Capital Corp of the West

Selected Financial Data

 
|                                             |   | **2001**                                             |    | **2000** |   | **1999** |   | **1998** |    | **1997(1)** |   |
|--------------------------------------------------|--------|------------------------------------------------------|---------|----------|--------|----------|--------|----------|---------|-------------|--------|
|                                             |   | **(Amounts in thousands,****except per share data)** |    |
| **Summary income data:**                         |   |                                                 |    |     |   |     |   |     |    |        |   |
| Interest income                                  |   | $                                                    | 58,167  |     | $      | 50,888   |   | $        | 39,361  |        | $      | 34,614 |   | $ | 25,912 |   |
| Interest expense                                 |   | 22,699                                               |    | 20,768   |   | 14,040   |   | 13,634   |    | 10,190      |   |
| Net interest income                              |   | 35,468                                               |    | 30,120   |   | 25,321   |   | 20,980   |    | 15,722      |   |
| Provision for loan losses                        |   | 4,115                                                |    | 3,286    |   | 2,659    |   | 3,903    |    | 5,825       |   |
| Noninterest income                               |   | 6,274                                                |    | 5,407    |   | 5,089    |   | 4,838    |    | 3,852       |   |
| Noninterest expense                              |   | 26,897                                               |    | 22,774   |   | 20,538   |   | 18,244   |    | 13,372      |   |
| Income before provision for income taxes         |   | 10,730                                               |    | 9,467    |   | 7,213    |   | 3,671    |    | 377         |   |
| Provision (benefit) for income taxes             |   | 2,819                                                |    | 2,761    |   | 2,104    |   | 930      |    | (26         | )      |
| Net income                                       |   | $                                                    | 7,911   |     | $      | 6,706    |   | $        | 5,109   |        | $      | 2,741 |   | $ | 403 |   |
| **Share Data:**                                  |   |                                                 |    |     |   |     |   |     |    |        |   |
| Average common shares outstanding                |   | 4,848                                                |    | 4,755    |   | 4,790    |   | 4,832    |    | 3,640       |   |
| Basic earnings per share                         |   | $                                                    | 1.63    |     | $      | 1.41     |   | $        | 1.07    |        | $      | 0.57 |   | $ | 0.11 |   |
| Diluted earnings per share                       |   | 1.58                                                 |    | 1.37     |   | 1.04     |   | 0.55     |    | 0.10        |   |
| Cash dividends per share                         |   | —                                               |    | —   |   | —   |   | —   |    | —      |   |
| Book value per share                             |   | 13.01                                                |    | 11.18    |   | 9.25     |   | 8.85     |    | 8.32        |   |
| Tangible book value per share                    |   | $                                                    | 12.31   |     | $      | 10.29    |   | $        | 8.18    |        | $      | 7.64 |   | $ | 6.95 |   |
| **Balance Sheet Data:**                          |   |                                                 |    |     |   |     |   |     |    |        |   |
| Total assets                                     |   | $                                                    | 894,327 |     | $      | 683,021  |   | $        | 563,550 |        | $      | 499,859 |   | $ | 421,394 |   |
| Total securities                                 |   | 271,411                                              |    | 191,052  |   | 147,368  |   | 154,867  |    | 148,032     |   |
| Total loans                                      |   | 532,420                                              |    | 412,664  |   | 331,268  |   | 268,933  |    | 217,977     |   |
| Total deposits                                   |   | 732,641                                              |    | 601,498  |   | 494,901  |   | 444,210  |    | 356,395     |   |
| Shareholders’ equity                        |   | $                                                    | 64,120  |     | $      | 53,451   |   | $        | 43,677  |        | $      | 42,804 |   | $ | 40,248 |   |
| **Operating Ratios:**                            |   |                                                 |    |     |   |     |   |     |    |        |   |
| Return on average equity                         |   | 13.40                                                | %       | 14.33    | %      | 11.86    | %      | 6.48     | %       | 1.46        | %      |
| Return on average assets                         |   | 1.03                                                 |    | 1.09     |   | .99      |   | .60      |    | .13         |   |
| Average equity to average assets ratio           |   | 7.69                                                 |    | 7.64     |   | 8.35     |   | 9.06     |    | 8.76        |   |
| Net interest margin                              |   | 5.01                                                 |    | 5.46     |   | 5.55     |   | 5.19     |    | 5.65        |   |
| **Credit Quality Ratios:**                       |   |                                                 |    |     |   |     |   |     |    |        |   |
| Nonperforming loans to total loans(2)            |   | 0.91                                                 | %       | 0.57     | %      | 0.60     | %      | 0.54     | %       | 1.26        | %      |
| Allowance for loan losses to total loans         |   | 1.83                                                 |    | 1.99     |   | 1.97     |   | 1.78     |    | 1.76        |   |
| Allowance for loan losses to nonperforming loans |   | 200.65                                               |    | 350.66   |   | 328.83   |   | 310.87   |    | 139.79      |   |
| **Capital Ratios:**                              |   |                                                 |    |     |   |     |   |     |    |        |   |
| Risk-based tier 1 capital                        |   | 9.49                                                 | %       | 9.66     | %      | 9.99     | %      | 10.69    | %       | 11.60       | %      |
| Total risk-based capital                         |   | 10.74                                                |    | 10.92    |   | 11.24    |   | 11.94    |    | 12.78       |   |
| Leverage ratio                                   |   | 7.72                                                 |    | 7.56     |   | 7.50     |   | 7.58     |    | 8.58        |   |

 

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*(1)        Reflects the acquisition of threebranches from Bank of America in December, 1997.*

 

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

 

Management’sDiscussion and Analysis 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

 

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theCompany and the notes thereto. The consolidated financial statements of theCompany include its subsidiaries, County Bank (the “Bank”) and Capital WestGroup (“CWG”). It also includes the Bank’s subsidiaries, Merced Area InvestmentDevelopment, Inc. (“MAID”), County Asset Advisor, Inc. (“CAA”), CountyInvestment Trust (“REIT”) and County Investment II (“REIT 2”). During January2002, the board approved the dissolution of REIT 2. It is anticipated that REIT2 will be completely liquidated and dissolved by the end of the second quarterof 2002.

 

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 may causedifferences from expected results include the following: the Company’s loangrowth is dependent on economic conditions, as well as various discretionaryfactors, such as decisions to sell, or purchase certain loans or loanportfolios; participations of loans and the management of borrower, industry,product and geographic concentrations and the mix of the loan portfolio. Therate of charge-offs and provision expense can be affected by local, regionaland international economic and market conditions, concentrations of borrowers,industries, products and geographical conditions, the mix of the loan portfolioand management’s judgements regarding the collectibility of loans. Liquidityrequirements may change as a result of fluctuations in assets and liabilitiesand off-balance sheet exposures, which will impact the capital and debtfinancing needs of the Company and the mix of funding sources. Decisions topurchase, hold, or sell securities are also dependent on liquidity requirementsand market volatility, as well as on and off-balance sheet positions. Factorsthat may impact interest rate risk include local, regional and internationaleconomic conditions, levels, mix, maturities, yields or rates of assets andliabilities and the wholesale and retail funding sources of the Company. TheCompany is also exposed to the potential of losses arising from adverse changesin market rates and prices which can adversely impact the value of financialproducts, including securities, loans, and deposits. In addition, the bankingindustry in general is subject to various monetary and fiscal policies andregulations, which include those determined by the Federal Reserve Board, theFederal Deposit Insurance Corporation and state regulators, whose policies andregulations 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 nonbank financialinstitutions, such as investment banking firms, investment advisory firms,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’sdiscussion and analysis of its financial condition and results of operationsare based upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, the Company evaluatesits estimates, including those related to the adequacy of the allowance forloan losses, investments, intangible assets, income taxes and contingencies.The Company bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. The one accounting estimate that materially affects the financialstatements is the allowance for loan losses. The policies that guide theformulation of provision for loan loss entries and the adequacy of theallowance for loan losses can be found in footnote 1 the “Allowance for LoanLosses” section and in footnote 3, titled “Loans”, within the Company’s 2001Annual Report.

 

**Overview** During 2001, earnings increased$1,205,000 or 18% to $7,911,000 which compares favorably to earnings of$6,706,000 and $5,109,000 achieved in 2000 and 1999. Basic earnings per sharewere $1.63 in 2001 compared to $1.41 and $1.07 in 2000 and 1999. Dilutedearnings per share were $1.58 in 2001 compared to $1.37 and $1.04 in 2000 and1999. The Company’s return on average total assets was 1.03% in 2001 comparedwith 1.09% and 0.99% in 2000 and 1999. The $1,205,000 earnings improvement in2001 was the result of sizable growth in interest earning assets andimprovement in noninterest income when compared to the prior two years. In2001, the provision for loan losses increased by $829,000 to $4,115,000compared to the $3,286,000 recorded in 2000. In 1999, the provision for loanlosses totaled $2,659,000. The increase in the provision for loan losses in2001 compared to 2000 was primarily due to an increase in

 

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nonperformingloans and an increase in the size of the loan portfolio as a whole in 2001. Netloan charge-off amounts increased in 2001 when compared to 2000 levels, whichwere larger than occurred in 1999. The size of the provision in 1999 was due tolower levels of net charge-off loans that occurred during that year. TheCompany achieved strong asset growth in 2001, reaching total assets at December31, 2001 of $894,327,000, up $211,306,000 or 31% from $683,021,000 at December31, 2000. Net loans grew to $522,677,000 at December 31, 2001, an increase of$118,220,000 or 29% from the $404,457,000 outstanding at December 31, 2000.Deposits grew to $732,641,000 at December 31, 2001, an increase of $131,143,000or 22% over the $601,498,000 outstanding as of December 31, 2000. Total shareholder’sequity grew to $64,120,000 at December 31, 2001, an increase of $10,669,000 or20% over the year-end 2000 total of $53,451,000 and the Company continues to bewell capitalized by regulatory definitions. The Company’s return on averageequity was 13.40%, 14.33% and 11.86% in 2001, 2000, and 1999.

 

**Results of Operations** Capital Corp of the West’s earnings were a record $7,911,000 during2001, driven primarily by an increase in average earning asset balances. Netinterest income increased by $5,348,000, or 18%, to $35,468,000 during 2001 ascompared to an increase in net interest income of $4,799,000 in 2000 over 1999levels. The improvement in earnings during 2000 compared to 1999 was achievedas a result of an increase in the size of the Bank’s loan portfolio.

 

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 $50,888,000 in 2000 to $58,167,000,a $7,279,000 or 14% increase in 2001. During 2000, there was an increase of$11,527,000 or 29% to $50,888,000 compared to $39,361,000 in 1999. The level ofinterest income is affected by changes in the volume and the rates earned oninterest earning assets. During 2001, the increase in interest income is due toan increase in the volume which is partially offset by a decrease in ratesreceived on earning assets. During the second half of 2000 and during all of2001 there has been a rapid drop in interest rates. If the current rateenvironment holds during 2002, the interest earned on the existing interestearning assets is expected to decline during 2002 due to a further decline inrate that is anticipated to occur within the adjustable rate loan andsecurities portfolios. Interest earning assets consist primarily of loans,investment securities and federal funds sold. Average interest earning assetsin 2001 were $703,388,000 as compared with $555,428,000 in 2000, an increase of$147,960,000 or 27%. The average rate earned on interest earning assets was8.31% in 2001, a decrease of 89 basis points over the 9.20% earned in 2000.

 

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 2001 were$592,533,000 as compared with $473,581,000 in 2000, an increase of $118,952,000or 25%. Total interest expense increased $1,931,000 or 9% to $22,699,000 in2001 as compared to $20,768,000 for 2000. Total interest expense in 1999totaled $14,040,000. If the current rate environment holds during 2002, it isanticipated that the average interest paid on certificates of deposit shoulddecline as these accounts reprice at their maturities to a prevailing lowerinterest rate level.

 

TheCompany’s net interest margin, the ratio of net interest income to averageinterest earning assets for 2001 was 5.01%. This is a decrease of 54 basispoints compared to the 2000 margin of 5.55%. The decrease in net interestmargin during 2001 was primarily the result of an overall decline in prevailinginterest rates during the period. If the current interest rate environmentcontinues throughout 2002, it is anticipated the Company’s overall net interestmargin will decline slightly during 2002. A modest increase in rates shouldcause the Company’s net interest margin to slightly increase. The net interestmargin decrease of 9 basis points during 2000 from the 5.64% achieved in 1999was primarily the result of a larger decrease in interest rates paid oninterest- bearing assets than the increase in interest rates paid on interestearning assets during the year. In 2001, loans comprised 64% of averageinterest earning assets as compared with 67% and 68% in 2000 and 1999.Securities comprised 33% of average interest earning in 2001 compared with 30%and 26% in 2000 and 1999.

 

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. The effectsof tax-equivalent yields have not been considered because they are notconsidered significant.

 

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 $147,960,000 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 average interest-bearing liabilities which created avolume increase of $5,644,000 during 2001 when compared to 2000 which waspartially offset by a $3,713,000 rate decrease during this same period.

 

Theincrease in total interest income of $11,527,000 in 2000 is comprised of a$8,866,000 volume increase primarily attributable to an increase in averageinterest earning assets of $95,675,000 between 2000 and 1999 coupled with a$2,661,000 rate increase during this same period. The increase in totalinterest expense of $6,728,000 in 2000 related to a $78,877,000 increase inaverage interest-bearing liabilities between 2000 and 1999 coupled with a$2,598,000 rate increase during this same period.

 

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**Provision for Loan Losses** The Company maintains anallowance for loan losses at a level considered by management to be adequate tocover the inherent risks of loss associated with its loan portfolio underprevailing and anticipated economic conditions. The provision for loan lossesis charged against income and increases the allowance for loan losses. Theprovision for loan losses for the year ended December 31, 2001 was $4,115,000compared to $3,286,000 in 2000 and $2,659,000 in 1999. The increased level ofprovision for loan losses in 2001 when compared to 2000 was primarily theresult of an increase in non-performing loans and an overall increase in thesize of the portfolio. The increased level of provision for loan losses in 2000when compared to 1999 was primarily the result of an increased level of netcharge-offs experienced during the year coupled with significant growth in thesize of the loan portfolio. The reduced level of the provision for loan lossesin 1999 is attributable to a reduced level of net charge-offs experiencedduring the year. The methodology used to determine the level of provision forloan losses includes an analysis of relevant risk factors within the entireloan portfolio, including nonperforming loans. The methodology is based, inpart, on management’s use of a loan grading and classification system. TheBank’s management grades its loans through internal reviews and periodicallysubjects loans to external reviews. These external reviews are presented to andassessed by the Bank’s audit committee. Credit reviews are performed quarterlyand the quality grading process occurs on a monthly basis. The level ofprovision for loan losses in 2001, 2000, and 1999 also supports the generalloan growth of the Company, as gross loans increased 29% in 2001, and 25% in2000.

