**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**ý****  Quarterly Report Under Section 13 or15(d) of the Securities Exchange Act of 1934**

**forthe Quarterly Period Ended June 30, 2004**

 

**or**

 

**o****  Transition Report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

**forthe Transition Period from                        to                         **

 

**Commission File Number: 0-27384**

 

**CAPITAL CORP OF THE WEST**

(Exact name ofregistrant as specified in its charter)

 

| **California **                                             | ** ** | **77-0405791 **    |
|------------------------------------------------------------------|------------|-------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | IRS Employer ID  Number |

**550 West Main, Merced, CA  95340**

(Address ofprincipal executive offices)

 

Registrant’s telephone number, including area code:**  (209) 725-2200**

 

Former name, former address and former fiscal year, ifchanged since last report:  **Not applicable**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 

Yes ý No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý   No o

 

The number of shares outstanding of the registrant’scommon stock, no par value, as of June 30, 2004 was 5,754,060.  No shares of preferred stock, no par value,were outstanding at June 30, 2004.

 

 

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**CapitalCorp of the West**

 

Table of Contents

 
| PART I.   — FINANCIAL INFORMATION                                                                | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                       | ** ** |
| Item 1.  Financial Statements                                                                         | ** ** |
| Consolidated Balance Sheets (unaudited)                                                                    |       |
| Consolidated Statements of Income and  Comprehensive Income (unaudited)                                    |       |
| Consolidated Statement of Changes in  Stockholders’ Equity (unaudited)                                |       |
| Consolidated Statements of Cash Flows  (unaudited)                                                         |       |
| Notes to the Consolidated Financial  Statements (unaudited)                                                |       |
|                                                                                                       |       |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       |
| Item  3.  Quantitative and Qualitative  Disclosures about Market Risk                                 |       |
| Item  4.  Controls and Procedures                                                                     |       |
|                                                                                                       |       |
| PART II.  — OTHER INFORMATION                                                                    |       |
|                                                                                                       |       |
| Item 1.   Legal Proceedings                                                                           |       |
| Item 2.  Changes in Securities  and Use of Proceeds                                                   |       |
| Item 3.   Defaults Upon Senior Securities                                                             |       |
| Item 4.  Submission of Matters  to a Vote of Security Holders                                         |       |
| Item  5.  Other Information                                                                           |       |
| Item  6.  Exhibits and Reports on Form 8-K                                                            |       |
|                                                                                                       |       |
| SIGNATURES                                                                                                 |       |
|                                                                                                       |       |
| Exhibit  Index                                                                                             |       |

 

2

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Capital Corp ofthe West

Consolidated BalanceSheets

(Unaudited)

 
| ** **                                                                                                                                                    | ** ** | **June 30,  2004**    | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                    |       |                       |       |                        |       |
| Cash and noninterest-bearing deposits in  other banks                                                                                                         |       | $                          | 47,979     |                        | $          | 44,292 |   |
| Federal funds sold                                                                                                                                            |       | 21,200                     |       | 1,190                       |       |
| Time deposits at other financial  institutions                                                                                                                |       | 350                        |       | 350                         |       |
| Investment securities available for sale,  at fair value                                                                                                      |       | 267,832                    |       | 275,403                     |       |
| Investment securities held to maturity at  cost, fair value of  $98,089 and  $97,295 at June 30, 2004 and December 31, 2003                    |       | 99,929                     |       | 96,612                      |       |
| Loans, net of allowance for loan losses  of  $13,757 and  $13,263 at June 30, 2004 and  December 31, 2003                                 |       | 803,974                    |       | 750,989                     |       |
| Interest receivable                                                                                                                                           |       | 6,296                      |       | 6,045                       |       |
| Premises and equipment, net                                                                                                                                   |       | 18,469                     |       | 16,557                      |       |
| Goodwill and other intangible assets                                                                                                                          |       | 2,315                      |       | 2,649                       |       |
| Cash value of life insurance                                                                                                                                  |       | 27,616                     |       | 24,138                      |       |
| Investment in housing tax credit limited  partnerships                                                                                                        |       | 8,592                      |       | 8,717                       |       |
| Other assets                                                                                                                                                  |       | 9,628                      |       | 7,600                       |       |
|                                                                                                                                                          |       |                       |       |                        |       |
| Total assets                                                                                                                                                  |       | $                          | 1,314,180  |                        | $          | 1,234,542 |   |
|                                                                                                                                                          |       |                       |       |                        |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                 |       |                       |       |                        |       |
| Deposits                                                                                                                                                      |       |                       |       |                        |       |
| Noninterest-bearing demand                                                                                                                                    |       | $                          | 226,067    |                        | $          | 206,709 |   |
| Negotiable orders of withdrawal                                                                                                                               |       | 145,065                    |       | 136,975                     |       |
| Savings                                                                                                                                                       |       | 358,802                    |       | 330,023                     |       |
| Time, under $100,000                                                                                                                                          |       | 183,689                    |       | 182,363                     |       |
| Time, $100,000 and over                                                                                                                                       |       | 160,924                    |       | 172,738                     |       |
| Total deposits                                                                                                                                                |       | 1,074,547                  |       | 1,028,808                   |       |
|                                                                                                                                                          |       |                       |       |                        |       |
| Borrowed funds                                                                                                                                                |       | 122,902                    |       | 92,817                      |       |
| Junior subordinated debentures                                                                                                                                |       | 16,496                     |       | 16,496                      |       |
| Accrued interest, taxes and other  liabilities                                                                                                                |       | 5,062                      |       | 6,936                       |       |
| Total liabilities                                                                                                                                             |       | 1,219,007                  |       | 1,145,057                   |       |
|                                                                                                                                                          |       |                       |       |                        |       |
| Preferred stock, no par value; 10,000,000  shares authorized; None outstanding                                                                                |       | —                     |       | —                      |       |
| Common stock, no par value; 20,000,000  shares authorized; 5,754,060 and 5,660,739 issued & outstanding at  June 30, 2004 and December 31, 2003 |       | 55,750                     |       | 54,228                      |       |
| Retained earnings                                                                                                                                             |       | 41,766                     |       | 34,816                      |       |
| Accumulated other comprehensive income                                                                                                                        |       | (2,343                     | )          | 441                         |       |
|                                                                                                                                                          |       |                       |       |                        |       |
| Total shareholders’ equity                                                                                                                               |       | 95,173                     |       | 89,485                      |       |
|                                                                                                                                                          |       |                       |       |                        |       |
| Total liabilities and shareholders’ equity                                                                                                               |       | $                          | 1,314,180  |                        | $          | 1,234,542 |   |

 

See accompanyingnotes to consolidated financial statements

 

3

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Capital Corp ofthe West

Consolidated Statementsof Income and Comprehensive Income

(Unaudited)

 
| ** **                                                    | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share data)**     | ** ** |
| Interest income:                                              |       |                                          |       |                                        |       |   |   |   |   |
| Interest and fees on loans                                    |       | $                                             | 13,591     |                                        | $          | 12,086 |   | $ | 26,739 |   | $ | 23,419 |   |
| Interest on deposits with other financial  institutions       |       | 2                                             |       | 3                                           |       | 4 |   | 5 |   |
| Interest on investments held to maturity:                     |       |                                          |       |                                        |       |   |   |   |   |
| Taxable                                                       |       | 564                                           |       | 714                                         |       | 1,165 |   | 1,480 |   |
| Non-taxable                                                   |       | 512                                           |       | 55                                          |       | 992 |   | 110 |   |
| Interest on investments available for sale:                   |       |                                          |       |                                        |       |   |   |   |   |
| Taxable                                                       |       | 2,585                                         |       | 2,319                                       |       | 5,238 |   | 4,495 |   |
| Non-taxable                                                   |       | 10                                            |       | 273                                         |       | 21 |   | 545 |   |
| Interest on federal funds sold                                |       | 30                                            |       | 51                                          |       | 41 |   | 90 |   |
| Total interest income                                         |       | 17,294                                        |       | 15,501                                      |       | 34,200 |   | 30,144 |   |
|                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Interest expense:                                             |       |                                          |       |                                        |       |   |   |   |   |
| Interest on negotiable orders of withdrawal                   |       | 17                                            |       | 14                                          |       | 32 |   | 28 |   |
| Interest on savings deposits                                  |       | 753                                           |       | 643                                         |       | 1,518 |   | 1,223 |   |
| Interest on time deposits, under $100,000                     |       | 1,052                                         |       | 1,104                                       |       | 2,135 |   | 2,224 |   |
| Interest on time, $100,000 and over                           |       | 882                                           |       | 1,061                                       |       | 1,809 |   | 2,050 |   |
| Interest on subordinated debentures                           |       | 265                                           |       | 158                                         |       | 529 |   | 315 |   |
| Interest on other borrowings                                  |       | 1,167                                         |       | 1,193                                       |       | 2,232 |   | 2,344 |   |
| Total interest expense                                        |       | 4,136                                         |       | 4,173                                       |       | 8,255 |   | 8,184 |   |
|                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Net interest income before provision for  loan losses         |       | 13,158                                        |       | 11,328                                      |       | 25,945 |   | 21,960 |   |
| Provision for loan losses                                     |       | 621                                           |       | 482                                         |       | 1,241 |   | 1,153 |   |
| Net interest income after provision for  loan losses          |       | 12,537                                        |       | 10,846                                      |       | 24,704 |   | 20,807 |   |
|                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Noninterest income:                                           |       |                                          |       |                                        |       |   |   |   |   |
| Service charges on deposit accounts                           |       | 1,580                                         |       | 1,357                                       |       | 3,014 |   | 2,634 |   |
| Increase in cash surrender value of life  insurance policies  |       | 262                                           |       | 271                                         |       | 496 |   | 517 |   |
| Other                                                         |       | 749                                           |       | 773                                         |       | 1,521 |   | 1,580 |   |
| Total noninterest income                                      |       | 2,591                                         |       | 2,401                                       |       | 5,031 |   | 4,731 |   |
|                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Noninterest Expense:                                          |       |                                          |       |                                        |       |   |   |   |   |
| Salaries and related benefits                                 |       | 5,438                                         |       | 4,934                                       |       | 10,494 |   | 9,437 |   |
| Equipment                                                     |       | 746                                           |       | 702                                         |       | 1,572 |   | 1,461 |   |
| Premises and occupancy                                        |       | 764                                           |       | 712                                         |       | 1,543 |   | 1,382 |   |
| Professional fees                                             |       | 398                                           |       | 484                                         |       | 768 |   | 758 |   |
| Marketing                                                     |       | 152                                           |       | 248                                         |       | 500 |   | 508 |   |
| Intangible amortization                                       |       | 166                                           |       | 170                                         |       | 333 |   | 340 |   |
| Supplies                                                      |       | 178                                           |       | 197                                         |       | 400 |   | 432 |   |
| Other                                                         |       | 1,546                                         |       | 1,391                                       |       | 3,104 |   | 2,880 |   |
| Total noninterest expense                                     |       | 9,388                                         |       | 8,838                                       |       | 18,714 |   | 17,198 |   |
|                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Income before income taxes                                    |       | 5,740                                         |       | 4,409                                       |       | 11,021 |   | 8,340 |   |
| Provision for income taxes                                    |       | 1,860                                         |       | 1,014                                       |       | 3,497 |   | 1,918 |   |
| Net income                                                    |       | $                                             | 3,880      |                                        | $          | 3,395 |   | $ | 7,524 |   | $ | 6,422 |   |
| Comprehensive Income:                                         |       |                                          |       |                                        |       |   |   |   |   |
| Unrealized loss on securities arising  during the period, net |       | (3,829                                        | )          | (237                                        | )          | (2,784 | ) | (592 | ) |
| Comprehensive income                                          |       | $                                             | 51         |                                        | $          | 3,158 |   | $ | 4,740  |   | $ | 5,830 |   |
|                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Basic earnings per share                                      |       | $                                             | 0.68       |                                        | $          | 0.61 |   | $ | 1.32 |   | $ | 1.15 |   |
| Diluted earnings per share                                    |       | $                                             | 0.66       |                                        | $          | 0.59 |   | $ | 1.27 |   | $ | 1.11 |   |

