**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**ý****  Quarterly Report Under Section13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly PeriodEnded September 30, 2002**

 

**or**

 

**o****  Transition Report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934 for the TransitionPeriod from                to                 **

 

**CommissionFile Number: 0-27384**

 

 

| **CAPITAL  CORP OF THE WEST**                                                                       |
|-----------------------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                                             |
|                                                                                                |   |   |
| **California**                                                                                      |   | **77-0405791** |
| (State or other  jurisdiction of  incorporation or organization)                                    |   | IRS Employer ID  Number |
|                                                                                                |   |   |
| **550  West Main, Merced, CA  95340**                                                          |
| (Address of  principal executive offices)                                                           |
|                                                                                                |
| Registrant’s telephone number, including area  code:    **(209) 725-2200** |

 

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

 

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

Yes    ý    No   o

 

The number of shares outstanding of the registrant’scommon stock, no par value, as of September 30, 2002 was 5,309,386.  No shares of preferred stock, no par value,were outstanding at September 30, 2002.

 

 

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**Capital Corp of the West**

Table of Contents

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

 

2

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Capital Corp of the West

Consolidated Balance Sheets

(Unaudited)

 
|                                                                                                                                                      |   | **September  30,  2002**    |      | **December  31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|-------------------------|--------|
|                                                                                                                                                      |   | **(Dollars  in thousands)** |      |
| **Assets**                                                                                                                                                |   |                        |      |                    |   |
| Cash and noninterest-bearing deposits in other banks                                                                                                      |   | $                           | 35,564    |                    | $      | 38,003 |   |
| Federal funds sold                                                                                                                                        |   | 37,450                      |      | 11,285                  |   |
| Time deposits at other financial institutions                                                                                                             |   | 500                         |      | 500                     |   |
| Investment securities available for sale, at fair  value                                                                                                  |   | 229,209                     |      | 229,852                 |   |
| Investment securities held to maturity at cost, fair  value of $63,897,000, and $42,185,000 at September 30, 2002 and December 31,  2001                  |   | 61,506                      |      | 41,559                  |   |
| Loans, net of allowance for loan losses of  $11,934,000 and $9,743,000 at September  30, 2002 and December 31, 2001                                  |   | 600,821                     |      | 522,677                 |   |
| Interest receivable                                                                                                                                       |   | 5,606                       |      | 5,757                   |   |
| Premises and equipment, net                                                                                                                               |   | 14,016                      |      | 13,143                  |   |
| Intangible assets                                                                                                                                         |   | 3,495                       |      | 3,493                   |   |
| Other assets                                                                                                                                              |   | 28,234                      |      | 28,058                  |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| Total assets                                                                                                                                              |   | $                           | 1,016,401 |                    | $      | 894,327 |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                            |   |                        |      |                    |   |
| Deposits                                                                                                                                                  |   |                        |      |                    |   |
| Noninterest-bearing demand                                                                                                                                |   | $                           | 142,776   |                    | $      | 132,496 |   |
| Negotiable orders of withdrawal                                                                                                                           |   | 103,762                     |      | 102,055                 |   |
| Savings                                                                                                                                                   |   | 220,800                     |      | 203,721                 |   |
| Time, under $100,000                                                                                                                                      |   | 168,700                     |      | 163,195                 |   |
| Time, $100,000 and over                                                                                                                                   |   | 163,872                     |      | 131,174                 |   |
| Total deposits                                                                                                                                            |   | 799,910                     |      | 732,641                 |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| Borrowed funds                                                                                                                                            |   | 131,147                     |      | 80,685                  |   |
| Accrued interest, taxes and other liabilities                                                                                                             |   | 5,159                       |      | 10,881                  |   |
| Total liabilities                                                                                                                                         |   | 936,216                     |      | 824,207                 |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| Capital Securities and minority interests                                                                                                                 |   | 6,031                       |      | 6,000                   |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| Preferred Stock, no par value; 10,000,000 shares  authorized;  None outstanding                                                                           |   | —                      |      | —                  |   |
| Common stock, no par value; 20,000,000 shares  authorized;  5,309,386 and 5,173,838 issued & outstanding at September 30, 2002 and  December 31, 2001 |   | 46,075                      |      | 40,089                  |   |
| Retained earnings                                                                                                                                         |   | 24,990                      |      | 22,372                  |   |
| Accumulated other comprehensive income                                                                                                                    |   | 3,089                       |      | 1,659                   |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| Total shareholders’ equity                                                                                                                           |   | 74,154                      |      | 64,120                  |   |
|                                                                                                                                                      |   |                        |      |                    |   |
| Total liabilities, Capital Securities and minority  interests and shareholders’ equity                                                               |   | $                           | 1,016,401 |                    | $      | 894,327 |   |

 

See accompanyingnotes

 

3

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Capital Corp of the West

Consolidated Statementsof Income and Comprehensive Income

(Unaudited)

 
|                                                          |   | **For the Three Months  Ended September 30,** |       | **For the Nine Months  Ended September 30,** |   |
|---------------------------------------------------------------|--------|-----------------------------------------------|------------|----------------------------------------------|--------|
|                                                          |   | **2002**                                      |       | **2001**                                     |   | **2002** |   | **2001** |   |
|                                                          |   | **(In thousands, except per share data)**     | ** ** |
| Interest income:                                              |   |                                          |       |                                         |   |   |   |   |   |
| Interest and fees on loans                                    |   | $                                             | 11,292     |                                         | $      | 11,398 |   | $ | 32,107 |   | $ | 32,675 |   |
| Interest on deposits with other financial  institutions       |   | 3                                             |       | 4                                            |   | 8 |   | 11 |   |
| Interest on investments held to maturity:                     |   |                                          |       |                                         |   |   |   |   |   |
| Taxable                                                       |   | 846                                           |       | 734                                          |   | 2,741 |   | 1,861 |   |
| Non-taxable                                                   |   | 55                                            |       | 56                                           |   | 165 |   | 167 |   |
| Interest on investments available for sale:                   |   |                                          |       |                                         |   |   |   |   |   |
| Taxable                                                       |   | 2,697                                         |       | 2,632                                        |   | 7,695 |   | 7,427 |   |
| Non-taxable                                                   |   | 272                                           |       | 273                                          |   | 817 |   | 817 |   |
| Interest on federal funds sold                                |   | 127                                           |       | 118                                          |   | 226 |   | 689 |   |
| Total interest income                                         |   | 15,292                                        |       | 15,215                                       |   | 43,759 |   | 43,647 |   |
|                                                          |   |                                          |       |                                         |   |   |   |   |   |
| Interest expense:                                             |   |                                          |       |                                         |   |   |   |   |   |
| Interest on negotiable orders of withdrawal                   |   | 47                                            |       | 49                                           |   | 159 |   | 201 |   |
| Interest on savings deposits                                  |   | 787                                           |       | 1,396                                        |   | 2,477 |   | 4,817 |   |
| Interest on time deposits, under $100,000                     |   | 1,416                                         |       | 2,121                                        |   | 4,300 |   | 6,312 |   |
| Interest on time, $100,000 and over                           |   | 1,229                                         |       | 1,514                                        |   | 3,577 |   | 4,436 |   |
| Interest on other borrowings                                  |   | 1,237                                         |       | 689                                          |   | 3,411 |   | 1,542 |   |
| Total interest expense                                        |   | 4,716                                         |       | 5,769                                        |   | 13,924 |   | 17,308 |   |
|                                                          |   |                                          |       |                                         |   |   |   |   |   |
| Net interest income                                           |   | 10,576                                        |       | 9,446                                        |   | 29,835 |   | 26,339 |   |
| Provision for loan losses                                     |   | 1,190                                         |       | 1,540                                        |   | 3,421 |   | 3,079 |   |
| Net interest income after provision for loan losses           |   | 9,386                                         |       | 7,906                                        |   | 26,414 |   | 23,260 |   |
|                                                          |   |                                          |       |                                         |   |   |   |   |   |
| Noninterest income:                                           |   |                                          |       |                                         |   |   |   |   |   |
| Service charges on deposit accounts                           |   | 1,326                                         |       | 1,027                                        |   | 3,732 |   | 2,933 |   |
| Income from real estate held for sale                         |   | —                                        |       | —                                       |   | 33 |   | — |   |
| Other                                                         |   | 960                                           |       | 544                                          |   | 2,430 |   | 1,565 |   |
| Total noninterst income                                       |   | 2,286                                         |       | 1,571                                        |   | 6,195 |   | 4,498 |   |
|                                                          |   |                                          |       |                                         |   |   |   |   |   |
| Noninterest Expenses:                                         |   |                                          |       |                                         |   |   |   |   |   |
| Salaries and related benefits                                 |   | 4,232                                         |       | 3,426                                        |   | 12,015 |   | 10,067 |   |
| Equipment                                                     |   | 745                                           |       | 703                                          |   | 2,165 |   | 2,007 |   |
| Premises and occupancy                                        |   | 676                                           |       | 578                                          |   | 1,816 |   | 1,562 |   |
| Professional fees                                             |   | 322                                           |       | 93                                           |   | 892 |   | 309 |   |
| Marketing                                                     |   | 270                                           |       | 291                                          |   | 677 |   | 732 |   |
| Intangible amortization                                       |   | 170                                           |       | 198                                          |   | 510 |   | 594 |   |
| Supplies                                                      |   | 201                                           |       | 202                                          |   | 558 |   | 656 |   |
| Dividend Expense on Capital Securities                        |   | 153                                           |       | 151                                          |   | 459 |   | 369 |   |
| Other                                                         |   | 1,561                                         |       | 1,145                                        |   | 4,176 |   | 3,306 |   |
| Total noninterest expenses                                    |   | 8,330                                         |       | 6,787                                        |   | 23,268 |   | 19,602 |   |
|                                                          |   |                                          |       |                                         |   |   |   |   |   |
| Income before income taxes                                    |   | 3,342                                         |       | 2,690                                        |   | 9,341 |   | 8,156 |   |
| Provision for income taxes                                    |   | 356                                           |       | 781                                          |   | 1,747 |   | 2,354 |   |
| Net income                                                    |   | $                                             | 2,986      |                                         | $      | 1,909 |   | $ | 7,594 |   | $ | 5,802 |   |
| Comprehensive Income:                                         |   |                                          |       |                                         |   |   |   |   |   |
| Unrealized gain on securities arising during the  period, net |   | 1,199                                         |       | 1,624                                        |   | 1,430 |   | 2,742 |   |
| Comprehensive income                                          |   | $                                             | 4,185      |                                         | $      | 3,533 |   | $ | 9,024 |   | $ | 8,544 |   |
|                                                          |   |                                          |       |                                         |   |   |   |   |   |
| Basic earnings per share                                      |   | $                                             | 0.56       |                                         | $      | 0.37 |   | $ | 1.44 |   | $ | 1.14 |   |
| Diluted earnings per share                                    |   | $                                             | 0.55       |                                         | $      | 0.36 |   | $ | 1.40 |   | $ | 1.11 |   |

 

See accompanyingnotes

 

