**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-K**

 

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION  13 or 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                               |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                      |
|       |   | **For the Fiscal Year Ended December 31, 2002**                                                                                                                                                                                                                                                                           |
|       |   | **Commission File Number: 0-27384**                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                      |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                      |
|       |   | **For the Transition Period  From                       to                       ** |

** **

**CAPITALCORP OF THE WEST**

(Exact name ofregistrant as specified in its charter)

 

| **California**                                                          |   | **77-0405791**                        |
|-------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)         |   | (I.R.S. Employer  Identification No.) |
|                                                                    |   |                                  |
| **550 West Main Street,**  **Merced, California**                  |   | **95340**                             |
| (Address of  principal executive offices)                               |   | (Zip Code)                            |
|                                                                    |   |                                  |
| **(209) 725-2269**                                                      |
| (Registrant’s  telephone number, including area code)              |
|                                                                    |
| Securities  registered under Section 12(b) of the Act:                  |
| **None**                                                                |
|                                                                    |
| Securities  registered under Section 12(g) of the Act (Title of Class): |
| **Common Stock, no par value;  Preferred Share Purchase Rights**        |

 

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

Yes ý  No o

 

Disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form10-K.          ý

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theAct.)  Yes  ý  No  o

 

Aggregate market value ofthe voting stock held by nonaffiliates of the Registrant was $100,473,144(based on the $18.97 average of bid and ask prices per common share on June 28,2002).

 

The number of sharesoutstanding of the Registrant’s common stock, no par value, as of March 25,2003 was 5,329,038.

 

Documents incorporated byreference:

Portions of thedefinitive proxy statement for the 2003 Annual Meeting of Shareholders to befiled with the Securities and Exchange Commission pursuant to Regulation 14Aare incorporated by reference in Part III, Items 10 through 13 and portions ofthe Annual Report to Shareholders for 2002 are incorporated by reference inPart II, Item 5 through 8.

 

 

----

 

**Capital Corp of the West**

Table of Contents

** **
|        |                                                                                        |   | **Reference**                              |
|-------------|---------------------------------------------------------------------------------------------|--------|--------------------------------------------|
|        | **PART I**                                                                                  |   |                                       |
|        |                                                                                        |   |                                       |
| ITEM 1.     | BUSINESS                                                                                    |   |                                       |
|        |                                                                                        |   |                                       |
| ITEM 2.     | PROPERTIES                                                                                  |   |                                       |
|        |                                                                                        |   |                                       |
| ITEM  3.    | LEGAL  PROCEEDINGS                                                                          |   |                                       |
|        |                                                                                        |   |                                       |
| ITEM  4.    | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |                                       |
|        |                                                                                        |   |                                       |
|        | **PART II**                                                                                 |   |                                       |
|        |                                                                                        |   |                                       |
| ITEM  5.    | MARKET  FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS          |   | Page 19 of 2002 Annual  Report             |
|        |                                                                                        |   |                                       |
| ITEM 6.     | SELECTED FINANCIAL  DATA                                                                    |   | Page 9 of 2002 Annual  Report              |
|        |                                                                                        |   |                                       |
| ITEM  7.    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   | Pages 10 through 19 of  2002 Annual Report |
|        |                                                                                        |   |                                       |
| ITEM  7A.   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET   RISK                          |   | Pages 10 through 19 of  2002 Annual Report |
|        |                                                                                        |   |                                       |
| ITEM  8.    | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                |   | Pages 21 through 45 of  2002 Annual Report |
|        |                                                                                        |   |                                       |
| ITEM  9.    | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |                                       |
|        |                                                                                        |   |                                       |
|        | **PART III**                                                                                |   |                                       |
|        |                                                                                        |   |                                       |
| ITEM****10. | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         |   | Proxy Statement for  2003 Annual Meeting   |
|        |                                                                                        |   |                                       |
| ITEM 11.    | EXECUTIVE COMPENSATION                                                                      |   | Proxy Statement for  2003 Annual Meeting   |
|        |                                                                                        |   |                                       |
| ITEM  12.   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MATTERS         |   | Proxy Statement for  2003 Annual Meeting   |
|        |                                                                                        |   |                                       |
| ITEM  13.   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                             |   | Proxy Statement for  2003 Annual Meeting   |
|        |                                                                                        |   |                                       |
| ITEM 14.    | CONTROLS AND PROCEDURES                                                                     |   | Proxy Statement for  2003 Annual Meeting   |

 

2

----

 
|           | **PART IV**                                                               |   |   |
|----------------|---------------------------------------------------------------------------|--------|--------|
|           |                                                                      |   |   |
| ITEM 15.       | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND  REPORTS ON FORM 8-K         |   |   |
|           |                                                                      |   |   |
| SIGNATURES     |                                                                      |   |   |
|           |                                                                      |   |   |
| CERTIFICATIONS | CERTIFICATIONS  PURSUANT TO SECTION 302 OF SARBANES-OXLEY AND RULE 13a-14 |   |   |
|           |                                                                      |   |   |
| EXHIBIT INDEX  |                                                                      |   |   |

 

3

----

 

**PARTI**

** **

**ITEM1.                  BUSINESS**

 

In addition to historical information, this discussion and analysisincludes certain forward-looking statements that are subject to risks anduncertainties and include information about possible or assumed future resultsof operations.  Many possible events orfactors could affect the future financial results and performance of theCompany.  This could cause results orperformance to differ materially from those expressed in our forward-lookingstatements.  Words such as “expects”,“anticipates”, “believes”, “estimates”, “intends”, “plans”, “assumes”, “projects”,“predicts”, “forecasts”, variations of such words and other similar expressionsare intended to identify such forward-looking statements.  These statements are not guarantees offuture performance and involve certain risks, uncertainties and assumptionswhich are difficult to predict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in, or implied by, such forward-looking statements.

 

Readers of the Company’s Annual Report and Form 10-K should not relysolely on forward looking statements and should consider all uncertainties andrisks discussed throughout this report. These statements are representative only on the date hereof, and theCompany undertakes no obligation to update any forward-looking statementsmade.  Some possible events or factorsthat could occur that may cause differences from expected results include thefollowing: the Company’s loan growth is dependent on economic conditions, aswell as various discretionary factors, such as decisions to sell, or purchasecertain loans or loan portfolios; participations of loans and the management ofborrower, industry, product and geographic concentrations and the mix of theloan portfolio.  The rate of charge-offsand provision expense can be affected by local, regional and internationaleconomic and market conditions, concentrations of borrowers, industries,products and geographical conditions, the mix of the loan portfolio andmanagement’s judgements regarding the collectibility of loans.  Liquidity requirements may change as aresult of fluctuations in assets and liabilities and off-balance sheetexposures, which will impact the capital and debt financing needs of theCompany and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent onliquidity requirements and market volatility, as well as on and off-balancesheet positions.  Factors that mayimpact interest rate risk include local, regional and international economicconditions, levels, mix, maturities, yields or rates of assets and liabilitiesand the wholesale and retail funding sources of the Company. The Company isalso exposed to the potential of losses arising from adverse changes in marketrates and prices which can adversely impact the value of financial products,including securities, loans, and deposits. In addition, the banking industry in general is subject to variousmonetary and fiscal policies and regulations, which include those determined bythe Federal Reserve Board, the Federal Deposit Insurance Corporation and stateregulators, whose policies and regulations could affect the Company’s results.

 

Other factors that may cause actual results to differ from theforward-looking statements include the following: competition with other localand regional banks, savings and loan associations, credit unions and othernon-bank financial institutions, such as investment banking firms, investmentadvisory firms, brokerage firms, mutual funds and insurance companies, as wellas other entities which offer financial services; interest rate, market andmonetary fluctuations; inflation; market volatility; general economicconditions; introduction and acceptance of new banking-related products,services and enhancements; fee pricing strategies, mergers and acquisitions andtheir integration into the Company, civil disturbances or terrorist threats oracts, or apprehension about the possible future occurrences or acts of thistype, outbreak or escalation of hostilities in which the United States isinvolved, any declaration of war by the U.S. Congress or any other national orinternational calamity, crisis or emergency, and management’s ability to managethese and other risks.

 

***General Development of the Company***

 

General

Capital Corp of the West (the “Company”) is a bank  holding company incorporated under the lawsof the State of California on April 26, 1995.  On November 1, 1995, the Company became registered as a bank 

 

4

----

 

holding company and is the holder of all of the capital stock of CountyBank (the “Bank”).  During 1999, Townand Country Finance and Thrift (the “Thrift”) was merged into County Bank.  The Company’s primary asset is the Bank****andthe Bank is the Company’s primary source of income.  As of March 21, 2003, the Company had outstanding 5,325,082shares of Common Stock, no par value, and no shares of Preferred Stock.  As of March 15, 2003 there were 5,325,082common shares outstanding, held by approximately 1,700 shareholders.   There were no preferred shares outstandingat March 15, 2003.  The Company has onewholly owned investment advisory and asset management company, RegencyInvestment Advisors, Incorporated (“RIA”) which was acquired in June, 2002.  The Company also has one wholly owned inactivenonbank subsidiary, Capital West Group (“CWG”) at December 31, 2002.  The Bank has three wholly ownedsubsidiaries, Merced Area Investment & Development, Inc. (“MAID”), CountyAsset Advisors (“CAA”) and County Investment Trust (“REIT”).  CAA is currently inactive.   All references herein to the “Company”includes direct subsidiaries of the Company as well as the Bank and the Bank’ssubsidiaries, unless the context otherwise requires.

 

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

 

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

 

Industry & MarketArea

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

 

Competition

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

 

Smaller independentfinancial institutions, savings and loans and credit unions also serve ascompetition in our service area.  In thepast, the Bank’s principal competitors for deposits and loans have been otherbanks (particularly major banks), savings and loan associations and creditunions.  To a lesser extent, competitionwas also provided by thrift and loans, mortgage brokerage companies andinsurance companies.  Otherinstitutions, such as brokerage houses, credit card companies, and even retailestablishments have offered new investment vehicles, such as money-marketfunds, which also compete with banks. The direction of federal legislation in recent years seems to favorcompetition between different types of financial institutions and to foster newentrants into the financial services market, and it is anticipated that thistrend will continue.

 

To compete effectively inour service area, the Bank relies upon specialized services, responsivehandling of customer needs, local promotional activity, and personal contactsby its officers, directors and staff. For customers whose loan demands exceed the Bank’s lending limits, theBank seeks to arrange funding for such loans on a participation basis with itscorrespondent banks or other independent commercial banks.  The Bank

 

5

----

 

also assists customersrequiring services not offered by the Bank to obtain such services from itscorrespondent banks.

 

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

 

***Bank’s Services and Markets***

 

Bank

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

 

The five general areas inwhich the Bank has directed its lendable assets are (i) real estatemortgage loans, (ii) commercial loans, (iii) agricultural loans, (iv) real estate construction loans, and (v) consumer loans.  As of December 31, 2001, these fivecategories accounted for approximately 39%, 23%, 15%, 12% and 11%,respectively, of the Bank’s loan portfolio.

 

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

 

The Bank’s deposits areattracted primarily from individuals and small and medium-sizedbusiness-related sources. The Bank also attracts some deposits frommunicipalities and other governmental agencies and entities.  In connection with the deposits ofmunicipalities or other governmental agencies, the Bank is generally requiredto pledge securities to secure such deposits, except when the depositor signs awaiver with respect to the first $100,000 of such deposits, which amount isinsured by the FDIC.

 

The principal sources of the Bank’s revenues are (i) interest and fees onloans, (ii) interest on investment securities (principally U.S. governmentagency securities, mortgage-backed securities, collateralized mortgageobligations, municipal and corporate bonds), and (iii) service charges ondeposit accounts.  For the year endedDecember 31, 2002, these sources comprised approximately 65%, 22%, and 8%respectively, of the Bank’s total interest and noninterest income.