 

See accompanyingnotes to consolidated financial statements

 

4

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Capital Corp ofthe West

Consolidated Statement ofChanges in Shareholders’ Equity

(Unaudited)

 
| ** **                                                                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **             | ** ** | **Accumulated**                       | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                                                        | ** ** | **Common Stock**      | ** ** | ** **  | ** ** | **other**              | ** ** | ** **                            | ** ** |
| **(Amounts  in thousands)**                                                                       | ** ** | **Number of  shares** | ** ** | **Amounts** | ** ** | **Retained  earnings** | ** ** | **comprehensive  income (loss)** | ** ** | **Total**  | ** ** |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Balance, December 31, 2003                                                                   |       | 5,661                 |       | $           | 54,228     |                   | $          | 34,816                                |       | $          | 441        |   | $ | 89,485 |   |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Exercise of stock options                                                                         |       | 74                    |       | 898         |       | —                 |       | —                                |       | 898        |       |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Issuance of shares pursuant to  401k and ESOP plans                                          |       | 19                    |       | 624         |       | —                 |       | —                                |       | 624        |       |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Net Change in fair market value of  investment securities and swaps, net of tax benefit of $1,807 |       | —                |       | —      |       | —                 |       | (2,784                                | )          | (2,784     | )          |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Cash dividend                                                                                     |       | —                |       | —      |       | (574                   | )          | (574                                  | )          |       |       |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Net income                                                                                        |       | —                |       | —      |       | 7,524                  |       | —                                |       | 7,524      |       |
|                                                                                              |       |                  |       |        |       |                   |       |                                  |       |       |       |
| Balance, June 30, 2004                                                                       |       | 5,754                 |       | $           | 55,750     |                   | $          | 41,766                                |       | $          | (2,343     | ) | $ | 95,173 |   |

 

See accompanying notesto consolidated financial statements

 

5

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Capital Corp ofthe West

Consolidated Statementsof Cash Flows

(Unaudited)

 
| **(Dollars  in thousands)**                                                            | ** ** | **6 months ended  June 30,  2004** | ** ** | **6 months ended  June 30,  2003** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Operating  activities:**                                                             |       |                                    |       |                                    |       |
| Net income                                                                             |       | $                                       | 7,524      |                                    | $          | 6,422 |   |
| Adjustments to reconcile net income to net  cash provided by                           |       |                                    |       |                                    |       |
| Operating activities:                                                                  |       |                                    |       |                                    |       |
| Provision for loan losses                                                              |       | 1,241                                   |       | 1,153                                   |       |
| Depreciation, amortization and accretion,  net                                         |       | 3,197                                   |       | 2,361                                   |       |
| Net increase in interest receivable &  other assets                                |       | (4,098                                  | )          | (6,858                                  | )          |
| Net increase in deferred loan fees                                                     |       | 755                                     |       | 495                                     |       |
| Net (decrease) increase in accrued  interest, taxes & other liabilities            |       | (1,874                                  | )          | 950                                     |       |
| Net cash provided by operating activities                                              |       | 6,745                                   |       | 4,523                                   |       |
|                                                                                   |       |                                    |       |                                    |       |
| **Investing  activities:**                                                             |       |                                    |       |                                    |       |
| Investment securities purchases – available  for sale securities                  |       | (40,632                                 | )          | (48,199                                 | )          |
| Investment securities purchases – held to  maturity securities                    |       | (9,283                                  | )          | (48,150                                 | )          |
| Proceeds from maturities of available for  sale investment securities                  |       | 36,830                                  |       | 22,645                                  |       |
| Proceeds from maturities of held to  maturity investment securities                    |       | 5,966                                   |       | 33,220                                  |       |
| Proceeds from sales of available for sale  securities                                  |       | 5,940                                   |       | 231                                     |       |
| Net increase in time deposits in other  financial institutions                         |       | —                                  |       | (100                                    | )          |
| Proceeds from sales of loans                                                           |       | 1,707                                   |       | 2,497                                   |       |
| Net increase in loans                                                                  |       | (57,625                                 | )          | (64,078                                 | )          |
| Purchase of premises and equipment                                                     |       | (2,723                                  | )          | (2,019                                  | )          |
| Net cash used in investing activities                                                  |       | (59,820                                 | )          | (103,953                                | )          |
|                                                                                   |       |                                    |       |                                    |       |
| **Financing  activities:**                                                             |       |                                    |       |                                    |       |
| Net increase in demand, NOW and savings  deposits                                      |       | 56,227                                  |       | 59,612                                  |       |
| Net (decrease) increase in certificates of  deposit                                    |       | (10,488                                 | )          | 48,112                                  |       |
| Net proceeds (repayments) from other  borrowings                                       |       | 30,085                                  |       | (17,848                                 | )          |
| Payment of cash dividends                                                              |       | (574                                    | )          | —                                  |       |
| Issuance of shares pursuant to 401K and  ESOP plans                                    |       | 624                                     |       | —                                  |       |
| Exercise of stock options                                                              |       | 898                                     |       | 151                                     |       |
| Cash in lieu fractional shares from stock  dividend                                    |       | —                                  |       | (14                                     | )          |
| Net cash provided by financing activities                                              |       | 76,772                                  |       | 90,013                                  |       |
|                                                                                   |       |                                    |       |                                    |       |
| Net increase (decrease) in cash and cash  equivalents                                  |       | 23,697                                  |       | (9,417                                  | )          |
|                                                                                   |       |                                    |       |                                    |       |
| Cash and cash equivalents at beginning of  period                                      |       | 45,482                                  |       | 73,183                                  |       |
| Cash and cash equivalents at end of period                                             |       | $                                       | 69,179     |                                    | $          | 63,766 |   |
|                                                                                   |       |                                    |       |                                    |       |
| **Cash  paid during the quarter:**                                                     |       |                                    |       |                                    |       |
| Interest paid                                                                          |       | $                                       | 7,647      |                                    | $          | 7,782 |   |
| Income tax payments                                                                    |       | 7,561                                   |       | 2,750                                   |       |
| **Supplemental  disclosure of noncash investing**  **and  financing activities:** |       |                                    |       |                                    |       |
| Investment securities unrealized losses and  swaps, net of tax                         |       | (2,784                                  | )          | (592                                    | )          |
| Transfer of securities from available for  sale to held to maturity                    |       | —                                  |       | 24,557                                  |       |

 

See accompanyingnotes to consolidated financial statements

 

6

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Capital Corp ofthe West

Notes toConsolidated Financial Statements

June 30, 2004and December 31, 2003

(Unaudited)

 

GENERAL - COMPANY

 

Capital Corp of the West (the “Company” or “Capital Corp”) is a bankholding company incorporated under the laws of the State of California onApril 26, 1995.  On November 1,1995, the Company became registered as a bank holding company, and is a holderof all of the capital stock of County Bank (the “Bank”).  During 1998, the Company formed Capital WestGroup, a subsidiary that engages in the financial institution advisory businessbut is currently inactive.  The Company’sprimary asset is the Bank****and the Bankis the Company’s primary source of income. The Company’s securities consist of 20,000,000 shares of Common Stock,no par value, 10,000,000 shares of Authorized Preferred Stock, and 6,000,000 ofTrust Preferred 10.20% Capital Securities which have a liquidation amount of$1,000 per capital security.  As ofJune 30, 2004 there were 5,754,060 common shares outstanding, held ofrecord by approximately 1,700 shareholders. There were no preferred shares outstanding at June 30, 2004.  The Bank has three wholly owned subsidiaries,Merced Area Investment & Development, Inc. (“MAID”), County Asset Advisors(“CAA”), and County Investment Trust (“REIT”). CAA is currently inactive.  OnApril 26, 2002, the Company entered into an agreement to purchase RegencyInvestment Advisors, Inc (“RIA”).  Thepurchase of RIA was completed during the second quarter, 2002.  The Company has two other wholly ownedsubsidiaries, County Statutory Trust (“Trust”), and Capital West Group,Inc.  The Trust is used in connectionwith the Capital Securities that have been issued by the Company.  Capital West Group, Inc. is currentlyinactive.  All references herein to the“Company” include the Company, the Company’s subsidiaries, the Bank and theBank’s subsidiaries, unless the context otherwise requires.

 

GENERAL - BANK

 

The Bank was organized on August 1, 1977, as County Bank ofMerced, a California state banking corporation. The Bank commenced operations on December 22, 1977.  In November 1992, the Bank changed itslegal name to County Bank.  The Bank’ssecurities consist of one class of Common Stock, no par value and is whollyowned by the Company.  The Bank’sdeposits are insured under the Federal Deposit Insurance Act by the FederalDeposit Insurance Corporation (“FDIC”) up to applicable limits statedtherein.  The Bank is a member of theFederal Reserve System.

 

INDUSTRY ANDMARKET AREA

 

The Bank engages in general commercial banking business primarily inFresno, Madera, Mariposa, Merced, San Francisco, San Joaquin, Stanislaus andTuolomne counties.  The Bank has twentyfull service branch offices; two of which are located in Merced with the branchlocated in downtown Merced currently serving as both a branch and as administrativeheadquarters. There are offices in Atwater, Dos Palos, Hilmar, Livingston, LosBanos, Madera, Mariposa, San Francisco, Sonora, Stockton, two offices inModesto, four in Fresno and two offices in Turlock.  The Bank’s administrative headquarters alsoprovides accommodations for the activities of MAID, the Bank’s wholly ownedreal estate subsidiary.

 

OTHER FINANCIALNOTES

 

All adjustments which in the opinion of Management are necessary for afair presentation of the Company’s financial position at June 30, 2004 andDecember 31, 2003 and the results of operations for

 

7

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the three and six month periods ended June 30, 2004 and 2003, andthe statements of cash flows for the six months ended June 30, 2004 and2003 have been included.  The interimresults for the three and six months ended June 30, 2004 are notnecessarily indicative of results to be expected for the full year.  These financial statements should be read inconjunction with the financial statements and the notes included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

The accompanying unaudited financial statements have been prepared on abasis consistent with generally accepted accounting principles and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.

 

EARNINGS PER SHARE

 

Basic earnings per share (EPS) is computed by dividing net incomeavailable to shareholders by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share is computed by dividing net income available to commonshareholders by the weighted average number of common shares outstanding duringthe period plus potential common shares outstanding.  Diluted earnings per share reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the Company.

