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**FORM10-Q**

 

**SECURITIESAND 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 June 30, 2001** |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

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

 

**Commission File Number: 0-27384**

**          CAPITALCORP OF THE WEST          ******(Exact name ofregistrant as specified in its charter)

 

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

 

| 550 West Main, Merced,  CA  95340    |
|-------------------------------------------|
|                                           |
| (Address of principal  executive offices) |

Registrant’stelephone number, including area code:    (209)725-2200    

Formername, former address and former fiscal year, if changed since last report:  Not applicable

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.Yes ýNo o

The number of shares outstanding of theregistrant’s common stock, no par value, as of June 30, 2001 was4,854,812.  No shares of preferredstock, no par value, were outstanding at June 30, 2001.

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**Capital Corp of the West**Table ofContents

PART I. — FINANCIAL INFORMATION

 

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

 

PART II. — OTHER INFORMATION

 

| Item 1.    | Legal Proceedings                                    |   |
|------------|------------------------------------------------------|--------|
| Item  2.   | Changes  in Securities                               |   |
| Item  3.   | Defaults  Upon Senior Securities                     |   |
| Item  4.   | Submission  of matters to a vote of Security Holders |   |
| Item 5.    | Other  Information                                   |   |
| Item 6.    | Exhibits  and Reports on Form 8-K                    |   |
|       |                                                 |   |
| SIGNATURES |                                                 |   |
|       |                                                 |   |
|       |                                                 |   |
|            |                                                      |        |  |

CapitalCorp of the WestConsolidated Balance Sheets(Unaudited)

 

|                                                                                                                                                                     | June  30                                         |    | December  31 |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|---------|--------------|---------|
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     | 2001                                             |    | 2000         |    |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     | (Dollars  in thousands)                          |
| **Assets**                                                                                                                                                               |                                             |    |         |    |
| Cash and  noninterest-bearing deposits in other banks                                                                                                                    | $                                                | 34,601  |         | $       | 46,353 |   |
| Federal funds sold                                                                                                                                                       | 6,785                                            |    | 1,415        |    |
| Time deposits at other  financial institutions                                                                                                                           | 500                                              |    | 100          |    |
| Investment securities  available for sale, at fair value                                                                                                                 | 202,354                                          |    | 155,830      |    |
| Investment  securities held to maturity at cost, fair value of   $40,843,000, and $35,412,000 at June 30, 2001 and   December 31, 2000, respectively                     | 40,274                                           |    | 35,222       |    |
| Loans,  net of allowance for loan losses of   $8,802,000 and   $8,207,000 at June 30, 2001 and December 31, 2000                                                    | 439,810                                          |    | 404,457      |    |
| Interest receivable                                                                                                                                                      | 5,451                                            |    | 5,215        |    |
| Premises and  equipment, net                                                                                                                                             | 13,570                                           |    | 13,021       |    |
| Intangible assets                                                                                                                                                        | 3,881                                            |    | 4,277        |    |
| Other assets                                                                                                                                                             | 23,799                                           |    | 17,131       |    |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     |                                             |    |         |    |
|                                                                                                                                                                     | Total assets                                     | $       | 771,025      |    | $ | 683,021 |   |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     |                                             |    |         |    |
| **Liabilities  and Shareholders’ Equity**                                                                                                                           |                                             |    |         |    |
| Deposits                                                                                                                                                                 |                                             |    |         |    |
|                                                                                                                                                                     | Noninterest-bearing  demand                      | $       | 106,174      |    | $ | 107,581 |   |
|                                                                                                                                                                     | Negotiable orders of  withdrawal                 | 82,521  |         | 84,521  |   |
|                                                                                                                                                                     | Savings                                          | 200,678 |         | 184,073 |   |
|                                                                                                                                                                     | Time, under $100,000                             | 155,570 |         | 131,669 |   |
|                                                                                                                                                                     | Time, $100,000 and  over                         | 111,193 |         | 93,654  |   |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     | Total deposits                                   | 656,136 |         | 601,498 |   |
|                                                                                                                                                                     |                                             |    |         |    |
| Short term borrowings                                                                                                                                                    | 38,649                                           |    | 19,272       |    |
| Long term borrowings                                                                                                                                                     | 3,128                                            |    | 3,155        |    |
| Accrued interest,  taxes and other liabilities                                                                                                                           | 7,973                                            |    | 5,645        |    |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     | Total  liabilities                          | 705,886 |         | 629,570 |   |
|                                                                                                                                                                     |                                             |    |         |    |
| Trust Preferred  Securities                                                                                                                                              | 6,000                                            |    | -            |    |
|                                                                                                                                                                     |                                             |    |         |    |
| Preferred  Stock, no par value; 10,000,000 shares authorized;    None outstanding                                                                                   | -                                                |    | -            |    |
| Common  stock, no par value; 20,000,000 shares authorized;      4,854,812 and 4,779,644 issued & outstanding at June 30, 2001   and December 31, 2000 | 39,583                                           |    | 35,918       |    |
| Retained earnings                                                                                                                                                        | 18,354                                           |    | 17,449       |    |
| Accumulated other  comprehensive income                                                                                                                                  | 1,202                                            |    | 84           |    |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     | Total shareholders’  equity                 | 59,139  |         | 53,451  |   |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                     | Total  liabilities and shareholders’ equity | $       | 771,025      |    | $ | 683,021 |   |
|                                                                                                                                                                     |                                                  |    |              |    |
|                                                                                                                                                                          |                                                  |         |              |         |  |  |  |  |

See accompanying notes

Capital Corp of the WestConsolidated Statements ofIncome and Comprehensive Income(Unaudited)

|                                                            | For  the Three Months   Ended June 30,                  |   | For  the Six Months   Ended June 30, |   |
|-----------------------------------------------------------------|---------------------------------------------------------|--------|--------------------------------------|--------|
|                                                            |                                                    |   |                                 |   |   |   |   |   |
|                                                            | 2001                                                    |   | 2000                                 |   | 2001 |   | 2000 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
|                                                            | (In  thousands, except per share data)                  |
| Interest income:                                                |                                                    |   |                                 |   |   |   |   |   |
|                                                            | Interest and fees on  loans                             | $      | 10,497                               |   | $ | 9,242 |   | $ | 21,277 |   | $ | 17,721 |   |
|                                                            | Interest on deposits  with other financial institutions | 5      |                                 | 6      |   | 7 |   | 18 |   |
|                                                            | Interest on  investments held to maturity:              |   |                                 |   |   |   |   |   |   |
|                                                            | Taxable                                                 | 551    |                                 | 506    |   | 1,127 |   | 997 |   |
|                                                            | Non-taxable                                             | 55     |                                 | 56     |   | 111 |   | 112 |   |
|                                                            | Interest on  investments available for sale:            |   |                                 |   |   |   |   |   |   |
|                                                            | Taxable                                                 | 2,539  |                                 | 2,041  |   | 4,795 |   | 3,877 |   |
|                                                            | Non-taxable                                             | 272    |                                 | 286    |   | 544 |   | 571 |   |
|                                                            | Interest on federal  funds sold                         | 227    |                                 | 224    |   | 571 |   | 298 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
|                                                            | Total interest income                                   | 14,146 |                                 | 12,361 |   | 28,432 |   | 23,594 |   |
|                                                            |                                                    |   |                                 |   |   |   |   |   |
| Interest expense:                                               |                                                    |   |                                 |   |   |   |   |   |
|                                                            | Interest on negotiable  orders of withdrawal            | 61     |                                 | 124    |   | 152 |   | 245 |   |
|                                                            | Interest on savings  deposits                           | 1,614  |                                 | 1,773  |   | 3,421 |   | 3,287 |   |
|                                                            | Interest on time  deposits, under $100,000              | 2,099  |                                 | 1,472  |   | 4,191 |   | 2,795 |   |
|                                                            | Interest on time,  $100,000 and over                    | 1,431  |                                 | 1,236  |   | 2,922 |   | 2,226 |   |
|                                                            | Interest on other  borrowings                           | 463    |                                 | 436    |   | 853 |   | 792 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
|                                                            | Total interest expense                                  | 5,668  |                                 | 5,041  |   | 11,539 |   | 9,345 |   |
|                                                            |                                                    |   |                                 |   |   |   |   |   |
| Net interest income                                             | 8,478                                                   |   | 7,320                                |   | 16,893 |   | 14,249 |   |
| Provision for loan  losses                                      | 789                                                     |   | 768                                  |   | 1,539 |   | 1,531 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
| Net interest income  after provision for loan losses            | 7,689                                                   |   | 6,552                                |   | 15,354 |   | 12,718 |   |
|                                                            |                                                    |   |                                 |   |   |   |   |   |
| Other income:                                                   |                                                    |   |                                 |   |   |   |   |   |
|                                                            | Service charges on  deposit accounts                    | 1,004  |                                 | 871    |   | 1,906 |   | 1,684 |   |
|                                                            | Income from real  estate held for sale                  | -      |                                 | 381    |   | - |   | 381 |   |
|                                                            | Other                                                   | 570    |                                 | 392    |   | 1,021 |   | 726 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
|                                                            | Total other income                                      | 1,574  |                                 | 1,644  |   | 2,927 |   | 2,791 |   |
|                                                            |                                                    |   |                                 |   |   |   |   |   |
| Other Expenses:                                                 |                                                    |   |                                 |   |   |   |   |   |
|                                                            | Salaries and related  benefits                          | 3,328  |                                 | 2,715  |   | 6,641 |   | 5,221 |   |
|                                                            | Equipment                                               | 680    |                                 | 654    |   | 1,304 |   | 1,244 |   |
|                                                            | Premises and occupancy                                  | 519    |                                 | 422    |   | 984 |   | 828 |   |
|                                                            | Professional fees                                       | 99     |                                 | 334    |   | 216 |   | 495 |   |
|                                                            | Marketing                                               | 230    |                                 | 236    |   | 441 |   | 464 |   |
|                                                            | Goodwill and  intangible amortization                   | 198    |                                 | 198    |   | 396 |   | 396 |   |
|                                                            | Supplies                                                | 252    |                                 | 186    |   | 454 |   | 314 |   |
|                                                            | Dividend Expense on  Capital Securities                 | 155    |                                 | -      |   | 218 |   | - |   |
|                                                            | Other                                                   | 1,015  |                                 | 910    |   | 2,161 |   | 1,836 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
| Total other expenses                                            | 6,476                                                   |   | 5,655                                |   | 12,815 |   | 10,798 |   |
|                                                            |                                                    |   |                                 |   |   |   |   |   |
| Income before income  taxes                                     | 2,787                                                   |   | 2,541                                |   | 5,466 |   | 4,711 |   |
| Provision for income  taxes                                     | 806                                                     |   | 741                                  |   | 1,573 |   | 1,397 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
| Net income                                                      | $                                                       | 1,981  |                                 | $      | 1,800 |   | $ | 3,893 |   | $ | 3,314 |   |
|                                                                 |
| Comprehensive Income:                                           |                                                    |   |                                 |   |   |   |   |   |
| Unrealized (loss) gain  on securities arising during the period | (97                                                     | )      | (187                                 | )      | 1,118 |   | (264 | ) |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
| Comprehensive income,  net                                      | $                                                       | 1,884  |                                 | $      | 1,613 |   | $ | 5,011 |   | $ | 3,050 |   |
|                                                            |                                                         |   |                                      |   |  |   |  |   |
|                                                            |                                                    |   |                                 |   |   |   |   |   |
| Basic earnings per  share                                       | $                                                       | 0.41   |                                 | $      | 0.38 |   | $ | 0.81 |   | $ | 0.70 |   |
| Diluted earnings per  share                                     | $                                                       | 0.40   |                                 | $      | 0.37 |   | $ | 0.78 |   | $ | 0.68 |   |
|                                                                 |                                                         |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |

----

Seeaccompanying notesCapital Corp of the West
ConsolidatedStatement of Changes in Shareholders’ Equity(Unaudited)

 
(Amounts in thousands)           Common  Stock   Accumulated        other     Number  of shares Amounts Retained  earnings comprehensive  loss, net Total                  Balance, December 31,  20004,552 $35,918 $17,449 $84 $53,451            5%  stock dividend, including cash     payment for fractional shares228 2,981 (2,988)- (7)           Exercise of stock  options49 334 - - 334            Issuance of shares  pursuant to   401K and ESOP plans26 350 - - 350            Net change in fair  market value of investment securities, net of tax effect of  $(447)-   -   -   1,118   1,118              Net income- - 3,893 - 3,893       Balance, June 30, 20014,855 $39,583 $18,354 $1,202 $59,139       
 

 

 

 

 

 

 

Seeaccompanying notes

Capital Corp of the WestConsolidated Statements of Cash Flows(Unaudited)
  6  months ended 6  months ended   06/30/01 06/30/00      (In  thousands) **Operating activities:**     Net income $3,893 $3,314  Adjustments to  reconcile net income to net cash provided by operating activities:          Provision for loan  losses 1,539 1,531  Depreciation,  amortization and accretion, net 1,447 1,164  Gain on sale of real  estate held for sale - 381  Net increase in  interest receivable & other assets (7,657)(2,556) Net increase in  deferred loan fees 52 125  Net increase in  accrued interest payable & other liabilities 2,328 1,305      Net cash provided by  operating activities 1,602 5,264       **Investing activities:**      Investment security  purchases (64,595)(39,047) Proceeds from  maturities of investment securities 14,778 6,663  Proceeds from sales of  AFS investment securities - 1,725  Net (increase)  decrease in time deposits in other financial institutions (400)500  Proceeds from sales of  commercial and real estate loans 1,605 1,315  Net increase in loans (38,540)(39,903) Purchases of premises  and equipment (1,497)(734) Proceeds from sales of  real estate held for sale - 381      Net cash used by  investing activities (88,649)(69,100)      **Financing activities:**      Net increase in  demand, NOW and savings deposits 13,198 23,545  Net increase in  certificates of deposit 41,440 29,480  Net increase in other  borrowings 19,350 6,468  Issuance of Capital  Securities 6,000 -  Issuance of shares  pursuant to 401k and ESOP plans 350 -  Exercise of stock  options 334 149  Cash in lieu  fractional shares from stock dividend (7)-      Net cash provided by  financing activities 80,665 59,642       Net decrease in cash  and cash equivalents (6,382)(4,194)      Cash and cash equivalents  at beginning of period 47,768 50,222     Cash and cash  equivalents at end of period $41,386 $46,028     **Cash Paid during the quarter:**      Interest paid $11,705 $9,554  Income tax payments 2,325 1,770 **Supplemental disclosure of noncash investing and financing  activities:**      Investment securities  net unrealized gains (losses); net of tax 1,118 (264) Loans transferred to  other real estate owned 335 143 
See accompanying notes
Capital Corp of the West Notes to Consolidated FinancialStatementsJune 30, 2001 and December 31, 2000(Unaudited)

GENERAL - COMPANY

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

             TheCompany’s securities consist of 20,000,000 shares of Common Stock, no par value,and 10,000,000 shares of Authorized Preferred Stock.  As of June 30, 2001 there were 4,854,812 common sharesoutstanding, held of record by approximately 2,500 shareholders.  There were no preferred shares outstandingat June 30, 2001.  The Bank has twowholly owned subsidiaries, Merced Area Investment & Development, Inc.(“MAID”) and County Asset Advisors (“CAA”). CAA is currently inactive.  Allreferences herein to the “Company” include the Bank, the Bank’s subsidiariesand Capital West Group unless context otherwise requires.

GENERAL - BANK

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

INDUSTRY AND MARKET AREA

             TheBank engages in general commercial banking business primarily in Fresno,Madera, Mariposa, Merced, San Joaquin, Stanislaus, Toulumne and Tularecounties.  The Bank has eighteen branchoffices: two in Merced with one branch centrally located in Merced and theother in downtown Merced within the Bank’s administrative office building, twoin Modesto, two in Turlock and single offices in Atwater, Dos Palos, Fresno,Hilmar, Los Banos, Livingston, Madera, Mariposa, San Francisco, Sonora,Stockton and Visalia.

 

OTHER FINANCIAL NOTES

             Alladjustments which in the opinion of Management are necessary for a fairpresentation of the Company’s financial position at June 30, 2001 and December31, 2000 and the results of operations for the three and six month periodsended June 30, 2001 and 2000, and the statements of cash flows for the sixmonths ended June 30, 2001 and 2000 have been included.  The interim results for the three and sixmonths ended June 30, 2001 and 2000 are not necessarily indicative of resultsfor the full year.  These financialstatements should be read in conjunction with the financial statements and thenotes included in the Company’s Annual Report for the year ended December 31,2000.

 

             
             Theaccompanying unaudited financial statements have been prepared on a basisconsistent with the generally accepted accounting principles and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.

             Basicearnings per share (EPS) is computed by dividing net income available toshareholders by the weighted average number of common shares outstanding duringthe period.  Diluted earnings per shareis computed by dividing net income available to common shareholders by theweighted average number of common shares outstanding during the period pluspotential common shares outstanding. Diluted earnings per share reflects the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of the Company.

