                          |         | — |   | 381 |   |
| Purchase of subsidiary                                                                                                           |   | (520                         | )            | — |   | — |   |
|                                                                                                                             |   |                         |         |   |   |   |   |
| Net cash used in investing activities                                                                                            |   | **$**                        | **(121,736** | **)** | **$** | **(203,627** | **)** | **$** | **(122,562** | **)** |
|                                                                                                                             |   |                         |         |   |   |   |   |
| **Financing activities:**                                                                                                        |   |                         |         |   |   |   |   |
| Net increase in demand, NOW and savings deposits                                                                                 |   | $                            | 70,433       |   | $ | 62,097 |   | $ | 51,612 |   |
| Net increase in certificates of deposit                                                                                          |   | 31,305                       |         | 69,046 |   | 54,933 |   |
| Proceeds from borrowings                                                                                                         |   | 29,519                       |         | 74,358 |   | 19,213 |   |
| Repayment of borrowings                                                                                                          |   | —                       |         | (16,100 | ) | (17,600 | ) |
| Issued shares for benefit plan purchases                                                                                         |   | 537                          |         | 595 |   | 72 |   |
| Payment for fractional shares                                                                                                    |   | (12                          | )            | (7 | ) | — |   |
| Issuance of Trust Preferred Securities and Minority  Interests                                                                   |   | 31                           |         | 6,000 |   | — |   |
| Exercise of stock options, net                                                                                                   |   | 667                          |         | 595 |   | 253 |   |
|                                                                                                                             |   |                         |         |   |   |   |   |
| Net cash provided by financing activities                                                                                        |   | **$**                        | **132,480**  | ** ** | **$** | **196,584** | ** ** | **$** | **108,483** | ** ** |
|                                                                                                                             |   |                         |         |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                             |   | 23,895                       |         | 1,520 |   | (2,454 | ) |
| Cash and cash equivalents at beginning of year                                                                                   |   | 49,288                       |         | 47,768 |   | 50,222 |   |
| Cash and cash equivalents at end of year                                                                                         |   | **$**                        | **73,183**   | ** ** | **$** | **49,288** | ** ** | **$** | **47,768** | ** ** |
|                                                                                                                             |   |                         |         |   |   |   |   |
| Supplemental disclosure of non-cash investing and  financing activities:                                                         |   |                         |         |   |   |   |   |
| Investment securities unrealized gains, net of taxes                                                                             |   | $                            | 1,250        |   | $ | 1,575 |   | $ | 2,743 |   |
| Interest paid                                                                                                                    |   | 18,436                       |         | 22,586 |   | 20,657 |   |
| Income tax payments                                                                                                              |   | 4,531                        |         | 4,325 |   | 2,880 |   |
| Loans transferred to other real estate owned                                                                                     |   | $                            | —       |   | $ | 610 |   | $ | 443 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

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**NOTE 1. Summary of Significant Accounting Policies**

 

CapitalCorp of the West (the “Company”) is a registered bank holding company, whichprovides a full range of banking services to individual and business customersprimarily in the Central San Joaquin Valley, through its subsidiaries. Thefollowing is a description of the more significant policies.

 

**Principles of Consolidation:** The consolidated financial statements of CapitalCorp of the West include its subsidiaries: County Bank (the “Bank”), Capital WestGroup (“CWG”), Regency Investment Advisors (“RIA”), and the subsidiaries ofCounty Bank which include County Asset Advisor, Inc. (“CAA”), Merced AreaInvestment Development, Inc. (“MAID”), and County Investment Trust (“REIT”).CWG, a subsidiary formed in 1996, became inactive in 1997. Regency InvestmentAdvisors was acquired in June 2002. All significant intercompany balances andtransactions are eliminated.

 

Theconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America. In preparing theconsolidated financial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during the reportedperiod. Actual results could differ from those estimates applied in thepreparation of the consolidated financial statements. A material estimate thatis particularly susceptible to change in the near term relates to thedetermination of the allowance for loan losses.

 

**Cash and Cash Equivalents:** The Company maintains deposit balances withvarious banks which are necessary for check collection and account activitycharges. Cash in excess of immediate requirements is invested in federal fundssold or other short-term investments. Generally, federal funds are sold forperiods from one to thirty days. Cash, noninterest-bearing deposits in otherbanks and federal funds sold are considered to be cash and cash equivalents forthe purposes of the consolidated statements of cash flows. Banks are requiredto maintain minimum average reserve balances with the Federal Reserve Bank. Theamount of those reserve balances was approximately $25,000, and $159,000 atDecember 31, 2002 and 2001.

 

**Investment Securities:** Investment securities consist of U.S. treasury,federal agencies, state and county municipal securities, corporate bonds,mortgage-backed securities, collateralized mortgage obligations, agencypreferred stock, trust preferred stock and equity securities. Investmentsecurities are classified into one of three categories. These categoriesinclude trading, available for sale, and held to maturity. The category of eachsecurity is determined based on the Company’s investment objectives,operational needs and intent. The Company has not purchased securities with theintent of actively trading them.

 

Securitiesavailable for sale may be sold prior to maturity and are available for futureliquidity requirements. These securities are carried at fair value. Unrealizedgains and losses on securities available for sale are excluded from earningsand reported net of tax as a separate component of shareholders’ equity untilrealized.

 

Securitiesheld to maturity are classified as such where the Company has the ability andpositive intent to hold them to maturity. These securities are carried at cost,adjusted for amortization of premiums and accretion of discounts.

 

Premiumsand discounts are amortized or accreted over the life of the related investmentsecurity as an adjustment to yield using the effective interest method.Dividend and interest income are recognized when earned. Realized gains andlosses for securities classified as available for sale or held to maturity areincluded in earnings and are derived using the specific identification methodfor determining the cost of securities sold. Unrealized losses due tofluctuations in fair value of securities held to maturity or available for saleare recognized through earnings when it is determined that a permanent declinein value has occurred.

 

**Loans:**Loans are carried at the principal amount outstanding, net of unearned income,including deferred loan origination fees and costs. Nonrefundable loanorigination and commitment fees and the direct costs associated withoriginating or acquiring the loans are deferred and amortized as an adjustmentto interest income over the life of the related loan using a method thatapproximates the level yield method.

 

Interestincome on loans is accrued based on contract interest rates and principalamounts outstanding. Loans which are more than 90 days delinquent, with respectto interest or principal, are placed on non-accrual status, unless theoutstanding principal and interest is adequately secured and, in the opinion ofmanagement, remains collectable. Uncollected accrued interest is reversedagainst interest income, and interest is subsequently recognized only as receiveduntil the loan is returned to accrual status. Interest accruals are resumedwhen such loans are brought fully current with respect to interest andprincipal and when, in the judgment of management, the loans are estimated tobe fully collectable as to both principal and interest.

 

Aloan is considered impaired, if it is probable that the Company will be unableto collect the scheduled payments of principal and interest 

 

17

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whendue according to the contractual terms of the loan agreement. Any allowance forloan losses on impaired loans is measured based upon the present value offuture cash flows discounted at the loan’s effective rate, the loan’sobservable market price, or the fair value of collateral if the loan iscollateral dependent. Interest on impaired loans is recognized on a cash basis.In general, these statements are not applicable to large groups of smallbalance homogenous loans that are collectively evaluated for impairment, suchas residential mortgage and consumer installment loans. Income recognition onimpaired loans conforms to the method the Company uses for income recognitionon nonaccrual loans. Interest income on nonaccrual loans is recorded on a cashbasis. Payments may be treated as interest income or return of principaldepending upon management’s opinion of the ultimate risk of loss on theindividual loan. Cash payments are treated as interest income when managementbelieves the remaining principal balance is fully collectable.

 

**Allowance for Loan Losses:** The allowance for loan losses is maintained atthe level considered to be adequate for inherent loan losses based onmanagement’s assessment of various factors affecting the loan portfolio, whichinclude: growth trends in the portfolio, historical experience, concentrationsof credit risk, delinquency trends, general economic conditions, and internaland external credit reviews. In addition, various regulatory agencies, as anintegral part of their examination process, periodically review the Company’sallowance for loan losses. Such agencies may require the Company to recognizeadditions to the allowance for loan losses based on their judgment ofinformation available to them at the time of their examination. Additions to theallowance for loan losses, in the form of provision for loan losses, arereflected in current operating results, while charge-offs to the allowance forloan losses are made when a loss is determined to have occurred. Managementuses the best information available on which to base estimates, however,ultimate losses may vary from current estimates.

 

**Gain or Loss on Sale of Loans:** Transfers of real estate mortgage loans held forsale in which the Company surrenders control over those loans are accounted foras a sale to the extent that consideration other than beneficial interests inthe transferred loans is received in exchange. There were no loans held forsale as of December 31, 2002 and 2001. Gains or losses are recognized atthe time of sale and are calculated based on the amounts received and the bookvalue of the loans sold.

 

**Premises and Equipment:** Premises and equipment are stated at cost, lessaccumulated depreciation and amortization. Depreciation and amortization arecomputed on the straight line basis over the estimated useful life of each typeof asset. Estimated useful lives range up to 39 years for buildings, up to thelease term for leasehold improvements, and 3 to 15 years for furniture andequipment.

 

**Real Estate Held for Sale or Development:** Real estate held for sale or development isrecorded at the lower of cost or net realizable value. Revenue recognition onthe disposition of real estate is dependent upon the transaction meetingcertain criteria relating to the nature of the property sold and the terms ofthe sale. Under certain circumstances, revenue recognition may be deferreduntil these criteria are met.

 

**Other Real Estate:** Other real estate is comprised of property acquired through foreclosureproceedings or acceptance of deeds-in-lieu of foreclosure. Losses recognized atthe time of acquiring property in full or partial satisfaction of debt arecharged against the allowance for loan losses. Other real estate is recorded atthe lower of the related loan balance or fair value, less estimated dispositioncosts. Fair value of other real estate is generally based on an independentappraisal of the property. Any subsequent costs or losses are recognized asnoninterest expense when incurred.

