** **

**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

| **ý** |   | **Quarterly  Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------|--------|----------------------------------------------------------------------------------------|

** **

**For the Quarterly Period Ended September30, 2001**

** **

**or**

 

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

** **

**For the Transition Period from_____________ to ___________**

 

**CommissionFile Number: 0-27384**

 

**CAPITAL CORP OF THE WEST**

(Exact name of registrantas 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 of principal  executive offices)                                                                    |   | (zip code)             |
|                                                                                                         |   |                   |
|                                                                                                         |
| Registrant’s telephone  number, including area code:  **(209) 725-2200**                           |
|                                                                                                         |
|                                                                                                         |
| Former name, former  address and former fiscal year, if changed since last report:  **Not  applicable** |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý    No o

 

Thenumber of shares outstanding of the registrant’s common stock, no par value, asof September 30, 2001 was 4,863,130.  Noshares of preferred stock, no par value, were outstanding at September 30,2001.

 

 

**Capital Corp of the West**

Table of Contents

 
| PART I.  --  | FINANCIAL INFORMATION                                                                       |
|-------------------|---------------------------------------------------------------------------------------------|
|              |                                                                                        |
| Item 1 ** ** | Financial Statements                                                                        |
|              | Consolidated  Balance Sheets                                                                |
|              | Consolidated  Statements of Income and Comprehensive Income                                 |
|              | Consolidated  Statement of Changes in Stockholders' Equity                                  |
|              | Consolidated  Statements of Cash Flows                                                      |
|              | Notes to  Consolidated Financial Statements                                                 |
|              |
| Item  2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|              |                                                                                        |
| Item  3.          | Quantitative  and Qualitative Disclosures about Market Risk                                 |
|              |
| PART II.  -- | OTHER INFORMATION                                                                           |
|              |
| Item 1.           | Legal Proceedings                                                                           |
| Item  2.          | Changes  in Securities                                                                      |
| 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        |
|                   |                                                                                             |  |  |  |

 

**Capital Corp of the West**

**ConsolidatedBalance Sheets**

**(Unaudited)**

 
|                                                                                                                                                     |   | **September 30**           |    | **December 31** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|-----------------|--------|
|                                                                                                                                                     |   | **2001**                   |    | **2000**        |   |
|                                                                                                                                                     |   | **(Dollars in thousands)** |    |
| **Assets**                                                                                                                                               |   |                       |    |            |   |
| Cash and noninterest-bearing  deposits in other banks                                                                                                    |   | $                          | 26,824  |            | $      | 46,353 |   |
| Federal funds sold                                                                                                                                       |   | 23,495                     |    | 1,415           |   |
| Time deposits at other  financial institutions                                                                                                           |   | 500                        |    | 100             |   |
| Investment securities  available for sale, at fair value                                                                                                 |   | 198,834                    |    | 155,830         |   |
| Investment securities held to maturity at cost, fair  value of $49,169,000, and $35,412,000 at September 30, 2001 and December 31,  2000, respectively   |   | 48,071                     |    | 35,222          |   |
| Loans, net of allowance for loan losses of  $9,040,000 and $8,207,000 at September 30,  2001 and December 31, 2000                                  |   | 488,508                    |    | 404,457         |   |
| Interest receivable                                                                                                                                      |   | 5,511                      |    | 5,215           |   |
| Premises and equipment,  net                                                                                                                             |   | 13,597                     |    | 13,021          |   |
| Intangible assets                                                                                                                                        |   | 3,683                      |    | 4,277           |   |
| Other assets                                                                                                                                             |   | 23,062                     |    | 17,131          |   |
|                                                                                                                                                     |   |                       |    |            |   |
| Total assets                                                                                                                                             |   | $                          | 832,085 |            | $      | 683,021 |   |
|                                                                                                                                                     |   |                       |    |            |   |
| **Liabilities and Shareholders’  Equity**                                                                                                           |   |                       |    |            |   |
| Deposits                                                                                                                                                 |   |                       |    |            |   |
| Noninterest-bearing demand                                                                                                                               |   | $                          | 123,597 |            | $      | 107,581 |   |
| Negotiable orders of withdrawal                                                                                                                          |   | 89,145                     |    | 84,521          |   |
| Savings                                                                                                                                                  |   | 199,838                    |    | 184,073         |   |
| Time, under $100,000                                                                                                                                     |   | 165,746                    |    | 131,669         |   |
| Time, $100,000 and over                                                                                                                                  |   | 121,501                    |    | 93,654          |   |
| Total deposits                                                                                                                                           |   | 699,827                    |    | 601,498         |   |
|                                                                                                                                                     |   |                       |    |            |   |
| Short term borrowings                                                                                                                                    |   | 54,782                     |    | 19,272          |   |
| Long term borrowings                                                                                                                                     |   | 3,113                      |    | 3,155           |   |
| Accrued interest, taxes  and other liabilities                                                                                                           |   | 5,565                      |    | 5,645           |   |
| Total   liabilities                                                                                                                                 |   | 763,287                    |    | 629,570         |   |
|                                                                                                                                                     |   |                       |    |            |   |
| Trust Preferred  Securities                                                                                                                              |   | 6,000                      |    | -               |   |
|                                                                                                                                                     |   |                       |    |            |   |
| Preferred Stock, no par value; 10,000,000 shares  authorized; None outstanding                                                                           |   | -                          |    | -               |   |
| Common stock, no par value; 20,000,000 shares  authorized; 4,863,130 and 4,779,644 issued & outstanding at September 30,  2001 and December 31, 2000 |   | 39,709                     |    | 35,918          |   |
| Retained earnings                                                                                                                                        |   | 20,263                     |    | 17,449          |   |
| Accumulated other  comprehensive income                                                                                                                  |   | 2,826                      |    | 84              |   |
| Total shareholders’ equity                                                                                                                          |   | 62,798                     |    | 53,451          |   |
|                                                                                                                                                     |   |                       |    |            |   |
| Total liabilities and shareholders’ equity                                                                                                          |   | $                          | 832,085 |            | $      | 683,021 |   |

 

See accompanying notes

 

**CapitalCorp of the West**

**ConsolidatedStatements of Income and Comprehensive Income**

**(Unaudited)**

 
|                                                          |   | **For  the Three Months**                  |   | **For  the Nine Months Ended** |   |
|---------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------|--------|
|                                                          |   | **Ended  September 30**                    |   | **Ended  September 30**        |   |
|                                                          |   | **2001**                                   |   | **2000**                       |   | **2001** |   | **2000** |   |
|                                                          |   | **(In thousands, except per share  data)** |   |
| Interest income:                                              |   |                                       |   |                           |   |   |   |   |   |
| Interest and fees on loans                                    |   | $                                          | 11,398 |                           | $      | 10,178 |   | $ | 32,675 |   | $ | 27,899 |   |
| Interest on deposits with other financial  institutions       |   | 4                                          |   | 11                             |   | 11 |   | 29 |   |
| Interest on investments held to maturity:                     |   |                                       |   |                           |   |   |   |   |   |
| Taxable                                                       |   | 734                                        |   | 502                            |   | 1,861 |   | 1,499 |   |
| Non-taxable                                                   |   | 56                                         |   | 55                             |   | 167 |   | 167 |   |
| Interest on investments available for sale:                   |   |                                       |   |                           |   |   |   |   |   |
| Taxable                                                       |   | 2,632                                      |   | 2,148                          |   | 7,427 |   | 6,025 |   |
| Non-taxable                                                   |   | 273                                        |   | 281                            |   | 817 |   | 852 |   |
| Interest on federal funds sold                                |   | 118                                        |   | 124                            |   | 689 |   | 422 |   |
| Total interest income                                         |   | 15,215                                     |   | 13,299                         |   | 43,647 |   | 36,893 |   |
| Interest expense:                                             |   |                                       |   |                           |   |   |   |   |   |
| Interest on negotiable orders of withdrawal                   |   | 49                                         |   | 125                            |   | 201 |   | 370 |   |
| Interest on savings deposits                                  |   | 1,396                                      |   | 1,900                          |   | 4,817 |   | 5,187 |   |
| Interest on time deposits, under $100,000                     |   | 2,121                                      |   | 1,832                          |   | 6,312 |   | 4,627 |   |
| Interest on time, $100,000 and over                           |   | 1,514                                      |   | 1,368                          |   | 4,436 |   | 3,594 |   |
| Interest on other borrowings                                  |   | 689                                        |   | 367                            |   | 1,542 |   | 1,159 |   |
| Total interest expense                                        |   | 5,769                                      |   | 5,592                          |   | 17,308 |   | 14,937 |   |
|                                                          |   |                                       |   |                           |   |   |   |   |   |
| Net interest income                                           |   | 9,446                                      |   | 7,707                          |   | 26,339 |   | 21,956 |   |
| Provision for loan losses                                     |   | 1,540                                      |   | 792                            |   | 3,079 |   | 2,323 |   |
| Net interest income after provision for loan losses           |   | 7,906                                      |   | 6,915                          |   | 23,260 |   | 19,633 |   |
|                                                          |   |                                       |   |                           |   |   |   |   |   |
| Other income:                                                 |   |                                       |   |                           |   |   |   |   |   |
| Service charges on deposit accounts                           |   | 1,027                                      |   | 921                            |   | 2,933 |   | 2,605 |   |
| Income from real estate held for sale                         |   | -                                          |   | -                              |   | - |   | 381 |   |
| Other                                                         |   | 544                                        |   | 419                            |   | 1,565 |   | 1,145 |   |
| Total other income                                            |   | 1,571                                      |   | 1,340                          |   | 4,498 |   | 4,131 |   |
| Other Expenses:                                               |   |                                       |   |                           |   |   |   |   |   |
| Salaries and related benefits                                 |   | 3,426                                      |   | 2,969                          |   | 10,067 |   | 8,190 |   |
| Equipment                                                     |   | 258                                        |   | 431                            |   | 1,562 |   | 1,259 |   |
| Premises and occupancy                                        |   | 1,023                                      |   | 618                            |   | 2,007 |   | 1,862 |   |
| Professional fees                                             |   | 93                                         |   | 307                            |   | 309 |   | 802 |   |
| Marketing                                                     |   | 291                                        |   | 214                            |   | 732 |   | 678 |   |
| Goodwill and intangible amortization                          |   | 198                                        |   | 198                            |   | 594 |   | 594 |   |
| Supplies                                                      |   | 202                                        |   | 160                            |   | 656 |   | 474 |   |
| Dividend Expense on Capital Securities                        |   | 151                                        |   | -                              |   | 369 |   | - |   |
| Other                                                         |   | 1,145                                      |   | 991                            |   | 3,306 |   | 2,827 |   |
| Total other expenses                                          |   | 6,787                                      |   | 5,888                          |   | 19,602 |   | 16,686 |   |
|                                                          |   |                                       |   |                           |   |   |   |   |   |
| Income before income taxes                                    |   | 2,690                                      |   | 2,367                          |   | 8,156 |   | 7,078 |   |
| Provision for income taxes                                    |   | 781                                        |   | 721                            |   | 2,354 |   | 2,118 |   |
| Net income                                                    |   | $                                          | 1,909  |                           | $      | 1,646 |   | $ | 5,802 |   | $ | 4,960 |   |
| Comprehensive Income:                                         |   |                                       |   |                           |   |   |   |   |   |
| Unrealized gain on securities arising during the  period, net |   | 1,624                                      |   | 1,173                          |   | 2,742 |   | 909 |   |
| Comprehensive income                                          |   | $                                          | 3,533  |                           | $      | 2,819 |   | $ | 8,5443 |   | $ | 5,869 |   |
| Basic earnings per share                                      |   | $                                          | 0.39   |                           | $      | 0.35 |   | $ | 1.20. |   | $ | 1.04 |   |
| Diluted earnings per share                                    |   | $                                          | 0.38   |                           | $      | 0.34 |   | $ | 1.16 |   | $ | 1.02 |   |

 