 

The following tables provide a reconciliation of the numerator anddenominator of the basic and diluted earnings per share computation for thethree and six month periods ended June 30, 2004 and 2003:

 
| ** **                                         | ** ** | **For The Three Months  Ended June 30,** | ** ** | **For The Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars  in thousands, except per share data)** | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                               |       |                                          |       |                                        |       |   |   |   |   |
| Basic EPS computation:                             |       |                                          |       |                                        |       |   |   |   |   |
| Net income                                         |       | $                                             | 3,880      |                                        | $          | 3,395 |   | $ | 7,524 |   | $ | 6,422 |   |
| Average common shares outstanding                  |       | 5,716                                         |       | 5,602                                       |       | 5,695 |   | 5,597 |   |
| Basic EPS                                          |       | $                                             | 0.68       |                                        | $          | 0.61 |   | $ | 1.32 |   | $ | 1.15 |   |
|                                               |       |                                          |       |                                        |       |   |   |   |   |
| Diluted EPS Computations:                          |       |                                          |       |                                        |       |   |   |   |   |
| Net income                                         |       | $                                             | 3,880      |                                        | $          | 3,395 |   | $ | 7,524 |   | $ | 6,422 |   |
| Average common shares outstanding                  |       | 5,716                                         |       | 5,602                                       |       | 5,695 |   | 5,597 |   |
| Effect of stock options                            |       | 202                                           |       | 196                                         |       | 218 |   | 190 |   |
|                                               |       | 5,918                                         |       | 5,798                                       |       | 5,913 |   | 5,787 |   |
| Diluted EPS                                        |       | $                                             | 0.66       |                                        | $          | 0.59 |   | $ | 1.27 |   | $ | 1.11 |   |

 

8

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INTANGIBLE ASSETS

 

The Company has intangible assets consisting of core deposit premiumsand goodwill.  Core deposit premiums areamortized using an accelerated method over a period of ten years.  Intangible assets related to goodwill are nolonger amortized after December 31, 2001 but are reviewed periodically forpotential impairment.  During 2004,management has determined there was no impairment of goodwill.  As of June 30, 2004 andDecember 31, 2003, the Company had unamortized core deposit premiums of$391,000 and $724,000, respectively. Amortization of core deposit premiums and other intangibles was $166,000and $170,000 during the second quarter of 2004 and 2003 and $333,000 and$340,000 for the six months ended June 30, 2004 and 2003.  Core deposit premiums and other intangiblesare scheduled to amortize at a rate of approximately $167,000 per quarter throughthe quarter ending December 31, 2004 and at a rate of $56,000 during thefirst quarter of 2005.  Core depositpremiums of $460,000 and $4,340,000 were initially recorded as a result ofpurchasing deposits from Town and Country Finance and Thrift in July, 1996 andfrom the purchase of three branches from Bank of America in December, 1997,respectively.

 

STOCK COMPENSATION

 

The Company provides stock-based compensation to certain officers anddirectors.  The Company uses theintrinsic value method to account for its stock option plans (in accordancewith the provisions of Accounting Principles Board Opinion No. 25).  Under this method, compensation expense isrecognized for awards of options to purchase shares of common stock toemployees under compensatory plans only if the fair market value of the stockat the option grant date (or other measurement date, if later) is greater thanthe amount the employee must pay to acquire the stock.  Statement of Financial Accounting StandardsNo. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companiesto continue using the intrinsic value method or to adopt a fair value basedmodel to account for stock option plans. The fair value based method results in recognizing as expense over thevesting period the fair value of all stock-based awards on the date ofgrant.  The Company has elected tocontinue to use the intrinsic value method.

 

9

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Had compensation cost for the Company’s option plans been determined inaccordance with SFAS 123, the Company’s net income and earnings per share wouldhave been reduced to the pro forma amounts indicated as follows:

 
| ** **                                                                                          | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| **(dollars  in thousands except per share amounts)**                                                | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income:                                                                                         |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                                                         |       | $                                             | 3,880      |                                        | $          | 3,395 |   | $ | 7,524 |   | $ | 6,422 |   |
| Pro forma                                                                                           |       | $                                             | 3,734      |                                        | $          | 3,282 |   | $ | 7,019 |   | $ | 6,134 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Basic earnings per share:                                                                           |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                                                         |       | $                                             | 0.68       |                                        | $          | 0.61 |   | $ | 1.32 |   | $ | 1.15 |   |
| Pro forma                                                                                           |       | $                                             | 0.65       |                                        | $          | 0.59 |   | $ | 1.23 |   | $ | 1.10 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Diluted earnings per share:                                                                         |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                                                         |       | $                                             | 0.66       |                                        | $          | 0.59 |   | $ | 1.27 |   | $ | 1.11 |   |
| Pro forma                                                                                           |       | $                                             | 0.63       |                                        | $          | 0.57 |   | $ | 1.19 |   | $ | 1.06 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Stock-based employee compensation cost  included in salaries and related benefits:                  |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                                                         |       | $                                             | —     |                                        | $          | — |   | $ | — |   | $ | — |   |
| Pro forma                                                                                           |       | $                                             | 163        |                                        | $          | 118 |   | $ | 578 |   | $ | 296 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Stock-based employee compensation cost, net  of related tax effects of $17, included in net income: |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                                                         |       | $                                             | —     |                                        | $          | — |   | $ | — |   | $ | — |   |
| Pro forma                                                                                           |       | $                                             | 146        |                                        | $          | 113 |   | $ | 505 |   | $ | 288 |   |

 

10

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RECENT ACCOUNTING PRONOUNCEMETS

 

In December 2003, the FASB issued FASB Interpretation No. 46(revised December 2003), *Consolidation of VariableInterest Entities*, which addresses how a business enterprise shouldevaluate whether it has a controlling financial interest in a “VariableInterest Entity” (“VIE”) through means other than voting rights and accordinglyshould consolidate the entity.  FIN 46Rreplaces FASB Interpretation No. 46, *Consolidation of VariableInterest Entities*, which was issued in January 2003.  The Company will be required to apply FIN 46Rto variable interests in VIEs created after December 31, 2003.  For variable interests in VIEs created beforeJanuary 1, 2004, the Interpretation will be applied beginning onJanuary 1, 2005.  For any VIEs thatmust be consolidated under FIN 46R that were created before January 1,2004, the assets, liabilities and noncontrolling interests of the VIE initiallywould be measured at their carrying amounts with any difference between the netamount added to the balance sheet and any previously recognized interest beingrecognized as the cumulative effect of an accounting change.  If determining the carrying amounts is notpracticable, fair value at the date FIN 46R first applies may be used tomeasure the assets, liabilities and noncontrolling interest of the VIE.

 

The Company has adopted FIN 46R and applied it to existing VIEs inwhich the Company has variable interests. As a result of adopting FIN 46R, the balance sheet line items related toCapital Securities and the related income statement effect of dividends onCapital Securities in the June 30, 2003 consolidated financial statementshave been reclassified to conform with the 2004 presentation.    The junior subordinated debentures issuedto the Trusts as VIEs were reflected as long-term debt in the consolidatedbalance sheets at June 30, 2004 and December 31, 2003.  Prior to December 31, 2003, the Trustswere consolidated subsidiaries and were included in liabilities in theconsolidated balance sheet, as “Capital Securities”. The common securities anddebentures, along with the related income effects were eliminated in theconsolidated financial statements.

 

In December 2003, FASB issued Statement No. 132 (revised 2003), *Employers’ Disclosures about Pensions and Other PostretirementBenefits. *This Statementprescribes employers’ disclosures about pension plans and other postretirementbenefit plans; it does not change the measurement or recognition of thoseplans.  The Statement retains and revisesthe disclosure requirements contained in the original Statement 132.  It also requires additional disclosures aboutthe assets, obligations, cash flows, and net periodic benefit cost of definedbenefit plans and other postretiment benefit plans.  The Statement generally is effective forfiscal years ending after December 15, 2003.  The Company currently does not have anypostretirement benefit plans that are within the scope of this Statement.

 

In March,2004, the Emerging Issues Task Force (“EITF”) Issue No. 03-1 “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments”consensus was published.  Issue No. 03-1contained new guidance effectively codifying the provisions of SEC StaffAccounting Bulletin No. 59 and creates a new model that calls for new judgmentsand additional evidence gathering.  ThisEITF Issue has not had an impact on the Company’s Consolidated FinancialStatements.

 

*Investment Securities.*****AtJune 30, 2004 equity securities included $14.7 million of preferred stockissued by the Federal National Mortgage Association and the Federal Home LoanMortgage Corporation.  These issues ofpreferred stock are tied to various short term indexes ranging from the oneyear LIBOR interest rate to the five year U. S. Treasury rate.  These securities have AA- credit ratings fromthe securities rating agencies and are callable by the issuer at par.  At June 30, 2004, the unrealized loss onthese securities totaled $2.7 million compared to $1.8 million at December 31,2003.  It is expected that theseinvestments will increase in value as short term interest rates rise towardstheir historical levels.

 

In March 2004,the FASB issued Emerging Issues Task Force Issue No. 03-1. “The Meaning ofOther-Than-Temporary Impairment and Its Application to CertainInvestments”.  This EITF describes amodel involving three steps: (1) determine whether an investment is impaired,(2) determine whether the impairment is other-than -temporary, and (3)recognize the impairment loss in earnings. The EITF also requires several additional disclosures for cost-methodinvestments.  The EITF’s impairmentaccounting guidance was effective for reporting periods beginning after June15, 2004.  The Company expects theadoption of this EITF will not have a material impact on its consolidatedfinancial statements.

 

At June 30,2004, management believes the impairments described above are tomporary and,accordingly, no impairment loss has been recognized in the Company’sconsolidated statement of income.

 

11

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**Item2****.    Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations**

 

The following Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains forward-looking statements thatare subject to risks and uncertainties and include information about possibleor assumed future results of operations. Many possible events or factors could affect the future financialresults and performance of the company. This could cause results or performance to differ materially from thoseexpressed in our forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”,variations of such words and other similar expressions are intended to identifysuch forward-looking statements.  Thesestatements are not guarantees of future performance and involve certain risks,uncertainties and assumptions which are difficult to predict.  Therefore, actual outcomes and results maydiffer materially from what is expressed or forecasted in, or implied by, suchforward-looking statements.

 

Readers of the Company’s Form 10-Q should not relysolely on forward looking statements and should consider all uncertainties andrisks discussed throughout this report, as well as those discussed in theCompany’s 2003 Annual Report on Form 10-K filed on March 15, 2004**.**  These statements are representative only onthe date of which they are made, and the Company undertakes no obligation toupdate any forward-looking statements made. Some possible events or factors that could occur that may causedifferences from expected results include the following: the Company’s loangrowth is dependent on economic conditions, as well as various discretionaryfactors, such as decisions to sell, or purchase certain loans or loanportfolios; participations of loans and the management of borrower, industry,product and geographic concentrations and the mix of the loan portfolio.  The rate of charge-offs and provision expensecan be affected by local, regional and international economic and marketconditions, concentrations of borrowers, industries, products and geographicalconditions, the mix of the loan portfolio and management’s judgements regardingthe collectibility of loans.  Liquidityrequirements may change as a result of fluctuations in assets and liabilitiesand off-balance sheet exposures, which will impact the capital and debtfinancing needs of the Company and the mix of funding sources.  Decisions to purchase, hold, or sellsecurities are also dependent on liquidity requirements and market volatility,as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional andinternational economic conditions, levels, mix, maturities, yields or rates ofassets and liabilities and the wholesale and retail funding sources of the Company.