 

**Intangible Assets:** Goodwill, representing the excess of purchase price paid over the fairvalue of net assets acquired in an acquisition, was generated with the purchaseof the Town and County Finance and Thrift (the “Thrift”) in June 1996. TheThrift’s assets, including intangible assets, were subsequently merged intoCounty Bank in November 1999, and the Thrift’s charter was eliminated. Goodwillassociated with the purchase of the Thrift is no longer being amortizedbeginning on January 1, 2002 and had a balance of $1,405,000 as ofDecember 31, 2002 and 2001. The goodwill associated with the purchase ofRegency Investment Advisors Inc. in June 2002 was $520,000. Core depositintangibles, representing the excess of purchase price paid over the fair valueof net savings deposits acquired, were generated by the purchase of the Thriftin June 1996 and the purchase of three branches from the Bank of America inDecember, 1997. Core deposit intangibles resulting from these acquisitions arebeing amortized over 10 and 7 years, respectively. Core deposit intangibles hada balance of $1,399,000 and $2,064,000 as of December 31, 2002 and 2001.Amortization of core deposit premiums was $680,000 for the years endedDecember 31, 2002, 2001 and 2000. Core deposit premiums are scheduled toamortize at a rate of approximately $170,000 per quarter through the quarterended September 30, 2004 and at a rate of $47,000 during the fourthquarter of 2004. Goodwill and intangible assets are reviewed on a periodicbasis for impairment. If such impairment is indicated, recoverability of theasset is assessed based upon expected undiscounted net cash flows.

 

InJuly 2001, the FASB issued Statement No. 141, Business Combinations, andStatement No. 142, Goodwill and Other Intangible Assets. Statement 141requires that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001 and specifies criteria thatintangible assets acquired in a purchase method business combination must meetto be recognized and reported apart from goodwill. Statement 142 requiresthat goodwill and intangible assets with indefinite useful lives no longer beamortized after 2001, but instead be periodically evaluated for impairment.Intangible assets with definite useful lives are required to be amortized overtheir respective estimated useful lives to their estimated residual values, andalso reviewed for impairment. The Company was required to adopt the provisionsof Statement 141 immediately and Statement 142 effectiveJanuary 1, 2002. Accordingly, the goodwill from the Thrift

 

18

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purchasehas not been amortized beginning January 1, 2002, but has been evaluatedfor impairment in accordance with the appropriate accounting literature. TheCompany had no transitional impairment losses recognized as a cumulative effectof a change in accounting principle related to the adoption of this statement.As a result of adoption of Statement 141, the Company has ceasedamortizing $1,405,000 of goodwill, which eliminates $122,000 of annual goodwillexpense amortization.

 

FromJuly 1, 1996 through December 31, 2001, goodwill attributable to theT&C acquisition was amortized at a rate of $28,000 per quarter. During 2001and 2000 the goodwill amortization lowered earnings by $112,000 or $0.02 pershare on an after tax basis when compared with the same period in 2002. Therehas been no recorded amortization of the RIA acquisition and there has been noimpairment losses recognized on the T&C and RIA recorded goodwill as ofDecember 31, 2002.

 

**Impairment of Long-Lived Assets and Long-Lived Assets to BeDisposed Of:** Long-livedassets and certain identifiable intangibles are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset to futurenet cash flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the assets exceed the fair value of theassets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell.

 

**Deferred Compensation:** The Company has purchased single premiumuniversal life insurance policies in conjunction with implementation of salarycontinuation plans for certain members of management, a deferred compensationplan for certain members of the Board of Directors, and for general investmentpurposes. The Company is the owner and beneficiary of these policies. The Bankhas also formed a Rabbi trust and has irrevocably assigned some of theseuniversal life insurance policies to the Rabbi trust in support of these salarycontinuation and deferred compensation benefits. The cash surrender value ofthe insurance policies is recorded in other assets and these values totaled$17,240,000 and $16,160,000 as of December 31, 2002 and 2001. Income fromthese policies is recorded in other income and the load, mortality andsurrender charges have been recorded in other expenses. An accrued liability of$2,487,000 and $1,859,000 as of December 31, 2002 and 2001 was recorded toreflect the present value of the expected retirement benefits for the salary continuationplans and the deferred compensation benefits and was included in otherliabilities. Deferred compensation expense of $656,000 and $476,000 wasrecorded for the years ending December 31, 2002 and 2001.

 

**Income Taxes:** The Company files a consolidated federal income tax return and acombined state franchise tax return. The provision for income taxes includesfederal income and state franchise taxes. Income tax expense is allocated toeach entity of the Company based upon the analysis of the tax consequences ofeach company on a stand alone basis.

 

TheCompany accounts for income taxes under the asset and liability method. Underthe asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

**Income Tax Credits:** The Company has investments in limited partnerships which own lowincome affordable housing projects that generate tax benefits in the form offederal and state housing tax credits. As an investor in these partnerships,the Company receives tax benefits in the form of tax deductions frompartnership operating losses and income tax credits. These income tax creditsare earned over a 10-year period as a result of the investment meeting certaincriteria and are subject to recapture over a 15-year period. The expectedbenefit resulting from the affordable housing income tax credits is recognizedin the period in which the tax benefit is recognized in the Company’sconsolidated tax returns. These investments are accounted for using theeffective yield method and are evaluated at each reporting period forimpairment. The Bank had gross investments in these partnerships of $8,368,000and $6,809,000 as of December 31, 2002 and 2001 which were included inother assets.

 

**Exit or Disposal Activities:** In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No.146 addresses financial accounting and reporting for costs associated with exitor disposal activities. The statement supersedes Emerging Issues Task Force (EITF)Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).” SFAS No. 146 is effective for exit or disposal activities thatare initiated after December 31, 2002, with early application encouraged.The Company does not believe the adoption of this Statement will have amaterial impact on the Company’s financial position or results of operations.

 

**Derivative Instruments and Hedging Activities:** All derivative instruments are recognized in theconsolidated balance sheet at fair value. The accounting treatment for gains orlosses from changes in the derivative instrument’s fair value is contingent onwhether the derivative instrument qualifies as a hedge under the accountingstandard. On the date the Company enters into a derivative contract, theCompany designates the derivative instruments as (1) a hedge of the fair valueof a recognized asset or liability or of an unrecognized firm commitment (fair valuehedge), (2) a hedge of a forecasted transaction or of the variability of cashflows to be received or paid related to a

 

19

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recognizedasset or liability (cash flow hedge) or (3) hedge for trading, customeraccommodation or not qualifying for hedge accounting (free-standing derivativeinstruments). For a fair value hedge, changes in the far value of thederivative instrument and changes in the fair value of the hedged asset orliability or of an unrecognized firm commitment attributable to the hedged riskare recorded in current period net income. For a cash flow hedge, changes inthe fair value of the derivative instrument to the extent that it is effectiveare recorded in other comprehensive income, net of tax, within shareholders’equity and subsequently reclassified to net income in the same period(s) thatthe hedged transaction impacts net income. For free-standing derivativeinstruments, changes in the fair values are reported in current period netincome. The Company formally documents the relationship between hedginginstruments and hedged items, as well as the risk management objective andstrategy for undertaking any hedge transaction. This process includes linkingall derivative instruments that are designated as fair value or cash flowhedges to specific assets and liabilities on the balance sheet or to specificforecasted transactions. The Company also formally assesses both at theinception of the hedge and on an ongoing basis, whether the derivativeinstruments used are highly effective in offsetting changes in fair values orcash flows of hedged items. If it is determined that the derivative instrumentis not highly effective as a hedge, hedge accounting is discontinued. Duringthe third quarter of 2001, the Company entered into an interest rate exchangeagreement with the Federal Home Loan Bank of San Francisco that was recorded asa cash flow hedge transaction. The notional amount of the swap is $20 millionwith a term of 3 years expiring on August 23, 2004. The Company entered intothe interest rate swap to convert floating-rate loans (based on prime) to afixed rate (7.46%). The Company will pay prime rate, which at the time of thetransaction was 6.50%. The Company intends to use the swap as a hedge of therelated loans for 3 years. At December 31, 2002, the fair market value ofthis interest rate swap of $750,000 was reported as an other asset in theconsolidated balance sheet and included as other comprehensive income in theconsolidated statements of income and comprehensive income. Management hasdetermined that the amount of the hedge ineffectiveness from inception of thehedge to December 31, 2002 was not significant.

 

**Earnings Per Share:** Basic earnings per share (EPS) includes no dilution and is computed bydividing income available to common stockholders by the weighted-average numberof common shares outstanding for the period. Diluted EPS reflects the potentialdilution of securities that could share in the earnings of an entity.

 

Thefollowing table provides a reconciliation of the numerator and denominator ofthe basic and diluted earnings per share computation of the twelve monthperiods ended December 31, 2002, 2001 and 2000:

 
| **(Dollars in thousands,**                                         |   | **For The Twelve Months Ended  December 31,** |       |
|--------------------------------------------------------------------|--------|----------------------------------------------------|------------|
| **except per share data)**                                         |   | **2002**                                           | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                               |   |                                               | ** ** |   | ** ** |   | ** ** |
| Basic EPS computation:                                             |   |                                               |       |   |   |   |   |
| Net income                                                         |   | $                                                  | 10,428     |   | $ | 7,911 |   | $ | 6,706 |   |
|                                                               |   |                                               |       |   |   |   |   |
| Average common shares outstanding                                  |   | 5,274                                              |       | 5,090 |   | 4,994 |   |
| 5% stock dividend in April, 2003                                   |   | 264                                                |       | 255 |   | 250 |   |
| Average common shares outstanding, adjusted for 5%  stock dividend |   | 5,538                                              |       | 5,345 |   | 5,244 |   |
|                                                               |   |                                               |       |   |   |   |   |
| Basic EPS                                                          |   | $                                                  | 1.88       |   | $ | 1.48 |   | $ | 1.28 |   |
|                                                               |   |                                               |       |   |   |   |   |
| Diluted EPS computations:                                          |   |                                               |       |   |   |   |   |
| Net income                                                         |   | $                                                  | 10,428     |   | $ | 7,911 |   | $ | 6,706 |   |
|                                                               |   |                                               |       |   |   |   |   |
| Average common shares outstanding                                  |   | 5,274                                              |       | 5,090 |   | 4,994 |   |
| 5% stock dividend in April, 2003                                   |   | 264                                                |       | 255 |   | 250 |   |
| Effect of stock options                                            |   | 152                                                |       | 155 |   | 122 |   |
| Total weighted average shares and common stock  equivalents        |   | 5,690                                              |       | 5,500 |   | 5,366 |   |
|                                                               |   |                                               |       |   |   |   |   |
| Diluted EPS                                                        |   | $                                                  | 1.83       |   | $ | 1.44 |   | $ | 1.25 |   |

 

In2002, 2001, and 2000 there were options covering 0, 24,675, and 44,211 sharesthat were not considered in the earnings per share computations because theoption exercise price was in excess of the stock closing price onDecember 31, 2002, 2001 and 2000 making these shares antidilutive.