See accompanying notes

**CapitalCorp of the West**

**Consolidated Statement of Changes inShareholders’ Equity**

**(Unaudited)**

 
| **(Amounts  in thousands)**                                                                     |   |                  |   |        |   |                   |   | **Accumulated  other comprehensive income, net** |      |   |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------|--------|-------------|--------|------------------------|--------|--------------------------------------------------|-----------|--------|--------|
|                                                                                            |   | **Common  Stock**     |   |        |   |                   |   |                                             |
|                                                                                            |   | **Number  of shares** |   | **Amounts** |   | **Retained  earnings** |   |                                             | **Total** |   |
| Balance,  December 31, 2000                                                                     |   | 4,552                 |   | $           | 35,918 |                   | $      | 17,449                                           |      | $      | 84     |   | $ | 53,451 |   |
|                                                                                            |   |                  |   |        |   |                   |   |                                             |      |   |   |
| 5% stock  dividend, including cash payment for fractional shares                                |   | 228                   |   | 2,981       |   | (2,988                 | )      | -                                                |      | (7     | )      |
|                                                                                            |   |                  |   |        |   |                   |   |                                             |      |   |   |
| Exercise of  stock options                                                                      |   | 51                    |   | 358         |   | -                      |   | -                                                |      | 358    |   |
|                                                                                            |   |                  |   |        |   |                   |   |                                             |      |   |   |
| Issuance of  shares pursuant to 401K and ESOP plans                                             |   | 32                    |   | 452         |   | -                      |   | -                                                |      | 452    |   |
|                                                                                            |   |                  |   |        |   |                   |   |                                             |      |   |   |
| Net change in  fair market value of  investment  securities, net of tax effect of $(1,349) |   | -                     |   | -           |   | -                      |   | 2,742                                            |      | 2,742  |   |
|                                                                                            |   |                  |   |        |   |                   |   |                                             |      |   |   |
| Net income                                                                                      |   | -                     |   | -           |   | 5,802                  |   | -                                                |      | 5,802  |   |
|                                                                                            |   |                  |   |        |   |                   |   |                                             |      |   |   |
| Balance,  September 30, 2001                                                                    |   | 4,863                 |   | $           | 39,709 |                   | $      | 20,263                                           |      | $      | 2,826  |   | $ | 62,798 |   |

 

See accompanying notes

 

**CapitalCorp of the West**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

** **
|                                                                               |       | **9 months ended** |       | **9 months ended** |       |
|------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                                                               |       | ** 09/30/01** |       | ** 09/30/00** |       |
|                                                                               |       | **(In thousands)** |       |
| **Operating activities:**                                                          | ** ** |               | ** ** |               | ** ** |
| Net income                                                                         |       | $                  | 5,802      |               | $          | 4,960 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |               |       |               |       |
| Provision for loan losses                                                          |       | 3,079              |       | 2,323              |       |
| Depreciation, amortization and accretion, net                                      |       | 2,283              |       | 1,713              |       |
| Gain on sale of real estate held for sale                                          |       | -                  |       | 381                |       |
| Net increase in interest receivable & other  assets                            |       | (7,576             | )          | (2,812             | )          |
| Net increase in deferred loan fees                                                 |       | 350                |       | 100                |       |
| Net (decrease) increase in accrued interest payable  & other liabilities       |       | (80                | )          | 2,209              |       |
| Net cash provided by operating activities                                          |       | 3,858              |       | 8,874              |       |
|                                                                               |       |               |       |               |       |
| **Investing activities:**                                                          |       |               |       |               |       |
| Investment security purchases                                                      |       | (75,455            | )          | (44,931            | )          |
| Proceeds from maturities of investment securities                                  |       | 23,488             |       | 9,941              |       |
| Proceeds from sales of AFS investment securities                                   |       | -                  |       | 1,725              |       |
| Net (increase) decrease in time deposits in other  financial institutions          |       | (400               | )          | 250                |       |
| Proceeds from sales of commercial and real estate  loans                           |       | 2,109              |       | 2,315              |       |
| Net increase in loans                                                              |       | (89,661            | )          | (67,609            | )          |
| Purchases of premises and equipment                                                |       | (1,988             | )          | (1,142             | )          |
| Proceeds from sales of real estate held for sale                                   |       | -                  |       | 381                |       |
| Net cash used by investing activities                                              |       | (141,907           | )          | (99,070            | )          |
|                                                                               |       |               |       |               |       |
| **Financing activities:**                                                          |       |               |       |               |       |
| Net increase in demand, NOW and savings deposits                                   |       | 36,405             |       | 23,648             |       |
| Net increase in certificates of deposit                                            |       | 61,924             |       | 37,899             |       |
| Net increase in other borrowings                                                   |       | 35,468             |       | 7,053              |       |
| Issuance of Trust Preferred Securities                                             |       | 6,000              |       | -                  |       |
| Issuance of shares pursuant to 401k and ESOP plans                                 |       | 452                |       | -                  |       |
| Exercise of stock options                                                          |       | 358                |       | 215                |       |
| Cash in lieu fractional shares from stock dividend                                 |       | (7                 | )          | -                  |       |
| Net cash provided by  financing activities                                         |       | 140,600            |       | 68,815             |       |
|                                                                               |       |               |       |               |       |
| Net increase (decrease)  in cash and cash equivalents                              |       | 2,551              |       | (21,381            | )          |
|                                                                               |       |               |       |               |       |
| Cash and cash  equivalents at beginning of period                                  |       | 47,768             |       | 50,222             |       |
| Cash and cash  equivalents at end of period                                        |       | $                  | 50,319     |               | $          | 28,841 |   |
|                                                                               |       |               |       |               |       |
| **Cash Paid during the quarter:**                                                  |       |               |       |               |       |
| Interest paid                                                                      |       | $                  | 17,514     |               | $          | 15,031 |   |
| Income tax payments                                                                |       | 3,225              |       | 1,895              |       |
| **Supplemental disclosure of noncash investing****and financing activities:**      |       |               |       |               |       |
| Investment securities unrealized gain, net of tax                                  |       | 2,742              |       | 909                |       |
| Loans transferred to other real estate owned                                       |       | 335                |       | 443                |       |

 

See accompanying notes

 

Capital Corp of the West

Notes to Consolidated Financial Statements

September 30, 2001 andDecember 31, 2000

(Unaudited)

 

GENERAL - COMPANY

 

Capital Corp ofthe West (the “Company” or “Capital Corp”) is a bank holding companyincorporated under the laws of the State of California on April 26, 1995.  On November 1, 1995, the Company becameregistered as a bank holding company, and is a holder of all of the capitalstock of County Bank (the “Bank”). During 1998, the Company formed Capital West Group, a new subsidiarythat engages in the financial institution advisory business but is currentlyinactive.  The Company’s primary assetis the Bank and the Bank is the Company’s primary source of income.

 

The Company’ssecurities consist of 20,000,000 shares of Common Stock, no par value, and10,000,000 shares of Authorized Preferred Stock.  As of September 30, 2001 there were 4,863,130 common sharesoutstanding, held of record by approximately 2,500 shareholders.  There were no preferred shares outstandingat September 30, 2001.  The Bank has twowholly owned subsidiaries, Merced Area Investment & Development, Inc. (“MAID”)and County Asset Advisors (“CAA”).  CAAis currently inactive.  All referencesherein to the “Company” include the Bank, the Bank’s subsidiaries and CapitalWest Group unless context otherwise requires.

 

GENERAL - BANK

 

The Bank wasorganized and commenced operations, in 1977, as County Bank of Merced, aCalifornia state banking corporation. In November 1992, the Bank changed its legal name to County Bank.  The Bank’s securities consist of one classof Common Stock, no par value and are wholly owned by the Company.  The Bank’s deposits are insured under theFederal Deposit Insurance Act by the Federal Deposit Insurance Corporation(“FDIC”) up to applicable limits stated therein.  County Bank is a member of the Federal Reserve System.

 

INDUSTRY AND MARKET AREA

 

The Bank engagesin general commercial banking business primarily in Fresno, Madera, Mariposa,Merced, San Francisco, San Joaquin, Stanislaus, Toulumne and Tularecounties.  The Bank has eighteen branchoffices: Two in Fresno, two in Merced with one branch centrally located inMerced and the other in downtown Merced within the Bank’s administrative officebuilding, two in Modesto, two in Turlock and single offices in Atwater, DosPalos, Hilmar, Los Banos, Livingston, Madera, Mariposa, San Francisco, Sonora,and Stockton.

 

OTHER FINANCIAL NOTES

 

All adjustmentswhich in the opinion of Management are necessary for a fair presentation of theCompany’s financial position at September 30, 2001 and December 31, 2000 andthe results of operations for the three and nine month periods ended September30, 2001 and 2000, and the statements of cash flows for the nine months endedSeptember 30, 2001 and 2000 have been included.  The interim results for the three and nine months ended September30, 2001 and 2000 are not necessarily indicative of results for the fullyear.  These financial statements shouldbe read in conjunction with the financial statements and the notes included inthe Company’s Annual Report for the year ended December 31, 2000.

 

The accompanyingunaudited financial statements have been prepared on a basis consistent with thegenerally accepted accounting principles and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X.

 

Basic earnings pershare (EPS) is computed by dividing net income available to shareholders by theweighted average number of common shares outstanding during the period.  Diluted earnings per share is computed bydividing net income available to common shareholders by the weighted averagenumber of common shares outstanding during the period plus potential commonshares outstanding.  Diluted earningsper share reflects the potential dilution that could occur if securities orother contracts to issue common stock were exercised or converted into commonstock or resulted in the issuance of common stock that then shared in theearnings of the Company.

 

The followingtable provides a reconciliation of the numerator and denominator of the basicand diluted earnings per share computation of the three and nine month periodsending September 30, 2001 and 2000:

 
|                                       |   | **For the three months** |   | **For the nine months** |   |
|--------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                       |   | **ended September 30,**  |   | **Ended September 30,** |   |
| **(In thousands, except per share  data)** |   | **2001**                 |   | **2000**                |   | **2001** |   | **2000** |   |
| Basic EPS computation:                     |   |                     |   |                    |   |   |   |   |   |
| Net income                                 |   | $                        | 1,909  |                    | $      | 1,646 |   | $ | 5,802 |   | $ | 4,960 |   |
| Average common shares outstanding          |   | 4,859                    |   | 4,766                   |   | 4,836 |   | 4,750 |   |
| Basic EPS                                  |   | $                        | 0.39   |                    | $      | 0.35 |   | $ | 1.20 |   | $ | 1.04 |   |
|                                       |   |                     |   |                    |   |   |   |   |   |
| Diluted EPS Computations:                  |   |                     |   |                    |   |   |   |   |   |
| Net income                                 |   | $                        | 1,909  |                    | $      | 1,646 |   | $ | 5,802 |   | $ | 4,960 |   |
| Average common shares outstanding          |   | 4,859                    |   | 4,766                   |   | 4,836 |   | 4,750 |   |
| Effect of stock options                    |   | 173                      |   | 123                     |   | 156 |   | 123 |   |
|                                       |   | 5,032                    |   | 4,875                   |   | 4,992 |   | 4,873 |   |
| Diluted EPS                                |   | $                        | 0.38   |                    | $      | 0.34 |   | $ | 1.16 |   | $ | 1.02 |   |

 

On February 22,2001, the Company issued $6,000,000 in Trust Preferred Securities through its100% ownership position in the County Statutory Trust I.  The Trust Preferred Securities pay quarterlycumulative cash distributions at an annual rate of 10.2% of the liquidationvalue of $1,000 per share.  The TrustPreferred Securities represent undivided beneficial interests in theTrust.  The Company owns all of theissued and outstanding common securities of the Trust.  Proceeds from the offering and from theissuance of common securities were invested in the Trust in the Company’s 10.2%Junior Subordinated Deferrable Interest Debentures due February 22, 2031 withan aggregate principal amount of $6,000,000. The primary asset of the Trust is the Junior Debentures.  The obligations of the Trust with respect tothe Trust Preferred Securities are fully and unconditionally guaranteed by usto the extent provided in the Guarantee Agreement with respect to the CapitalSecurities.  The proceeds are to be usedfor general corporate purposes.  Theall-in costs of the Trust Preferred Securities was 10.39%.  The Trust Preferred Securities have the addedbenefit of qualifying as Tier 1 capital for regulatory purposes.