4

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Capital Corp of the West

Consolidated Statement ofChanges in Shareholders’ Equity

(Unaudited)

 
| **(Amounts in thousands)**                                                                        |   | **Common  Stock** |   | **Retained  earnings** |   | **Accumulated  other  comprehensive  income** |   | **Total** |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------------------|--------|-----------------------------------------------|--------|-----------|--------|
| **Number of  shares**                                                                             |   | **Amounts**       |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| Balance, December 31, 2001                                                                        |   | 5,174             |   | $                      | 40,089 |                                          | $      | 22,372    |   | $ | 1,659 |   | $ | 64,120 |   |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| Exercise of stock options                                                                         |   | 106               |   | 551                    |   | —                                        |   | —    |   | 551 |   |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| Issuance of shares pursuant to 401K and ESOP plans                                                |   | 29                |   | 471                    |   | —                                        |   | —    |   | 471 |   |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| Net Change in fair market value of  investment securities, net of tax benefit  of  $966 |   | —            |   | —                 |   | —                                        |   | 1,430     |   | 1,430 |   |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| 5% stock dividend, including cash payment for  fractional shares                                  |   | —            |   | 4,964                  |   | (4,976                                        | )      | —    |   | (12 | ) |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| Net income                                                                                        |   | —            |   | —                 |   | 7,594                                         |   | —    |   | 7,594 |   |
|                                                                                              |   |              |   |                   |   |                                          |   |      |   |   |   |
| Balance, September 30, 2002                                                                       |   | 5,309             |   | $                      | 46,075 |                                          | $      | 24,990    |   | $ | 3,089 |   | $ | 74,154 |   |
|                                                                                                   |        |                   |        |                        |        |                                               |        |           |        |  |  |  |  |  |  |  |  |

 

See accompanyingnotes

 

5

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Capital Corp ofthe West

Consolidated Statementsof Cash Flows

(Unaudited)

 
| **(Dollars in thousands)**                                                         |   | **9 months  ended  September 30,  2002** |   | **9 months  ended  September 30,  2001** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| **Operating  activities:**                                                         |   |                                     |   |                                     |   |
| Net income                                                                         |   | $                                        | 7,594  |                                     | $      | 5,802 |   |
| Adjustments to reconcile net income to net cash  provided by Operating activities: |   |                                     |   |                                     |   |
| Provision for loan losses                                                          |   | 3,421                                    |   | 3,079                                    |   |
| Depreciation, amortization and accretion, net                                      |   | 2,827                                    |   | 2,283                                    |   |
| Gain on sale of real estate owned                                                  |   | 33                                       |   | —                                   |   |
| Net increase in interest receivable & other  assets                            |   | (1,016                                   | )      | (7,576                                   | )      |
| Net increase in deferred loan fees                                                 |   | 579                                      |   | 350                                      |   |
| Net decrease in accrued interest payable & other  liabilities                  |   | (5,722                                   | )      | (80                                      | )      |
| Net cash provided by operating activities                                          |   | 7,716                                    |   | 3,858                                    |   |
|                                                                               |   |                                     |   |                                     |   |
| **Investing  activities:**                                                         |   |                                     |   |                                     |   |
| Investment securities purchases                                                    |   | (66,311                                  | )      | (75,455                                  | )      |
| Proceeds from maturities of investment securities                                  |   | 37,724                                   |   | 23,488                                   |   |
| Proceeds from sales of AFS investment securities                                   |   | 11,057                                   |   | —                                   |   |
| Net increase in time deposits in other financial  institutions                     |   | —                                   |   | (400                                     | )      |
| Proceeds from sales of commercial and real estate  loans                           |   | 1,901                                    |   | 2,109                                    |   |
| Net increase in loans                                                              |   | (84,312                                  | )      | (89,661                                  | )      |
| Purchases of premises and equipment                                                |   | (2,301                                   | )      | (1,988                                   | )      |
| Purchase of subsidiary                                                             |   | (520                                     | )      | —                                   |   |
| Net cash used in investing activities                                              |   | (102,762                                 | )      | (141,907                                 | )      |
|                                                                               |   |                                     |   |                                     |   |
| **Financing  activities:**                                                         |   |                                     |   |                                     |   |
| Net increase in demand, NOW and savings deposits                                   |   | 29,066                                   |   | 36,405                                   |   |
| Net increase in certificates of deposit                                            |   | 38,203                                   |   | 61,924                                   |   |
| Net proceeds from other borrowings                                                 |   | 50,462                                   |   | 35,468                                   |   |
| Issuance of Capital Securities and increase in  minority interests                 |   | 31                                       |   | 6,000                                    |   |
| Issuance of shares pursuant to 401K and ESOP plans                                 |   | 471                                      |   | 452                                      |   |
| Exercise of stock options                                                          |   | 551                                      |   | 358                                      |   |
| Cash in lieu fractional shares from stock dividend                                 |   | (12                                      | )      | (7                                       | )      |
| Net cash provided by financing activities                                          |   | 118,772                                  |   | 140,600                                  |   |
|                                                                               |   |                                     |   |                                     |   |
| Net increase (decrease) in cash and cash equivalents                               |   | 23,726                                   |   | 2,551                                    |   |
|                                                                               |   |                                     |   |                                     |   |
| Cash and cash equivalents at beginning of period                                   |   | 49,288                                   |   | 47,768                                   |   |
| Cash and cash equivalents at end of period                                         |   | $                                        | 73,014 |                                     | $      | 50,319 |   |
|                                                                               |   |                                     |   |                                     |   |
| **Cash  paid during the quarter:**                                                 |   |                                     |   |                                     |   |
| Interest paid                                                                      |   | $                                        | 13,972 |                                     | $      | 17,514 |   |
| Income tax payments                                                                |   | 3,075                                    |   | 3,225                                    |   |
| **Supplemental  disclosure of noncash investing****and financing activities:**     |   |                                     |   |                                     |   |
| Investment securities unrealized gains, net of tax                                 |   | 1,430                                    |   | 2,742                                    |   |
| Loans transferred to other real estate owned                                       |   | —                                   |   | 335                                      |   |

 

See accompanyingnotes

 

6

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Capital Corp ofthe West

Notes to ConsolidatedFinancial Statements

September 30, 2002and December 31, 2001

(Unaudited)

 

GENERAL - COMPANY

 

Capital Corp ofthe West (the “Company” or “Capital Corp”) is a bank holding companyincorporated under the laws of the State of California on April 26, 1995.  On November 1, 1995, the Company becameregistered as a bank holding company, and is a holder of all of the capitalstock of County Bank (the “Bank”).  During1998, the Company formed Capital West Group, a subsidiary that engages in thefinancial institution advisory business but is currently inactive.  The Company’s primary asset is the Bank****andthe Bank is the Company’s primary source of income.  The Company’s securities consist of 20,000,000 shares of CommonStock, no par value, 10,000,000 shares of Authorized Preferred Stock, and6,000,000 of Trust Preferred 10.20% Capital Securities which have a liquidationamount of $1,000 per capital security. As of September 30, 2002 there were 5,309,386 common shares outstanding,held of record by approximately 2,000 shareholders.  There were no preferred shares outstanding at September 30,2002.  On June 28, 2002, the Companyacquired Regency Investment Advisors, Incorporated (“RIA”) as a wholly ownedsubsidiary from California Bank & Trust, a subsidiary of ZionsBancorporation.  RIA provides financialadvisory services for individuals, small businesses and retirementprograms.  The Bank has three whollyowned subsidiaries, Merced Area Investment & Development, Inc. (“MAID”),County Asset Advisors (“CAA”) and County Investment Trust (“REIT”).  During January 2002, the board approved thedissolution of County Investment II (“REIT 2”) which was completed in thesecond quarter of 2002.  CAA iscurrently inactive.  All referencesherein to the “Company” include the Bank and the Bank’s subsidiaries, unlessthe context otherwise requires.

 

GENERAL - BANK

 

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

 

INDUSTRY ANDMARKET AREA

 

The Bank engages in general commercial bankingbusiness primarily in Fresno, Madera, Mariposa, Merced, San Francisco, SanJoaquin, Stanislaus and Tuolomne counties. The Bank has eighteen full service branch offices; two of which are locatedin Merced with the branch located in downtown Merced currently serving as botha branch and as administrative headquarters. There are offices in Atwater, DosPalos, Hilmar, Livingston, Los Banos, Madera, Mariposa, San Francisco, Sonora,Stockton and two offices in Modesto, two in Fresno and two offices inTurlock.  The Bank’s administrativeheadquarters also provides accommodations for the activities of Merced AreaInvestment & Development (“MAID”), the Bank’s wholly owned real estatesubsidiary.

 

7

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OTHER FINANCIALNOTES

 

All adjustments which in the opinion of Management arenecessary for a fair presentation of the Company’s financial position atSeptember 30, 2002 and December 2001 and the results of operations for thethree and nine month periods ended September 30, 2002 and 2001, and thestatements of cash flows for the nine months ended September 30, 2002 and 2001have been included.  Earnings per sharehave been adjusted to reflect the affect of the 5% stock dividend that was paidApril 26, 2002 to shareholders of record on April 5, 2002.  The interim results for the three and ninemonths ended September 30, 2002 and 2001 are not necessarily indicative ofresults for the full year.  Thesefinancial statements should be read in conjunction with the financialstatements and the notes included in the Company’s Annual Report for the yearended December 31, 2001.

 

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

 

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

 

The following table provides a reconciliation of thenumerator and denominator of the basic and diluted earnings per sharecomputation of the three and nine month periods ended September 30, 2002 and2001:

 
|                                              |   | **For The  Three Months  Ended September 30,** |   | **For The  Nine Months  Ended September 30,** |   |
|---------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
| **(Dollars in thousands, except per share data)** |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Basic EPS computation:                            |   |                                           |   |                                          |   |   |   |   |   |
| Net income                                        |   | $                                              | 2,986  |                                          | $      | 1,909 |   | $ | 7,594 |   | $ | 5,802 |   |
| Average common shares outstanding                 |   | 5,303                                          |   | 5,102                                         |   | 5,260 |   | 5,078 |   |
| Basic EPS                                         |   | $                                              | 0.56   |                                          | $      | 0.37 |   | $ | 1.44 |   | $ | 1.14 |   |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Diluted EPS Computations:                         |   |                                           |   |                                          |   |   |   |   |   |
| Net income                                        |   | $                                              | 2,986  |                                          | $      | 1,909 |   | $ | 7,594 |   | $ | 5,802 |   |
| Average common shares outstanding                 |   | 5,303                                          |   | 5,102                                         |   | 5,260 |   | 5,078 |   |
| Effect of stock options                           |   | 133                                            |   | 173                                           |   | 155 |   | 156 |   |
|                                              |   | 5,436                                          |   | 5,275                                         |   | 5,415 |   | 5,234 |   |
| Diluted EPS                                       |   | $                                              | 0.55   |                                          | $      | 0.36 |   | $ | 1.40 |   | $ | 1.11 |   |

 

On February 22, 2001, the Company issued $6,000,000 inCapital Securities through its 100% ownership position in the County StatutoryTrust I.  The Capital Securities payquarterly cumulative cash distributions at an annual rate of 10.2% of theliquidation value of $1,000 per share. The Capital

 

8

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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 CapitalSecurities are fully and unconditionally guaranteed by the Company to theextent provided in the Guarantee Agreement with respect to the CapitalSecurities.  The proceeds are to be usedfor general corporate purposes.  Theall-in costs of the Capital Securities was 10.39%.  The Capital Securities have the added benefit of qualifying asTier 1 capital for regulatory purposes.

