** **

**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 March 31, 2003**                                                                                                                                                                                                                                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **or**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **o****  Transition Report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the Transition Period from                                  to                                ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Commission File Number: 0-27384**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

| **CAPITAL CORP OF THE WEST**                                    |
|-----------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)         |
|                                                            |   |   |
| **California**                                                  |   | **77-0405791** |
| (State or other  jurisdiction of incorporation or organization) |   | IRS Employer ID Number |
|                                                            |   |   |
| **550 West Main, Merced, CA  95340**                       |
| (Address of principal  executive offices)                       |

 

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

 

Former name, former address and former fiscal year, if changed sincelast report: ** Not applicable**

 

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

Yes   ý  No  o

 

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

 

The number of shares outstanding of the registrant’s common stock, nopar value, as of March 31, 2003 was 5,329,038. No shares of preferred stock, no par value, were outstanding at March31, 2003.

 

 

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**Capital Corp of the West**

Table of Contents

 
| PART I. —  FINANCIAL INFORMATION                                                                           |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| Item 1.  Financial Statements                                                                         |
|                                                                                                            | Consolidated Balance Sheets  (unaudited) |
|                                                                                                            | Consolidated  Statements of Income and Comprehensive Income (unaudited) |
|                                                                                                            | Consolidated  Statement of Changes in Stockholders Equity (unaudited) |
|                                                                                                            | Consolidated  Statements of Cash Flows (unaudited) |
|                                                                                                            | Notes to the  Consolidated Financial Statements (unaudited) |
|                                                                                                            |
| Item  2.  Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|                                                                                                            |
| Item  3.  Quantitative and Qualitative Disclosures about Market Risk                                  |
| Item  4.  Controls and Procedures                                                                     |
|                                                                                                            |
| PART II. — OTHER  INFORMATION                                                                              |
|                                                                                                            |
| Item  1.  Legal Proceedings                                                                           |
| Item  2.  Changes in Securities                                                                       |
| 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                                                                                                      |
| Certifications under Section 302  of the Sarbanes-Oxley Act of 2002                                             |
| Exhibit Index                                                                                                   |

 

2

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Capital Corp of the West

Consolidated Balance Sheets(Unaudited)

 
|                                                                                                                                                  |   | **March 31,  2003**         |      | **December  31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|-------------------------|--------|
|                                                                                                                                                  |   | **(Dollars  in thousands)** |      |
| **Assets**                                                                                                                                            |   |                        |      |                    |   |
| Cash and  noninterest-bearing deposits in other banks                                                                                                 |   | $                           | 33,197    |                    | $      | 46,628 |   |
| Federal funds  sold                                                                                                                                   |   | —                      |      | 26,555                  |   |
| Time deposits at  other financial institutions                                                                                                        |   | 600                         |      | 500                     |   |
| Investment  securities available for sale, at fair value                                                                                              |   | 255,858                     |      | 231,392                 |   |
| Investment  securities held to maturity at cost, fair value of $61,641 and $57,905 at  March 31, 2003 and December 31, 2002                           |   | 59,775                      |      | 55,628                  |   |
| Loans, net of  allowance for loan losses of $12,690 and $12,134 at March 31, 2003 and  December 31, 2002                                              |   | 642,638                     |      | 621,639                 |   |
| Interest  receivable                                                                                                                                  |   | 5,517                       |      | 5,532                   |   |
| Premises and  equipment, net                                                                                                                          |   | 15,278                      |      | 13,942                  |   |
| Intangible  assets                                                                                                                                    |   | 3,155                       |      | 3,325                   |   |
| Other assets                                                                                                                                          |   | 33,660                      |      | 29,069                  |   |
|                                                                                                                                                  |   |                        |      |                    |   |
| Total assets                                                                                                                                          |   | $                           | 1,049,678 |                    | $      | 1,034,210 |   |
|                                                                                                                                                  |   |                        |      |                    |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                        |   |                        |      |                    |   |
| Deposits                                                                                                                                              |   |                        |      |                    |   |
| Noninterest-bearing  demand                                                                                                                           |   | $                           | 151,409   |                    | $      | 164,852 |   |
| Negotiable  orders of withdrawal                                                                                                                      |   | 117,574                     |      | 120,449                 |   |
| Savings                                                                                                                                               |   | 226,049                     |      | 223,404                 |   |
| Time, under  $100,000                                                                                                                                 |   | 158,923                     |      | 164,959                 |   |
| Time, $100,000  and over                                                                                                                              |   | 152,816                     |      | 160,715                 |   |
| Total deposits                                                                                                                                        |   | 806,771                     |      | 834,379                 |   |
|                                                                                                                                                  |   |                        |      |                    |   |
| Borrowed funds                                                                                                                                        |   | 151,009                     |      | 110,204                 |   |
| Accrued  interest, taxes and other liabilities                                                                                                        |   | 5,986                       |      | 6,427                   |   |
| Total  liabilities                                                                                                                                    |   | 963,766                     |      | 951,010                 |   |
|                                                                                                                                                  |   |                        |      |                    |   |
| Capital  Securities and minority interests                                                                                                            |   | 6,031                       |      | 6,031                   |   |
|                                                                                                                                                  |   |                        |      |                    |   |
| Preferred Stock,  no par value; 10,000,000 shares authorized;   None outstanding                                                                      |   | —                      |      | —                  |   |
| Common stock, no  par value; 20,000,000 shares authorized;  5,329,038 and 5,325,082 issued & outstanding at March 31, 2003 and  December 31, 2002 |   | 46,476                      |      | 46,436                  |   |
| Retained  earnings                                                                                                                                    |   | 30,851                      |      | 27,824                  |   |
| Accumulated  other comprehensive income                                                                                                               |   | 2,554                       |      | 2,909                   |   |
|                                                                                                                                                  |   |                        |      |                    |   |
| Total  shareholders’ equity                                                                                                                      |   | 79,881                      |      | 77,169                  |   |
| Total  liabilities, Capital Securities and minority interests and shareholders’  equity                                                          |   | $                           | 1,049,678 |                    | $      | 1,034,210 |   |

 

See accompanying notes

 

3

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CapitalCorp of the WestConsolidated Statements of Incomeand Comprehensive Income(Unaudited)

 
|                                                     |   | **For the  three months  ended March 31,** |   |
|----------------------------------------------------------|--------|--------------------------------------------|--------|
| **(Dollars in thousands, except per share data)**        |   | **2003**                                   |   | **2002** |   |
| **Interest income:**                                     |   |                                       |   |   |   |
| Interest and  fees on loans                              |   | $                                          | 11,333 |   | $ | 10,137 |   |
| Interest on  deposits with other financial institutions  |   | 2                                          |   | 2 |   |
| Interest on  investments held to maturity:               |   |                                       |   |   |   |
| Taxable                                                  |   | 766                                        |   | 927 |   |
| Non-taxable                                              |   | 55                                         |   | 55 |   |
| Interest on  investments available for sale:             |   |                                       |   |   |   |
| Taxable                                                  |   | 2,176                                      |   | 2,472 |   |
| Non-taxable                                              |   | 272                                        |   | 272 |   |
| Interest on  federal funds sold                          |   | 39                                         |   | 12 |   |
| Total interest  income                                   |   | 14,643                                     |   | 13,877 |   |
|                                                     |   |                                       |   |   |   |
| **Interest expense:**                                    |   |                                       |   |   |   |
| Interest on  negotiable orders of withdrawal             |   | 14                                         |   | 54 |   |
| Interest on  savings deposits                            |   | 580                                        |   | 831 |   |
| Interest on time  deposits, under $100                   |   | 1,120                                      |   | 1,539 |   |
| Interest on time  deposits, $100 and over                |   | 989                                        |   | 1,179 |   |
| Interest on  other borrowings                            |   | 1,151                                      |   | 948 |   |
| Total interest  expense                                  |   | 3,854                                      |   | 4,551 |   |
|                                                     |   |                                       |   |   |   |
| Net interest  income                                     |   | 10,789                                     |   | 9,326 |   |
| Provision for  loan losses                               |   | 671                                        |   | 780 |   |
| Net interest  income after provision for loan losses     |   | 10,118                                     |   | 8,546 |   |
|                                                     |   |                                       |   |   |   |
| **Noninterest income:**                                  |   |                                       |   |   |   |
| Service charges  on deposit accounts                     |   | 1,277                                      |   | 1,127 |   |
| Other                                                    |   | 1,049                                      |   | 652 |   |
| Total  noninterest income                                |   | 2,326                                      |   | 1,779 |   |
|                                                     |   |                                       |   |   |   |
| **Noninterest expenses:**                                |   |                                       |   |   |   |
| Salaries and  related benefits                           |   | 4,503                                      |   | 3,944 |   |
| Premises and  occupancy                                  |   | 670                                        |   | 569 |   |
| Equipment                                                |   | 759                                        |   | 716 |   |
| Professional  fees                                       |   | 274                                        |   | 253 |   |
| Marketing                                                |   | 260                                        |   | 188 |   |
| Intangible asset  amortization                           |   | 170                                        |   | 170 |   |
| Supplies                                                 |   | 235                                        |   | 186 |   |
| Dividend Expense  on Capital Securities                  |   | 153                                        |   | 154 |   |
| Other                                                    |   | 1,489                                      |   | 1,245 |   |
| Total  noninterest expenses                              |   | 8,513                                      |   | 7,425 |   |
|                                                     |   |                                       |   |   |   |
| Income before  income taxes                              |   | 3,931                                      |   | 2,900 |   |
| Provision for  income taxes                              |   | 904                                        |   | 676 |   |
| Net income                                               |   | $                                          | 3,027  |   | $ | 2,224 |   |
| Comprehensive  Income:                                   |   |                                       |   |   |   |
| Unrealized loss  on securities arising during the period |   | (355                                       | )      | (1,386 | ) |
| Comprehensive  Income                                    |   | $                                          | 2,672  |   | $ | 838 |   |
| Basic earnings  per share                                |   | $                                          | 0.54   |   | $ | 0.41 |   |
| Diluted earnings  per share                              |   | $                                          | 0.52   |   | $ | 0.40 |   |