 

The Company is also exposed to the potential of lossesarising from adverse changes in market rates and prices which can adverselyimpact the value of financial products, including securities, loans, anddeposits.  In addition, the bankingindustry in general is subject to various monetary and fiscal policies andregulations, which include those determined by the Federal Reserve Board, theFederal Deposit Insurance Corporation and state regulators, whose policies andregulations could affect the Company’s results.

 

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 othernonbank 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 or acts,or apprehension about the possible future occurrences or acts of this type,outbreak or escalation of hostilities in which the United States is involved,any declaration of war by the

 

12

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U.S. Congress or any other national or international calamity, crisisor emergency, and management’s ability to manage these and other risks.

 

**Critical accounting policies and estimates**

 

The company’s discussion and analysis of its financialcondition and results of operations are based upon the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these financial statementsrequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities.  Onan on-going basis, the Company evaluates its estimates, including those relatedto the adequacy of the allowance for loan losses, intangible assets, andcontingencies.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions. (See caption “Allowancefor Loan Losses” for a more detailed discussion).

 

During 2003, California enacted tax legislation thatadded new penalties for institutions that engaged in strategies andtransactions that the Franchise Tax Board (“FTB”) defined as abusive tax shelters.  The FTB gave taxpayers until April 15,2004 to take advantage of a voluntary compliance initiative (“VCI”) that wouldallow taxpayers to amend prior year filings without being subject to the newtax shelter penalties.  On April 15,2004, the Company took advantage of the VCI, amended tax returns for the taxyears ended December 31, 2001 and 2002, and paid the FTB $2,411,000.  As part of this process, the Companymaintained the legal rights to pursue a claim of refund from the FTB for aportion of the amounts paid, and has every intention of doing so.   As of June 30, 2004, the Company has arecorded income tax receivable of $1,563,000 based on a claim of refundpertaining to REIT benefits.  Companymanagement believes the strategy used is lawful and defensible, and intends todefend the tax position taken.  If thecompany is ultimately unsuccessful in its claims against California, it wouldadversely affect the Company’s financial condition and results of operationsand the Company could be held liable for additional accuracy related penalties.

 

13

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The followingdiscussion and analysis is designed to provide a better understanding of thesignificant changes and trends related to the Company and its subsidiaries’financial condition, operating results, asset and liability management,liquidity and capital resources and should be read in conjunction with theConsolidated Financial Statements of the Company and the Notes thereto.

 

# **Results OfOperations**

# ** **

**Three and Six Months Ended June 30, 2004Compared With Three and Six Months Ended June 30, 2003**

 

*Overview.* For the three and six months ended June 30, 2004 the Companyreported record net income of $3,880,000 and $7,524,000.  This compares to $3,395,000 and $6,422,000for the same periods in 2003 and represents an increase of $485,000 and$1,102,000 or 14% and 17% over the prior year periods.  Basic earnings per share were $0.68 and $1.32for the three and six months ended June 30, 2004.  This compares to $0.61 and $1.15 for theprior year period.  Fully dilutedearnings per share were $0.66 and $1.27 for the three and six months endedJune 30, 2004.  This compares to$0.59 and $1.11 for the prior year periods. The changes represent an increase of $0.07 per share for basic and fullydiluted earnings per share for the three months and $0.17 and $0.16 per sharefor basic and fully diluted earnings per share for the six months endedJune 30, 2004, over the same periods of 2003.  The annualized return on average assets was1.20% and 1.19% for the first three and six months of 2004 which compares with1.24% and 1.22% for the three and six months ended June 30, 2003respectively.  The Company’s annualizedreturn on average equity was 16.34% and 16.09% for the three and six monthsended June 30, 2004 which compares with 16.61% and 16.00% for the sameperiods in 2003.  The decreased return onassets and increased return on equity were primarily the result of a smallincrease in interest earning assets that was more than offset by an increase inthe Company’s effective tax rate.

 

*NetInterest Income.*  The Company’s primary source of income is netinterest income and is determined by the difference between interest income andfees derived from earning assets and interest paid on interest bearingliabilities.  Net interest income for thethree month period ended June 30, 2004 rose 16% and for the six monthperiod ended June 30, 2004 rose 18% to a total of $13,158,000 and $25,945,000and represented an increase of $1,830,000 and $3,985,000 when compared to the$11,328,000 and $21,960,000 achieved during the three and six months endedJune 30, 2003.

 

Total interest andfees on earning assets were $17,294,000 and $34,200,000 for the three and sixmonths ended June 30, 2004, rising 12% or $1,793,000 for the three monthperiod ended June 30, 2004 and rising 13% or $4,056,000 for the six monthperiod ended June 30, 2004 when compared to the $15,501,000 and$30,144,000 achieved during the three and six months ended June 30,2003.  Total interest income is affectedby changes in volume of and rates earned on interest-earning assets.  Interest-earning assets consist primarily ofloans, investment securities and federal funds sold.  The increase in total interest income for thethree and six months ended June 30, 2004 was primarily the result of anincrease in volume of interest earning assets. Average interest-earning assets for the three and six months endedJune 30, 2004 were $1,198,896,000 and $1,174,503,000 compared with$1,017,352,000 and $976,310,000 for the three and six months endedJune 30, 2003, an increase of $181,544,000 or 18% and $198,193,000 or 20%during both time periods.

 

Interest expenseis a function of the volume of and the rates paid on interest-bearingliabilities.  Interest-bearingliabilities consist primarily of certain deposits and borrowed funds.  Total interest expense was $4,136,000 and$8,255,000 for the three and six months ended June 30, 2004, compared with$4,173,000 and $8,184,000 for the three and six months ended June 30,2003, a decrease of $37,000

 

14

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or 1% and an increase of $71,000 or 1%. These modest changes wereprimarily the result of a decrease in the interest rate paid oninterest-bearing liabilities that was offset by increase in average outstandinginterest-bearing liabilities. Average interest-bearing liabilities were$987,596,000 and $969,855,000 for the three and six months ended June 30,2004 compared with $856,773,000 and $816,364,000 for the same three and sixmonths in 2003, an increase of 130,823,000 and $153,491,000 or 15% and19%.  Average interest rates paid oninterest-bearing liabilities were 1.68% and 1.71% for the three and six monthsended June 30, 2004 compared with 1.98% and 2.02% for the same three andsix months of 2003, a decrease in interest rates paid of 30 and 31 basispoints.

 

The increase ininterest-earning assets and interest-bearing liabilities is primarily theresult of increased market penetration within our target markets, accomplishedby increasing the loan and deposit production of existing facilities and theaddition of one new retail banking facility in Fresno, California inJune 2003.

 

The Company’staxable equivalent net interest margin, the ratio of net interest income toaverage interest-earning assets, was 4.48% and 4.51% for the three and sixmonths ended June 30, 2004 compared with 4.57% and 4.59% for the sameperiods in 2003.  Net interest marginprovides a measurement of the Company’s ability to employ funds profitablyduring the period being measured.  TheCompany’s decrease in net interest margin was primarily attributable to alarger drop in overall interest –earning asset yields than the correspondingdrop in interest-bearing liabilities.

 

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*AverageBalances And Rates Earned And Paid.*  The followingtable presents condensed average balance sheet information for the Company,together with interest rates earned and paid on the various sources and uses ofits funds for each of the periods indicated. Nonaccruing loans are included in the calculation of the averagebalances of loans, but the nonaccrued interest on such loans is excluded.

 

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS

 
| ** **                                      | ** ** | **Three months ended  June 30, 2004** | ** ** | **Three months ended  June 30, 2003** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **Average  Balance**                       | ** ** | **Taxable  Equivalent  Interest**          | ** ** | **Taxable  Equivalent  Yield/rate** | ** ** | **Average  Balance** | ** ** | **Taxable  Equivalent  Interest** | ** ** | **Taxable  Equivalent  Yield/rate** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Assets**                                      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Federal funds sold                              |       | $                                          | 12,286     |                                       | $          | 30 |   | .98 | % | $ | 16,945 |   | $ | 51 |   | 1.22 | % |
| Time deposits at other financial  institutions  |       | 350                                        |       | 2                                          |       | 2.29 |   | 600 |   | 3 |   | 2.03 |   |
| Taxable investment securities  (1)         |       | 334,739                                    |       | 3,175                                      |       | 3.80 |   | 294,620 |   | 3,065 |   | 4.22 |   |
| Nontaxable investment securities (1)            |       | 52,905                                     |       | 695                                        |       | 5.27 |   | 29,139 |   | 433 |   | 6.03 |   |
| Loans, gross: (2)                               |       | 798,616                                    |       | 13,591                                     |       | 6.83 |   | 676,048 |   | 12,086 |   | 7.25 |   |
| Total interest-earning assets:                  |       | 1,198,896                                  |       | 17,493                                     |       | 5.85 |   | 1,017,352 |   | 15,638 |   | 6.23 |   |
| Allowance for loan losses                       |       | (13,847                                    | )          |                                       |       |   |   | (12,845 | ) |   |   |   |   |
| Cash and due from banks                         |       | 39,503                                     |       |                                       |       |   |   | 34,589 |   |   |   |   |   |
| Premises and equipment, net                     |       | 18,053                                     |       |                                       |       |   |   | 15,261 |   |   |   |   |   |
| Interest receivable and other assets            |       | 50,534                                     |       |                                       |       |   |   | 42,353 |   |   |   |   |   |
| Total assets                                    |       | $                                          | 1,293,139  |                                       |       |   |   |   | $ | 1,096,710 |   |   |   |   |   |
|                                            |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| **Liabilities  And Shareholders’ Equity**  |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal                  |       | $                                          | 143,762    |                                       | $          | 17 |   | 0.05 | % | $ | 117,697 |   | $ | 14 |   | 0.05 | % |
| Savings deposits                                |       | 352,525                                    |       | 753                                        |       | .86 |   | 247,854 |   | 643 |   | 1.05 |   |
| Time deposits                                   |       | 351,422                                    |       | 1,934                                      |       | 2.21 |   | 350,961 |   | 2,165 |   | 2.50 |   |
| Other borrowings                                |       | 123,391                                    |       | 1,167                                      |       | 3.79 |   | 134,075 |   | 1,193 |   | 3.61 |   |
| Subordinated Debentures                         |       | 16,496                                     |       | 265                                        |       | 6.44 |   | 6,186 |   | 158 |   | 10.36 |   |
| Total interest-bearing liabilities              |       | 987,596                                    |       | 4,136                                      |       | 1.68 |   | 856,773 |   | 4,173 |   | 1.98 |   |
|                                            |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                    |       | 207,103                                    |       |                                       |       |   |   | 152,415 |   |   |   |   |   |
| Accrued interest, taxes and other  liabilities  |       | 3,432                                      |       |                                       |       |   |   | 5,792 |   |   |   |   |   |
| Total liabilities                               |       | 1,198,131                                  |       |                                       |       |   |   | 1,014,980 |   |   |   |   |   |
|                                            |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Total shareholders’ equity                 |       | 95,008                                     |       |                                       |       |   |   | 81,730 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                          | 1,293,139  |                                       |       |   |   |   | $ | 1,096,710 |   |   |   |   |   |
|                                            |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Net interest income and margin (3)              |       |                                       |       | $                                          | 13,357     |   | 4.48 | % |   |   | $ | 11,465 |   | 4.57 | % |

 

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(1)                                  Tax-equivalentadjustments included in the nontaxable investment securities portfolio are $173,000 and $105,000 for the threemonths ended June 30, 2004 and 2003, respectively.  Tax equivalent adjustments included in thetaxable investment securities created by a dividends received deduction were **$**26,000****and $32,000****for the three months ended June 30, 2004 and 2003,respectively.