 

20

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**Stock Option Plan:** Statement of Financial Accounting Standards No 148, “Accounting forStock Based Compensation-Transition and Disclosure” an amendment of FASBStatement No. 123 and Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,” establishes financial accounting andreporting standards for stock-based compensation plans, including employeestock purchase plans, stock options and restricted stock. Statement No. 148 and123 encourages all entities to adopt a fair value method of accounting forstock-based compensation plans, whereby compensation cost is measured at thegrant date upon the fair value of the award and is realized as an expense overthe service or vesting period. However, Statement No. 148 and 123 also allow anentity to continue to measure compensation cost for these plans using theintrinsic value method of accounting prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” as long asproforma fair market method disclosures of net income and basic and dilutedearnings per share and stock-based compensation costs, net of related taxeffects, are prominently disclosed. The Company accounts for stock-based awardsto employees and directors using the intrinsic value method of accounting inaccordance with Accounting Principles Board Opinion No. 25. Under the intrinsicvalue method, compensation cost is generally the excess, if any, of the quotedmarket price of the stock at the grant or other measurement date over theexercise price. See Note 13 for additional disclosure information relative tooptions granted and outstanding.

 

TheCompany applies APB Opinion No. 25 in accounting for its plan and, accordingly,no compensation cost has been recognized for its stock options in theaccompanying consolidated financial statements. Had the Company determinedcompensation cost based on the fair value at the grant date for its stockoptions under SFAS No. 123, *Accounting forStock-Based Compensation*, the Company’s net income would have beenreduced to the proforma amounts indicated as follows:

 
|                           |   | **Years Ended December 31,** |       |
|--------------------------------|--------|-----------------------------------|------------|
| **(Dollars in thousands)**     |   | **2002**                          | ** ** | **2001** | ** ** | **2000** | ** ** |
|                           |   |                              | ** ** |   | ** ** |   | ** ** |
| **Net income**                 |   |                              |       |   |   |   |   |
| As reported                    |   | $                                 | 10,428     |   | $ | 7,911 |   | $ | 6,706 |   |
| Proforma                       |   | 10,004                            |       | 7,557 |   | 6,547 |   |
| **Basic earnings per share**   |   |                              |       |   |   |   |   |
| As reported                    |   | 1.88                              |       | 1.48 |   | 1.28 |   |
| Proforma                       |   | 1.80                              |       | 1.41 |   | 1.25 |   |
| **Diluted earnings per share** |   |                              |       |   |   |   |   |
| As reported                    |   | 1.83                              |       | 1.44 |   | 1.25 |   |
| Proforma                       |   | 1.75                              |       | 1.37 |   | 1.22 |   |
|                                |        |                                   |            |  |  |  |  |  |  |  |

 

Totalcompensation expense related to the issuance of options that would have beenreported was $449,000, $402,000, and $168,000 during 2002, 2001 and 2000.

 

Theper share weighted average fair value of stock options granted during 2002,2001, and 2000 was $7.57, $5.47, and $3.45 on the date of grant using the BlackScholes option pricing model with the following weighted average assumptions:2002-2000 expected dividend yield 0%; 2002 expected volatility of 29%, 2001expected volatility of 29%, 2000 expected volatility of 26% and a risk freeinterest rate of 4.75%, 4.75%, and 5.05% for 2002, 2001, and 2000; and anexpected life of 7 years in 2002, 2001, and 2000, respectively.

 

**Comprehensive Income:** Comprehensive income consists of net income andunrealized gains (losses) on securities and certain derivative instruments andis presented in the consolidated statements of income and comprehensive income.

 

**NOTE 2. Investment Securities**

 

Theamortized cost and estimated market value of investment securities atDecember 31, are summarized below:

 

21

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| **(Dollars in thousands)**                   |   | **Amortized  Cost** |       | **Gross  Unrealized********Gains** |       | **Gross  Unrealized********Losses** |       | **Estimated********Fair********Value** |       |
|----------------------------------------------|--------|---------------------|------------|------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|
|                                         |   |                | ** ** |                               | ** ** |                                | ** ** |                                   | ** ** |
| **2002**                                     |   |                |       |                               |       |                                |       |                                   |       |
|                                         |   |                |       |                               |       |                                |       |                                   |       |
| **Available for sale securities:**           |   |                |       |                               |       |                                |       |                                   |       |
| U.S. Treasury and U.S. Government agencies   |   | $                   | 64,812     |                               | $          | 1,318                               |       | $                                      | —     |   | $ | 66,130 |   |
| State & political subdivisions           |   | 24,565              |       | 1,054                              |       | —                              |       | 25,619                                 |       |
| Mortgage-backed securities                   |   | 62,451              |       | 2,204                              |       | —                              |       | 64,655                                 |       |
| Collateralized mortgage obligations          |   | 40,661              |       | 291                                |       | —                              |       | 40,952                                 |       |
| Corporate debt securities                    |   | 3,553               |       | 6                                  |       | —                              |       | 3,559                                  |       |
| Total debt securities                        |   | 196,042             |       | 4,873                              |       | —                              |       | 200,915                                |       |
| Agency preferred stock                       |   | 14,912              |       | 110                                |       | 409                                 |       | 14,613                                 |       |
| Trust preferred stock                        |   | 5,518               |       | —                             |       | 591                                 |       | 4,927                                  |       |
| Equity securities                            |   | 10,882              |       | 55                                 |       | —                              |       | 10,937                                 |       |
| Total available for sale securities          |   | 227,354             |       | 5,038                              |       | 1,000                               |       | 231,392                                |       |
|                                         |   |                |       |                               |       |                                |       |                                   |       |
| **Held to maturity securities:**             |   |                |       |                               |       |                                |       |                                   |       |
| U.S. Treasury & U.S. government agencies |   | 4,629               |       | 251                                |       | —                              |       | 4,880                                  |       |
| State and political subdivisions             |   | 4,347               |       | 310                                |       | —                              |       | 4,657                                  |       |
| Mortgage-backed securities                   |   | 46,652              |       | 1,831                              |       | 115                                 |       | 48,368                                 |       |
| Total held to maturity securities            |   | $                   | 55,628     |                               | $          | 2,392                               |       | $                                      | 115        |   | $ | 57,905 |   |
|                                         |   |                |       |                               |       |                                |       |                                   |       |
| **2001**                                     |   |                |       |                               |       |                                |       |                                   |       |
|                                         |   |                |       |                               |       |                                |       |                                   |       |
| **Available for sale securities:**           |   |                |       |                               |       |                                |       |                                   |       |
| U.S. Treasury and U.S. Government agencies   |   | $                   | 77,534     |                               | $          | 1,275                               |       | $                                      | 97         |   | $ | 78,712 |   |
| State & political subdivisions           |   | 24,601              |       | 91                                 |       | 423                                 |       | 24,269                                 |       |
| Mortgage-backed securities                   |   | 53,678              |       | 1,134                              |       | 15                                  |       | 54,797                                 |       |
| Collateralized mortgage obligations          |   | 32,903              |       | 551                                |       | 108                                 |       | 33,346                                 |       |
| Corporate debt securities                    |   | 13,382              |       | 235                                |       | 57                                  |       | 13,560                                 |       |
| Total debt securities                        |   | 202,098             |       | 3,286                              |       | 700                                 |       | 204,684                                |       |
| Agency preferred stock                       |   | 15,006              |       | 174                                |       | 168                                 |       | 15,012                                 |       |
| Trust preferred stock                        |   | 5,503               |       | —                             |       | 606                                 |       | 4,897                                  |       |
| Equity securities                            |   | 5,259               |       | —                             |       | —                              |       | 5,259                                  |       |
| Total available for sale securities          |   | 227,866             |       | 3,460                              |       | 1,474                               |       | 229,852                                |       |
|                                         |   |                |       |                               |       |                                |       |                                   |       |
| **Held to maturity securities:**             |   |                |       |                               |       |                                |       |                                   |       |
| U.S. Treasury & U.S. government agencies |   | 4,611               |       | 198                                |       | —                              |       | 4,809                                  |       |
| State and political subdivisions             |   | 4,361               |       | 33                                 |       | —                              |       | 4,394                                  |       |
| Mortgage-backed securities                   |   | 31,900              |       | 552                                |       | 172                                 |       | 32,280                                 |       |
| Collateralized mortgage obligations          |   | 687                 |       | 15                                 |       | —                              |       | 702                                    |       |
| Total held to maturity securities            |   | $                   | 41,559     |                               | $          | 798                                 |       | $                                      | 172        |   | $ | 42,185 |   |

 

AtDecember 31, 2002 and 2001, investment securities with carrying values ofapproximately $193,962,000 and $141,386,000, respectively, were pledged ascollateral for deposits of public funds, government deposits, the Bank’s use ofthe Federal Reserve Bank’s discount window and Federal Home Loan Bank line ofcredit. The Bank is a member of the Federal Reserve Bank and the Federal HomeLoan Bank. The Bank carried balances, stated at cost, of $6,258,000 and$3,942,000 of Federal Home Loan Bank stock and $1,066,000 and $886,000 ofFederal Reserve Bank stock as of December 31, 2002 and 2001. Gross losseson sale of available for sale securities of $99,000, $0, and $235,000, wererecognized in 2002, 2001, and 2000. Gross gain on sale of available for salesecurities of $279,000, $0, and $0 were recognized in 2002, 2001, and 2000.

 

Thecarrying and estimated fair values of debt securities at December 31, 2002by contractual maturity, are shown on the following table. Actual maturitiesmay differ from contractual maturities because issuers generally have the rightto call or prepay obligations with or without call or prepayment penalties.