 

**Other income** The following table summarizesother income for the years ended December 31.

 
|                                                 |   | **2001**                    |   | **2000** |   | **1999** |   |
|------------------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|
|                                                 |   | **(Dollars in  thousands)** |   |
| **Other Income:**                                    |   |                        |   |     |   |     |   |
| Deposit service charges                              |   | $                           | 3,981  |     | $      | 3,527    |   | $ | 3,254 |   |
| Income from real estate held for sale or development |   | —                      |   | 381      |   | 260      |   |
| Earnings on bank owned insurance                     |   | 622                         |   | 311      |   | 288      |   |
| Loan packaging fees                                  |   | 236                         |   | 116      |   | 167      |   |
| Gain on sale of loans                                |   | 166                         |   | 82       |   | 48       |   |
| Retail investment commissions                        |   | 222                         |   | 78       |   | 139      |   |
| Other                                                |   | 1,007                       |   | 912      |   | 933      |   |
|                                                 |   |                        |   |     |   |     |   |
| Total other income                                   |   | $                           | 6,274  |     | $      | 5,407    |   | $ | 5,089 |   |

 

Totalother income increased by $867,000 or 16% to $6,274,000 in 2001 which compareswith $5,407,000 and $5,089,000 earned in 2000 and 1999. Deposit service chargesincreased by $454,000 or 13% during 2001. The 2001, 2000, and 1999 increase indeposit service charges was primarily the result of an increase in demanddeposit and NOW accounts in each of these years.  Other income increased by $95,000 or 10% to $1,007,000 in 2001,compared to $912,000 and $933,000 in 2000 and 1999. The 1999 increase is dueprimarily to an increase in ancillary product income.

 

**Other Expense** Total noninterest expenseincreased $4,123,000 or 18% to $26,897,000 in 2001 as compared with an increaseof $2,236,000 or 11% to $22,774,000 in 2000. Noninterest expense totaled$20,538,000 in 1999.

 

Salariesand related benefits increased by $2,549,000 or 23% to $13,615,000 in 2001,compared with an increase of $1,367,000 or 14% to $11,066,000 in 2000. Salariesand related benefits totaled $9,699,000 in 1999. The salary increases wereprimarily due to opening of new branch locations and the addition of backoffice support personnel. Premises and occupancy expenses increased 419,000 or24% to $2,133,000 in 2001 compared with an increase of $135,000 or 9% to$1,714,000 in 2000. Premises and occupancy expense totaled $1,579,000 in 1999.The increases in 2001 and 2000 were caused primarily by the addition of newbranch facilities.

 

Equipmentexpenses increased $181,000, or 7% to $2,739,000 in 2001 compared with anincrease of $414,000 to $2,558,000 in 2000. Equipment expenses were $2,144,000in 1999. The increase in 2001 was primarily due to purchasing new equipment tosupport branch expansion. The increase in 2000 was primarily due to upgradedcomputer technology, additional branches and branch relocation expenses. Thedecrease during 1999 was the result of a slowdown in spending on technologyduring 1999.

 

TheCompany’s professional fees include legal, consulting, audit and accountingfees. These expenses decreased by $634,000 or 58% to $467,000 in 2001ascompared with an increase of $41,000 or 4% to $1,101,000 in 2000. Totalprofessional fees were $1,060,00 in 1999. The decrease in 2001 is attributableto a decreased use of consulting firms involved in strategic planning of theCompany. The increase in 2000 is due, in part, to the continued outsourcing ofinternal audits, legal fees due to regulatory matters, consultants used inconjunction with the Bank’s strategic planning process and expendituresrelating to earnings enhancement programs.

 

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Suppliesincreased by $225,000 or 34% to $885,000 in 2001 as compared with an increaseof $109,000 or 20% to $660,000 in 2000. Supplies expense totaled $551,000 in1999. The increase in 2001 was primarily related to increased volumes caused bybranch expansion. The increase in 2000 was primarily related to new branchopenings.

 

Marketingexpenses increased by $59,000 or 7% to $949,000 in 2001 as compared with anincrease of $182,000 or 26% to $890,000 in 2000. Marketing expenses totaled$708,000 in 1999. Marketing expenses have continued to increase over the pastseveral years as the Company has actively promoted various deposit and loanproducts using television, newspaper, and other media sources to assist inattracting new and retaining existing customers.

 

Otherexpenses increased $1,324,000 to $5,317,000 in 2001. Other expenses includeincreases in 2001 other expenses relative to corporate donations,telecommunications expenses and branch robbery losses. During 2000, otherexpenses decreased $12,000 to $3,993,000 in 2000.

 

**Provision for Income Taxes** The Company’s provision forincome taxes was $2,819,000 in 2001 compared to a provision for income taxes of$2,761,000 and $2,104,000 in 2000 and 1999. The effective income tax rates(computed as income taxes as a percentage of income before income taxes) were26%, 29%, and 29% for 2001, 2000, and 1999. During 2001, the effective tax ratealso lowered by the implementation of new tax strategies designed to reducestate income taxes. These strategies lowered taxable state income byapproximately $6,000,000. During 2000 and 1999 the tax rate was lower than thestatutory rate due, in part, to tax credits earned from the investment oflow-income housing partnerships that qualify for housing tax credits. Totalhousing tax credits for 2001, 2000, and 1999 were approximately $733,000**,** $550,000, and $375,000. In addition,during 2001, 2000, and 1999, the Company realized tax benefits of $386,000**,** $390,000, and $413,000 from nontaxableinterest income received from bank qualified municipal securities.

 

**Financial Condition** Total assets increased 31% to$894,327,000 at December 31, 2001, compared to $683,021,000 at December 31,2000. Net loans increased to $118,220,000 at year end 2001, a 29% increase fromthe balance of $404,457,000 at December 31, 2000. Deposits grew by $131,143 or22% in 2001 to $732,641,000 which compares to $601,498,000 at December 31,2000.

 

**Securities:** The following table sets forththe carrying amount (fair value) of available for sale securities at December31,

 
|                                         |   | **2001**                   |       | **2000** |   | **1999** |   |
|----------------------------------------------|--------|----------------------------|------------|----------|--------|----------|--------|
|                                         |   | **(Dollars in thousands)** | ** ** |
| U.S. Treasury & U.S. Government agencies |   | $                          | 78,712     |     | $      | 35,939   |   | $ | 16,756 |   |
| State and political subdivisions             |   | 24,269                     |       | 24,170   |   | 23,371   |   |
| Mortgage-backed securities                   |   | 54,797                     |       | 54,409   |   | 43,723   |   |
| Collateralized mortgage obligations          |   | 33,346                     |       | 29,015   |   | 20,341   |   |
| Other securities                             |   | 38,728                     |       | 12,297   |   | 13,623   |   |
|                                         |   |                       |       |     |   |     |   |
| Carrying amount and fair value               |   | $                          | 229,852    |     | $      | 155,830  |   | $ | 117,814 |   |

 

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

 
|                                       |   | **2001**                   |       | **2000** |   | **1999** |   |
|--------------------------------------------|--------|----------------------------|------------|----------|--------|----------|--------|
|                                       |   | **(Dollars in thousands)** | ** ** |
| U.S. Treasury and U.S. Government agencies |   | $                          | 4,611      |     | $      | 4,595    |   | $ | 1,004 |   |
| State and political subdivisions           |   | 4,361                      |       | 4,375    |   | 4,389    |   |
| Mortgage-backed securities                 |   | 31,900                     |       | 22,736   |   | 24,161   |   |
| Collateralized mortgage obligations        |   | 687                        |       | 3,516    |   | —   |   |
|                                       |   |                       |       |     |   |     |   |
| Carrying amount (amortized cost)           |   | $                          | 41,559     |     | $      | 35,222   |   | $ | 29,554 |   |
|                                       |   |                       |       |     |   |     |   |
| Fair value                                 |   | $                          | 42,185     |     | $      | 35,412   |   | $ | 28,675 |   |

 

Availablefor sale securities increased $714,022 or 47% at December 31, 2001 over thecomparable year-end in 2000. Held to maturity

 

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securitiesincreased $6,337,000 or 18% to $41,559,000 at December 31, 2001 compared to$35,222,000 outstanding at December 31, 2000. The increases achieved withinboth segments of the securities portfolio were made possible by increaseddeposit liabilities and increased borrowings. The single largest component ofthe Company’s investment portfolio during the last three years has beenmortgage-backed securities. At December 31, 2001 and 2000 the Company did nothold any structured notes. See Note 1 and 3 to the Company’s ConsolidatedFinancial Statements for further information concerning the securitiesportfolio.

 

**Loans** Total loans increased $119,756,000 to$532,420,000 at December 31, 2001, compared to the $412,664,000 outstanding atDecember 31, 2000. The increase in loan volumes in 2001 were due to anexpansion into the San Francisco and Stockton market, and increased marketpenetration within the existing geographic markets.

 

TheCompany concentrates its lending activities in five principal areas:commercial, agricultural, real estate construction, real estate mortgage, and consumerloans. Interest rates charged for loans made by the Company vary with thedegree 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 closelymonitors the markets in which it conducts its lending operations and adjustsits strategy to control exposure to loans with higher credit risk. Assetreviews are performed using grading standards and criteria similar to thoseemployed by bank regulatory agencies. Assets receiving lesser grades become“classified assets” which include all nonperforming assets and potentialproblem loans and receive an elevated level of attention to improve thelikelihood of collection. The policy of the Company is to review each loan inthe portfolio to identify problem credits. There are three classifications forproblem loans: “substandard,” “doubtful” and “loss.” Substandard loans have oneor more defined weaknesses and are characterized by the distinct possibilitythat the Company will sustain some loss if the deficiencies are not corrected.Doubtful loans have the weaknesses of substandard loans with the additionalcharacteristic that the weaknesses make collection or liquidation in full onthe basis of currently existing facts, conditions and values questionable, andthere is a high possibility of loss. A loan classified as loss is considereduncollectible and its continuance as an asset is not warranted. The level ofnonperforming loans and real estate acquired through foreclosure are twoindicators of asset quality. Nonperforming loans are those in which theborrower fails to perform under the original terms of the obligation and arecategorized as loans past due 90 days or more but still accruing, loans onnonaccrual status and restructured loans. Loans are generally placed onnonaccrual status and accrued but unpaid interest is reversed against currentyear income when interest or principal payments become 90 days past due unlessthe outstanding principal and interest is adequately secured and, in theopinion of management, are deemed to be in the process of collection. Loansthat are not 90 days past due may also be placed on nonaccrual status ifmanagement reasonably believes the borrower will not be able to comply to thecontractual loan repayment terms and the collection of principal or interest isin 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, 2001 and 2000, 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 nonperforming loans at December 31, 2001 of $4,856,000 as comparedwith $2,340,000 at December 31, 2000. The 2001 and 2000 totals contain no loanssecured by first deeds of trust on real property. Impaired loans as of December31, 2001 were $4,856,000, which had specific allowances for loan loss of$644,000 as compared with impaired loans of $2,340,000 as of December 31, 2000,which had specific allowance for loan losses of $302,000. Other forms ofcollateral, such as inventory, chattel, and equipment secure the remainingnonperforming loans as of each date.

 

AtDecember 31, 2001 the Bank had $472,000 of real estate acquired throughforeclosure. This compares with a balance of $247,000 at December 31, 2000. AtDecember 31, 2001 the Company owned one residential, one commercial, and oneagricultural foreclosure property. At December 31, 2000 the Company owned oneresidential foreclosure property.

 

**Allowance for Loan Losses** In determining the adequacy ofthe allowance for loan losses, management takes into consideration the growthtrend in the portfolio, examinations by financial institution supervisoryauthorities, internal and external credit reviews, prior loan loss experienceof the Company, 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 adverselyaffect the Company’s borrowers, and thereby cause loan losses to exceed thecurrent allowance for loan losses.

 

Thebalance in the allowance for loan losses was affected by the amounts providedfrom operations, amounts charged-off and recoveries of

 

6

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loanspreviously charged off. The Company had provisions to the allowance in 2001 of$4,115,000 as compared to $3,286,000 and $2,659,000 in 2000 and 1999. See“Results of Operations - Provision for Loan Losses.”