             Thefollowing table provides a reconciliation of the numerator and denominator ofthe basic and diluted earnings per share computation of the three and six monthperiods ending June 30, 2001 and 2000:
 For  the three months For  the six months  ended  June 30, ended  June 30,    (In thousands, except  per share data)2001 2000 2001 2000      Basic EPS computation:         Net income$1,981 $1,800 $3,893 $3,314        Average common shares  outstanding4,844 4,752 4,825 4,743      Basic EPS$0.41 $0.38 $0.81 $0.70      Diluted EPS Computations:         Net income$1,981 $1,800 $3,893 $3,314        Average common shares  outstanding4,844 4,752 4,825 4,743  Stock options156 123 146 123       5,000 4,875 4,971 4,866      Diluted EPS$0.40 $0.37 $0.78 $0.68      
             OnFebruary 22, 2001, the Company issued $6,000,000 in Trust Preferred Securitiesthrough its 100% ownership position in the County Statutory Trust I.  The Trust Preferred Securities pay quarterlycumulative cash distributions at an annual rate of 10.2% of the liquidationvalue of $1,000 per share.  The TrustPreferred Securities represent undivided beneficial interests in the Trust.  The Company owns all of the issued andoutstanding common securities of the Trust. Proceeds from the offering and from the issuance of common securitieswere invested in the Trust in the Company’s 10.2% Junior SubordinatedDeferrable Interest Debentures due February 22, 2031 with an aggregateprincipal amount of $6,000,000.  Theprimary asset of the Trust is the Junior Debentures.  The obligations of the Trust with respect to the Trust PreferredSecurities are fully and unconditionally guaranteed by us to the extentprovided in the Guarantee Agreement with respect to the CapitalSecurities.  The proceeds are to be usedfor general corporate purposes.  Theall-in costs of the Trust Preferred Securities was 10.39%.  The Trust Preferred Securities have theadded benefit of qualifying as Tier 1 capital for regulatory purposes.

 

 

 

             Impactof Recently Issued Accounting Standards

             InJuly 2001, the FASB issued Statement No. 141, Business Combinations, andStatement No. 142, Goodwill and Other Intangible Assets. Statement 141 requiresthat the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001 as well as all purchase method businesscombinations completed after June 30, 2001. Statement 141 also specifiescriteria intangible assets acquired in a purchase method business combinationmust meet to be recognized and reported apart from goodwill, noting that anypurchase price allocable to an assembled workforce may not be accounted forseparately. Statement 142 will require that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead tested forimpairment at least annually in accordance with the provisions of Statement142. Statement 142 will also require that intangible assets with definiteuseful lives be amortized over their respective estimated useful lives to theirestimated residual values, and reviewed for impairment in accordance with SFASNo. 121, Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of.

             TheCompany is required to adopt the provisions of Statement 141 immediately,except with regard to business combinations initiated prior to July 1, 2001,which it expects to account for using the pooling-of-interests method, andStatement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have anindefinite useful life that are acquired in a purchase business combinationcompleted after June 30, 2001 will not be amortized, but will continue to beevaluated for impairment in accordance with the appropriate pre-Statement 142accounting literature. Goodwill and intangible assets acquired in businesscombinations completed before July 1, 2001 will continue to be amortized priorto the adoption of Statement 142.

             Statement141 will require upon adoption of Statement 142, that the Company evaluate itsexisting intangible assets and goodwill that were acquired in a prior purchasebusiness combination, and to make any necessary reclassifications in order toconform with the new criteria in Statement 141 for recognition apart fromgoodwill. Upon adoption of Statement 142, the Company will be required toreassess the useful lives and residual values of all intangible assets acquiredin purchase business combinations, and make any necessary amortization periodadjustments by the end of the first interim period after adoption. In addition,to the extent an intangible asset is identified as having an indefinite usefullife, the Company will be required to test the intangible asset for impairmentin accordance with the provisions of Statement 142 within the first interimperiod. Any impairment loss will be measured as of the date of adoption andrecognized as the cumulative effect of a change in accounting principle in thefirst interim period.

             Inconnection with the transitional goodwill impairment evaluation, Statement 142will require the Company to perform an assessment of whether there is anindication that goodwill [and equity-method goodwill] is impaired as of thedate of adoption. To accomplish this the Company must identify its reportingunits and determine the carrying value of each reporting unit by assigning theassets and liabilities, including the existing goodwill and intangible assets,to those reporting units as of the date of adoption. The Company will then haveup to six months from the date of adoption to determine the fair value of eachreporting unit and compare it to the reporting unit’s carrying amount. To theextent a reporting unit’s carrying amount exceeds its fair value, an indicationexists that the reporting unit’s goodwill may be impaired and the Company mustperform the second step of the transitional impairment test. In the secondstep, the Company must compare the implied fair value of the reporting unit’sgoodwill, determined by allocating the reporting unit’s fair value to all of itassets (recognized and unrecognized) and liabilities in a manner similar to apurchase price allocation in accordance with Statement 141, to its carryingamount, both of which would be measured as of the date of adoption. This secondstep is required to be completed as soon as possible, but no later than the endof the year of adoption. Any transitional impairment loss will be recognized asthe cumulative effect of a change in accounting principle in the Company’sstatement of earnings.

             Finally,any unamortized negative goodwill [and negative equity-method goodwill]existing at the date Statement 142 is adopted must be written off as thecumulative effect of a change in accounting principle.

             Asof the date of adoption, the Company expects to have unamortized goodwill inthe amount of $1,405,000, unamortized identifiable intangible assets in theamount of $2,080,000, and no unamortized negative goodwill, all of which willbe subject to the transition provisions of Statements 141 and 142. Amortizationexpense related to goodwill was $56,000 and $112,000 for the six months endedJune 30, 2001 and the year ended December 31, 2000.  Because of the extensive effort needed to comply with adoptingStatements 141 and 142, it is not practicable to reasonably estimate the impactof adopting these Statements on the Company’s financial statements at the dateof this report, including whether any transitional impairment losses will berequired to be recognized as the cumulative effect of a change in accountingprinciple.

 

 

 

 

 

 

 

 

 

**Item 2.             Management's Discussion AndAnalysis Of Financial ConditionAnd Results Of Operations**

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

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

             TheCompany is also exposed to the potential of losses arising from adverse changesin market rate and prices which can adversely impact the value of financialproducts, including securities, loans, and deposits. In addition, the bankingindustry in general is subject to various monetary and fiscal policies andregulations, which include those determined by the Federal Reserve Board, theFederal Deposit Insurance Corporation and state regulators, whose policies andregulations could affect the Company’s results.

                          Other factors that may causeactual results to differ from the forward-looking statements include thefollowing: competition with other local and regional banks, savings and loanassociations, credit unions and other non-bank financial institutions, such asinvestment banking firms, investment advisory firms, brokerage firms, mutualfunds and insurance companies, as well as other entities which offer financialservices; interest rate, market and monetary fluctuations: inflation; marketvolatility; general economic conditions; introduction and acceptance of newbanking-related products, services and enhancement; fee pricing strategies,mergers and acquisitions and their integration into the Company andmanagement’s ability to manage these and other risks.
             Thefollowing discussion and analysis is designed to provide a better understandingof the significant changes and trends related to the Company and itssubsidiaries' financial condition, operating results, asset and liabilitymanagement, liquidity and capital resources and should be read in conjunctionwith the Consolidated Financial Statements of the Company and the Notesthereto.

**Results Of Operations**

*             Overview. *For the three and six months ended June 30, 2001the Company reported record net income of $1,981,000 and $3,893,000.  This compares to $1,800,000 and $3,314,000for the same period in 2000 and represents an increase of $181,000 and $579,000.  Basic and diluted earnings per share were$.41 and $.40 for the three months ending June 30, 2001. This compares to basicand diluted earnings per share of $.38 and $.37 for the three months endingJune 30, 2000 and represents an increase of $0.03 per basic and diluted share.The annualized return on average assets was 1.08% and 1.18% for the threemonths ended June 30, 2001 and 2000. The Company's annualized return on average equity was 13.80% and 15.73%for the three months ended June 30, 2001 and 2000.

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

 
 Three  Months     Ending  June 30,  Percentage Change  2001 2000  Increase (decrease)  (in  thousands, except earnings per share)            Interest income$14,146 $12,361 14.4% Interest expense5,668 5,041 12.4  Net interest income8,478 7,320 15.8  Provisions for loan  losses789 768 2.7  Net interest income  after provision for loan losses7,689 6,552 17.4  Other income1,574 1,644 (4.3) Other expenses6,476 5,655 14.5  Net income before  income taxes2,787 2,541 9.7  Income taxes806 741 8.8  Net income1,981 1,800 10.1  Diluted earnings per  common share0.40 0.37 8.1  
 

 
 Six Months    Ending June 30, Percentage  Change  2001 2000 Increase  (decrease)  (in  thousands, except earnings per share)          Interest income$28,432 $23,594 20.5%Interest expense11,539 9,345 23.5 Net interest income16,893 14,249 18.6 Provisions for loan  losses1,539 1,531 0.5 Net interest income  after provision for loan losses15,354 12,718 20.7 Other income2,927 2,791 4.9 Other expenses12,815 10,798 18.7 Net income before  income taxes5,466 4,711 16.0 Income taxes1,573 1,397 12.6 Net income3,893 3,314 17.5 Diluted earnings per  common share0.78 0.68 14.7 
             *Net Interest Income.*  The Company's primary source of income isnet interest income and is determined by the difference between interest incomeand fees derived from earning assets and interest paid on interest bearingliabilities.  Net interest income forthe three and six months ended June 30, 2001 totaled $8,478,000 and $16,893,000and represented an increase of $1,158,000 and $2,644,000 when compared to the$7,320,000 and $14,249,000 achieved during the three and six months ended June30, 2000.