 

DerivativeInstruments and Hedging Activities

 

On January 1, 2001, the Company adopted Statement ofFinancial Accounting Standards Board (FASB) No. 133, “Accounting forDerivatives and Hedging Activities” and FASB Statement No. 138 “Accounting forCertain Derivative Instruments and Certain Hedging Activities – An Amendment ofFASB Statement No. 133.”  All derivativeinstruments (including certain derivative instrument's embedded in other contracts)are recognized in the consolidated balance sheet at fair value.  FASB 133 dictates that the accountingtreatment for gains or losses from changes in the derivative instrument's fairvalue is contingent on whether the derivative instrument qualifies as a hedgeunder the accounting standard.  On thedate the Company enters into a derivative contract, the Company designates thederivative instrument as (1) a hedge of the fair value of a recognized asset orliability or of an unrecognized firm commitment (“fair value” hedge), (2) ahedge of a forecasted transaction or of the variability of cash flows to bereceived or paid related to a recognized asset or liability (“cash flow” hedge)or (3) hedge for trading, customer accommodation or not qualifying for hedgeaccounting (“free-standing derivative instruments”).  For a fair value hedge, changes in the fair value of thederivative instrument and changes in the fair value of the hedged asset orliability or of an unrecognized firm commitment attributable to the hedged riskare recorded in current period net income. For a cash flow hedge, changes in the fair value of the derivativeinstrument to the extent that it is effective are recorded in othercomprehensive income, net of tax, within stockholders’ equity and subsequentlyreclassified to net income in the same period(s) that the hedged transactionimpacts net income.  For free-standingderivative instruments, changes in the fair values are reported in current periodnet income.  The Company formally documentsthe relationship between hedging instruments and hedged items, as well as therisk management objective and strategy for undertaking any hedgetransaction.  This process includeslinking all derivative instruments that are designated as fair value or cashflow hedges to specific assets and liabilities on the balance sheet or tospecific forecasted transactions.  TheCompany also formally assesses both at the inception of the hedge and on anongoing basis, whether the derivative instruments used are highly effective inoffsetting changes in fair values or cash flows of hedged items. If it isdetermined that the derivative instrument is not highly effective as a hedge,hedge accounting is discontinued.

 

During the third quarter of 2001, the Company enteredinto an interest rate exchange agreement with the Federal Home Loan Bank of SanFrancisco that was recorded as a cash flow hedge transaction.  The notional amount of the swap is $20million with a term of 3 years expiring on August 23, 2004.  The Company entered into the interest rateswap to convert floating-rate loans (based on prime) to a fixed rate(7.46%).  The Company will pay primerate, which at the time of the transaction was 6.50%.  The Company intends to use the swap as a hedge of the relatedloans for 3 years.  At September 30,2001, the fair market value of this hedge of $491,000 was reported as an otherasset in the consolidated balance sheet and included as other comprehensiveincome in the consolidated statements of income and comprehensive income.  The amount of hedge ineffectiveness frominception of the hedge to September 30, 2001 was not significant.                Impact of Recently IssuedAccounting Standards

 

In July 2001, the FASB issued Statement No. 141,Business Combinations, and Statement No. 142, Goodwill and Other IntangibleAssets. Statement 141 requires that the purchase method of accounting be usedfor all business combinations initiated after June 30, 2001 as well as allpurchase method business combinations completed after June 30, 2001. Statement141 also specifies criteria intangible assets acquired in a purchase methodbusiness combination must meet to be recognized and reported apart fromgoodwill, noting that any purchase price allocable to an assembled workforcemay not be accounted for separately. Statement 142 will require that goodwilland intangible assets with indefinite useful lives no longer be amortized, butinstead tested for impairment at least annually in accordance with theprovisions of Statement 142. Statement 142 will also require that intangibleassets with definite useful lives be amortized over their respective estimateduseful lives to their estimated residual values, and reviewed for impairment inaccordance with SFAS No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets.

 

The Company is required to adopt the provisions ofStatement 141 immediately, except with regard to business combinationsinitiated prior to July 1, 2001, which it expects to account for using thepooling-of-interests method, and Statement 142 effective January 1, 2002.  Furthermore, any goodwill and any intangibleasset determined to have an indefinite useful life that are acquired in apurchase business combination completed after June 30, 2001 will not beamortized, but will continue to be evaluated for impairment in accordance withthe appropriate pre-Statement 142 accounting literature. Goodwill andintangible assets acquired in business combinations completed before July 1,2001 will continue to be amortized prior to the adoption of Statement 142.

 

Statement 141 will require upon adoption of Statement142, that the Company evaluate its existing intangible assets and goodwill thatwere acquired in a prior purchase business combination, and to make anynecessary reclassifications in order to conform with the new criteria inStatement 141 for recognition apart from goodwill. Upon adoption of Statement142, the Company will be required to reassess the useful lives and residualvalues of all intangible assets acquired in purchase business combinations, andmake any necessary amortization period adjustments by the end of the firstinterim period after adoption. In addition, to the extent an intangible assetis identified as having an indefinite useful life, the Company will be requiredto test the intangible asset for impairment in accordance with the provisionsof Statement 142 within the first interim period. Any impairment loss will bemeasured as of the date of adoption and recognized as the cumulative effect ofa change in accounting principle in the first interim period.                In connection with thetransitional goodwill impairment evaluation, Statement 142 will require theCompany to perform an assessment of whether there is an indication thatgoodwill [and equity-method goodwill] is impaired as of the date of adoption.To accomplish this the Company must identify its reporting units and determinethe carrying value of each reporting unit by assigning the assets andliabilities, including the existing goodwill and intangible assets, to thosereporting units as of the date of adoption. The Company will then have up tosix months from the date of adoption to determine the fair value of eachreporting unit and compare it to the reporting unit’s carrying amount. To theextent a reporting unit’s carrying amount exceeds its fair value, an indicationexists that the reporting unit’s goodwill may be impaired and the Company mustperform the second step of the transitional impairment test. In the secondstep, the Company must compare the implied fair value of the reporting unit’sgoodwill, determined by allocating the reporting unit’s fair value to all of itassets (recognized and unrecognized) and liabilities in a manner similar to apurchase price allocation in accordance with Statement 141, to its carryingamount, both of which would be measured as of the date of adoption. This secondstep is required to be completed as soon as possible, but no later than the endof the year of adoption. Any transitional impairment loss will be recognized asthe cumulative effect of a change in accounting principle in the Company’sstatement of earnings.

 

Finally, any unamortized negative goodwill [andnegative equity-method goodwill] existing at the date Statement 142 is adoptedmust be written off as the cumulative effect of a change in accountingprinciple.

 

As of the date of adoption of Statement 142, theCompany expects to have unamortized goodwill in the amount of $1,405,000,unamortized identifiable intangible assets in the amount of $2,080,000, and no unamortizednegative goodwill, all of which will be subject to the transition provisions ofStatements 141 and 142. Amortization expense related to goodwill was $84,000and $112,000 for the nine months ended September 30, 2001 and the year endedDecember 31, 2000. Management has accessed whether any transitional impairmentlosses will be required to be recognized as the cumulative effect of a changein accounting principle and determined that based on current market conditions,there would be no adjustment.

 

**Item 2     Management's Discussion And Analysis Of Financial Condition**

**And Results Of Operations**

 

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations contains forward-looking statements that are subject torisks and uncertainties and include information about possible or assumedfuture results of operations. Many possible events or factors could affect thefuture financial results and performance of the company. This could causeresults or performance to differ materially from those expressed in ourforward-looking statements. Words such as “experts”, “anticipates”, “believes”,“estimates”, variations of such words and other similar expressions areintended to identify such forward-looking statements. These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions, which are difficult to predict. Therefore, actual outcomes andresults may differ materially from what is expressed or forecasted in, orimplied by, such forward-looking statements.

 

Readersof the Company’s Form 10-Q should not rely solely on forward looking statementsand should consider all uncertainties and risks discussed throughout thisreport, as well as those discussed in the Company’s 2000 annual Report on Form10-K.  These statements arerepresentative only on the date hereof, and the Company undertakes noobligation to update any forward-looking statements made. Some possible eventsor factors that could occur that may cause differences from expected resultsinclude the following: the company’s loan growth is dependent on economicconditions, as well as various discretionary factors, such as decisions tosell, or purchase certain loans or loan portfolios; participations of loans andthe management of borrower, industry, product and geographic concentrations andthe 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. Liquidity requirements may change as a result offluctuations in assets and liabilities and off-balance sheet exposures, whichwill impact the capital and debt financing needs of the company and the mix offunding sources. Decisions to purchase, hold, or sell securities are alsodependent of liquidity requirements and market volatility, as well as on and off-balancesheet positions. Factors that may impact interest rate risk include local,regional and international economic conditions, levels, mix, maturities, yieldsor rates of assets and liabilities and the wholesale and retail funding sourcesof the Company.

 

TheCompany is also exposed to the potential of losses arising from adverse changesin market rate and prices which can adversely impact the value of financialproducts, including securities, loans, and deposits. In addition, the bankingindustry in general is subject to various monetary and fiscal policies andregulations, which include those determined by the Federal Reserve Board, theFederal Deposit Insurance Corporation and state regulators, whose policies andregulations could affect the Company’s results.                Other factors that maycause actual results to differ from the forward-looking statements include thefollowing: competition with other local and regional banks, savings and loanassociations, credit unions and other non-bank financial institutions, such asinvestment banking firms, investment advisory firms, brokerage firms, mutualfunds and insurance companies, as well as other entities which offer financialservices; interest rate, market and monetary fluctuations: inflation; marketvolatility; general economic conditions; introduction and acceptance of newbanking-related products, services and enhancement; fee pricing strategies,mergers and acquisitions and their integration into the Company andmanagement’s ability to manage these and other risks.

 

Thefollowing discussion and analysis is designed to provide a better understandingof the significant changes and trends related to the Company and itssubsidiaries' financial condition, operating results, asset and liabilitymanagement, liquidity and capital resources and should be read in conjunctionwith the Consolidated Financial Statements of the Company and the Notesthereto.

 

# **Results Of Operations**

 

*Overview.* For the three and nine months ended September 30, 2001 the Companyreported net income of $1,909,000 and $5,802,000.  This compares to $1,646,000 and $4,960,000 for the same period in2000 and represents an increase of $263,000 and $842,000.  Basic and diluted earnings per share were$.39 and $.38 for the three months ended September 30, 2001. This compares tobasic and diluted earnings per share of $.35 and $.34 for the three monthsending September 30, 2000 and represents an increase of $0.04 per basic anddiluted share. The annualized return on average assets was 0.95% and 1.04% for thethree months ended September 30, 2001 and 2000.  The Company's annualized return on average equity was 12.67% and13.67% for the three months ended September 30, 2001 and 2000.

 

Thefollowing tables provides a summary of the major categories of income andexpense for the third quarter of 2001 compared with the third quarter of 2000and for the first nine months of 2001 compared with the first nine months of2000:

 
|                                                 |   | **Three Months**                               |       |                  |       |
|------------------------------------------------------|--------|------------------------------------------------|------------|-----------------------|------------|
|                                                 |   | **Ending September 30,**                       |       | **Percentage Change** |       |
|                                                 |   | **2001**                                       |       | **2000**              |       | **Increase (decrease)** |   |
|                                                 |   | **(in  thousands, except earnings per share)** | ** ** |                  | ** ** |
| Interest income                                      |   | $                                              | 15,215     |                  | $          | 13,299 |   | 14.4 | % |
| Interest expense                                     |   | 5,769                                          |       | 5,592                 |       | 3.2 |   |
| Net interest income                                  |   | 9,446                                          |       | 7,707                 |       | 22.6 |   |
| Provisions for loan  losses                          |   | 1,540                                          |       | 792                   |       | 94.4 |   |
| Net interest income  after provision for loan losses |   | 7,906                                          |       | 6,915                 |       | 14.3 |   |
| Other income                                         |   | 1,571                                          |       | 1,340                 |       | 17.2 |   |
| Other expenses                                       |   | 6,787                                          |       | 5,888                 |       | 15.3 |   |
| Net income before  income taxes                      |   | 2,690                                          |       | 2,367                 |       | 13.6 |   |
| Income taxes                                         |   | 781                                            |       | 721                   |       | 8.3 |   |
| Net income                                           |   | 1,909                                          |       | 1,646                 |       | 16.0 |   |
| Diluted earnings per  common share                   |   | 0.38                                           |       | 0.34                  |       | 11.8 |   |
|                                                      |        |                                                |            |                       |            |  |  |  |  |

 

 
|                                                 |   | **Nine Months**                                |   |                  |   |                    |   |
|------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------|--------|-------------------------|--------|
|                                                 |   | **Ending September 30,**                       |   | **Percentage Change** |   |                    |   |
|                                                 |   | **2001**                                       |   | **2000**              |   | **Increase (decrease)** |   |
|                                                 |   | **(in  thousands, except earnings per share)** |   |                  |   |
| Interest income                                      |   | $                                              | 43,647 |                  | $      | 36,893                  |   | 18.3 | % |
| Interest expense                                     |   | 17,308                                         |   | 14,937                |   | 15.9                    |   |
| Net interest income                                  |   | 26,339                                         |   | 21,956                |   | 20.0                    |   |
| Provisions for loan  losses                          |   | 3,079                                          |   | 2,323                 |   | 32.5                    |   |
| Net interest income  after provision for loan losses |   | 23,260                                         |   | 19,633                |   | 18.5                    |   |
| Other income                                         |   | 4,498                                          |   | 4,131                 |   | 8.9                     |   |
| Other expenses                                       |   | 19,602                                         |   | 16,686                |   | 17.5                    |   |
| Net income before  income taxes                      |   | 8,156                                          |   | 7,078                 |   | 15.2                    |   |
| Income taxes                                         |   | 2,354                                          |   | 2,118                 |   | 11.1                    |   |
| Net income                                           |   | 5,802                                          |   | 4,960                 |   | 17.0                    |   |
| Diluted earnings per  common share                   |   | 1.16                                           |   | 1.02                  |   | 13.7                    |   |
|                                                      |        |                                                |        |                       |        |                         |        |  |  |  |  |  |  |

* *

*NetInterest Income.*  The Company's primary source of income isnet interest income and is determined by the difference between interest incomeand fees derived from earning assets and interest paid on interest bearingliabilities.  Net interest income forthe three and nine months ended September 30, 2001 totaled $9,446,000 and$26,339,000 and represented an increase of $1,739,000 and $4,383,000 whencompared to the $7,707,000 and $21,956,000 achieved during the three and ninemonths ended September 30, 2000.