 

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

 
|                             |   | **2001**                   |       | **2000** |   | **1999** |   | **1998** |    | **1997** |   |
|----------------------------------|--------|----------------------------|------------|----------|--------|----------|--------|----------|---------|----------|--------|
|                             |   | **(Dollars in thousands)** | ** ** |
| Allowance for loan losses:       |   |                       |       |     |   |     |   |     |    |     |   |
| Balance at beginning of year     |   | $                          | 8,207      |     | $      | 6,542    |   | $        | 4,775   |     | $      | 3,833 |   | $ | 2,792 |   |
| Provision for loan losses        |   | 4,115                      |       | 3,286    |   | 2,659    |   | 3,903    |    | 5,825    |   |
| Charge-offs:                     |   |                       |       |     |   |     |   |     |    |     |   |
| Commercial and agricultural      |   | 864                        |       | 423      |   | 531      |   | 2,539    |    | 1,121    |   |
| Real-estate - construction       |   | —                     |       | —   |   | —   |   | —   |    | 3,458    |   |
| Real-estate - mortgage           |   | —                     |       | —   |   | —   |   | 4        |    | —   |   |
| Consumer                         |   | 2,288                      |       | 1,971    |   | 1,323    |   | 983      |    | 471      |   |
|                             |   |                       |       |     |   |     |   |     |    |     |   |
| Total charge-offs                |   | 3,152                      |       | 2,394    |   | 1,854    |   | 3,526    |    | 5,050    |   |
|                             |   |                       |       |     |   |     |   |     |    |     |   |
| Recoveries:                      |   |                       |       |     |   |     |   |     |    |     |   |
| Commercial and agricultural      |   | 159                        |       | 410      |   | 715      |   | 135      |    | 155      |   |
| Real-estate - construction       |   | —                     |       | —   |   | —   |   | —   |    | 1        |   |
| Real-estate - mortgage           |   | —                     |       | —   |   | —   |   | 100      |    | —   |   |
| Consumer                         |   | 414                        |       | 363      |   | 247      |   | 330      |    | 110      |   |
|                             |   |                       |       |     |   |     |   |     |    |     |   |
| Total recoveries                 |   | 573                        |       | 773      |   | 962      |   | 565      |    | 266      |   |
|                             |   |                       |       |     |   |     |   |     |    |     |   |
| Net charge-offs                  |   | 2,579                      |       | 1,621    |   | 892      |   | 2,961    |    | 4,784    |   |
|                             |   |                       |       |     |   |     |   |     |    |     |   |
| Balance at end of year           |   | $                          | 9,743      |     | $      | 8,207    |   | $        | 6,542   |     | $      | 4,775 |   | $ | 3,833 |   |
|                             |   |                       |       |     |   |     |   |     |    |     |   |
| Loans outstanding at year-end    |   | $                          | 532,420    |     | $      | 412,664  |   | $        | 331,268 |     | $      | 268,993 |   | $ | 217,997 |   |
| Average loans outstanding        |   | $                          | 453,503    |     | $      | 369,367  |   | $        | 303,463 |     | $      | 242,989 |   | $ | 198,140 |   |
| Net charge-offs to average loans |   | .57                        | %          | 0.44     | %      | 0.29     | %      | 1.22     | %       | 2.41     | %      |
| Allowance for loan losses        |   |                       |       |     |   |     |   |     |    |     |   |
| To total loans                   |   | 1.83                       | %          | 1.99     | %      | 1.97     | %      | 1.78     | %       | 1.76     | %      |
| To nonperforming loans           |   | 200.65                     | %          | 350.66   | %      | 328.74   | %      | 302.79   | %       | 139.79   | %      |
| To nonperforming assets          |   | 182.85                     | %          | 317.12   | %      | 292.45   | %      | 291.69   | %       | 136.80   | %      |

 

TheCompany’s charge-offs, net of recoveries, were $2,579,000 in 2001 as comparedwith $1,621,000 and $892,000 in 2000 and 1999. This represents loan lossexperience ratios of 0.57%, 0.44% and 0.29% in those respective years stated asa percentage of average loans outstanding for each year. The increase in netcharge-offs in 2001 when compared to 2000 is due to increased net charge-offswithin the consumer portfolio coupled with increased net charge-offs onagricultural and commercial loans. As of December 31, 2001 the allowancefor loan losses was $9,743,000 or 1.83% of total loans outstanding. Thiscompares with an allowance for loan losses of $8,207,000 or 1.99% in 2000 and$6,542,000 or 1.97% in 1999. The increase in net charge-offs in 2000 comparedto 1999 was due to increased net charge-offs within the indirect auto loancontract component of the consumer loan portfolio.

 

**Liquidity** To maintain adequate liquidityrequires that sufficient resources be available at all times to meet cash flowrequirements of the Company. The need for liquidity in a banking institutionarises principally to provide for deposit withdrawals, the credit needs of itscustomers and to take advantage of investment opportunities as they arise. Acompany may achieve desired liquidity from both assets and liabilities. TheCompany considers cash and deposits held in other banks, federal funds sold,other short term investments, maturing loans and investments, receipts ofprincipal and interest on loans, available for sale investments and potentialloan sales as sources of asset liquidity. Deposit growth and access to creditlines established with correspondent banks and market sources of funds areconsidered by the Company as sources of liquidity. The Holding Company’sprimary source of liquidity is from dividends received from the Bank. Dividendsfrom the bank are subject to certain regulatory 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 $279,640,000 and $203,698,000 at December 31, 2001 and 2000 andwere 31% and 30% of total assets on December 31, 2001 and 2000. Cash and noninterestbearing deposits in other banks decreased $8,350,000 or 18% to $38,003,000 atDecember 31, 2001, compared to $46,353,000

 

7

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atDecember 31, 2000. The decrease in the 2001 cash position when compared to 2000was the result of lower in-transit cash items at December 31, 2001 than atDecember 31, 2000. Liquidity is also affected by collateral requirements of itspublic agency deposits and certain borrowings. Total pledged securities were$141,386,000 and $124,396,000 at December 31, 2001 and 2000.

 

During2001, the Company entered into an interest rate exchange agreement with theFederal Home Loan Bank (“FHLB”) of San Francisco that was recorded as a cashflow hedge transaction. The notional amount of the swap is $20 million with aterm of 3 years expiring on August 23, 2004. This swap is subject to collateralrequirements that are established by the FHLB. For more information regardingthis swap transaction, see Footnote 1, the section titled “Derivative Instrumentsand Hedging Activities” in the Company’s 2001 annual report. Although theCompany’s primary sources of liquidity include liquid assets and a stabledeposit base, the Company maintains lines of credit with certain correspondentbanks, the Federal Reserve Bank, and the Federal Home Loan Bank aggregating$87,719,000 of which $73,759,000 was outstanding as of December 31, 2001. Thiscompares with lines of credit of $49,608,000 of which $14,600,000 wasoutstanding as of December 31, 2000.

 

**Market and Interest Rate Risk Management** In the normalcourse of business, the Company is exposed to market risk which includes bothprice and liquidity risk. Price risk is created from fluctuations in interestrates and the mismatch in repricing characteristics of assets, liabilities, andoff balance sheet instruments at a specified point in time. Mismatches ininterest rate repricing among assets and liabilities arise primarily throughthe interaction of the various types of loans versus the types of deposits thatare maintained as well as from management’s discretionary investment and fundsgathering activities. Liquidity risk arises from the possibility that theCompany may not be able to satisfy current and future financial commitments orthat the Company may not be able to liquidate financial instruments at marketprices. Risk management policies and procedures have been established and areutilized to manage the Company’s exposure to market risk. Quarterly testing ofthe Company’s assets and liabilities under both increasing and decreasinginterest rate environments are performed to insure the Company does not assumea magnitude of risk that is outside 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 isdependent on its net interest income. Net interest income is susceptible tointerest rate risk to the degree that interest-bearing liabilities mature orreprice on a different basis than interest earning assets. Wheninterest-bearing liabilities mature or reprice more quickly than interestearning assets in a given period, a significant increase in market rates ofinterest could adversely affect net interest income. Similarly, when interestearning assets mature or reprice more quickly than interest-bearingliabilities, falling interest rates could result in a decrease in net interestincome.

 

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 and down 2percent, as well as the effect of immediate and sustained flattening orsteepening 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, 2001 is presented in the following 

 

8

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table:

| **Change in Interest rates  (In basis points)** |   | **Change in net  interest  Income(1)** |       | **Percentage change  in net interest  income** |   |
|-------------------------------------------------|--------|----------------------------------------|------------|------------------------------------------------|--------|
| +200                                            |   | $                                      | 535,000    |                                           | +1.4   | % |
|  -200                                      |   | $                                      | (1,360,000 | )                                              | - 3.6  | % |

 

----

*(1)        The amount in this column represents thechange in net interest income for 12 months in a stable interest rateenvironment versus the net interest income in the various rate scenarios.*

 

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, 2001 mix of interest sensitive assets and liabilities, givensustained increase in the federal funds rate of 2.0%, this model estimated theCompany’s cumulative net interest income over the next year would increase by$535,000. This compares with a cumulative one year expected decrease in netinterest income of $77,000 as of December 31, 2000. If prevailing marketinterest rates sustained a decrease of 2.0% at December 31, 2001, this modelestimated the Company’s cumulative one year expected decrease in net interestincome would be $1,360,000. This compares with an expected cumulative one yeardecrease in net interest income of $374,000 as of December 31, 2000. The modelshows that at December 31, 2001 if interest rates increase, the Company hasless downside interest rate risk than at December 31, 2000. Conversely, in afalling interest rate environment, at December 31, 2001 the Company has moredownside interest rate risk than at December 31, 2000. The change in interestrate risk profile between 2000 and 2001 is primarily caused by the overall lowlevel of interest rates. The Bank’s risk to falling rates has increased due tothe inability to bring deposit rates down further as rates decline. The Bank’srisk to rising rates has improved due to a greater percentage of variable rateloans being tied to prime rate compared to the prior year whereby a greaterpercentage of variable rate loans were tied to the Bank’s own cost of funds. Asthe total measure of interest rate risk indicates, the Company is assetsensitive.

 

**Capital Resources** The Company is subject to variousregulatory capital requirements administered by the federal banking agencies.Failure to meet minimum capital requirements can initiate mandatory andpossibly additional discretionary actions by the regulators that, ifundertaken, could have a material effect on the Company’s financial statements.Management believes, as of December 31, 2001, that the Company and the Bankmeet all capital requirements to which they are subject. The Company’s leveragecapital ratio at December 31, 2001 was 7.72% as compared with 7.56% as ofDecember 31, 2000. The Company’s total risk-based capital ratio at December 31,2001 was 10.74% as compared to 10.92% as of December 31, 2000.

 

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, 2001 of $5,075,000. The Bank had the ability to pay cashdividends to the Company at December 31, 2001 of $1,900,000.

 

**Impact of Inflation** The primary impact of inflationon the Company is its effect on interest rates. The Company’s primary source ofincome is net interest income which is affected by changes in interest rates.The Company attempts to limit inflation’s impact on its net interest marginthrough management of rate-sensitive assets and liabilities and the analysis ofinterest rate sensitivity. The effect of inflation on premises and equipment,as well as noninterest expenses, has not been significant for the periodscovered in this report.

 

**Market for Company’s Common Stock and Related Stock Matters** The Company’s stockis included for quotation on the NASDAQ National Market System with a stockquotation symbol of CCOW.

 

Thefollowing table indicates the range of high and low sales prices for the periodshown, based upon information provided by the

 

9

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NASDAQNational Market System.

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

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

 

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

 

**Prospective Accounting Pronouncements** In July 2001, theFASB issued Statement No. 141, Business Combinations, and Statement No. 142,Goodwill and Other Intangible Assets. Statement 141 requires that the purchasemethod of accounting be used for all business combinations initiated after June30, 2001 and specifies criteria that intangible assets acquired in a purchasemethod business combination must meet to be recognized and reported apart fromgoodwill. Statement 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized after 2001, but instead beperiodically evaluated for impairment. Intangible assets with definite usefullives are required to be amortized over their respective estimated useful livesto their estimated residual values, and also reviewed for impairment. TheCompany was required to adopt the provisions of Statement 141 immediately andStatement 142 effective January 1, 2002. Accordingly, the goodwill fromthe Thrift purchase will not be amortized beginning in January 1, 2002, butwill continue to be evaluated for impairment in accordance with the appropriateaccounting literature. The Company will also be required to reassess the usefullives and residual values of all such intangible assets and make any necessaryamortization period adjustments by the end of the first interim period afteradoption. In addition, to the extent an intangible asset is identified ashaving an indefinite useful life, the Company will be required to test theintangible asset for impairment within the first interim period. Any impairmentloss will be measured as of the date of adoption and recognized as thecumulative effect of a change in accounting principle in the first interimperiod. The Company does not expect to have any transitional impairment lossesto be recognized as a cumulative effect of a change in accounting principle. Asa result of the adoption of Statement 141, the Company will no longer beamortizing $1,405,000 of goodwill.

 

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, 2001 and2000, 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, 2001. 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, 2001 and 2000 and theresults of their operations and their cash flows for each of the years in thethree year period ended December 31, 2001, in conformity with accountingprinciples generally accepted in the 

 

10

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United States of America.

SanFrancisco, California

January25, 2002

 

CapitalCorp of the West

ConsolidatedBalance Sheets

 
|                                                                                                                                                                                                                        |   | **As of December 31,**     |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|
|                                                                                                                                                                                                                        |   | **2001**                   |    | **2000** |   |
|                                                                                                                                                                                                                        |   | **(Dollars in thousands)** |    |
| **Assets**                                                                                                                                                                                                                  |   |                       |    |   |   |
| Cash and noninterest-bearing deposits in other banks                                                                                                                                                                        |   | $                          | 38,003  |   | $ | 46,353 |   |
| Federal funds sold                                                                                                                                                                                                          |   | 11,285                     |    | 1,415 |   |
| Time deposits at other financial institutions                                                                                                                                                                               |   | 500                        |    | 100 |   |
| Investment securities available for sale, at fair value                                                                                                                                                                     |   | 229,852                    |    | 155,830 |   |
| Investment securities held to maturity; market values  of $42,185 and $35,412 in 2001 and 2000                                                                                                                              |   | 41,559                     |    | 35,222 |   |
| Loans, net                                                                                                                                                                                                                  |   | 522,677                    |    | 404,457 |   |
| Interest receivable                                                                                                                                                                                                         |   | 5,757                      |    | 5,215 |   |
| Premises and equipment, net                                                                                                                                                                                                 |   | 13,143                     |    | 13,021 |   |
| Goodwill and other intangible assets                                                                                                                                                                                        |   | 3,493                      |    | 4,277 |   |
| Other assets                                                                                                                                                                                                                |   | 28,058                     |    | 17,131 |   |
| Total assets                                                                                                                                                                                                                |   | $                          | 894,327 |   | $ | 683,021 |   |
|                                                                                                                                                                                                                        |   |                       |    |   |   |
| **Liabilities**                                                                                                                                                                                                             |   |                       |    |   |   |
| Deposits:                                                                                                                                                                                                                   |   |                       |    |   |   |
| Noninterest-bearing demand                                                                                                                                                                                                  |   | $                          | 132,496 |   | $ | 107,581 |   |
| Negotiable orders of withdrawal                                                                                                                                                                                             |   | 102,055                    |    | 84,521 |   |
| Savings                                                                                                                                                                                                                     |   | 203,721                    |    | 184,073 |   |
| Time, under $100,000                                                                                                                                                                                                        |   | 163,195                    |    | 131,669 |   |
| Time, $100,000 and over                                                                                                                                                                                                     |   | 131,174                    |    | 93,654 |   |
|                                                                                                                                                                                                                        |   |                       |    |   |   |
| Total deposits                                                                                                                                                                                                              |   | 732,641                    |    | 601,498 |   |
| Borrowed funds                                                                                                                                                                                                              |   | 80,685                     |    | 22,427 |   |
| Accrued interest, taxes and other liabilities                                                                                                                                                                               |   | 10,881                     |    | 5,645 |   |
| Total liabilities                                                                                                                                                                                                           |   | 824,207                    |    | 629,570 |   |
| **Trust Preferred Securities**                                                                                                                                                                                              |   | 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; 4,927,465 and 4,779,644 issued and outstanding  in 2001 and 2000 |   | 40,089                     |    | 35,918 |   |
| Retained earnings                                                                                                                                                                                                           |   | 22,372                     |    | 17,449 |   |
| Accumulated other comprehensive income, net                                                                                                                                                                                 |   | 1,659                      |    | 84 |   |
|                                                                                                                                                                                                                        |   |                       |    |   |   |
| Total shareholders’ equity                                                                                                                                                                                             |   | 64,120                     |    | 53,451 |   |
|                                                                                                                                                                                                                        |   |                       |    |   |   |
| Total Liabilities, Trust Preferred Securities, and  Shareholders’ Equity                                                                                                                                               |   | $                          | 894,327 |   | $ | 683,021 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