 

See accompanying notes

 

4

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Capital Corp of the West

Consolidated Statement ofChanges in Shareholders’ Equity

(Unaudited)

 

 
| **(Amounts in thousands)**                                                                       |   |        |   | **Retained  earnings** |   | **Accumulated  other  comprehensive   income** |   | **Total** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------|--------|------------------------|--------|------------------------------------------------|--------|-----------|--------|
| **Common  Stock**                                                                                |   |
| **Number of  shares**                                                                            |   | **Amounts** |   |
|                                                                                             |
|                                                                                             |   |        |   |                   |   |                                           |   |      |   |   |   |
| Balance,  December 31, 2002                                                                      |   | 5,325       |   | $                      | 46,436 |                                           | $      | 27,824    |   | $ | 2,909 |   | $ | 77,169 |   |
|                                                                                             |   |        |   |                   |   |                                           |   |      |   |   |   |
| Exercise of  stock options                                                                       |   | 4           |   | 40                     |   | —                                         |   | —    |   | 40 |   |
|                                                                                             |   |        |   |                   |   |                                           |   |      |   |   |   |
| Net Change in  fair market value of investment securities and swaps, net of tax benefit of  $232 |   | —      |   | —                 |   | —                                         |   | (355      | )      | (355 | ) |
|                                                                                             |   |        |   |                   |   |                                           |   |      |   |   |   |
| Net income                                                                                       |   | —      |   | —                 |   | 3,027                                          |   | —    |   | 3,027 |   |
|                                                                                             |   |        |   |                   |   |                                           |   |      |   |   |   |
| Balance, March  31, 2003                                                                         |   | 5,329       |   | $                      | 46,476 |                                           | $      | 30,851    |   | $ | 2,554 |   | $ | 79,881 |   |

 

See accompanying notes

 

5

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CapitalCorp of the WestConsolidated Statements of Cash Flows(Unaudited)

 
| **(Dollars in thousands)**                                                     |   | **3 months  ended  March 31,  2003** |   | **3 months  ended  March 31,  2002** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
| **Operating activities:**                                                      |   |                                 |   |                                 |   |
| Net income                                                                     |   | $                                    | 3,027  |                                 | $      | 2,224 |   |
| Adjustments to  reconcile net income to net cash provided by (used in)         |   |                                 |   |                                 |   |
| Operating  activities:                                                         |   |                                 |   |                                 |   |
| Provision for  loan losses                                                     |   | 671                                  |   | 780                                  |   |
| Depreciation,  amortization and accretion, net                                 |   | 1,276                                |   | 846                                  |   |
| Net increase in  interest receivable & other assets                        |   | (4,187                               | )      | (1,527                               | )      |
| Net increase  (decrease) in deferred loan fees                                 |   | 129                                  |   | 114                                  |   |
| Net decrease in  accrued interest payable & other liabilities              |   | (441                                 | )      | (5,343                               | )      |
| Net cash  provided by (used in) operating activities                           |   | 475                                  |   | (2,906                               | )      |
|                                                                           |   |                                 |   |                                 |   |
| **Investing activities:**                                                      |   |                                 |   |                                 |   |
| Investment  securities purchases                                               |   | (51,616                              | )      | (45,653                              | )      |
| Proceeds from  maturities of investment securities                             |   | 21,916                               |   | 16,499                               |   |
| Net increase in  time deposits in other financial institutions                 |   | (100                                 | )      | —                               |   |
| Proceeds from  sales of loans                                                  |   | 1,991                                |   | 1,200                                |   |
| Net increase in  loans                                                         |   | (24,150                              | )      | (16,936                              | )      |
| Purchases of  premises and equipment                                           |   | (1,739                               | )      | (282                                 | )      |
| Net cash used in  investing activities                                         |   | (53,698                              | )      | (45,172                              | )      |
|                                                                           |   |                                 |   |                                 |   |
| **Financing activities:**                                                      |   |                                 |   |                                 |   |
| Net (decrease)  increase in demand, NOW and savings deposits                   |   | (13,673                              | )      | 6,377                                |   |
| Net decrease in  certificates of deposit                                       |   | (13,935                              | )      | (7,475                               | )      |
| Net proceeds  from other borrowings                                            |   | 40,805                               |   | 35,951                               |   |
| Issuance of  Capital Securities and increase in minority interests             |   | —                               |   | 31                                   |   |
| Issuance of  shares pursuant to 401K and ESOP plans                            |   | —                               |   | 313                                  |   |
| Exercise of  stock options                                                     |   | 40                                   |   | 139                                  |   |
| Net cash  provided by financing activities                                     |   | 13,237                               |   | 35,336                               |   |
|                                                                           |   |                                 |   |                                 |   |
| Net decrease in  cash and cash equivalents                                     |   | (39,986                              | )      | (12,742                              | )      |
|                                                                           |   |                                 |   |                                 |   |
| Cash and cash  equivalents at beginning of period                              |   | 73,183                               |   | 49,288                               |   |
| Cash and cash  equivalents at end of period                                    |   | $                                    | 33,197 |                                 | $      | 36,546 |   |
|                                                                           |   |                                 |   |                                 |   |
| **Cash paid during the quarter:**                                              |   |                                 |   |                                 |   |
| Interest paid                                                                  |   | $                                    | 3,488  |                                 | $      | 4,623 |   |
| **Supplemental disclosure of noncash  investing****and financing activities:** |   |                                 |   |                                 |   |
| Investment  securities unrealized losses and swaps, net of tax                 |   | (355                                 | )      | (1,386                               | )      |

 

See accompanying notes

 

6

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CapitalCorp of the WestNotes to Consolidated FinancialStatementsMarch 31, 2003 and December 31, 2002(Unaudited)

GENERAL - COMPANY

 

Capital Corp of the West (the “Company” or “Capital Corp”) is a bankholding company incorporated under the laws of the State of California on April26, 1995.  On November 1, 1995, theCompany became registered as a bank holding company, and is a holder of all ofthe capital stock of County Bank (the “Bank”). During 1998, the Company formed Capital West Group, a subsidiary thatengages 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’s securities consist of20,000,000 shares of Common Stock, no par value, 10,000,000 shares ofAuthorized Preferred Stock, and 6,000,000 of Trust Preferred 10.20% CapitalSecurities which have a liquidation amount of $1,000 per capital security.  As of March 31, 2003 there were 5,329,038common shares outstanding, held of record by approximately 1,700shareholders.  There were no preferredshares outstanding at March 31, 2003. The Bank has three wholly owned subsidiaries, Merced Area Investment& Development, Inc. (“MAID”), County Asset Advisors (“CAA”), and CountyInvestment Trust (“REIT”).  CAA iscurrently inactive.  On April 26, 2002,the Company entered into an agreement to purchase Regency Investment Advisors,Inc (“RIA”).  The purchase of RIA wascompleted during the second quarter, 2002. The Company has two other wholly owned subsidiaries, County StatutoryTrust (“Trust”), and Capital West Group, Inc. The Trust is used in connection with the Capital Securities that havebeen issued by the Company.  CapitalWest Group, Inc. is currently inactive. All references herein to the “Company” include the Company, theCompany’s subsidiaries, the Bank and the Bank’s subsidiaries, unless thecontext otherwise requires.

 

GENERAL - BANK

 

The Bank was organized on August 1, 1977, as CountyBank of Merced, a California state banking corporation.  The Bank commenced operations on December22, 1977.  In November 1992, the Bankchanged its legal name to County Bank. The Bank’s securities consist of one class of Common Stock, no par valueand is wholly owned by the Company.  TheBank’s deposits are insured under the Federal Deposit Insurance Act by theFederal Deposit Insurance Corporation (“FDIC”) up to applicable limits statedtherein.  Like most state-charteredbanks of its size in California, it is not a member of the Federal ReserveSystem.