(2)                                  Amounts of interestearned includes loan fees of $629,000 and $739,000 for the three months endedJune 30, 2004 and 2003, respectively.

(3)                                  Net interest marginis computed by dividing net interest income by total average interest-earningassets.

 

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AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS

 
| ** **                                      | ** ** | **Six months ended  June 30, 2004** | ** ** | **Six months ended  June 30, 2003** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Average  Balance**                     | ** ** | **Taxable  Equivalent  Interest**        | ** ** | **Taxable  Equivalent  Yield/rate** | ** ** | **Average  Balance** | ** ** | **Taxable  Equivalent  Interest** | ** ** | **Taxable  Equivalent  Yield/rate** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**               | ** ** |
| **Assets**                                      |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Federal funds sold                              |       | $                                        | 8,251      |                                     | $          | 41 |   | 1.00 | % | $ | 15,157 |   | $ | 90 |   | 1.20 | % |
| Time deposits at other financial  institutions  |       | 350                                      |       | 4                                        |       | 1.72 |   | 580 |   | 5 |   | 1.74 |   |
| Taxable investment securities  (1)         |       | 330,265                                  |       | 6,459                                    |       | 3.92 |   | 275,867 |   | 6,042 |   | 4.42 |   |
| Nontaxable investment securities (1)            |       | 50,830                                   |       | 1,346                                    |       | 5.31 |   | 29,024 |   | 867 |   | 6.02 |   |
| Loans, gross: (2)                               |       | 784,807                                  |       | 26,739                                   |       | 6.83 |   | 655,682 |   | 23,419 |   | 7.20 |   |
| Total interest-earning assets:                  |       | 1,174,503                                |       | 34,589                                   |       | 5.91 |   | 976,310 |   | 30,423 |   | 6.28 |   |
| Allowance for loan losses                       |       | (13,659                                  | )          |                                     |       |   |   | (12,619 | ) |   |   |   |   |
| Cash and due from banks                         |       | 39,410                                   |       |                                     |       |   |   | 33,588 |   |   |   |   |   |
| Premises and equipment, net                     |       | 17,460                                   |       |                                     |       |   |   | 14,805 |   |   |   |   |   |
| Interest receivable and other assets            |       | 49,310                                   |       |                                     |       |   |   | 40,748 |   |   |   |   |   |
| Total assets                                    |       | $                                        | 1,267,024  |                                     |       |   |   |   | $ | 1,052,832 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Liabilities  And Shareholders’ Equity**  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal                  |       | $                                        | 139,220    |                                     | $          | 32 |   | 0.05 |   | $ | 117,606 |   | $ | 28 |   | 0.05 |   |
| Savings deposits                                |       | 346,485                                  |       | 1,518                                    |       | .88 |   | 236,040 |   | 1,223 |   | 1.04 |   |
| Time deposits                                   |       | 356,538                                  |       | 3,944                                    |       | 2.22 |   | 333,255 |   | 4,274 |   | 2.59 |   |
| Other borrowings                                |       | 111,116                                  |       | 2,232                                    |       | 4.03 |   | 123,277 |   | 2,344 |   | 3.83 |   |
| Subordinated Debentures                         |       | 16,496                                   |       | 529                                      |       | 6.43 |   | 6,186 |   | 315 |   | 10.28 |   |
| Total interest-bearing liabilities              |       | 969,855                                  |       | 8,255                                    |       | 1.71 |   | 816,364 |   | 8,184 |   | 2.02 |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                    |       | 198,844                                  |       |                                     |       |   |   | 150,432 |   |   |   |   |   |
| Accrued interest, taxes and other  liabilities  |       | 4,770                                    |       |                                     |       |   |   | 5,763 |   |   |   |   |   |
| Total liabilities                               |       | 1,173,469                                |       |                                     |       |   |   | 972,559 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total shareholders’ equity                 |       | 93,555                                   |       |                                     |       |   |   | 80,273 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                        | 1,267,024  |                                     |       |   |   |   | $ | 1,052,832 |   |   |   |   |   |
|                                            |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net interest income and margin (3)              |       |                                     |       | $                                        | 26,334     |   | 4.51 | % |   |   | $ | 22,239 |   | 4.59 | % |

 

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(1)                                  Tax-equivalentadjustments included in the nontaxable investment securities portfolio are$333,000 and $212,000 for the six months ended June 30, 2004 and 2003,respectively.  Tax equivalent adjustmentsincluded in the taxable investment securities created by a dividends receiveddeduction were $57,000 and $67,000 forthe six months ended June 30, 2004 and 2003, respectively.

(2)                                  Amounts of interestearned includes loan fees of $1,140,000 and $1,100,000 for the six months endedJune 30, 2004 and 2003, respectively.

(3)                                  Net interest marginis computed by dividing net interest income by total average interest-earningassets.

 

17

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*NetInterest Income Changes Due To Volume And Rate.*  The followingtable sets forth, for the periods indicated, a summary of the changes inaverage asset and liability balances and interest earned and interest paidresulting from changes in average asset and liability balances (volume) andchanges in average interest rates and the total net change in interest incomeand expenses.  The changes in interestdue to both rate and volume have been allocated to volume and rate changes inproportion to the relationship of the absolute dollar amount of the change ineach.

 

Net Interest Income Variance Analysis:

 
| ** **                                     | ** ** | **Three months ended  June 30, 2004 compared to June 30, 2003** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(Dollar  in thousands)**                     | ** ** | **Volume**                                                                | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                                           |       |                                                                      |       |   |   |   |   |
| Increase (decrease) in interest income:        |       |                                                                      |       |   |   |   |   |
| Federal funds sold                             |       | $                                                                         | (12        | ) | $ | (9 | ) | $ | (21 | ) |
| Time deposits at other financial  institutions |       | (1                                                                        | )          | — |   | (1 | ) |
| Taxable investment securities                  |       | 419                                                                       |       | (309 | ) | 110 |   |
| Tax-exempt investment securities               |       | 323                                                                       |       | (61 | ) | 262 |   |
| Loans                                          |       | 2,222                                                                     |       | (717 | ) | 1,505 |   |
| Total:                                         |       | $                                                                         | 2,951      |   | $ | (1,096 | ) | $ | 1,855 |   |
|                                           |       |                                                                      |       |   |   |   |   |
| Increase (decrease) in interest expense:       |       |                                                                      |       |   |   |   |   |
| Interest bearing demand                        |       | $                                                                         | 3          |   | $ | — |   | $ | 3 |   |
| Savings deposits                               |       | 245                                                                       |       | (135 | ) | 110 |   |
| Time deposits                                  |       | 3                                                                         |       | (234 | ) | (231 | ) |
| Other borrowings                               |       | (91                                                                       | )          | 65 |   | (26 | ) |
| Subordinated Debentures                        |       | 186                                                                       |       | (79 | ) | 107 |   |
| Total:                                         |       | $                                                                         | 346        |   | $ | (383 | ) | $ | (37 | ) |
|                                           |       |                                                                      |       |   |   |   |   |
| Increase (decrease) in net interest income     |       | $                                                                         | 2,605      |   | $ | (713 | ) | $ | 1,892 |   |

 
| ** **                                     | ** ** | **Six months ended  June 30, 2004 compared to June 30, 2003** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **(Dollar  in thousands)**                     | ** ** | **Volume**                                                              | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                                           |       |                                                                    |       |   |   |   |   |
| Increase (decrease) in interest income:        |       |                                                                    |       |   |   |   |   |
| Federal funds sold                             |       | $                                                                       | (36        | ) | $ | (13 | ) | $ | (49 | ) |
| Time deposits at other financial  institutions |       | (2                                                                      | )          | — |   | (2 | ) |
| Taxable investment securities                  |       | 701                                                                     |       | (283 | ) | 418 |   |
| Tax-exempt investment securities               |       | 503                                                                     |       | (24 | ) | 479 |   |
| Loans                                          |       | 3,595                                                                   |       | (275 | ) | 3,320 |   |
| Total:                                         |       | $                                                                       | 4,761      |   | $ | (595 | ) | $ | 4,166 |   |
|                                           |       |                                                                    |       |   |   |   |   |
| Increase (decrease) in interest expense:       |       |                                                                    |       |   |   |   |   |
| Interest bearing demand                        |       | $                                                                       | 4          |   | $ | — |   | $ | 4 |   |
| Savings deposits                               |       | 367                                                                     |       | (72 | ) | 295 |   |
| Time deposits                                  |       | 93                                                                      |       | (423 | ) | (330 | ) |
| Other borrowings                               |       | (153                                                                    | )          | 41 |   | (112 | ) |
| Subordinated debentures                        |       | 272                                                                     |       | (58 | ) | 214 |   |
| Total:                                         |       | $                                                                       | 583        |   | $ | (512 | ) | $ | 71 |   |
|                                           |       |                                                                    |       |   |   |   |   |
| Increase (decrease) in net interest income     |       | $                                                                       | 4,178      |   | $ | (83 | ) | $ | 4,095 |   |

 

18

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*ProvisionFor Loan Losses.*** **The provision for loan losses for the three and sixmonths ended June 30, 2004 was $621,000 and $1,241,000 compared with$482,000 and $1,153,000 for the three and six months ended June 30, 2003,an increase of $139,000 and $88,000 or 29% and 8%.  See “Allowance for Loan Losses” contained herein.  As of June 30, 2004 the allowance forloan losses was $13,757,000 or 1.68% of total loans which compares to theallowance for loan losses of $13,263,000 or 1.74% of total loans as ofDecember 31, 2003.  At June 30,2004, nonperforming assets totaled $5,001,000 or 0.38% of total assets,nonperforming loans totaled $4,941,000 or 0.60% of total loans and theallowance for loan losses totaled 278% of nonperforming loans.  At December 31, 2003, nonperforming assetstotaled $4,047,000 or 0.33% of total assets, nonperforming loans totaled$3,987,000 or 0.52% of total loans and the allowance for loan losses totaled333% of nonperforming loans.  Noassurance can be given that nonperforming loans will not increase or that theallowance for loan losses will be adequate to cover losses inherent in the loanportfolio.