 

Totalinterest and fees on earning assets were $15,215,000 and $43,647,000 for thethree and nine months ended September 30, 2001, an increase of $1,916,000 and$6,754,000 from the $13,299,000 and $36,893,000 for the same period in 2000.  The level of interest income is affected bychanges in volume of and rates earned on interest–earning assets.  Interest–earning assets consistprimarily of loans, investment securities and federal funds sold.  The increase in interest income for thethree and nine months ended September 30, 2001 was primarily the result of anincrease in the volume of interest–earning assets.  Average interest–earning assets forthe three and nine months ended September 30, 2001 were $733,550,000 and$678,436,000 compared with $574,465,000 and $541,689,000 for the three and ninemonths ended September 30, 2000, an increase of $159,085,000 and $136,747,000or 27.7% and 25.2%.

 

Interestexpense is 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 $5,769,000 and$17,308,000 for the three and nine months ended September 30, 2001, comparedwith $5,592,000 and $14,937,000 for the three and nine months ended September30, 2001, an increase of $177,000 and $2,371,000 or 3.2% and 15.9%. Thisincrease was primarily the result of an increase in the volumes of interest–bearingliabilities. Average interest–bearing liabilities were $621,370,000 and$572,039,000 for the three and nine months ended September 30, 2001 comparedwith $487,234,000 and $452,757,000 for the same three and six months in 2000,an increase of $134,136,000 and $119,282,000 or 27.5% and 26.3%.  Average interest rates paid oninterest-bearing liabilities were 3.71% and 4.03% for the three and nine monthsended September 30, 2001 compared with 4.59% and 4.40% for the same three andnine months of 2000, a decrease of 88 basis points or 19.2% and 37 basis pointsor 8.4% for these periods.

 

Theincrease in interest-earning assets and interest-bearing liabilities isprimarily the result of increased market penetration within our target markets.                The Company's net interestmargin, the ratio of net interest income to average interest–earningassets, was 5.21% and 5.22% for the three and nine months ended September 30,2001 compared with 5.40% and 5.44% for the same periods in 2000, a decrease of19 and 22 basis points for the three and nine months ended September 30, 2001compared to the same three and nine months ended September 30, 2000.  Net interest margin provides a measurementof the Company's ability to employ funds profitably during the period beingmeasured.  The Company's decrease in netinterest margin for the three and nine months ending September 30, 2001 wasprimarily attributable to the decrease in market rates experienced during2001.  Loans as a percentage of averageinterest-earning assets were 64% for the three months ended September 30, 2001compared to 67% for the three months ended September 30, 2000.

 

*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 three month periods indicated.  Nonaccruing loans are included in thecalculation of the average balances of loans, but the nonaccrued interest onsuch loans is excluded.

 

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTERESTEARNINGS

 
|                                           |   | **Three months  ended**    |    | **Three months  ended** |   |
|------------------------------------------------|--------|----------------------------|---------|-------------------------|--------|
|                                           |   | **September 30,  2001**    |    | **September 30,  2000** |   |
|                                           |   | **Average****Balance**     |    | **Interest**            |   | **Taxable****EquivalentYield/rate** |   | **Average****Balance** |   | **Interest** |   | **Taxable****EquivalentYield/rate** |   |
| Assets                                         |   | **(Dollars In thousands)** |    |
| Federal  funds sold                            |   | $                          | 14,365  |                    | $      | 118 |   | 3.29 | % | $ | 7,910 |   | $ | 124 |   | 6.27 | % |
| Time  deposits at other financial institutions |   | 500                        |    | 4                       |   | 3.20 |   | 603 |   | 11 |   | 7.30 |   |
| Taxable  investment securities (1)             |   | 219,095                    |    | 3,419                   |   | 6.24 |   | 150,688 |   | 2,650 |   | 7.03 |   |
| Nontaxable  investment securities (2)          |   | 28,973                     |    | 379                     |   | 5.23 |   | 29,517 |   | 385 |   | 5.21 |   |
| Loans,  gross: (3)                             |   | 470,637                    |    | 11,398                  |   | 9.69 |   | 385,747 |   | 10,178 |   | 10.55 |   |
| Total  interest-earning assets:                |   | 733,550                    |    | 15,318                  |   | 8.35 |   | 574,465 |   | 13,348 |   | 9.29 |   |
| Allowance  for loan losses                     |   | (8,631                     | )       |                    |   |   |   | (7,133 | )  |   |   |   |   |
| Cash  and due from banks                       |   | 30,838                     |    |                    |   |   |   | 25,300 |   |   |   |   |   |
| Premises  and equipment, net                   |   | 13,636                     |    |                    |   |   |   | 12,876 |   |   |   |   |   |
| Interest  receivable and other assets          |   | 32,776                     |    |                    |   |   |   | 27,959 |   |   |   |   |   |
| Total  assets                                  |   | $                          | 802,169 |                    |   |   |   |   | $ | 633,467 |   |   |   |   |   |
|                                           |   |                       |    |                    |   |   |   |   |   |   |   |   |   |
| Liabilities  And Shareholders' Equity          |   |                       |    |                    |   |   |   |   |   |   |   |   |   |
| Negotiable  order of withdrawal                |   | $                          | 87,290  |                    | $      | 49 |   | 0.22 | % | $ | 74,116 |   | $ | 125 |   | 0.67 | % |
| Savings  deposits                              |   | 200,988                    |    | 1,396                   |   | 2.78 |   | 182,283 |   | 1,900 |   | 4.17 |   |
| Time  deposits                                 |   | 280,337                    |    | 3,635                   |   | 5.19 |   | 209,681 |   | 3,200 |   | 6.10 |   |
| Other  borrowings                              |   | 52,755                     |    | 689                     |   | 5.22 |   | 21,154 |   | 367 |   | 6.94 |   |
| Total  interest–bearing liabilities       |   | 621,370                    |    | 5,769                   |   | 3.71 |   | 487,234 |   | 5,592 |   | 4.59 |   |
| Noninterest–bearing  deposits             |   | 108,787                    |    |                    |   |   |   | 92,154 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities |   | 5,765                      |    |                    |   |   |   | 5,925 |   |   |   |   |   |
| Total liabilities                              |   | 735,922                    |    |                    |   |   |   | 585,313 |   |   |   |   |   |
|                                           |   |                       |    |                    |   |   |   |   |   |   |   |   |   |
| Trust  Preferred Capital Securities            |   | 6,000                      |    |                    |   |   |   | - |   |   |   |   |   |
|                                           |   |                       |    |                    |   |   |   |   |   |   |   |   |   |
| Total  shareholders' equity                    |   | 60,247                     |    |                    |   |   |   | 48,154 |   |   |   |   |   |
| Total  liabilities and shareholders' equity    |   | $                          | 802,169 |                    |   |   |   |   | $ | 633,467 |   |   |   |   |   |
|                                           |   |                       |    |                    |   |   |   |   |   |   |   |   |   |
| Net  interest income and margin (4)            |   |                       |    | $                       | 9,549  |   | 5.21 | % |   |   | $ | 7,756 |   | 5.40 |   |

 

----

(1)   Tax advantaged corporatedividends received are computed on a taxable-equivalent basis.

(2)   Interest on tax advantagedsecurities such as municipal securities is computed on a taxable-equivalentbasis.

(3)   Amounts of interest earnedincludes loan fees of $325,000 and $214,000 for September 30, 2001 and 2000respectively. Average loan balances include non-accrual loan balances.

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

 

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 nine month periods indicated.  Nonaccruing loans are included in thecalculation of the average balances of loans, but the nonaccrued interest onsuch loans is excluded.

 
|                                           |   | **Nine months  ended**  |    | **Nine months  ended**  |   |
|------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
|                                           |   | **September 30,  2001** |    | **September 30,  2000** |   |
|                                           |   | **Average****Balance**  |    | **Interest**            |   | **Yield/rate** |   | **Average****Balance** |   | **Interest** |   | **Yield/rate** |   |
|                                           |   | **(In thousands)**      |    |
| Assets                                         |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Federal  funds sold                            |   | $                       | 19,925  |                    | $      | 689 |   | 4.61 | % | $ | 8,996 |   | $ | 422 |   | 6.25 | % |
| Time  deposits at other financial institutions |   | 347                     |    | 11                      |   | 4.23 |   | 668 |   | 29 |   | 5.79 |   |
| Taxable  investment securities (1)             |   | 193,646                 |    | 9,341                   |   | 6.43 |   | 143,000 |   | 7,524 |   | 7.02 |   |
| Nontaxable  investment securities (2)          |   | 28,989                  |    | 1,133                   |   | 5.21 |   | 29,677 |   | 1,167 |   | 5.24 |   |
| Loans,  gross: (3)                             |   | 435,529                 |    | 32,675                  |   | 10.00 |   | 359,348 |   | 27,899 |   | 10.35 |   |
| Total  interest-earning assets:                |   | 678,436                 |    | 43,849                  |   | 8.62 |   | 541,689 |   | 37,041 |   | 9.12 |   |
| Allowance  for loan losses                     |   | (8,548                  | )       |                    |   |   |   | (6,887 | )  |   |   |   |   |
| Cash  and due from banks                       |   | 28,102                  |    |                    |   |   |   | 23,658 |   |   |   |   |   |
| Premises  and equipment, net                   |   | 13,340                  |    |                    |   |   |   | 13,042 |   |   |   |   |   |
| Interest  receivable and other assets          |   | 30,785                  |    |                    |   |   |   | 27,704 |   |   |   |   |   |
| Total  assets                                  |   | $                       | 742,115 |                    |   |   |   |   | $ | 599,206 |   |   |   |   |   |
|                                           |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Liabilities  And Shareholders' Equity          |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Negotiable  order of withdrawal                |   | $                       | 83,269  |                    | $      | 201 |   | 0.32 | % | $ | 73,297 |   | $ | 370 |   | 0.67 | % |
| Savings  deposits                              |   | 193,808                 |    | 4,817                   |   | 3.31 |   | 176,905 |   | 5,187 |   | 3.91 |   |
| Time  deposits                                 |   | 257,740                 |    | 10,748                  |   | 5.56 |   | 191,031 |   | 8,221 |   | 5.74 |   |
| Other  borrowings                              |   | 37,222                  |    | 1,542                   |   | 5.52 |   | 23,099 |   | 1,159 |   | 6.69 |   |
| Total  interest–bearing liabilities       |   | 572,039                 |    | 17,308                  |   | 4.03 |   | 464,332 |   | 14,937 |   | 4.29 |   |
|                                           |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Noninterest–bearing  deposits             |   | 101,998                 |    |                    |   |   |   | 83,889 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities |   | 5,689                   |    |                    |   |   |   | 4,990 |   |   |   |   |   |
| Total liabilities                              |   | 679,726                 |    |                    |   |   |   | 553,211 |   |   |   |   |   |
|                                           |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Trust  Preferred Capital Securities            |   | 4,857                   |    |                    |   |   |   | - |   |   |   |   |   |
|                                           |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Total  shareholders' equity                    |   | 57,532                  |    |                    |   |   |   | 45,995 |   |   |   |   |   |
| Total  liabilities and shareholders' equity    |   | $                       | 742,115 |                    |   |   |   |   | $ | 599,206 |   |   |   |   |   |
|                                           |   |                    |    |                    |   |   |   |   |   |   |   |   |   |
| Net  interest income and margin (4)            |   |                    |    | $                       | 26,541 |   | 5.22 | % |   |   | $ | 22,104 |   | 5.44 | % |
|                                                |        |                         |         |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Tax advantaged corporatedividends received are computed on a taxable-equivalent basis.

(2     Interest on tax advantagedsecurities such as municipal securities is computed on a taxable-equivalentbasis.