 

INDUSTRY AND MARKET AREA

 

The Bank engages in general commercial bankingbusiness primarily in Fresno, Madera, Mariposa, Merced, San Francisco, SanJoaquin, Stanislaus and Tuolomne counties. The Bank has eighteen full service branch offices; two of which arelocated in Merced with the branch located in downtown Merced currently servingas both a branch and as administrative headquarters. There are offices inAtwater, Dos Palos, Hilmar, Livingston, Los Banos, Madera, Mariposa, SanFrancisco, Sonora, Stockton, two offices in Modesto, two in Fresno and twooffices in Turlock.  The Bank’sadministrative headquarters also provides accommodations for the activities ofMerced Area Investment & Development (“MAID”), the Bank’s wholly owned realestate subsidiary.

 

7

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OTHER FINANCIAL NOTES

 

All adjustments which in the opinion of Management arenecessary for a fair presentation of the Company’s financial position at March31, 2003 and December 2002 and the results of operations for the three monthperiods ended March 31, 2003 and 2002, and the statements of cash flows for thethree months ended March 31, 2003 and 2002 have been included.  Earnings per share have been adjusted toreflect the affect of the 5% stock dividend that was paid April 25, 2003 toshareholders of record on April 1, 2003. The interim results for the three months ended March 31, 2003 and 2002are not necessarily indicative of results for the full year.  These financial statements should be read inconjunction with the financial statements and the notes included in theCompany’s Annual Report for the year ended December 31, 2002.

 

The accompanying unaudited financial statements havebeen prepared on a basis consistent with generally accepted accountingprinciples and with the instructions to Form 10-Q and Rule 10-01 of RegulationS-X.

 

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

 

The following table provides a reconciliation of thenumerator and denominator of the basic and diluted earnings per sharecomputation of the three month periods ended March 31, 2003 and 2002:

 
|                                              |   | **For The  Three Months  Ended March 31,** |   |
|---------------------------------------------------|--------|--------------------------------------------|--------|
| **(Dollars in thousands, except per share data)** |   | **2003**                                   |   | **2002** |   |
|                                              |   |                                       |   |   |   |
| Basic EPS  computation:                           |   |                                       |   |   |   |
| Net income                                        |   | $                                          | 3,027  |   | $ | 2,224 |   |
| Average common  shares outstanding                |   | 5,326                                      |   | 5,195 |   |
| 5% Stock  Dividend in April, 2003                 |   | 266                                        |   | 247 |   |
| Average common  shares outstanding                |   | 5,592                                      |   | 5,455 |   |
| Basic EPS                                         |   | $                                          | 0.54   |   | $ | 0.41 |   |
|                                              |   |                                       |   |   |   |
| Diluted EPS  Computations:                        |   |                                       |   |   |   |
| Net income                                        |   | $                                          | 3,027  |   | $ | 2,224 |   |
| Average common  shares outstanding                |   | 5,326                                      |   | 5,195 |   |
| 5% Stock  Dividend in April, 2002                 |   | 266                                        |   | 247 |   |
| Effect of stock  options                          |   | 184                                        |   | 160 |   |
|                                              |   | 5,776                                      |   | 5,602 |   |
| Diluted EPS                                       |   | $                                          | 0.52   |   | $ | 0.40 |   |

 

The Company has intangible assets consisting of coredeposit premiums and goodwill.  Coredeposit premiums are amortized using an accelerated method over a period of tenyears.  Intangible assets related togoodwill will no longer be amortized after December 31, 2001 but will bereviewed for potential 

 

8

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impairment.  Management hasdetermined there was no impairment of goodwill as of March 31, 2003.  As of March 31, 2003 and December 31, 2002,the Company had unamortized core deposit premiums of $1,223,000 and $1,390,000,respectively.  Amortization of coredeposit premiums and other intangibles was $170,000 during the first quarter of2003 and 2002.  Core deposit premiumsand other intangibles are scheduled to amortize at a rate of approximately$170,000 per quarter through the quarter ended September 30, 2004 and at a rateof $47,000 during the fourth quarter of 2004. Core deposit premiums of $460,000 and $4,340,000 were initially recordedas a result of purchasing deposits from Town and Country Finance and Thrift inJuly, 1996 and from the purchase of three branches from Bank of America inDecember, 1997, respectively.

 

The Company provides stock-based compensation tocertain officers and directors.  TheCompany uses the intrinsic value method to account for its stock option plans(in accordance with the provisions of Accounting Principles Board Opinion No.25).  Under this method, compensationexpense is recognized for awards of options to purchase shares of common stockto employees under compensatory plans only if the fair market value of thestock at the option grant date (or other measurement date, if later) is greaterthan the amount the employee must pay to acquire the stock.  Statement of Financial Accounting StandardsNo. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companiesto continue using the intrinsic value method or to adopt a fair value basedmodel to account for stock option plans. The fair value based method results in recognizing as expense over thevesting period the fair value of all stock-based awards on the date ofgrant.  The Company has elected tocontinue to use the intrinsic value method.

 

Had compensation cost for the Company’s option plansbeen determined in accordance with SFAS 123, the Company’s net income andearnings per share would have been reduced to the pro forma amounts indicatedas follows:

 
|                                                                                         |   | **Three  months ended March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(dollars in thousands except per share amounts)**                                          |   | **2003**                          |   | **2002** |   |
| Net income:                                                                                  |   | $                                 | 3,027  |   | $ | 2,224 |   |
| As reported                                                                                  |   |                              |   |   |   |
| Pro forma                                                                                    |   | $                                 | 2,851  |   | $ | 2,105 |   |
|                                                                                         |   |                              |   |   |   |
| Basic earnings  per share:                                                                   |   |                              |   |   |   |
| As reported                                                                                  |   | $                                 | 0.54   |   | $ | 0.41 |   |
| Pro forma                                                                                    |   | $                                 | 0.51   |   | $ | 0.39 |   |
|                                                                                         |   |                              |   |   |   |
| Diluted earnings  per share:                                                                 |   |                              |   |   |   |
| As reported                                                                                  |   | $                                 | 0.52   |   | $ | 0.40 |   |
| Pro forma                                                                                    |   | $                                 | 0.49   |   | $ | 0.37 |   |
|                                                                                         |   |                              |   |   |   |
| Stock-based  employee compensation cost, net of related tax effects, included in net income: |   |                              |   |   |   |
| As reported                                                                                  |   | $                                 | — |   | $ | — |   |
| Pro forma                                                                                    |   | $                                 | 176    |   | $ | 119 |   |

 

9

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**Item2.    Management’s Discussion****And AnalysisOf Financial Condition And Results OfOperations**

 

The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains forward-lookingstatements that are subject to risks and uncertainties and include informationabout possible or assumed future results of operations.  Many possible events or factors could affectthe future financial results and performance of the company.  This could cause results or performance todiffer materially from those expressed in our forward-looking statements.  Words such as “experts”, “anticipates”,“believes”, “estimates”, variations of such words and other similar expressionsare intended to identify such forward-looking statements.  These statements are not guarantees offuture performance and involve certain risks, uncertainties and assumptionswhich are difficult to predict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in, or implied by, such forward-looking statements.

 

Readers of the Company’s Form 10-Q should not relysolely on forward looking statements and should consider all uncertainties andrisks discussed throughout this report, as well as those discussed in theCompany’s 2002 Annual Report on Form 10-K filed March 27, 2003.  These statements are representative only onthe date hereof, and the Company undertakes no obligation to update anyforward-looking statements made.  Somepossible events or factors that could occur that may cause differences fromexpected results include the following: the Company’s loan growth is dependenton economic conditions, as well as various discretionary factors, such asdecisions to sell, or purchase certain loans or loan portfolios; participationsof loans and the management of borrower, industry, product and geographicconcentrations and the mix of the loan portfolio.  The rate of charge-offs and provision expense can be affected bylocal, regional and international economic and market conditions,concentrations of borrowers, industries, products and geographical conditions,the mix of the loan portfolio and management’s judgements regarding thecollectibility of loans.  Liquidityrequirements may change as a result of fluctuations in assets and liabilitiesand off-balance sheet exposures, which will impact the capital and debtfinancing needs of the Company and the mix of funding sources.  Decisions to purchase, hold, or sellsecurities are also dependent on liquidity requirements and market volatility,as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional andinternational economic conditions, levels, mix, maturities, yields or rates ofassets and liabilities and the wholesale and retail funding sources of theCompany.