 

*NoninterestIncome.*** **Noninterest income increased by $190,000 and $300,000or 8% and 6% to $2,591,000 and $5,031,000 for the three and six months endedJune 30, 2004 compared with $2,401,000 and $4,731,000 for the same periodsduring 2003.  Service charges on depositaccounts increased by $223,000 and $380,000 or 16% and 14% to $1,580,000 and$3,014,000 for the three and six months ended June 30, 2004 compared with$1,357,000 and $2,634,000 achieved during for the same period in 2003.  The increase in fees is the result ofincreased customer use of existing fee based products.  Other income decreased by $24,000 and $59,000or 3% and 4% for the three and six month periods ended June 30, 2004 whencompared to the same periods in 2003. The primary source of this modest decrease in other income is the saleof the consumer credit card portfolio in March, 2003 for a gain of $82,000, thegain on sale of foreclosure property with a book basis of $0 for an $81,000gain in February 2003, and modestly reduced mortgage packaging fees.  These decreases are partially offset byincreases in retail investment fees and fees generated by Regency InvestmentAdvisors, Incorporated for the three and six months ended June 30, 2004.

 

*Noninterest Expense.*** **Noninterest expensesincreased by $550,000 and $1,516,000 or 6% and 9% to $9,388,000 and $18,714,000for the three and six months ended June 30, 2004 compared with the$8,838,000 and $17,198,000 recorded during for the same periods in 2003.  The primary components of noninterestexpenses were salaries and employee benefits, premises and occupancy expense,equipment expense, professional fees, marketing expense, supplies expense andother operating expenses.

 

For the three and sixmonths ended June 30, 2004, salaries and related benefits increased by$504,000 and $1,057,000 or 10% and 11% to $5,438,000 and $10,494,000 from the$4,934,000 and $9,437,000 recorded for the same period in 2003. The salaryexpense increase was primarily the result of normal salary progression andincentive bonus payments.  Equipmentexpense increased by $44,000 and $111,000 or 6% and 8% to $746,000 and$1,572,000 for the three and six months ended June 30, 2004 from the$702,000 and $1,461,000 recorded during the same periods in 2003.  The increased equipment costs were related tobranch equipment upgrades and increased technology spending.  Premises and occupancy expenses increased by$52,000 and $161,000 to $764,000 and $1,543,000 for the three and six monthsended June 30, 2004 from $712,000 and $1,382,000 during the same periodsin 2003.  The primary reason for theincrease in occupancy costs in 2004 is related to general Company growth andbranch site improvements and the addition of a new retail banking facility inFresno in June 2003.  When comparing the results of the three andsix months ended June 30, 2004 to three and six months ended June 30,2003, professional fees decreased by $86,000 or 18% for the three month periodand increased $10,000 or 1% for the six month period, marketing expensesdecreased by $96,000 and $8,000 or 39% and 2%, goodwill and intangibleamortization expense decreased by $4,000 and $7,000 or 2%, supplies

 

19

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expense decreased by $19,000 and $32,000 or 10% and 7%, and otherexpenses increased $155,000 and $224,000 or 11% and 8% from 2003 levels. ** **These general andadministrative expense changes were the result of general growth of the Companyduring the period, and the timing between first and second quarters as to whenthese expenses were incurred.

 

*ProvisionFor Income Taxes.*** **The Company recorded an increasein the income tax provision of $846,000 and $1,579,000 or 83% and 82% to$1,860,000 and $3,497,000 for the three and six months ended June 30, 2004compared to $1,014,000 and $1,918,000 recorded for the same period in2003.  During the three and six monthsended June 30, 2004 the Company achieved an effective tax rate of 32%which compares to 23% for the three and six months ended June 30,2003.  During 2004, the effective taxrate has increased 9% over 2003 levels. The effective tax rate for the second quarter of 2003 includes a REIT benefitthat was reversed in the fourth quarter of 2003 when the Franchise Tax Board listedcertain REIT transactions as abusive tax shelters.  For the full year 2003, the Company’seffective tax rate was 26%.  The increasein the effective tax rate in 2004 was primarily the result of the eliminationof a recorded tax benefit related to the Bank’s REIT as well as increasedlevels of fully taxable earnings.  TheCompany’s effective tax rate of 32% in 2004 and 26% in 2003 is also lowered dueto the Bank’s investment in such as investments as limited partnerships whichown low income housing projects that generate federal and state income taxcredits and other investments which earnings provide the Company with taxexemptions such as municipal securities and single premium universal lifepolicies.

 

**Financial Condition**

 

 Total assets at June 30, 2004 were$1,314,180,000, an increase of $79,638,000 or 6% compared with total assets of$1,234,542,000 at December 31, 2003. Net loans were $803,974,000 at June 30, 2004, an increase of$52,985,000 or 7% compared with net loans of $750,989,000 at December 31,2003.  Deposits were $1,074,547,000 atJune 30, 2004, an increase of $45,739,000 or 4% compared with deposits of$1,028,808,000 at December 31, 2003. The increase in total assets of the Company between December 31,2003 and June 30, 2004 was primarily the result of an increase in depositsand other borrowed funds that were obtained to fund additional purchases ofinterest earning assets.

 

Totalshareholders’ equity was $95,173,000 at June 30, 2004, an increase of$5,688,000 or 6% from the $89,485,000 at December 31, 2003. The growth inshareholders’ equity between December 31, 2003 and June 30, 2004 wasachieved through the retention of accumulated earnings which was partiallyoffset by a decline in other comprehensive income.  Other comprehensive income consists ofchanges in the fair market value compared to book value of available for saleinvestment securities and valuation changes in the Bank’s interest rate swap,net of estimated federal and state income taxes.

 

* Off-Balance Sheet Commitments. *The following table shows the distribution of theCompany’s undisbursed loan commitments at the dates indicated.

 
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars  in thousands)**  | ** ** | **2004**          | ** ** | **2003**              | ** ** |
|                         |       |              |       |                  |       |
| Letters of credit            |       | $                 | 13,311     |                  | $          | 7,380 |   |
| Commitments to extend credit |       | 311,500           |       | 348,282               |       |
| Total                        |       | $                 | 324,811    |                  | $          | 355,662 |   |

 

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*OtherInterest-Earning Assets. *The following table relates to the cashsurrender value of life insurance policies that are carried in other assets atthe dates indicated.  The insurancepolices are associated with a salary continuation plan for the Company’sexecutive management and deferred retirement benefits for participating boardmembers.  The plan is informally linkedwith universal life insurance policies for the salary continuation plan.  Income from these policies is reflected innoninterest income.

 
| ** **                             | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|----------------------------------------|------------|----------------------|------------|--------------------------|------------|
| **(Dollars  in thousands)**            | ** ** | **2004**             | ** ** | **2003**                 | ** ** |
|                                   |       |                 |       |                     |       |
| Cash surrender value of life insurance |       | $                    | 27,616     |                     | $          | 24,138 |   |
|                                        |            |                      |            |                          |            |  |  |

 

*Nonperforming Assets. *Nonperformingassets include nonaccrual loans, loans 90 days or more past due, restructuredloans and other real estate owned.

 

Nonperformingloans are those which the borrower fails to perform in accordance with theoriginal terms of the obligation and include loans on nonaccrual status, loanspast due 90 days or more and restructured loans.  The Company generally places loans onnonaccrual status and accrued but unpaid interest is reversed against thecurrent year’s income when interest or principal payments become 90 days ormore past due unless the outstanding principal and interest is adequatelysecured and, in the opinion of management, is deemed in the process ofcollection.  Interest income onnonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principaldepending upon management’s opinion of the ultimate risk of loss on theindividual loan.  Cash payments aretreated as interest income where management believes the remaining principalbalance is fully collectible.  Additionalloans not 90 days past due may also be placed on nonaccrual status ifmanagement reasonably believes the borrower will not be able to comply with thecontractual loan repayment terms and collection of principal or interest is inquestion.

 

A “restructuredloan” is a loan on which interest accrues at a below market rate or upon whichcertain principal has been forgiven so as to aid the borrower in the finalrepayment of the loan, with any interest previously accrued, but not yetcollected, being reversed against current income.  Interest is reported on a cash basis untilthe borrower’s ability to service the restructured loan in accordance with itsterms is established.  The Company had norestructured loans as of the dates indicated in the table below.

 

21

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The followingtable summarizes nonperforming assets of the Company at June 30, 2004 andDecember 31, 2003:

 
| **(Dollars in thousands)**              | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                    |       |                    |       |                        |       |
| Nonaccrual loans                        |       | $                       | 4,874      |                        | $          | 3,987 |   |
| Accruing loans past due 90 days or more |       | 67                      |       | —                      |       |
| Total nonperforming loans               |       | 4,941                   |       | 3,987                       |       |
| Other real estate owned                 |       | 60                      |       | 60                          |       |
| Total nonperforming assets              |       | $                       | 5,001      |                        | $          | 4,047 |   |
|                                    |       |                    |       |                        |       |
| Nonperforming loans to total loans      |       | 0.60                    | %          | 0.52                        | %          |
| Nonperforming assets to total assets    |       | 0.38                    | %          | 0.33                        | %          |

 

Contractualaccrued interest income on loans on nonaccrual status as of June 30, 2004and 2003, that would have been recognized if the loans had been current inaccordance with their original terms was approximately $115,000 and $39,000, respectively.

 

At June 30,2004, nonperforming assets represented .38% of total assets, an increase of 5basis points when compared to the .33% at December 31, 2003.  Nonperforming loans represented .60% of totalloans at June 30, 2004, an increase of 8 basis points compared to the .52%at December 31, 2003.  Nonperformingloans that were secured by first deeds of trust on real property were $0 atJune 30, 2004 and December 31, 2003.  Other forms of collateral such as inventory and equipment secured thenonperforming loans as of each date.  Noassurance can be given that the collateral securing nonperforming loans will besufficient to prevent losses on such loans.

 

The increase innonperforming loans and nonperforming assets as of June 30, 2004 comparedwith their levels as of December 31, 2003, was due to a slight increase in the nonperforming commercial segment ofthe loan portfolio.

 

At June 30,2004 and December 31, 2003, the Company had $60,000 invested in oneproperty, respectively, that had been acquired through foreclosure.  The property was carried at the lower of itsestimated market value, as evidenced by an independent appraisal, or therecorded investment in the related loan, less estimated selling expenses.  At foreclosure, if the fair value of the realestate is less than the Company’s recorded investment in the related loan, acharge is made to the allowance for loan losses.  The Company expects to sell most of theseproperties within a twelve month period.   No assurance can be given that the Company will sell the remainingproperty during 2004 or at any time or the amount for which the property mightbe sold.

 

Management definesimpaired loans, regardless of past due status on loans, as those on whichprincipal and interest are not expected to be collected under the originalcontractual loan repayment terms.  Animpaired loan is charged off at the time management believes the collectionprocess has been exhausted.  AtJune 30, 2004 and December 31, 2003, impaired loans were measuredbased on the present value of future cash flows discounted at the loan’seffective rate, the loan’s observable market price or the fair value ofcollateral if the loan is collateral-dependent. Impaired loans at June 30, 2004 were **$**4,941,000 for which the Company madeprovisions to the allowance for loan losses of approximately $553,000.

 

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Except for loansthat are disclosed above, there were no assets as of June 30, 2004, whereknown information about possible credit problems of borrower causes managementto have serious doubts as to the ability of the borrower to comply with thepresent loan repayment terms and which may become nonperforming assets.  Given the magnitude of the Company’s loanportfolio, however, it is always possible that current credit problems mayexist that may not have been discovered by management.