             Totalinterest and fees on earning assets were $14,146,000 and $28,432,000 for thethree and six months ended June 30, 2001, an increase of $1,785,000 and$4,838,000 from the $12,361,000 and $23,594,000 for the same period in 2000.  The level of interest income is affected bychanges in volume of and rates earned on interest–earning assets.  Interest–earning assets consistprimarily of loans, investment securities and federal funds sold.  The increase in interest income for thethree and six months ended June 30, 2001 was primarily the result of anincrease in the volume of interest–earning assets.  Average interest–earning assets forthe three and six months ended June 30, 2001 were $668,802,000 and $650,423,000compared with $544,401,000 and $525,122,000 for the three and six months endedJune 30, 2000, an increase of $124,401,000 and $125,301,000 or 22.9% and 23.9%.

             Interestexpense is a function of the volume of and the rates paid on interest–bearingliabilities.  Interest–bearingliabilities consist primarily of certain deposits and borrowed funds.  Total interest expense was $5,668,000 and$11,539,000 for the three and six months ended June 30, 2001, compared with$5,041,000 and $9,345,000 for the three and six months ended June 30, 2000, anincrease of $627,000 and $2,194,000 or 12.4% and 23.5%. This increase wasprimarily the result of an increase in the volumes of interest–bearingliabilities. Average interest–bearing liabilities were $563,895,000 and$546,964,000 for the three and six months ended June 30, 2001 compared with$469,183,000 and $452,757,000 for the same three and six months in 2000, anincrease of $94,712,000 and $87,336,000 or 20.2 and 19.3%.  Average interest rates paid oninterest-bearing liabilities were 4.02% and 4.27% for the three and six monthsending June 30, 2001 compared with 4.30 and 4.13% for the same three and monthsof 2000, a decrease of 28 basis points or 6.5% and an increase of 14 basispoints or 3.4% for these periods.

             Theincrease in interest-earning assets and interest-bearing liabilities isprimarily the result of increased market penetration within our targetmarkets.  Internal growth has beenachieved primarily through expanding loan and deposit balances through our existingbranch network.

                          The Company's net interestmargin, the ratio of net interest income to average interest–earningassets, was 5.13% and 5.22% for the three and six months ended June 30, 2001compared with 5.45% and 5.46% for the same periods in 2000, a decrease of 32and 24 basis points for the three and six months ending June 30, 2001 comparedto the same three and six months ending June 30, 2000.  Net interest margin provides a measurementof the Company's ability to employ funds profitably during the period beingmeasured.  The Company's decrease in netinterest margin for the three and six months ending June 30, 2001 was primarilyattributable to the decrease in market rates experienced during 2001.  Loans as a percentage of averageinterest-earning assets were 64% for the three months ended June 30, 2001compared to 65% for the three months ended June 30, 2000.
 

*             AverageBalances And Rates Earned And Paid.* Thefollowing table presents condensed average balance sheet information for theCompany, together with interest rates earned and paid on the various sourcesand uses of its funds for each of the three month periods indicated.  Nonaccruing loans are included in thecalculation of the average balances of loans, but the nonaccrued interest onsuch loans is excluded.

AVERAGEBALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
              Three  months ended Three  months ended  June  30, 2001 June  30, 2000   Average  Balance Interest Taxable  Equivalent  Yield/rate Average  Balance Interest Taxable  Equivalent  Yield/rate      (Dollars  In thousands)     Assets          Federal funds sold$20,759 $227 4.37%$13,821 $224 6.48%Time deposits at other financial institutions427 5 4.68 483 6 4.97 Taxable investment securities193,888 3,090 6.37 143,981 2,547 7.08 Nontaxable investment securities (1)28,991 423 5.84 29,709 442 5.95 Loans, gross: (2)424,737 10,497 9.89 356,407 9,242 10.37        Total interest-earning assets:668,802 14,242 8.52 544,401 12,461 9.16 Allowance for loan losses(8,608)    (6,801)    Cash and due from banks26,453     22,976     Premises and equipment, net13,323     13,083     Interest receivable and other assets33,108     28,273                Total assets$733,078     $601,932                             Liabilities And Shareholders' Equity            Negotiable order of withdrawal$81,995 $61 0.30%$73,917 $124 0.67%Savings deposits193,457 1,614 3.34 177,380 1,773 4.00 Time deposits255,454 3,530 5.53 191,402 2,708 5.66 Other borrowings32,989 463 5.61 26,484 436 6.59        Total interest–bearing liabilities563,895 5,668 4.02 469,183 5,041 4.30              Noninterest–bearing deposits100,391     82,517     Accrued interest, taxes and other liabilities5,387     4,457                 Total liabilities669,673     556,157                  Trust Preferred Capital Securities6,000     -                  Total shareholders' equity57,405     45,775                Total liabilities and shareholders' equity$733,078     $601,932                Net interest income and margin (3)  $8,574 5.13%  $7,420 5.45%         
(1)         Intereston tax advantaged securities such as municipal securities is computed on ataxable–equivalent basis(2)         Amounts of interest earnedincludes loan fees of $266,000 and $190,000 for June 30, 2001 and 2000respectively.(3)         Net interest margin iscomputed by dividing net interest income by total average interest–earningassets.

The following table presents condensedaverage balance sheet information for the Company, together with interest ratesearned and paid on the various sources and uses of its funds for each of thesix month periods indicated. Nonaccruing loans are included in the calculation of the average balancesof loans, but the nonaccrued interest on such loans is excluded.
 Six  months ended Six  months ended  June  30, 2001 June  30, 2001  Average  Balance Interest Yield/rate Average  Balance Interest Yield/rate      (In  thousands)     Assets            Federal funds sold$22,761 $571 5.02%$9,544 $298 6.24%Time deposits at other financial institutions269 7 5.20 702 18 5.13 Taxable investment securities180,711 5,922 6.55 139,115 4,874 7.01 Nontaxable investment securities (1)28,997 751 5.18 29,758 782 5.26 Loans, gross: (2)417,685 21,277 10.19 346,003 17,721 10.24        Total interest-earning assets:650,423 28,528 8.77 525,122 23,693 9.02 Allowance for loan losses(8,506)    (6,762)    Cash and due from banks26,716     22,827     Premises and equipment, net13,190     13,126     Interest receivable and other assets29,769     27,575                Total assets$711,592     $581,888                Liabilities And Shareholders' Equity            Negotiable order of withdrawal$81,224 $152 0.37 %$72,884 $245 0.67%Savings deposits190,159 3,421 3.60 174,187 3,287 3.77 Time deposits246,254 7,113 5.78 181,603 5,021 5.53 Other borrowings29,327 853 5.82 24,083 792 6.58        Total interest–bearing liabilities546,964 11,539 4.22 452,757 9,345 4.13              Noninterest–bearing deposits98,548     79,711     Accrued interest, taxes and other liabilities5,652     4,484                 Total liabilities651,164     536,952                  Trust Preferred Capital Securities4,276 -                      Total shareholders' equity56,152     44,936     Total liabilities and shareholders' equity$711,592     $581,888                Net interest income and margin (3)  $16,989 5.22%  $14,348 5.46%         
(1)         Intereston tax advantaged securities such as municipal securities is computed on atax-equivalent basis.(2)         Amounts of interest earnedincludes loan fees of $533,000 and $326,000 for June 30, 2001 and 2000respectively.(3)         Net interest margin iscomputed by dividing net interest income by total average interest-earningassets.
**Net Interest Income ChangesDue 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.