11

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CapitalCorp of the West

ConsolidatedStatements of Income and Comprehensive Income

 
|                                                                 |   | **Years Ended December 31,**                 |   |
|----------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                 |   | **2001**                                          |   | **2000** |   | **1999** |   |
|                                                                 |   | **(Dollars in thousands, except per share data)** |   |
| **Interest income:**                                                 |   |                                              |   |   |   |   |   |
| Interest and fees on loans                                           |   | $                                                 | 43,495 |   | $ | 38,643 |   | $ | 30,255 |   |
| Interest on deposits with other financial institutions               |   | 16                                                |   | 39 |   | 156 |   |
| Interest on investment securities held to maturity:                  |   |                                              |   |   |   |   |   |
| Taxable                                                              |   | 2,524                                             |   | 2,055 |   | 1,116 |   |
| Non-taxable                                                          |   | 223                                               |   | 223 |   | 190 |   |
| Interest on investment securities available for sale:                |   |                                              |   |   |   |   |   |
| Taxable                                                              |   | 10,030                                            |   | 8,154 |   | 6,013 |   |
| Non-taxable                                                          |   | 1,088                                             |   | 1,124 |   | 1,188 |   |
| Interest on federal funds sold                                       |   | 791                                               |   | 650 |   | 443 |   |
| Total interest income                                                |   | 58,167                                            |   | 50,888 |   | 39,361 |   |
| **Interest expense:**                                                |   |                                              |   |   |   |   |   |
| **Deposits:**                                                        |   |                                              |   |   |   |   |   |
| Negotiable orders of withdrawal                                      |   | 254                                               |   | 503 |   | 458 |   |
| Savings                                                              |   | 5,856                                             |   | 7,095 |   | 5,752 |   |
| Time, under $100,000                                                 |   | 8,370                                             |   | 6,613 |   | 4,504 |   |
| Time, $100,000 and over                                              |   | 5,911                                             |   | 5,029 |   | 2,570 |   |
| Total interest on deposits                                           |   | 20,391                                            |   | 19,240 |   | 13,284 |   |
| Other borrowings                                                     |   | 2,308                                             |   | 1,528 |   | 756 |   |
| Total interest expense                                               |   | 22,699                                            |   | 20,768 |   | 14,040 |   |
| **Net interest income**                                              |   | 35,468                                            |   | 30,120 |   | 25,321 |   |
| Provision for loan losses                                            |   | 4,115                                             |   | 3,286 |   | 2,659 |   |
| Net interest income after provision for loan losses                  |   | 31,353                                            |   | 26,834 |   | 22,662 |   |
| **Other income:**                                                    |   |                                              |   |   |   |   |   |
| Service charges on deposit accounts                                  |   | 3,981                                             |   | 3,527 |   | 3,254 |   |
| Income from sale of real estate                                      |   | —                                            |   | 390 |   | 260 |   |
| Other                                                                |   | 2,293                                             |   | 1,490 |   | 1,575 |   |
| Total other income                                                   |   | 6,274                                             |   | 5,407 |   | 5,089 |   |
| **Other Expenses:**                                                  |   |                                              |   |   |   |   |   |
| Salaries and related benefits                                        |   | 13,615                                            |   | 11,066 |   | 9,699 |   |
| Premises and occupancy                                               |   | 2,133                                             |   | 1,714 |   | 1,579 |   |
| Equipment                                                            |   | 2,739                                             |   | 2,558 |   | 2,144 |   |
| Professional fees                                                    |   | 467                                               |   | 1,101 |   | 1,060 |   |
| Supplies                                                             |   | 885                                               |   | 660 |   | 551 |   |
| Marketing                                                            |   | 949                                               |   | 890 |   | 708 |   |
| Goodwill and intangible amortization                                 |   | 792                                               |   | 792 |   | 792 |   |
| Other                                                                |   | 5,317                                             |   | 3,993 |   | 4,005 |   |
| Total other expenses                                                 |   | 26,897                                            |   | 22,774 |   | 20,538 |   |
| Income before provision for income taxes                             |   | 10,730                                            |   | 9,467 |   | 7,213 |   |
| Provision for income taxes                                           |   | 2,819                                             |   | 2,761 |   | 2,104 |   |
|                                                                 |   |                                              |   |   |   |   |   |
| Net income                                                           |   | $                                                 | 7,911  |   | $ | 6,706 |   | $ | 5,109 |   |
|                                                                 |   |                                              |   |   |   |   |   |
| **Comprehensive income:**                                            |   |                                              |   |   |   |   |   |
| Unrealized gain (loss) on securities arising during the  period, net |   | 1,575                                             |   | 2,743 |   | (2,687 | ) |
| Comprehensive income                                                 |   | $                                                 | 9,486  |   | $ | 9,449 |   | $ | 2,422 |   |
|                                                                 |   |                                              |   |   |   |   |   |
| Basic earnings per share                                             |   | $                                                 | 1.63   |   | $ | 1.41 |   | $ | 1.07 |   |
| Diluted earnings per share                                           |   | $                                                 | 1.58   |   | $ | 1.37 |   | $ | 1.04 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

12

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**Capital Corp of the West**

**Consolidated Statements of Shareholders’ Equity**

 
|                                                                                                      |   |               |   |                         |   |                                                             |   |      |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------------|--------|------------------------------------------------------------------|--------|-----------|--------|
|                                                                                                      |   | **Common Stock**   |   | **Retained********Earnings** |   | **Accumulated  Other  Comprehensive********Income (Loss),  Net** |   | **Total** |   |
| **Number of********shares**                                                                               |   | **Amounts**        |
|                                                                                                      |   | **(In thousands)** |   |
| Balance, December 31, 1998                                                                                |   | 4,607              |   | $                            | 37,142 |                                                             | $      | 5,634     |   | $ | 28 |   | $ | 42,804 |   |
|                                                                                                      |   |               |   |                         |   |                                                             |   |      |   |   |   |
| Exercise of stock options                                                                                 |   | 26                 |   | 219                          |   | —                                                           |   | —    |   | 219 |   |
| Stock repurchases                                                                                         |   | (137               | )      | (1,768                       | )      | —                                                           |   | —    |   | (1,768 | ) |
| Net change in fair market value of available for sale  investment securities, net of tax effect of $1,824 |   | —             |   | —                       |   | —                                                           |   | (2,687    | )      | (2,687 | ) |
| Net income                                                                                                |   | —             |   | —                       |   | 5,109                                                            |   | —    |   | 5,109 |   |
|                                                                                                      |   |               |   |                         |   |                                                             |   |      |   |   |   |
| 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 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

13

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**Capital Corp of the West**

**Consolidated Statements of Cash Flows**

 
|                                                                                                                   |   | **Years Ended December 31,** |         |
|------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------------|
|                                                                                                                   |   | **2001**                     |         | **2000** |   | **1999** |   |
|                                                                                                                   |   | **(Dollars in thousands)**   |         |
| **Operating activities:**                                                                                              |   |                         |         |   |   |   |   |
| Net income                                                                                                             |   | $                            | 7,911        |   | $ | 6,706 |   | $ | 5,109 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                     |   |                         |         |   |   |   |   |
| Provision for loan losses                                                                                              |   | 4,115                        |         | 3,286 |   | 2,659 |   |
| Depreciation, amortization and accretion, net                                                                          |   | 3,142                        |         | 2,291 |   | 2,763 |   |
| Benefit for deferred income taxes                                                                                      |   | (902                         | )            | (405 | ) | (1,090 | ) |
| Gain on sale of real estate                                                                                            |   | —                       |         | (381 | ) | (260 | ) |
| Net increase in interest receivable & other assets                                                                 |   | (10,939                      | )            | (1,176 | ) | (2,820 | ) |
| Net increase in accrued interest payable & other  liabilities                                                      |   | 5,236                        |         | 1,539 |   | 1,727 |   |
|                                                                                                                   |   |                         |         |   |   |   |   |
| Net cash provided by operating activities                                                                              |   | **$**                        | **8,563**    | ** ** | **$** | **11,860** | ** ** | **$** | **8,088** | ** ** |
|                                                                                                                   |   |                         |         |   |   |   |   |
| **Investing activities:**                                                                                              |   |                         |         |   |   |   |   |
| Investment security purchases - available for sale  securities                                                         |   | $                            | (73,329      | ) | $ | (25,062 | ) | $ | (20,272 | ) |
| Investment security purchases - held to maturity  securities                                                           |   | —                       |         | (4,594 | ) | — |   |
| Investment security purchases - mortgage-backed  securities and collaterized mortgage obligations-available for sale   |   | (25,974                      | )            | (36,312 | ) | (9,953 | ) |
| Investment security purchases - mortgage-backed  securities and collateralized mortgage obligations - held to maturity |   | (18,303                      | )            | (5,989 | ) | (17,569 | ) |
| Proceeds from maturities of available for sale  investment securities                                                  |   | 3,958                        |         | 869 |   | 1,719 |   |
| Proceeds from maturities of held to maturity investment  securities                                                    |   | —                       |         | 1,017 |   | 1,000 |   |
| Proceeds from maturities of mortgage-backed securities  and collateralized mortgage obligations - available for sale   |   | 22,995                       |         | 8,035 |   | 21,798 |   |
| Proceeds from maturities of mortgage-backed securities  and collateralized mortgage obligations - held to maturity     |   | 11,968                       |         | 3,898 |   | 4,481 |   |
| Proceeds from sales of available for sale investment  securities                                                       |   | —                       |         | 8,188 |   | 13,777 |   |
| Proceeds from sales of mortgage-backed securities and  collateralized mortgage obligations - available for sale        |   | —                       |         | 10,623 |   | 7,574 |   |
| Net (decrease) increase in time deposits in other  financial institutions                                              |   | (400                         | )            | 750 |   | (250 | ) |
| Proceeds from sales of commercial and real estate loans                                                                |   | 3,094                        |         | 3,397 |   | 1,023 |   |
| Origination of loans                                                                                                   |   | (319,958                     | )            | (224,921 | ) | (228,289 | ) |
| Proceeds from repayment of loans                                                                                       |   | 194,350                      |         | 138,727 |   | 163,982 |   |
| Purchases of premises and equipment                                                                                    |   | (2,028                       | )            | (1,804 | ) | (1,585 | ) |
| Proceeds from sales of real estate held for sale or  development                                                       |   | —                       |         | 381 |   | 260 |   |
|                                                                                                                   |   |                         |         |   |   |   |   |
| Net cash used in investing activities                                                                                  |   | **$**                        | **(203,627** | **)** | **$** | **(122,797** | **)** | **$** | **(62,304** | **)** |
|                                                                                                                   |   |                         |         |   |   |   |   |
| **Financing activities:**                                                                                              |   |                         |         |   |   |   |   |
| Net increase in demand, NOW and savings deposits                                                                       |   | $                            | 62,097       |   | $ | 51,612 |   | $ | 6,966 |   |
| Net increase in certificates of deposit                                                                                |   | 69,046                       |         | 54,933 |   | 43,777 |   |
| Proceeds from borrowings                                                                                               |   | 74,358                       |         | 19,213 |   | 19,523 |   |
| Repayment of Borrowings                                                                                                |   | (16,100                      | )            | (17,600 | ) | (9,175 | ) |
| Issued shares for benefit plan purchases                                                                               |   | 595                          |         | 72 |   | — |   |
| Stock repurchases                                                                                                      |   | —                       |         | — |   | (1,768 | ) |
| Payment for fractional shares                                                                                          |   | (7                           | )            | — |   | — |   |
| Issuance of Trust Preferred Securities                                                                                 |   | 6,000                        |         | — |   | — |   |
| Exercise of stock options, net                                                                                         |   | 595                          |         | 253 |   | 219 |   |
|                                                                                                                   |   |                         |         |   |   |   |   |
| Net cash provided by financing activities                                                                              |   | **$**                        | **196,584**  | ** ** | **$** | **108,483** | ** ** | **$** | **59,542** | ** ** |
|                                                                                                                   |   |                         |         |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                   |   | 1,520                        |         | (2,454 | ) | 5,326 |   |
| Cash and cash equivalents at beginning of year                                                                         |   | 47,768                       |         | 50,222 |   | 44,896 |   |
|                                                                                                                   |   |                         |         |   |   |   |   |
| Cash and cash equivalents at end of year                                                                               |   | **$**                        | **49,288**   | ** ** | **$** | **47,768** | ** ** | **$** | **50,222** | ** ** |
|                                                                                                                   |   |                         |         |   |   |   |   |
| Supplemental disclosure of non-cash investing and  financing activities:                                               |   |                         |         |   |   |   |   |
| Investment securities unrealized gains (losses), net of  taxes                                                         |   | $                            | 1,575        |   | $ | 2,743 |   | $ | (2,687 | ) |
| Interest paid                                                                                                          |   | 22,586                       |         | 20,657 |   | 13,788 |   |
| Income tax payments                                                                                                    |   | 4,325                        |         | 2,880 |   | 2,827 |   |
| Transfer of securities from available for sale to held  to maturity                                                    |   | —                       |         | — |   | 4,499 |   |
| Loans transferred to other real estate owned                                                                           |   | $                            | 610          |   | $ | 443 |   | $ | 187 |   |

 

*Seeaccompanying notes to consolidated financial statements*

 

14

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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 financialstatements of Capital Corp of the West include its subsidiaries: County Bank(the “Bank”) and Capital West Group (“CWG”) and the subsidiaries of County Bankwhich include County Asset Advisor, Inc. (“CAA”), Merced Area InvestmentDevelopment, Inc. (“MAID”), County Investment Trust (“REIT”), and CountyInvestment II (“REIT 2”). Town and Country Finance and Thrift was acquired inJune 1996 and merged into County Bank on November 23, 1999. CWG, a subsidiaryformed in 1996, became inactive in 1997. All significant intercompany balancesand transactions 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 depositbalances with various banks which are necessary for check collection andaccount activity charges. Cash in excess of immediate requirements is investedin federal funds sold or other short-term investments. Generally, federal fundsare sold for periods from one to thirty days. Cash, noninterest-bearingdeposits in other banks and federal funds sold are considered to be cash andcash equivalents for the purposes of the consolidated statements of cash flows.Banks are required to maintain minimum average reserve balances with theFederal Reserve Bank. The amount of those reserve balances was approximately $159,000and $93,000 at December 31, 2001 and 2000.