 

Most of the Bank’sbusiness originates from individuals, businesses and professional firms locatedin its service area. The Bank is not dependent upon a single customer or groupof related customers for a material portion of its deposits, nor is a materialportion of the Bank’s loans concentrated within a single industry or group ofrelated industries.  The quality of Bankassets and Bank earnings could be adversely affected by a downturn in the localeconomy, including the agricultural sector.

 

Regency InvestmentAdvisors, Inc (RIA)

RIA provides investment advisory services in the markets served by theCompany.  Customers of RIA are chargedan asset management fee for investment advisory services related to business,personal and retirement brokerage accounts performed by RIA.

 

Bank’s Real EstateSubsidiary (MAID)

 

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

 

Federal law now precludesbanks from engaging in real estate development.  At December 31, 2001, MAID held no real estate investments forsale.  The last remaining real estateparcel held by MAID was sold 

 

6

----

 

during 2000.  MAID does not currently intend to purchaseor develop any new investment properties for sale or lease.  During 2002, MAID was used to own, operate,and maintain the County Bank Merced downtown branch and County Bankadministration building.  MAID may serveas owner for additional branch premise properties in the future.

 

County Investment Trust(REIT)

The County InvestmentTrust is a real estate investment trust that invests in loan participationsserviced by the Bank.  The REIT providesthe Bank with another vehicle in which business may be conducted and equitycapital could be raised.  While the Bankowns 100% of the common equity of the REIT, approximately 120 officers andemployees of the Bank own a minority interest in the REIT in the amount of$31,000.

 

***Employees***

 

As of December 31,2002, the Company employed a total of 286 full-time equivalent employees.  The Company believes that employee relationsare excellent.

 

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

 

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

 

***Operations in Foreign Countries***

 

The Company conducts nooperations in any foreign country.

 

***Other Financial Information:***

 

***Prospective Accounting Pronouncements***

 

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

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends No.123, “Accounting for Stock-Based Compensation,” to provide alternative methodsof transition for a voluntary change to the fair value based methods ofaccounting for stock-based employee compensation. Companies are able toeliminate a “ramp-up” effect that the SFAS No. 123 transition rule creates inthe year of adoption. Companies can choose to elect a method that will providefor comparability amongst years reported. In addition, this Statement amendsthe disclosure requirement of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the fair value based methodof accounting for stock-based employee compensation and the effect of themethod used on reported results. The transition amendments to SFAS No. 123 areeffective for financial statements for fiscal years ending after December 15,2002. The Company is not currently considering the adoption of fair value basedcompensation of stock options. The potential impact to the Company of adoptingsuch accounting can be seen in Footnote 1 of the Notes to Consolidated FinancialStatements.

 

7

----

 

**REGULATION AND SUPERVISION**

 

REGULATORY ENVIRONMENT

The banking andfinancial services industry is heavily regulated.  Regulations, statutes and policies affecting the industry arefrequently under review by Congress and state legislatures, and by the federaland state agencies charged with supervisory and examination authority overbanking institutions. Changes in the banking and financial services industrycan be expected to occur in the future. Some of the changes may createopportunities for the Company and the Bank to compete in financial markets withless regulation. However, these changes also may create new competitors ingeographic and product markets which have historically been limited by law tobank institutions, such as the Bank. Changes in the regulation, statutes orpolicies that impact the Company and the Bank cannot necessarily be predictedand may have a material effect on their business and earnings.

 

The operations ofbank holding companies and their subsidiaries are affected by the regulatoryoversight and the credit and monetary policies of the Federal Reserve Board(FRB).  An important function of the FRBis to regulate the national supply of bank credit. Among the instruments ofmonetary policy used by the FRB to implement its objectives are open marketoperations in U.S. government securities, changes in the discount rate on bankborrowings and changes in reserve requirements on bank deposits. Theseinstruments of monetary policy are used in varying combinations to influencethe overall level of bank loans, investments and deposits, the interest ratescharged on loans and paid for deposits, the price of the dollar in foreignexchange markets, and the level of inflation. The credit and monetary policiesof the FRB will continue to have a significant effect on the Bank and on theCompany.

 

Set forth below isa summary of significant statutes, regulations and policies that apply to theoperation of banking institutions. This summary is qualified in its entirety byreference to the full text of such statutes, regulations and policies.

 

BANK HOLDINGCOMPANY ACT

The Company isregistered as a bank holding company under the Bank Holding Company Act of1956, as amended (“BHCA”).  As a bankholding company, Capital Corp is subject to examination by the FRB. Pursuant tothe BHCA, Capital Corp is also subject to limitations on the kinds ofbusinesses in which it can engage directly or through subsidiaries.  It may, of course, manage or controlbanks.  Generally, however, it isprohibited, with certain exceptions, from acquiring direct or indirectownership or control of more than five percent of any class of voting shares ofan entity engaged in nonbanking activities, unless the FRB finds suchactivities to be “so closely related to banking” as to be deemed “a properincident thereto” within the meaning of the BHCA.  As a bank holding company, the Company may not acquire more thanfive percent of the voting shares of any domestic bank without the priorapproval of (or, for “well managed” companies, prior written notice to) theFRB.

 

The BHCA includesminimum capital requirements for bank holding companies.  See section titled “Regulation andSupervision – Regulatory Capital Requirements”.  Regulations and policies of the FRB also require a bank holdingcompany to serve as a source of financial and managerial strength to itssubsidiary banks. It is the FRB’s policy that a bank holding company should standready to use available resources to provide adequate capital funds to asubsidiary bank during periods of financial stress or adversity and that itshould maintain the financial flexibility and capital-raising capacity neededto obtain additional resources for assisting the subsidiary bank. Under certainconditions, the FRB may conclude that certain actions of a bank holdingcompany, such as the payment of a cash dividend, would constitute an unsafe andunsound banking practice.

 

COUNTY BANK

County Bank is aCalifornia state-licensed bank.  TheBank is a member of the Federal Reserve System.  The Bank’s deposits are insured by the Federal Deposit InsuranceCorporation (FDIC) and thus is subject to the rules and regulations of the FDICpertaining to deposit insurance, including deposit insurance assessments. TheBank is subject to regulation and supervision by the FRB and the CaliforniaDepartment of Financial Institutions (the “Department” or “DFI”).  Applicable federal and state regulationsaddress many aspects of the Bank’s business and activities, includinginvestments, loans, borrowings, transactions with affiliates,

 

8

----

 

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

 

DIVIDENDS

The Company maymake a distribution to its shareholders if the corporation’s retained earningsequal at least the amount of the proposed distribution. In the event sufficientretained earnings are not available for the proposed distribution, the Companymay nevertheless make a distribution to its shareholders if, after givingeffect to the distribution, the Company’s assets equal at least 125% of itsliabilities and certain other conditions are met. Since the 125% ratiotranslates into a minimum capital ratio of 20%, most bank holding companies,including the Company, based on its current capital ratios, are unable tosatisfy this second test.

 

The primary sourceof funds for payment of dividends by the Company to its shareholders is thereceipt of dividends from the Bank.  TheBank’s ability to pay dividends to the Company is limited by applicable stateand federal law. A California state-licensed bank may not make a cashdistribution to its shareholders in excess of the lesser of: (i) the bank’sretained earnings, or (ii) the bank’s net income for its last three fiscalyears, less the amount of any distributions made by the bank to its shareholdersduring such period. However, with the approval of the Commissioner of FinancialInstitutions (the “Commissioner”), a California state-licensed bank may paydividends in an amount not to exceed the greater of (i) the bank’s retainedearnings, (ii) its net income for its last fiscal year, or (iii) its net incomefor the current fiscal year.

 

The FRB, FDIC andthe Commissioner have authority to prohibit a bank from engaging in practiceswhich are considered to be unsafe and unsound. Depending on the financialcondition of the Bank and upon other factors, the FRB or the Commissioner coulddetermine that payment of dividends or other payments by the Bank mightconstitute an unsafe or unsound practice. Finally, any dividend that wouldcause a bank’s capital to fall below required regulatory capital levels couldalso be prohibited.

 

REGULATORY CAPITALREQUIREMENTS

The Company andthe Bank are both required to maintain a minimum risk-based capital ratio of 8%(at least 4% in the form of Tier 1 capital) of risk-weighted assets andoff-balance sheet items. “Tier 1” capital consists of common equity,non-cumulative perpetual preferred stock and minority interests in the equityaccounts of consolidated subsidiaries, and excludes goodwill. “Tier 2” capitalconsists of cumulative perpetual preferred stock, limited-life preferred stock,mandatory convertible securities, subordinated debt and (subject to a limit of1.25% of risk-weighted assets) general loan loss reserves. In calculating therelevant ratio, a bank’s assets and off-balance sheet commitments arerisk-weighted; thus, for example, loans are included at 100% of their bookvalue while assets considered less risky are included at a percentage of theirbook value (20%, for example, for interbank obligations, and 0% for vault cashand U.S. Government securities).

 

The Company andthe Bank are also subject to leverage capital ratio guidelines. The leverageratio guidelines require maintenance of a minimum ratio of 3% Tier 1 capital tototal assets for the most highly rated organizations. Institutions that areless highly rated, anticipating significant growth or subject to othersignificant risks will be required to maintain capital levels ranging from 1%to 2% above the 3% minimum.

 

Federal regulationhas established five tiers of capital measurement, ranging from “wellcapitalized” to “critically undercapitalized.” Federal bank regulatoryauthorities are required to take prompt corrective action with respect toinadequately capitalized banks. If a bank does not meet the minimum capitalrequirements set by its regulators, the regulators are compelled to takecertain actions, which may include a prohibition on the payment of dividends toa parent holding company and requiring adoption of an acceptable plan torestore capital to an acceptable level. Failure to comply will result infurther sanctions, which may include orders to raise capital, merge withanother institution, restrict transactions with affiliates, limit asset growthor reduce asset size, divest certain investments and /or elect new directors.It is the Company’s intention to maintain risk-based capital ratios for itselfand for the Bank at above the minimum for the “well capitalized” level (6% Tier1 risk-based; 10% total risk-based) and to maintain the leverage capital ratiofor County Bank above the 5% minimum for “well-capitalized” banks.   At December 31, 2002, the Company’sleverage, Tier 1 risk-based and total risk-based capital ratios were 7.68%,9.49% and 10.74%, and the Bank’s leverage, Tier 1 risk-based and totalrisk-based capital ratios were 7.48%, 9.25% and 10.50%.  No assurance can be given that the Companyor the Bank will be able to maintain capital ratios in the “well capitalized”level in the future.

 

9

----

 

“SOURCE OFSTRENGTH” POLICY

According to FRBpolicy, bank holding companies are expected to act as a source of financialstrength to each subsidiary bank and to commit resources to support suchsubsidiary.

 

LIMITATIONS ONACTIVITIES

The Federal DepositInsurance Corporation Improvement Act (“FDICIA”) prohibits state charteredbanks and their subsidiaries from engaging, as principal, in activities notpermissible by national banks and their subsidiaries, unless the bank’s primaryfederal regulator determines the activity poses no significant risk to the BankInsurance Fund (“BIF”) and the state bank is and continues to be adequatelycapitalized.  Similarly, state banksubsidiaries may not engage, as principal, in activities impermissible bysubsidiaries of national banks.  Thisprohibition extends to acquiring or retaining any investment, including thosethat would otherwise be permissible under California law.

 

The State BankParity Act, eliminates certain disparities between California state charteredbanks and federally chartered national banks by authorizing the Commissioner toaddress such disparities through a streamlined rulemaking process.  The Commissioner has taken action pursuantto the Parity Act to authorize, among other matters, previously impermissibleshare repurchases by state banks, subject to the prior approval of theCommissioner.