 
 Three  Months Ended  June  30, 2001 compared to June 30, 2000  Volume Rate Total      (Dollar  in thousands) Increase (decrease) in interest  income:      Federal funds sold$178 $(175)$3 Time deposits at other financial institutions(1)- (1)Taxable investment securities1,196 (654)542 Tax-exempt investment securities(5)(13)(18)Loans1,705 (450)1,255     Total3,073 (1,292)1,781     Increase (decrease) interest expense:      Interest bearing demand12 (75)(63)Savings deposits151 (310)(159)Time deposits886 (64)822 Other borrowings97 (70)27     Total1,146 (519)627     Increase in net interest income$1,927 $(773)$1,154                    Six  Months Ended  June  30, 2001 compared to June 30, 2000  Volume Rate Total      (Dollar  in thousands)       Increase (decrease) in interest  income:      Federal funds sold$444 $(171)$273 Time deposits at other financial institutions(12)1 (11)Taxable investment securities1,899 (852)1,047 Tax-exempt investment securities(20)(11)(31)Loans3,839 (282)3,557     Total6,150 (1,315)4,835     Increase (decrease) interest expense:      Interest bearing demand70 (163)(93)Savings deposits495 (361)134 Time deposits1,859 233 2,092 Other borrowings279 (218)61     Total2,703 (509)2,194     Increase in net interest income$3,447 $(806)$2,641     
*                          Provision For Loan Losses.  Theprovision for loan losses for the three and six months ended June 30, 2001 was$789,000 and $1,539,000 which compares with $768,000 and $1,531,000 for thethree and six months ended June 30, 2000.  See "Allowance for Loan Losses" contained herein.  As of June 30, 2001 the allowance for loanlosses was $8,802,000 or 1.96% of total loans. At June 30, 2001, nonperforming assets totaled $3,035,000 or .39% oftotal assets, nonperforming loans totaled $2,453,000 or .55% of total loans andthe allowance for loan losses totaled 359% of nonperforming loans.  At December 31, 2000, nonperforming assetstotaled $2,588,000 or .38% of total assets, nonperforming loans totaled$2,340,000 or .57% of total loans and the allowance for loan losses totaled351% 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.
*             OtherIncome.* Total other income for the three and sixmonths ended June 30, 2001 was $1,574,000 and $2,927,000 which compares with$1,644,000 and $2,791,000 for the same periods in 2000.  Service charges on deposit accountsincreased by $133,000 and 222,000 or 15.3% and 13.2% to $1,004,000 and$1,906,000 for the three and six months ended June 30, 2001 compared with$871,000 and $1,684,000 for the same three and six month period in 2000.  Income from the sale of real estate held forsale or development decreased by $381,000 over 2000 levels, as there were noreal estate sales during the second quarter of 2001. The $381,000 gain on saleof real estate recorded during the second quarter of 2000 resulted from thesale of the last remaining land parcel held by MAID, a real estate subsidiaryof County Bank.  The book value of thisproperty had been previously written off. Other income, which includes commissions earned on the retail sale ofsecurities and annuities and dividends received on life insurance policies,increased by $178,000 and $295,000 or 45% and 41% for the three and six monthperiod ended June 30, 2001 to 570,000 and $1,021,000.  This compares to $392,000 and $726,000 in other income for thethree and six months ended June 30, 2000.

             *Other Expense.*** **Noninterest expenses for the three and six months ended June30, 2001 were $6,476,000 and $12,815,000 which compares with $5,655,000 and$10,798,000 for the three and six months ended June 30, 2000. The primarycomponents of noninterest expenses were salaries and related benefits,equipment expenses, premises and occupancy expenses, professional fees,marketing expenses, goodwill and intangible amortization expense, suppliesexpense, and other operating expenses.

             Forthe three and six months ended June 30, 2001, salaries and related benefitsincreased by $613,000 and $1,420,000 over the same period in 2000 to $3,328,000and $6,641,000.  Equipment expensesincreased by $26,000 and $60,000 or 4% and 5% during the three and six monthsended June 30, 2001 to $680,000 and $1,304,000 from the $654,000 and $1,244,000experienced during the three and six months ending June 30, 2000.  When comparing the results of the three andsix months ending June 30, 2001 with the results of the three and six monthsending June 30, 2000, premises and occupancy expenses increased $97,000 and $156,000or 23% and 19%, professional fees decreased by $235,000 and $279,000 or 70% and56%, marketing expenses increased by $6,000 and decreased by $23,000 or 3% and5%, supplies expense increased by $66,000 and $140,000 or 35% and 45%, andother expenses increased by $105,000 and $325,000 or 12% and 18%.  The salary expense increases were primarilythe result of increased staffing levels and normal salary progression.  Increased equipment expenses were primarilythe result of increased spending on technology and processing equipment.  Increased spending on premises and occupancyis primarily related to increased spending on branch office maintenance andrepair.  Decreased professional feeswere primarily the result of decreased use of outside consulting firms.  Decreased marketing expenses were primarilythe result of decreased media spending on network and cable televisionadvertising.  Increased supplies expensewas primarily the result of increased use of supplies in supporting increasedloan and deposit volumes.  The increasein other expense was primarily the result of increased transaction volumes thathave accompanied balance sheet growth.

*                          Provision For IncomeTaxes.  The Company recorded an increase of $65,000 and$176,000 in the income tax provision to $806,000 and $1,573,000 for the threeand six months ended June 30, 2001compared to the $741,000 and $1,397,000recorded for the same periods in 2000. For the three and six months ended June 30, 2001, the Companyexperienced an effective tax rate of 29% compared to 29% and 30% recorded forthe same periods in 2000.  The increasein income taxes during the six months ending June 30, 2001 as compared to thesame period in 2000 is primarily related to an overall increase in pretaxearnings.  The decrease in effective taxrates during the six months ending June 30, 2001 as compared to the same periodin 2000 is primarily related to an increased utilization of federal low incomehousing tax credits that were obtained from investments in limited partnershipsin low-income affordable housing projects and increased investments in AgencyPreferred Stock.  The Company hadinvestments in these partnerships of $6,026,000 and $5,238,000 as of June 30,2001 and 2000 which generated estimated tax credits of $150,000 and $300,000for the three and six months ended June 30, 2001 compared with $105,000 and$245,000 for the same periods in 2000.
**Interest Rate Risk Management**

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

 

             Thefollowing tables set forth the interest rate sensitivity of the Company’sinterest–earning assets and interest–bearing liabilities as of June30, 2001, using the interest rate sensitivity gap ratio.  For purposes of the following table, anasset or liability is considered rate–sensitive within a specified periodwhen it can be repriced or matures within its contractual terms.  
               **At June 30, 2001**  ********    **After 3** **After 1**          **But** **Year But**        **Within** **Within** **Within** **After** **Noninterest-**    **3 Months** **12 Months** **5 Years** **5 Years** **Bearing** **Total**  **** **** **** **** **** ****      **(Dollars In Thousands)**      **Assets**             Time deposits at other banks$500 $- $- $- $- $500  Federal funds sold6,785 - - - - 6,785  Investment securities6,324 4,426 50,652 163,282 17,944 242,628  Loans239,331 52,918 105,402 50,961 - 448,612          Total earning assets252,940 57,344 156,054 214,243 17,944 698,525  Noninterest–earning  assets and allowances for loan losses- - - - 72,500 72,500           Total assets$252,940 $57,344 $156,054 $214,243 $90,444 $771,025                **Liabilities And**             **Shareholders' Equity**             Demand deposits$- $- $- $- $106,174 $106,174  Savings, money market and NOW deposits283,199 - - - - 283,199  Time deposits43,940 188,036 34,787 - - 266,763  Other interest–bearing liabilities7,649 8,000 13,000 13,128 - 41,777  Other liabilities, capital securities and shareholders'  equity- - - 6,000 67,112 73,112          Total liabilities, capital securities and shareholders'  equity334,788 196,036 47,787 19,128 173,286  771,025   $  Incremental gap(81,848)(138,692)108,267 195,115 (82,842)   Cumulative gap$(81,848)$(220,540)$(112,273)$82,842 $-    Cumulative gap as a % of earning  assets(11.72)%(31.57)%(16.07)%11.86%     
             TheCompany was liability–sensitive with a negative cumulative one–yeargap of $220,540,000 or (31.57)% of interest–earning assets at June 30,2001.  In general, based upon theCompany's mix of deposits, loans and investments, increases in interest rateswould be expected to result in a decrease in the Company's net interest margin.

             Theinterest rate gaps reported in the tables arise when assets are funded withliabilities having different repricing intervals.  Since these gaps are actively managed and change daily asadjustments are made in interest rate views and market outlook, positions atthe end of any period may not be reflective of the Company's interest ratesensitivity in subsequent periods. Active management dictates that longer–term economic views arebalanced against prospects for short–term interest rate changes in allrepricing intervals.  For purposes ofthe analysis above, repricing of fixed–rate instruments is based upon thecontractual maturity of the applicable instruments.  Actual payment patterns may differ from contractual paymentpatterns.  The change in net interestincome may not always follow the general expectations of an asset–sensitiveor liability–sensitive balance sheet during periods of changing interestrates, because interest rates earned or paid may change by differing incrementsand at different time intervals for each type of interest–sensitive assetand liability.  As a result of thesefactors, at any given time, the Company may be more sensitive or less sensitiveto changes in interest rates than indicated in the above tables.  Greater liability sensitivity would have amore adverse effect on net interest margin if market interest rates were toincrease, and a more favorable effect if rates were to decrease.