 

**Investment Securities:** Investment securities consist ofU.S. treasury, federal agencies, state and county municipal securities,corporate bonds, mortgage- backed securities, collateralized mortgage obligationsand equity securities. Investment securities are classified into one of threecategories. These categories include trading, available for sale, and held tomaturity. The category of each security is determined based on the Company’sinvestment objectives, operational needs and intent. The Company has notpurchased securities with the intent 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 amountoutstanding, net of unearned income, including deferred loan origination feesand costs. Nonrefundable loan origination and commitment fees and the directcosts associated with originating or acquiring the loans are deferred andamortized as an adjustment to interest income over the life of the related loanusing a method that approximates 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 asreceived until the loan is returned to accrual status. Interest accruals areresumed when 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

 

15

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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 ismaintained at the level considered to be adequate for inherent loan lossesbased on management’s assessment of various factors affecting the loanportfolio, which include: growth trends in the portfolio, historicalexperience, concentrations of credit risk, delinquency trends, general economicconditions, and internal and external credit reviews. In addition, variousregulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses. Such agencies mayrequire the Company to recognize additions to the allowance for loan lossesbased on their judgment of information available to them at the time of theirexamination. Additions to the allowance for loan losses, in the form ofprovision for loan losses, are reflected in current operating results, whilecharge-offs to the allowance for loan losses are made when a loss is determinedto have occurred. Management uses the best information available on which tobase estimates, however, ultimate losses may vary from current estimates.

 

**Gain or Loss on Sale of Loans:** Transfers of real estatemortgage loans held for sale in which the Company surrenders control over thoseloans are accounted for as a sale to the extent that consideration other thanbeneficial interests in the transferred loans is received in exchange. Therewere no loans held for sale as of December 31, 2001 and 2000. Gains or lossesare recognized at the time of sale and are calculated based on the amountsreceived and the book value of the loans sold.

 

**Premises and Equipment:** Premises and equipment arestated at cost, less accumulated depreciation and amortization. Depreciationand amortization are computed on the straight line basis over the estimateduseful life of each type of asset. Estimated useful lives range up to 35 yearsfor buildings, up to the lease term for leasehold improvements, and 3 to 15years for furniture and equipment.

 

**Real Estate Held for Sale or Development:** Real estate heldfor sale or development is recorded at the lower of cost or net realizablevalue. Revenue recognition on the disposition of real estate is dependent uponthe transaction meeting certain criteria relating to the nature of the propertysold and the terms of the sale. Under certain circumstances, revenuerecognition may be deferred until these criteria are met.

 

**Other Real Estate:** Other real estate is comprisedof property acquired through foreclosure proceedings or acceptance of deeds–in–lieuof foreclosure. Losses recognized at the time of acquiring property in full orpartial satisfaction of debt are charged against the allowance for loan losses.Other real estate is recorded at the lower of the related loan balance or fairvalue, less estimated disposition costs. Fair value of other real estate isgenerally based on an independent appraisal of the property. Any subsequentcosts or losses are recognized as noninterest expense when incurred.

 

**Intangible Assets:** Goodwill, representing theexcess of purchase price paid over the fair value of net assets acquired in anacquisition, was generated with the purchase of 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 being amortized over 18 years andhad a balance of $1,405,000 and $1,517,000 as of December 31, 2001 and 2000.Core deposit intangibles, representing the excess of purchase price paid overthe fair value of net savings deposits acquired, were generated by the purchaseof the Thrift in June 1996 and the purchase of three branches from the Bank ofAmerica in December, 1997. Core deposit intangibles are being amortized over 10and 7 years, respectively. Intangible assets are reviewed on a periodic basisfor impairment. If such impairment is indicated, recoverability of the asset isassessed 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 141 requiresthat the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001 and specifies criteria that intangible assetsacquired in a purchase method business combination must meet to be recognizedand reported apart from goodwill. Statement 142 requires that goodwill andintangible assets with indefinite useful lives no longer be amortized after2001, but instead be periodically evaluated for impairment. Intangible assetswith definite useful lives are required to be amortized over their respectiveestimated useful lives to their estimated residual values, and also reviewedfor impairment. The Company was required to adopt the provisions of Statement141 immediately and Statement 142 effective January 1, 2002. Accordingly,the goodwill from the Thrift purchase will not be amortized beginningJanuary 1, 2002, but will continue to be evaluated for impairment inaccordance with the appropriate accounting literature. The Company will also berequired to reassess the useful lives and residual values of all suchintangible assets and make any necessary amortization period adjustments by theend of the first interim period after adoption. In addition, to the extent anintangible asset is identified as having an indefinite useful life, the Companywill be required to test the intangible asset for impairment within the firstinterim period. Any impairment loss will be measured as of the date of adoptionand recognized as the 

 

16

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cumulativeeffect of a change in accounting principle in the first interim period. TheCompany does not expect to have any transitional impairment losses to berecognized as a cumulative effect of a change in accounting principle. As aresult of adoption of Statement 141, the Company will no longer be amortizing$1,405,000 of goodwill, which will eliminate $122,000 of annual goodwillexpense amortization.

 

**Impairment of Long-Lived Assets and Long-Lived Assets to BeDisposed Of:** Long-lived assets and certain identifiable intangiblesare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to future net cash flows expected to be generatedby the asset. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of theassets exceed the fair value of the assets. Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs to sell.

 

**Deferred Compensation:** The Company has purchased singlepremium universal life insurance policies in conjunction with implementation ofsalary continuation plans for certain members of management, a deferredcompensation plan for certain members of the Board of Directors, and forgeneral investment purposes. The Company is the owner and beneficiary of thesepolicies. The cash surrender value of the insurance policies is recorded inother assets and these values totaled $16,160,000 and $6,075,000 as of December31, 2001 and 2000. Income from these policies is recorded in other income andthe load, mortality and surrender charges have been recorded in other expenses.An accrued liability of $1,859,000 and $1,486,000 as of December 31, 2001 and2000 was recorded to reflect the present value of the expected retirementbenefits for the salary continuation plans and the deferred compensationbenefits and was included in other liabilities. Deferred Compensation expenseof $476,000 and $567,000 was recorded for the years ending December 31, 2001and 2000.

 

**Income Taxes:** The Company files a consolidatedfederal income tax return and a combined state franchise tax return. Theprovision for income taxes includes federal income and state franchise taxes.Income tax expense is allocated to each entity of the Company based upon theanalysis of the tax consequences of each 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 inlimited partnerships which own low income affordable housing projects thatgenerate tax benefits in the form of federal and state housing tax credits. Asan investor in these partnerships, the Company receives tax benefits in theform of tax deductions from partnership operating losses and income taxcredits. These income tax credits are earned over a 10-year period as a resultof the investment meeting certain criteria and are subject to recapture over a15-year period. The expected benefit resulting from the affordable housingincome tax credits is recognized in the period in which the tax benefit isrecognized in the Company’s consolidated tax returns. These investments areaccounted for using the effective yield method and are evaluated at each reportingperiod for impairment. The Bank had investments in these partnerships of$6,809,000 and $6,144,000 as of December 31, 2001 and 2000 which were includedin other assets.

 

**Derivative Instruments and Hedging Activities:** On January 1, 2001,the Company adopted Statement of Financial Standards Board (FASB) No. 133,Accounting for Derivatives and Hedging Activities and FASB Statement No. 138Accounting for Certain Derivative Instruments and Certain Hedging Activities,an Amendment of FASB Statement No. 133. All derivative instruments (includingcertain derivative instrument’s embedded in other contracts) are recognized inthe consolidated balance sheet at fair value. FASB 133 dictates that theaccounting treatment for gains or losses from changes in the derivativeinstrument’s fair value is contingent on whether the derivative instrumentqualifies as a hedge under the accounting standard. On the date the Companyenters into a derivative contract, the Company designates the derivativeinstruments as (1) a hedge of the fair value of a recognized asset or liabilityor of an unrecognized firm commitment (fair value hedge), (2) a hedge of aforecasted transaction or of the variability of cash flows to be received orpaid related to a recognized asset or liability (cash flow hedge) or (3) hedgefor trading, customer accommodation or not qualifying for hedge accounting(free-standing derivative instruments). For a fair value hedge, changes in thefar value of the derivative instrument and changes in the fair value of thehedged asset or liability or of an unrecognized firm commitment attributable tothe hedged risk are recorded in current period net income. For a cash flowhedge, changes in the fair value of the derivative instrument to the extentthat it is effective are recorded in other comprehensive income, net of tax,within shareholders’ equity and subsequently reclassified to net income in thesame period(s) that the hedged transaction impacts net income. Forfree-standing derivative instruments, changes in the fair values are reportedin current period net income. The Company formally documents the relationshipbetween hedging instruments and hedged items, as well as the risk managementobjective and strategy for undertaking any hedge transaction. This process includeslinking all derivative instruments that are designated as fair value or cashflow hedges to specific assets and liabilities on the balance sheet or tospecific forecasted transactions. The Company also formally assesses both atthe inception 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 

 

17

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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, 2001, the fair market value of thisinterest rate swap of $191,000 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, 2001 was not significant.

 

**Stock Option Plan:** Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation,”establishes financial accounting and reporting standards for stock-basedcompensation plans, including employee stock purchase plans, stock options andrestricted stock. Statement No. 123 encourages all entities to adopt a fairvalue method of accounting for stock-based compensation plans, wherebycompensation cost is measured at the grant date upon the fair value of theaward and is realized as an expense over the service or vesting period.However, Statement No. 123 also allows an entity to continue to measurecompensation cost for these plans using the intrinsic value method ofaccounting prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.” The Company accounts forstock-based awards to employees and directors using the intrinsic value methodof accounting in accordance with Accounting Principles Board Opinion No. 25.Under the intrinsic value method, compensation cost is generally the excess, ifany, of the quoted market price of the stock at the grant or other measurementdate over the exercise price. See Note 13 for a pro forma presentation of netincome and earnings per share had compensation cost related to stock optionawards been determined under the fair value method.

 

**Earnings Per Share:** Basic earnings per share (EPS)includes no dilution and is computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding forthe period. Diluted EPS reflects the potential dilution of securities thatcould share in the earnings of an entity.

 

**Comprehensive Income:** Comprehensive income consists ofnet income and unrealized gains (losses) on securities and certain derivativeinstruments and is presented in the consolidated statements of income andcomprehensive income.

 

**NOTE 2. Investment Securities**

 

Theamortized cost and estimated market value of investment securities at December31, are summarized below:

 
|                                         |   | **Amortized Cost**          |   | **Gross  Unrealized Gains** |   | **Gross  Unrealized Losses** |   | **Estimated Fair  Value** |   |
|----------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|------------------------------|--------|---------------------------|--------|
|                                         |   | **(Dollars in  thousands)** |   |
| **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                       |   | —                      |   | 605                          |   | 4,898                     |   |
| Equity securities                            |   | 5,259                       |   | —                      |   | —                       |   | 5,259                     |   |
|                                         |   |                        |   |                        |   |                         |   |                      |   |
| Total available for sale securities          |   | 227,866                     |   | 3,460                       |   | 1,473                        |   | 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 |   |
|                                         |   |                        |   |                        |   |                         |   |                      |   |
| **2000**                                     |   |                        |   |                        |   |                         |   |                      |   |
| **Available for sale securities:**           |   |                        |   |                        |   |                         |   |                      |   |
| U.S. Treasury and U.S. Government agencies   |   | $                           | 35,413 |                        | $      | 564                          |   | $                         | 38     |   | $ | 35,939 |   |
| State & political subdivisions           |   | 24,631                      |   | 74                          |   | 535                          |   | 24,170                    |   |
| Mortgage-backed securities                   |   | 54,364                      |   | 370                         |   | 325                          |   | 54,409                    |   |
| Collateralized mortgage obligations          |   | 29,237                      |   | 102                         |   | 324                          |   | 29,015                    |   |
| Corporate debt securities                    |   | 9,674                       |   | 186                         |   | 27                           |   | 9,833                     |   |
|                                         |   |                        |   |                        |   |                         |   |                      |   |
| Total debt securities                        |   | 153,319                     |   | 1,296                       |   | 1,249                        |   | 153,366                   |   |
| Equity securities                            |   | 2,464                       |   | —                      |   | —                       |   | 2,464                     |   |
|                                         |   |                        |   |                        |   |                         |   |                      |   |
| Total available for sale securities          |   | 155,783                     |   | 1,296                       |   | 1,249                        |   | 155,830                   |   |
|                                         |   |                        |   |                        |   |                         |   |                      |   |
| **Held to maturity securities:**             |   |                        |   |                        |   |                         |   |                      |   |
| U.S. Treasury & U.S. government agencies |   | 4,595                       |   | —                      |   | —                       |   | 4,595                     |   |
| State and political subdivisions             |   | 4,375                       |   | 78                          |   | —                       |   | 4,453                     |   |
| Mortgage-backed securities                   |   | 22,736                      |   | 269                         |   | 201                          |   | 22,804                    |   |
| Collateralized mortgage obligations          |   | 3,516                       |   | 44                          |   | —                       |   | 3,560                     |   |
|                                         |   |                        |   |                        |   |                         |   |                      |   |
| Total held to maturity securities            |   | $                           | 35,222 |                        | $      | 391                          |   | $                         | 201    |   | $ | 35,412 |   |

 

18

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AtDecember 31, 2001 and 2000, investment securities with carrying values ofapproximately $141,386,000 and $124,396,000, 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 $3,942,000 and$1,223,000 of Federal Home Loan Bank stock and $886,000 and $886,000 of FederalReserve Bank stock as of December 31, 2001 and 2000. Gross losses on sale ofavailable for sale securities of $0**,**$235,000, and $118,000 were recognized in 2001, 2000, and 1999.