 

22

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| **(Dollars in thousands)**               |   | **Amortized********Cost** |       | **Estimated********Fair Value** |       |
|------------------------------------------|--------|---------------------------|------------|---------------------------------|------------|
|                                     |   |                      | ** ** |                            | ** ** |
| **Available for sale debt securities:**  |   |                      |       |                            |       |
| One year or less                         |   | $                         | 20,702     |                            | $          | 20,901 |   |
| One to five years                        |   | 47,849                    |       | 48,997                          |       |
| Five to ten years                        |   | 17,239                    |       | 17,995                          |       |
| Over ten years                           |   | 7,140                     |       | 7,416                           |       |
| Mortgage-backed securities and CMOs      |   | 103,112                   |       | 105,606                         |       |
| Total available for sale debt securities |   | $                         | 196,042    |                            | $          | 200,915 |   |
|                                     |   |                      |       |                            |       |
| **Held to maturity debt securities:**    |   |                      |       |                            |       |
| One year or less                         |   | $                         | —     |                            | $          | — |   |
| One to five years                        |   | —                    |       | —                          |       |
| Five to ten years                        |   | 4,629                     |       | 4,880                           |       |
| Over ten years                           |   | 4,347                     |       | 4,657                           |       |
| Mortgage-backed securities and CMOs      |   | 46,652                    |       | 48,368                          |       |
| Total held to maturity debt securities   |   | $                         | 55,628     |                            | $          | 57,905 |   |

 

**NOTE 3. Loans**

 

Loansat December 31 consisted of the following:

 
| **(Dollars in thousands)**      |   | **2002** |       | **2001** |       |
|---------------------------------|--------|----------|------------|----------|------------|
|                            |   |     | ** ** |     | ** ** |
| Commercial                      |   | $        | 145,364    |     | $          | 118,626 |   |
| Agricultural                    |   | 96,793   |       | 96,489   |       |
| Real estate - mortgage     |   | 244,468  |       | 187,586  |       |
| Real estate - construction |   | 78,064   |       | 57,989   |       |
| Consumer                        |   | 69,084   |       | 71,730   |       |
| Gross loans                     |   | 633,773  |       | 532,420  |       |
| Less allowance for loan losses  |   | (12,134  | )          | (9,743   | )          |
| Net loans                       |   | $        | 621,639    |     | $          | 522,677 |   |

 

Loansare net of deferred loan fees of $2,021,000 and $1,352,000 and deferred loancosts of $660,000 and $1,120,000 as of December 31, 2002 and 2001.

 

Nonaccrualloans totaled $2,381,000 and $4,247,000 at December 31, 2002 and 2001.Foregone interest on nonaccrual loans was approximately $131,000, $170,000, and$224,000 for the years ended December 31, 2002, 2001 and 2000.

 

Impairedloans are loans for which it is probable that the Company will not be able tocollect all amounts due. At December 31, 2002 and 2001, the recordedinvestment in impaired loans was $2,383,000, and $4,856,000 which had a relatedallowance for loan losses of $406,000, and $644,000 in 2002 and 2001. As ofDecember 31, 2002 and 2001, there were no impaired loans without a relatedallowance for loan loss assigned to them. The average outstanding balance ofimpaired loans for the years ended December 31, 2002, 2001 and 2000 was$5,134,000, $3,629,000, and $2,165,000 on which $210,000, $105,000, and $79,000was recognized as interest income on a cash basis.

 

AtDecember 31, 2002 and 2001, the collateral value method was used tomeasure impairment for all loans classified as impaired. The following tableshows the recorded investment in impaired loans by loan category atDecember 31:

 

23

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| **(Dollars in thousands)** |   | **2002** |       | **2001** |       |
|----------------------------|--------|----------|------------|----------|------------|
|                       |   |     | ** ** |     | ** ** |
| Commercial                 |   | $        | 234        |     | $          | 552 |   |
| Agricultural               |   | 2,090    |       | 4,254    |       |
| Consumer and other         |   | 59       |       | 50       |       |
|                       |   | $        | 2,383      |     | $          | 4,856 |   |

 

Thefollowing is a summary of changes in the allowance for loan losses during theyears ended December 31:

 
| **(Dollars in thousands)**                 |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                       |   |     | ** ** |     | ** ** |     | ** ** |
| Balance at beginning of year               |   | $        | 9,743      |     | $          | 8,207    |       | $ | 6,542 |   |
| Loans charged-off                          |   | (2,589   | )          | (3,152   | )          | (2,394   | )          |
| Recoveries of loans previously charged-off |   | 829      |       | 573      |       | 773      |       |
| Provision for loan losses                  |   | 4,151    |       | 4,115    |       | 3,286    |       |
| Balance at end of year                     |   | $        | 12,134     |     | $          | 9,743    |       | $ | 8,207 |   |

 

Inthe ordinary course of business, the Company, through its subsidiaries, hasmade loans to certain directors and officers and their related businesses. Inmanagement’s opinion, these loans are granted on substantially the same terms,including interest rates and collateral, as those prevailing on comparabletransactions with unrelated parties, and do not involve more than the normalrisk of collectibility.

 

Activityin loans to, or guaranteed by, directors and executive officers and theirrelated businesses at December 31, are summarized as follows:

 
| **(Dollars in thousands)**   |   | **2002** |       | **2001** |       |
|------------------------------|--------|----------|------------|----------|------------|
|                         |   |     | ** ** |     | ** ** |
| Balance at beginning of year |   | $        | 2,744      |     | $          | 2,226 |   |
| Loan advances and renewals   |   | 1,154    |       | 1,171    |       |
| Loans matured or collected   |   | (1,725   | )          | (653     | )          |
| Balance at end of year       |   | $        | 2,173      |     | $          | 2,744 |   |

 

TheBank’s business activity is with customers located primarily in the counties ofFresno, Madera, Mariposa, Merced, San Francisco, San Joaquin, Stanislaus, andTuolumne. Consumer lending and small working capital loans representsapproximately 20% of the total loan portfolio and consists of consumer lending,loans to small businesses, credit cards and the purchase of financing contractsprincipally from automobile dealers. Individual loans and lines are made in avariety of ways. In many cases collateral such as real estate, automobiles andequipment are used to support the extension of credit. Repayment, however, islargely dependent upon the borrower’s personal cash flow.

 

Realestate, construction, agricultural, and large business loans make upapproximately 80% of the Bank’s loan portfolio. Lending activities are spreadacross a wide spectrum including commercial loans to businesses, constructionand permanent real estate financing, short and long term agricultural loans forproduction and real estate purposes and SBA financing. Where appropriate,collateral is taken to secure and reduce the Bank’s credit risk. Each loan issubmitted to an individual risk grading process but the borrowers’ ability torepay is dependent, in part, upon factors affecting the local and nationaleconomies.

 

24

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**NOTE 4.  Premises andEquipment**

 

Premisesand equipment consisted of the following at December 31:

 
| **(Dollars in thousands)**                     |   | **2002** |       | **2001** |       |
|------------------------------------------------|--------|----------|------------|----------|------------|
|                                           |   |     | ** ** |     | ** ** |
| Land                                           |   | $        | 1,849      |     | $          | 1,349 |   |
| Buildings                                      |   | 10,709   |       | 9,516    |       |
| Leasehold improvements                         |   | 1,729    |       | 1,758    |       |
| Furniture and equipment                        |   | 13,346   |       | 12,522   |       |
| Subtotal                                       |   | 27,633   |       | 25,145   |       |
| Less accumulated depreciation and amortization |   | 13,691   |       | 12,002   |       |
| Premises and equipment, net                    |   | $        | 13,942     |     | $          | 13,143 |   |

 

Includedin the totals to the left are construction in progress of $378,000 and $120,000at December 31, 2002 and 2001 respectively. Depreciation expense totaled$1,903,000, $1,906,000 and $1,946,000 in 2002, 2001 and 2000.

 

**NOTE 5. Borrowed Funds**

 

Thefollowing is a summary of selected information for short term borrowings. Theseborrowings generally mature in less than one year.

 

**As of December 31,**

 
| **(Dollars in Millions)**   |       | **2002**   | ** ** | **Interest  Rate(s)** |       | **2001** | ** ** | **Interest  Rate(s)** |       | **2000** | ** ** | **Interest  Rate(s)** |       |
|-----------------------------|------------|------------|------------|-----------------------|------------|----------|------------|-----------------------|------------|----------|------------|-----------------------|------------|
| **Amount**                  | **Amount** | **Amount** |
|                        |       |       | ** ** |                  | ** ** |     | ** ** |                  | ** ** |     | ** ** |                  | ** ** |
| Treasury Tax Loan(1)        |       | $          | 6,303      |                  | .98        | %        | $          | 3,810                 |       | 2.03     | %          | $                     | 4,672      |   | 6.25 | % |
| FHLB advances               |       | 23,700     |       | 1.37 - 4.47      | %          | 31,700   |       | 1.87 - 4.92      | %          | 8,600    |       | 6.62 - 6.65      | %          |
| Total short term borrowings |       | $          | 30,003     |                  |       |     | $          | 35,510                |       |     |       | $                     | 13,272     |   |   |   |

 

----

*(1)**                               The Treasury tax loan is a variable rate productthat reprices weekly based on the Federal Funds rate. The account is payable ona daily basis.*

 

TheCompany maintains a secured line of credit with the Federal Home Loan Bank ofSan Francisco (FHLB). Based on the FHLB stock requirements at December 31,2002, this line provided for maximum borrowings of $100,841,000 of which$100,841,000 was outstanding. At December 31, 2002 this borrowing line iscollateralized by securities with a market value of $105,797,000. At December31, 2001, the line of credit collateralized by securities totaled $77,419,000of which $73,759,000 was outstanding leaving $3,660,000 available. The Companyhad additional secured, unused lines of credit of $19,705,000 and unsecuredunused lines of credit of $40,000,000 at December 31, 2002. This compares withsecured, unused lines of credit of $7,945,000 and unsecured unused lines ofcredit of $10,000,000 as of December 31, 2001.