             Inorder to manage interest rate sensitivity, the Company utilizes a detailedmodel to expected change in net interest income.  The model's estimate of interest rate sensitivity takes intoaccount the differing time intervals and differing rate change increments ofeach type of interest–sensitive asset and liability.  It then measures the projected impact ofchanges in market interest rates on the Company's net interest income.  Based upon the June 30, 2001 mix of interest–sensitiveassets and liabilities, given an immediate and sustained decrease in the marketinterest rates of 2%, this model estimates the Company's cumulative change innet interest income over the next year would decrease by approximately$1,133,000 or 3% of annualized net interest income.  Based upon the June 30, 2001 mix of interest-sensitive assets andliabilities, given an immediate and sustained increase in the market interestrates of 2%, this model estimates the Company's cumulative change in netinterest income over the next year would decrease by approximately $130,000 orless than 1% of annualized net interest income.  No assurance can be given that actual net interest income wouldnot decrease by more than $1,133,000 or 3% in response to a 2% decrease inmarket interest rates or that net interest income would not decrease by morethan $130,000 or less than 1% in response to a 2% increase in market interestrates or that actual net interest income would not decrease substantially ifmarket interest rates increased or decreased by more than 2%.

**FinancialCondition**

              Total assets at June 30, 2001 were$771,025,000, an increase of $88,004,000 or 13% compared with total assets of$683,021,000 at December 31, 2000.  Netloans were $439,810,000 at June 30, 2001, an increase of $35,353,000 or 9%compared with net loans of $404,457,000 at December 31, 2000.  Deposits were $656,136,000 at June 30, 2001,an increase of $54,638,000 or 9% compared with deposits of $601,498,000 atDecember 31, 2000.  The increase intotal assets of the Company from December 31, 2000 to June 30, 2001 was primarilythe result of increased deposit gathering efforts in gathering retail depositsand the introduction of a brokered certificate of deposit program.  During the second quarter of 2001,maturities that occurred within the investment portfolio and new deposit moniesreceived were primarily used to fund loan growth.  All short term borrowings were secured by a portion of theCompany's investment portfolio.

             Totalshareholders' equity was $59,139,000 at June 30, 2001, an increase of$5,688,000 or 11% from $53,451,000 at December 31, 2000. The growth inshareholders’ equity between December 31, 2000 and June 30, 2001 was primarilyachieved through the retention of accumulated earnings.

*Investment Portfolio.*  The following table sets forth the carryingamount (fair value) of available for sale investment securities as of June 30,2001 and December 31, 2000.

 
 June  30 December  31 (In thousands)2001 2000    Available for sale securities:        U.S.  government  agencies$38,005 $35,939 State and political subdivisions24,536 24,170 Mortgage–backed securities64,141 54,409 Collateralized mortgage obligations38,911 29,015 Corporate debt securities18,817 9,833 Equity securities17,944 2,464    Carrying amount and fair value$202,354 $155,830   
 

             Thefollowing table sets forth the carrying amount (amortized cost) and fair valueof held to maturity securities at June 30, 2001 and December 31, 2000:

 
     **June 30** **December 31** (Dollars in thousands)**2001** **2000** **** **** Held To Maturity Securities:        Carrying amount (amortized cost):    U.S.  Government  agency$4,603 $4,595 State and political subdivisions4,317 4,375 Mortgage-backed securities29,435 22,736 Collateralized mortgage obligations1,919 3,516     $40,274 $35,222    Fair Value:    U.S. Government agency$4,746 $4,595 State and political subdivisions4,395 4,453 Mortgage-backed securities29,744 22,804 Collateralized mortgage obligations1,958 3,560     $40,843 $35,412   
 

 

 

 

                          The following table setsforth the maturities of the Company's debt security investments at June 30,2001 and the weighted average yields of suchsecurities calculated on a book value basis using the weighted average yieldswithin each scheduled maturity grouping. Maturities of mortgage-backed securities and collateralized mortgageobligations are stipulated in their respective contracts.  However, actual maturities may differ fromcontractual maturities because borrowers may have the right to prepayobligations with or without prepayment penalties.  Yields on municipal securities have been recalculated on a tax–equivalentbasis.   **At June  30, 2001** **** **Within  One Year** **One  To  5 Years** **Five To  Ten Years** **Over Ten  Years** **Total** **Amount** **Yield** **Amount** **Yield** **Amount** **Yield** **Amount** **Yield** **Amount**(Dollars in thousands) ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** Available for Sale  Securities:                 U.S. Government agency$- -%$26,136 6.66%$11,869 7.14%$- - $38,005State and political- - - - 9,674 6.74 14,862 7.02 24,536Mortgage–backed  securities3 8.99 21 9.26 5,446 5.97 58,671 6.78 64,141Collateralized mortgage  obligations- - - - - - 38,911 5.84 38,911Corporate debt securities682 6.17 12,865 5.78 - - 5,270 5.39 18,817 Carrying amount and fair  value685 6.18 39,022 6.37 26,989 6.76 117,714 6.44 184,410 Held to maturity securities:                 U.S. Government agency- - 4,603 6.70 - - - - 4,603State and political- - - - - - 4,317 8.10 4,317Mortgage-backed  securities- - - - - - 29,435 7.09 29,435Collateralized mortgage  obligations- - - - - - 1,919 7.72 1,919 Carrying amount  (amortized cost)- - 4,603 6.70 - - 35,671 7.25 40,274 Total debt securities$685 6.18%$43,625 6.40%$26,989 6.76%$153,385 6.63%$224,684         
             Inthe preceding table, mortgage-backed securities and collateralized mortgageobligations are shown repricing at the time of maturity rather than inaccordance with their principal amortization schedules.  The Company does not own securities of asingle issuer whose aggregate book value is in excess of 10% of its totalequity.

*Loan Portfolio.*Thefollowing table shows the composition of the Company's loan portfolio at the dates indicated.  
          June  30 December  31   (In  thousands)2001 2000       Loan Categories:Dollar  Amount Percentof loans Dollar  Amount Percentof loans       Commercial$90,509 20%$71,920 17%  Agricultural88,441 20 84,032 20   Real estate construction38,013 8 30,133 7   Real estate mortgage153,530 34 141,575 35   Consumer78,119 18 85,004 21          Total448,612 100%412,664 100%         Less allowance for loan losses(8,802)  (8,207)             Net loans$439,810   $404,457            
 

                          The following table shows thematurity distribution of the portfolio of commercial, agricultural, real estateconstruction, real estate mortgage, and consumer loans at June 30, 2001:
 
 At  June 30, 2001    After  1 but     Within  1 year within  5 years After  5 years Total  (In  thousands)        Commercial and agricultural        Loans with floating interest rates$67,067 $38,014 $22,161 $127,242 Loans with fixed interest rates7,599 26,698 17,411 51,708     Subtotal74,666 64,712 39,572 178,950Real estate construction        Loans with floating interest rates22,083 6,455 6,307 34,845 Loans with fixed interest rates1,767 209 1,192 3,168     Subtotal23,850 6,664 7,499 38,013Real estate mortgage        Loans with floating interest rates9,377 21,275 77,325 107,977 Loans with fixed interest rates1,891 5,868 37,794 45,553     Subtotal11,268 27,143 115,119 153,530Consumer Installment        Loans with floating interest rates12,482 6,951 - 19,433 Loans with fixed interest rates3,994 51,533 3,159 58,686     Subtotal16,476 58,484 3,159 78,119     Total$126,260 $157,003 $165,349 $448,612    
             *Off-Balance Sheet Commitments.* The following table shows the distribution ofthe Company's undisbursed loan commitments at the dates indicated.

 
 June  30, December  31, 2001 2000   (In  thousands)     Letters of credit$2,328 $1,320 Commitments to extend credit168,449 144,480    Total$170,777 $145,800  
             *Other Interest-Earning Assets.* The following table relates to otherinterest-earning assets not disclosed previously for the dates indicated.  This item consists of a salary continuationplan for the Company's executive management and deferred retirement benefitsfor participating board members.  Theplan is informally linked with universal life insurance policies for the salarycontinuation plan.  Income from thesepolicies is reflected in noninterest income.

 
 At  June 30, At  December 31, 2001 2000   (In  thousands)    Cash surrender value of life insurance$12,797 $6,075  **Nonperforming Assets. *Nonperformingassets include nonaccrual loans, loans 90 days or more past due, restructuredloans and other real estate owned.

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

             A"restructured loan" is a loan on which interest accrues at a belowmarket rate or upon which certain principal has been forgiven so as to aid theborrower in the final repayment of the loan, with any interest previouslyaccrued, but not yet collected, being reversed against current income.  Interest is reported on a cash basis untilthe borrower's ability to service the restructured loan in accordance with itsterms is established.  The Company hadno restructured loans as of the dates indicated in the table below.

             Thefollowing table summarizes nonperforming assets of the Company at June 30, 2001and December 31, 2000:
 June  30 December  31  2001 2000     (In  thousands)      Nonaccrual  loans$2,015 $2,243  Accruing loans past due 90 days or more437 97           Total  nonperforming loans2,452 2,340  Other real estate owned583 248           Total  nonperforming assets$3,035 $2,588            Nonperforming loans to total loans.55%.57% Nonperforming assets to total assets.39%.38%
             Contractualaccrued interest income on loans on nonaccrual status as of June 30, 2001 and2000 that would have been recognized if the loans had been current inaccordance with their loan agreement was approximately $82,000 and $60,000 forthe six month periods ended June 30, 2001 and 2000.