 

**Allowancefor Loan Losses**

 

The following table summarizes the loan loss experience of the Companyfor the six months ended June 30, 2004 and 2003, and for the year endedDecember 31, 2003.

 
| ** **                                  | ** ** | **June 30**           | ** ** | **December 31** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2004**                   | ** ** | **2003**             | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Allowance for Loan Losses:                  |       |                       |       |                 |       |   |   |
| Balance at beginning of period              |       | $                          | 13,263     |                 | $          | 12,134 |   | $ | 12,134 |   |
| Provision for loan losses                   |       | 1,241                      |       | 1,153                |       | 2,455 |   |
| Charge-offs:                                |       |                       |       |                 |       |   |   |
| Commercial and agricultural                 |       | 878                        |       | 476                  |       | 1,010 |   |
| Real estate mortgage                        |       | —                     |       | —               |       | 29 |   |
| Consumer                                    |       | 152                        |       | 493                  |       | 956 |   |
| Total charge-offs                           |       | 1,030                      |       | 969                  |       | 1,995 |   |
| Recoveries                                  |       |                       |       |                 |       |   |   |
| Commercial and agricultural                 |       | 143                        |       | 88                   |       | 302 |   |
| Consumer                                    |       | 140                        |       | 220                  |       | 367 |   |
| Total recoveries                            |       | 283                        |       | 308                  |       | 669 |   |
| Net charge-offs                             |       | 747                        |       | 661                  |       | 1,326 |   |
| Balance at end of period                    |       | $                          | 13,757     |                 | $          | 12,626 |   | $ | 13,263 |   |
|                                        |       |                       |       |                 |       |   |   |
| Loans outstanding at period-end             |       | $                          | 817,731    |                 | $          | 693,835 |   | $ | 764,252 |   |
| Average loans outstanding                   |       | $                          | 784,807    |                 | $          | 655,682 |   | $ | 687,419 |   |
|                                        |       |                       |       |                 |       |   |   |
| Annualized net charge-offs to average loans |       | 0.19                       | %          | 0.20                 | %          | 0.19 | % |
| Allowance for loan losses                   |       |                       |       |                 |       |   |   |
| To total loans                              |       | 1.68                       | %          | 1.82                 | %          | 1.74 | % |
| To nonperforming loans                      |       | 278.42                     | %          | 898.51               | %          | 332.70 | % |
| To nonperforming assets                     |       | 275.06                     | %          | 861.48               | %          | 327.74 | % |

 

The Companymaintains an allowance for loan losses at a level considered by management tobe adequate to cover the inherent risks of loss associated with its loanportfolio under prevailing and anticipated economic conditions.  In determining the adequacy of the allowancefor loan losses, management takes into consideration growth trends in theportfolio, examination of financial institution supervisory authorities, priorloan loss experience for the Company, concentrations of credit risk,delinquency trends, general economic conditions, the interest rate environmentand internal and external credit reviews. In addition, the risks management considers vary depending on the natureof the loan.  The normal risks consideredby management with respect to agricultural loans include the fluctuating valueof the collateral, changes in weather conditions and the availability ofadequate water resources in the Company’s local market area.  The normal risks considered by managementwith respect to real estate construction loans include fluctuation in realestate values, the demand for improved commercial and industrial properties andhousing, the availability of permanent financing in the Company’s market areaand borrowers’ ability to obtain permanent financing.  The normal risks considered by managementwith respect to real estate mortgage loans include fluctuations in the value ofreal estate.  Additionally, the

 

23

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Company relies on data obtained through independent appraisals forsignificant properties to determine loss exposure on nonperforming loans.

 

The balance in theallowance is affected by the amounts provided from operations, amounts chargedoff and recoveries of loans previously charged off.  The Company recorded a provision for loanlosses of $621,000 and $1,241,000 for the three and six months endedJune 30, 2004 compared with $482,000 and $1,153,000 during the sameperiods of 2003. The increase in loan loss provision during the first sixmonths of 2004 was recorded to coincide with the modestly higher level ofcharge-offs experienced and modestly increased nonperforming loan levels duringthe first six months of 2004 when compared to the same period in 2003.  The Company’s charge-offs, net of recoveries,were $747,000 for the six months ended June 30, 2004 compared with $661,000for the same six months in 2003.  Theincrease in net charge-offs for the first six months of 2004 was primarily dueto increased charge-offs that occurred within the commercial and agriculturalsegment and decreased recoveries within the consumer loan segment of the loanportfolio.

 

As of June 30,2004, the allowance for loan losses was $13,757,000 or 1.68% of total loansoutstanding, compared with $13,263,000 or 1.74% of total loans outstanding asof December 31, 2003 and $12,626,000 or 1.82% of total loans outstandingas of June 30, 2003.

 

The Company uses amethod developed by management for determining the appropriate level of itsallowance for loan losses.  This methodapplies relevant risk factors to the entire loan portfolio, includingnonperforming loans.  The methodology isbased, in part, on the Company’s loan grading and classification system.  The Company grades its loans through internalreviews and periodically subjects loans to external reviews which then areassessed by the Company’s audit committee and management.  Credit reviews are performed on a monthlybasis and the quality grading process occurs on a quarterly basis. Risk factorsapplied to the performing loan portfolio are based on the Company’s past losshistory considering the current portfolio’s characteristics, current economicconditions and other relevant factors. General reserves are applied to various categories of loans atpercentages ranging up to 1.8% based on the Company’s assessment of creditrisks for each category.  Risk factorsare applied to the carrying value of each classified loan: (i) loansinternally graded “Watch” or “Special Mention” carry a risk factor from 1.0% to2.0%; (ii) ”Substandard” loans carry a risk factor from 15% to 40%depending on collateral securing the loan, if any; (iii) “Doubtful” loans carrya 50% risk factor; and (iv) “Loss” loans are charged off 100%.  In addition, a portion of the allowance isspecially allocated to identified problem credits.  The analysis also includes reference tofactors such as the delinquency status of the loan portfolio, inherent risk bytype of loans, industry statistical data, recommendations made by the Company’sregulatory authorities and outside loan reviewers, and current economicenvironment.  Important components of theoverall credit rating process are the asset quality rating process and theinternal loan review process.

 

The allowance isbased on estimates and ultimate future losses may vary from currentestimates.  It is always possible thatfuture economic or other factors may adversely affect the Company’s borrowers,and thereby cause loan losses to exceed the current allowance.  In addition, there can be no assurance thatfuture economic or other factors will not adversely affect the Company’sborrowers, or that the Company’s asset quality may not deteriorate throughrapid growth, failure to enforce underwriting standards, failure to maintainappropriate underwriting standards, failure to maintain an adequate number ofqualified loan personnel, failure to identify and monitor potential problem loansor for other reasons, and thereby cause loan losses to exceed the currentallowance.

 

The allocation ofthe allowance to loan categories is an estimate by management of the relativerisk characteristics of loans in those categories.  No assurance can be given that losses in oneor more

 

24

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loan categories will not exceed the portion of the allowance allocatedto that category or even exceed the entire allowance.

 

*ExternalFactors Affecting Asset Quality. *As a result of the Company’s loanportfolio mix, the future quality of its assets could be affected by adverseeconomic trends in its region or in the agricultural community.  These trends are beyond the control of theCompany.

 

California is anearthquake-prone region.  Accordingly, amajor earthquake could result in material loss to the Company.  At times the Company’s service area hasexperienced other natural disasters such as floods and droughts.  The Company’s properties and substantiallyall of the real and personal property securing loans in the Company’s portfolioare located in California.  The Companyfaces the risk that many of its borrowers face uninsured property damage,interruption of their businesses or loss of their jobs from earthquakes, floodsor droughts.  As a result these borrowersmay be unable to repay their loans in accordance with their terms and thecollateral for such loans may decline significantly in value.  The Company’s service area is a largelyagricultural region and therefore is highly dependent on a reliable supply ofwater for irrigation purposes.  The areaobtains nearly all of its water from the run-off of melting snow in themountains of the Sierra Nevada to the east. Although such sources have usually been available in the past, watersupply can be adversely affected by light snowfall over one or more winters orby any diversion of water from its present natural courses.  Any such natural disaster could impair theability of many of the Company’s borrowers to meet their obligations to theCompany.

 

Parts ofCalifornia have experienced significant floods in the late 1990s. No assurancecan be given that future flooding will not have an adverse impact on theCompany and its borrowers and depositors.

 

*Liquidity.*In order tomaintain adequate liquidity, the Company must have sufficient resourcesavailable at all times to meet its cash flow requirements.  The need for liquidity in a bankinginstitution arises principally to provide for deposit withdrawals, the creditneeds of its customers and to take advantage of investment opportunities asthey arise.  The Company may achievedesired liquidity from both assets and liabilities.  The Company considers cash and deposits heldin other banks, federal funds sold, other short term investments, maturingloans and investments, payments of principal and interest on loans andinvestments and potential loan sales as sources of asset liquidity.  Deposit growth and access to credit linesestablished with correspondent banks and market sources of funds are consideredby the Company as sources of liability liquidity.  The holding company’s primary source ofliquidity is from dividends received from the Bank.  Dividends from the Bank are subject tocertain regulatory restrictions.

 

The Companyreviews its liquidity position on a regular basis based upon its currentposition and expected trends of loans and deposits. These assets include cashand deposits in other banks, available-for-sale securities and federal fundssold.  The Company’s liquid assetstotaled $337,361,000 and $321,235,000 on June 30, 2004 andDecember 31, 2003, respectively, and constituted 26% of total assets onthose dates.  Liquidity is also affectedby the collateral requirements of its public deposits and certain borrowings.  Total pledged securities were $289,040,000 atJune 30, 2004 compared with $295,024,000****atDecember 31, 2003.

 

Although theCompany’s primary sources of liquidity include liquid assets and a stabledeposit base, the Company maintains lines of credit with the Federal ReserveBank of San Francisco, Federal Home Loan Bank of San Francisco, Pacific CoastBankers’ Bank, Union Bank of California, Wells Fargo Bank and First TennesseeBank aggregating $175,043,000 of which $113,426,000 was outstanding as of June 30,2004 and $83,346,000 was outstanding as of December 31, 2003. The increasein borrowings

 

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outstanding during 2004 produced an inflow of funds that were used topurchase additional investment securities and allowed the Bank to allow$20,000,000 in brokered deposits to mature. Management believes that the Company maintains adequate amounts ofliquid assets to meet its liquidity needs. The Company’s liquidity might be insufficient if deposit withdrawalswere to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financialdifficulties or receives adverse publicity for other reasons, or if itspricing, products or services are not competitive with those offered by otherinstitutions.

 

*CapitalResources. *Capital serves as a source of funds andhelps protect depositors against potential losses.  The primary source of capital for the Companyhas been internally generated capital through retained earnings.  The Company’s shareholders’ equity increasedby $5,688,000 or 6% from December 31, 2003 to June 30, 2004.

 

The Company issubject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meetminimum capital requirements can initiate mandatory and possibly additionaldiscretionary actions by the regulators that, if undertaken, could have amaterial adverse effect on the Company’s financial statements.  Management believes, as of June 30,2004, that the Company and the Bank met all applicable capitalrequirements.  The Company’s leveragecapital ratio at June 30, 2004 was 8.48% as compared with 8.55% as ofDecember 31, 2003.  The Company’s totalrisk based capital ratio at June 30, 2004 was 11.61% as compared to 11.57%as of December 31, 2003.