 

In November 1996,the Office of the Comptroller of the Currency (OCC) issued final regulationspermitting national banks to engage in a wider range of activities throughsubsidiaries.  “Eligible institutions”(those national banks that are well-capitalized, have a high overall rating anda satisfactory CRA rating, and are not subject to an enforcement order) mayengage in activities related to banking through operating subsidiaries aftergoing through a new expedited application process.  In addition, the new regulations include a provision whereby anational bank may apply to the OCC to engage in an activity through a subsidiaryin which the bank itself may not engage. In determining whether to permit the subsidiary to engage in theactivity, the OCC will evaluate why the bank itself is not permitted to engagein the activity and whether a Congressional purpose will be frustrated if theOCC permits the subsidiary to engage in the activity.  The State Bank Parity Act may permit state-licensed banks toengage in similar activities, subject to the discretion of the Commissioner.

 

TIE-INARRANGEMENTS AND TRANSACTIONS WITH AFFILIATED PERSONS

A bank isprohibited from certain tie-in arrangements in connection with any extension ofcredit, sale or lease of property or furnishing of services.  For example, with certain exceptions, a bankmay not condition an extension of credit on a promise by its customer to obtainother services provided by it, its holding company or other subsidiaries (ifany), or on a promise by its customer not to obtain other services from acompetitor.

 

Directors,officers and principal shareholders of the Company, and the companies withwhich they are associated, may conduct banking transactions with the Company inthe ordinary course of business.  Anyloans and commitments to loans included in such transactions must be made inaccordance with applicable law, on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with other persons of similar creditworthiness, and on terms notinvolving more than the normal risk of collectibility or presenting otherunfavorable features.

 

CROSS-INSTITUTIONASSESSMENTS

Any insureddepository institution owned by the Company can be assessed for losses incurredby the FDIC in connection with assistance provided to, or the failure of, anyother depository institution owned by the Company.

 

INSURANCE PREMIUMSAND ASSESSMENTS

The FDIC hasauthority to impose a special assessment on members of the BIF to ensure thatthere will be sufficient assessment income for repayment of BIF obligations andfor any other purpose which it deems necessary. The FDIC is authorized to setsemi-annual assessment rates for BIF members at levels sufficient to maintainthe BIF’s reserve ratio to a designated level of 1.25% of insureddeposits.  The FDIC has developed arisk-based assessment system, under which the assessment rate for an insureddepository institution varies according to the level of risk incurred in itsactivities. An institution’s risk category is based upon whether the

 

10

----

 

institution is“well capitalized,” “adequately capitalized,” or “undercapitalized.”  Each insured depository institution is alsoassigned to “supervisory subgroup” A, B or C. Subgroup A institutions are financially sound institutions with no morethan a few minor weaknesses; Subgroup B institutions are institutions thatdemonstrate weaknesses which, if not corrected, could result in significantdeterioration; and Subgroup C institutions are institutions for which there isa substantial probability that the FDIC will suffer a loss in connection withthe institution unless effective action is taken to correct the areas ofweakness. The FDIC assigns each member institution an annual FDIC assessmentrate which, as of the date of this report, varies between 0.0% per annum with a$2,000 minimum (for well capitalized Subgroup A institutions) and 0.27% perannum (for undercapitalized Subgroup C institutions). Insured institutions arenot permitted to disclose their risk assessment classification.

 

AUDIT REQUIREMENTS

All insureddepository institutions are required to have an annual, full-scope on-siteexamination.  Depository institutionswith assets greater than $500 million are required to have annual independentaudits, prepare financial statements in accordance with generally acceptedaccounting principles, and develop policies that ensure adequate internalcontrols over financial reporting. Insured depository institutions are also required to have an independentaudit committee comprised entirely of outside directors.

 

COMMUNITYREINVESTMENT ACT

The CommunityReinvestment Act (“CRA”) requires banks to identify the communities served bythe bank’s offices and to identify the types of credit the bank is prepared toextend within such communities. It also requires the bank’s regulators to assessthe bank’s performance in meeting the credit needs of its community and to takethat assessment into consideration in reviewing applications for mergers,acquisitions and other transactions. During January 2001, a CRA examination was completed.  The Bank was assigned a CRA rating of“satisfactory” as of this examination.

 

BANK SECRECY ACT

The Bank SecrecyAct requires financial institutions to keep records and file reports regardingcertain financial transactions that involve cash, and to implement counter-moneylaundering programs and compliance procedures.

 

SECURITIES ANDEXCHANGE COMMISSION FILINGS

Under theSecurities Exchange Act of 1934 (“Exchange Act”), Sections 13 and 15(d), thecompany must file periodic and current reports as well as proxy statements withthe Securities and Exchange Commission (the “SEC”).  The Company electronically files the following reports with theSEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), and Form 8-K(Current Report).  The Company mayprepare additional filings as required. The SEC maintains an Internet site, www.sec.gov, at which all formsfiled electronically may be accessed.

 

POTENTIALENFORCEMENT ACTIONS

Banks and theirinstitution-affiliated parties may be subject to potential enforcement actions bythe bank regulatory agencies for unsafe or unsound practices in conductingtheir businesses, or for violations of any law, rule, regulation or provision,any consent order with any agency, any condition imposed in writing by anagency, or any written agreement with the agency. Enforcement actions mayinclude the imposition of a conservator or receiver, cease-and-desist ordersand written agreements, the termination of deposit insurance, the imposition ofcivil money penalties, and removal and prohibition orders againstinstitution-affiliated parties. See “ — County Bank”.

 

INTERSTATE BANKING

Riegle-NealInterstate Banking and Branching Efficiency Act. The Riegle-Neal InterstateBanking and Branching Efficiency Act (the “Riegle-Neal Act”) was enacted in 1994.Generally, provisions of the Riegle-Neal Act authorize interstate banking andinterstate branching, subject to certain state options. The following is asummary of its provisions:

 

11

----

 

INTERSTATEBANKING AND BRANCHING

 

• Interstate acquisition of banks bybank holding companies was permitted in all states beginning on September 29,1995. However, states may continue to prohibit the acquisition of banks thathave been in existence less than five years and the interstate chartering ofnew banks.

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

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

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

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

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

HOSTSTATE REGULATION.  Out-of-state banksseeking to acquire or establish a branch are required to comply with anynondiscriminatory filing requirements of the host state where the branch islocated. The host state may set notification and reporting requirements for abranch of an out-of-state bank. A branch of an out-of-state bank is subject toall of the laws of the host state regarding intrastate branching, consumerprotection, fair lending and community reinvestment. A branch of anout-of-state bank is not permitted to conduct any activities at the branch thatare not permissible for a bank chartered by the host state.

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

CALIFORNIALAW.  California has enacted statelegislation in accordance with authority granted under the Riegle-Neal Act.This legislation permits banks headquartered outside California to acquire ormerge with California banks that have been in existence for at least fiveyears, and to thereby establish one or more California branch offices. Anout-of-state bank may not enter California by acquiring one or more branches ofa California bank or other operations constituting less than the whole bank.The law authorizes waiver of the 30% limit on state-wide market share for depositsas permitted by the Riegle-Neal Act. This law also authorizes Californiastate-licensed banks to conduct certain banking activities (including receiptof deposits and loan payments and conducting loan closings) on an agency basison behalf of out-of-state banks and to have out-of-state banks conduct similaragency activities on their behalf.

 

FINANCIAL SERVICESMODERNIZATION LEGISLATION

TheGramm-Leach-Bliley Act of 1999 (the “Modernization Act”).  The Modernization Act repealed twoprovisions of the Glass-Steagall Act: Section 20, which restricted theaffiliation of Federal Reserve member banks with firms “engaged principally” inspecified securities activities; and Section 32, which restricted officer,director, or employee interlocks between a member bank and any company orperson “primarily engaged” in specified securities activities.  In addition, the Modernization Act alsoexpressly preempts any state law restricting the establishment of financialaffiliations, primarily related to insurance. The law establishes a comprehensive framework to permit affiliationsamong commercial banks, insurance companies, securities firms, and otherfinancial service providers by revising and expanding the BHC Act framework topermit a holding company and its subsidiaries to engage in a full range offinancial activities through a new entity known as a Financial HoldingCompany.  “Financial activities” isbroadly defined to include not only banking, insurance, and securities activities,but also merchant banking and additional activities that the Federal Reserve,in conjunction with the Secretary of the Treasury, determine to be financial innature, incidental to such financial activities, or complementary activitiesthat do not pose a substantial risk to the safety and soundness of depositoryinstitutions or the financial system generally.

 

12

----

 

In order for theCompany to take advantage of the authority provided by the Modernization Act toaffiliate with other financial service providers, it must become a “FinancialHolding Company.”  To do so, the Companywould file a declaration with the FRB, electing to engage in activitiespermissible for Financial Holding Companies and certifying that it is eligibleto do so because its insured depository institution subsidiary (the Bank) iswell-capitalized and well-managed.  Inaddition, the Federal Reserve must determine that an insured depository institution subsidiary has at leasta “satisfactory” rating under the Community Reinvestment Act.  The Company currently meets the requirementsfor Financial Holding Company status. The Company will continue to monitor its strategic business plan todetermine whether, based on market conditions and other factors, the Companywishes to utilize any of its expanded powers provided in the Modernization Act.

 

The ModernizationAct also includes a new section of the Federal Deposit Insurance Act whichgoverns subsidiaries of state banks that engage in activities as principal thatwould only be permissible for a national bank to conduct in a financialsubsidiary.  The Act expressly preservesthe ability of a state bank to retain all existing subsidiaries.  Because California currently permitscommercial banks chartered by the state to engage in any activity permissiblefor national banks, the Bank will be permitted to form subsidiaries to engagein the activities authorized by the Modernization Act to the same extent as anational bank.  In order to form afinancial subsidiary, the Bank must be well-capitalized, and the Bank would besubject to the same capital deduction, risk management and affiliatetransaction rules as are applicable to national banks.  The Bank currently meets those requirements.

 

Under the Modernization Act, securities firms and insurance companiesthat elect to become Financial Holding Companies may acquire banks and otherfinancial institutions.  The Companydoes not believe that the Modernization Act will have a material adverse effecton its operations in the near-term.  However,to the extent that it permits banks, securities firms, and insurance companiesto affiliate, the financial services industry may experience furtherconsolidation.  The Modernization Act isintended to grant to community banks certain powers as a matter of right thatlarger institutions have accumulated on an ad hoc basis.  Nevertheless, the Modernization Act may havethe effect of increasing the amount of competition that the Company and theBank face from larger institutions and other types of companies that offerfinancial products, many of which may have substantially more financialresources than the Company and the Bank.

 

INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIALANTI-TERRORISM ACT OF 2001

The terrorist attacks in September, 2001, impacted the financialservices industry and led to federal legislation that attempts to addresscertain issues involving financial institutions. On October 26, 2001, PresidentBush signed into law the Uniting and Strengthening America by Providing AppropriateTools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USAPATRIOT Act”).

 

Part of the USA PATRIOT Act is the International Money LaunderingAbatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”).  IMLAFATA authorizes the Secretary of theTreasury, in consultation with the heads of other government agencies, to adoptspecial measures applicable to banks, bank holding companies, and otherfinancial institutions. These measures may include enhanced recordkeeping andreporting requirements for certain financial transactions that are of primarymoney laundering concern, due diligence requirements concerning the beneficialownership of certain types of accounts, and restrictions or prohibitions oncertain types of accounts with foreign financial institutions.