 

During January, 2002, the County Investment Trust realestate investment trust (“REIT”) issued $31,000 in Preferred Stock to 123individual investors that was accounted for on the balance sheet as otherminority interests.  County Bank owns100% of the common stock of the REIT. The REIT may issue, at management’s discretion, Preferred Stock or othercapital instruments in the future in the normal course of operations.  Management has no such plans to issueadditional common or preferred stock in the REIT at this time.  The REIT’s primary business purpose is toinvest in mortgage related assets of the Bank and to provide management with anadditional channel through which equity capital may be raised in the future.

 

OnApril 26, 2002, the Company entered into an agreement to purchase RegencyInvestment Advisors, Incorporated (“RIA”) from California Bank and Trust, asubsidiary of Zions Bancorporation.  Theall cash purchase was completed on June 28, 2002 at a price of $520,000.  RIA’s purchase price included no physicalassets but provided the Company with expected future financial advisory feeincome.  The entire purchase price wasrecorded as a purchase of goodwill.  Ifit is determined that valuations have permanently declined and goodwill isdeemed impaired, the amount of the impairment will be written-off to expense inthat period.

 

EffectiveJanuary 1, 2002, the Company was required to adopt the provisions of SFAS 142.Accordingly, any goodwill and any intangible asset determined to have anindefinite useful life that are acquired in a purchase business combinationwill not be amortized, but will continue to be evaluated for impairment inaccordance with the appropriate accounting literature. The Company was alsorequired to reassess the useful lives and residual values of all suchintangible assets and make any necessary amortization period adjustments byMarch 31, 2002. As a result of this assessment, management determined that noaccounting adjustments were necessary. As of September 30, 2002 and December31, 2001, the Company had recorded goodwill of $1,925,000 and $1,405,000,respectively.  The recording of goodwilloccurred with the acquisition of Town and Country Finance and Thrift(“T&C”) in June, 1996 and RIA in June, 2002.  The original amount of recorded goodwill at the time of theT&C and RIA acquisitions was $2,023,000 and $520,000, respectively.  From July 1, 1996 through December 31, 2001,goodwill attributable to the T&C acquisition was amortized at a rate of$98,000 per quarter. During the first nine months of 2001, the goodwillamortization lowered earnings by $294,000 or $0.06 per share on an after taxbasis when compared with the same period in 2002.  There has been no recorded amortization of the RIA acquisitionand there has been no impairment losses recognized on the T&C and RIArecorded goodwill as of September 30, 2002.

 

Asof the date of adoption, the Company had identifiable intangible assetsconsisting of core deposit premiums and goodwill.  Core deposit premiums are amortized using an accelerated methodover a period of ten years. Intangible assets related to goodwill will nolonger be amortized after December 31, 2001 but will be reviewed for potentialimpairment.  Management has determinedthere was no impairment of goodwill as of January 1, 2002.  As of September 30, 2002 and December 31,2001, the Company had unamortized core deposit premiums of $1,556,000 and$2,088,000, respectively.

 

9

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Amortization of core deposit premiums was$510,000 for the nine months ended September 30, 2002 and 2001.  Core deposit premiums are scheduled toamortize at a rate of approximately $170,000 per quarter through the quarterended September 30, 2004 and at a rate of $47,000 during the fourth quarter of 2004.  Core deposit premiums of $460,000 and $4,340,000 were initiallyrecorded as the result of purchasing deposits from T&C in July, 1996 andfrom the purchase of three branches from Bank of America in December, 1997,respectively.

 

**Impact of Recently Issued Accounting Standards**

 

On October 3, 2001, the Financial Accounting StandardsBoard issued FASB Statement No. 144, Accounting for the Impairment or Disposalof Long-Lived Assets, which addresses financial accounting and reporting forthe impairment or disposal of long-lived assets.  While Statement No. 144 supersedes FASB Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets toBe Disposed Of, it retains many of the fundamental provisions of thatStatement.  Statement No. 144 alsosupersedes the accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations – Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions, for the disposal of a segment of a business.  However, it retains the requirement inOpinion 30 to report separately discontinued operations and extends thatreporting to a component of an entity that either has been disposed of (bysale, abandonment, or in a distribution to owners) or is classified as held forsale.  By broadening the presentation ofdiscontinued operations to include more disposal transactions, the FASB has enhancedmanagement’s ability to provide information that helps financial statementusers to assess the effects of a disposal transaction on the ongoing operationsof an entity.  The Company adopted theprovisions of Statement 144 on January 1, 2002.  The adoption of Statement No. 144 did not have a material impacton the financial condition or operating results of the Company.

 

10

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**Item 2.      Management’s Discussion And Analysis Of Financial Condition And Results Of Operations**

 

The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements that are subject to risks anduncertainties and include information about possible or assumed future resultsof operations.  Many possible events orfactors could affect the future financial results and performance of thecompany.  This could cause results orperformance to differ materially from those expressed in our forward-lookingstatements.  Words such as “experts”,“anticipates”, “believes”, “estimates”, variations of such words and othersimilar expressions are intended to identify such forward-lookingstatements.  These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in, or implied by, such forward-looking statements.

Readers of theCompany’s Form 10-Q should not rely solely on forward looking statements andshould consider all uncertainties and risks discussed throughout this report,as well as those discussed in the Company’s 2001 Annual Report on Form 10-Kfiled March 29, 2002.  These statementsare representative only on the date hereof, and the Company undertakes noobligation to update any forward-looking statements made.  Some possible events or factors that couldoccur that may cause differences from expected results include the following:the Company’s loan growth is dependent on economic conditions, as well asvarious discretionary factors, such as decisions to sell, or purchase certainloans or loan portfolios; participations of loans and the management ofborrower, industry, product and geographic concentrations and the mix of theloan portfolio.  Prevailing interestrates will also affect loan volumes, particularly in the mortgage loan segmentof the portfolio.  The rate ofcharge-offs and provision expense can be affected by local, regional and internationaleconomic and market conditions, concentrations of borrowers, industries,products and geographical conditions, the mix of the loan portfolio andmanagement’s judgements regarding the collectibility of loans.  Liquidity requirements may change as aresult of fluctuations in assets and liabilities and off-balance sheetexposures, which will impact the capital and debt financing needs of theCompany and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent onliquidity requirements and market volatility, as well as on and off-balancesheet positions.  Factors that mayimpact interest rate risk include local, regional and international economicconditions, levels, mix, maturities, yields or rates of assets and liabilitiesand the wholesale and retail funding sources of the Company.

The Company isalso exposed to the potential of losses arising from adverse changes in marketrates and prices which can adversely impact the value of financial products,including securities, loans, and deposits. In addition, the banking industry in general is subject to variousmonetary and fiscal policies and regulations, which include those determined bythe Federal Reserve Board, the Federal Deposit Insurance Corporation and stateregulators, whose policies and regulations could affect the Company’s results.

Other factors thatmay cause actual results to differ from the forward-looking statements includethe following: competition with other local and regional banks, savings andloan associations, credit unions and other nonbank financial institutions, suchas investment 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 enhancements; fee pricing strategies,mergers and acquisitions and their integration into the Company andmanagement’s ability to manage these and other risks.

 

11

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**Critical accounting policies andestimates**

 

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

 

12

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

 

# **Results Of Operations**

 

**Three and Nine Months Ended September 30, 2002 Compared WithThree and Nine Months Ended September 30, 2001**

 

*Overview.*  For the three and nine months endedSeptember 30, 2002 the Company reported record net income of $2,986,000 and$7,594,000.  This compares to $1,909,000and $5,802,000 for the same periods in 2001 and represents an increase of$1,077,000 and $1,792,000 or 56% and 31%. Basic earnings per share were $.56 and $1.44 for the three and ninemonths ended September 30, 2002. Fully diluted earnings per share were $.55 and$1.40 for the three and nine months ended September 30, 2002.  This compares to basic and fully dilutedearnings per share of $.37 and $.36 for the three months and $1.14 and $1.11for the nine months ended September 30, 2001 and represents an increase of$0.19 per share for both basic and fully diluted earnings per share for thethree months ended September 30, 2002 and an increase of $.30 and $.29 for thenine months ended September 30, 2002. The basic and fully diluted earnings per share are reflective of the 5%stock dividend paid in April, 2002.  Theannualized return on average assets was 1.20% and 1.08% for the three and ninemonths ended September 30, 2002 which compares with 0.95% and 1.04% of thethree and nine months ended September 30, 2001 an increase of 25 and 4 basispoints, respectively.  The Company’sannualized return on average equity was 16.72% and 14.87% for the three andnine months ended September 30, 2002 which compares with 12.67% and 13.45% forthe three and nine months ended September 30, 2001 an increase of 405 and 142basis points.  The increased return onequity and assets was primarily the result of growth in net interest incomethat exceeded the growth in noninterest expenses, growth in noninterest incomeand a reduction in the provision for income taxes.  Between September 30, 2001 and September 30, 2002, general marketinterest rates have declined significantly which has caused net interestmargins to decline even as total net interest income has increased.

 

*NetInterest Income.*  TheCompany’s primary source of income is net interest income and is determined bythe difference between interest income and fees derived from earning assets andinterest paid on interest bearing liabilities. Net interest income for the three and nine months ended September 30,2002 totaled $10,576,000 and $29,835,000 which represents an increase of$1,130,000 and $3,496,000 or 12% and 13% when compared to the $9,446,000 and$26,339,000 achieved during the three and nine months ended September 30, 2001.

 

Total interest on earning assets were $15,292,000 and$43,759,000 for the three and nine months ended September 30, 2002, an increaseof $77,000 and $112,000 or less than 1% from both the $15,215,000 and$43,647,000 achieved during the same periods in 2001.  The level of interest income is affected by changes in volume ofand rates earned on interest-earning assets. Interest-earning assets consist primarily of loans, investmentsecurities and federal funds sold.  Thesmall increase in total interest income for the three and nine months endedSeptember 30, 2002 was primarily the result of a decrease in the rates earnedon interest-earning assets and an increase in volumes of interest-earningsassets generated.  Average interest-earningassets for the three and nine months ended September 30, 2002 were $921,812,000and $870,186,000 which compares with $733,550,000 and $678,436,000 for thethree and nine months ended September 30, 2001, an increase of $188,262,000 and$191,750,000 or 26% and 28%, respectively.