 

The Company’s andBank’s actual capital amounts and ratios met all regulatory requirements as ofJune 30, 2004 and were summarized as follows:

 
| **Dollars  in thousands**                | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well Capitalized  Under Prompt  Corrective  Action Provisions:** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Consolidated                             |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| As of June 30, 2004                 |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |       | $          | 122,641    |                               | 11.61      | %                                                                        | $          | 84,513 |   | 8.0 | % | $ | 105,641 |   | 10.0 | % |
| Tier 1 capital (to risk weighted assets) |       | 109,429    |       | 10.36                              |       | 42,256                                                                   |       | 4.0 |   | 63,384 |   | 6.0 |   |
| Leverage ratio*                          |       | 109,429    |       | 8.48                               |       | 51,633                                                                   |       | 4.0 |   | 64,541 |   | 5.0 |   |
|                                     |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| The Bank:                                |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| As of June 30, 2004                 |       |       |       |                               |       |                                                                     |       |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |       | $          | 111,328    |                               | 10.57      | %                                                                        | $          | 84,264 |   | 8.0 | % | $ | 105,330 |   | 10.0 | % |
| Tier 1 capital (to risk weighted assets) |       | 98,154     |       | 9.32                               |       | 42,132                                                                   |       | 4.0 |   | 63,198 |   | 6.0 |   |
| Leverage ratio*                          |       | 98,154     |       | 7.62                               |       | 51,518                                                                   |       | 4.0 |   | 64,399 |   | 5.0 |   |

 

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***** The leverage ratio consists of Tier 1capital divided by adjusted quarterly average assets.  The minimum leverage ratio is 3 percent forbanking organizations that do not anticipate significant growth and that havewell-diversified risk, excellent asset quality and in general, are consideredtop-rated banks.

 

The Company has noformal dividend policy, and dividends are issued solely at the discretion ofthe Company’s Board of Directors, subject to compliance with regulatoryrequirements.  In order to pay any cashdividends, the Company must receive payments of dividends or management feesfrom the Bank.  There are certainregulatory limitations on the payment of cash dividends by banks.

 

*Deposits.* Deposits are the Company’s primary source of funds.  At June 30, 2004, the Company had adeposit mix of 33% in savings deposits, 32% in time deposits, 14% ininterest-bearing checking

 

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accounts and 21% in noninterest-bearing demand accounts.  Noninterest-bearing demand deposits enhancethe Company’s net interest income by lowering its costs of funds.

 

The Companyobtains deposits primarily from the communities it serves.  No material portion of its deposits has beenobtained from or is dependent on any one person or industry.  The Company’s business is not seasonal innature.  The Company accepts deposits inexcess of $100,000 from customers.  Thesedeposits are priced to remain competitive. At June 30, 2004, the Company had brokered deposits of $299,000.

 

Maturities of timecertificates of deposits of $100,000 or more outstanding at June 30, 2004and December 31, 2003 are summarized as follows:

 
| ** **                | ** ** | **June 30, 2004**     | ** ** | **December 31, 2003** | ** ** |
|---------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
|                      |       |                       |       |                       |       |
| Three months or less      |       | $                          | 65,380     |                       | $          | 68,249 |   |
| Over three to six months  |       | 25,710                     |       | 37,829                     |       |
| Over six to twelve months |       | 29,429                     |       | 31,060                     |       |
| Over twelve months        |       | 40,405                     |       | 35,600                     |       |
| Total                     |       | $                          | 160,924    |                       | $          | 172,738 |   |

 

**Borrowed Funds**

 

Borrowed fundsincreased by $30,085,000 or 32% to $122,902,000 at June 30, 2004 comparedto the $92,817,000 outstanding at December 31, 2003.  The increase in borrowed funds during 2004was primarily used to purchase new investment securities and to allow$20,000,000 in brokered certificates of deposit to mature.

 

**Return onEquity and Assets**

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Year ended**       | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **June 30**       | ** ** | **June 30**       | ** ** | **December 31** | ** ** |
| ** **                          | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2003**             | ** ** |
|                                |       |                   |       |                   |       |                 |       |
| Annualized return on average assets |       | 1.20                   | %          | 1.24                   | %          | 1.23                 | %          |
| Annualized return on average equity |       | 16.34                  | %          | 16.61                  | %          | 16.43                | %          |
| Dividend payout ratio               |       | 7.58                   | %          | —                 |       | —               |       |
| Average equity to average assets    |       | 7.35                   | %          | 7.45                   | %          | 7.46                 | %          |

 

**Impact ofInflation**

 

The primary impactof inflation on the Company is its effect on interest rates.  The Company’s primary source of income is netinterest income which is affected by changes in interest rates.  The Company attempts to limit inflation’simpact on its net interest margin through management of rate sensitive assetsand liabilities and the analysis of interest rate sensitivity.  The effect of inflation on premises and equipment,as well as on interest expenses, has not been significant for the periodscovered in this report.

 

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**Item3****.****                                   Quantitativeand Qualitative Disclosures about Market Risk**

 

In the normal course of business, the Company is exposed to market riskwhich includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and themismatch in repricing characteristics of assets, liabilities, and off balancesheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities ariseprimarily through the interaction of the various types of loans versus thetypes of deposits that are maintained as well as from management’s discretionaryinvestment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not beable to satisfy current and future financial commitments or that the Companymay not be able to liquidate financial instruments at market prices.  Risk management policies and procedures havebeen established and are utilized to manage the Company’s exposure to marketrisk.  Quarterly testing of the Company’sassets and liabilities under both increasing and decreasing interest rateenvironments are performed to insure the Company does not assume a magnitude ofrisk that is outside approved policy limits.

 

The Company’s success is largely dependent upon itsability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Company’s netinterest income to adverse movements in interest rates.  Although the Company manages other risks,such as credit and liquidity risk in the normal course of its business,management considers interest rate risk to be its most significant market riskand could potentially have the largest material effect on the Company’sfinancial condition and results of operations. Correspondingly, the overall strategy of the Company is to manageinterest rate risk, through balance sheet structure, to be interest rateneutral.

 

The Company’s interest rate risk management is the responsibility ofthe Asset/Liability Management Committee (ALCO), which reports to the Board ofDirectors.  ALCO establishes policiesthat monitors and coordinates the Company’s sources, uses and pricing offunds.  ALCO is also involved informulating the economic projections for the Company’s budget and strategicplan.  ALCO sets specific rate sensitivitylimits for the Company.  ALCO monitorsand adjusts the Company’s exposure to changes in interest rates to achievepredetermined risk targets that it believes are consistent with current andexpected market conditions.  Balancesheet management personnel monitor the asset and liability changes on anongoing basis and provide report information and recommendations to the ALCOcommittee in regards to those changes.

 

It is the opinion of management there has been no material change inthe Company’s market risk during the six months ended June 30, 2004 whencompared to the level of market risk at December 31, 2003.  If interest rates were to suddenly andmaterially fall from levels anticipated in the third quarter of 2004, theCompany could become susceptible to an increased level of market risk.

 

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**Item4****.****                                   Controlsand Procedures**

 

Evaluation Of Disclosure Controls And Procedures

 

Under the supervision and with the participation of the Company’smanagement, including its chief executive office and chief financial officer,the Company conducted an evaluation of the effectiveness of the design andoperation of its disclosure controls and procedures as defined by Rules 13a –15 under the Securities Exchange Act of 1934.

 

Based on the evaluation, the chief executive officer and chief financialofficer concluded that as of the Evaluation Date the disclosure controls andprocedures were adequate and effective, and that the material informationrequired to be included in this report, including information from theCompany’s consolidated subsidiaries, was properly recorded, processed,summarized and reported, and was made known to the chief executive officer andchief financial officer by others within the Company in a timely manner,particularly during the period when this quarterly report on Form 10-Q wasbeing prepared.

 

Changes In Internal Controls

 

There were no significant changes in our internal over financialreporting that occurred during our last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II****- Other Information**

 

**Item 1.****                                       ****LegalProceedings**

 

The Company is a party to routine litigation in theordinary course of its business.  In theopinion of management, pending and threatened litigation is not likely to havea material adverse effect on the financial condition or results of operationsof the Company.

 

**Item 2.****                                       ****Changes in Securities and****Use of Proceeds.**

 

None.

 

**Item 3.****                                       ****Defaults Upon Senior Securities.**

 

None.

 

**Item 4.****                                       ****Submission of Matters to a****Vote of Securities Holders.**

 

(a.)                               Our Annual Meeting of Shareholders for2004 was held April 13, 2004.  Thenumber of shares represented in person or by proxy and constituting a quorumwas 4,354,260, which equaled approximately 76% of the shares outstanding.

 

(b.)                              The following are the results of theelection of directors in Class II of the Board:

 
| **Election  of directors** | ** ** | **Votes For** | ** ** | **Votes Withheld** |
|----------------------------|------------|---------------|------------|--------------------|
| John D. Fawcett            |       | 4,315,150     |       | 39,110             |
| Thomas T. Hawker           |       | 4,304,418     |       | 49,842             |
| Curtis A. Riggs            |       | 4,211,510     |       | 142,750            |
| Roberto Salazar            |       | 4,240,308     |       | 113,952            |

 

(c.)                               The following are the results of the voteon proposal 2, to increase the number of shares available for grants of stockoptions pursuant to the Capital Corp of the West 2002 Stock Option Plan:

 
| **Votes  For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** | **Broker Non-Votes** |
|----------------|------------|-------------------|------------|---------------------|------------|----------------------|
| **3,095,917**  | ** ** | **294,494**       | ** ** | **46,229**          | ** ** | **917,620**          |
| ** **     | ** ** | ** **        | ** ** | ** **          | ** ** | ** **           |
| ** **     | ** ** | ** **        | ** ** | ** **          | ** ** | ** **           |

 

**Item 5****.****                                       ****Other Information.**

 

None

 

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**Item 6****. Exhibits and Reports on Form 8-K.**

 

See Exhibit Index

 

 

**Reports on Form 8-K**

 

Theregistrant filed a report on Form 8-K dated April 28, 2004 (Item 5)

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                            | CAPITAL CORP OF  THE WEST |             |
|---------------------------------|---------------------------|------------------|
|                            | (Registrant)              |             |   |
|                            |                      |             |   |
|                            |                      |             |   |   |
| Date:  August 9, 2004 | By                        |    /s/ | Thomas T. Hawker |   |
|                            |                      |             | Thomas T. Hawker |   |
|                            |                      |             | President and |   |
|                            |                      |             | Chief Executive  Officer |   |
|                            |                      |             |   |   |
| Date:  August 9, 2004      | By                        |    /s/ | R. Dale McKinney |   |
|                            |                      |             | R. Dale McKinney |   |
|                            |                      |             | Chief Financial  Officer |   |
|                                 |                           |                  |  |  |  |  |  |  |

 

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Exhibit Index

 
| **Exhibit** | ** ** | **Description**                                                                                                            |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                       |
| 31.1        |       | Certification of Registrant’s Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2003 |
|        |       |                                                                                                                       |
| 31.2        |       | Certification of Registrant’s Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2003 |
|        |       |                                                                                                                       |
| 32.1        |       | Certification of Registrant’s Chief Executive Officer Pursuant to 18  U.S.C. Section 1350                        |
|        |       |                                                                                                                       |
| 32.2        |       | Certification  of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350                       |

 

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