 

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

 

Other factors that may cause actual results to differfrom the forward-looking statements include the following: competition withother local and regional banks, savings and loan associations, credit unionsand other nonbank financial institutions, such as investment banking firms,investment advisory firms, brokerage firms, mutual funds and insurancecompanies, as well as other entities which offer financial services; interestrate, market and monetary fluctuations; inflation; market volatility; generaleconomic conditions; introduction and acceptance of new banking-relatedproducts, services and enhancements; fee pricing strategies, mergers andacquisitions and their integration into the Company, civil disturbances orterrorist threats or acts, or apprehension about the possible futureoccurrences or acts of this type, outbreak or escalation of hostilities inwhich the United States is involved, any declaration of war by the 

 

10

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

 

**Criticalaccounting policies and estimates**

 

The company’s discussion and analysis of its financialcondition and results of operations are based upon the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.  Onan on-going basis, the Company evaluates its estimates, including those relatedto the adequacy of the allowance for loan losses, intangible assets, and contingencies.  The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. (See caption “Allowance for Loan Losses” for a moredetailed discussion).

 

11

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The following discussion and analysis is designed toprovide a better understanding of the significant changes and trends related tothe Company and its subsidiaries’ financial condition, operating results, assetand liability management, liquidity and capital resources and should be read inconjunction with the Consolidated Financial Statements of the Company and theNotes thereto.

 

**ResultsOf Operations**

** **

**Three Months Ended March 31, 2003 Compared With Three MonthsEnded March 31, 2002**

 

*Overview.*  For the three months ended March 31, 2003the Company reported record net income of $3,027,000.  This compares to $2,224,000 for the same period in 2002 andrepresents an increase of $803,000 or 36%. Basic and fully diluted earnings per share were $.54 and $.52 for the threemonths ended March 31, 2003. This compares to basic and fully diluted earningsper share of $.41 and $.40 for the three months ended March 31, 2002 andrepresents an increase of $0.13 and $0.12 per share for both basic and fullydiluted earnings per share. The basic and fully diluted earnings per share arereflective of the 5% stock dividend paid in April, 2003.  The annualized return on average assets was1.20% and 1.01% for the first three months of 2003 and 2002.  The Company’s annualized return on averageequity was 15.37% and 13.64% for the three months ended March 31, 2003 and2002.

* *

*NetInterest Income.*  TheCompany’s primary source of income is net interest income and is determined bythe difference between interest income and fees derived from earning assets andinterest paid on interest bearing liabilities. Net interest income for the three months ended March 31, 2003 totaled$10,789,000 and represented an increase of $1,463,000 or 16% when compared to the$9,326,000 achieved during the three months ended March 31, 2002.

 

Total interest and fees on earning assets were$14,643,000 for the three months ended March 31, 2003, an increase of $766,000or 6% from the $13,877,000 for the same period in 2002.  The level of interest income is affected by changesin volume of and rates earned on interest-earning assets.  Interest-earning assets consist primarily ofloans, investment securities and federal funds sold.  The increase in total interest income for the three months endedMarch 31, 2003 was primarily the result of an increase in volume of interestearning assets.  Averageinterest-earning assets for the three months ended March 31, 2003 were$934,810,000 compared with $811,208,000 for the three months ended March 31,2002, an increase of $123,602,000 or 15%.

 

Interest expense is a function of the volume of andthe rates paid on interest-bearing liabilities.  Interest-bearing liabilities consist primarily of certaindeposits and borrowed funds.  Totalinterest expense was $3,854,000 for the three months ended March 31, 2003,compared with $4,551,000 for the three months ended March 31, 2002, a decreaseof $697,000 or 15%. This decrease was primarily the result of a decrease in theinterest rate paid on interest-bearing liabilities. Average interest-bearingliabilities were $769,322,000 for the three months ended March 31, 2003compared with $687,335,000 for the same three months in 2002, an increase of$81,987,000 or 12%.  Average interestrates paid on interest-bearing liabilities were 2.03% for the three monthsending March 31, 2003 compared with 2.69% for the same three months of 2002, adecrease in interest rates paid of 66 basis points or 25%.

 

The increase in interest-earning assets andinterest-bearing liabilities is primarily the result of increased marketpenetration within our target markets which has been accomplished by increasingthe utilization of existing facilities and the addition of branches in SanFrancisco and Stockton, California.

 

12

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The Company’s taxable equivalent net interest margin,the ratio of net interest income to average interest-earning assets, was 4.74%for the three months ended March 31, 2003 compared with 4.73% for the sameperiod in 2002.  Net interest marginprovides a measurement of the Company’s ability to employ funds profitablyduring the period being measured.  TheCompany’s slight increase in net interest margin was primarily attributable tothe Company’s ability to increase the loan percentage within interest-earningassets.  Loans as a percentage ofaverage interest-earning assets increased to 68% for the three months endedMarch 31, 2003 compared with 65% for the three months ended March 31, 2002.

* *

*AverageBalances And Rates Earned And Paid.*  The following table presents condensed average balance sheetinformation for the Company, together with interest rates earned and paid onthe various sources and uses of its funds for each of the periodsindicated.  Nonaccruing loans areincluded in the calculation of the average balances of loans, but thenonaccrued interest on such loans is excluded.

 

AVERAGE BALANCE SHEET& ANALYSIS OF NET INTEREST EARNINGS

 
|                                             |   | **Three months ended  March 31, 2003** |      | **Three months ended  March 31, 2002** |   |
|--------------------------------------------------|--------|----------------------------------------|-----------|----------------------------------------|--------|
|                                             |   | **Average****Balance**                 |      | **Taxable****EquivalentInterest**      |   | **Taxable****EquivalentYield/rate** |   | **Average****Balance** |   | **Taxable****Equivalent  Interest** |   | **Taxable****EquivalentYield/rate** |   |
|                                             |   | **(Dollars in thousands)**             |      |
| **Assets**                                       |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                               |   | $                                      | 13,349    |                                   | $      | 39 |   | 1.18 | % | $ | 2,837 |   | $ | 12 |   | 1.72 | % |
| Time deposits at other  financial institutions   |   | 559                                    |      | 2                                      |   | 1.45 |   | 500 |   | 2 |   | 1.62 |   |
| Taxable investment securities  (1)               |   | 256,905                                |      | 2,977                                  |   | 4.70 |   | 248,697 |   | 3,443 |   | 5.61 |   |
| Nontaxable investment  securities (1)            |   | 28,908                                 |      | 434                                    |   | 6.09 |   | 28,958 |   | 428 |   | 5.99 |   |
| Loans, gross: (2)                                |   | 635,089                                |      | 11,333                                 |   | 7.24 |   | 530,216 |   | 10,137 |   | 7.75 |   |
| Total interest-earning  assets:                  |   | 934,810                                |      | 14,785                                 |   | 6.41 |   | 811,208 |   | 14,022 |   | 7.01 |   |
| Allowance for loan losses                        |   | (12,390                                | )         |                                   |   |   |   | (10,044 | ) |   |   |   |   |
| Cash and due from banks                          |   | 32,575                                 |      |                                   |   |   |   | 28,090 |   |   |   |   |   |
| Premises and equipment, net                      |   | 14,343                                 |      |                                   |   |   |   | 13,128 |   |   |   |   |   |
| Interest receivable and other  assets            |   | 38,876                                 |      |                                   |   |   |   | 38,672 |   |   |   |   |   |
| Total assets                                     |   | $                                      | 1,008,214 |                                   |   |   |   |   | $ | 881,054 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| **Liabilities And Shareholders’ Equity**    |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Negotiable order of  withdrawal                  |   | $                                      | 117,514   |                                   | $      | 14 |   | 0.05 |   | $ | 97,617 |   | $ | 54 |   | 0.22 |   |
| Savings deposits                                 |   | 224,096                                |      | 580                                    |   | 1.05 |   | 210,435 |   | 831 |   | 1.60 |   |
| Time deposits                                    |   | 315,352                                |      | 2,109                                  |   | 2.71 |   | 284,395 |   | 2,718 |   | 3.88 |   |
| Other borrowings                                 |   | 112,360                                |      | 1,151                                  |   | 4.15 |   | 94,888 |   | 948 |   | 4.05 |   |
| Total interest-bearing  liabilities              |   | 769,322                                |      | 3,854                                  |   | 2.03 |   | 687,335 |   | 4,551 |   | 2.69 |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                     |   | 148,426                                |      |                                   |   |   |   | 116,556 |   |   |   |   |   |
| Accrued interest, taxes and  other liabilities   |   | 5,635                                  |      |                                   |   |   |   | 5,929 |   |   |   |   |   |
| Total liabilities                                |   | 923,383                                |      |                                   |   |   |   | 809,820 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Capital Securities and other  minority interests |   | 6,031                                  |      |                                   |   |   |   | 6,000 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Total shareholders’ equity                  |   | 78,800                                 |      |                                   |   |   |   | 65,234 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |   | $                                      | 1,008,214 |                                   |   |   |   |   | $ | 881,054 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Net interest income and  margin (3)              |   |                                   |      | $                                      | 10,931 |   | 4.74 | % |   |   | $ | 9,471 |   | 4.73 | % |

 

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(1)                                  Tax-equivalent adjustments included in thenontaxable investment securities portfolio are $107,000 and $101,000 for thethree months ended March 31, 2003 and 2002, respectively.  Tax equivalent adjustments included in thetaxable investment securities created by a dividends received deduction were$35,000 and $45,000 for the three months ended March 31, 2003 and 2002.