 

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Interest expense is a function of the volume of andthe rates paid on interest-bearing liabilities.  Interest-bearing liabilities consist primarily of certaindeposits and borrowed funds.  Totalinterest expense was $4,716,000 and $13,924,000 for the three and nine monthsended September 30, 2002, compared with $5,769,000 and $17,308,000 for thethree and nine months ended September 30, 2001, a decrease of $1,053,000 and$3,384,000 or 18% and 20%.  Thisdecrease was primarily the result of a decrease in the interest rate paid oninterest-bearing liabilities.  Averageinterest-bearing liabilities were $773,106,000 and $734,383,000 for the threeand nine months ended September 30, 2002 compared with $621,370,000 and$572,039,000 for the same three and nine months in 2001, an increase of$151,736,000 and $162,344,000 or 24% and 28%. Average interest rates paid on interest-bearing liabilities were 2.42%and 2.53% for the three and nine months ending September 30, 2002 compared with3.68% and 4.05% for the same three and nine months of 2001, a decrease ininterest rates paid of 126 and 152 basis points or 34% and 38%.

 

The increase in interest-earning assets is primarilythe result of increased market penetration within our target markets achievedby increasing the utilization of existing facilities.  This included using business bankers, other outside salesrepresentatives and focused marketing activities to develop additional customerrelationships.  Deposit and loan growthhas been achieved primarily through existing product lines.  During 2002, a new checking account type waslaunched that included an internet service provider account with a checkingaccount for a single monthly fee.  Theadoption rate to date for this new product has been slow, and did notmaterially add to the September 30, 2002 deposit totals.  The increase in average interest-bearingliabilities was primarily achieved through the increased use of borrowed fundsin the form of Federal Home Loan Bank advances and increased savings andcertificate of deposit balances.

 

The Company’s taxable equivalent net interest margin,the ratio of net interest income to average interest-earning assets, was 4.59%and 4.63% for the three and nine months ended September 30, 2002 compared with5.16% and 5.24% for the same period in 2001. The decrease in net interest margin in 2002 compared with 2001 wasprimarily the result of a decrease in prevailing market interest rates.  Net interest margin provides a measurementof the Company’s ability to employ funds profitably during the period beingmeasured.  Average loans as a percentageof average interest-earning assets were 65% for the three and nine months endedSeptember 30, 2002 which was 100 basis points better than the 64% achieved forthe three and nine months ended September 30, 2001.

 

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

 

AVERAGE BALANCE SHEET& ANALYSIS OF NET INTEREST EARNINGS

 
|                                             |   | **Three months ended  September 30, 2002** |    | **Three months ended  September 30, 2001** |   |
|--------------------------------------------------|--------|--------------------------------------------|---------|--------------------------------------------|--------|
|                                             |   | **Average****Balance**                     |    | **Taxable****EquivalentInterest**          |   | **Taxable****EquivalentYield/rate** |   | **Average  Balance** |   | **Taxable****Equivalent  Interest** |   | **Taxable****EquivalentYield/rate** |   |
|                                             |   | **(Dollars in thousands)**                 |    |
| **Assets**                                       |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| Federal funds sold                               |   | $                                          | 29,802  |                                       | $      | 127 |   | 1.69 | % | $ | 14,345 |   | $ | 118 |   | 3.26 | % |
| Time deposits at other  financial institutions   |   | 500                                        |    | 3                                          |   | 2.38 |   | 500 |   | 4 |   | 3.17 |   |
| Taxable investment  securities(1)                |   | 265,241                                    |    | 3,579                                      |   | 5.35 |   | 219,095 |   | 3,419 |   | 6.19 |   |
| Nontaxable investment  securities(1)             |   | 28,923                                     |    | 381                                        |   | 5.23 |   | 28,973 |   | 379 |   | 5.19 |   |
| Loans, gross:(2)                                 |   | 597,346                                    |    | 11,292                                     |   | 7.50 |   | 470,637 |   | 11,398 |   | 9.61 |   |
| Total interest-earning assets:                   |   | 921,812                                    |    | 15,382                                     |   | 6.62 |   | 733,550 |   | 15,318 |   | 8.28 |   |
| Allowance for loan losses                        |   | (11,750                                    | )       |                                       |   |   |   | (8,631 | ) |   |   |   |   |
| Cash and due from banks                          |   | 32,127                                     |    |                                       |   |   |   | 30,828 |   |   |   |   |   |
| Premises and equipment, net                      |   | 14,085                                     |    |                                       |   |   |   | 13,636 |   |   |   |   |   |
| Interest receivable and other  assets            |   | 38,649                                     |    |                                       |   |   |   | 32,786 |   |   |   |   |   |
| Total assets                                     |   | $                                          | 994,923 |                                       |   |   |   |   | $ | 802,169 |   |   |   |   |   |
|                                             |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| **Liabilities And Shareholders’ Equity**    |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal                   |   | $                                          | 102,565 |                                       | $      | 47 |   | 0.18 |   | $ | 87,290 |   | $ | 49 |   | 0.22 |   |
| Savings deposits                                 |   | 221,130                                    |    | 787                                        |   | 1.41 |   | 200,988 |   | 1,396 |   | 2.76 |   |
| Time deposits                                    |   | 331,509                                    |    | 2,645                                      |   | 3.17 |   | 280,337 |   | 3,635 |   | 5.14 |   |
| Other borrowings                                 |   | 117,901                                    |    | 1,237                                      |   | 4.16 |   | 52,755 |   | 689 |   | 5.18 |   |
| Total interest-bearing  liabilities              |   | 773,105                                    |    | 4,716                                      |   | 2.42 |   | 621,370 |   | 5,769 |   | 3.68 |   |
|                                             |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                     |   | 138,441                                    |    |                                       |   |   |   | 108,787 |   |   |   |   |   |
| Accrued interest, taxes and  other liabilities   |   | 5,934                                      |    |                                       |   |   |   | 5,765 |   |   |   |   |   |
| Total liabilities                                |   | 917,480                                    |    |                                       |   |   |   | 735,922 |   |   |   |   |   |
|                                             |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| Capital Securities and other  minority interests |   | 6,031                                      |    |                                       |   |   |   | 6,000 |   |   |   |   |   |
|                                             |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| Total shareholders’ equity                  |   | 71,412                                     |    |                                       |   |   |   | 60,247 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |   | $                                          | 994,923 |                                       |   |   |   |   | $ | 802,169 |   |   |   |   |   |
|                                             |   |                                       |    |                                       |   |   |   |   |   |   |   |   |   |
| Net interest income and  margin(3)               |   |                                       |    | $                                          | 10,666 |   | 4.59 | % |   |   | $ | 9,549 |   | 5.16 | % |

 

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(1)                                  Tax-equivalent adjustments included in nontaxableinvestment securities income totaled $54,000 and $50,000 for the three monthsended September 30, 2002 and 2001.  Taxequivalent income adjustments included in the nontaxable investment securitiesincome were derived from nontaxable municipal interest income.  Tax equivalent income adjustments includedin taxable investment securities income were created by a dividends receiveddeduction of $36,000 and $53,000 for the three months ended September 30, 2002and 2001

(2)                                  Amounts of interest earned includes loan fees of$155,000 and $325,000 for the three months ended September 30, 2002 and 2001,respectively.  Average loan balancesinclude average non-accrual loan balances.

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

 

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

 

AVERAGE BALANCE SHEET& ANALYSIS OF NET INTEREST EARNINGS

 
|                                             |   | **Nine months ended  September 30, 2002** |    | **Nine months ended  September 30, 2001** |   |
|--------------------------------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|
|                                             |   | **Average  Balance**                      |    | **Taxable****EquivalentInterest**         |   | **Taxable****EquivalentYield/rate** |   | **Average****Balance** |   | **Taxable****Equivalent  Interest** |   | **Taxable****EquivalentYield/rate** |   |
|                                             |   | **(Dollars in thousands)**                |    |
| **Assets**                                       |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| Federal funds sold                               |   | $                                         | 17,837  |                                      | $      | 226 |   | 1.69 | % | $ | 19,925 |   | $ | 689 |   | 4.62 | % |
| Time deposits at other  financial institutions   |   | 500                                       |    | 8                                         |   | 2.14 |   | 347 |   | 11 |   | 4.24 |   |
| Taxable investment  securities(1)                |   | 259,389                                   |    | 10,546                                    |   | 5.44 |   | 193,646 |   | 9,381 |   | 6.48 |   |
| Nontaxable investment securities(1)              |   | 28,942                                    |    | 1,201                                     |   | 5.55 |   | 28,989 |   | 1,133 |   | 5.23 |   |
| Loans, gross:(2)                                 |   | 563,518                                   |    | 32,107                                    |   | 7.62 |   | 435,529 |   | 32,675 |   | 10.03 |   |
| Total interest-earning assets:                   |   | 870,186                                   |    | 44,088                                    |   | 6.77 |   | 678,436 |   | 43,889 |   | 8.65 |   |
| Allowance for loan losses                        |   | (10,823                                   | )       |                                      |   |   |   | (8,548 | ) |   |   |   |   |
| Cash and due from banks                          |   | 29,533                                    |    |                                      |   |   |   | 28,102 |   |   |   |   |   |
| Premises and equipment, net                      |   | 13,422                                    |    |                                      |   |   |   | 13,340 |   |   |   |   |   |
| Interest receivable and other  assets            |   | 38,683                                    |    |                                      |   |   |   | 30,785 |   |   |   |   |   |
| Total assets                                     |   | $                                         | 941,001 |                                      |   |   |   |   | $ | 742,115 |   |   |   |   |   |
|                                             |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| **Liabilities And Shareholders’ Equity**    |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal                   |   | $                                         | 100,713 |                                      | $      | 159 |   | 0.21 |   | $ | 83,269 |   | $ | 201 |   | 0.32 |   |
| Savings deposits                                 |   | 216,396                                   |    | 2,477                                     |   | 1.53 |   | 193,808 |   | 4,817 |   | 3.32 |   |
| Time deposits                                    |   | 307,114                                   |    | 7,877                                     |   | 3.43 |   | 257,740 |   | 10,748 |   | 5.58 |   |
| Other borrowings                                 |   | 110,160                                   |    | 3,411                                     |   | 4.14 |   | 37,222 |   | 1,542 |   | 5.54 |   |
| Total interest-bearing  liabilities              |   | 734,383                                   |    | 13,924                                    |   | 2.53 |   | 572,039 |   | 17,308 |   | 4.05 |   |
|                                             |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                     |   | 126,718                                   |    |                                      |   |   |   | 101,998 |   |   |   |   |   |
| Accrued interest, taxes and  other liabilities   |   | 5,766                                     |    |                                      |   |   |   | 5,689 |   |   |   |   |   |
| Total liabilities                                |   | 866,867                                   |    |                                      |   |   |   | 679,726 |   |   |   |   |   |
|                                             |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| Capital Securities and other  minority interests |   | 6,028                                     |    |                                      |   |   |   | 4,857 |   |   |   |   |   |
|                                             |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| Total shareholders’ equity                  |   | 68,106                                    |    |                                      |   |   |   | 57,532 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |   | $                                         | 941,001 |                                      |   |   |   |   | $ | 742,115 |   |   |   |   |   |
|                                             |   |                                      |    |                                      |   |   |   |   |   |   |   |   |   |
| Net interest income and  margin(3)               |   |                                      |    | $                                         | 30,164 |   | 4.63 | % |   |   | $ | 26,581 |   | 5.24 | % |

 

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(1)                                  Tax-equivalent adjustments included in nontaxableinvestment securities income totaled $219,000 and $149,000 for the nine months ended September 30, 2002 and2001, respectively.  Tax equivalentincome adjustments included in the nontaxable investment securities income werederived from nontaxable municipal interest income.  Tax equivalent income adjustments included in taxable investmentsecurities income were created by a dividends received deduction of $110,000and $93,000 for the nine months ended September 30, 2002 and 2001,respectively.