 

Among its other provisions, IMLAFATA requires each financialinstitution to: (i) establish an anti-money laundering program; (ii) establishdue diligence policies, procedures and controls with respect to its privatebanking accounts and correspondent banking accounts involving foreignindividuals and certain foreign banks; and (iii) avoid establishing,maintaining, administering, or managing correspondent accounts in the UnitedStates for, or on behalf of, a foreign bank that does not have a physicalpresence in any country.  In addition,IMLAFATA contains a provision encouraging cooperation among financialinstitutions, regulatory authorities and law enforcement authorities withrespect to individuals, entities and organizations engaged in, or reasonablysuspected of engaging in, terrorist acts or money laundering activities.  IMLAFATA expands the circumstances underwhich funds in a bank account may be forfeited and requires

 

13

----

 

covered financial institutions to respond under certain circumstancesto requests for information from federal banking agencies within 120 hours.IMLAFATA also amends the Bank Holding Company Act and the Bank Merger Act torequire the federal banking agencies to consider the effectiveness of afinancial institution’s anti-money laundering activities when reviewing anapplication under these acts.

 

Treasury regulations implementing the due diligence requirements ofIMLAFATA include standards to verify customer identity, to encouragecooperation among financial institutions, federal banking agencies, and lawenforcement authorities regarding possible money laundering or terroristactivities, to prohibit the anonymous use of “concentration accounts,” and torequire all covered financial institutions to have in place a Bank Secrecy Actcompliance program.

 

SARBANES-OXLEY ACT OF 2002

 

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Actof 2002 (“SOA”).  The stated goals ofthe SOA are to increase corporate responsibility, to provide for enhancedpenalties for accounting and auditing improprieties at publicly-tradedcompanies, and to protect investors by improving the accuracy and reliabilityof corporate disclosures made pursuant to the securities laws.

 

The SOA generally applies to all companies, both U.S. and non-U.S.,that file or are required to file periodic reports with the SEC under theExchange Act.  Given the extensive SECrole in implementing rules relating to many of the SOA’s new requirements, thefinal scope of these requirements remains to be determined.

 

The SOA includes very specific additional disclosure requirements andnew corporate governance rules, requires the SEC and securities exchanges toadopt extensive additional disclosure, corporate governance and other relatedrules, and mandates further studies of certain issues by the SEC and theComptroller General.  The SOA representssignificant federal involvement in matters traditionally left to stateregulatory systems, such as the regulation of the accounting profession, and tostate corporate law, such as the relationship between a board of directors andmanagement and a board of directors and its committees.

 

The SOA addresses, among other matters: auditcommittees for all reporting companies; certification of financial statementsby the chief executive officer and the chief financial officer; the forfeitureof bonuses or other incentive-based compensation and profits from the sale ofan issuer’s securities by directors and senior officers in the twelve monthperiod following initial publication of any financial statements that laterrequire restatement; a prohibition on insider trading during black out periods;disclosure of off-balance sheet transactions; a prohibition on personal loansto directors and officers; expedited filing requirements for Form 4’s;disclosure of a code of ethics and filing of a Form 8-K for a change or waiverof such code; “real time” filing of issuers’ periodic reports; the formation ofa public accounting oversight board; auditor independence; and variousincreased criminal penalties for violation of securities laws.

 

The SOA contains provisions which became effective upon enactment onJuly 30, 2002 and provisions which will become effective from within 30 days toone year from enactment.  The SEC hasbeen delegated the task of enacting rules to implement various provisions withrespect to, among other matters, disclosure in periodic filings pursuant to theExchange Act

 

REGULATION W

Transactionsbetween a bank and its “affiliates” are quantitatively and qualitativelyrestricted under the Federal Reserve Act. The Federal Deposit Insurance Act (“FDIA”) applies Section 23A and 23Bto insured nonmember banks in the same manner and to the same extent as if theywere members of the Federal Reserve System. The FRB has also issued Regulation W, which codifies prior regulationsunder Section 23A and 23B of the Federal Reserve Act and provides interpretiveguidance with respect to affiliate transactions.  Regulation W incorporates the exemption from the affiliatetransaction rules but expands the exemption to cover the purchase of any typeof loan or extension of credit from an affiliate.  Affiliates of a bank include, among other entities, the bank’sholding company and companies that are under common control with the bank.  The Company is considered to be an affiliateof the Bank.  In general, subject tocertain specified exemptions, a bank or its subsidiaries are limited in theirability to engage in “covered transactions” with

 

14

----

 

affiliates: (i) toan amount equal to 10% of the bank’s capital and surplus in the case of coveredtransactions with any one affiliate; and (ii) to an amount equal to 20% of thebank’s capital and surplus in the case of covered transactions with allaffiliates.  In addition, a bank and itssubsidiaries may engage in covered transactions and other specifiedtransactions only on terms and under circumstances that are substantially thesame, or at least as favorable to the bank or its subsidiaries, as thoseprevailing at the time for comparable transactions with nonaffiliatedcompanies.  “Covered transactions”include: (i) a loan or extension of credit to an affiliate; (ii) a purchase of,or an investment in, securities issued by an affiliate; (iii) a purchase ofassets from an affiliate, with some exceptions; (iv) the acceptance ofsecurities issued by an affiliate as collateral for a loan or extension ofcredit to any party; and (v) the issuance of a guarantee, acceptance or letterof credit on behalf of an affiliate. Additionally, under Regulation W, a bank and its subsidiaries may notpurchase a low-quality asset from an affiliate; covered transactions and otherspecified transactions between a bank or its subsidiaries and an affiliate mustbe on terms and conditions that are consistent with safe and sound bankingpractices; and with some exceptions, each loan or extension of credit by a bankto an affiliate must be secured by collateral with a market value ranging from100% to 130%, depending on the type of collateral, of the amount of the loan orextension of credit.

 

Regulation Wgenerally excludes all non-bank subsidiaries of the banks from treatment asaffiliates, except to the extent that the Federal Reserve Board decides totreat these subsidiaries as affiliates.

 

Concurrent withthe adoption of Regulation W, the Federal Reserve Board has proposed aregulation that would further limit the amount of loans hat could be purchasedby a bank from an affiliate to not more than 100% of the bank’s capital andsurplus.

 

It is impossible topredict with any degree of accuracy the competitive impact the laws andregulations described above will have on commercial banking in general and onthe business of the Company in particular. It is anticipated that the banking industry will continue to be a highlyregulated industry.  Additionally, thereappears to be a continued lessening of the historical distinction between theservices offered by financial institutions and other businesses offeringfinancial services.  Finally, the trendtoward nationwide interstate banking is expected to continue.  As a result of these factors, it isanticipated banks will experience increased competition for deposits and loansand, possibly, further increases in their cost of doing business.

 

15

----

 

***SelectedStatistical Information***

 

The following tables on pages 12 through 18 present certain statisticalinformation concerning the business of the Company.  This information should be read in conjunction with “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” atITEM 7, pages 10 through 20 of the Company’s 2002 Annual Report to Shareholdersincorporated herein by reference, and with the Company’s Consolidated FinancialStatements and the Notes thereto included in Item 8, pages 22 through 46 of theCompany’s 2002 Annual Report to Shareholders incorporated herein by reference.  The statistical information that follows isgenerally based on average daily amounts.

 

**Interest Rates and Margins:**

Managing interest ratesand margins is essential to the Company in order to maintain profitability. Thefollowing table presents, for the periods indicated, the distribution ofaverage assets, liabilities and shareholder’s equity, as well as the totaldollar amount of interest income from average interest-earning assets andresultant yields and the dollar amounts of interest expense and averageinterest-bearing liabilities, expressed both in dollars and rates.

 
|                                             |   | **For the  years ended December 31,** |    |
|--------------------------------------------------|--------|---------------------------------------|---------|
|                                             |   | **2002**                              |    | **2001** |   | **2000** |   |
| **(Dollars  in thousands)**                      |   | **Average  Balance**                  |    | **Interest** |   | **Rate** |   | **Average  Balance** |   | **Interest** |   | **Rate** |   | **Average  Balance** |   | **Interest** |   | **Rate** |   |
| Assets                                           |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                              |   | 21,244                                |    | 337 |   | 1.59 |   | 19,280 |   | 791 |   | 4.10 |   | 10,208 |   | 650 |   | 6.37 |   |
| Time deposits at  other financial institutions   |   | 500                                   |    |  

10 |   |  

2.00 |   | 385 |   |  

16 |   |  

4.16 |   | 635 |   |  

39 |   |  

6.14 |   |
| Nontaxable  investment securities(1)             |   | 28,936                                |    |  

1,606 |   |  

5.55 |   | 28,983 |   |  

1,522 |   |  

5.25 |   | 29,511 |   |  

1,537 |   |  

5.21 |   |
| Taxable  investment securities(1)                |   | 258,049                               |    |  

13,797 |   |  

5.35 |   | 201,237 |   |  

12,649 |   |  

6.29 |   | 145,707 |   |  

10,209 |   |  

7.01 |   |
| Loans, gross(2)                                  |   | 576,156                               |    | 43,503 |   | 7.55 |   | 453,503 |   | 43,495 |   | 9.59 |   | 369,367 |   | 38,643 |   | 10.46 |   |
| Total  interest-earning assets                   |   | 884,885                               |    | 59,253 |   | 6.70 |   | 703,388 |   | 58,473 |   | 8.31 |   | 555,428 |   | 51,078 |   | 9.19 |   |
| Allowance for  loan losses                       |   | (11,232                               | )       |   |   |   |   | (8,770 | ) |   |   |   |   | (7,121 | ) |   |   |   |   |
| Cash and due  from banks                         |   | 30,372                                |    |   |   |   |   | 28,498 |   |   |   |   |   | 23,753 |   |   |   |   |   |
| Premises and  equipment, net                     |   | 13,551                                |    |   |   |   |   | 13,358 |   |   |   |   |   | 13,036 |   |   |   |   |   |
| Interest  receivable and other assets            |   | 38,666                                |    |   |   |   |   | 31,759 |   |   |   |   |   | 27,786 |   |   |   |   |   |
| Total assets                                     |   | $                                     | 956,242 |   |   |   |   |   | $ | 768,233 |   |   |   |   |   | $ | 612,882 |   |   |   |   |   |
|                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and  shareholders’ equity       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Negotiable  orders of withdrawal                 |   | $                                     | 103,209 |   | 189 |   | .18 | % | $ | 86,011 |   | 254 |   | .30 | % | 74,663 |   | 503 |   | .67 | % |
| Savings deposits                                 |   | 218,788                               |    | 3,172 |   | 1.45 |   | 196,838 |   | 5,856 |   | 2.98 |   | 178,279 |   | 7,095 |   | 3.98 |   |
| Time deposits                                    |   | 311,583                               |    | 10,264 |   | 3.29 |   | 265,912 |   | 14,281 |   | 5.37 |   | 198,183 |   | 11,642 |   | 5.87 |   |
| Other borrowings                                 |   | 109,742                               |    | 4,598 |   | 4.19 |   | 43,772 |   | 2,308 |   | 6.47 |   | 22,456 |   | 1,528 |   | 6.80 |   |
| Total  interest-bearing liabilities              |   | 743,322                               |    | 18,223 |   | 2.45 |   | 592,533 |   | 22,699 |   | 3.83 |   | 473,581 |   | 20,768 |   | 4.39 |   |
| Noninterest-bearing  deposits                    |   | 131,367                               |    |   |   |   |   | 105,888 |   |   |   |   |   | 86,706 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities   |   | 5,767                                 |    |   |   |   |   | 5,620 |   |   |   |   |   | 5,787 |   |   |   |   |   |
| Total  liabilities                               |   | 880,456                               |    |   |   |   |   | 704,041 |   |   |   |   |   | 566,074 |   |   |   |   |   |
|                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity                 |   | 69,755                                |    |   |   |   |   | 59,047 |   |   |   |   |   | 46,808 |   |   |   |   |   |
|                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trust Preferred  Securities                      |   | 6,031                                 |    |   |   |   |   | 5,145 |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | $                                     | 956,242 |   |   |   |   |   | $ | 768,233 |   |   |   |   |   | $ | 612,882 |   |   |   |   |   |
|                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income and margin (3)              |   |                                  |    | $ | 41,030 |   | 4.64 | % |   |   | $ | 35,774 |   | 5.09 | % |   |   | $ | 30,310 |   | 5.46 | % |
|                                                  |        |                                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Tax-equivalentadjustments included in nontaxable investment securities income totaled$297,000, $211,000 and $190,000 in 2002, 2001 and 2000, respectively.  Tax equivalent income adjustments includedin the nontaxable investment securities income were derived from nontaxablemunicipal interest income.  Taxequivalent income adjustments included in taxable investment securities incomewere created by a dividends received deduction of $145,000, $95,000 and $0 in2002, 2001 and 2000, respectively.