 

Thefollowing is a summary of selected information for long-term borrowings. Theseborrowings generally mature in greater than one year.

 
|                       |   |                  |       |               |       | **2002**   |       | **2001**   |       | **2000**   |       |
|----------------------------|--------|-----------------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|
| **(Dollars in millions)**  |   | **Interest  Rate(s)** |       | **Maturity Dates** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amount** | ** ** |
|                       |   |                  | ** ** |               | ** ** |       | ** ** |       | ** ** |       | ** ** |
| Mortgage note              |   | 7.80                  | %          | 2007               |       | $          | 3,060      |       | $          | 3,116      |       | $ | 3,155 |   |
| FHLB advances              |   | 3.30 - 6.83      | %          | 2004 - 2011   |       | 77,141     |       | 42,059     |       | 6,000      |       |
| Total long term borrowings |   | 3.30 - 7.80      | %          |               |       | $          | 80,201     |       | $          | 45,175     |       | $ | 9,155 |   |

 

25

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Interestexpense related to FHLB borrowings totaled $4,265,000, $1,884,000, and $951,000in 2002, 2001, and 2000. Interest expense related to the mortgage note totaled$245,000, $262,000, and $249,000 in 2002, 2001, and 2000. This long term noteis secured by Company land and buildings. Interest expense on federal fundspurchased was $22,000, $5,000 and $16,000 in 2002, 2001, and 2000. Compensatingbalance arrangements are not significant to the operations of the Company.

 

Principalpayments required to service the Company’s borrowings during the next fiveyears are:

 

 
| **Years ended December 31,  (Dollars in thousands)** |   |   | ** ** |
|------------------------------------------------------|--------|--------|------------|
| 2003                                                 |   | $      | 30,003     |   |
| 2004                                                 |   | 11,000 |       |
| 2005                                                 |   | 17,000 |       |
| 2006                                                 |   | 12,641 |       |
| 2007                                                 |   | 26,500 |       |
| Thereafter                                           |   | 13,060 |       |
|                                                 |   |   |       |
| Total borrowed funds                                 |   | $      | 110,204    |   |

 

**NOTE 6. Trust Preferred Securities**

 

CountyStatutory Trust I is a Connecticut statutory trust, which was formed for thepurpose of issuing County Statutory Trust I Capital Securities (Trust PreferredSecurities). The Trust Preferred Securities are described below. Interest onthe Trust Preferred Securities is payable semi-annually and is deferrable, atthe option of the Company for up to five years. Following the issuance of theTrust Preferred Securities, the Trust used the proceeds from the TrustPreferred Securities offering to purchase a like amount of Junior SubordinatedDebt Securities (the Debt Securities) of the Company. The debt securities bearthe same terms and interest rates as the related Trust Preferred Securities. TheDebt Securities are the sole assets of the Trust and are eliminated, along withthe related income statement effects, in the consolidated financial statements.The Company has fully and unconditionally guaranteed all of the obligations ofthe Trust. Under applicable regulatory guidelines, the Trust PreferredSecurities will qualify as Tier I capital. The following Trust PreferredSecurities were outstanding at December 31, 2002.

 
| **Security title**        |   | **Issuer**                    |       | **Amount********Outstanding** |       | **Date of  Original********Issue** |          | **Stated  Maturity** |          | **Optional  Redemption Date** |          |
|---------------------------|--------|-------------------------------|------------|-------------------------------|------------|------------------------------------|---------------|----------------------|---------------|-------------------------------|---------------|
|                      |   |                          | ** ** |                          | ** ** |                               | ** **    |                 | ** **    |                          | ** **    |
| 10.20% Capital Securities |   | County Statutory Trust I |       | $                             | 6,000,000  |                               | Feb. 22, 2001 |                 | Feb. 22, 2031 |                          | Feb. 22, 2021 |   |
|                           |        |                               |            |                               |            |                                    |               |                      |               |                               |               |  |

 

TheTrust Preferred Securities are mandatorily redeemable, in whole or in part,upon repayment of their underlying Debt Securities at their respective statedmaturities or their earlier redemption. The Debt Securities are redeemableprior to maturity at the option of the Company on or after their respectiveoptional redemption dates.

 

Thetotal amount of Trust Preferred Securities outstanding at December 31, 2002 was$6,000,000. The Trust Preferred Securities accrue interest at an annual rate of10.20%. The dividends expense on Trust Preferred Securities were $612,000 and$522,000 in 2002 and 2001 and is included in other expense.

 

26

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**NOTE 7. Real Estate Operations**

 

Asof December 31, 2002, MAID owned the County Bank Administrative Headquartersbuilding. During 2002, MAID agreed that the only real estate holdings thecompany would own would be branch premises property. During 2000, the lastremaining real estate parcel held by MAID was sold for $390,000. Prior to thetime the parcel was sold, the book value had been completely written off.

 

**NOTE 8. Income Taxes**

 

Theprovision for income taxes for the years ended December 31 is comprised of thefollowing:

 
| **(Dollars in thousands)** |   | **Federal** |       | **State** |       | **Total** |       |
|----------------------------|--------|-------------|------------|-----------|------------|-----------|------------|
|                       |   |        | ** ** |      | ** ** |      | ** ** |
| **2002**                   |   |        |       |      |       |      |       |
| Current                    |   | $           | 4,416      |      | $          | 136       |       | $ | 4,552 |   |
| Deferred                   |   | (1,124      | )          | (973      | )          | (2,097    | )          |
|                       |   | 3,292       |       | $         | (837       | )         | $          | 2,455 |   |
|                       |   |        |       |      |       |      |       |
| **2001**                   |   |        |       |      |       |      |       |
| Current                    |   | $           | 3,304      |      | $          | 417       |       | $ | 3,721 |   |
| Deferred                   |   | (804        | )          | (98       | )          | (902      | )          |
|                       |   | $           | 2,500      |      | $          | 319       |       | $ | 2,819 |   |
|                       |   |        |       |      |       |      |       |
| **2000**                   |   |        |       |      |       |      |       |
| Current                    |   | $           | 2,612      |      | $          | 554       |       | $ | 3,166 |   |
| Deferred                   |   | (597        | )          | 192       |       | (405      | )          |
|                       |   | $           | 2,015      |      | $          | 746       |       | $ | 2,761 |   |

 

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at December 31, 2002and 2001 consists of the following:

 
| **(Dollars in thousands)**            |   | **2002** |       | **2001** |       |
|---------------------------------------|--------|----------|------------|----------|------------|
|                                  |   |     | ** ** |     | ** ** |
| **Deferred tax assets:**              |   |     |       |     |       |
| Allowance for loan losses             |   | $        | 4,994      |     | $          | 3,294 |   |
| Deferred compensation                 |   | 1,023    |       | 803      |       |
| Intangible amortization               |   | 744      |       | 583      |       |
| Nonaccrual interest                   |   | 224      |       | 70       |       |
| Fixed assets                          |   | 37       |       | 117      |       |
| Other                                 |   | 102      |       | 100      |       |
| Total gross deferred tax assets       |   | 7,124    |       | 4,967    |       |
| Less valuation allowance              |   | (20      | )          | (20      | )          |
| Deferred tax assets                   |   | $        | 7,104      |     | $          | 4,947 |   |
| **Deferred tax liabilities:**         |   |     |       |     |       |
| Investment securities unrealized gain |   | 1,879    |       | 1,115    |       |
| Investment in partnerships            |   | 393      |       | 354      |       |
| Insurance accrual                     |   | 43       |       | 38       |       |
| FHLB stock dividends                  |   | 158      |       | 147      |       |
| Other                                 |   | 81       |       | —   |       |
| Total gross deferred tax liabilities  |   | 2,554    |       | 1,654    |       |
| Net deferred tax assets               |   | $        | 4,550      |     | $          | 3,293 |   |

 

27

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Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management considers thescheduled reversal of deferred tax liabilities, projected future taxableincome, and tax planning strategies in making this assessment. Based upon thelevel of historical taxable income and projections for future taxable incomeover the periods which the deferred tax assets are deductible, managementbelieves it is more likely than not the Company will realize the benefits ofthese deductible differences, net of the existing valuation allowances atDecember 31, 2002 and 2001.

 

Areconciliation of income tax at the federal statutory rate to the provision forincome taxes follows:

 
| **(Dollars in thousands)**                                                 |   | **2002** |       | **2001** |       | **2000** |       |
|----------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                       |   |     | ** ** |     | ** ** |     | ** ** |
| Statutory (34%) federal income tax rate due                                |   | $        | 4,380      |     | $          | 3,648    |       | $ | 3,218 |   |
| State franchise tax, at statutory rate, net of federal  income tax benefit |   | (552     | )          | 211      |       | 504      |       |
| Tax exempt interest income, net                                            |   | (407     | )          | (386     | )          | (390     | )          |
| Housing tax credits                                                        |   | (750     | )          | (600     | )          | (550     | )          |
| Dividends received deduction                                               |   | (168     | )          | (163     | )          | —   |       |
| Intangible amortization                                                    |   | —   |       | 43       |       | 43       |       |
| Cash surrender value life insurance                                        |   | (309     | )          | (225     | )          | (106     | )          |
| Other                                                                      |   | 261      |       | 291      |       | 42       |       |
| Provision for income taxes                                                 |   | $        | 2,455      |     | $          | 2,819    |       | $ | 2,761 |   |

 

**NOTE 9. Regulatory Matters**

 

TheCompany is subject to various regulatory capital requirements administered byfederal banking agencies. Failure to meet minimum capital requirements caninitiate mandatory and possibly, additional discretionary actions by regulatorsthat, if undertaken, could have a direct material effect on the Company’sfinancial statements. Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Company must meet specific capitalguidelines that involve quantitative measures of the Company’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccounting practices. The Company’s capital amounts and classification are alsosubject to qualitative judgments by the regulators about components, riskweighting and other factors.

 

First,a bank must meet a minimum Tier I (as defined in the regulations) capital ratioranging from 3% to 5% based upon the bank’s CAMEL (“capital adequacy, assetquality, management, earnings and liquidity”) rating.

 

Second,a bank must meet minimum total risk based capital to risk weighted assets ratioof 8%. Risk based capital and asset guidelines vary from Tier I capitalguidelines by redefining the components of capital, categorizing assets intodifferent risk classes, and including certain off-balance sheet items in thecalculation of the capital ratio. The effect of the risk based capitalguidelines is that banks with high exposure will be required to raiseadditional capital while institutions with low risk exposure could, with theconcurrence of regulatory authorities, be permitted to operate with lowercapital ratios. In addition, a bank must meet minimum Tier I capital to averageassets ratio of 4%.