(3)   Amounts of interest earned includes loan feesof $858,000 and $540,000 for September 30, 2001 and 2000.  Averageloan balances include non-accrual loan balances.

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

 

*Net Interest Income Changes Due ToVolume And Rate.*  The following table sets forth, for theperiods indicated, a summary of the changes in average asset and liabilitybalances and interest earned and interest paid resulting from changes inaverage asset and liability balances (volume) and changes in average interestrates and the total net change in interest income and expenses.  The changes in interest due to both rate andvolume have been allocated to volume and rate changes in proportion to therelationship of the absolute dollar amount of the change in each.

 
|                                           |   | **Three Months  Ended**                                      |   |
|------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                           |   | **September 30,  2001 compared to September  30, 2000** |   |
|                                           |   | **Volume**                                                   |   | **Rate** |   | **Total** |   |
|                                           |   | **(Dollar in thousands)**                                    |   |
| Increase  (decrease) in interest  income: |   |                                                         |   |   |   |   |   |
| Federal  funds sold                            |   | $                                                            | 172    |   | $ | (178 | ) | $ | (6 | ) |
| Time  deposits at other financial institutions |   | (2                                                           | )      | (5 | ) | (7 | ) |
| Taxable  investment securities                 |   | 1,584                                                        |   | (815 | ) | 769 |   |
| Tax-exempt  investment securities              |   | (9                                                           | )      | 3 |   | (6 | ) |
| Loans                                          |   | 2,106                                                        |   | (886 | ) | 1,220 |   |
| Total                                          |   | 3,851                                                        |   | (1,881 | ) | 1,970 |   |
|                                           |   |                                                         |   |   |   |   |   |
| Increase  (decrease) interest expense:         |   |                                                         |   |   |   |   |   |
| Interest  bearing demand                       |   | 19                                                           |   | (95 | ) | (76 | ) |
| Savings  deposits                              |   | 180                                                          |   | (684 | ) | (504 | ) |
| Time  deposits                                 |   | 966                                                          |   | (531 | ) | 435 |   |
| Other  borrowings                              |   | 432                                                          |   | (110 | ) | 322 |   |
| Total                                          |   | 1,597                                                        |   | (1,420 | ) | 177 |   |
|                                           |   |                                                         |   |   |   |   |   |
| Increase  in net interest income               |   | $                                                            | 2,254  |   | $ | (461 | ) | $ | 1,793 |   |

 
|                                           |   | **Nine Months  Ended**                                 |   |
|------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                           |   | **September 30,  2001 compared to September 30, 2000** |   |
|                                           |   | **Volume**                                             |   | **Rate** |   | **Total** |   |
|                                           |   | (Dollar in thousands)                                  |   |
| Increase  (decrease) in interest  income: |   |                                                   |   |   |   |   |   |
| Federal  funds sold                            |   | $                                                      | 463    |   | $ | (196 | ) | $ | 267 |   |
| Time  deposits at other financial institutions |   | (12                                                    | )      | (6 | ) | (18 | ) |
| Taxable  investment securities                 |   | 2,823                                                  |   | (1,006 | ) | 1,817 |   |
| Tax-exempt  investment securities              |   | (28                                                    | )      | (6 | ) | (34 | ) |
| Loans                                          |   | 6,283                                                  |   | (1,507 | ) | 4,776 |   |
| Total                                          |   | 9,529                                                  |   | (2,721 | ) | 6,808 |   |
|                                           |   |                                                   |   |   |   |   |   |
| Increase  (decrease) interest expense:         |   |                                                   |   |   |   |   |   |
| Interest  bearing demand                       |   | 72                                                     |   | (241 | ) | (169 | ) |
| Savings  deposits                              |   | 670                                                    |   | (1,040 | ) | (370 | ) |
| Time  deposits                                 |   | 2,945                                                  |   | (418 | ) | 2,527 |   |
| Other  borrowings                              |   | 279                                                    |   | (334 | ) | 383 |   |
| Total                                          |   | 4,404                                                  |   | (2,033 | ) | 2,371 |   |
|                                           |   |                                                   |   |   |   |   |   |
| Increase  in net interest income               |   | $                                                      | 5,125  |   | $ | (688 | ) | $ | 4,437 |   |

* *

*Provision For Loan Losses.*** **The provision for loan losses for the three and nine months endedSeptember 30, 2001 was $1,540,000 and $3,079,000 which compares with $792,000and $2,323,000 for the three and nine months ended September 30, 2000.   See "Allowance for Loan Losses"contained herein.  As of September 30, 2001 the allowancefor loan losses was $9,040,000 or 1.82% of total loans.  At September 30, 2001, nonperforming assetstotaled $5,264,000 or .63% of total assets, nonperforming loans totaled$4,681,000 or .94% of total loans and the allowance for loan losses totaled193% of nonperforming loans.  AtDecember 31, 2000, nonperforming assets totaled $2,588,000 or .38% of totalassets, nonperforming loans totaled $2,340,000 or .57% of total loans and theallowance for loan losses totaled 351% of nonperforming loans.  No assurance can be given that nonperformingloans will not increase or that the allowance for loan losses will be adequateto cover losses inherent in the loan portfolio.

 

*OtherIncome.*** **Totalother income for the three and nine months ended September 30, 2001 was$1,571,000 and $4,498,000 which compares with $1,340,000 and $4,131,000 for thesame periods in 2000.  Service chargeson deposit accounts increased by $106,000 and 328,000 or 12% and 13% to$1,027,000 and $2,933,000 for the three and nine months ended September 30,2001 compared with $921,000 and $2,605,000 for the same three and nine monthperiod in 2000.  Income from the sale ofreal estate held for sale or development decreased by $381,000 over 2000levels, as there were no real estate sales during all of 2001. The $381,000gain on sale of real estate recorded during the second quarter of 2000 resultedfrom the sale of the last remaining land parcel held by MAID, a real estatesubsidiary of County Bank.  The bookvalue of this property had been previously written off.  Other income, which includes commissionsearned on the retail sale of securities and annuities and dividends received onlife insurance policies, increased by $125,000 and $420,000 or 30% and 37% forthe three and nine month period ended September 30, 2001 to $544,000 and$1,565,000.  This compares to $419,000and $1,145,000 in other income for the three and nine months ended September30, 2000.

 

*Other Expense.*** **Noninterest expenses for the three andnine months ended September 30, 2001 were $6,787,000 and $19,602,000 whichcompares with $5,888,000 and $16,686,000 for the three and nine months endedSeptember 30, 2000. The primary components of noninterest expenses weresalaries and related benefits, equipment expenses, premises and occupancyexpenses, professional fees, marketing expenses, goodwill and intangibleamortization expense, supplies expense, dividend expense on Capital Securitiesand other operating expenses.

 

Forthe three and nine months ended September 30, 2001, salaries and relatedbenefits increased by $457,000 and $1,877,000 over the same period in 2000 to$3,426,000 and $10,067,000.  Equipmentexpenses decreased by $173,000 or 40% and increased by $303,000 or 24% duringthe three and nine months ended September 30, 2001 to $258,000 and $1,562,000from the $431,000 and $1,259,000 experienced during the three and nine monthsended September 30, 2000. When comparing the results of the three and ninemonths ended September 30, 2001 with the results of the three and nine monthsended September 30, 2000, premises and occupancy expenses increased $405,000and $145,000 or 66% and 8%, professional fees decreased by $214,000 and$493,000 or 70% and 61%, marketing expenses increased by $77,000 and $54,000 or36% and 8%, supplies expense increased by $42,000 and $182,000 or 26% and 38%,and other expenses increased by $154,000 and $479,000 or 16% and 17%.  The increase in dividends on CapitalSecurities expense is related to the issuance of $6,000,000 in CapitalSecurities during the first quarter of 2001. The salary expense increases were primarily the result of increasedstaffing levels and normal salary progression. Equipment expense decreasesduring the third quarter of 2001 are primarily related to a decrease intechnology related expenses during the quarter.  For the nine months ended September 30, 2001 compared to the sameperiod in 2000, technology equipment expenses increased primarily due toincreased growth within the Company and the opening of new branch officesduring the first quarter of 2001. Increased spending on premises and occupancy is primarily related toincreased spending on branch renovation projects and branch office maintenanceand repair.  Decreased professional feeswere primarily the result of decreased use of outside consulting firms.  Increased marketing expenses were primarilythe result of increased media spending on network and cable televisionadvertising.  Increased supplies expensewas primarily the result of increased use of supplies in supporting increasedloan and deposit volumes.  The increasein other expense was primarily the result of increased transaction volumes thathave accompanied balance sheet growth.

 

*ProvisionFor Income Taxes.*** **The Company recorded an increase of $60,000 and$236,000 in the income tax provision to $781,000 and $2,354,000 for the threeand nine months ended September 30, 2001 compared to the $721,000 and $2,118,000recorded for the same periods in 2000. For the three and nine months ended September 30, 2001, the Companyexperienced an effective tax rate of 29% compared to 30% recorded for the sameperiods in 2000.  The decrease in incometaxes during the three and nine months ending September 30, 2001 as compared tothe same period in 2000 is primarily related to an overall increase inEnterprise Zone hiring credits received from the state of California, increasedinvestments in Agency Preferred Stock, and an increased utilization of federallow income housing tax credits that were obtained from investments inlow-income affordable housing projects held through limited partnerships.  The Company had investments in these lowincome housing partnerships of $6,800,000 and $5,800,000 as of September 30,2001 and 2000 which generated estimated tax credits of $150,000 and $450,000for the three and nine months ended June 30, 2001 compared with $135,000 and$380,000 for the same periods in 2000.

 

**InterestRate Risk Management**

 

Managinginterest rate risk is an integral part of managing a banking institution'sprimary source of income, net interest income. The Company manages the balance between rate–sensitive assets andrate–sensitive liabilities being repriced in any given period with theobjective of stabilizing net interest income during periods of fluctuatinginterest rates.  The Company considersits rate–sensitive assets to be those which either contain a provision toadjust the interest rate periodically or mature within one year.  These assets include certain loans,investment securities and federal funds sold. Rate–sensitive liabilities are those which allow for periodicinterest rate changes within one year and include maturing time certificates,certain savings deposits and interest–bearing demand deposits.  The difference between the aggregate amountof assets and liabilities that reprice at various time frames is called the"gap." Generally, if repricing assets exceed repricing liabilities ina time period the Company would be considered to be asset–sensitive.  If repricing liabilities exceed repricingassets in a time period the Company would be considered to be liability–sensitive.  Generally, the Company seeks to maintain abalanced position whereby there is no significant asset or liabilitysensitivity within a one–year period to ensure net interest marginstability in times of volatile interest rates. This is accomplished through maintaining a significant level of loans,investment securities and deposits available for repricing within one year.                The following tables setforth the interest rate sensitivity of the Company’s interest–earningassets and interest–bearing liabilities as of September 30, 2001, usingthe interest rate sensitivity gap ratio.  For purposes of the following table, an asset or liability isconsidered rate–sensitive within a specified period when it can berepriced or matures within its contractual terms.  