(2)          Interest on non-accrualloans is recognized into income on a cash received basis.

(3)          Net interest margin iscomputed by dividing net interest income by total average interest-earningassets.

 

16

----

 

The Company’s netinterest income is affected by changes in the amount and mix ofinterest-earning assets and interest-bearing liabilities.  It is also affected by changes in yieldsearned on interest-earning assets and rates paid on interest-bearing depositsand borrowed funds.  The following tablesets forth changes in interest income and interest expense for each majorcategory of interest-earning asset and interest-bearing liability and theamount of change attributable to volume and rate changes for the yearsindicated.  The changes due to both rateand volume have been allocated to rate and volume in proportion to therelationship of the absolute dollar amount of the change in each.   Interest on non-accrual loans wasrecognized into income on a cash basis. Tax equivalent adjustments have been made to reflect the before taxinterest income for tax advantaged investments.

 
| **(Dollars  in thousands)**                     |   | **2002  Compared to 2001** |   | **2001  Compared to 2000** |   |
|-------------------------------------------------|--------|----------------------------|--------|----------------------------|--------|
|                                            |   | **Volume**                 |   | **Rate**                   |   | **Total** |   | **Volume** |   | **Rate** |   | **Total** |   |
| **Net Interest Income Variance  Analysis**      |   |                       |   |                       |   |   |   |   |   |   |   |   |   |
| **Increase (decrease) in interest  income:**    |   |                       |   |                       |   |   |   |   |   |   |   |   |   |
| Loans                                           |   | $                          | 10,363 |                       | $      | (10,355 | ) | $ | 8 |   | $ | 8,266 |   | $ | (3,414 | ) | $ | 4,852 |   |
| Taxable  investment securities                  |   | 3,222                      |   | (2,074                     | )      | 1,148 |   | 3,576 |   | (1,136 | ) | 2,440 |   |
| Nontaxable  investment securities               |   | (2                         | )      | 86                         |   | 84 |   | (28 | ) | 13 |   | (15 | ) |
| Federal funds  sold                             |   | 74                         |   | (528                       | )      | (454 | ) | 431 |   | (290 | ) | 141 |   |
| Time deposit at other institutions              |   | 4                          |   | (10                        | )      | (6 | ) | (13 | ) | (10 | ) | (23 | ) |
| Total                                           |   | 13,661                     |   | (12,881                    | )      | 780 |   | 12,232 |   | (4,837 | ) | 7,395 |   |
| **Increase (decrease) in interest  expense:**   |   |                       |   |                       |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand deposits               |   | 44                         |   | (109                       | )      | (65 | ) | 67 |   | (316 | ) | (249 | ) |
| Savings deposits                                |   | 593                        |   | (3,277                     | )      | (2,684 | ) | 685 |   | (1,924 | ) | (1,239 | ) |
| Time deposits                                   |   | 2,161                      |   | (6,178                     | )      | (4,017 | ) | 3,706 |   | (1,067 | ) | 2,639 |   |
| Other borrowings                                |   | 2,850                      |   | (560                       | )      | 2,290 |   | 1,187 |   | (407 | ) | 780 |   |
| Total                                           |   | 5,648                      |   | (10,124                    | )      | (4,476 | ) | 5,645 |   | (3,714 | ) | 1,931 |   |
| **Increase (decrease) in net interest  income** |   | $                          | 8,013  |                       | $      | (2,757 | ) | $ | 5,256 |   | $ | 6,587 |   | $ | (1,123 | ) | $ | 5,464 |   |

 

**Investment Portfolio Maturities**

The following table setsforth the maturities of debt securities at December 31, 2002 and the weightedaverage yields of such securities calculated on a book value basis using theweighted average yield within each scheduled maturity grouping.  Maturities of mortgage-backed securities andcollateralized mortgage obligations are stipulated in their respectivecontracts, however, actual maturities may differ from contractual maturitiesbecause borrowers may have the right to call or prepay obligations with orwithout call prepayment penalties. Yields on municipal securities have not been calculated on atax-equivalent basis.

 
|                                       |   | **Within One  Year** |   | **One to  Five Years** |   | **Five to  Ten Years** |   | **Over Ten  Years** |   |       |   |
|--------------------------------------------|--------|----------------------|--------|------------------------|--------|------------------------|--------|---------------------|--------|------------|--------|
| **(Dollars in thousands)**                 |   | **Amount**           |   | **Yield**              |   | **Amount**             |   | **Yield**           |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Total** |   |
|                                       |   |                 |   |                   |   |                   |   |                |   |       |   |   |   |   |   |   |   |   |   |
| Available for sale debt securities:        |   |                 |   |                   |   |                   |   |                |   |       |   |   |   |   |   |   |   |   |   |
| U.S. Treasury and U.S. government agencies |   | $                    | 20,394 |                   | 3.04   | %                      | $      | 45,687              |   | 4.68       | %      | $ | 49 |   | 3.19 | % | $ | — |   | — | % | $ | 66,130 |   |
| State and political subdivisions           |   | —               |   | —                 |   | 258                    |   | 4.40                |   | 17,946     |   | 4.37 |   | 7,416 |   | 4.56 |   | 25,620 |   |
| Mortgage-backed securities                 |   | —               |   | —                 |   | 3                      |   | 8.73                |   | 21,915     |   | 4.59 |   | 42,736 |   | 5.81 |   | 64,654 |   |
| Collateralized mortgage obligations        |   | —               |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 40,952 |   | 4.32 |   | 40,952 |   |
| Corporate debt securities                  |   | 507                  |   | 6.12                   |   | 3,052                  |   | 5.54                |   | —     |   | — |   | — |   | — |   | 3,559 |   |
| Held to maturity debt securities:          |   |                 |   |                   |   |                   |   |                |   |       |   |   |   |   |   |   |   |   |   |
| U.S. Treasury and U.S. government agencies |   | —               |   | —                 |   | —                 |   | —              |   | 4,629      |   | 6.70 |   | — |   | — |   | 4,629 |   |
| State and political subdivisions           |   | —               |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 4,347 |   | 5.14 |   | 4,347 |   |
| Mortgage-backed securities                 |   | —               |   | —                 |   | —                 |   | —              |   | —     |   | — |   | 46,652 |   | 5.98 |   | 46,652 |   |
| Total debt securities                      |   | $                    | 20,901 |                   | 3.11   | %                      | $      | 49,000              |   | 4.73       | %      | $ | 44,539 |   | 4.72 | % | $ | 142,103 |   | 5.35 | % | $ | 256,543 |   |

 

17

----

 

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

 

**Asset / Liability Repricing**

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

 
|                                                      |   | **By  Repricing Interval** |     |
|-----------------------------------------------------------|--------|----------------------------|----------|
| **(Dollars in thousands)**                                |   | **Within  three  months**  |     | **After  three  months,  Within  one year** |   | **After one year, within  five years** |   | **After  five years** |   | **Noninterest-bearing  Funds** |   | **Total** |   |
| **Assets**                                                |   |                       |     |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                                       |   | $                          | 26,555   |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 26,555 |   |
| Time deposits at  other institutions                      |   | 250                        |     | 250 |   | — |   | — |   | — |   | 500 |   |
| Investment  securities                                    |   | 4,977                      |     | 22,075 |   | 68,774 |   | 180,257 |   | 10,937 |   | 287,020 |   |
| Loans                                                     |   | 357,204                    |     | 72,080 |   | 151,037 |   | 53,452 |   | — |   | 633,773 |   |
| Noninterest-earning  assets and allowance for loan losses |   | —                     |     | — |   | — |   | — |   | 86,362 |   | 86,362 |   |
| Total assets                                              |   | $                          | 388,986  |   | $ | 94,405 |   | $ | 219,811 |   | $ | 233,709 |   | $ | 97,299 |   | $ | 1,034,210 |   |
|                                                      |   |                       |     |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and shareholders’ equity**            |   |                       |     |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                           |   | $                          | —   |   | $ | — |   | $ | — |   | $ | — |   | $ | 164,852 |   | $ | 164,852 |   |
| Savings, money  market & NOW deposits                 |   | 343,853                    |     | — |   | — |   | — |   | — |   | 343,853 |   |
| Time deposits                                             |   | 125,744                    |     | 126,825 |   | 73,105 |   | — |   | — |   | 325,674 |   |
| Other  interest-bearing liabilities                       |   | 25,003                     |     | 5,000 |   | 67,141 |   | 13,060 |   | — |   | 110,204 |   |
| Trust Preferred  Securities                               |   | —                     |     | — |   | — |   | 6,031 |   | — |   | 6,031 |   |
| Other  liabilities and shareholders’ equity          |   | —                     |     | — |   | — |   | — |   | 83,596 |   | 83,596 |   |
| Total  liabilities and shareholders’ equity          |   | $                          | 494,600  |   | $ | 131,825 |   | $ | 140,246 |   | $ | 19,091 |   | $ | 248,448 |   | $ | 1,034,210 |   |
|                                                      |   |                       |     |   |   |   |   |   |   |   |   |   |   |
| Interest rate  sensitivity gap                            |   | $                          | (105,614 | ) | $ | (37,420 | ) | $ | 79,565 |   | $ | 214,618 |   | $ | (151,149 | ) | $ | — |   |
|                                                      |   |                       |     |   |   |   |   |   |   |   |   |   |   |
| Cumulative  interest rate sensitivity gap                 |   | $                          | (105,614 | ) | $ | (143,034 | ) | $ | (63,469 | ) | $ | 151,149 |   | $ | — |   | — |   |

 

18

----

 

**Loan Portfolio**

At December 31, 2002, the Company had approximately $235,140,000 inundisbursed loan commitments.  Thiscompares with $188,802,000 at December 31, 2001.  Standby and performance letters of credit were $6,522,000 and$3,852,000, at December 31, 2002 and 2001. For further information about the composition of the Company’s loanportfolio see  “ITEM 7–MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”section entitled “Credit Risk Management and Asset Quality,” pages 15 through17 of the Company’s 2002 Annual Report to Shareholders incorporated herein byreference.