 

Managementbelieves, as of December 31, 2002 that the Company and the Bank meet allcapital adequacy requirements to which they are subject, including the ratiotest for a well capitalized bank under the regulatory framework for promptcorrective action. The most recent notification from the FRB categorized the Companyand the Bank as well capitalized under the FDICIA regulatory framework forprompt corrective action. Subsequent to this notification, there are noconditions or events that management believes have changed the risk basedcapital category of the Company and the Bank. To be categorized as wellcapitalized, the Bank must meet minimum ratios.

 

28

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TheCompany has no formal dividend policy, and dividends are issued solely at thediscretion of the Company’s Board of Directors subject to compliance withregulatory requirements. In order to pay any cash dividends, the Company mustreceive payments of dividends from the Bank. There are certain regulatorylimitations on the payment of cash dividends by banks.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios (set forth in the followingtable).

 

TheCompany’s and Bank’s actual capital amounts and ratios as of December 31,2002 are as follows:

 
|                                     |   | **Actual** |   | **For Capital********Adequacy Purposes** |   | **To Be Well Capitalized********Under Prompt Corrective********Action Provisions** |   |
|------------------------------------------|--------|------------|--------|------------------------------------------|--------|------------------------------------------------------------------------------------|--------|
| **(Dollars in thousands)**               |   | **Amount** |   | **Ratio**                                |   | **Amount**                                                                         |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   |       |   |                                     |   |                                                                               |   |   |   |   |   |   |   |
| **The Company:**                         |   |       |   |                                     |   |                                                                               |   |   |   |   |   |   |   |
|                                     |   |       |   |                                     |   |                                                                               |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 86,794 |                                     | 10.74  | %                                                                                  | $      | 64,645 |   | 8.0 | % | $ | 80,806 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 76,668     |   | 9.49                                     |   | 32,322                                                                             |   | 4.0 |   | 48,483 |   | 6.0 |   |
| Leverage ratio(1)                        |   | $          | 76,668 |                                     | 7.68   | %                                                                                  | $      | 39,925 |   | 4.0 | % | $ | 49,907 |   | 5.0 | % |
|                                     |   |       |   |                                     |   |                                                                               |   |   |   |   |   |   |   |
| **The Bank:**                            |   |       |   |                                     |   |                                                                               |   |   |   |   |   |   |   |
|                                     |   |       |   |                                     |   |                                                                               |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 84,613 |                                     | 10.50  | %                                                                                  | $      | 64,453 |   | 8.0 | % | $ | 80,566 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 74,517     |   | 9.25                                     |   | 32,226                                                                             |   | 4.0 |   | 48,339 |   | 6.0 |   |
| Leverage ratio(1)                        |   | $          | 74,517 |                                     | 7.48   | %                                                                                  | $      | 39,864 |   | 4.0 | % | $ | 49,830 |   | 5.0 | % |

 

----

*(1)**                               The leverage ratio consists of Tier 1 capitaldivided by quarterly average assets. The minimum leverage ratio is 3 percentfor banking organizations that do not anticipate significant growth and thathave well diversified risk, excellent asset quality and in general, areconsidered top-rated banks.*

 

TheCompany’s and Bank’s actual capital amounts and ratios as of December 31, 2001are as follows:

 
|                                     |   | **Actual** |       | **For Capital********Adequacy Purposes** |       | **To Be Well Capitalized********Under Prompt Corrective********Action Provisions** |       |
|------------------------------------------|--------|------------|------------|------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**               |   | **Amount** | ** ** | **Ratio**                                | ** ** | **Amount**                                                                         | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                     |   |       | ** ** |                                     | ** ** |                                                                               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **The Company:**                         |   |       |       |                                     |       |                                                                               |       |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 73,554     |                                     | 10.74      | %                                                                                  | $          | 54,783 |   | 8.0 | % | $ | 68,479 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 64,997     |       | 9.49                                     |       | 27,392                                                                             |       | 4.0 |   | 41,088 |   | 6.0 |   |
| Leverage ratio(1)                        |   | $          | 64,997     |                                     | 7.72       | %                                                                                  | $          | 33,690 |   | 4.0 | % | $ | 42,112 |   | 5.0 | % |
|                                     |   |       |       |                                     |       |                                                                               |       |   |   |   |   |   |   |
| **The Bank:**                            |   |       |       |                                     |       |                                                                               |       |   |   |   |   |   |   |
|                                     |   |       |       |                                     |       |                                                                               |       |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 69,771     |                                     | 10.28      | %                                                                                  | $          | 54,297 |   | 8.0 | % | $ | 67,871 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 61,269     |       | 9.03                                     |       | 27,148                                                                             |       | 4.0 |   | 40,722 |   | 6.0 |   |
| Leverage ratio(1)                        |   | $          | 61,269     |                                     | 7.33       | %                                                                                  | $          | 33,453 |   | 4.0 | % | $ | 41,816 |   | 5.0 | % |

 

----

*(1)**                               The leverage ratio consists of Tier 1 capitaldivided by quarterly average assets. The minimum leverage ratio is 3 percentfor banking organizations that do not anticipate significant growth and thathave well-diversified risk, excellent asset quality and in general, areconsidered top-rated banks.*

 

29

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**NOTE 10.Commitments and Financial Instruments With Off-Balance Sheet Credit Risk**

 

AtDecember 31, 2002, the Company has operating lease rental commitments forremaining terms of one to ten years. The Company has options to renew two ofits leases for a period of 10 and 15 years. The minimum future commitmentsunder non-cancelable lease agreements having terms in excess of one year atDecember 31, 2002 are as follows:

 
| **Years ended December 31,  (Dollars in thousands)** |   |   |       |
|------------------------------------------------------|--------|--------|------------|
|                                                 |   |   | ** ** |
| 2003                                                 |   | $      | 885        |   |
| 2004                                                 |   | 822    |       |
| 2005                                                 |   | 743    |       |
| 2006                                                 |   | 602    |       |
| 2007                                                 |   | 432    |       |
| Thereafter                                           |   | 1,206  |       |
|                                                 |   |   |       |
| Total minimum lease payments                         |   | $      | 4,690      |   |

 

Rentexpense was approximately $873,000, $811,000**,**and $598,000, for the years ended December 31, 2002, 2001, and 2000.

 

Inthe ordinary course of business, the Company enters into various types oftransactions which involve financial instruments with off-balance sheet risk. Theseinstruments include commitments to extend credit and standby letters of creditand are not reflected in the accompanying balance sheet. These transactions mayinvolve, to varying degrees, credit and interest risk in excess of the amount,if any, recognized in the balance sheet.

 

TheCompany’s off-balance sheet credit risk exposure is the contractual amount ofcommitments to extend credit and standby letters of credit. The Company appliesthe same credit standards to these contracts as it uses in its lending process.Additionally, commitments to extend credit and standby letters of credit bearsimilar credit risk characteristics as outstanding loans.

 

Financialinstruments whose contractual amount represents risk:

 
|                         |   | **As of December 31** |       |
|------------------------------|--------|-----------------------|------------|
| **(Dollars in thousands)**   |   | **2002**              | ** ** | **2001** | ** ** |
|                         |   |                  | ** ** |   | ** ** |
| Commitments to extend credit |   | $                     | 235,140    |   | $ | 188,802 |   |
| Standby letters of credit    |   | 6,522                 |       | 3,852 |   |
|                              |        |                       |            |  |  |  |  |

 

Commitmentsto extend credit are agreements to lend to customers. These commitments havespecified interest rates and generally have fixed expiration dates, but may beterminated by the Company if certain conditions of the contract are violated.Although currently subject to draw down, many of these commitments are expectedto expire or terminate without funding. Therefore, the total commitment amountsdo not necessarily represent future cash requirements. Collateral held relatingto these commitments varies, but may include securities, equipment, inventoryand real estate.

 

Standbyletters of credit are conditional commitments issued by the Company toguarantee the performance of the customer to a third party. The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending loan facilities to customers. Collateral held for standby lettersof credit is based on an individual evaluation of each customer’s creditworthiness, but may include cash, equipment, inventory and securities.

 

TheCompany because of the nature of its business, is subject to various threatenedor filed legal cases. The Company, based on the advice of legal counsel, doesnot expect such cases will have a material, adverse effect on its financialposition or results of operations.

 

30

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**NOTE 11. Time Deposits**

 

AtDecember 31, 2002 the aggregate maturities for time deposits are as follows:

** **
| **Years ended December 31,  (Dollars in thousands)** |   |   |       |
|------------------------------------------------------|--------|--------|------------|
|                                                 |   |   | ** ** |
| 2003                                                 |   | $      | 244,700    |   |
| 2004                                                 |   | 64,135 |       |
| 2005                                                 |   | 16,154 |       |
| 2006                                                 |   | 395    |       |
| 2007                                                 |   | 156    |       |
| Thereafter                                           |   | 134    |       |
|                                                 |   |   |       |
| Total time deposits                                  |   | $      | 325,674    |   |

 

**NOTE 12.  Employee andDirector Benefit Plans**

 

TheCompany has a noncontributory employee stock ownership plan (“ESOP”) and anemployee savings plan covering substantially all employees. During 2002, 2001,and 2000, the Company contributed approximately $468,000, $326,000, and$288,000, to the ESOP and $173,000, $116,000, and $95,000 to the employeesavings plan.

 

Underprovisions of the ESOP, the Company can make discretionary contributions to beallocated based on eligible individual annual compensation, as approved by theBoard of Directors. Contributions to the ESOP are recognized as compensationexpense. For the years December 31, 2002, 2001, and 2000, the ESOP owned206,100, 180,079**,** and 164,800shares of the Company’s stock. ESOP shares are included in the weighted averagenumber of shares outstanding for earnings per share computations.

 

Theemployee savings plan allowed participating employees to contribute up to$12,000 each in 2002. The Company matched 25% of the employees’ electivecontribution, as defined, not to exceed 10% of eligible annual compensation.

 

TheCompany maintains a non-qualified salary continuation plan for certain seniorexecutive officers of the Company and the Bank. Under the plan, the Company hasagreed to pay these executives retirement benefits for a ten to fifteen yearperiod after their retirement so long as they meet certain length of servicevesting requirements. The plan is informally linked to several single premiumuniversal life insurance policies that provide life insurance on certain seniorexecutive officers with the Company named as the owner and beneficiary of thesepolicies. The Bank has a Rabbi trust and specific life insurance contracts havebeen irrevocably assigned to the trust in support of the salary continuationplans. Salary continuation expense totaled $656,000, $406,000**,** and $595,000, in 2002, 2001, and 2000.