 

InFebruary 1999, state and political subdivision securities with a market valueof $4,499,000 were transferred from the available for sale portfolio to theheld to maturity portfolio at market value. The unrealized holding gain at thedate of transfer is reported as a separate component of shareholders’ equity,and is amortized over the remaining life of the securities as an adjustment ofyield in a manner consistent with the amortization of a premium or discount.

 

Thecarrying and estimated fair values of debt securities at December 31, 2001 bycontractual maturity, are shown on the following table. Actual maturities maydiffer from contractual maturities because issuers generally have the right tocall or prepay obligations with or without call or prepayment penalties.

 
|                                     |   | **Amortized********Cost**  |    | **Estimated********Fair Value** |   |
|------------------------------------------|--------|----------------------------|---------|---------------------------------|--------|
|                                     |   | **(Dollars in thousands)** |    |
| **Available for sale debt securities:**  |   |                       |    |                            |   |
| One year or less                         |   | $                          | 1,670   |                            | $      | 1,692 |   |
| One to five years                        |   | 79,342                     |    | 80,182                          |   |
| Five to ten years                        |   | 22,343                     |    | 22,770                          |   |
| Over ten years                           |   | 12,163                     |    | 11,898                          |   |
| Mortgage-backed securities and CMOs      |   | 86,580                     |    | 88,142                          |   |
|                                     |   |                       |    |                            |   |
| Total available for sale debt securities |   | $                          | 202,098 |                            | $      | 204,684 |   |
|                                     |   |                       |    |                            |   |
| **Held to maturity debt securities:**    |   |                       |    |                            |   |
| One year or less                         |   | $                          | —  |                            | $      | — |   |
| One to five years                        |   | —                     |    | —                          |   |
| Five to ten years                        |   | 4,611                      |    | 4,810                           |   |
| Over ten years                           |   | 4,360                      |    | 4,393                           |   |
| Mortgage-backed securities and CMOs      |   | 32,588                     |    | 32,982                          |   |
|                                     |   |                       |    |                            |   |
| Total held to maturity debt securities   |   | $                          | 41,559  |                            | $      | 42,185 |   |

 

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**NOTE 3. Loans**

 

Loansat December 31 consisted of the following:

 
|                           |   | **2001**                    |    | **2000** |   |
|--------------------------------|--------|-----------------------------|---------|----------|--------|
|                           |   | **(Dollars in  thousands)** |    |
| Commercial                     |   | $                           | 118,626 |     | $      | 71,920 |   |
| Agricultural                   |   | 96,489                      |    | 84,032   |   |
| Real estate - mortgage         |   | 187,586                     |    | 141,575  |   |
| Real estate - construction     |   | 57,989                      |    | 30,133   |   |
| Consumer                       |   | 71,730                      |    | 85,004   |   |
|                           |   |                        |    |     |   |
| Gross loans                    |   | 532,420                     |    | 412,664  |   |
| Less allowance for loan losses |   | (9,743                      | )       | (8,207   | )      |
|                           |   |                        |    |     |   |
| Net loans                      |   | $                           | 522,677 |     | $      | 404,457 |   |

 

Loansare net of deferred loan fees of $1,352,000 and $1,006,000 and deferred loancosts of $1,120,000 and $1,741,000 as of December 31, 2001 and 2000.

 

Non-accrualloans totaled $4,247,000 and $2,243,000 at December 31, 2001 and 2000. Foregoneinterest on nonaccrual loans was approximately $170,000, $224,000 and $143,000for the years ended December 31, 2001, 2000 and 1999.

 

Impairedloans are loans for which it is probable that the Company will not be able tocollect all amounts due. At December 31, 2001 and 2000, the recorded investmentin impaired loans was $4,856,000 and $2,340,000 which had a related allowancefor loan losses of $644,314,000 and $302,000 in 2001 and 2000. As of December31, 2001 and 2000, there were no impaired loans without a related allowance forloan loss assigned to them.. The average outstanding balance of impaired loansfor the years ended December 31, 2001, 2000 and 1999 was $3,629,000,$2,165,000, and $2,215,000, on which $105,000, $79,000 and $126,000, wasrecognized as interest income on a cash basis.

 

AtDecember 31, 2001 and 2000, the collateral value method was used to measureimpairment for all loans classified as impaired. The following table shows therecorded investment in impaired loans by loan category at December 31:

 
|               |   | **2001**                    |   | **2000** |   |
|--------------------|--------|-----------------------------|--------|----------|--------|
|               |   | **(Dollars in  thousands)** |   |
| Commercial         |   | $                           | 552    |     | $      | 734 |   |
| Agricultural       |   | 4,254                       |   | 1,423    |   |
| Consumer and other |   | 50                          |   | 183      |   |
|               |   | $                           | 4,856  |     | $      | 2,340 |   |

 

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

 
|                                       |   | **2001**                    |   | **2000** |   | **1999** |   |
|--------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|
|                                       |   | **(Dollars in  thousands)** |   |
| Balance at beginning of year               |   | $                           | 8,207  |     | $      | 6,542    |   | $ | 4,775 |   |
| Loans charged-off                          |   | (3,152                      | )      | (2,394   | )      | (1,854   | )      |
| Recoveries of loans previously charged-off |   | 573                         |   | 773      |   | 962      |   |
| Provision for loan losses                  |   | 4,115                       |   | 3,286    |   | 2,659    |   |
|                                       |   |                        |   |     |   |     |   |
| Balance at end of year                     |   | $                           | 9,743  |     | $      | 8,207    |   | $ | 6,542 |   |

 

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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:

 
|                         |   | **2001**                    |   | **2000** |   |
|------------------------------|--------|-----------------------------|--------|----------|--------|
|                         |   | **(Dollars in  thousands)** |   |
| Balance at beginning of year |   | $                           | 2,226  |     | $      | 562 |   |
| Loan advances and renewals   |   | 1,171                       |   | 1,777    |   |
| Loans matured or collected   |   | (653                        | )      | (96      | )      |
| Other changes                |   | —                      |   | (17      | )      |
|                         |   |                        |   |     |   |
| Balance at end of year       |   | $                           | 2,744  |     | $      | 2,226 |   |

 

Otherchanges in 2000 represent loans to former directors and executive officers ofthe company who are no longer related parties.

 

TheBank’s business activity is with customers located primarily in the counties ofFresno, Madera, Mariposa, Merced, San Francisco, San Joaquin, Stanislaus,Tulare and Tuolumne. The Bank is diversified into retail and wholesale lending.Retail lending represents approximately 20% of the total loan portfolio andconsists of consumer lending, loans to small businesses, credit cards and thepurchase of financing contracts principally from automobile dealers. Individualloans and lines are made in a variety of ways. In many cases collateral such asreal estate, automobiles and equipment are used to support the extension ofcredit. Repayment, however, is largely dependent upon the borrower’s personalcash flow.

 

Loansto businesses and agricultural communities make up nearly 80% of the Bank’sloan portfolio. Wholesale activities are spread across a wide spectrumincluding commercial loans to businesses, construction and permanent realestate financing, short and long term agricultural loans for production andreal estate purposes and SBA financing. Where appropriate, collateral is takento secure and reduce the Bank’s credit risk. Each loan is submitted to anindividual risk grading process but the borrowers’ ability to repay isdependent, in part, upon factors affecting the local and national economies.

 

**NOTE 4. Premises and Equipment**

 

Premisesand equipment consisted of the following at December 31:

 
|                                           |   | **2001**                    |   | **2000** |   |
|------------------------------------------------|--------|-----------------------------|--------|----------|--------|
|                                           |   | **(Dollars in  thousands)** |   |
| Land                                           |   | $                           | 1,349  |     | $      | 1,349 |   |
| Buildings                                      |   | 9,516                       |   | 8,544    |   |
| Leasehold improvements                         |   | 1,758                       |   | 1,605    |   |
| Furniture and equipment                        |   | 12,522                      |   | 11,863   |   |
|                                           |   |                        |   |     |   |
| Subtotal                                       |   | 25,145                      |   | 23,361   |   |
| Less accumulated depreciation and amortization |   | 12,002                      |   | 10,340   |   |
|                                           |   |                        |   |     |   |
| Premises and equipment, net                    |   | $                           | 13,143 |     | $      | 13,021 |   |

 

Includedin the totals to the left are equipment and construction in progress of$120,000 and $207,000 at December 31, 2001 and 2000 respectively. Depreciationexpense totaled $1,906,000, $1,946,000, and $1,741,000 in 2001, 2000 and 1999.

 

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**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,**     |   |
|-----------------------------|--------|----------------------------|--------|
|                        |   | **2001**                   |   | **2000** |   | **1999** |   |
|                        |   | **Amount**                 |   | **Interest  Rate(s)** |   | **Amount** | ** ** | **Interest  Rate(s)** |   | **Amount** |   | **Interest  Rate(s)** |   |
|                        |   | **(Dollars in  Millions)** |   |
| Treasury Tax Loan(1)        |   | $                          | 3,810  |   | 2.03 | % | $ | 4,672 |   | 6.25 | % | $ | 5,000 |   | 5 | % |
| FHLB advances               |   | 31,700                     |   | 1.87-4.92 | % | 8,600 |   | 6.62-6.65 | % | 12,600 |   | 5.75-6.36 | % |
|                        |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Total short term borrowings |   | $                          | 35,510 |   |   |   | $ | 13,272 |   |   |   | $ | 17,600 |   |   |   |

 

*(1)        The Treasury tax loan is a variable rateproduct that reprices weekly based on the Federal Funds rate. The account ispayable on a 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 31,2001, this line provided for maximum borrowings of $77,419,000 of which$73,759,000 was outstanding, leaving $3,660,000 available. At December 31, 2001this borrowing line is collateralized by securities with a market value of$81,494,000. At December 31, 2000, the line of credit collateralized bysecurities totaled $49,608,000 of which $14,600,000 was outstanding leaving$35,008,000 available. The Company had additional secured, unused lines ofcredit of $7,945,000 and unsecured unused lines of credit of $10,000,000 atDecember 31, 2001. This compares with secured, unused lines of credit of$7,000,000 and unsecured unused lines of credit of $7,000,000 as of December31, 2000.

 

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

 
|                       |   |                      |   |               |   | **2001**   |   | **2000**   |   | **1999**   |   |
|----------------------------|--------|---------------------------|--------|--------------------|--------|------------|--------|------------|--------|------------|--------|
|                       |   | **Interest  Rate(s)**     |   | **Maturity Dates** |   | **Amount** |   | **Amount** |   | **Amount** |   |
|                       |   | **(Dollars in millions)** |   |
| Mortgage note              |   | 7.80                      | %      | 2007               |   | $          | 3,116  |       | $      | 3,155      |   | $ | 3,214 |   |
| FHLB advances              |   | 1.42-6.83                 | %      | 2003 - 2011        |   | 42,059     |   | 6,000      |   | —     |   |
|                       |   |                      |   |               |   |       |   |       |   |       |   |
| Total long term borrowings |   | 1.42-7.80                 | %      |               |   |       | $      | 45,175     |   | $          | 9,155  |   | $ | 3,214 |   |
|                            |        |                           |        |                    |        |            |        |            |        |            |        |  |  |  |  |  |

 

Interest expense related to FHLB borrowings totaled $1,884,000, $951,000and $375,000 in 2001, 2000, and 1999. Interest expense related to notes totaled$262,000, $249,000, and $273,000 in 2001, 2000, and 1999. This long term noteis secured by Company land and buildings. Interest expense on federal fundspurchased was $5,000, $16,000, and $80,000 in 2001, 2000, and 1999.Compensating balance arrangements are not significant to the operations of theCompany.

 

Principal payments required to service the Company’s borrowings duringthe next five years are:

 
|                 |   | **Years ended  December 31,** |   |
|----------------------|--------|-------------------------------|--------|
|                 |   | **(Dollars in  thousands)**   |   |
| 2002                 |   | $                             | 35,510 |   |
| 2003                 |   | 5,000                         |   |
| 2004                 |   | 2,000                         |   |
| 2005                 |   | 13,000                        |   |
| 2006                 |   | 9,559                         |   |
| Thereafter           |   | 15,616                        |   |
|                 |   |                          |   |
| Total borrowed funds |   | $                             | 80,685 |   |

 

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**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 on theTrust Preferred Securities is payable semi-annually and is deferrable, at theoption of the Company for up to five years. Following the issuance of the TrustPreferred Securities, the Trust used the proceeds from the Trust PreferredSecurities offering to purchase a like amount of Junior Subordinated DebtSecurities (the Debt Securities) of the Company. The debt securities bear thesame terms and interest rates as the related Trust Preferred Securities. TheDebt Securities are the sole assets of the Trusts and are eliminated, alongwith the related income statement effects, in the consolidated financialstatements. The Company has fully and unconditionally guaranteed all of theobligations of the Trust. Under applicable regulatory guidelines, the Trust PreferredSecurities will qualify as Tier I capital. The following Trust PreferredSecurities were outstanding at December 31, 2001.

 
| **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, 2001 was$6,000,000. The Trust Preferred Securities accrue interest at an annual rate of10.2%. The dividends expense on Trust Preferred Securities were $510,000 in2001, and is included in other expense.