 

The following table shows the composition of the loan portfolio of theCompany by type of loan on the dates indicated:

 
|                                   |   | **December 31,** |    |
|----------------------------------------|--------|------------------|---------|
|                                   |   | **2002**         |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **(Dollars  in thousands)**            |   | **Amount**       |    | **Amount** |   | **Amount** |   | **Amount** |   | **Amount** |   |
| Commercial, financial and agricultural |   | $                | 242,157 |   | $ | 215,115 |   | $ | 155,952 |   | $ | 112,179 |   | $ | 87,245 |   |
| Real estate –construction         |   | 78,064           |    | 57,989 |   | 30,133 |   | 11,926 |   | 13,840 |   |
| Real estate – mortgage            |   | 244,468          |    | 187,586 |   | 141,575 |   | 120,978 |   | 96,957 |   |
| Consumer installment                   |   | 69,084           |    | 71,730 |   | 85,004 |   | 86,185 |   | 70,891 |   |
| Total                                  |   | $                | 633,773 |   | $ | 532,420 |   | $ | 412,664 |   | $ | 331,268 |   | $ | 268,933 |   |

 

The table that followsshows the maturity distribution of the portfolio of commercial andagricultural, real estate construction, real estate mortgage and installmentloans on December 31, 2002 by fixed and floating rate attributes:

 
|                             |   | **December  31, 2002** |    |
|----------------------------------|--------|------------------------|---------|
| **(Dollars in thousands)**       |   | **Within  One Year**   |    | **One to  Five Years** |   | **Over  Five Years** |   | **Total** |   |
|                             |   |                   |    |   |   |   |   |   |   |
| *Commercial and agricultural*    |   |                   |    |   |   |   |   |   |   |
| Loans with floating rates        |   | $                      | 159,620 |   | $ | 16,885 |   | $ | 28,316 |   | $ | 204,821 |   |
| Loans with predetermined rates   |   | 18,288                 |    | 4,637 |   | 14,411 |   | 37,336 |   |
| Subtotal                         |   | 177,908                |    | 21,522 |   | 42,727 |   | 242,157 |   |
|                             |   |                   |    |   |   |   |   |   |   |
| *Real  Estate—Construction* |   |                   |    |   |   |   |   |   |   |
| Loans with floating rates        |   | 37,806                 |    | 10,177 |   | 18,103 |   | 66,086 |   |
| Loans with predetermined rates   |   | 8,783                  |    | 3,142 |   | 53 |   | 11,978 |   |
| Subtotal                         |   | 46,589                 |    | 13,319 |   | 18,156 |   | 78,064 |   |
|                             |   |                   |    |   |   |   |   |   |   |
| *Real  Estate—Mortgage*     |   |                   |    |   |   |   |   |   |   |
| Loans with floating rates        |   | 16,578                 |    | 13,690 |   | 162,704 |   | 192,972 |   |
| Loans with predetermined rates   |   | 803                    |    | 6,001 |   | 44,692 |   | 51,496 |   |
| Subtotal                         |   | 17,381                 |    | 19,691 |   | 207,396 |   | 244,468 |   |
|                             |   |                   |    |   |   |   |   |   |   |
| *Consumer installment*           |   |                   |    |   |   |   |   |   |   |
| Loans with floating rates        |   | 21,917                 |    | 10,432 |   | 11,068 |   | 43,417 |   |
| Loans with predetermined rates   |   | 5,221                  |    | 15,763 |   | 4,683 |   | 25,667 |   |
| Subtotal                         |   | 27,138                 |    | 26,195 |   | 15,751 |   | 69,084 |   |
|                             |   |                   |    |   |   |   |   |   |   |
| Total                            |   | $                      | 269,016 |   | $ | 80,727 |   | $ | 284,030 |   | $ | 633,773 |   |

 

The Company seeks to mitigatethe risks inherent in its loan portfolio by adhering to certain underwritingpractices. They include analysis of prior credit histories, financialstatements, tax returns and cash flow

 

19

----

 

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

 

The Company also has aninternal loan review process as well as periodic external reviews.  The results of these reviews are assessed bythe Company’s audit committee. Collection of delinquent loans is generally the responsibility of the Company’scredit administration staff.  However,certain problem loans may be dealt with by the originating loan officer.  The Directors Loan Committee reviews thestatus of delinquent and problem loans on a monthly basis. The Company’sunderwriting and review practices notwithstanding, in the normal course ofbusiness, the Company expects to incur loan losses in the future.

 

**Nonaccrual, Past Due and Restructured Loans**

 

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

 
|                                    |   | **December 31,** |        |
|-----------------------------------------|--------|------------------|-------------|
|                                    |   | **2002**         |        | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **(Dollars in thousands)**              |   | **Amount**       |        | **Amount** |   | **Amount** |   | **Amount** |   | **Amount** |   |
| Nonaccrual loans                        |   | $                |  2,381 |   | $ |  4,247 |   | $ |  2,243 |   | $ |  1,984 |   | $ | 1,164 |   |
| Accruing loans past due 90 days or more |   | 2                |        | 609 |   | 97 |   | 6 |   | 413 |   |
| Total nonperforming loans               |   | 2,383            |        | 4,856 |   | 2,340 |   | 1,990 |   | 1,577 |   |
| Other real estate owned                 |   | 60               |        | 472 |   | 248 |   | 247 |   | 60 |   |
| Total nonperforming assets              |   | $                |  2,443 |   | $ |  5,328 |   | $ |  2,588 |   | $ |  2,237 |   | $ | 1,637 |   |
|                                    |   |             |        |   |   |   |   |   |   |   |   |
| Nonperforming loans to total loans      |   | 0.38             | %           | 0.91 | % | 0.57 | % | 0.60 | % | 0.59 | % |
| Nonperforming assets to total assets    |   | 0.24             | %           | 1.00 | % | 0.38 | % | 0.40 | % | 0.33 | % |

 

Loans with significant potential problems or impaired loans are placedon nonaccrual status.  Managementdefines impaired loans as those loans, regardless of past due status, in whichmanagement believes the collection of principal and interest is in doubt.  The balance of impaired loans was$2,383,000, $4,856,000, $2,340,000, $1,990,000 and $1,577,000 in 2002, 2001,2000, 1999, and 1998 respectively. Nonaccrual loans totaled $2,381,000, $4,247,000, $2,243,000, $1,984,000,and $1,164,000 in 2002, 2001, 2000, 1999, and 1998 respectively.  The amount of gross interest income thatwould have been recorded on nonaccrual loans in the periods then ended if theloans had been current in accordance with the original terms and had been outstandingthroughout the period or since origination, if held for part of the period, was$131,000, $170,000****$224,000, $143,000 and $91,000 in 2002,2001, 2000, 1999, and 1998 .  The amountof interest income on nonaccrual loans that was included in net income was$210,000, $105,000**,**$79,000, $126,000, and $134,000 in 2002,2001, 2000, 1999, and 1998.

 

**Allocation of the Allowance for Loan Losses**

The following table summarizes a breakdown of the allowance for loanlosses by loan category and the percentage by loan category of total loans forthe dates indicated:

 
|                                   |   | **December 31,** |   |
|----------------------------------------|--------|------------------|--------|
|                                   |   | **2002**         |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **(Dollars in thousands)**             |   | **Amount**       |   | **Loans  % to   total  loans** |   | **Amount** |   | **Loan  % to  Total  loans** |   | **Amount** |   | **Loans  % to   total  loans** |   | **Amount** |   | **Loans  % to   total  loans** |   | **Amount** |   | **Loans  % to  Total  loans** |   |
| Commercial, financial and agricultural |   | $                | 6,674  |   | 38 | % | $ | 6,029 |   | 40 | % | $ | 4,186 |   | 38 | % | $ | 3,365 |   | 34 | % | $ | 2,618 |   | 33 | % |
| Real estate –construction         |   | 971              |   | 12 |   | 676 |   | 11 |   | 451 |   | 7 |   | 358 |   | 4 |   | 376 |   | 5 |   |
| Real estate – mortgage            |   | 3,397            |   | 39 |   | 2,187 |   | 35 |   | 2,076 |   | 34 |   | 1,815 |   | 36 |   | 1,260 |   | 36 |   |
| Installment                            |   | 1,092            |   | 11 |   | 851 |   | 14 |   | 1,494 |   | 21 |   | 1,004 |   | 26 |   | 521 |   | 26 |   |
| Total                                  |   | $                | 12,134 |   | 100 | % | $ | 9,743 |   | 100 | % | $ | 8,207 |   | 100 | % | $ | 6,542 |   | 100 | % | $ | 4,775 |   | 100 | % |

 

20

----

 

**Other Interest-Bearing Assets**

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

 
|                                   |   | **December  31** |   |
|----------------------------------------|--------|------------------|--------|
| **(Dollars in thousands)**             |   | **2002**         |   | **2001** |   | **2000** |   |
|                                   |   |             |   |   |   |   |   |
| Cash surrender value of life insurance |   | $                | 17,240 |   | $ | 16,160 |   | $ | 6,075 |   |
|                                        |        |                  |        |  |  |  |  |  |  |  |

 

During 2002, 2001, and2000 the Bank purchased $172,000, $9,595,000, and $0 in new bank owned lifeinsurance policies.  This additionallife insurance is in the form of single premium life policies covering bankofficers.  These policies have avariable rate of return that is reset annually by each insurer.  The Bank is the owner of these policies andalso the named beneficiary.

 

**Deposits**

 

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

 

Deposits

 
|                                |   | **For the  Year Ended December 31,** |    |
|-------------------------------------|--------|--------------------------------------|---------|
|                                |   | **2002**                             |    | **2001** |   | **2000** |   |
| **(Dollars in thousands)**          |   | **Amount**                           |    | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
| Noninterest-bearing demand deposits |   | $                                    | 131,367 |   | — | % | $ | 105,888 |   | — | % | $ | 86,706 |   | — | % |
| Interest-bearing demand deposits    |   | 103,209                              |    | 0.18 |   | 86,011 |   | 0.30 |   | 74,663 |   | 0.67 |   |
| Savings deposits                    |   | 218,788                              |    | 1.45 |   | 196,838 |   | 2.98 |   | 178,279 |   | 3.98 |   |
| Time deposits under $100,000        |   | 161,810                              |    | 3.44 |   | 154,883 |   | 5.33 |   | 114,422 |   | 5.78 |   |
| Time deposits $100,000 and over     |   | 149,773                              |    | 3.14 |   | 111,029 |   | 5.42 |   | 83,761 |   | 6.00 |   |
|                                     |        |                                      |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

Maturities of timecertificates of deposits of $100,000 or more outstanding at December 31,2002 are summarized as follows:

 
| **(Dollars in thousands)**     |   |   | ** ** |
|--------------------------------|--------|--------|------------|
| Remaining Maturity:            |   |   |       |
| Three months or less           |   | $      | 69,661     |   |
| Over three through six months  |   | 38,863 |       |
| Over six through twelve months |   | 23,319 |       |
| Over twelve months             |   | 28,872 |       |
| Total                          |   | $      | 160,715    |   |

 

21

----

 

**Return on Equity and Assets**

 

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

 

 

**Return on Average Equity and Assets**
|                             |   | **For the  year ended  December 31,** |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **2002**                              |   | **2001** | ** ** | **2000** | ** ** |
| Return on average assets         |   | 1.09                                  | %      | 1.03 | % | 1.09 | % |
| Return on average equity         |   | 14.94                                 |   | 13.40 |   | 14.33 |   |
| Dividend payout ratio            |   | —                                |   | — |   | — |   |
| Average equity to average assets |   | 7.29                                  | %      | 7.69 | % | 7.64 | % |

 

22

----

 

**ITEM 2.                  PROPERTIES**

 

***The Bank***

 

(1)           North Merced Office

The Bank’s north Mercedoffice is located at 490 West Olive Avenue in Merced with approximately 5,600square feet of interior floor space. This building was constructed in 1978 at a cost of approximately$400,000 and is situated on a lot of approximately 47,000 square feet, whichthe Bank purchased in 1977 for $186,000. The building was remodeled in 2002 at a cost of approximately$703,000.Management believes that this facility will be adequate to accommodatethe operations of this branch for the foreseeable future.