 

TheCompany also maintains a non-qualified deferred compensation plan for membersof the board of directors of the Company and the Bank. Under the deferredcompensation plan, members of the board of directors have the ability to defercompensation they receive as directors until they reach retirement age, so longas they meet certain length of service vesting requirements. Upon reachingretirement age, the Company has agreed to pay these directors retirementbenefits over a ten year period. The plan is informally linked to severalsingle premium universal life insurance policies that provide life insurance oncertain directors with the Company named as the owner and beneficiary of thesepolicies. The Bank has a Rabbi trust and specific life insurance contracts havebeen irrevocably assigned to the trust in support of the deferred compensationplans. Deferred compensation expense totaled $59,000, $70,000, and $63,000 in2002, 2001, and 2000.

 

**NOTE 13. Stock Option Plan**

 

In1992, shareholders approved the adoption of an incentive stock option plan forbank management and a non-statutory stock option plan 

 

31

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fordirectors. The maximum number of shares issuable under the plans was 126,000and was amended by the shareholders in 1995 and 2001 to 450,000 and 675,000options available for grant. Options are available for grant under the plans atprices that approximate fair market value of the stock at the date of grant.Options granted under both plans become exercisable 25% at the time of grantand 25% each year thereafter and expire 10 years from the date of grant.

 

Asummary of the status of the Company’s stock options as of and for the yearsended December 31, 2002, 2001, and 2000 and changes during the years endedon those dates, follows:

 
|                               |   | **Number of********shares** |       | **Weighted********average********exercise price** |       | **Number of********shares** |       | **Weighted  average********exercise price** |       | **Number of********shares** |       | **Weighted********average********exercise price** |       |
|------------------------------------|--------|-----------------------------|------------|---------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|
|                               |   | **2002**                    | ** ** | **2001**                                          | ** ** | **2000**                    | ** ** |
|                               |   |                        | ** ** |                                              | ** ** |                        | ** ** |                                        | ** ** |                        | ** ** |                                              | ** ** |
| Outstanding at beginning of year   |   | 416,201                     |       | $                                                 | 9.29       |                        | 411,575    |                                        | $          | 7.55                        |       | 398,317                                           |       | $ | 6.83 |   |
| Granted                            |   | 82,775                      |       | 17.77                                             |       | 111,735                     |       | 12.48                                       |       | 71,104                      |       | 9.47                                              |       |
| Exercised                          |   | (116,026                    | )          | 5.75                                              |       | (102,460                    | )          | 5.70                                        |       | (54,091                     | )          | 4.54                                              |       |
| Forfeited                          |   | (26,467                     | )          | 10.66                                             |       | (4,649                      | )          | 10.86                                       |       | (3,755                      | )          | 10.74                                             |       |
|                               |   |                        |       |                                              |       |                        |       |                                        |       |                        |       |                                              |       |
| Outstanding at end of year         |   | 356,483                     |       | $                                                 | 12.31      |                        | 416,201    |                                        | $          | 9.29                        |       | 411,575                                           |       | $ | 7.55 |   |
| Options exercisable at end of year |   | 236,784                     |       | $                                                 | 11.10      |                        | 287,318    |                                        | $          | 8.38                        |       | 311,991                                           |       | $ | 6.88 |   |

 

Thefollowing table summarizes information about options outstanding atDecember 31, 2002:

 
| **Range of********exercise********prices** |   | **Number  of shares********outstanding** |       | **Weighted  remaining********contractual  life** |       | **Weighted********average********exercise price** |       | **Number********exercisable** |       | **Weighted********average********exercise price** |       |
|--------------------------------------------|--------|------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------|------------|---------------------------------------------------|------------|
|                                       |   | **Options********outstanding**           | ** ** |                                             | ** ** | **Options********exercisable**                    | ** ** |
|                                       |   |                                     | ** ** |                                             | ** ** |                                              | ** ** |                          | ** ** |                                              | ** ** |
| $ 6 - 10                         |   | 97,874                                   |       | 6.07 Years                                       |       | $                                                 | 8.67       |                          | 87,951     |                                              | $          | 8.65 |   |
|  10 - 14                         |   | 162,846                                  |       | 7.09                                             |       | 11.56                                             |       | 120,243                       |       | 11.49                                             |       |
|  14 - 18                         |   | 50,138                                   |       | 8.84                                             |       | 15.20                                             |       | 17,183                        |       | 15.18                                             |       |
|  18 - 22                         |   | 45,625                                   |       | 9.56                                             |       | 19.57                                             |       | 11,407                        |       | 19.57                                             |       |
| $ 6 - 22                         |   | 356,483                                  |       | 7.37 Years                                       |       | $                                                 | 12.31      |                          | 236,784    |                                              | $          | 11.10 |   |

 

Thenumber of shares and exercise price per share has been adjusted for stock dividendsand stock splits during the period. See footnote 1 for additional informationrelated to total compensation and effects on net income.

 

32

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**NOTE 14. Fair Value of Financial Instruments**

 

TheCompany in estimating its fair value disclosures for financial instruments usedthe following methods and assumptions:

 

**Financial Assets:**

 

**Cash and cash equivalents:** For these assets, the carrying amount is areasonable estimate for fair value.

 

**Investments:** Fair values for available for sale and held to maturity investmentsecurities are based on quoted market prices where available. If quoted marketprices were not available, fair values were based upon quoted market prices ofcomparable instruments.

 

**Net loans:**The fair value of loans is estimated by utilizing discounted future cash flowcalculations using the interest rates currently being offered for similar loansto borrowers with similar credit risks and for the remaining or estimatedmaturities considering prepayments. The carrying value of loans is net of theallowance for loan losses and unearned loan fees.

 

**Financial Liabilities:**

 

**Deposits:**The fair values disclosed for deposits generally paid upon demand (i.e.noninterest-bearing and interest-bearing demand) savings and money marketaccounts are considered equal to their respective carrying amounts as reportedon the consolidated balance sheets. The fair value of fixed rate certificatesof deposit is estimated using the rates currently offered for deposits ofsimilar remaining maturities.

 

**Borrowings:** For these instruments, the fair value is estimated using ratescurrently available for similar loans with similar credit risk and for theremaining maturities.

 

**Commitments to extend credit and standby letters of credit:** The fair value of commitments to extend creditand standby letters of credit is estimated using the fees currently charged toenter into similar agreements, taking into account the remaining terms of theagreements and the present credit worthiness of the counter parties. For fixedrate loan commitments, fair value also considers the difference between currentlevels of interest rates and the committed rate. The fair value of letters ofcredit is based on fees currently charged for similar arrangements or on theestimated cost to terminate them or otherwise settle the obligation with thecounter parties at the recording date.

 

Fairvalues for financial instruments are management’s estimates of the values atwhich the instruments could be exchanged in a transaction between willingparties. These estimates are subjective and may vary considerably from amountsthat would be realized in actual transactions. In addition, other significantassets are not considered financial assets including, any deferred tax assetsand premises and equipment. Further, the tax ramifications related to therealization of the unrealized gains and losses can have a significant effect onthe fair value estimates and have not been considered in any of theseestimates.

 
| **(Dollars in thousands)  2002**              |   | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------------|--------|----------------------|------------|----------------|------------|
|                                          |   |                 |       |           |       |
| **Financial assets:**                         |   |                 |       |           |       |
| Cash and cash equivalents                     |   | $                    | 73,183     |           | $          | 73,183 |   |
| Time deposits at other financial institutions |   | 500                  |       | 500            |       |
| Available for sale investment securities      |   | 231,392              |       | 231,392        |       |
| Held to maturity investment securities        |   | 55,628               |       | 57,905         |       |
| Net loans                                     |   | 621,639              |       | 625,497        |       |
| **Financial liabilities**                     |   |                 |       |           |       |
| Noninterest-bearing demand                    |   | 164,852              |       | 164,852        |       |
| Negotiable orders of withdrawl                |   | 120,449              |       | 120,449        |       |
| Savings                                       |   | 223,404              |       | 223,404        |       |
| Time deposits                                 |   | 325,674              |       | 329,568        |       |
| Borrowings                                    |   | 110,204              |       | 112,764        |       |
| Trust Preferred Securities                    |   | $                    | 6,000      |           | $          | 5,880 |   |

 

33

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|                      |   | **Contract  Amount** | ** ** |   | ** ** |
|---------------------------|--------|----------------------|------------|--------|------------|
|                      |   |                 |       |   |       |
| **Off-balance sheet:**    |   |                 |       |   |       |
| Commitments               |   | $                    | 235,140    |   | $          | 23,514 |   |
| Standby letters of credit |   | 6,522                |       | 65     |       |
|                           |        |                      |            |        |            |  |  |

 
| **(Dollars in thousands)  2001**              |   | **Carrying  Amount** |       | **Fair Value** |       |
|-----------------------------------------------|--------|----------------------|------------|----------------|------------|
|                                          |   |                 | ** ** |           | ** ** |
| **Financial assets:**                         |   |                 |       |           |       |
| Cash and cash equivalents                     |   | $                    | 49,288     |           | $          | 49,288 |   |
| Time deposits at other financial institutions |   | 500                  |       | 500            |       |
| Available for sale investment securities      |   | 229,852              |       | 229,852        |       |
| Held to maturity investment securities        |   | 41,559               |       | 42,185         |       |
| Net loans                                     |   | 522,677              |       | 529,604        |       |
| **Financial liabilities**                     |   |                 |       |           |       |
| Noninterest-bearing demand                    |   | 132,496              |       | 132,496        |       |
| Negotiable orders of withdrawl                |   | 102,055              |       | 102,055        |       |
| Savings                                       |   | 203,721              |       | 203,721        |       |
| Time deposits                                 |   | 294,369              |       | 297,009        |       |
| Borrowings                                    |   | 80,685               |       | 82,396         |       |
| Trust Preferred Securities                    |   | $                    | 6,000      |           | $          | 5,960 |   |

 
|                      |   | **Contract  Amount** |    |   |   |
|---------------------------|--------|----------------------|---------|--------|--------|
|                      |   |                 |    |   |   |
| **Off-balance sheet:**    |   |                 |    |   |   |
| Commitments               |   | $                    | 188,802 |   | $      | 18,880 |   |
| Standby letters of credit |   | 3,852                |    | 39     |   |
|                           |        |                      |         |        |        |  |  |