 

             AtJune 30, 2001, nonperforming assets represented .39% of total assets, anincrease of .01% of total assets compared to the .38% at December 31,2000.  Nonperforming loans represented .68% of total loans at June 30, 2001, an increase of .11% of total loanscompared to the .57% at December 31, 2000. Nonperforming loans that were secured by first deeds of trust on realproperty were $0 at June 30, 2001 and December 31, 2000.   Other forms of collateral such as inventoryand equipment secured the remaining nonperforming loans as of each date.  No assurance can be given that thecollateral securing nonperforming loans will be sufficient to prevent losses onsuch loans.

             Theincrease in nonperforming loans and nonperforming assets at June 30, 2001compared with the levels as of December 31, 2000, was due primarily to aincrease in non performing agricultural and commercial loans and an increase inforeclosure properties being held for sale.

             AtJune 30, 2001, the Company had $583,000 in three propertues acquired throughforeclosure.  The properties are carriedat 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. No assurance can be given that the Company will sell such propertyduring 2001 or at any time or the amount for which such property might be sold.

             Managementdefines impaired loans, regardless of past due status on loans, as those onwhich principal and interest are not expected to be collected under theoriginal contractual loan repayment terms. An impaired loan is charged off at the time management believes the collectionprocess has been exhausted.  At June 30,2001 and December 31, 2000, impaired loans were measured based on the presentvalue of future cash flows discounted at the loan's effective rate, the loan'sobservable market price or the fair value of collateral if the loan iscollateral–dependent.  Impairedloans at June 30, 2001 were $2,452,000, on account of which the Company hadmade provisions to the allowance for loan losses of $589,000.

             Exceptfor loans that are disclosed above, there were no assets as of June 30, 2001,where known information about possible credit problems of the borrower causesmanagement to have serious doubts as to the ability of the borrower to complywith the present loan repayment terms and which may become nonperformingassets.  Given the magnitude of theCompany’s loan portfolio, however, it is always possible that current creditproblems may exist that may not have been discovered by management.

 

 

 

 

 

 

 

**Allowance for Loan Losses**

             Thefollowing table summarizes the loan loss experience of the Company for the sixmonths ended June 30, 2001 and 2000, and the year ended December 31, 2000:
 June  30, December  31,  2001 2000 2000      In  thousands **Allowance  for Loan Losses:**      Balance at beginning of period$8,207 $6,542 $6,542     Provision for loan losses1,539 1,531 3,286 Charge-offs:       Commercial and   agricultural188 416 423  Real estate construction- - -  Consumer1,088 935 1,971      Total charge–offs1,276 1,351 2,394     Recoveries       Commercial and agricultural125 41 410  Real estate-mortgage- - -  Consumer207 162 363      Total recoveries332 203 773     Net charge–offs944 1,148 1,621     Balance at end of period$8,802 $6,925 $8,207            Loans outstanding at period-end$448,612 $368,501 $412,664     Average loans outstanding$417,685 $346,003 $369,367            Annualized net charge-offs to average loans0.45%0.66%0.44%       Allowance for loan losses       To total loans1.96%1.88%1.99% To nonperforming assets289.99%373.88%317.12%       
 

 

             TheCompany maintains an allowance for loan losses at a level considered bymanagement to be adequate to cover the inherent risks of loss associated withits loan portfolio under prevailing economic conditions.  In determining the adequacy of the allowancefor loan losses, management takes into consideration growth trends in theportfolio, examination of financial institution supervisory authorities, priorloan loss experience for the Company, concentrations of credit risk,delinquency trends, general economic conditions, the interest rate environmentand internal and external credit reviews. In addition, the risks management considers vary depending on the natureof the loan.  The normal risksconsidered by management with respect to agricultural loans include thefluctuating value of the collateral, changes in weather conditions and theavailability of adequate water resources in the Company's local marketarea.  The normal risks considered bymanagement with respect to real estate construction loans include fluctuationin real estate values, the demand for improved commercial and industrialproperties and housing, the availability of permanent financing in theCompany's market area and borrowers' ability to obtain permanentfinancing.  The normal risks consideredby management with respect to real estate mortgage loans include fluctuationsin the value of real estate. Additionally, the Company relies on data obtained through independentappraisals for significant properties to determine loss exposure onnonperforming loans.

             Thebalance in the allowance is affected by the amounts provided from operations,amounts charged off and recoveries of loans previously charged-off.  The Company recorded provisions for loanlosses for the three and six months ended June 30, 2001 of $789,000 and$1,539,000 compared with $768,000 and $1,531,000 for the same periods during2000. The increase in loan loss provisions in 2001 compared to 2000 wasprimarily due to loan portfolio growth that has occurred over the last severalquarters.

             TheCompany's charge-offs, net of recoveries, were $944,000 for the six monthsended June 30, 2001 compared with net charge-offs of $1,148,000 for the samesix months in 2000.  The decrease in netcharge-offs during the first six months of 2001 compared with the same periodin 2000 was primarily due to decreased charge-offs in the commercial andagricultural segments of the loan portfolio.

             Asof June 30, 2001, the allowance for loan losses were $8,802,000 or 1.96% oftotal loans outstanding, compared with $8,207,000 or 1.99% of total loansoutstanding as of December 31, 2000. During the second quarter of 2001, theallowance for loan loss increased $595,000 or 7% compared to December 31, 2000levels.

             TheCompany uses a method developed by management determining the appropriate levelof its allowance for loan losses.  Thismethod applies relevant risk factors to the entire loan portfolio, includingnonperforming loans.  The methodology isbased, in part, on the Company's loan grading and classification system.  The Company grades its loans throughinternal reviews and periodically subjects loans to external reviews which thenare assessed by the Company's audit committee. Credit reviews are performed on a monthly basis and the quality gradingprocess occurs on a quarterly basis. Risk factors applied to the 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 the loan, if any; (iii)"Doubtful" loans carry a 50% risk factor; and (iv) "Loss"loans are charged off 100%.  Inaddition, a portion of the allowance is specially allocated to identifiedproblem credits.  The analysis alsoincludes reference to factors such as the delinquency status of the loanportfolio, inherent risk by type of loans, industry statistical data,recommendations made by the Company's regulatory authorities and outside loanreviewers, and current economic environment. Important components of the overall credit rating process are the assetquality rating process and the internal loan review process.

             Theallowance is based on estimates and ultimate future losses may vary fromcurrent estimates.  It is alwayspossible that future economic or other factors may adversely affect theCompany's borrowers, and thereby cause loan losses to exceed the currentallowance.  In addition, there can be noassurance that future economic or other factors will not adversely affect theCompany's borrowers, or that the Company's asset quality may not deterioratethrough rapid growth, failure to enforce underwriting standards, failure tomaintain appropriate underwriting standards, failure to maintain an adequatenumber of qualified loan personnel, failure to identify and monitor potentialproblem loans or for other reasons, and thereby cause loan losses to exceed thecurrent allowance.

             Theallocation of the allowance to loan and business risk components is an estimateby management of the relative overall risk characteristics of the Company.  No assurance can be given that losses in oneor more risk categories will not exceed the portion of the allowance allocatedto that category or even exceed the entire allowance.

*             ExternalFactors Affecting Asset Quality. *As a result of the Company's loan portfolio mix,the future quality of its assets could be affected by adverse economic trendsin its region or in the agricultural community.  These trends are beyond the control of the Company.

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

             Californiais a region that also experiences flooding. The Company is not aware of any material adverse effects to thecollateral position of the Company as a result of flooding, but no assurancecan be given that future flooding will not have an adverse impact on theCompany and its borrowers and depositors.

*             Liquidity.* In order to maintain adequate liquidity, theCompany must have sufficient resources available at all times to meet its cashflow requirements.  The need forliquidity in a banking institution arises principally to provide for depositwithdrawals, the credit needs of its customers and to take advantage ofinvestment opportunities as they arise. The Company may achieve desired liquidity from both assets andliabilities.  The Company considers cashand deposits held in other banks, federal funds sold, other short terminvestments, maturing loans and investments, payments of principal and intereston loans and investments and potential loan sales as sources of assetliquidity.  Deposit growth and access tocredit lines established with correspondent banks and market sources of fundsare considered by the Company as sources of liability liquidity.  The Holding Company’s primary source ofliquidity is from dividends received from the Bank.  Dividends from the Bank are subject to certain regulatorylimitations.

             TheCompany reviews its liquidity position on a regular basis based upon itscurrent position and expected trends of loans and deposits. These assetsinclude cash and deposits in other banks, available–for–salesecurities and federal funds sold.  TheCompany's liquid assets totaled $244,240,000 and $203,698,000 on June 30, 2001and December 31, 2000, respectively, and constituted 32%, and 30%,respectively, of total assets on those dates. Liquidity is also affected by the collateral requirements of its publicdeposits and certain borrowings.  Totalpledged securities were $124,454,000 at June 30, 2001 compared with$124,396,000 at December 31, 2000.