(2)                                  Amounts of interest earned includes loan fees of$850,000 and $858,000 for September 30, 2002 and 2001 respectively.

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

 

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

 

Net Interest Income Variance Analysis:

 
|                                           |   | **Three months ended  September 30, 2002 compared to September 30, 2001** |   |
|------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
| **(Dollar in thousands)**                      |   | **Volume**                                                                |   | **Rate** |   | **Total** |   |
|                                           |   |                                                                      |   |   |   |   |   |
| Increase (decrease) in  interest  income: |   |                                                                      |   |   |   |   |   |
| Federal funds sold                             |   | $                                                                         | 194    |   | $ | (185 | ) | $ | 9 |   |
| Time deposits at other  financial institutions |   | —                                                                    |   | (1 | ) | (1 | ) |
| Taxable investment securities                  |   | 1,073                                                                     |   | (913 | ) | 160 |   |
| Tax-exempt investment  securities              |   | (1                                                                        | )      | 3 |   | 2 |   |
| Loans                                          |   | 2,675                                                                     |   | (2,781 | ) | (106 | ) |
| Total                                          |   | $                                                                         | 3,941  |   | $ | (3,877 | ) | $ | 64 |   |
|                                           |   |                                                                      |   |   |   |   |   |
| Increase (decrease) in interest  expense:      |   |                                                                      |   |   |   |   |   |
| Interest bearing demand                        |   | $                                                                         | 8      |   | $ | (10 | ) | $ | (2 | ) |
| Savings deposits                               |   | 126                                                                       |   | (735 | ) | (609 | ) |
| Time deposits                                  |   | 574                                                                       |   | (1,564 | ) | (990 | ) |
| Other borrowings                               |   | 705                                                                       |   | (157 | ) | 548 |   |
| Total                                          |   | $                                                                         | 1,413  |   | $ | (2,466 | ) | $ | (1,053 | ) |
|                                           |   |                                                                      |   |   |   |   |   |
| Increase (decrease) in net  interest income    |   | $                                                                         | 2,528  |   | $ | (1,411 | ) | $ | 1,117 |   |

 

 
|                                           |   | **Nine months ended  September 30, 2002 compared to September 30, 2001** |   |
|------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
| **(Dollar in thousands)**                      |   | **Volume**                                                               |   | **Rate** |   | **Total** |   |
|                                           |   |                                                                     |   |   |   |   |   |
| Increase (decrease) in  interest  income: |   |                                                                     |   |   |   |   |   |
| Federal funds sold                             |   | $                                                                        | (66    | ) | $ | (397 | ) | $ | (463 | ) |
| Time deposits at other  financial institutions |   | 5                                                                        |   | (8 | ) | (3 | ) |
| Taxable investment securities                  |   | 3,532                                                                    |   | (2,377 | ) | 1,155 |   |
| Tax-exempt investment  securities              |   | (3                                                                       | )      | 75 |   | 72 |   |
| Loans                                          |   | 11,245                                                                   |   | (11,813 | ) | (568 | ) |
| Total                                          |   | $                                                                        | 14,713 |   | $ | (14,520 | ) | $ | 193 |   |
|                                           |   |                                                                     |   |   |   |   |   |
| Increase (decrease) in interest  expense:      |   |                                                                     |   |   |   |   |   |
| Interest bearing demand                        |   | $                                                                        | 54     |   | $ | (96 | ) | $ | (42 | ) |
| Savings deposits                               |   | 819                                                                      |   | (3,159 | ) | (2,340 | ) |
| Time deposits                                  |   | 2,722                                                                    |   | (5,593 | ) | (2,871 | ) |
| Other borrowings                               |   | 2,578                                                                    |   | (709 | ) | 1,869 |   |
| Total:                                         |   | $                                                                        | 6,173  |   | $ | (9,557 | ) | $ | (3,384 | ) |
|                                           |   |                                                                     |   |   |   |   |   |
| Increase (decrease) in net  interest income    |   | $                                                                        | 8,540  |   | $ | (4,963 | ) | $ | 3,577 |   |

 

17

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*Provision For Loan Losses.*** **The provision for loan losses for the three and nine months endedSeptember 30, 2002 was $1,190,000 and $3,421,000 compared with $1,540,000 and $3,079,000for the three and nine months ended September 30, 2001, a decrease of $350,000for the three months ended September 30, 2002 and an increase of $342,000 forthe nine months ended September 30, 2002. The decrease in the provision for loan losses for the three months endedSeptember 30, 2002 is primarily the result of decreased loss experience in theconsumer segment of the loan portfolio in 2002 as compared with 2001.  The increase in the provision for loanlosses for the nine months ended September 30, 2002 as compared to the sameperiod in 2001 is primarily the result of a greater allowance requirementwithin the agricultural segment of the loan portfolio. The additional provisionand corresponding increase in allowance was necessary due to the increased yearover year delinquency that has occurred within this portfolio segment.  See “Allowance for Loan Losses” containedherein.  As of September 30, 2002 the allowance for loan losseswas $11,934,000 or 1.95% of total loans, which compares to the allowance forloan losses of $9,743,000 or 1.83% as of December 31, 2001.  At September 30, 2002, nonperforming assetstotaled $7,480,000 or 0.74% of total assets, nonperforming loans totaled$7,420,000 or 1.21% of total loans and the allowance for loan losses totaled161% of nonperforming loans.  AtDecember 31, 2001, nonperforming assets totaled $5,328,000 or 0.60% of totalassets, nonperforming loans totaled $4,856,000 or 0.91% of total loans and theallowance for loan losses totaled 201% of nonperforming loans.  No assurance can be given that nonperformingloans will not increase or that the allowance for loan losses will be adequateto cover losses inherent in the loan portfolio.

 

*NoninterestIncome.*** **Noninterestincome increased by $715,000 and $1,697,000 or 46% and 38% to $2,286,000 and$6,195,000 for the three and nine months ended September 30, 2002 compared with$1,571,000 and $4,498,000 during the same period in 2001.  Service charges on deposit accounts increasedby $299,000 and $799,000 or 29% and 27% to $1,326,000 and $3,732,000 for thethree and nine months ended September 30, 2002 compared with $1,027,000 and$2,933,000 for the same period in 2001. The increase in fees is the result of increased customer use offee-based products.  Income from thesale of real estate increased $33,000 for the nine months ended September 30,2002.  During the 2nd quarterof 2002 the Company sold two other real estate owned properties for a net gainof $33,000.  There were no real estatesales during the comparable period in 2001. Other income increased by $416,000 and $865,000 or 76% and 55% for thethree and nine month periods ended September 30, 2002 when compared to the sameperiods in 2001.  The primary source ofthis increased other income is an increase in the investment in andcorresponding dividend income earned on bank owned life insurancepolicies.  The policy dividends areaccrued and added to the cash surrender value of bank owned life insurancepolicies on a monthly basis.

 

*NoninterestExpense.*** **Noninterestexpenses increased by $1,543,000 and $3,666,000 or 23% and 19% to $8,330,000and $23,268,000 for the three and nine months ended September 30, 2002 comparedwith $6,787,000 and $19,602,000 for the same periods in 2001.  The primary components of noninterestexpenses were salaries and employee benefits, furniture and equipment expenses,occupancy expenses, professional fees, marketing expenses, goodwill andintangible amortization, supplies expense, dividend expense on CapitalSecurities and other noninterest expense.

 

For the three and nine months ended September 30,2002, salaries and related benefits increased by $806,000 and $1,948,000 or 24%and 19% to $4,232,000 and $12,015,000 from the $3,426,000 and $10,067,000recorded for the same periods in 2001. The salary expense increase wasprimarily the result of increased staffing levels needed for expanded businessvolumes and normal salary progression. Equipment expenses increased by $42,000and $158,000 or 6% and 8% to $745,000 and $2,165,000 during the three and ninemonths ended September 30, 2002 from the $703,000 and $2,007,000 experiencedduring the same periods in 2001.  Theincrease in equipment expense is primarily the result of increased spending ontechnology during 2002 as compared to 2001. Premises and occupancy expenses increased by $98,000 and $254,000 or 17%and 16% to $676,000 and $1,816,000 for the three and nine months endedSeptember 30, 2002 from $578,000 and $1,562,000 recorded during the same periodin 2001.  The primary reason for theincrease in occupancy costs in 2002 is related to retrofit charges for branchfacilities in Atwater, Fresno, and Merced and the costs of branch expansioninto

 

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Stockton and San Francisco. When comparing the results of the three and nine months ending September30, 2002 to the three and nine months ended September 30, 2001, professionalfees increased by $229,000 and $583,000 or 246% or 189%, marketing expensesdecreased by $21,000 and $55,000 or 7% and 8%, goodwill and intangibleamortization expense decreased by $28,000 and $84,000 or 14% in both periods,supplies expense decreased by $1,000 and $98,000 or less than 1% and 15%,dividend expense on Capital Securities increased by $2,000 and $90,000 or 1%and 24% and other expenses increased $416,000 and $870,000 or 36% and 26% from2001 levels. Increased professional fees in 2002 were the result of anincreased use of consultants used to identify new business profitability andtax saving strategies and consulting fees related to the RIA acquisition.  The increased dividend expense on CapitalSecurities during the nine months ended September 30, 2002 as compared to thesame period in 2001 was due to the fact that the securities were issued duringthe latter part of the first quarter of 2001 and therefore were onlyoutstanding during a small portion of that quarter.  The increase in other noninterest expenses during the threemonths ended September 30, 2002 as compared to this same period in 2001 was primarilyattributable to an operating loss of $200,000 related to an ongoing wiretransfer dispute.  The Company continuesto utilize all legal means possible to collect this disputed amount.  There can be no assurance the Company willbe successful in its collection efforts so the disputed amount has beenrecorded as a loss as of September 30, 2002. The increase in other general and administrative expenses for the ninemonths ended September 30, 2002 as compared to the same period in 2001 wasprimarily attributable to increased operating losses coupled with increasedtelephone costs related to the 2002 new deposit product which offers internetservice provider services with the opening of a checking account.

 

*ProvisionFor Income Taxes.*** **The Company recorded a decrease of $425,000 and$607,000 or 54% and 26% in the income tax provision to $356,000 and $1,747,000for the three and nine months ended September 30, 2002 compared to the $781,000and $2,354,000 recorded for the same periods in 2001.  During the three and nine months ended September 30, 2002, theCompany achieved an effective tax rate of 11% and 19% compared to 29% and 29%recorded for the same periods in 2001.