 
|                                                            |   | **At September  30, 2001**  |       |
|-----------------------------------------------------------------|--------|-----------------------------|------------|
|                                                            |   | **Within****3 Months**      |       | **After 3****But****Within****12 Months** |   | **After 1****Year But****Within****5 Years** |   | **After****5 Years** |   | **Noninterest-****Bearing** |   | **Total** | ** ** |
|                                                            |   | **(Dollars In  Thousands)** | ** ** |
| **Assets**                                                      |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Time  deposits at other banks                                   |   | $                           | 500        |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 500 |   |
| Federal  funds sold                                             |   | 23,495                      |       | - |   | - |   | - |   | - |   | 23,495 |   |
| Investment  securities                                          |   | 6,944                       |       | 4,285 |   | 55,396 |   | 161,502 |   | 18,778 |   | 246,905 |   |
| Loans                                                           |   | 254,298                     |       | 59,706 |   | 124,418 |   | 59,126 |   | - |   | 497,548 |   |
| Total  earning assets                                           |   | 285,237                     |       | 63,991 |   | 179,814 |   | 220,628 |   | 18,778 |   | 768,448 |   |
| Noninterest–earning assets and allowances for  loan losses |   | -                           |       | - |   | - |   | - |   | 63,637 |   | 63,637 |   |
| Total  assets                                                   |   | $                           | 285,237    |   | $ | 63,991 |   | $ | 179,814 |   | $ | 220,628 |   | $ | 82,415 |   | $ | 832,085 |   |
|                                                            |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities And****Shareholders' Equity**                     |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                                |   | $                           | -          |   | $ | - |   | $ | - |   | $ | - |   | $ | 123,597 |   | $ | 123,597 |   |
| Savings, money market and NOW deposits                          |   | 288,983                     |       | - |   | - |   | - |   | - |   | 288,983 |   |
| Time  deposits                                                  |   | 54,212                      |       | 191,212 |   | 41,823 |   | - |   | - |   | 287,247 |   |
| Other  interest–bearing liabilities                        |   | 7,000                       |       | 8,000 |   | 29,781 |   | 13,114 |   | - |   | 57,895 |   |
| Other liabilities, capital securities and shareholders'  equity |   | -                           |       | - |   | - |   | 6,000 |   | 68,363 |   | 74,363 |   |
| Total liabilities, capital securities and shareholders'  equity |   | 350,195                     |       | 199,212 |   | 71,604 |   | 19,114 |   | 191,960 |   | $ | 832,085 |   |
| Incremental  gap                                                |   | (64,958                     | )          | (135,221 | ) | 108,210 |   | 201,514 |   | (109,545 | ) |   |   |
| Cumulative  gap                                                 |   | $                           | (64,958    | ) | $ | (200,179 | ) | $ | (91,969 | ) | $ | 109,545 |   | $ | - |   |   |   |
| Cumulative gap as a % of earning assets                         |   | (8.45                       | )%         | (26.05 | )% | (11.97 | )% | 14.26 | % |   |   |   |   |
|                                                                 |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                TheCompany was liability–sensitive with a negative cumulative one–yeargap of $200,179,000 or (26.05)% of interest–earning assets at September30, 2001.  In general, based upon theCompany's mix of deposits, loans and investments, increases in interest rateswould be expected to result in an increase in the Company's net interestmargin.                The interest rate gapsreported in the tables arise when assets are funded with liabilities havingdifferent repricing intervals.  Sincethese gaps are actively managed and change daily as adjustments are made in interestrate views and market outlook, positions at the end of any period may not bereflective of the Company's interest rate sensitivity in subsequentperiods.  Active management dictatesthat longer–term economic views are balanced against prospects for short–terminterest rate changes in all repricing intervals.  For purposes of the analysis above, repricing of fixed–rateinstruments is based upon the contractual maturity of the applicableinstruments.  Actual payment patternsmay differ from contractual payment patterns. The change in net interest income may not always follow the generalexpectations of an asset–sensitive or liability–sensitive balancesheet during periods of changing interest rates, because interest rates earnedor paid may change by differing increments and at different time intervals foreach type of interest–sensitive asset and liability.  As a result of these factors, at any giventime, the Company may be more sensitive or less sensitive to changes ininterest rates than indicated in the above tables.  Greater liability sensitivity would have a more adverse effect onnet interest margin if market interest rates were to increase, and a morefavorable effect if rates were to decrease.

 

On August 23, 2001, the Company entered into an interestrate exchange “swap” agreement with the Federal Home Loan Bank.  This agreement was accounted for as ahedging instrument in accordance with Statement No. 133 which is more fullydiscussed in the “Impact of Recently Issued Accounting Statements”.  The contractual or notional amount of theinterest rate swap was for $20,000,000. Notional amounts do not representamounts exchanged by the parties and therefore do not represent exposure toliquidity risk. The Company is not a dealer but an end-user of this instrumentand does not use swaps speculatively. Under the terms of the agreement, the Company agrees to pay prime ratein exchange for receiving a fixed rate of 7.46% for a period of three years.  The prime rate as used in this agreement was6.00% as of September 30, 2001. The agreement terminates on August 23, 2004.

 

Inorder to manage interest rate sensitivity, the Company utilizes a detailedmodel to forecast expected changes in net interest income.  The model's estimate of interest ratesensitivity takes into account the differing time intervals and differing ratechange increments of each type of interest–sensitive asset andliability.  It then measures theprojected impact of changes in market interest rates on the Company's netinterest income.  Based upon theSeptember 30, 2001 mix of interest–sensitive assets and liabilities,given an immediate and sustained decrease in the market interest rates of 2%,this model estimates the Company's cumulative change in net interest incomeover the next year would decrease by approximately $1,238,000 or 3% ofannualized net interest income.  Basedupon the September 30, 2001 mix of interest-sensitive assets and liabilities,given an immediate and sustained increase in the market interest rates of 2%,this model estimates the Company's cumulative change in net interest incomeover the next year would increase by approximately $312,000 or less than 1% ofannualized net interest income.  Noassurance can be given that actual net interest income would not decrease bymore than $1,238,000 or 3% in response to a 2% decrease in market interestrates or that net interest income would actually increase by approximately$312,000 or less than 1% in response to a 2% increase in market interest ratesor that actual net interest income would not decrease substantially if marketinterest rates increased or decreased by more than 2%.

 

**FinancialCondition**

 

 Total assets at September 30, 2001 were$832,085,000, an increase of $149,064,000 or 22% compared with total assets of$683,021,000 at December 31, 2000.  Netloans were $488,508,000 at September 30, 2001, an increase of $84,051,000 or21% compared with net loans of $404,457,000 at December 31, 2000.  Deposits were $699,827,000 at September 30,2001, an increase of $98,329,000 or 16% compared with deposits of $601,498,000at December 31, 2000.  The increase intotal assets of the Company from December 31, 2000 to September 30, 2001 wasprimarily the result of increased deposit gathering efforts in the retaildeposit sector and the introduction of a brokered certificate of depositprogram.  During the second quarter of2001, maturities that occurred within the investment portfolio and new depositmonies received were primarily used to fund loan growth.  All short term borrowings were secured by aportion of the Company's investment portfolio.

 

Totalshareholders' equity was $62,798,000 at September 30, 2001, an increase of$9,347,000 or 17% from $53,451,000 at December 31, 2000. The growth inshareholders’ equity between December 31, 2000 and September 30, 2001 wasprimarily achieved through the retention of accumulated earnings.                *Investment Portfolio.*  The following table sets forth the carryingamount (fair value) of available for sale investment securities as of September30, 2001 and December 31, 2000.

 

|                                 |   | **September 30** |    | **December 31** |   |
|--------------------------------------|--------|------------------|---------|-----------------|--------|
|                                 |   | **2001**         |    | **2000**        |   |
| **(In thousands)**                   |   |             |    |            |   |
| **Available for sale securities:**   |   |             |    |            |   |   |
| U.S.  government agencies       |   | $                | 38,471  |            | $      | 35,939 |   |
| State  and political subdivisions    |   | 25,008           |    | 24,170          |   |
| Mortgage–backed  securities     |   | 59,115           |    | 54,409          |   |
| Collateralized  mortgage obligations |   | 37,128           |    | 29,015          |   |
| Corporate  debt securities           |   | 20,334           |    | 9,833           |   |
| Equity  securities                   |   | 18,778           |    | 2,464           |   |
| Carrying  amount and fair value      |   | $                | 198,834 |            | $      | 155,830 |   |
|                                      |        |                  |         |                 |        |  |  |  |

 

The followingtable sets forth the carrying amount (amortized cost) and fair value of held tomaturity securities at September 30, 2001 and December 31, 2000:

 

|                                 |   | **September 30** |   | **December 31** |   |
|--------------------------------------|--------|------------------|--------|-----------------|--------|
| **(Dollars in thousands)**           |   | **2001**         |   | **2000**        |   |
| **Held To Maturity Securities:**     |   |             |   |            |   |   |
| Carrying  amount (amortized cost):   |   |             |   |            |   |
| U.S.  Government agency         |   | $                | 4,607  |            | $      | 4,595 |   |
| State  and political subdivisions    |   | 4,364            |   | 4,375           |   |
| Mortgage-backed  securities          |   | 37,887           |   | 22,736          |   |
| Collateralized  mortgage obligations |   | 1,213            |   | 3,516           |   |
|                                 |   | $                | 48,071 |            | $      | 35,222 |   |
| Fair  Value:                         |   |             |   |            |   |
| U.S.  Government agency              |   | $                | 4,886  |            | $      | 4,595 |   |
| State  and political subdivisions    |   | 4,490            |   | 4,453           |   |
| Mortgage-backed  securities          |   | 38,552           |   | 22,804          |   |
| Collateralized  mortgage obligations |   | 1,241            |   | 3,560           |   |
|                                 |   | $                | 49,169 |            | $      | 35,412 |   |
|                                      |        |                  |        |                 |        |  |  |  |

The following table sets forth the maturities ofthe Company's debt security investments at September 30, 2001 and the weighted average yields of suchsecurities calculated on a book value basis using the weighted average yieldswithin each scheduled maturity grouping. Maturities of mortgage–backed securities and collateralizedmortgage obligations are stipulated in their respective contracts.  However, actual maturities may differ fromcontractual maturities because borrowers may have the right to prepayobligations with or without prepayment penalties.  Yields on municipal securities have been recalculated on a tax–equivalentbasis.

 
|                                |   | **At September 30, 2001** |       |
|-------------------------------------|--------|---------------------------|------------|
|                                |   | **Within One Year**       |       | **One To  5 Years** |   | **Five To Ten Years** |   | **Over Ten Years** |   | **Total** | ** ** |
|                                |   | **Amount**                |       | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** | ** ** |
| **(Dollars in thousands)**          |   |                      | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Available for Sale Securities:      |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency              |   | $                         | -          |   | - | % | $ | 27,994 |   | 6.63 | % | $ | 10,477 |   | 7.16 | % | $ | - |   | - |   | $ | 38,471 |   |
| State and political                 |   | -                         |       | - |   | - |   | - |   | 11,669 |   | 6.60 |   | 13,339 |   | 7.32 |   | 25,008 |   |
| Mortgage–backed securities     |   | 2                         |       | 6.14 |   | 17 |   | 5.61 |   | 5,751 |   | 5.31 |   | 53,345 |   | 6.07 |   | 59,115 |   |
| Collateralized mortgage obligations |   | -                         |       | - |   | - |   | - |   | - |   | - |   | 37,128 |   | 6.88 |   | 37,128 |   |
| Corporate debt securities           |   | 1,703                     |       | 6.09 |   | 13,426 |   | 5.76 |   | - |   | - |   | 5,205 |   | 4.60 |   | 20,334 |   |
| Carrying amount and fair value      |   | 1,705                     |       | 6.09 |   | 41,437 |   | 6.35 |   | 27,897 |   | 6.54 |   | 109,017 |   | 5.91 |   | 180,056 |   |
|                                |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to maturity securities:        |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency              |   | -                         |       | - |   | 4,607 |   | 6.70 |   | - |   | - |   | - |   | - |   | 4,607 |   |
| State and political                 |   | -                         |       | - |   | - |   | - |   | - |   | - |   | 4,364 |   | 8.10 |   | 4,364 |   |
| Mortgage-backed securities          |   | -                         |       | - |   | - |   | - |   | - |   | - |   | 37,887 |   | 7.09 |   | 37,887 |   |
| Collateralized mortgage obligations |   | -                         |       | - |   | - |   | - |   | - |   | - |   | 1,213 |   | 7.72 |   | 1,213 |   |
| Carrying amount (amortized cost)    |   | -                         |       | - |   | 4,607 |   | 6.70 |   | - |   | - |   | 43,464 |   | 7.21 |   | 48,071 |   |
|                                |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total debt securities               |   | $                         | 1,705      |   | 6.09 | % | $ | 46,044 |   | 6.39 | % | $ | 27,897 |   | 6.54 | % | $ | 152,481 |   | 6.28 | % | $ | 228,127 |   |

In the precedingtable, mortgage–backed securities and collateralized mortgage obligationsare shown repricing at the time of maturity rather than in accordance withtheir principal amortization schedules. The Company does not own securities of a single issuer whose aggregatebook value is in excess of 10% of its total equity.