 

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**NOTE 7. Real Estate Operations**

 

Asof December 31, 2001, MAID had no real estate holdings. 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:

 
|     |   | **Federal**                 |   | **State** |   | **Total** |   |
|----------|--------|-----------------------------|--------|-----------|--------|-----------|--------|
|     |   | **(Dollars in  thousands)** |   |
| **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 |   |
| **1999** |   |                        |   |      |   |      |   |
| Current  |   | $                           | 2,248  |      | $      | 946       |   | $ | 3,194 |   |
| Deferred |   | (772                        | )      | (318      | )      | (1,090    | )      |
|     |   | $                           | 1,476  |      | $      | 628       |   | $ | 2,104 |   |

 

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at December 31, 2001 and2000 consists of the following:

 
|                                  |   | **2001**                    |   | **2000** |   |
|---------------------------------------|--------|-----------------------------|--------|----------|--------|
|                                  |   | **(Dollars in  Thousands)** |   |
| **Deferred tax assets:**              |   |                        |   |     |   |
| Allowance for loan losses             |   |                        |   | $        | 2,675  |   |
| Deferred compensation                 |   | 803                         |   | 612      |   |
| Intangible amortization               |   | 583                         |   | 301      |   |
| Nonaccrual interest                   |   | 70                          |   | 92       |   |
| State franchise taxes                 |   | —                      |   | 99       |   |
| Fixed assets                          |   | 117                         |   | —   |   |
| Other                                 |   | —                      |   | 70       |   |
|                                  |   |                        |   |     |   |
| Total gross deferred tax assets       |   | 4,967                       |   | 3,849    |   |
| Less valuation allowance              |   | (20                         | )      | (20      | )      |
|                                  |   |                        |   |     |   |
| Deferred tax assets                   |   | $                           | 4,947  |     | $      | 3,829 |   |
|                                  |   |                        |   |     |   |
| **Deferred tax liabilities:**         |   |                        |   |     |   |
| Fixed assets                          |   | $                           | — |     | $      | 125 |   |
| Investment securities unrealized gain |   | 1,115                       |   | 55       |   |
| Investment in partnerships            |   | 354                         |   | 116      |   |
| Insurance accrual                     |   | 38                          |   | —   |   |
| FHLB stock dividends                  |   | 147                         |   | 82       |   |
|                                  |   |                        |   |     |   |
| Total gross deferred tax liabilities  |   | 1,654                       |   | 378      |   |
|                                  |   |                        |   |     |   |
| Net deferred tax assets               |   | $                           | 3,293  |     | $      | 3,451 |   |

 

24

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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, 2001 and 2000.

 

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

 
|                                                                       |   | **2001**                    |   | **2000** |   | **1999** |   |
|----------------------------------------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|
|                                                                       |   | **(Dollars in  thousands)** |   |
| Statutory (34%) federal income tax rate due                                |   | $                           | 3,648  |     | $      | 3,218    |   | $ | 2,452 |   |
| State franchise tax, at statutory rate, net of federal  income tax benefit |   | 211                         |   | 504      |   | 516      |   |
| Tax exempt interest income, net                                            |   | (386                        | )      | (390     | )      | (413     | )      |
| Housing tax credits                                                        |   | (600                        | )      | (550     | )      | (375     | )      |
| Dividends received deduction                                               |   | (163                        | )      | —   |   | —   |   |
| Intangible amortization                                                    |   | 43                          |   | 43       |   | 43       |   |
| Cash surrender value life insurance                                        |   | (225                        | )      | (106     | )      | (98      | )      |
| Other                                                                      |   | 291                         |   | 42       |   | (21      | )      |
|                                                                       |   |                        |   |     |   |     |   |
| Provision for income taxes                                                 |   | $                           | 2,819  |     | $      | 2,761    |   | $ | 2,104 |   |

 

**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 raise additionalcapital while institutions with low risk exposure could, with the concurrenceof regulatory authorities, be permitted to operate with lower capital ratios.In addition, a bank must meet minimum Tier I capital to average assets ratio of4%.

 

Managementbelieves, as of December 31, 2001 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 theCompany and the Bank as well capitalized under the FDICIA regulatory frameworkfor prompt 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.

 

25

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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 regulatory limitationson 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, 2001are as follows:

 
|                                     |   | **Actual**                  |   | **For Capital********Adequacy Purposes** |   | **To Be Well Capitalized  Under Prompt Corrective  Action Provisions** |   |
|------------------------------------------|--------|-----------------------------|--------|------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                     |   | **Amount**                  |   | **Ratio**                                |   | **Amount**                                                             |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   | **(Dollars in  thousands)** |   |
| **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 1capital divided by quarterly average assets. The minimum leverage ratio is 3percent for banking organizations that do not anticipate significant growth andthat have 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, 2000are as follows:

 
|                                     |   | **Actual**                  |   | **For Capital  Adequacy Purposes** |   | **To Be Well Capitalized********Under Prompt Corrective********Action Provisions** |   |
|------------------------------------------|--------|-----------------------------|--------|------------------------------------|--------|------------------------------------------------------------------------------------|--------|
|                                     |   | **Amount**                  |   | **Ratio**                          |   | **Amount**                                                                         |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   | **(Dollars in  thousands)** |   |
| **The Company:**                         |   |                        |   |
|                                     |   |                        |   |
| Total capital (to risk weighted assets)  |   | $                           | 55,462 |                               | 10.92  | %                                                                                  | $      | 40,640 |   | 8.0 | % | $ | 50,800 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 49,089                      |   | 9.66                               |   | 20,320                                                                             |   | 4.0 |   | 30,480 |   | 6.0 |   |
| Leverage ratio(1)                        |   | 49,089                      |   | 7.56                               | %      | 25,973                                                                             |   | 4.0 | % | 32,467 |   | 5.0 | % |
|                                     |   |                        |   |                               |   |                                                                               |   |   |   |   |   |   |   |
| **The Bank:**                            |   |                        |   |                               |   |                                                                               |   |   |   |   |   |   |   |
|                                     |   |                        |   |                               |   |                                                                               |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $                           | 52,701 |                               | 10.57  | %                                                                                  | $      | 39,902 |   | 8.0 | % | $ | 49,878 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 46,442                      |   | 9.31                               |   | 19,951                                                                             |   | 4.0 |   | 29,927 |   | 6.0 |   |
| Leverage ratio(1)                        |   | 46,442                      |   | 7.21                               | %      | 25,759                                                                             |   | 4.0 | % | 32,192 |   | 5.0 | % |

 

*(1)**                      **Theleverage ratio consists of Tier 1 capital divided by quarterly average assets.The minimum leverage ratio is 3 percent for banking organizations that do notanticipate significant growth and that have well-diversified risk, excellentasset quality and in general, are considered top-rated banks.*

 

26

----

 

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

 

AtDecember 31, 2001, the Company has operating lease rental commitments for remainingterms of one to ten years. The Company has options to renew one of its leasesfor a period of 15 years. The minimum future commitments under non-cancelablelease agreements having terms in excess of one year at December 31, 2001 are asfollows:

 
| **Years ended December 31,** |   |   |   |
|------------------------------|--------|--------|--------|
| **(Dollars in thousands)**   |   |   |   |   |
| 2002                         |   | $      | 827    |   |
| 2003                         |   | 771    |   |
| 2004                         |   | 701    |   |
| 2005                         |   | 659    |   |
| 2006                         |   | 505    |   |
| Thereafter                   |   | 1,045  |   |
|                         |   |   |   |
| Total minimum lease payments |   | $      | 4,508  |   |

 

Rentexpense was approximately $811,000**,**$598,000, and $477,000 for the years ended December 31, 2001, 2000, and 1999.

 

Inthe ordinary course of business, the Company enters into various types oftransactions which involve financial instruments with of-balance sheet risk.These instruments include commitments to extend credit and standby letters ofcredit and are not reflected in the accompanying balance sheet. Thesetransactions may involve, to varying degrees, credit and interest risk inexcess 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**      |    |
|------------------------------|--------|----------------------------|---------|
|                         |   | **2001**                   |    | **2000** |   |
|                         |   | **(Dollars in thousands)** |    |
| Commitments to extend credit |   | $                          | 188,802 |   | $ | 144,480 |   |
| Standby letters of credit    |   | 3,852                      |    | 1,320 |   |
|                              |        |                            |         |  |  |  |  |  |

 

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

 

27

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oflegal counsel, does not expect such cases will have a material, adverse effecton its financial position or results of operations

** **

**NOTE 11. Time Deposits**

 

AtDecember 31, 2001 the aggregate maturities for time deposits are as follows:

 
| **Years ended December 31,** |   |   |    |
|------------------------------|--------|--------|---------|
| **(Dollars in thousands)**   |   |   |    |   |
| 2002                         |   | $      | 274,119 |   |
| 2003                         |   | 16,134 |    |
| 2004                         |   | 2,868  |    |
| 2005                         |   | 874    |    |
| 2006                         |   | 223    |    |
| Thereafter                   |   | 151    |    |
|                         |   |   |    |
| Total Time Deposits          |   | $      | 294,369 |   |

 

**NOTE 12. Employee and Director Benefit Plans**

 

TheCompany has a noncontributory employee stock ownership plan (“ESOP”) and anemployee savings plan covering substantially all employees. During 2001, 2000,and 1999, the Company contributed approximately $326,000**,** $288,000, and $217,000, to the ESOP and $116,000**,** $95,000, and $70,000 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, 2001, 2000, and 1999, the ESOP owned180,079**,** 164,800, and 154,305shares 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$10,500 each in 2001. 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. Salary continuation expense totaled $406,000**,**$595,000, and $341,000 in 2001, 2000, and1999.

 

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. Deferred compensation expense totaled $70,000**,** $63,000, and $58,000 in 2001, 2000, and1999.

 

**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 for directors. Themaximum number of shares issuable under the plans was 126,000 and was amendedby the shareholders in 1995 and 

 

28

----

 

2001to 450,000 and 675,000 options available for grant. Options are available forgrant under the plans at prices that approximate fair market value of the stockat the date of grant. Options granted under both plans become exercisable 25%at the time of grant and 25% each year thereafter and expire 10 years from thedate of grant.

 

Asummary of the status of the Company’s stock options as of and for the yearsended December 31, 2001, 2000, and 1999, and changes during the years ended onthose dates, follows:

 
|                               |   | **2001**                    |   | **2000**                                          |   | **1999**                    |    |
|------------------------------------|--------|-----------------------------|--------|---------------------------------------------------|--------|-----------------------------|---------|
|                               |   | **Number of********Shares** |   | **Weighted********Average********Exercise Price** |   | **Number of********Shares** |    | **Weighted********Average********Exercise Price** |   | **Number of********Shares** |   | **Weighted********Average********Exercise Price** |   |
| Outstanding at beginning of  year  |   | 363,598                     |   | $                                                 | 8.40   |                        | 351,573 |   | $ | 7.59 |   | 325,806 |   | $ | 7.25 |   |
| Granted                            |   | 103,925                     |   | 13.10                                             |   | 64,500                      |    | 10.43 |   | 68,000 |   | 10.45 |   |
| Exercised                          |   | (97,587                     | )      | 5.99                                              |   | (49,068                     | )       | 5.16 |   | (26,609 | ) | 8.09 |   |
| Forfeited                          |   | (4,430                      | )      | 11.41                                             |   | (3,407                      | )       | 11.84 |   | (15,624 | ) | 12.09 |   |
| Stock dividend declared            |   | 18,159                      |   | 8.40                                              |   | —                      |    | — |   | — |   | — |   |
|                               |   |                        |   |                                              |   |                        |    |   |   |   |   |   |   |
| Outstanding at end of year         |   | 383,665                     |   | $                                                 | 9.86   |                        | 363,598 |   | $ | 8.40 |   | 351,573 |   | $ | 7.59 |   |
|                               |   |                        |   |                                              |   |                        |    |   |   |   |   |   |   |
| Options exercisable at end of year |   | 262,776                     |   | $                                                 | 8.95   |                        | 274,717 |   | $ | 7.67 |   | 276,170 |   | $ | 6.58 |   |

 

Thefollowing table summarizes information about options outstanding at December31, 2001:

 
|                                  |   | **Options  Outstanding**                 |   |                                             |   | **Options  Exercisable**                          |   |
|---------------------------------------|--------|------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------|--------|
| **Range of   Exercise********Prices** |   | **Number********Of Shares  Outstanding** |   | **Weighted  Remaining********Contractual  Life** |   | **Weighted  Average**** ****Exercise Price** |   | **Number********Exercisable** |   | **Weighted  Average  Exercise Price** |   |
| 3 - 7                                 |   | 86,737                                   |   | 0.65 Years                                       |   | $                                                 | 4.43   |   | 86,737 |   | $ | 4.43 |   |
| 7 -  11                               |   | 131,612                                  |   | 7.54                                             |   | 9.68                                              |   | 85,785 |   | 9.63 |   |
| 11 - 15                               |   | 141,816                                  |   | 7.83                                             |   | 12.36                                             |   | 84,379 |   | 12.41 |   |
| 15 - 17                               |   | 3,500                                    |   | 9.52                                             |   | 15.87                                             |   | 5,875 |   | 15.87 |   |
|                                  |   |                                     |   |                                             |   |                                              |   |   |   |   |   |
| 3 - 17                                |   | 383,665                                  |   | 6.21 Years                                       |   | $                                                 | 9.86   |   | 262,776 |   | $ | 8.95 |   |

 

Thenumber of shares and exercise price per share has been adjusted for stockdividends and stock splits during the period.

 

Theper share weighted average fair value of stock options granted during 2001,2000 and 1999 was $5.47, $3.45 and $4.01 on the date of grant using the BlackScholes option pricing model with the following weighted average assumptions:2001-1999 expected dividend yield 0%; 2001 expected volatility of 29 percent,2000- 1999 expected volatility of 26 percent, risk free interest rate of 4.75%,5.05% and 6.41%; and an expected life of 7 years.

 

29

----

 

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, *Accountingfor Stock-Based Compensation,* the Company’s net income would havebeen reduced to the proforma amounts indicated as follows:

 

Yearsended December 31,

 
|                           |   | **2001**                   |       | **2000** |   | **1999** |   |
|--------------------------------|--------|----------------------------|------------|----------|--------|----------|--------|
|                           |   | **(Dollars in thousands)** | ** ** |
| Net income                     |   |                       |       |     |   |     |   |
| As reported                    |   | $                          | 7,911      |     | $      | 6,706    |   | $ | 5,109 |   |
| Proforma                       |   | 7,838                      |       | 6,592    |   | 5,018    |   |
| **Basic earnings per share**   |   |                       |       |     |   |     |   |
| As reported                    |   | 1.63                       |       | 1.41     |   | 1.07     |   |
| Proforma                       |   | 1.61                       |       | 1.39     |   | 1.05     |   |
| **Diluted earnings per share** |   |                       |       |     |   |     |   |
| As reported                    |   | 1.58                       |       | 1.37     |   | 1.04     |   |
| Proforma                       |   | 1.56                       |       | 1.35     |   | 1.02     |   |
|                                |        |                            |            |          |        |          |        |  |  |  |

 

**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 carryingamount is a reasonable estimate for fair value.

 

**Investments:** Fair values for available forsale and held to maturity investment securities are based on quoted marketprices where available. If quoted market prices were not available, fair valueswere based upon quoted market prices of comparable instruments.

 

**Net loans:** The fair value of loans isestimated by utilizing discounted future cash flow calculations using theinterest rates currently being offered for similar loans to borrowers withsimilar credit risks and for the remaining or estimated maturities consideringprepayments. The carrying value of loans is net of the allowance for loanlosses and unearned loan fees.