(2)                                  Amounts of interest earned includes loan fees of$361,000 and $197,000 for March 31, 2003 and 2002 respectively.

(3)                                  Net interest margin is computed by dividing netinterest income by total average interest-earning assets.

 

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*NetInterest Income Changes Due To Volume 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.

 

NetInterest Income Variance Analysis:

 

|                                          |   | **Three months ended  March 31, 2003 compared to March 31, 2002** |   |
|-----------------------------------------------|--------|-------------------------------------------------------------------|--------|
| **(Dollar in thousands)**                     |   | **Volume**                                                        |   | **Rate** |   | **Total** |   |
|                                          |   |                                                              |   |   |   |   |   |
| Increase (decrease) in interest income:       |   |                                                              |   |   |   |   |   |
| Federal funds sold                            |   | $                                                                 | 75     |   | $ | (48 | ) | $ | 27 |   |
| Time deposits at other financial institutions |   | —                                                            |   | — |   | — |   |
| Taxable investment securities                 |   | 197                                                               |   | (663 | ) | (466 | ) |
| Tax-exempt investment securities              |   | (1                                                                | )      | 7 |   | 6 |   |
| Loans                                         |   | 1,919                                                             |   | (723 | ) | 1,196 |   |
| Total:                                        |   | $                                                                 | 2,190  |   | $ | (1,427 | ) | $ | 763 |   |
|                                          |   |                                                              |   |   |   |   |   |
| Increase (decrease) in interest expense:      |   |                                                              |   |   |   |   |   |
| Interest bearing demand                       |   | $                                                                 | 9      |   | $ | (49 | ) | $ | (40 | ) |
| Savings deposits                              |   | 52                                                                |   | (303 | ) | (251 | ) |
| Time deposits                                 |   | 278                                                               |   | (887 | ) | (609 | ) |
| Other borrowings                              |   | 178                                                               |   | 25 |   | 203 |   |
| Total:                                        |   | $                                                                 | 517    |   | $ | (1,214 | ) | $ | (697 | ) |
|                                          |   |                                                              |   |   |   |   |   |
| Increase (decrease) in net interest income    |   | $                                                                 | 1,673  |   | $ | (213 | ) | $ | 1,460 |   |

* *

*Provision For Loan Losses.*** **The provision for loan losses for the three monthsended March 31, 2003 was $671,000 compared with $780,000 for the three monthsended March 31, 2002, a decrease of $109,000 or 14%. See “Allowance for LoanLosses” contained herein.  As ofMarch 31, 2003 the allowance for loan losses was $12,690,000 or 1.94% of totalloans which compares to the allowance for loan losses of $12,134,000 or 1.91%of total loans as of December 31, 2002. At March 31, 2003, nonperforming assets totaled $2,248,000 or 0.21% oftotal assets, nonperforming loans totaled $2,188,000 or 0.33% of total loansand the allowance for loan losses totaled 580% of nonperforming loans.  At December 31, 2002, nonperforming assetstotaled $2,443,000 or 0.24% of total assets, nonperforming loans totaled$2,383,000 or 0.38% of total loans and the allowance for loan losses totaled509% of nonperforming loans.  Noassurance can be given that nonperforming loans will not increase or that theallowance for loan losses will be adequate to cover losses inherent in the loanportfolio.

* *

*NoninterestIncome.*** **Noninterestincome increased by $547,000 or 31% to $2,326,000 for the three months endedMarch 31, 2003 compared with $1,779,000 in the same period during 2002.  Service charges on deposit accountsincreased by $150,000 or 13% to $1,277,000 for the three months ended March 31,2003 compared with $1,127,000 for the same period in 2002.  The increase in fees is the result ofincreased customer use of fee based products. Other income increased by $397,000 or 61% for the three month periodended March 31, 2003 when compared to the same period in 2002.  The primary source of this increased otherincome is the sale of the consumer credit card portfolio in March, 2003 for again of $82,000, the gain on sale of foreclosure property with a book basis of$0 for an $81,000 gain, 

 

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and the $127,000 in first quarter, 2003 asset management fees generatedby Regency Investment Advisors, Incorporated. Regency Investment Advisors, Incorporated was acquired in June, 2002.

 

*NoninterestExpense.*** **Noninterestexpenses increased by $1,088,000 or 15% to $8,513,000 for the three monthsended March 31, 2003 compared with $7,425,000 for the same period in 2002.  The primary components of noninterestexpenses were salaries and employee benefits, premises expenses, occupancyexpenses, equipment expenses, professional fees, marketing expenses, and otheroperating expenses.

 

For the three months ended March 31, 2003, salariesand related benefits increased by $559,000 or 14% to $4,503,000 from the$3,944,000 recorded for the same period in 2002. The salary expense increasewas primarily the result of normal salary progression.  Premises and occupancy expenses increased by$101,000 or 18% to $670,000 for the three months ending March 31, 2003 from$569,000 during the same period in 2002. The primary reason for the increase in occupancy costs in 2003 isrelated to retrofit charges for branch facilities in Atwater, Fresno, andMerced.  Equipment expenses increased by$43,000 or 6% to $759,000 during the three months ended March 31, 2003 from the$716,000 experienced during the same period in 2002.  When comparing the results of the three months ending March 31,2003 to three months ending March 31, 2002, professional fees increased by$21,000 or 8%, marketing expenses increased by $72,000 or 38%, goodwill andintangible amortization expense were constant at $170,000, supplies expenseincreased by $49,000 or 26%, dividend expense on Capital Securities decreasedby $1,000 or less than 1% and other expenses increased $244,000 or 20% from2002 levels. Increased professional fees in 2003 were the result of anincreased use of consultants used to identify new business profitabilitystrategies.  The increased otherexpenses were the result of increased operating losses and supplies usage.

 

*ProvisionFor Income Taxes.*** **TheCompany recorded an increase of $228,000 or 34% in the income tax provision to$904,000 for the three months ended March 31, 2003 compared to the $676,000recorded for the same period in 2002. During the first quarter of 2003 and 2002, the Company achieved aneffective tax rate of 23%.  Theeffective tax rate was constant, with the increase in provision for incometaxes caused primarily by a volume increase in pretax income.  Effective tax rates below statutory tax ratelevels have been achieved primarily through the continued utilization of a realestate investment trust established during the fourth quarter of 2001 thatprovides the Company with a means to potentially generate future additionalcapital for the Bank as well as to currently reduce state income tax expense.

 

**Financial Condition**

 

Total assets at March 31, 2003 were $1,049,678,000, anincrease of $15,468,000 or 1% compared with total assets of $1,034,210,000 atDecember 31, 2002.  Net loans were$642,638,000 at March 31, 2003, an increase of $20,999,000 or 3% compared withnet loans of $621,639,000 at December 31, 2002.  Deposits were $806,771,000 at March 31, 2003, a decrease of$27,608,000 or 3% compared with deposits of $834,379,000 at December 31,2002.  The increase in total assets ofthe Company between December 31, 2002 and March 31, 2003 was primarily theresult of an increase in borrowings that were obtained to fund additional purchasesof investment securities.

 

Total shareholders’ equity was $79,881,000 at March31, 2003, an increase of $2,712,000 or 4% from the $77,169,000 at December 31,2002. The growth in shareholders’ equity between December 31, 2002 and March31, 2003 was achieved through the retention of accumulated earnings which waspartially offset by a decline in other comprehensive income.  Other comprehensive income consists of 

 

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changes in the fair market value compared to book value of availablefor sale investment securities and valuation changes in the Bank’s interestrate swap, net of estimated federal and state income taxes.

 

*Off-BalanceSheet Commitments. *Thefollowing table shows the distribution of the Company’s undisbursed loancommitments at the dates indicated.