 

*Loan Portfolio.*The following table shows the compositionof the Company's loan portfolio at the datesindicated.

 
|                            |   | **September 30**  |    | **December 31**         |   |
|---------------------------------|--------|-------------------|---------|-------------------------|--------|
| **(In thousands)**              |   | **2001**          |    | **2000**                |   |
| Loan  Categories:               |   | **Dollar Amount** |    | **Percent****of loans** |   | **Dollar Amount** |   | **Percent****of loans** |   |
| Commercial                      |   | $                 | 106,420 |                    | 21     | % | $ | 71,920 |   | 17 | % |
| Agricultural                    |   | 93,692            |    | 19                      |   | 84,032 |   | 20 |   |
| Real  estate construction       |   | 51,227            |    | 10                      |   | 30,133 |   | 7 |   |
| Real  estate mortgage           |   | 173,372           |    | 35                      |   | 141,575 |   | 35 |   |
| Consumer                        |   | 72,837            |    | 15                      |   | 85,004 |   | 21 |   |
| Total                           |   | 497,548           |    | 100                     | %      | 412,664 |   | 100 | % |
| Less  allowance for loan losses |   | (9,040            | )       |                    |   | (8,207 | )  |   |   |
| Net  loans                      |   | $                 | 488,508 |                    |   |   | $ | 404,457 |   |   |   |

 

Thefollowing table shows the maturity distribution of the portfolio of commercial,agricultural, real estate construction, real estate mortgage, and consumerloans at September 30, 2001:

 
|                               |   | **At September  30, 2001** |    |
|------------------------------------|--------|----------------------------|---------|
|                               |   | **Within 1 year**          |    | **After 1 but****Within 5 years** |   | **After 5 years** |   | **Total** |   |
|                               |   | **(In thousands)**         |    |
| Commercial  and agricultural       |   |                       |    |   |   |   |   |   |   |
| Loans with floating interest rates |   | $                          | 87,110  |   | $ | 35,969 |   | $ | 24,194 |   | $ | 147,273 |   |
| Loans with fixed interest rates    |   | 7,452                      |    | 29,898 |   | 15,489 |   | 52,839 |   |
| Subtotal                           |   | 94,562                     |    | 65,867 |   | 39,683 |   | 200,112 |   |
| Real  estate construction          |   |                       |    |   |   |   |   |   |   |
| Loans with floating interest rates |   | 28,870                     |    | 11,756 |   | 6,854 |   | 47,480 |   |
| Loans with fixed interest rates    |   | 1,795                      |    | 208 |   | 1,744 |   | 3,747 |   |
| Subtotal                           |   | 30,665                     |    | 11,964 |   | 8,598 |   | 51,227 |   |
| Real  estate mortgage              |   |                       |    |   |   |   |   |   |   |
| Loans with floating interest rates |   | 7,332                      |    | 19,469 |   | 83,434 |   | 110,235 |   |
| Loans with fixed interest rates    |   | 991                        |    | 17,424 |   | 44,722 |   | 63,137 |   |
| Subtotal                           |   | 8,323                      |    | 36,893 |   | 128,156 |   | 173,372 |   |
| Consumer  Installment              |   |                       |    |   |   |   |   |   |   |
| Loans with floating interest rates |   | 17,464                     |    | 7,814 |   | - |   | 25,278 |   |
| Loans with fixed interest rates    |   | 2,290                      |    | 42,311 |   | 2,958 |   | 47,559 |   |
| Subtotal                           |   | 19,754                     |    | 50,125 |   | 2,958 |   | 72,837 |   |
|                               |   |                       |    |   |   |   |   |   |   |
| Total                              |   | $                          | 153,304 |   | $ | 164,849 |   | $ | 179,395 |   | $ | 497,548 |   |

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

 

|                          |   | **September 30,**  |    | **December 31,** |   |
|-------------------------------|--------|--------------------|---------|------------------|--------|
|                          |   | **2001**           |    | **2000**         |   |
|                          |   | **(In thousands)** |    |
| Letters  of credit            |   | $                  | 4,006   |             | $      | 1,320 |   |
| Commitments  to extend credit |   | 181,896            |    | 144,480          |   |
| Total                         |   | $                  | 185,902 |             | $      | 145,800 |   |

* *

*OtherInterest-Earning Assets. *The following table relates to otherinterest–earning assets not disclosed previously for the datesindicated.  This item consists of asalary continuation plan for the Company's executive management and deferredretirement benefits for participating board members.  The plan is informally linked with universal life insurancepolicies for the salary continuation plan. Income from these policies is reflected in noninterest income.

 
|                                    |   | **At September  30,** |   | **At December  31,** |   |
|-----------------------------------------|--------|-----------------------|--------|----------------------|--------|
|                                    |   | **2001**              |   | **2000**             |   |
|                                    |   | **(In thousands)**    |   |
| Cash  surrender value of life insurance |   | $12,978               |   | $6,075               |   |

 

                *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 still accruing 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. Additional loans not 90 days past due may also be placed on nonaccrualstatus if management reasonably believes the borrower will not be able tocomply with the contractual loan repayment terms and collection of principal orinterest is in question.

 

A"restructured loan" is a loan on which interest accrues at a belowmarket rate or upon which certain principal has been forgiven so as to aid theborrower in the final repayment of the loan, with any interest previouslyaccrued, but not yet collected, 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 hadno restructured loans as of the dates indicated in the table below.

 

Thefollowing table summarizes nonperforming assets of the Company at September 30,2001 and December 31, 2000:

 

|                                     |   | **September 30**   |   | **December 31** |   |
|------------------------------------------|--------|--------------------|--------|-----------------|--------|
|                                     |   | **2001**           |   | **2000**        |   |
|                                     |   | **(In thousands)** |   |
| Nonaccrual loans                         |   | $                  | 3,886  |            | $      | 2,243 |   |
| Accruing  loans past due 90 days or more |   | 795                |   | 97              |   |
| Total nonperforming loans                |   | 4,681              |   | 2,340           |   |
| Other  real estate owned                 |   | 583                |   | 248             |   |
| Total nonperforming assets               |   | $                  | 5,264  |            | $      | 2,588 |   |
|                                     |   |               |   |            |   |
| Nonperforming  loans to total loans      |   | .94                | %      | .57             | %      |
| Nonperforming  assets to total assets    |   | .63                | %      | .38             | %      |

 

Contractual accrued interest income on loans on nonaccrualstatus as of September 30, 2001 and 2000 that would have been recognized if theloans had been current in accordance with their loan agreement wasapproximately $91,000 and $78,000 for the nine month periods ended September30, 2001 and 2000.

 

At September 30, 2001, nonperforming assetsrepresented .63% of total assets, an increase of .25% of total assets comparedto the .38% at December 31, 2000. Nonperforming loans represented .94% of total loans at September 30,2001, an increase of .37% of total loans compared to the .57% at December 31,2000.  Nonperforming loans that weresecured by first deeds of trust on real property were $2,448,000 at September30, 2001 and $0 at December 31, 2000.  Other forms of collateral such as inventory and equipment secured theremaining nonperforming loans as of each date. No assurance can be given that the collateral securing nonperformingloans will be sufficient to prevent losses on such loans.

 

The increase in nonperforming loans and nonperformingassets at September 30, 2001 compared with the levels as of December 31, 2000,was due primarily to a increase in non performing agricultural and commercialloans and an increase in foreclosure properties being held for sale.  During the third quarter of 2001, there wasan addition of a single nonperforming agricultural loan totaling $2,448,000that relates to specific financial problems experienced by this borrower.  Management does not believe the problemsassociated with this borrower are indicative of any systemic problems that mayexist within the Company’s agricultural loan portfolio.

 

At September 30, 2001, the Company had $583,000 inthree properties acquired through foreclosure. The properties are carried at the lower of its estimated market value,as evidenced by an independent appraisal, or the recorded investment in therelated loan, less estimated selling expenses. At foreclosure, if the fair value of the real estate is less than theCompany's recorded investment in the related loan, a charge is made to theallowance for loan losses. No assurance can be given that the Company will sellsuch property during 2001 or at any time or the amount for which such propertymight be sold.

 

Management defines impaired loans, regardless of pastdue status on loans, as those on which principal and interest are not expectedto be collected under the original contractual loan repayment terms.  At September 30, 2001 and December 31, 2000,impaired loans were measured based on the present value of future cash flowsdiscounted at the loan's effective rate, the loan's observable market price orthe fair value of collateral if the loan is collateral–dependent.  Impaired loans at September 30, 2001 were$4,681,000, on account of which the Company had made provisions to the allowancefor loan losses of $1,192,000.

 

Except for loans that are disclosed above, there wereno assets as of September 30, 2001, where known information about possiblecredit problems of the borrower causes management to have serious doubts as tothe ability of the borrower to comply with the present loan repayment terms andwhich may become nonperforming assets. Given the magnitude of the Company’s loan portfolio, however, it isalways possible that current credit problems may exist that may not have been discoveredby management.

 

**Allowancefor Loan Losses**

 

The following table summarizes the loan loss experience of the Companyfor the nine months ended September 30, 2001 and 2000, and the year endedDecember 31, 2000:

** **
|                                         |   | **September 30,** |    | **December 31,** |   |
|----------------------------------------------|--------|-------------------|---------|------------------|--------|
|                                         |   | **2001**          |    | **2000**         |   | **2000** |   |
|                                         |   | **In thousands**  |    |
| **Allowance for Loan Losses:**               |   |              |    |             |   |   |   |
| Balance  at beginning of period              |   | $                 | 8,207   |             | $      | 6,542 |   | $ | 6,542 |   |
| Provision  for loan losses                   |   | 3,079             |    | 2,323            |   | 3,286 |   |
| Charge-offs:                                 |   |              |    |             |   |   |   |
| Commercial and   agricultural           |   | 191               |    | 416              |   | 423 |   |
| Real estate construction                     |   | -                 |    | -                |   | - |   |
| Consumer                                     |   | 2,506             |    | 1,502            |   | 1,971 |   |
| Total charge–offs                       |   | 2,697             |    | 1,918            |   | 2,394 |   |
| Recoveries                                   |   |              |    |             |   |   |   |
| Commercial and agricultural                  |   | 155               |    | 101              |   | 410 |   |
| Real estate-mortgage                         |   | -                 |    | -                |   | - |   |
| Consumer                                     |   | 296               |    | 261              |   | 363 |   |
| Total recoveries                             |   | 451               |    | 362              |   | 773 |   |
| Net  charge–offs                        |   | 2,246             |    | 1,556            |   | 1,621 |   |
| Balance  at end of period                    |   | $                 | 9,040   |             | $      | 7,309 |   | $ | 8,207 |   |
|                                         |   |              |    |             |   |   |   |
| Loans  outstanding at period-end             |   | $                 | 497,548 |             | $      | 394,980 |   | $ | 412,664 |   |
| Average  loans outstanding                   |   | $                 | 435,529 |             | $      | 359,348 |   | $ | 369,367 |   |
|                                         |   |              |    |             |   |   |   |
| Annualized  net charge-offs to average loans |   | 0.69              | %       | 0.58             | %      | 0.44 | % |
|                                         |   |              |    |             |   |   |   |
| Allowance  for loan losses                   |   |              |    |             |   |   |   |
| To total loans                               |   | 1.82              | %       | 1.85             | %      | 1.99 | % |
| To nonperforming assets                      |   | 171.74            | %       | 297.22           | %      | 317.12 | % |

 

TheCompany maintains an allowance for loan losses at a level considered bymanagement to be adequate to cover the inherent risks of loss associated withits loan portfolio under prevailing 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 risksconsidered by management with respect to agricultural loans include the fluctuatingvalue of 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 management with respect to realestate mortgage loans include fluctuations in the value of real estate.  Additionally, the Company relies on dataobtained through independent appraisals for significant properties to determineloss exposure on nonperforming loans.

 

The balance in the allowance is affected by the amounts provided fromoperations, amounts charged off and recoveries of loans previouslycharged-off.  The Company recordedprovisions for loan losses for the three and nine months ended September 30,2001 of $1,540,000 and $3,079,000 compared with $792,000 and $2,323,000 for thesame periods during 2000. The increase in loan loss provisions in 2001 comparedto 2000 was primarily due to loan portfolio growth that has occurred over thelast several quarters.

 

TheCompany's charge–offs, net of recoveries, were $2,246,000 for the ninemonths ended September 30, 2001 compared with net charge-offs of $1,556,000 forthe same nine months in 2000.  Theincrease in net charge–offs during the first nine months of 2001 comparedwith the same period in 2000 was primarily due to decreased charge-offs in theindirect auto loan segment of the consumer loan portfolio.                As of September 30, 2001,the allowance for loan losses were $9,040,000 or 1.82% of total loans outstanding,compared with $8,207,000 or 1.99% of total loans outstanding as of December 31,2000. During the first nine months of 2001, the allowance for loan lossincreased $833,000 or 10% compared to December 31, 2000 levels.  During the third quarter of 2001, theallowance for loan losses increased $238,000 or 3% compared to June 30, 2001levels.