             Althoughthe Company's primary sources of liquidity include liquid assets and a stabledeposit base, the Company maintains lines of credit with the Federal ReserveBank of San Francisco, Federal Home Loan Bank of San Francisco and PacificCoast Bankers' Bank aggregating $59,045,000 of which $31,000,000 wasoutstanding as of June 30, 2001 and $14,600,000 was outstanding as of December31, 2000.  Funds used to reduceoutstanding short term borrowings during the second quarter of 1999 wereobtained from maturities and curtailments that occurred within the investmentportfolio and deposit gathering efforts. Management believes that the Company maintains adequate amounts ofliquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawalswere to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financialdifficulties or receives adverse publicity for other reasons, or if itspricing, products or services are not competitive with those offered by otherinstitutions.

*             CapitalResources      *Capital serves as a source of funds and helpsprotect depositors against potential losses. The primary source of capital for the company has been internalygenerated capital through retained earnings. The Company’s shareholder equity increased by $5,688,000 or 11% fromDecember 31, 2000 to June 30, 2001.

             TheCompany is subject to various regulatory capital requirements administered bythe federal banking agencies.  Failureto meet minimum capital requirements can initiate mandatory and possiblyadditional discretionary actions by the regulators that, if undertaken, couldhave a material adverse effect on the Company’s financial statements.  Management believes, as of June 30, 2001,that the Company and the Bank met all capital requirements to which they aresubject.  The Company’s leverage capitalratio at June 30, 2001 was 8.24% as compared with 7.56% as of December 31,2000.  The Company’s total risk basedcapital ratio at June 30, 2001 was 11.53% as compared to 10.92% as of December31, 2000.

 

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

 
         To  Be Well Capitalized          Under  Prompt       For  Capital Corrective In thousandsActual Adequacy  Purposes Action  Provisions: The Company:Amount Ratio Amount Ratio Amount Ratio ****As of June 30, 2001            Total capital (to risk weighted assets)$67,379 11.53%$46,748 8.0%$58,435 10.0%Tier 1 capital (to risk weighted assets)60,056 10.28 23,374 4.0 35,061 6.0 Leverage ratio*60,056 8.24 29,168 4.0 36,460 5.0              The Bank:            As of June 30, 2001            Total capital (to risk weighted assets)$60,498 10.45%$46,304 8.0%$57,880 10.0%Tier 1 capital (to risk weighted assets)53,244 9.20 23,152 4.0 34,728 6.0 Leverage ratio*53,244 7.36 28,931 4.0 36,164 5.0 
*           The leverage ratio consists of Tier 1capital divided by 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.

 

                           TheCompany has no formal dividend policy, and dividends are issued solely at thediscretion of the Company’s Board of Directors, subject to compliance withregulatory requirements.  In order topay any cash dividends, the Company must receive payments of dividends ormanagement fees from the Bank.  Thereare certain regulatory limitations on the payment of cash dividends by banks.

*             Deposits. *Deposits are the Company's primary source offunds.  At June 30, 2001, the Companyhad a deposit mix of 31% in savings deposits, 41% in time deposits, 12% ininterest–bearing checking accounts and 16% in noninterest-bearing demandaccounts.  Noninterest-bearing demanddeposits enhance the Company's net interest income by lowering its costs offunds.

             TheCompany obtains deposits primarily from the communities it serves.  No material portion of its deposits has beenobtained from or is dependent on any one person or industry.  The Company's business is not seasonal innature.  The Company accepts deposits inexcess of $100,000 from customers. These deposits are priced to remain competitive.  At June 30, 2001, the Company had brokereddeposits of $1,278,000.

             Maturitiesof time certificates of deposits of $100,000 or more outstanding at June 30,2001 and December 31, 2000 are summarized as follows:

 
 June  30, 2001 December  31, 2000     (In  thousands)       Three months or less$20,829 $45,233  Over three to six months53,464 20,643  Over six to twelve months24,110 16,526  Over twelve months12,790 10,252      Total$111,193 $93,654    
**BorrowedFunds**

             Theincrease in other borrowings during the secondquarter of 2001 was primarily due to the use of a leveraged investment strategythat used additional FHLB borrowings to fund purchases of investment securitieswithin the Bank’s investment portfolio.

**Impact of Inflation**

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

 

 

**Item 3.              Quantitative and Qualitative Disclosures about MarketRisk**

             Inthe normal course of business, the Company is exposed to market risk whichincludes both price and liquidity risk. Price risk is created from fluctuations in interest rates and themismatch in repricing characteristics of assets, liabilities, and off balancesheet instruments at a specified point in time.  Mismatches in interest rate repricing among assets and liabilitiesarise primarily through the interaction of the various types of loans versusthe types of deposits that are maintained as well as from management'sdiscretionary investment and funds gathering activities.  Liquidity risk arises from the possibility thatthe Company may not be able to satisfy current and future financial commitmentsor that the Company may not be able to liquidate financial instruments atmarket prices.  Risk management policiesand procedures have been established and are utilized to manage the Company'sexposure to market risk.

             OnJune 30, 2001, the interest rate position of the Company was relatively neutralas the impact of a gradual parallel 100 basis-point rise or fall in interestrates over the next 12 months was estimated to be approximately 1-2% of netinterest income when compared to stable rates.   See "Management's Discussion and Analysis of FinancialCondition and Results of Operations - Interest Rate Risk Management."

 

**PART II - Other Information**

**Item 1.             Legal Proceedings**

The Company is a party to routine litigationin the ordinary course of its business. In the opinion of management, pending and threatened litigation is notlikely to have a material adverse effect on the financial condition or resultsof operations of the Company.

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

None.

**Item 3.              DefaultsUpon Senior Securities.**

None.

 

**Item 4.              Submission of Matters to a Vote of Securities Holders.**
(a.)Annual  Meeting was held April 17, 2001.  The  number of shares represented in person or by proxy and constituting a quorum  was 3,395,380 which equals approximately 74% of the shares outstanding.  (b.)Election  of directorsVotes  For    John  D. Fawcett3,109,730 Thomas  T. Hawker3,128,037 Curtis  A. Riggs3,142,411   (c.)Proposal  to increase the number of shares available for grant under the Company’s  Stock Option Plan.  The proposal was  approved with 2,780,341 voting in favor and 588,846 were opposed.
 

**Item 5.              Other Information.**

In the opinion of management, there is noadditional information relating to these periods being reported which warrantsinclusion in the report.

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

             (a)         Exhibits.
Exhibits Description  of Exhibits     3.1 Articles  of Incorporation, incorporated by reference from (filed as Exhibit 3.1 of the  Company’s June 30, 1996 Form 10Q filed with the SEC on or about November 14,  1996). *     3.2 Bylaws  (filed as Exhibit 3.2 of the Company’s June 30, 1996 Form 10Q filed with the  SEC on or about November 14, 1996.) *     10 Employment  agreement between Thomas T. Hawker and Capital Corp. (Filed as Exhibit 10 of  the Company’s 1996 form 10K filed with the SEC on or about June 30, 1997) *     10.1 Administration  Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10K  filed with the SEC on or about June 30, 1996). *     10.2 Stock  Option Plan (filed as Exhibit 10.6 of the Company’s 1995 Form 10K filed with  the SEC on or about March 31, 1996). *     10.3 401  (k) Plan (filed as Exhibit 10.7 of the Company’s 1995 Form 10K filed with the  SEC on or about March 31, 1996). *     10.4 Employee  Stock Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10K  filed with the SEC on or about March 31, 1996). *     10.5 Purchase  Agreement for three branches from Bank of America is incorporated herein by  reference from Exhibit 2.1 Registration Statement on Form S-2 filed July 14,  1997, File No. 333-31193. *     10.6 Change-in-Control  Agreement between R. Dale McKinney and Capital Corp of the West (filed as  Exhibit 10.6 of the Company’s 1999 Form 10K with the SEC on or about March  17, 2000). *     10.7 Deferred  Compensation Agreement between members of the board of directors and Capital  Corp of the West (filed as Exhibit 10.7 of the Company’s 1999 Form 10K with  the SEC on or about March 17, 2000). *     10.8 Executive  Salary Continuation Agreement between certain members of executive management  and Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999  Form 10K with the SEC on or about March 17, 2000). *     
**(b)            ****Reportson Form 8-K**

                           None

 

***Denotes documents which have been incorporated by reference.SIGNATURES
             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
 CAPITAL  CORP OF THE WEST  (Registrant)     By  /s/     Thomas T. Hawker                 Thomas T. Hawker                 President and                Chief Executive Officer   By  /s/     R. Dale McKinney                 R. Dale McKinney                 Chief Financial Officer
 

 ******