 

| **(Dollars in thousands)**   |   | **March 31,  2003** |    | **December 31,  2002** |   |
|------------------------------|--------|---------------------|---------|------------------------|--------|
|                         |   |                |    |                   |   |
| Letters of credit            |   | $                   | 7,295   |                   | $      | 6,522 |   |
| Commitments to extend credit |   | 243,103             |    | 235,140                |   |
| Total                        |   | $                   | 250,398 |                   | $      | 241,662 |   |

* *

*OtherInterest-Earning Assets. *Thefollowing table relates to other interest-earning assets not disclosedpreviously for the dates indicated. This item consists of a salary continuation plan for the Company’sexecutive management and deferred retirement benefits for participating boardmembers.  The plan is informally linkedwith universal life insurance policies for the salary continuation plan.  Income from these policies is reflected innoninterest income.

 
| **(Dollars in thousands)**             |   | **At March 31,  2003** |   | **At December 31,  2002** |   |
|----------------------------------------|--------|------------------------|--------|---------------------------|--------|
|                                   |   |                   |   |                      |   |
| Cash surrender value of life insurance |   | $                      | 20,462 |                      | $      | 17,240 |   |
|                                        |        |                        |        |                           |        |  |  |

 

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

 

Nonperforming loans are those which the borrower failsto perform in accordance with the original terms of the obligation and includeloans on nonaccrual status, loans past due 90 days or more and restructuredloans.  The Company generally placesloans on nonaccrual status and accrued but unpaid interest is reversed againstthe current 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 interestaccrues at a below market rate or upon which certain principal has beenforgiven so as to aid the borrower in the final repayment of the loan, with anyinterest previously accrued, but not yet collected, being reversed againstcurrent income.  Interest is reported ona cash basis until the borrower’s ability to service the restructured loan inaccordance with its terms is established. The Company had no restructured loans as of the dates indicated in thetable below.

 

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The following table summarizes nonperforming assets of the Company atMarch 31, 2003 and December 31, 2002:

 

| **(Dollars in thousands)**              |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                    |   |                |   |                   |   |
| Nonaccrual loans                        |   | $                   | 2,188  |                   | $      | 2,381 |   |
| Accruing loans past due 90 days or more |   | —              |   | 2                      |   |
| Total nonperforming loans               |   | 2,188               |   | 2,383                  |   |
| Other real estate owned                 |   | 60                  |   | 60                     |   |
| Total nonperforming assets              |   | $                   | 2,248  |                   | $      | 2,443 |   |
|                                    |   |                |   |                   |   |
| Nonperforming loans to total loans      |   | 0.33                | %      | 0.38                   | %      |
| Nonperforming assets to total assets    |   | 0.21                | %      | 0.24                   | %      |

 

Contractual accrued interest income on loans onnonaccrual status as of March 31, 2003 and 2002, that would have beenrecognized if the loans had been current in accordance with their originalterms was approximately $41,000 and $267,000, respectively.

 

At March 31, 2003, nonperforming assets represented..21% of total assets, a decrease of 3 basis point when compared to the .24% atDecember 31, 2002.  Nonperforming loansrepresented .33% of total loans at March 31, 2003, a decrease of 5 basis pointscompared to the .38% at December 31, 2002. Nonperforming loans that were secured by first deeds of trust on real propertywere $0 at March 31, 2003 and December 31, 2002.   Other forms of collateral such as inventory and equipmentsecured the nonperforming loans as of each date.  No assurance can be given that the collateral securingnonperforming loans will be sufficient to prevent losses on such loans.

 

The decrease in nonperforming loans and nonperformingassets as of March 31, 2003 compared with their levels as of December 31, 2002,was due to a slight decrease in the nonperforming agricultural segment of theloan portfolio.

 

At March 31, 2003 and December 31, 2002, the Companyhad $60,000 invested in one property, respectively, that had been acquiredthrough foreclosure.  The property wascarried at the lower of its estimated market value, as evidenced by an independentappraisal, or the recorded investment in the related loan, less estimatedselling expenses.  At foreclosure, ifthe fair value of the real estate is less than the Company’s recordedinvestment in the related loan, a charge is made to the allowance for loanlosses.  The Company expects to sellmost of these properties within a twelve month period.  During the first quarter of 2003, oneforeclosure property was acquired and sold for $81,000 that had no assignedbook value for a gain on sale of $81,000.  No assurance can be given that the Company will sell the remainingproperty during 2003 or at any time or the amount for which the property mightbe 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.  An impaired loan is charged off at the timemanagement believes the collection process has been exhausted.  At March 31, 2003 and December 31, 2002, impairedloans were measured based on the present value of future cash flows discountedat the loan’s effective rate, the loan’s observable market price or the fairvalue of collateral if the loan is collateral-dependent.  Impaired loans at March 31, 2003 

 

17

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were $2,188,000 for which the Company made provisions to the allowancefor loan losses of approximately $363,000.

 

Except for loans that are disclosed above, there wereno assets as of March 31, 2003, where known information about possible creditproblems of borrower causes management to have serious doubts as to the abilityof the borrower to comply with the present loan repayment terms and which maybecome nonperforming assets.  Given themagnitude of the Company’s loan portfolio, however, it is always possible thatcurrent credit problems may exist that may not have been discovered bymanagement.

** **

**Allowancefor Loan Losses**

 

Thefollowing table summarizes the loan loss experience of the Company for the threemonths ended March 31, 2003 and 2002, and for the year ended December 31, 2002.

** **
|                                        |   | **March 31**               |    | **December 31  2002** |   |
|---------------------------------------------|--------|----------------------------|---------|-----------------------|--------|
|                                        |   | **2003**                   |    | **2002**              |   |   |
|                                        |   | **(Dollars in thousands)** |    |
| **Allowance  for Loan Losses:**             |   |                       |    |                  |   |   |   |
| Balance at beginning of period              |   | $                          | 12,134  |                  | $      | 9,743 |   | $ | 9,743 |   |
| Provision for loan losses                   |   | 671                        |    | 780                   |   | 4,151 |   |
| Charge-offs:                                |   |                       |    |                  |   |   |   |
| Commercial and agricultural                 |   | 6                          |    | 218                   |   | 1,504 |   |
| Consumer                                    |   | 306                        |    | 262                   |   | 1,085 |   |
| Total charge-offs                           |   | 312                        |    | 480                   |   | 2,589 |   |
| Recoveries                                  |   |                       |    |                  |   |   |   |
| Commercial and agricultural                 |   | 69                         |    | 19                    |   | 233 |   |
| Consumer                                    |   | 128                        |    | 167                   |   | 596 |   |
| Total recoveries                            |   | 197                        |    | 186                   |   | 829 |   |
| Net charge-offs                             |   | 115                        |    | 294                   |   | 1,760 |   |
| Balance at end of period                    |   | $                          | 12,690  |                  | $      | 10,229 |   | $ | 12,134 |   |
|                                        |   |                       |    |                  |   |   |   |
| Loans outstanding at period-end             |   | $                          | 655,328 |                  | $      | 547,751 |   | $ | 633,733 |   |
| Average loans outstanding                   |   | $                          | 635,089 |                  | $      | 530,216 |   | $ | 576,156 |   |
|                                        |   |                       |    |                  |   |   |   |
| Annualized net charge-offs to average loans |   | 0.07                       | %       | 0.22                  | %      | 0.31 | % |
| Allowance for loan losses                   |   |                       |    |                  |   |   |   |
| To total loans                              |   | 1.94                       | %       | 1.87                  | %      | 1.91 | % |
| To nonperforming assets                     |   | 564.50                     | %       | 182.47                | %      | 496.56 | % |

 

The Company maintains an allowance for loan losses ata level considered by management to be adequate to cover the inherent risks ofloss associated with its loan portfolio under prevailing and anticipatedeconomic conditions.  In determining theadequacy of the allowance for loan losses, management takes into considerationgrowth trends in the portfolio, examination of financial institutionsupervisory authorities, prior loan loss experience for the Company,concentrations of credit risk, delinquency trends, general economic conditions,the interest rate environment and internal and external credit reviews.  In addition, the risks management considersvary depending on the nature of the loan. The normal risks considered by management with respect to agriculturalloans include the fluctuating value of the collateral, changes in weatherconditions and the availability of adequate water resources in the Company’slocal market area.  The normal risksconsidered by management with respect to real estate construction loans includefluctuation in real estate values, the demand for improved commercial and 

 

18

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industrial properties and housing, the availability of permanentfinancing in the Company’s market area and borrowers’ ability to obtainpermanent financing.  The normal risksconsidered by management with respect to real estate mortgage loans includefluctuations in the value of real estate. Additionally, the Company relies on data obtained through independentappraisals for significant properties to determine loss exposure onnonperforming loans.

 

The balance in the allowance is affected by theamounts provided from operations, amounts charged off and recoveries of loanspreviously charged off.  The Companyrecorded provisions for loan losses in the first three months of 2003 of$671,000 compared with $780,000 in the same period of 2002. The decrease inloan loss provisions in 2003 was recorded to coincide with the lower level ofcharge-offs experienced in the first quarter of 2003 in comparison to the samequarter in 2002.  The Company’scharge-offs, net of recoveries, were $115,000 for the three months ended March31, 2003 compared with $294,000 for the same three months in 2002.  The decrease in net charge-offs for thefirst quarter of 2003 was primarily due to decreased charge-offs that occurredwithin the commercial and agricultural segment of the loan portfolio.  The decreased charge-offs in this segment ofthe portfolio are primarily attributable to a tightening of the creditstandards in this segment of the loan portfolio that has occurred.