 

TheCompany uses a method developed by management determining the appropriate levelof its allowance for loan losses.  Thismethod applies 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 throughinternal reviews and periodically subjects loans to external reviews which thenare assessed by the Company's audit committee. Credit reviews are performed on a monthly basis and the quality gradingprocess occurs on a quarterly basis. Risk factors applied to the performing loanportfolio are based on the Company's past loss history considering the currentportfolio's characteristics, current economic conditions and other relevantfactors.  General reserves are appliedto various categories of loans at percentages ranging up to 1.8% based on theCompany's assessment of credit risks for each category.  Risk factors are applied to the carryingvalue of each classified loan: (i) loans internally graded"Watch" or "Special Mention" carry a risk factor from 1.0%to 2.0%; (ii) "Substandard" loans carry a risk factor from 15%to 40% depending on collateral securing the loan, if any; (iii)"Doubtful" loans carry a 50% risk factor; and (iv) "Loss"loans are charged off 100%.  Inaddition, a portion of the allowance is specially allocated to identifiedproblem credits.  The analysis alsoincludes reference to factors such as the delinquency status of the loanportfolio, inherent risk by type of loans, industry statistical data,recommendations made by the Company's regulatory authorities and outside loanreviewers, and current economic environment. Important components of the overall credit rating process are the assetquality rating process and the internal loan review process.

 

Theallowance is based on estimates and ultimate future losses may vary fromcurrent estimates.  It is alwayspossible that future economic or other factors may adversely affect theCompany's borrowers, and thereby cause loan losses to exceed the currentallowance.  In addition, there can be noassurance that future economic or other factors will not adversely affect theCompany's borrowers, or that the Company's asset quality may not deterioratethrough rapid growth, failure to enforce underwriting standards, failure tomaintain appropriate underwriting standards, failure to maintain an adequatenumber of qualified loan personnel, failure to identify and monitor potentialproblem loans or for other reasons, and thereby cause loan losses to exceed thecurrent allowance.  The allocation ofthe allowance to loan and business risk components is an estimate by managementof the relative overall risk characteristics of the Company.  No assurance can be given that losses in oneor more risk 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, a major earthquake could result in material loss to theCompany.  At times the Company's servicearea has experienced 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 theseborrowers may be unable to repay their loans in accordance with their terms andthe collateral 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 event could impair the ability ofmany of the Company's borrowers to meet their obligations to the Company.

 

Californiais a region that also experiences flooding. The Company is not aware of any material adverse effects to thecollateral position of the Company as a result of flooding, but no assurance canbe given that future flooding will not have an adverse impact on the Companyand 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 held in other banks,federal funds sold, other short term investments, maturing loans andinvestments, payments of principal and interest on loans and investments andpotential loan sales as sources of asset liquidity.  Deposit growth and access to credit lines established withcorrespondent banks and market sources of funds are considered by the Companyas sources of liability liquidity.  TheHolding Company’s primary source of liquidity is from dividends received fromthe Bank.  Dividends from the Bank aresubject to certain regulatory limitations.

 

TheCompany reviews its liquidity position on a regular basis based upon itscurrent position and expected trends of loans and deposits. These assetsinclude cash and deposits in other banks, available–for–salesecurities and federal funds sold.  TheCompany's liquid assets totaled $249,653,000 and $203,698,000 on September 30,2001 and December 31, 2000, respectively, and constituted 30% of total assetson both those dates.  Liquidity is alsoaffected by the collateral requirements of its public deposits and certainborrowings.  Total pledged securities were$120,646,000 at September 30, 2001 compared with $124,396,000 at December 31,2000.

 

Althoughthe Company'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 and PacificCoast Bankers' Bank aggregating $70,327,000 of which $47,781,000 wasoutstanding as of September 30, 2001 and $14,600,000 was outstanding as ofDecember 31, 2000.  Management believesthat the Company maintains adequate amounts of liquid assets to meet itsliquidity needs.  The Company'sliquidity might be insufficient if deposit withdrawals were to exceedanticipated levels.  Deposit withdrawalscan increase if a company experiences financial difficulties or receivesadverse publicity for other reasons, or if its pricing, products or servicesare not competitive with those offered by other institutions.*                Capital Resources*               Capital serves as a source offunds and helps protect depositors against potential losses.  The primary source of capital for thecompany has been internaly generated capital through retained earnings.  The Company’s shareholder equity increasedby $9,347,000 or 17% from December 31, 2000 to September 30, 2001.

 

TheCompany is subject to various regulatory capital requirements administered bythe federal banking agencies.  Failureto meet minimum capital requirements can initiate mandatory and possiblyadditional discretionary actions by the regulators that, if undertaken, couldhave a material adverse effect on the Company’s financial statements.  Management believes, as of September 30,2001, that the Company and the Bank met all capital requirements to which theyare subject.  The Company’s leveragecapital ratio at September 30, 2001 was 8.02% as compared with 7.56% as ofDecember 31, 2000.  The Company’s totalrisk based capital ratio at September 30, 2001 was 11.27% as compared to 10.92%as of December 31, 2000.

 

TheCompany’s and Bank’s actual capital amounts and ratios met all regulatoryrequirements as of September 30, 2001 and were summarized as follows:

 
| **In thousands**                          |   | **Actual** |   | **For Capital****Adequacy Purposes** |   | **To Be Well  Capitalized****Under Prompt   CorrectiveAction Provisions:** |   |
|-------------------------------------------|--------|------------|--------|--------------------------------------|--------|----------------------------------------------------------------------------|--------|
| The Company:                              |   | **Amount** |   | **Ratio**                            |   | **Amount**                                                                 |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| As  of September 30, 2001                 |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| Total  capital (to risk weighted assets)  |   | $          | 72,062 |                                 | 11.27  | %                                                                          | $      | 51,153 |   | 8.0 | % | $ | 63,941 |   | 10.0 | % |
| Tier  1 capital (to risk weighted assets) |   | 64,056     |   | 10.02                                |   | 25,576                                                                     |   | 4.0 |   | 38,365 |   | 6.0 |   |
| Leverage  ratio*                          |   | 64,056     |   | 8.02                                 |   | 31,939                                                                     |   | 4.0 |   | 39,924 |   | 5.0 |   |
|                                      |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| The  Bank:                                |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| As  of September 30, 2001                 |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| Total  capital (to risk weighted assets)  |   | $          | 65,793 |                                 | 10.39  | %                                                                          | $      | 50,672 |   | 8.0 | % | $ | 63,340 |   | 10.0 | % |
| Tier  1 capital (to risk weighted assets) |   | 57,862     |   | 9.14                                 |   | 25,336                                                                     |   | 4.0 |   | 38,004 |   | 6.0 |   |
| Leverage  ratio*                          |   | 57,862     |   | 7.30                                 |   | 31,701                                                                     |   | 4.0 |   | 39,627 |   | 5.0 |   |

 

----

*   Theleverage ratio consists of Tier 1 capital divided by quarterly averageassets.  The minimum leverage ratio is 3percent for banking organizations that do not anticipate significant growth andthat have well-diversified risk, excellent asset quality and in general, areconsidered top-rated banks.

 

The Company has no formal dividend policy, anddividends are issued solely at the discretion of the Company’s Board ofDirectors, subject to compliance with regulatory requirements.  In order to pay any cash dividends, theCompany must receive payments of dividends or management fees from theBank.  There are certain regulatorylimitations on the payment of cash dividends by banks.                *Deposits.*  Deposits are the Company's primary source offunds.  At September 30, 2001, theCompany had a deposit mix of 28% in savings deposits, 41% in time deposits, 18%in interest–bearing checking accounts and 13% in noninterest–bearingdemand accounts.  Noninterest–bearingdemand deposits enhance the Company's net interest income by lowering its costsof funds.

 

TheCompany obtains 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. These deposits are priced to remain competitive.  At September 30, 2001, the Company hadbrokered deposits of $1,181,000.

 

Maturitiesof time certificates of deposits of $100,000 or more outstanding at September30, 2001 and December 31, 2000 are summarized as follows:

 
|                      |   | **September  30, 2001** |    | **December  31, 2000** |   |
|---------------------------|--------|-------------------------|---------|------------------------|--------|
|                      |   | **(In  thousands)**     |    |
| Three months or less      |   | $                       | 33,146  |                   | $      | 45,233 |   |
| Over three to six months  |   | 52,200                  |    | 20,643                 |   |
| Over six to twelve months |   | 18,431                  |    | 16,526                 |   |
| Over twelve months        |   | 17,724                  |    | 11,252                 |   |
| Total                     |   | $                       | 121,501 |                   | $      | 93,654 |   |

 

**Borrowed Funds**

 

The increase in other borrowings during the second quarter of 2001 was primarily due tothe use of a leveraged investment strategy that used additional FHLB borrowingsto fund purchases of investment securities within the Bank’s investmentportfolio.

 

**Impactof Inflation**

 

Theprimary impact of inflation on the Company is its effect on interestrates.  The Company’s primary source ofincome is net interest income which is affected by changes in interestrates.  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 andequipment, as well as on interest expenses, has not been significant for theperiods covered in this report.

 

**Item3.    Quantitative and QualitativeDisclosures 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 andliabilities arise primarily through the interaction of the various types ofloans versus the types of deposits that are maintained as well as frommanagement's discretionary investment and funds gathering activities.  Liquidity risk arises from the possibilitythat the Company may not be able to satisfy current and future financialcommitments or that the Company may not be able to liquidate financialinstruments at market prices.  Riskmanagement policies and procedures have been established and are utilized tomanage the Company's exposure to market risk.

 

At September 30, 2001, the interest rate position of the Company wasrelatively neutral as the impact of a gradual parallel 100 basis-point rise orfall in interest rates over the next 12 months was estimated to beapproximately 1-2% of net interest income when compared to stable rates.   See "Management's Discussion andAnalysis of Financial Condition and Results of Operations - Interest Rate RiskManagement."

 

**PART II - Other Information**

 

**Item 1.    Legal Proceedings**

 

TheCompany is a party to routine litigation in the ordinary course of itsbusiness.  In the opinion of management,pending and threatened litigation is not likely to have a material adverseeffect on the financial condition or results of operations of the Company.

**Item2.                    Changes inSecurities and Use of Proceeds****.**

None.

**Item3.                    Defaults Upon SeniorSecurities.**

None.

**Item4.                    Submission ofMatters to a Vote of Securities Holders.**

None

**Item5.                    Other Information.**

In the opinion of management, there is no additionalinformation relating to these periods being reported which warrants inclusionin the report.

**Item6.  Exhibits and Reports on Form 8-K.**

(a)           Exhibits.

 
| Exhibits |   | Description of Exhibits                                                                                                                                                                                                      |   |   |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|     |   |                                                                                                                                                                                                                         |   |   |
| 3.1      |   | Articles of Incorporation, incorporated by reference  from (filed as Exhibit 3.1 of the Company’s June 30, 1996 Form 10Q filed with  the SEC on or about November 14, 1996).                                            |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 3.2      |   | Bylaws (filed as Exhibit 3.2 of the Company’s June  30, 1996 Form 10Q filed with the SEC on or about November 14, 1996.)                                                                                                |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10       |   | Employment agreement between Thomas T. Hawker and  Capital Corp. (Filed as Exhibit 10 of the Company’s 1996 form 10K filed with  the SEC on or about June 30, 1997)                                                     |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.1     |   | Administration Construction Agreement (filed as  Exhibit 10.4 of the Company’s 1995 Form 10K filed with the SEC on or about  June 30, 1996).                                                                            |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.2     |   | Stock Option Plan (filed as Exhibit 10.6 of the  Company’s 1995 Form 10K filed with the SEC on or about March 31, 1996).                                                                                                |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.3     |   | 401 (k) Plan (filed as Exhibit 10.7 of the Company’s  1995 Form 10K filed with the SEC on or about March 31, 1996).                                                                                                     |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.4     |   | Employee Stock Ownership Plan (filed as Exhibit 10.8  of the Company’s 1995 Form 10K filed with the SEC on or about March 31,  1996).                                                                                   |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.5     |   | Purchase Agreement for three branches from Bank of  America is incorporated herein by reference from Exhibit 2.1 Registration  Statement on Form S-2 filed July 14, 1997, File No. 333-31193.                                |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.6     |   | Change-in-Control Agreement between R. Dale McKinney  and Capital Corp of the West (filed as Exhibit 10.6 of the Company’s 1999  Form 10K with the SEC on or about March 17, 2000).                                     |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.7     |   | Deferred Compensation Agreement between members of  the board of directors and Capital Corp of the West (filed as Exhibit 10.7 of  the Company’s 1999 Form 10K with the SEC on or about March 17, 2000).                |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.8     |   | Executive Salary Continuation Agreement between  certain members of executive management and Capital Corp of the West (filed  as Exhibit 10.8 of the Company’s 1999 Form 10K with the SEC on or about March  17, 2000). |   | *      |
|     |   |                                                                                                                                                                                                                         |   |   |
| 10.9     |   | Capital Corp of the West 1992 Stock Option Plan as  amended by the board of directors on or about January 23, 2001.                                                                                                          |   | *      |

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

 

None

----

***Denotes documents which have been incorporated by reference.**

** **

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

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