 

On September 11, 2002, California enacted a lawrequiring large banks, defined as those with average assets in excess of $500million, to conform to federal law with respect to accounting for baddebts.  Prior to the law change, allbanks, regardless of size, were eligible to use the reserve method of accountingfor bad debts which enabled them to take deductions for anticipated bad debtlosses prior to those losses actually being incurred for California taxpurposes.  With the change in the law,large banks may now only deduct actual charge-offs, net of recoveries, indetermining their California taxable income. Banks that are required to conform to the new law must include intaxable income 50 percent of their existing bad debt reserves as of the end ofthe prior tax year.  As a concession forrequiring large banks to comply with the new law, recapture of the remaining 50percent of the reserve is waived creating a one-time permanent taxbenefit.  The Company’s tax benefitresulting from the law change was $290,000 or $0.05 per fully diluted share andhas been reflected in the Company’s provision for income tax expense for thequarter ended September 30, 2002.

 

During 2002, other reductions in the Company’seffective tax rate were made possible by the continued utilization of a realestate investment trust established during the fourth quarter of 2001 thatprovides the Company with a means to potentially generate future additionalcapital for the Bank as well as to currently reduce state income tax expenseand the increased investment in low-income housing tax credit real estatelimited partnerships (“HTC”).  TheCompany’s investment in HTC partnerships was $8,163,000 and $6,800,000 atSeptember 30, 2002 and 2001, respectively.

 

19

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**Interest Rate Risk**

 

A measure of interest rate sensitivity that theCompany monitors through a detailed model is its expected change in netinterest income.  This model’s estimateof interest rate sensitivity takes into account the differing time intervalsand differing rate change increments of each type of interest-sensitive assetand liability and includes certain assumptions and estimates related tocustomer retention levels, loan prepayment rates, and other estimates relatedto customer behavior.  It then measuresthe projected impact of changes in market interest rates on the Company’s netinterest income.  Based upon theSeptember 30, 2002 mix of interest-sensitive assets and liabilities, given animmediate and sustained decrease in the market interest rates of 1%, this modelestimates the Company’s net interest income over the next year would decreaseby $999,000 or 2% of net interest income. If the Company were to experience an immediate and sustained increase inthe market interest rates of 1%, the Company’s interest rate risk modelsestimates the Company’s net interest income over the next year would decrease$147,000 or less than 1% of net interest income.  No assurance can be given that the actual net interest incomewould not decrease by more than $999,000 or 2% in response to a 1% decrease inmarket interest rates or that actual net interest income would not decreasesubstantially if market interest rates decreased by more than 1%.  Conversely, no assurance can be given thatactual net interest income would increase by $147,000 or less than 1% of netinterest income in response to a 1% increase in market interest rates.

 

**FinancialCondition**

 

Total assets at September 30, 2002 were$1,016,401,000, an increase of $122,074,000 or 14% compared with total assetsof $894,327,000 at December 31, 2001. Net loans were $600,821,000 at September 30, 2002, an increase of$78,144,000 or 15% compared with net loans of $522,677,000 on December 31,2001.  Deposits totaled $799,910,000 atSeptember 30, 2002, an increase of $67,269,000 or 9% compared with deposits of$732,641,000 at December 31, 2001.  Theincrease in total assets of the Company between December 31, 2001 and September30, 2002 was primarily the result of an increase in deposit liabilities andincreased leverage maintained in the Company’s investment portfolio.  This additional source of funds was used tofund increased investments in loans and increase the size of the held tomaturity segment of the investment portfolio.

 

On February 22, 2001, the Company issued $6,000,000 inCapital Securities through its 100% ownership position in the County StatutoryTrust I.  The Capital Securities payquarterly cumulative cash distributions at an annual rate of 10.2% of theliquidation value of $1,000 per share. The Capital Securities represent undivided beneficial interests in theTrust.  The Company owns all of theissued and outstanding common securities of the Trust.  Proceeds from the offering and from theissuance of common securities were invested in the Trust in the Company’s 10.2%Junior Subordinated Deferrable Interest Debentures due February 22, 2031 withan aggregate principal amount of $6,000,000. The primary asset of the Trust is the Junior Debentures.  The obligations of the Trust with respect tothe Capital Securities are fully and unconditionally guaranteed by us to theextent provided in the Guarantee Agreement with respect to the CapitalSecurities.  The proceeds were used forgeneral corporate purposes.  The all-incosts of the Capital Securities was 10.39%. The Capital Securities have the added benefit of qualifying as Tier 1capital for regulatory purposes.

 

Total shareholders’ equity was $74,154,000 atSeptember 30, 2002, an increase of $10,034,000 or 16% from $64,120,000 atDecember 31, 2001. The growth in shareholders’ equity between December 31, 2001and September 30, 2002 was primarily achieved through the retention ofaccumulated earnings.  Othercomprehensive increased by $1,430,000 to $3,089,000 at September 30, 2002compared with $1,659,000 at December 31, 2001. Other comprehensive income consists of changes in the fair market

 

20

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value compared to book value of available for sale investmentsecurities and valuation changes in the Bank’s interest rate swap, net ofestimated federal and state income taxes.

 

*InvestmentPortfolio.*  At September 30, 2002 and December 31, 2001the carrying amount (fair value) of available for sale investment securitiestotaled $229,209,000 and $229,852,000 respectively.  The amortized cost of held to maturity securities at September30, 2002 and December 31, 2001 was $61,506,000 and $41,559,000.  The fair value of held to maturitysecurities at September 30, 2002 and December 31, 2001 was $63,897,000 and$42,185,000.  The increase in the sizeof the investment portfolio during 2002 has been primarily through increasedpurchases in investment securities classified as held to maturity.

 

*Off-BalanceSheet Commitments. *The following table shows thedistribution of the Company’s undisbursed loan commitments at the dates indicated.

 

| **(Dollars in thousands)**   |   | **September 30,  2002** |    | **December 31,  2001** |   |
|------------------------------|--------|-------------------------|---------|------------------------|--------|
|                         |   |                    |    |                   |   |
| Letters of credit            |   | $                       | 8,873   |                   | $      | 3,852 |   |
| Commitments to extend credit |   | 197,317                 |    | 188,802                |   |
| Total                        |   | $                       | 206,190 |                   | $      | 192,654 |   |

* *

*OtherInterest-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.  Thedeferred compensation plans are informally linked with universal life insurancepolicies for the salary continuation plans. Income from these policies is reflected in noninterest income.  Additionally, the bank has invested in cashsurrender value bank owned life insurance policies that are not linked todeferred compensation plans.

 
| **(Dollars in thousands)**              |   | **At September 30,  2002** |   | **At   December 31,  2001** |   |
|-----------------------------------------|--------|----------------------------|--------|----------------------------------|--------|
|                                    |   |                       |   |                             |   |
| Cash surrender value of life  insurance |   | $                          | 16,836 |                             | $      | 16,160 |   |
|                                         |        |                            |        |                                  |        |  |  |

 

*Nonperforming Assets. *Nonperforming assetsinclude nonaccrual loans, loans 90 days or more past due, restructured loansand other real estate owned.

 

Nonperforming loans are those which the borrower failsto perform in accordance with the original terms of the obligation and includeloans on nonaccrual status, loans past due 90 days or more and restructuredloans.  The Company generally placesloans on nonaccrual status and accrued but unpaid interest is reversed againstthe current year’s income when interest or principal payments become 90 days ormore past due unless the outstanding principal and interest is adequatelysecured and, in the opinion of management, is deemed in the process ofcollection.  Interest income onnonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principaldepending upon management’s opinion of the ultimate risk of loss on theindividual loan.  Cash payments aretreated as interest income where management believes the remaining principalbalance is fully collectible.  Additionalloans not 90 days past due may also be placed on nonaccrual status ifmanagement reasonably

 

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believes the borrower will not be able to comply with the contractualloan repayment terms and collection of principal or interest is in question.

 

A “restructured loan” is a loan on which interestaccrues at a below market rate or upon which certain principal has beenforgiven so as to aid the borrower in the final repayment of the loan, with anyinterest previously accrued, but not yet collected, being reversed againstcurrent income.  Interest is reported ona cash basis until the borrower’s ability to service the restructured loan inaccordance with its terms is established. The Company had no restructured loans as of the dates indicated in thetable below.

 

The following table summarizes nonperforming assets ofthe Company at September 30, 2002 and December 31, 2001:

 

| **(Dollars  in thousands)**              |   | **September 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                     |   |                    |   |                   |   |
| Nonaccrual loans                         |   | $                       | 6,973  |                   | $      | 4,247 |   |
| Accruing loans past due 90 days  or more |   | 447                     |   | 609                    |   |
| Total nonperforming loans                |   | 7,420                   |   | 4,856                  |   |
| Other real estate owned                  |   | 60                      |   | 472                    |   |
| Total nonperforming assets               |   | $                       | 7,480  |                   | $      | 5,328 |   |
|                                     |   |                    |   |                   |   |
| Nonperforming loans to total  loans      |   | 1.21                    | %      | 0.91                   | %      |
| Nonperforming assets to total  assets    |   | 0.74                    | %      | 0.60                   | %      |

 

Contractual accrued interest income on loans onnonaccrual status as of September 30, 2002 and 2001, that would have beenrecognized if the loans had been current in accordance with their originalterms was approximately $169,000 and $91,000 for the nine months endedSeptember 30, 2002 and 2001.

 

At September 30, 2002, nonperforming assetsrepresented .74% of total assets, an increase of 14 basis point when comparedto the .60% at December 31, 2001. Nonperforming loans represented 1.21% of total loans at September 30,2002, an increase of 30 basis points compared to the .91% at December 31,2001.  Nonperforming loans that weresecured by first deeds of trust on real property were $0 at September 30, 2002and December 31, 2001.   Other forms ofcollateral such as inventory and equipment secured the remaining nonperformingloans as of each date.  No assurance canbe given that the collateral securing nonperforming loans will be sufficient toprevent losses on such loans.

 

The increase in nonperforming loans and nonperformingassets as of September 30, 2002 compared with their levels as of December 31,2001, was due to a growth in nonperforming loans in the agricultural andcommercial segments of the loan portfolio.

 

At September 30, 2002, the Company had $60,000invested in one property acquired through foreclosure.  This property is carried at the lower of itsestimated market value, as evidenced by an independent appraisal, or therecorded investment in the related loan, less estimated selling expenses.  At foreclosure, if the fair value of thereal estate is less than the Company’s recorded investment in the related loan,a charge is made to the allowance for loan losses.  The Company expects to sell this property within a twelve monthperiod.  No assurance can be given thatthe Company will sell such properties during 2002 or at any time or the amountfor which such property might be sold.

 

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Management defines impaired loans, regardless of pastdue status on loans, as those on which principal and interest are not expectedto be collected under the original contractual loan repayment terms.  An impaired loan is charged off at the timemanagement believes the collection process has been exhausted.  At September 30, 2002 and December 31, 2001,impaired loans were measured based on the present value of future cash flowsdiscounted at the loan’s effective rate, the loan’s observable market price orthe fair value of collateral if the loan is collateral-dependent.  Impaired loans at September 30, 2002 were$7,420,000 on account of which the Company had made provisions to the allowancefor loan losses of approximately $1,189,000.