 

(2)           Downtown Merced Branch andAdministrative Headquarters

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

 

(3)           Atwater Branch

On October 5, 1981,the Bank opened a branch office at 735 Bellevue Road, Atwater.  The building contains approximately 6,000square feet of interior floor space, and was built at a total cost of approximately$500,000.  In 1994, the Bank purchasedthe lot at a cost of $316,000. Management of the Bank believes that this facility will be adequate toaccommodate the operations of this branch for the foreseeable future.  The data processing and central servicesupport personnel and related equipment were relocated to the new facility indowntown Merced, as discussed above in late 1997.  The building was remodeled in 2001 to accommodate the trainingdepartment at a cost of approximately $1,074,000.

 

 (4)          LosBanos Branch

In October of 1994, theBank opened a full service banking facility relocated at 953 W. PachecoBoulevard, Los Banos.  The Bank enteredinto a ten-year lease with a non-affiliated third party on the facility. Thenew facility contains 4,928 square feet of interior floor space.  Remodeling and redecorating expenses wereapproximately $355,000.  Managementbelieves that this facility will be adequate to accommodate the operation ofthe branch for the foreseeable future.

 

(5)           Hilmar Branch

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

 

(6)           Sonora Branch

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

 

(7)           Turlock Branches

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

 

23

----

 

In April 2002, 1999, theBank received regulatory approval to relocate the Turlock downtown branch.  A two year lease commenced on April2002.  The building was remodeled at a costof approximately $71,000.  The facilityincludes approximately 3,900 square feet located at 130 Main Street inTurlock.  Management is reviewingpossible alternative sites for a downtown Turlock office.  It is anticipated that either a new leasewill be executed or a relocation to a new site will occur during the secondquarter of 2004.

 

In October 2002, the Bankreceived approval to purchase another facility.  The facility includes approximately 10,000 square feet at a costof approximately $1,300,000.  The buildingis located at 2891 Geer Road Turlock. The building is currently being leased back to Foster Farms on amonth-to-month agreement.  It isanticipated that the Geer Road Turlock branch will relocate to this facility inthe future.

 

(8)           Modesto Branches

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

 

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

 

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

On December 11, 1997, theBank purchased the sites of three former branches of Bank of America.  These facilities are located at 640 MainStreet, Livingston, 1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa.The branch in Livingston was purchased at a cost of $251,000 and is a 5,699square feet facility.  The Dos Palosbranch was purchased at a cost of $296,000 and is an 8,274 square feet facility.  The Mariposa branch was purchased for a costof $313,000 and is a 4,200 square feet facility.  The Mariposa facility was remodeled in 2002 at a cost ofapproximately $97,000.  Managementbelieves that these facilities will be adequate to accommodate the bankingoperation for the foreseeable future.

 

(10)         Madera Branch

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

 

(11)         Fresno Branches

In November, 1999, the Bank received approval to convert the FresnoTown and County branch into a full service County Bank office. The Bankrelocated the previous Thrift office to a larger facility, entering into a 4year lease with a nonaffiliated party for an approximate 5,200 square footfacility located at 2150 West Shaw Avenue, Fresno, California.  The new lease agreement was entered into inAugust, 1999.  The building was purchasedin July 2002 at a cost of approximately $993,000.  Management believes the facility will be adequate to accommodatethe banking operation for the foreseeable future.

 

In September, 2000, the Bank opened a second full service office.  The Bank entered into a 10 year lease with anonaffiliated party for approximately a 4,755 square foot facility located at1330 East Shaw Avenue, Fresno, California. The new lease became effective July 1, 2000.  Management believes the facility will be adequate to accommodatethe banking operation for the foreseeable future.

 

In June 2002 the Bank received regulatory approval to purchase RegencyInvestment Advisors which is located at 7060 N. Fresno Street, Fresno,California.  The Bank entered into afacility lease agreement dated April 2002 for a term of 1 year with two 6 monthextension options.  It is anticipatedthat a relocation to a new site will occur.

 

24

----

 

(12)         San Francisco Branch

In March 2001, the Bank opened a full service office in San Francisco,California.  The current facility islocated at 130 Battery Street in San Francisco. Effective March 1, 2001, theBank entered into a 5 year lease with a nonaffiliated party for approximately2,880 square feet of office space. Management believes the facility will be adequate to accommodate the operationof the branch in San Francisco for the foreseeable future.

 

(13)         Stockton Branch

In June 2001, the Bank opened a full service banking facility locatedin Stockton, California.  The Bankentered into a five-year lease with a nonaffiliated third party forapproximately 1,740 square feet of office space.  Management believes that this facility will be adequate toaccommodate the operation of this branch for the foreseeable future.

 

(14)         Annex

In April, 2002, an additional 2225 square foot of office space wasleased at 470 W. Main Street Merced, California.  Several departments were relocated.

 

**ITEM 3.                  LEGALPROCEEDINGS**

 

As of December 31, 2002,the Company, is not a party to, nor is any of its properties the subject of,any material pending legal proceedings, nor are any such proceedings known tobe contemplated by government authorities.

 

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

 

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

 

The Company did not submit any matters to a vote ofsecurity holders in the quarter ended December 31, 2002.

 

**PART II**

 

**ITEM5.****                     MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED SHAREHOLDER MATTERS**

 

For information concerning the market for the Company’s common stockand related shareholder matters, see page 19 of the Company’s 2002 AnnualReport to Shareholders incorporated herein by reference.

 

For information concerning the Company’s dividend policy, see the“Capital Resources” discussion on page 11 of the Company’s 2002 Annual Reportto Shareholders incorporated herein by reference.

 

25

----

 

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

 

The Company’s stock is included for quotation on the Nasdaq NationalMarket System with a stock quotation symbol of CCOW.  The following table indicates the range of high and low bidprices for the period shown, based upon information provided by the NasdaqNational Market System.  Suchover-the-counter market quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission and may not necessarily reflect actualtransactions.  There were approximately1,700 CCOW shareholders as of December 31, 2002.

 

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

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

 

26

----

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

 

For selected consolidated financial data concerning the Company, seepage 9 of the Company’s 2002 Annual Report to Shareholders incorporated hereinby reference.

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

 

For management’s discussion and analysis of financial condition andresults of operations, see pages 10 through 20 of the Company’s 2002 AnnualReport to Shareholders incorporated herein by reference.

 
| **ITEM 7A.** |   | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET****RISK** |
|--------------|--------|--------------------------------------------------------------------|

 

For management’s discussion and analysis of marketrisk and interest rate risk management, see pages 17 through 19 of theCompany’s 2002 Annual Report to Shareholders incorporated herein by reference.

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

 

Audited Consolidated Balance Sheets as of December 31,2002 and 2001 and Audited Consolidated Statements of Income and ComprehensiveIncome, Shareholders’ Equity and Cash Flows for the fiscal years endingDecember 31, 2002, 2001, and 2000 appear on pages 22 through 25 of theCompany’s 2002 Annual Report to Shareholders incorporated herein byreference.  Notes to the ConsolidatedFinancial Statements appear on pages 26 through 46 of the Company’s 2002 AnnualReport to Shareholders incorporated herein by reference.  The Independent Auditors’ Report appears onpage 21 of the Company’s 2002 Annual Report to Shareholders incorporated hereinby reference.

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

 

There were no changes in and there were nodisagreements with accountants on accounting and financial disclosure.

 

**PARTIII**

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

 

As permitted by the Securitiesand Exchange Commission’s rules relating to Form 10-K, the information calledfor by this item is incorporated by reference from the section of the Company’s2003 Proxy Statement titled “Election of Directors,” which is to be filed on orabout March 14, 2003.

 
| **ITEM  11.** |   | **EXECUTIVE COMPENSATION** |
|---------------|--------|----------------------------|

 

As permitted by theSecurities and Exchange Commission, the information called for by this item isincorporated by reference from the section of the Company’s 2003 ProxyStatement titled “Information Pertaining to Election of Directors,” which is tobe filed on or about March 14, 2003.

 
| **ITEM 12.** |   | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|--------|-----------------------------------------------------------------------------------------------------|

 

As permitted by theSecurities and Exchange Commission’s rules relating to Form 10-K, theinformation called for by this item is incorporated by reference from theCompany’s 2003 Proxy Statement, which is to be filed on or about March 17,2003.

 

27

----

 

**Securities authorized for issuance under equity compensationplans.**

(a)          Theinformation in the following table is provided as of the end of the fiscal yearended December 2002 with respect to compensation plans (including individualcompensation arrangements) under which equity securities are issuable:

 

**Equity Compensation Plan Information**
|                                                       |   |                                                                                                        |   |                                                                                      |   |                                                                                                                                                        |
|------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Plan category**                                          |   | **(a)  Number of securities   to be issued upon   exercise of   outstanding options,  warrants and rights** |   | **(b)  Weighted-average   exercise price of   outstanding options,  warrants and rights** |   | **(c)  Number of securities   remaining available for   future issuance   under equity   compensation plans  (excluding securities   reflected in column)** |
| Equity compensation plans approved by security holders     |   | 356,483                                                                                                     |   | $                                                                                         | 12.307 |                                                                                                                                                        | 201,225 |
| Equity compensation plans not approved by security holders |   | —                                                                                                      |   | —                                                                                    |   | —                                                                                                                                                      |
| Total                                                      |   | 356,483                                                                                                     |   | $                                                                                         | 12.307 |                                                                                                                                                        | 201,225 |

 

**ITEM 13.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

As permitted by theSecurities and Exchange Commission’s rules relating to Form 10-K, theinformation called for by this item is incorporated by reference from theCompany’s Proxy Statement, which was filed on or about March 14, 2003.

 

**ITEM 14.               CONTROLSAND PROCEDURES**

 

EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision andwith the participation of the Company’s management, including its chiefexecutive office and chief financial officer, the Company conducted anevaluation of the effectiveness of the design and operation of its disclosurecontrols and procedures as defined by Rules 13a - 14(c) and 15d - 14(c)) underthe Securities Exchange Act of 1934.

 

The evaluation wascompleted within 90 days of the filing of this report (“Evaluation Date”).  Based on the evaluation, the chief executiveofficer and chief financial officer concluded that as of the Evaluation Datethe disclosure controls and procedures were adequate and effective, and thatthe material information required to be included in this report, includinginformation from the Company’s consolidated subsidiaries, was properly recorded,processed, summarized and reported, and was made known to the chief executiveofficer and chief financial officer by others within the Company in a timelymanner, particularly during the period when this annual report on Form 10-K wasbeing prepared.

 

CHANGES IN INTERNALCONTROLS

There were no significantchanges in our internal controls or in other factors that could significantlyaffect our disclosure controls subsequent to the Evaluation Date through thedate of this filing of Form 10-K for the annual period ended December 31, 2002,nor were there any significant deficiencies or material weaknesses in ourinternal controls that would require corrective action, so therefore there wereno corrective actions taken.