 

**Financial Liabilities:**

 

**Deposits:** The fair values disclosed for depositsgenerally paid upon demand (i.e. noninterest-bearing and interest-bearingdemand) savings and money market accounts are considered equal to theirrespective carrying amounts as reported on the consolidated balance sheets. Thefair value of fixed rate certificates of deposit is estimated using the ratescurrently offered for deposits of similar remaining maturities.

 

**Borrowings:** For these instruments, the fairvalue is estimated using rates currently available for similar loans withsimilar credit risk and for the remaining maturities.

 

**Commitments to extend credit and Standby Letters of Credit:** The Company has notestimated the fair value of commitments to extend credit and standby letters ofcredit. Because of the uncertainty in attempting to assess the likelihood andtiming of a commitment being drawn upon, coupled with the lack of anestablished market for these financial instruments, the Company does notbelieve it is meaningful or practicable to provide an estimate of fair value.

 

30

----

 
| **2001**                                      |   | **Carrying********Amount** |       | **Fair Value** |   |
|-----------------------------------------------|--------|----------------------------|------------|----------------|--------|
|                                          |   | **(Dollars in thousands)** | ** ** |
| **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 and money market                      |   | 203,721                    |       | 203,721        |   |
| Time deposits                                 |   | 294,369                    |       | 297,009        |   |
| Borrowings                                    |   | $                          | 80,685     |           | $      | 82,396 |   |

 
| **2000**                                      |   | **Carrying********Amount** |   | **Fair Value** |   |
|-----------------------------------------------|--------|----------------------------|--------|----------------|--------|
|                                          |   | **(Dollars in thousands)** |   |
| **Financial assets:**                         |   |                       |   |           |   |
| Cash and cash equivalents                     |   | $                          | 47,768 |           | $      | 47,768 |   |
| Time deposits at other financial institutions |   | 100                        |   | 100            |   |
| Available for sale investment securities      |   | 155,830                    |   | 155,830        |   |
| Held to maturity investment securities        |   | 35,222                     |   | 35,412         |   |
| Net loans                                     |   | 404,457                    |   | 398,059        |   |
| **Financial liabilities**                     |   |                       |   |           |   |
| Noninterest-bearing demand                    |   | 107,581                    |   | 107,581        |   |
| Negotiable orders of withdrawl                |   | 84,521                     |   | 84,521         |   |
| Savings and money market                      |   | 184,073                    |   | 184,073        |   |
| Time deposits                                 |   | 225,323                    |   | 225,838        |   |
| Borrowings                                    |   | $                          | 22,427 |           | $      | 22,888 |   |

 

**NOTE 15. Reconciliation of Basic and Diluted Earnings PerShare**

 
|                                                              |   | **Year ended December 31, 2001**                       |       |
|-------------------------------------------------------------------|--------|-------------------------------------------------------------|------------|
|                                                              |   | **Income**                                                  |       | **Shares** |   | **Per-Share** |   |
|                                                              |   | **(Dollars in thousands********except  per share amounts)** | ** ** |
| Basic EPS                                                         |   |                                                        |       |   |   |   |   |
| Income available to common shareholders                           |   | $                                                           | 7,911      |   | 4,848 |   | $ | 1.63 |   |
|                                                              |   |                                                        |       |   |   |   |   |
| Effect of dilutive securities:                                    |   |                                                        |       |   |   |   |   |
| Stock options                                                     |   | —                                                      |       | 155 |   | — |   |
| Diluted EPS                                                       |   |                                                        |       |   |   |   |   |
| Income available to common shareholders plus Assumed  conversions |   | $                                                           | 7,911      |   | 5,003 |   | $ | 1.58 |   |

 

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|                                                              |   | **Year ended December 31, 2000**                    |       |
|-------------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                              |   | **Income**                                          |       | **Shares** |   | **Per-Share** |   |
|                                                              |   | **(Dollars in thousands except per share amounts)** | ** ** |
| Basic EPS                                                         |   |                                                |       |   |   |   |   |
| Income available to common shareholders                           |   | $                                                   | 6,706      |   | 4,755 |   | $ | 1.41 |   |
|                                                              |   |                                                |       |   |   |   |   |
| Effect of dilutive securities:                                    |   |                                                |       |   |   |   |   |
| Stock options                                                     |   | —                                              |       | 131 |   | — |   |
| Diluted EPS                                                       |   |                                                |       |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |   | $                                                   | 6,706      |   | 4,886 |   | $ | 1.37 |   |

 
|                                                              |   | **Year ended December 31, 1999**                    |       |
|-------------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                              |   | **Income**                                          |       | **Shares** |   | **Per-Share** | ** ** |
|                                                              |   | **(Dollars in thousands except per share amounts)** | ** ** |
| Basic EPS                                                         |   |                                                |       |   |   |   |   |
| Income available to common shareholders                           |   | $                                                   | 5,109      |   | 4,790 |   | $ | 1.07 |   |
|                                                              |   |                                                |       |   |   |   |   |
| Effect of dilutive securities:                                    |   |                                                |       |   |   |   |   |
| Stock options                                                     |   | —                                              |       | 128 |   | — |   |
| Diluted EPS                                                       |   |                                                |       |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |   | $                                                   | 5,109      |   | 4,918 |   | $ | 1.04 |   |

 

**NOTE 16. 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, 2001 and 2000 and the condensedstatements of income and cash flows for the years ended December 31, 2001,2000, and 1999:

 

**Condensed balance sheets**

** **
|                                                                    |   | **December 31,**           |   |
|-------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                    |   | **2001**                   |   | **2000** |   |
|                                                                    |   | **(Dollars in thousands)** |   |
| **Assets**                                                              |   |                       |   |   |   |
| Cash and short-term investments                                         |   | $                          | 1,812  |   | $ | 960 |   |
| Investment in County Bank                                               |   | 66,388                     |   | 50,765 |   |
| Net premises and equipment                                              |   | 5,623                      |   | 5,931 |   |
| Other assets                                                            |   | 1,050                      |   | 918 |   |
|                                                                    |   |                       |   |   |   |
| Total assets                                                            |   | $                          | 74,873 |   | $ | 58,574 |   |
|                                                                    |   |                       |   |   |   |
| **Liabilities and shareholder’s Equity**                           |   |                       |   |   |   |
| **Liabilities**                                                         |   |                       |   |   |   |
| Borrowed funds                                                          |   | $                          | 3,116  |   | $ | 3,155 |   |
| Capitalized lease                                                       |   | 638                        |   | 931 |   |
| Other liabilities                                                       |   | 999                        |   | 1,037 |   |
|                                                                    |   |                       |   |   |   |
| Total liabilities                                                       |   | 4,753                      |   | 5,123 |   |
|                                                                    |   |                       |   |   |   |
| Trust Preferred Securities                                              |   | 6,000                      |   | — |   |
|                                                                    |   |                       |   |   |   |
| Total shareholders’ equity                                         |   | 64,120                     |   | 53,451 |   |
| Total liabilities, Preferred Securities, and  shareholders’ equity |   | $                          | 74,873 |   | $ | 58,574 |   |

 

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**Condensed statements of income**

 
|                                                                    |   | **Year Ended December 31,** |       |
|-------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                    |   | **2001**                    |       | **2000** |   | **1999** | ** ** |
|                                                                    |   | **(Dollars in thousands)**  | ** ** |
| **Income**                                                              |   |                        |       |   |   |   |   |
| Dividends from subsidiaries                                             |   | $                           | —     |   | $ | — |   | $ | 1,243 |   |
| Interest                                                                |   | 169                         |       | 1 |   | 19 |   |
| Lease income                                                            |   | 502                         |       | 502 |   | 502 |   |
| Management fees from subsidiaries                                       |   | 5,654                       |       | 4,918 |   | 2,101 |   |
|                                                                    |   |                        |       |   |   |   |   |
| Total income                                                            |   | 6,325                       |       | 5,421 |   | 3,865 |   |
| **Expenses**                                                            |   |                        |       |   |   |   |   |
| Interest on borrowings                                                  |   | 274                         |       | 282 |   | 273 |   |
| Capitalized lease interest                                              |   | 64                          |       | 80 |   | 71 |   |
| Salaries and related benefits                                           |   | 3,205                       |       | 2,975 |   | 2,340 |   |
| Other noninterest expense                                               |   | 2,940                       |       | 2,650 |   | 1,820 |   |
|                                                                    |   |                        |       |   |   |   |   |
| Total other expenses                                                    |   | 6,483                       |       | 5,987 |   | 4,504 |   |
| Loss before taxes and equity in undistributed earnings  of subsidiaries |   | (158                        | )          | (566 | ) | (639 | ) |
| Income tax benefit                                                      |   | 21                          |       | 211 |   | 219 |   |
| Equity in undistributed income of subsidiaries                          |   | 8,048                       |       | 7,061 |   | 5,529 |   |
|                                                                    |   |                        |       |   |   |   |   |
| Net income                                                              |   | $                           | 7,911      |   | $ | 6,706 |   | $ | 5,109 |   |

 
|                                                                               |   | **December 31,**            |   |
|------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                               |   | **2001**                    |   | **2000** |   | **1999** |   |
|                                                                               |   | **(Dollars in  thousands)** |   |
| **Operating activities:**                                                          |   |                        |   |   |   |   |   |
| Net income                                                                         |   | $                           | 7,911  |   | $ | 6,706 |   | $ | 5,109 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                        |   |   |   |   |   |
| Depreciation of fixed assets                                                       |   | 604                         |   | 629 |   | 509 |   |
| Equity in undistributed earnings of subsidiaries                                   |   | (8,048                      | )      | (7,061 | ) | (5,529 | ) |
| Increase in other assets                                                           |   | (132                        | )      | (573 | ) | (130 | ) |
| Increase (decrease) in other liabilities                                           |   | (38                         | )      | 668 |   | 171 |   |
|                                                                               |   |                        |   |   |   |   |   |
| Net cash provided by operating activities                                          |   | 297                         |   | 369 |   | 130 |   |
| **Investing activities:**                                                          |   |                        |   |   |   |   |   |
| Capital contribution to subsidiary bank                                            |   | (6,000                      | )      | — |   | — |   |
| Purchase of premises and equipment                                                 |   | (296                        | )      | (459 | ) | (278 | ) |
| Dividends from subsidiaries                                                        |   | —                      |   | — |   | 1,243 |   |
|                                                                               |   |                        |   |   |   |   |   |
| Net cash (used in) provided by investing activities                                |   | (6,296                      | )      | (459 | ) | 965 |   |
| **Financing activities:**                                                          |   |                        |   |   |   |   |   |
| Issuance of Trust Preferred Securities                                             |   | 6,000                       |   | — |   | — |   |
| Net (decrease) increase in other borrowings and  capitalized lease                 |   | (332                        | )      | 71 |   | (262 | ) |
| Issuance of common stock related to exercise of                                    |   |                        |   |   |   |   |   |
| stock options and employee benefit plans                                           |   | 1,190                       |   | 325 |   | 219 |   |
| Repurchase of common stock                                                         |   | —                      |   | — |   | (1,768 | ) |
| Cash dividends and fractional shares                                               |   | (7                          | )      | — |   | — |   |
|                                                                               |   |                        |   |   |   |   |   |
| Net cash provided by (used in) financing activities                                |   | 6,851                       |   | 396 |   | (1,811 | ) |
|                                                                               |   |                        |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                   |   | 852                         |   | 306 |   | (716 | ) |
| Cash and cash equivalents at beginning of year                                     |   | 960                         |   | 654 |   | 1,370 |   |
|                                                                               |   |                        |   |   |   |   |   |
| Cash and cash equivalents at end of year                                           |   | $                           | 1,812  |   | $ | 960 |   | $ | 654 |   |

 

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**NOTE 17. Quarterly Results of Operations (Unaudited)**

 
|                          |   | **2001 Quarter Ended**     |       |
|-------------------------------|--------|----------------------------|------------|
|                          |   | **Dec 31**                 |       | **Sept 30** |   | **June 30** |   | **Mar 31** | ** ** |
|                          |   | **(Dollars in thousands)** | ** ** |
| 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)   |   | $                          | .43        |   | $ | .39 |   | $ | .41 |   | $ | .40 |   |
|                          |   |                       |       |   |   |   |   |   |   |
| Diluted earnings per share(1) |   | $                          | .42        |   | $ | .38 |   | $ | .40 |   | $ | .39 |   |

 
|                          |   | **2000 Quarter Ended**     |   |
|-------------------------------|--------|----------------------------|--------|
|                          |   | **Dec 31**                 |   | **Sept 30** |   | **June 30** |   | **Mar 31** |   |
|                          |   | **(Dollars in thousands)** |   |
| Interest income               |   | $                          | 13,995 |   | $ | 13,299 |   | $ | 12,361 |   | $ | 11,233 |   |
| Interest expense              |   | 5,831                      |   | 5,592 |   | 5,041 |   | 4,304 |   |
| Net interest income           |   | 8,164                      |   | 7,707 |   | 7,320 |   | 6,929 |   |
| Provision for loan losses     |   | 963                        |   | 792 |   | 768 |   | 763 |   |
| Other income                  |   | 1,276                      |   | 1,340 |   | 1,644 |   | 1,147 |   |
| Other expenses                |   | 6,088                      |   | 5,888 |   | 5,655 |   | 5,143 |   |
| Income before income taxes    |   | 2,389                      |   | 2,367 |   | 2,541 |   | 2,170 |   |
| Income taxes                  |   | 643                        |   | 721 |   | 741 |   | 656 |   |
| Net income                    |   | $                          | 1,746  |   | $ | 1,646 |   | $ | 1,800 |   | $ | 1,514 |   |
|                          |   |                       |   |   |   |   |   |   |   |
| Basic earnings per share(1)   |   | $                          | .37    |   | $ | .35 |   | $ | .38 |   | $ | .32 |   |
|                          |   |                       |   |   |   |   |   |   |   |
| Diluted earnings per share(1) |   | $                          | .36    |   | $ | .34 |   | $ | .37 |   | $ | .31 |   |

 

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*(1)        Basic and diluted earnings per sharecalculations are based upon the weighted average number of shares outstandingduring each period. Full year weighted average shares differ from quarterlyweighted average shares and, therefore, annual earnings per share may not equalthe sum of the quarters.*

 

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