 

Except for loans that are disclosed above, there wereno assets as of September 30, 2002, where known information about possiblecredit problems of borrower causes management to have serious doubts as to theability of the borrower to comply with the present loan repayment terms andwhich may become nonperforming assets. Given the magnitude of the Company’s loan portfolio, however, it isalways possible that current credit problems may exist that may not have beendiscovered by management.

 

**Allowance for Loan Losses**

 

The following table summarizes the loan loss experience of the Companyfor the nine months ended September 30, 2002 and 2001, and for the year endedDecember 31, 2001.

 
|                                        |   | **September 30**           |    | **December 31** |   |
|---------------------------------------------|--------|----------------------------|---------|-----------------|--------|
|                                        |   | **2002**                   |    | **2001**        |   | **2001** |   |
|                                        |   | **(Dollars in thousands)** |    |
| **Allowance  for Loan Losses:**             |   |                       |    |            |   |   |   |
| Balance at beginning of period              |   | $                          | 9,743   |            | $      | 8,207 |   | $ | 8,207 |   |
| Provision for loan losses                   |   | 3,421                      |    | 3,079           |   | 4,115 |   |
| Charge-offs:                                |   |                       |    |            |   |   |   |
| Commercial and  agricultural           |   | 980                        |    | 191             |   | 864 |   |
| Consumer                                    |   | 867                        |    | 2,506           |   | 2,288 |   |
| Total charge-offs                           |   | 1,847                      |    | 2, 697          |   | 3,152 |   |
| Recoveries                                  |   |                       |    |            |   |   |   |
| Commercial and agricultural                 |   | 157                        |    | 155             |   | 159 |   |
| Consumer                                    |   | 460                        |    | 296             |   | 414 |   |
| Total recoveries                            |   | 617                        |    | 451             |   | 573 |   |
| Net charge-offs                             |   | 1,230                      |    | 2,246           |   | 2,579 |   |
| Balance at end of period                    |   | $                          | 11,934  |            | $      | 9,040 |   | $ | 9,743 |   |
|                                        |   |                       |    |            |   |   |   |
| Loans outstanding at period-end             |   | $                          | 612,755 |            | $      | 497,548 |   | $ | 532,420 |   |
| Average loans outstanding                   |   | $                          | 563,518 |            | $      | 435,529 |   | $ | 453,503 |   |
|                                        |   |                       |    |            |   |   |   |
| Annualized net charge-offs to average loans |   | 0.29                       | %       | 0.69            | %      | 0.57 | % |
| Allowance for loan losses                   |   |                       |    |            |   |   |   |
| To total loans                              |   | 1.95                       | %       | 1.82            | %      | 1.83 | % |
| To nonperforming assets                     |   | 159.56                     | %       | 171.74          | %      | 182.85 | % |
|                                             |        |                            |         |                 |        |  |  |  |  |  |  |

 

The Company maintains an allowance for loan losses ata level considered by management to be adequate to cover the inherent risks ofloss associated with its loan portfolio under prevailing and anticipatedeconomic conditions.  In determining theadequacy of the allowance for loan losses, management takes into considerationgrowth trends in the portfolio, examination of financial institution supervisoryauthorities, prior loan loss experience for the Company, concentrations ofcredit risk,

 

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delinquency trends, general economic conditions, the interest rateenvironment and internal and external credit reviews.  In addition, the Company’s risks management processes considersnormal risk factors that are specific to each credit being evaluated, and thoserisk factors may vary depending on the nature of the loan being reviewed.  The normal risks considered by managementwith respect to agricultural loans include the fluctuating value of thecollateral, changes in weather conditions and the availability of adequatewater resources in the Company’s local market area.  The normal risks considered by management with respect to realestate construction loans include fluctuation in real estate values, the demandfor improved commercial and industrial properties and housing, the availabilityof permanent financing in the Company’s market area and borrowers’ ability toobtain permanent financing.  The normalrisks considered by management with respect to real estate mortgage loansinclude fluctuations in the value of real estate.  Additionally, the Company relies on data obtained throughindependent appraisals for significant properties to determine loss exposure onnonperforming loans.

 

The balance in the allowance is affected by theamounts provided from operations, amounts charged off and recoveries of loanspreviously charged off.  The Companyrecorded provisions for loan losses for the three and nine months endedSeptember 30, 2002 of $1,190,000 and $3,421,000 compared with $1,540,000 and$3,079,000 during the same periods in 2001. The decrease in provision for loanlosses in the third quarter of 2002 was related to the reduced level ofconsumer loan charge-off activity that occurred.  Increases in the provision for loan losses for the nine monthsended September 30, 2002 were recorded to adequately provide for the generalloan growth of the Company that has occurred during the 2002 and to increasereserves allocated to the agricultural segment of the loan portfolio.

 

The Company’s charge-offs, net of recoveries, were$1,230,000 for the nine months ended September 30, 2002 compared with$2,246,000 for the same nine months in 2001. The decrease in net charge-offs for the nine months ended September 30,2002 when compared to the same period in 2001 was primarily due to decreasedcharge-offs that occurred within the consumer segment of the loanportfolio.  The decreased charge-offs inthis segment of the portfolio are primarily attributable to a tightening of thecredit standards in the indirect automobile contract segment of the loanportfolio that occurred during the second half of 2001.

 

As of September 30, 2002, the allowance for loanlosses was $11,934,000 or 1.95% of total loans outstanding, compared with$9,743,000 or 1.83% of total loans outstanding as of December 31, 2001 and$9,040,000 or 1.82% of total loans outstanding as of September 30, 2001.  Between September 30, 2001 and 2002, theallowance for loan loss increased $2,894,000 or 32%.

 

The Company uses a method developed by management fordetermining the appropriate level of its allowance for loan losses.  This method applies relevant risk factors tothe entire loan portfolio, including nonperforming loans.  The methodology is based, in part, on theCompany’s loan grading and classification system.  The Company grades its loans through internal reviews andperiodically subjects loans to external reviews which then are assessed by theCompany’s audit committee and management. Credit reviews are performed on a monthly basis and the quality gradingprocess occurs on a quarterly basis. Risk factors applied to the performingloan portfolio are based on the Company’s past loss history considering thecurrent portfolio’s characteristics, current economic conditions and otherrelevant factors.  General reserves areapplied to various categories of loans at percentages ranging up to 1.8% basedon the Company’s assessment of credit risks for each category.  Risk factors are applied to the carryingvalue of each classified loan: (i) loans internally graded “Watch” or“Special Mention” carry a risk factor from 1.0% to 2.0%;(ii) ”Substandard” loans carry a risk factor from 15% to 40% depending oncollateral securing the loan, if any; (iii) “Doubtful” loans carry a 50% riskfactor; and (iv) “Loss” loans are charged off 100%.  In addition, a portion of the allowance is specially allocated toidentified problem credits.  Theanalysis also includes reference to factors such as the delinquency status ofthe loan portfolio,

 

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inherent risk by type of loans, industry statistical data,recommendations made by the Company’s regulatory authorities and outside loanreviewers, and current economic environment. Important components of the overall credit rating process are the assetquality rating process and the internal loan review process.

 

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

 

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

 

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

 

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

 

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

 

*Liquidity.*In order tomaintain adequate liquidity, the Company must have sufficient resourcesavailable at all times to meet its cash flow requirements.  The need for liquidity in a bankinginstitution arises principally to provide for deposit withdrawals, the creditneeds of its customers and to take advantage of investment opportunities asthey arise.  The Company may achievedesired liquidity from both assets and liabilities.  The Company considers cash and deposits held in other banks,federal funds sold, other short term investments, maturing loans andinvestments, payments of principal and interest on loans and investments andpotential loan sales as sources of asset liquidity.  Deposit growth and access to credit lines established withcorrespondent banks and market sources of funds are considered by the

 

25

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Company as sources of liability liquidity.  The holding company’s primary source of liquidity is fromdividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.

 

The Company reviews its liquidity position on aregular basis based upon its current position and expected trends of loans anddeposits. These assets include cash and deposits in other banks,available-for-sale securities and federal funds sold.  The Company’s liquid assets totaled $302,723,000 and $279,640,000on September 30, 2002 and December 31, 2001, respectively, and constituted 30%and 31% of total assets on those dates. Liquidity is also affected by the collateral requirements of its publicdeposits and certain borrowings.  Totalpledged securities were $222,240,000 at September 30, 2002 compared with$141,386,000 at December 31, 2001.

 

Although the Company’s primary sources of liquidityinclude liquid assets and a stable deposit base, the Company maintains lines ofcredit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bankof San Francisco, Pacific Coast Bankers’ Bank, Union Bank of California, WellsFargo Bank and First Tennessee Bank aggregating $181,366,000 of which$121,076,000 was outstanding as of September 30, 2002 and $73,759,000 wasoutstanding as of December 31, 2001. The increase in borrowings outstandingduring the first nine months of 2002 produced an inflow of funds that were usedto purchase additional investment securities and fund loan production.  Management believes that the Companymaintains adequate amounts of liquid assets to meet its liquidity needs.  The Company’s liquidity might beinsufficient if deposit withdrawals were to exceed anticipated levels.  Deposit withdrawals can increase if acompany experiences financial difficulties or receives adverse publicity forother reasons, or if its pricing, products or services are not competitive withthose offered by other institutions.

 

*CapitalResources. *Capital serves as a source of funds andhelps protect depositors against potential losses.  The primary source of capital for the Company has been internallygenerated capital through retained earnings. The Company’s shareholders’ equity increased by $10,034,000 or 16% fromDecember 31, 2001 to September 30, 2002.

 

The Company is subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan initiate mandatory and possibly additional discretionary actions by theregulators that, if undertaken, could have a material adverse effect on theCompany’s financial statements. Management believes, as of September 30, 2002, that the Company and theBank met all applicable capital requirements. The Company’s leverage capital ratio at September 30, 2002 was 7.37% ascompared with 7.72% as of December 31, 2001. The Company’s total risk based capital ratio at September 30, 2002 was10.69% which compares with a 10.74% risk based capital ratio as of December 31,2001.