As of March 31, 2003, the allowance for loan losses was $12,690,000 or1.94% of total loans outstanding, compared with $12,134,000 or 1.91% of totalloans outstanding as of December 31, 2002 and $10,229,000 or 2.87% of totalloans outstanding as of March 31, 2002.

 

The Company uses a method developed by management fordetermining the appropriate level of its allowance for loan losses.  This method applies relevant risk factors tothe entire loan portfolio, including nonperforming loans.  The methodology is based, in part, on theCompany’s loan grading and classification system.  The Company grades its loans through internal reviews andperiodically subjects loans to external reviews which then are assessed by theCompany’s audit committee and management. Credit reviews are performed on a monthly basis and the quality gradingprocess occurs on a quarterly basis. Risk factors applied to the performingloan portfolio are based on the Company’s past loss history considering thecurrent portfolio’s characteristics, current economic conditions and otherrelevant factors.  General reserves areapplied to various categories of loans at percentages ranging up to 1.8% basedon the Company’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 theloan, 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.

 

The allowance is based on estimates and ultimatefuture losses may vary from current estimates. It is always possible that future economic or other factors mayadversely affect the Company’s borrowers, and thereby cause loan losses toexceed the current allowance.  Inaddition, there can be no assurance that future economic or other factors willnot adversely affect the Company’s borrowers, or that the Company’s assetquality may not deteriorate through rapid growth, failure to enforceunderwriting standards, failure to maintain appropriate underwriting standards,failure to maintain an adequate number of qualified loan personnel, failure toidentify and monitor potential problem loans or for other reasons, and therebycause loan losses to exceed the current allowance.

 

19

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The allocation of the allowance to loan categories isan estimate by management of the relative risk characteristics of loans inthose categories.  No assurance can begiven that losses in one or more loan categories will not exceed the portion ofthe allowance allocated to that category or even exceed the entire allowance.

 

*ExternalFactors Affecting Asset Quality. *Asa result of the Company’s loan portfolio mix, the future quality of its assetscould be affected by adverse economic trends in its region or in theagricultural community.  These trendsare beyond the control of the Company.

 

California is an earthquake-prone region.  Accordingly, a major earthquake could resultin material loss to the Company.  Attimes the Company’s service area has experienced other natural disasters suchas floods and droughts.  The Company’sproperties and substantially all of the real and personal property securingloans in the Company’s portfolio are located in California.  The Company faces the risk that many of itsborrowers face uninsured property damage, interruption of their businesses orloss of their jobs from earthquakes, floods or droughts.  As a result these borrowers may be unable torepay their loans in accordance with their terms and the collateral for suchloans may decline significantly in value. The Company’s service area is a largely agricultural region andtherefore is highly dependent on a reliable supply of water for irrigationpurposes.  The area obtains nearly allof its water from the run-off of melting snow in the mountains of the SierraNevada to the east.  Although suchsources have usually been available in the past, water supply can be adverselyaffected by light snowfall over one or more winters or by any diversion ofwater from its present natural courses. Any such natural disaster could impair the ability of many of theCompany’s borrowers to meet their obligations to the Company.

 

Parts of California have experienced significantfloods in the late 1990s. No assurance can be given that future flooding willnot have an adverse impact on the Company and its borrowers and depositors.

* *

*Liquidity.*In order to maintain adequate liquidity, the Company musthave sufficient resources available at all times to meet its cash flowrequirements.  The need for liquidity ina banking institution arises principally to provide for deposit withdrawals,the credit needs of its customers and to take advantage of investmentopportunities as they arise.  TheCompany may achieve desired liquidity from both assets and liabilities.  The Company considers cash and deposits heldin other banks, federal funds sold, other short term investments, maturingloans and investments, payments of principal and interest on loans and investmentsand potential loan sales as sources of asset liquidity.  Deposit growth and access to credit linesestablished with correspondent banks and market sources of funds are consideredby the Company as sources of liability liquidity.  The holding company’s primary source of liquidity is from dividendsreceived from the Bank.  Dividends fromthe Bank are subject to certain regulatory restrictions.

 

The Company reviews its liquidity position on aregular basis based upon its current position and expected trends of loans anddeposits. These assets include cash and deposits in other banks,available-for-sale securities and federal funds sold.  The Company’s liquid assets totaled $289,655,000 and $305,075,000on March 31, 2003 and December 31, 2002, respectively, and constituted 28% and29% of total assets on those dates. Liquidity is also affected by the collateral requirements of its publicdeposits and certain borrowings.  Totalpledged securities were $262,568,000 at March 31, 2003 compared with$193,962,000 at December 31, 2002.

 

Although the Company’s primary sources of liquidityinclude liquid assets and a stable deposit base, the Company maintains lines ofcredit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bankof San Francisco, Pacific Coast Bankers’ Bank, Union Bank of California, WellsFargo 

 

20

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Bank and First Tennessee Bank aggregating $219,112,000 of which$146,904,000 was outstanding as of March 31, 2003 and $100,841,000 wasoutstanding as of December 31, 2002. The increase in borrowings outstandingduring the first quarter of 2003 produced an inflow of funds that were used topurchase additional investment securities. Management believes that the Company maintains adequate amounts ofliquid assets to meet its liquidity needs. The Company’s liquidity might be insufficient if deposit withdrawalswere to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financialdifficulties or receives adverse publicity for other reasons, or if its pricing,products or services are not competitive with those offered by otherinstitutions.

* *

*CapitalResources. *Capitalserves as a source of funds and helps protect depositors against potentiallosses.  The primary source of capitalfor the Company has been internally generated capital through retainedearnings.  The Company’s shareholders’equity increased by $2,712,000 or 3.5% from December 31, 2002 to March 31,2003.

 

The Company is subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan initiate mandatory and possibly additional discretionary actions by theregulators that, if undertaken, could have a material adverse effect on theCompany’s financial statements.  Managementbelieves, as of March 31, 2003, that the Company and the Bank met allapplicable capital requirements.  TheCompany’s leverage capital ratio at March 31, 2003 was 8.12% as compared with7.68% as of December 31, 2002.  TheCompany’s total risk based capital ratio at March 31, 2003 was 11.14% ascompared to 10.74% as of December 31, 2002.

 

The Company’s and Bank’s actual capital amounts andratios met all regulatory requirements as of March 31, 2003 and were summarizedas follows:

 
| **Dollars in thousands**                 |   | **Actual** |   | **For Capital****Adequacy Purposes** |   | **To Be Well Capitalized****Under Prompt  CorrectiveAction Provisions:** |   |
|------------------------------------------|--------|------------|--------|--------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                     |   | **Amount** |   | **Ratio**                            |   | **Amount**                                                               |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| Consolidated                             |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| As of March 31, 2003                     |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 91,920 |                                 | 11.14  | %                                                                        | $      | 65,999 |   | 8.0 | % | $ | 82,498 |   | 10.0 | % |
| Tier 1 capital (to risk weighted assets) |   | 81,578     |   | 9.89                                 |   | 32,999                                                                   |   | 4.0 |   | 49,499 |   | 6.0 |   |
| Leverage ratio*                          |   | 81,578     |   | 8.12                                 |   | 40,202                                                                   |   | 4.0 |   | 50,253 |   | 5.0 |   |
|                                     |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| The Bank:                                |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| As of March 31, 2003                     |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 88,089 |                                 | 10.70  | %                                                                        | $      | 65,838 |   | 8.0 | % | $ | 82,298 |   | 10.0 | % |
| Tier 1 capital (to risk weighted assets) |   | 77,772     |   | 9.45                                 |   | 32,919                                                                   |   | 4.0 |   | 49,379 |   | 6.0 |   |
| Leverage ratio*                          |   | 77,772     |   | 7.75                                 |   | 40,134                                                                   |   | 4.0 |   | 50,168 |   | 5.0 |   |

 

----

* The leverage ratio consists of Tier 1 capitaldivided by adjusted quarterly average assets. The minimum leverage ratio is 3 percent for banking organizations thatdo not anticipate significant growth and that have well-diversified risk,excellent asset quality and in general, are considered 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 March 31, 2003, the Companyhad a deposit mix of 28% in savings deposits, 39% in time deposits, 14% ininterest-bearing 

 

21

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checking accounts and 19% in noninterest-bearing demand accounts.  Noninterest-bearing demand deposits enhancethe Company’s net interest income by lowering its costs of funds.

 

The Company obtains deposits primarily from thecommunities it serves.  No materialportion of its deposits has been obtained from or is dependent on any oneperson or industry.  The Company’sbusiness is not seasonal in nature.  TheCompany accepts deposits in excess of $100,000 from customers.  These deposits are priced to remaincompetitive.  At March 31, 2003, theCompany had brokered deposits of $18,461,000.