 

28

----

 

**PARTIV**

 

**ITEM 15.****                                           EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON****FORM 8-K.**

 
| (a)    |   | **Financial Statements and Schedules**                                                                                                                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | An index of all  financial statements and schedules filed as part of this Form 10-K appears  below and the material which begins on the pages of the Company’s Annual  Report to Shareholders for the year ended December 31, 2002 listed, are  incorporated herein by reference in response to Item 8 of this report. |
| (b)    |   | **Reports on Form 8-K**                                                                                                                                                                                                                                                                                                     |
|   |   | There were no reports  on Form 8-K filed in the quarter ending December 31, 2002.                                                                                                                                                                                                                                           |
| (c)    |   | **Exhibits****(Numbered in accordance with Item 601  of Regulation S-K)**                                                                                                                                                                                                                                                   |
|   |   | The Exhibit Index is  located on the final page of this report on Form 10-K.                                                                                                                                                                                                                                                |
| (d)    |   | **Financial Statement Schedules**                                                                                                                                                                                                                                                                                           |
|   |   | All other supporting schedules  are omitted because they are not applicable, not required, or the information  required to be set forth therein is included in the financial statements or  notes thereto incorporated herein by reference.                                                                                 |

 

29

----

 

**SIGNATURES**

 

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

 
|   | **CAPITAL CORP OF THE WEST** |                                                                                          |
|--------|------------------------------|-----------------------------------------------------------------------------------------------|
|   |                         |                                                                                          |
|   |                         |                                                                                          |
|   | By:                          |   /s/   THOMAS T. HAWKER                                                            |   |
|   |                         |   THOMAS T. HAWKER  President and Chief Executive Officer  (Principal Executive Officer) |   |
|   |                         |                                                                                          |   |
|   |                         |                                                                                          |   |
|   | By:                          |   /s/   R. DALE MCKINNEY                                                            |   |
|   |                         |   R. DALE MCKINNEY                                                                       |   |
|   |                         | Executive Vice President  and  Chief Financial Officer  (Principal Financial Officer)         |   |
|   |                         |                                                                                          |   |
|   |                         |                                                                                          |   |
|   | By:                          |   /s/   DAVID A. CURTIS                                                             |   |
|   |                         |   DAVID A. CURTIS                                                                        |   |
|   |                         | Vice President and  Controller  (Principal Accounting Officer)                                |   |

 

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

 
| **Signature**          |   | **Capacity**                 |             | **Date** |
|------------------------|--------|------------------------------|------------------|----------|
|                   |   |                         |             |     |
| /s/ DOROTHY L. BIZZINI |   |                         | Director         |     | March 25, 2003 |
| DOROTHY L. BIZZINI     |   |                         |             |     |
|                   |   |                         |             |     |
|                   |   |                         |             |     |
| /s/ JERRY E. CALLISTER |   |                         | Director         |     | March 25, 2002 |
| JERRY E. CALLISTER     |   |                         |             |     |
|                   |   |                         |             |     |
|                   |   |                         |             |     |
| /s/ JOHN FAWCETT       |   |                         | Director         |     | March 25, 2003 |
| JOHN FAWCETT           |   |                         |             |     |
|                   |   |                         |             |     |
|                   |   |                         |             |     |
| /s/ G MICHAEL GRAVES   |   |                         | Director         |     | March 25, 2002 |
| G MICHAEL GRAVES       |   |                         |             |     |
|                   |   |                         |             |     |
|                   |   |                         |             |     |
| /s/ THOMAS T. HAWKER   |   |                         | Director/CEO and |     | March 25, 2003 |
| THOMAS T. HAWKER       |   | Principal Executive  Officer |             |     |
|                   |   |                         |             |     |
|                        |        |                              |                  |          |  |  |

 

30

----

 
| /s/ BERTYL W. JOHNSON       |   |               | Director        |   | March 25, 2003 |
|-----------------------------|--------|--------------------|-----------------|--------|----------------|
| BERTYL W. JOHNSON           |   |               |            |   |
|                        |   |               |            |   |
|                        |   |               |            |   |
| /s/ CURTIS RIGGS            |   |               | Director        |   | March 25, 2003 |
| CURTIS RIGGS                |   |               |            |   |
|                        |   |               |            |   |
|                        |   |               |            |   |
| /s/ ROBERTO SALAZAR         |   |               | Director        |   | March 25, 2003 |
| ROBERTO SALAZAR             |   |               |            |   |
|                        |   |               |            |   |
|                        |   |               |            |   |
| /s/ JERRY TAHAJIAN          |   |               | Director        |   | March 25, 2003 |
| JERRY TAHAJIAN              |   |               |            |   |
|                        |   |               |            |   |
|                        |   |               |            |   |
| /s/ JAMES W. TOLLADAY       |   |               | Director        |   | March 25, 2003 |
| JAMES W. TOLLADAY           |   |               |            |   |
|                        |   |               |            |   |
|                        |   |               |            |   |
| /s/ TOM A.L. VAN  GRONINGEN |   |               | Chairman of the |   | March 25, 2003 |
| TOM A.L. VAN GRONINGEN      |   | Board of Directors |            |   |

 

31

----

 

**CERTIFICATIONS**

 

I, Thomas T. Hawker, certify that:

 
| 1.     | I have reviewed this  annual report on Form 10-K of Capital Corp of the West;                                                                                                                                                                                                                                                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 2.     | Based on my knowledge,  this annual report does not contain any untrue statement of a material fact  or omit to state a material fact necessary to make the statements made, in  light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this annual report;                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 3.     | Based on my knowledge,  the financial statements, and other financial information included in this  annual report, fairly present in all material respects, the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this annual report;                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 4.     | The registrant’s other  certifying officers and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14  and 15d-14) for the registrant and we have:                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | a.                                                                                                                                                                                                                                                                                                                                                                                              | Designed such  disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this annual report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | b.                                                                                                                                                                                                                                                                                                                                                                                              | Evaluated the  effectiveness of the registrant’s disclosure controls and procedures as of a  date within 90 days prior to the filing date of this annual report (the  “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | c.                                                                                                                                                                                                                                                                                                                                                                                              | Presented in this  annual report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 1.     | The registrant’s other  certifying officer and I have disclosed, based on our most recent evaluation,  to the registrant’s auditors and the audit committee of the registrant’s  board of directors (or persons performing the equivalent function):                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | a.                                                                                                                                                                                                                                                                                                                                                                                              | all significant  deficiencies in the design or operation of internal controls which could  adversely affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors any  material weakness in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | b.                                                                                                                                                                                                                                                                                                                                                                                              | any fraud, whether or  not material, that involves management or other employees who have a  significant role in the registrant’s internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 1.     | The registrant’s other  certifying officer and I have indicated in this annual report whether or not  there were significant changes in internal controls or in other factors that  could significantly affect internal controls subsequent to the date of our  most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |

 
| Date:  March 21, 2003 | /s/ Thomas T. Hawker                   |   |
|----------------------------|----------------------------------------|--------|
|                       | Thomas T. Hawker                       |
|                       | President and Chief  Executive Officer |

 

32

----

 

**CERTIFICATIONS**

 

I, R. Dale McKinney, certify that:

 
| 1.     | I have reviewed this  annual report on Form 10-K of Capital Corp of the West;                                                                                                                                                                                                                                                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 2.     | Based on my knowledge,  this annual report does not contain any untrue statement of a material fact  or omit to state a material fact necessary to make the statements made, in  light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this annual report;                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 3.     | Based on my knowledge,  the financial statements, and other financial information included in this  annual report, fairly present in all material respects, the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this annual report;                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 4.     | The registrant’s other  certifying officers and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14  and 15d-14) for the registrant and we have:                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | a.                                                                                                                                                                                                                                                                                                                                                                                              | Designed such  disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this annual report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | b.                                                                                                                                                                                                                                                                                                                                                                                              | Evaluated the  effectiveness of the registrant’s disclosure controls and procedures as of a  date within 90 days prior to the filing date of this annual report (the  “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | c.                                                                                                                                                                                                                                                                                                                                                                                              | Presented in this  annual report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 2.     | The registrant’s other  certifying officer and I have disclosed, based on our most recent evaluation,  to the registrant’s auditors and the audit committee of the registrant’s  board of directors (or persons performing the equivalent function):                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | a.                                                                                                                                                                                                                                                                                                                                                                                              | all significant  deficiencies in the design or operation of internal controls which could  adversely affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors any  material weakness in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | b.                                                                                                                                                                                                                                                                                                                                                                                              | any fraud, whether or  not material, that involves management or other employees who have a  significant role in the registrant’s internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 2.     | The registrant’s other  certifying officer and I have indicated in this annual report whether or not  there were significant changes in internal controls or in other factors that  could significantly affect internal controls subsequent to the date of our  most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |

 
| Date:  March 21, 2003 | /s/  R. Dale McKinney                             |   |
|----------------------------|--------------------------------------------------------|--------|
|                       | R. Dale McKinney                                       |
|                       | Executive Vice  President and Chief  Financial Officer |

 

33

----

 

**Exhibit Index**

 

Thefollowing is a list of all exhibits required by Item 601 of Regulation S-K tobe filed as part of this 10-K:

 
| **Exhibit Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                        |   |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1                |   | Articles of  Incorporation (filed as Exhibit 3.1 of the Company’s September 30, 1996 Form  10-Q filed with the SEC on or about November 14, 1996).                                                                                                                                                            |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 3.2                |   | Bylaws (filed as  Exhibit 3.2 of the Company’s September 30, 1996 Form 10-Q filed with the SEC  on or about November 14, 1996)                                                                                                                                                                                |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 3.3                |   | Rights Agreement between Capital Corp of the West  and Harris Trust Company of California dated as of September 26, 1997,  including Form of Right Certificate attached thereto as Exhibit B (filed as  Exhibit 4 to the Company’s Registration Statement on Form 8-A filed with the  SEC on October 1, 1997. |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10                 |   | Employment Agreement  between Thomas T. Hawker and Capital Corp. of the West                                                                                                                                                                                                                                       | *      |
|               |   | (filed as Exibit 10.10  of the Company's June 30, 2002 10-Q filed with the SEC on or about August 13,  2002).                                                                                                                                                                                                      |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.1               |   | Administration  Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10-K  filed with the SEC on or about March 31, 1996).                                                                                                                                                                |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.2               |   | Stock Option Plan (filed  as Exhibit 10.6 of the Company’s 1995 Form 10-K filed with the SEC on or  about March 31, 1996).                                                                                                                                                                                    | *      |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.3               |   | 401(k) Plan (filed as  Exhibit 10.7 of the Company’s 1995 Form 10-K filed with the SEC on or about  March 31, 1996).                                                                                                                                                                                          |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.4               |   | Employee Stock  Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10-K filed  with the SEC on or about March 31, 1996).                                                                                                                                                                        |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.5               |   | Purchase Agreement for  three branches from Bank of America is incorporated herein by reference from  Exhibit 2.1 Registration Statement on Form S-2 filed July 14, 1997, File No.  333-31193.                                                                                                                     |   |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.6               |   | Change-in-Control  Agreement between R. Dale McKinney and Capital Corp of the West (filed as  Exhibit 10.6 of the Company’s 1999 Form   10-K with the SEC on or about March 17, 2000).                                                                                                                   | *      |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.7               |   | Deferred Compensation  Agreement between members of the board of directors and Capital Corp of the  West (filed as exhibit 10.7 of the Company’s 1999 Form 10-K with the SEC on  or about March 17, 2000).                                                                                                    | *      |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.8               |   | Executive Salary  Continuation Agreement between certain members of executive management and  Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999 Form  10-K with the SEC in or about March 17, 2000).                                                                                      | *      |
|               |   |                                                                                                                                                                                                                                                                                                               |   |
| 10.9               |   | Executive Salary  Continuation Agreement between senior executive management and Capital Corp  of the West.                                                                                                                                                                                                        | *      |
|               |   | (filed as Exhibit 10.9  of the Company's 2001 Form 10-K with the SEC on or about March 29, 2002).                                                                                                                                                                                                                  |   |

 

34

----

 
| 11     |   | Statement Regarding the  Computation of Earnings Per Share is incorporated herein by reference from  Note 1 of the Company’s Consolidated Financial Statements. |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                      |   |
| 13     |   | Annual Report to Security Holders.                                                                                                                                        |   |
|   |   |                                                                                                                                                                      |   |
| 23     |   | Independent Auditors’  Consent Letter.                                                                                                                               |   |
|   |   |                                                                                                                                                                      |   |
| 99.1   |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The  Sarbanes-Oxley Act of 2002.                      |   |
|   |   |                                                                                                                                                                      |   |
| 99.2   |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley  Act of 2002.                      |   |

----

| * |   | Denotes management  contract or compensatory plan arrangement. |   |
|---|--------|----------------------------------------------------------------|--------|

 

35

----