 

26

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The Company’s and Bank’s actual capital amounts andratios met all regulatory requirements as of September 30, 2002 and weresummarized as follows:

 
| **Dollars in thousands**                  |   | **Actual** |   | **For Capital****Adequacy Purposes** |   | **To Be Well Capitalized****Under Prompt  CorrectiveAction Provisions:** |   |
|-------------------------------------------|--------|------------|--------|--------------------------------------|--------|--------------------------------------------------------------------------|--------|
| **Consolidated**                          |   | **Amount** |   | **Ratio**                            |   | **Amount**                                                               |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| As of September 30, 2002                  |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| Total capital (to risk weighted  assets)  |   | $          | 82,809 |                                 | 10.69  | %                                                                        | $      | 61,979 |   | 8.0 | % | $ | 77,474 |   | 10.0 | % |
| Tier 1 capital (to risk  weighted assets) |   | 73,097     |   | 9.44                                 |   | 30,990                                                                   |   | 4.0 |   | 46,484 |   | 6.0 |   |
| Leverage ratio*                           |   | 73,097     |   | 7.37                                 |   | 39,657                                                                   |   | 4.0 |   | 49,571 |   | 5.0 |   |
|                                      |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| The Bank:                                 |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| As of September 30, 2002                  |   |       |   |                                 |   |                                                                     |   |   |   |   |   |   |   |
| Total capital (to risk weighted  assets)  |   | $          | 80,862 |                                 | 10.46  | %                                                                        | $      | 61,820 |   | 8.0 | % | $ | 77,275 |   | 10.0 | % |
| Tier 1 capital (to risk  weighted assets) |   | 71,175     |   | 9.21                                 |   | 30,910                                                                   |   | 4.0 |   | 46,365 |   | 6.0 |   |
| Leverage ratio*                           |   | 71,175     |   | 7.19                                 |   | 39,603                                                                   |   | 4.0 |   | 49,504 |   | 5.0 |   |

 

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*The leverage ratio consists of Tier 1 capital divided by adjusted quarterlyaverage assets.  The minimum leverageratio is 3 percent for banking organizations that do not anticipate significantgrowth and that have well-diversified risk, excellent asset quality and ingeneral, are considered top-rated banks.

 

The Company has no formal dividend policy, anddividends are issued solely at the discretion of the Company’s Board ofDirectors, subject to compliance with regulatory requirements.  In order to pay any cash dividends, theCompany must receive payments of dividends or management fees from theBank.  There are certain regulatorylimitations on the payment of cash dividends by banks.

 

*Deposits.*  Deposits are the Company’s primary source offunds.  At September 30, 2002, theCompany had a deposit mix of 28% in savings deposits, 41% in time deposits, 13%in interest-bearing checking accounts and 18% in noninterest-bearing demandaccounts.  Noninterest-bearing demanddeposits enhance the Company’s net interest income by lowering its costs offunds.

 

The Company obtains deposits primarily from the communitiesit serves.  No material portion of itsdeposits has been obtained from or is dependent on any one person orindustry.  The Company’s business is notseasonal in nature.  The Company acceptsdeposits in excess of $100,000 from customers. These deposits are priced to remain competitive.  At September 30, 2002, the Company hadbrokered deposits of $15,496,000.

 

Maturities of time certificates of deposits of$100,000 or more outstanding at September 30, 2002 and December 31, 2001 aresummarized as follows:

 
|                      |   | **September 30, 2002**     |    | **December 31, 2001** |   |
|---------------------------|--------|----------------------------|---------|-----------------------|--------|
|                      |   | **(Dollars in thousands)** |    |
|                      |   |                       |    |                  |   |
| Three months or less      |   | $                          | 51,861  |                  | $      | 53,879 |   |
| Over three to six months  |   | 38,856                     |    | 37,358                |   |
| Over six to twelve months |   | 32,203                     |    | 30,776                |   |
| Over twelve months        |   | 40,952                     |    | 9,161                 |   |
| Total                     |   | $                          | 163,872 |                  | $      | 131,174 |   |

 

27

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**Borrowed Funds**

 

The increase in other borrowings during the first ninemonths of 2002 was primarily due to the use of a leveraged investment strategythat uses additional FHLB borrowings to fund purchases of investment securitieswithin the Bank’s investment portfolio.

 

**Return on Equity and Assets**

 
|                                 |   | **Nine months ended  September 30  2002** |   | **Nine months ended  September 30  2001** |   | **Year ended  December 31  2001** |   |
|--------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------|--------|
|                                 |   |                                      |   |                                      |   |                              |   |
| Annualized return on average  assets |   | 1.08                                      | %      | 1.04                                      | %      | 1.03                              | %      |
| Annualized return on average  equity |   | 14.87                                     | %      | 13.45                                     | %      | 13.40                             | %      |
| Average equity to average  assets    |   | 7.24                                      | %      | 7.75                                      | %      | 7.69                              | %      |

 

**Impactof Inflation**

 

The primary impact of inflation on the Company is itseffect on interest rates.  The Company’sprimary source of income is net interest income which is affected by changes ininterest rates.  The Company attempts tolimit inflation’s impact on its net interest margin through management of ratesensitive assets and liabilities and the analysis of interest ratesensitivity.  The effect of inflation onpremises and equipment, as well as on interest expenses, has not beensignificant for the periods covered in this report.

 

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**Item 3.                   Quantitative and Qualitative Disclosures aboutMarket Risk**

 

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

 

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

 

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

 

It is the opinion of managementthere has been no material change in the Company’s market risk during the firstnine months of 2002 when compared to the level of market risk at December 31,2001.  If interest rates were tosuddenly and materially fall from levels experienced during the first ninemonths of 2002, the Company could become susceptible to an increased level ofmarket risk.

 

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**Item4.                   Controls andProcedures**

 

The Company’s ChiefExecutive Officer and Chief Financial Officer have reviewed and evaluated theCompany’s disclosure controls and procedures within 90 days of the filing ofthis report, and have concluded that the Company’s disclosure controls andprocedures were adequate and effective to ensure that information required tobe disclosed is recorded, processed, summarized, and reported in a timelymanner.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the ChiefExecutive Officer and Chief Financial Officers evaluation, nor were there anysignificant deficiencies or material weaknesses in the controls which requiredcorrective action.

 

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**PARTII - Other Information**

 

**Item1.                   Legal Proceedings**

 

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

 

**Item2.                   Changes in Securitiesand Use of Proceeds.**

 

None.

 

**Item3.                   Defaults Upon SeniorSecurities.**

 

None.

 

**Item4.                   Submission of Mattersto a Vote of Securities Holders.**

 

None.

 

**Item5.                   Other Information.**

 

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

 

**Item6.                   Exhibits and Reportson Form 8-K.**

 

(a)                                 Exhibits.

 
| **Exhibit  Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                        |   |   |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1                 |   | Articles of  Incorporation (filed as Exhibit 3.1 of the Company’s September 30, 1996 Form  10-Q filed with the SEC on or about November 14, 1996).                                                                                                                                                            |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 3.2                 |   | Bylaws (filed as  Exhibit 3.2 of the Company’s September 30, 1996 Form 10-Q filed with the SEC  on or about November 14, 1996).                                                                                                                                                                               |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 3.3                 |   | Rights Agreement  between Capital Corp of the West and Harris Trust Company of California dated  as of September 26, 1997, including Form of Right Certificate attached  thereto as Exhibit B (filed as Exhibit 4 to the Company’s Registration  Statement on Form 8-A filed with the SEC on October 1, 1997. |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10                  |   | Employment Agreement  between Thomas T. Hawker and Capital Corp. of the West (filed as Exhibit  10.10 of the Company’s June 30, 2002 10-Q filed with the SEC on or about  August 13, 2002).                                                                                                                   |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.1                |   | Administration  Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10-K  filed with the SEC on or about March 31, 1996).                                                                                                                                                                |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.2                |   | Stock Option Plan  (filed as Exhibit 10.6 of the Company’s 1995 Form 10-K filed with the SEC on  or about March 31, 1996).                                                                                                                                                                                    |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.3                |   | 401(k) Plan (filed as  Exhibit 10.7 of the Company’s 1995 Form 10-K filed with the SEC on or about  March 31, 1996).                                                                                                                                                                                          |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.4                |   | Employee Stock  Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10-K filed  with the SEC on or about March 31, 1996).                                                                                                                                                                        |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.5                |   | Purchase Agreement for  three branches from Bank of America is incorporated herein by reference from  Exhibit 2.1 Registration Statement on Form S-2 filed July 14, 1997, File No.  333-31193.                                                                                                                     |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.6                |   | Change-in-Control  Agreement between R. Dale McKinney and Capital Corp of the West (filed as  Exhibit 10.6 of the Company’s 1999 Form   10-K with the SEC on or about March 17, 2000).                                                                                                                   |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.7                |   | Deferred Compensation  Agreement between members of the board of directors and Capital Corp of the  West (filed as exhibit 10.7 of the Company’s 1999 Form 10-K with the SEC on  or about March 17, 2000).                                                                                                    |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.8                |   | Executive Salary  Continuation Agreement between certain members of executive management and  Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999 Form  10-K with the SEC in or about March 17, 2000).                                                                                      |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.9                |   | Executive Salary  Continuation Agreement between senior executive management and Capital Corp  of the West (filed as Exhibit 10.9 of the Company’s 2001 Form 10-K with the  SEC on or about March 29, 2002).                                                                                                  |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 11                  |   | Statement Regarding the  Computation of Earnings Per Share is incorporated herein by reference from  Note 1 of the Company’s Consolidated Financial Statements.                                                                                                                                          |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 13                  |   | Annual Report to  Security Holders.                                                                                                                                                                                                                                                                                |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 99.1                |   | Certification of CEO  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 99.2                |   | Certification of CFO  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    |   |   |

----

*     Denotes management contract or compensatory plan arrangement.

 

**Reports on Form 8-K**

 

None

 

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**SIGNATURES**

 

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

 
|                   | CAPITAL CORP OF THE WEST |
|------------------------|--------------------------|
|                   | (Registrant)             |
|                   |                     |
| Date: November 6, 2002 | By                       | /s/ | Thomas T. Hawker |   |
|                   |                     |   | Thomas T. Hawker |   |
|                   |                     |   | President and |   |
|                   |                     |   | Chief Executive Officer |   |
|                   |                     |   |   |   |
| Date: November 6, 2002 | By                       | /s/ | R. Dale McKinney |   |
|                   |                     |   | R. Dale McKinney |   |
|                   |                     |   | Chief Financial Officer |   |

 

32

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**CERTIFICATIONS UNDER****SECTION 302 OF THE SARBANES OXLEY ACT OF 2002***

 

I,Thomas T. Hawker, certify that:

 

1. Ihave reviewed this quarterly report on Form 10-Q of Capital Corp of the West;

 

2. Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3. Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4. Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

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

 

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

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

33

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5. Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6. Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  November 6, 2002 |                    |
|-------------------------|-------------------------|
|                    |                    |
|                    | /s/ Thomas T. Hawker    |   |
|                    | Thomas T. Hawker        |   |
|                    |                    |   |
|                    | Chief Executive Officer |   |

 

34

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**CERTIFICATIONS UNDER**

**SECTION 302 OF**

**THE SARBANES OXLEY ACT OF 2002***

 

I, R.Dale McKinney, certify that:

 

1. Ihave reviewed this quarterly report on Form 10-Q of Capital Corp of the West;

 

2. Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3. Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4. Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

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

 

b)evaluated the effectiveness of the registrant’s disclosure controls and proceduresas of a date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

35

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5. Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6. Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  November 6, 2002 |                            |
|-------------------------|---------------------------------|
|                    |                            |
|                    | /s/  R. Dale McKinney |   |
|                    | R. Dale McKinney                |   |
|                    |                            |   |
|                    | Chief Financial Officer         |   |

 

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