 

Maturities of time certificates of deposits of$100,000 or more outstanding at March 31, 2003 and December 31, 2002 aresummarized as follows:

 
|                      |   | **March 31, 2003**         |    | **December 31, 2002** |   |
|---------------------------|--------|----------------------------|---------|-----------------------|--------|
|                      |   | **(Dollars in thousands)** |    |
|                      |   |                       |    |                  |   |
| Three months or less      |   | $                          | 21,626  |                  | $      | 69,661 |   |
| Over three to six months  |   | 48,979                     |    | 38,863                |   |
| Over six to twelve months |   | 40,210                     |    | 23,319                |   |
| Over twelve months        |   | 42,001                     |    | 28,872                |   |
| Total                     |   | $                          | 152,816 |                  | $      | 160,715 |   |

 

**Borrowed Funds**

 

The increase in other borrowings during the firstquarter of 2003 was primarily due to the use of a leveraged investment strategythat uses additional FHLB borrowings to fund purchases of investment securitieswithin the Bank’s investment portfolio.

 

**Returnon Equity and Assets**

** **
|                                |   | **Three months ended  March 31  2003** |   | **Three months ended  March 31  2002** |   | **Year ended  December 31  2002** |   |
|-------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|
|                                |   |                                   |   |                                   |   |                              |   |
| Annualized return on average assets |   | 1.20                                   | %      | 1.01                                   | %      | 1.09                              | %      |
| Annualized return on average equity |   | 15.37                                  | %      | 13.64                                  | %      | 14.94                             | %      |
| Average equity to average assets    |   | 7.82                                   | %      | 7.40                                   | %      | 7.29                              | %      |

 

**Impactof Inflation**

 

The primary impact of inflation on the Company is itseffect on interest rates.  The Company’sprimary source of income is net interest income which is affected by changes ininterest rates.  The Company attempts tolimit inflation’s impact on its net interest margin through management of ratesensitive assets and 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.

 

22

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**Item3.                    Quantitative andQualitative Disclosures about Market Risk**

 

In the normal course of business,the Company is exposed to market risk which includes both price and liquidityrisk.  Price risk is created fromfluctuations in interest rates and the mismatch in repricing characteristics ofassets, liabilities, and off balance sheet instruments at a specified point intime.  Mismatches in interest raterepricing among assets and liabilities arise primarily through the interactionof the various types of loans versus the types of deposits that are maintainedas well as from management’s discretionary investment and funds gatheringactivities.  Liquidity risk arises fromthe possibility that the Company may not be able to satisfy current and futurefinancial commitments or that the Company may not be able to liquidatefinancial instruments at market prices. Risk management policies and procedures have been established and areutilized to manage the Company’s exposure to market risk.  Quarterly testing of the Company’s assetsand liabilities under both increasing and decreasing interest rate environmentsare performed to insure the Company does not assume a magnitude of risk that isoutside approved policy limits.

 

The Company’s success is largely dependent upon itsability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Company’s net interestincome to adverse movements in interest rates. Although the Company manages other risks, such as credit and liquidityrisk in the normal course of its business, management considers interest raterisk to be its most significant market risk and could potentially have thelargest material effect on the Company’s financial condition and results ofoperations.  Correspondingly, theoverall strategy of the Company is to manage interest rate risk, throughbalance sheet structure, to be interest rate neutral.

 

The Company’s interest rate risk management is theresponsibility of the Asset/Liability Management Committee (ALCO), whichreports to the Board of Directors.  ALCOestablishes policies that monitors and coordinates the Company’s sources, usesand pricing of funds.  ALCO is alsoinvolved in formulating the economic projections for the Company’s budget andstrategic plan.  ALCO sets specific ratesensitivity limits for the Company. ALCO monitors and adjusts the Company’s exposure to changes in interestrates to achieve predetermined risk targets that it believes are consistentwith current and expected market conditions. Balance sheet management personnel monitor the asset and liabilitychanges on an ongoing basis and provide report information and recommendationsto the ALCO committee in regards to those changes.

 

It is the opinion of managementthere has been no material change in the Company’s market risk during the firstquarter of 2003 when compared to the level of market risk at December 31, 2002.  If interest rates were to suddenly andmaterially fall from levels experienced during the first quarter of 2003, theCompany could become susceptible to an increased level of market risk.

 

23

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**Item4.                    Controls andProcedures**

 

Evaluation Of Disclosure Controls And Procedures

 

Under the supervision and with the participation ofthe Company’s management, including its chief executive office and chieffinancial officer, the Company conducted an evaluation of the effectiveness ofthe design and operation of its disclosure controls and procedures as definedby Rules 13a - 14(c) and 15d - 14(c)) under the Securities Exchange Act of1934.

 

The evaluation was completed within 90 days of thefiling of this report (“Evaluation Date”). Based on the evaluation, the chiefexecutive officer and chief financial officer concluded that as of theEvaluation Date the disclosure controls and procedures were adequate andeffective, and that the material information required to be included in thisreport, including information from the Company’s consolidated subsidiaries, wasproperly recorded, processed, summarized and reported, and was made known tothe chief executive officer and chief financial officer by others within the Companyin a timely manner, particularly during the period when this annual report onForm 10-Q was being prepared.

 

Changes In Internal Controls

 

There were no significant changes in our internalcontrols or in other factors that could significantly affect our disclosurecontrols subsequent to the Evaluation Date through the date of this filing ofForm 10-Q for the quarterly period ended March 31, 2003, nor were there anysignificant deficiencies or material weaknesses in our internal controls thatwould require corrective action, so therefore there were no corrective actionstaken.

 

24

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**PART II - Other Information**

 

**Item 1****.                    Legal Proceedings**

 

The Company is a party to routine litigation in the ordinary course ofits business.  In the opinion ofmanagement, pending and threatened litigation is not likely to have a materialadverse effect on the financial condition or results of operations of theCompany.

 

**Item 2.****                    Changes in Securities andUse of Proceeds.**

 

None.

 

**Item 3.****                    Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4.****                    Submission of Matters to aVote of Securities Holders.**

 

None.

 

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

 

In the opinion of management, there is no additional informationrelating to these periods being reported which warrants inclusion in thereport.

 

25

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

 

(a)                                  Exhibits.

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

 

26

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| 10.9   |   | Executive Salary Continuation Agreement between  senior executive management and Capital Corp of the West (filed as Exhibit  10.9 of the Company’s 2001 Form 10-K with the SEC on or about March 29,  2002). | *      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                              |   |
| 11     |   | Statement Regarding the Computation of Earnings Per  Share is incorporated herein by reference from Note 1 of the Company’s  Consolidated Financial Statements.                                         |   |
|   |   |                                                                                                                                                                                                              |   |
| 13     |   | Annual Report to Security Holders.                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                              |   |
| 99.1   |   | Certification of CEO pursuant to 18 U.S.C. Section  1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                    |   |
|   |   |                                                                                                                                                                                                              |   |
| 99.2   |   | Certification of CFO pursuant to 18 U.S.C. Section  1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                    |   |
|   |   |                                                                                                                                                                                                              |   |
|        |   |
| *      |   | Denotes management contract or compensatory plan  arrangement.                                                                                                                                                    |   |

 

**Reportson Form 8-K**

 

None

 

27

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                     | CAPITAL CORP OF THE WEST |
|--------------------------|--------------------------|
|                     | (Registrant)             |
|                     |                     |   |   |
| Date:  May 9,  2003 | By                       | /s/ | Thomas T. Hawker |   |
|                     |                     |   | Thomas T. Hawker |
|                     |                     |   | President and  Chief Executive Officer |
|                     |                     |   |   |
|                     |                     |   |   |
| Date: May 9, 2003        | By                       | /s/ | R. Dale McKinney |   |
|                     |                     |   | R. Dale McKinney |
|                     |                     |   | Chief Financial Officer |

 

28

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**CERTIFICATIONS UNDER******

**SECTION 302 OF**

**THE SARBANES OXLEY ACT OF 2002***

I, Thomas T. Hawker, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Capital Corpof the West;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

29

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5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controls;and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: May 9, 2003       |
|-------------------------|
|                    |
|                    | /s/ Thomas T. Hawker |   |
| Thomas T. Hawker        |
| Chief Executive Officer |

 

30

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**CERTIFICATIONSUNDER**

**SECTION302 OF**

**THESARBANES OXLEY ACT OF 2002***

I, R. Dale McKinney, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Capital Corpof the West;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

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5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date: May 9, 2003       |
|-------------------------|
|                    |
|                    | /s/ R. Dale McKinney |   |
| R. Dale McKinney        |
|                    |
| Chief Financial Officer |

 

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Exhibit Index

 

 
| **Exhibit** |   | **Description**                                                                                |
|-------------|--------|------------------------------------------------------------------------------------------------|
|        |   |                                                                                           |
| 99.1        |   | Certification of Registrant’s Chief Executive  Officer Pursuant to 18 U.S.C. Section 1350 |
|        |   |                                                                                           |
| 99.2        |   | Certification of Registrant’s Chief Financial  Officer Pursuant to 18 U.S.C. Section 1350 |

 

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