 

**NOTE 15. Parent Company Only Financial Information**

 

Thisinformation should be read in conjunction with the other notes to theconsolidated financial statements. The following are the condensed balancesheets of the Company as of December 31, 2002 and 2001 and the condensedstatements of income and cash flows for the years ended December 31, 2002,2001, and 2000:

 

**Condensed balance sheets**

 
|                                                                    |   | **December 31,** |       |
|-------------------------------------------------------------------------|--------|------------------|------------|
| **(Dollars in thousands)**                                              |   | **2002**         | ** ** | **2001** | ** ** |
|                                                                    |   |             | ** ** |   | ** ** |
| **Assets**                                                              |   |             |       |   |   |
| Cash and short-term investments                                         |   | $                | 502        |   | $ | 1,812 |   |
| Investment in County Bank                                               |   | 80,520           |       | 66,388 |   |
| Investment in Regency Investment Advisors                               |   | 602              |       | — |   |
| Net premises and equipment                                              |   | 859              |       | 5,623 |   |
| Other assets                                                            |   | 1,787            |       | 1,050 |   |
|                                                                    |   |             |       |   |   |
| Total assets                                                            |   | $                | 84,270     |   | $ | 74,873 |   |
|                                                                    |   |             |       |   |   |
| **Liabilities and shareholders’ Equity**                           |   |             | ** ** |   | ** ** |
| **Liabilities**                                                         |   |             |       |   |   |
| Borrowed funds                                                          |   | $                | —     |   | $ | 3,116 |   |
| Capitalized lease                                                       |   | 320              |       | 638 |   |
| Other liabilities                                                       |   | 750              |       | 999 |   |
| Total liabilities                                                       |   | 1,070            |       | 4,753 |   |
| **Trust Preferred Securities and  minority interests**                  |   | 6,031            |       | 6,000 |   |
| Total shareholders’ equity                                         |   | 77,169           |       | 64,120 |   |
| Total liabilities, Preferred Securities, and  shareholders’ equity |   | $                | 84,270     |   | $ | 74,873 |   |

 

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**Condensed statements of income**

 
|                                                                           |   | **Years Ended  December 31,** |       |
|--------------------------------------------------------------------------------|--------|-------------------------------|------------|
| **(Dollars in thousands)**                                                     |   | **2002**                      | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                           |   |                          | ** ** |   | ** ** |   | ** ** |
| **Income**                                                                     |   |                          |       |   |   |   |   |
| Interest                                                                       |   | $                             | 31         |   | $ | 169 |   | $ | 1 |   |
| Lease income                                                                   |   | 45                            |       | 502 |   | 502 |   |
| Management fees from subsidiaries                                              |   | 6,556                         |       | 5,654 |   | 4,918 |   |
| Total income                                                                   |   | 6,632                         |       | 6,325 |   | 5,421 |   |
| **Expenses**                                                                   |   |                          |       |   |   |   |   |
| Interest on borrowings                                                         |   | —                        |       | 274 |   | 282 |   |
| Capitalized lease interest                                                     |   | 45                            |       | 64 |   | 80 |   |
| Salaries and related benefits                                                  |   | 3,928                         |       | 3,205 |   | 2,975 |   |
| Other noninterest expense                                                      |   | 3,514                         |       | 2,940 |   | 2,650 |   |
| Total other expenses                                                           |   | 7,487                         |       | 6,483 |   | 5,987 |   |
| Loss before income taxes and equity in undistributed  earnings of subsidiaries |   | (855                          | )          | (158 | ) | (566 | ) |
| Income tax benefit                                                             |   | 333                           |       | 21 |   | 211 |   |
| Equity in undistributed income of subsidiaries                                 |   | 10,950                        |       | 8,048 |   | 7,061 |   |
| Net income                                                                     |   | $                             | 10,428     |   | $ | 7,911 |   | $ | 6,706 |   |

** **

**Condensed statements of cashflows**

 
|                                                                                         |   | **Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|------------------------------|--------|
| **(Dollars  in thousands)**                                                                  |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                                         |   |                         |   |   |   |   |   |
| **Operating activities:**                                                                    |   |                         |   |   |   |   |   |
| Net income                                                                                   |   | $                            | 10,428 |   | $ | 7,911 |   | $ | 6,706 |   |
| Adjustments to reconcile net income to net cash (used  in) provided by operating activities: |   |                         |   |   |   |   |   |
| Depreciation of fixed assets                                                                 |   | 416                          |   | 604 |   | 629 |   |
| Equity in undistributed earnings of subsidiaries                                             |   | (10,950                      | )      | (8,048 | ) | (7,061 | ) |
| Increase in other assets                                                                     |   | (781                         | )      | (132 | ) | (573 | ) |
| (Decrease) increase in other liabilities                                                     |   | (249                         | )      | (38 | ) | 668 |   |
| Net cash (used in) provided by operating activities                                          |   | (1,136                       | )      | 297 |   | 369 |   |
| **Investing activities:**                                                                    |   |                         |   |   |   |   |   |
| Capital contribution to subsidiary bank                                                      |   | —                       |   | (6,000 | ) | — |   |
| Purchase of subsidiary and capital contributions                                             |   | (645                         | )      |   |   |   |   |
| Purchase of premises and equipment                                                           |   | (609                         | )      | (296 | ) | (459 | ) |
| Issuance of minority interest in REIT preferred stock                                        |   | 31                           |   | — |   | — |   |
| Net cash used in investing activities                                                        |   | (1,223                       | )      | (6,296 | ) | (459 | ) |
| **Financing activities:**                                                                    |   |                         |   |   |   |   |   |
| Issuance of Trust Preferred Securities                                                       |   | —                       |   | 6,000 |   | — |   |
| Net (decrease) increase in other borrowings and  capitalized lease                           |   | (322                         | )      | (332 | ) | 71 |   |
| Issuance of common stock related to exercise of stock  options and employee benefit plans    |   | 1,383                        |   | 1,190 |   | 325 |   |
| Cash dividends and fractional shares                                                         |   | (12                          | )      | (7 | ) | — |   |
| Net cash provided by financing activities                                                    |   | 1,049                        |   | 6,851 |   | 396 |   |
| (Decrease) increase in cash and cash equivalents                                             |   | (1,310                       | )      | 852 |   | 306 |   |
| Cash and cash equivalents at beginning of year                                               |   | 1812                         |   | 960 |   | 654 |   |
| Cash and cash equivalents at end of year                                                     |   | $                            | 502    |   | $ | 1,812 |   | $ | 960 |   |

 

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**NOTE 16. Quarterly Results of Operations (Unaudited)**

 
|                          |   | **2002 Quarter Ended** |       |
|-------------------------------|--------|------------------------|------------|
| **(Dollars in thousands)**    |   | **Dec 31**             | ** ** | **Sept 30** | ** ** | **June 30** | ** ** | **Mar 31** | ** ** |
|                          |   |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Interest income               |   | $                      | 15,052     |   | $ | 15,292 |   | $ | 14,590 |   | $ | 13,877 |   |
| Interest expense              |   | 4,299                  |       | 4,716 |   | 4,657 |   | 4,551 |   |
| Net interest income           |   | 10,753                 |       | 10,576 |   | 9,933 |   | 9,326 |   |
| Provision for loan losses     |   | 730                    |       | 1,190 |   | 1,451 |   | 780 |   |
| Other income                  |   | 2,049                  |       | 2,286 |   | 2,130 |   | 1,779 |   |
| Other expenses                |   | 8,530                  |       | 8,330 |   | 7,513 |   | 7,425 |   |
| Income before income taxes    |   | 3,542                  |       | 3,342 |   | 3,099 |   | 2,900 |   |
| Income taxes                  |   | 708                    |       | 356 |   | 715 |   | 676 |   |
| Net income                    |   | $                      | 2,834      |   | $ | 2,986 |   | $ | 2,384 |   | $ | 2,224 |   |
|                          |   |                   |       |   |   |   |   |   |   |
| Basic earnings per share(1)   |   | $                      | .51        |   | $ | .53 |   | $ | .43 |   | $ | .41 |   |
|                          |   |                   |       |   |   |   |   |   |   |
| Diluted earnings per share(1) |   | $                      | .50        |   | $ | .52 |   | $ | .42 |   | $ | .40 |   |

 
|                          |   | **2001  Quarter Ended** | ** ** |
|-------------------------------|--------|-------------------------|------------|
| **(Dollars in thousands)**    |   | **Dec 31**              |       | **Sept 30** |   | **June 30** |   | **Mar 31** |   |
|                          |   |                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Interest income               |   | $                       | 14,520     |   | $ | 15,215 |   | $ | 14,146 |   | $ | 14,286 |   |
| Interest expense              |   | 5,391                   |       | 5,769 |   | 5,668 |   | 5,871 |   |
| Net interest income           |   | 9,129                   |       | 9,446 |   | 8,478 |   | 8,415 |   |
| Provision for loan losses     |   | 1,036                   |       | 1,540 |   | 789 |   | 750 |   |
| Other income                  |   | 1,776                   |       | 1,571 |   | 1,574 |   | 1,353 |   |
| Other expenses                |   | 7,295                   |       | 6,787 |   | 6,476 |   | 6,339 |   |
| Income before income taxes    |   | 2,574                   |       | 2,690 |   | 2,787 |   | 2,679 |   |
| Income taxes                  |   | 465                     |       | 781 |   | 806 |   | 767 |   |
| Net income                    |   | $                       | 2,109      |   | $ | 1,909 |   | $ | 1,981 |   | $ | 1,912 |   |
|                          |   |                    |       |   |   |   |   |   |   |
| Basic earnings per share(1)   |   | $                       | .39        |   | $ | .35 |   | $ | .37 |   | $ | .36 |   |
|                          |   |                    |       |   |   |   |   |   |   |
| Diluted earnings per share(1) |   | $                       | .38        |   | $ | .34 |   | $ |  .36 |   | $ |  .35 |   |

 

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*(1)**                               Basic and diluted earnings per share calculationsare based upon the weighted average number of shares outstanding during each period.Full year weighted average shares differ from quarterly weighted average sharesand, therefore, annual earnings per share may not equal the sum of thequarters.*

 

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