** **

**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 
| **ý** | **Quarterly  Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for  the  Quarterly Period Ended March 31, 2002** |
|------------|----------------------------------------------------------------------------------------------------------------------------------------|

 

**or**

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

 

| **Commission File Number: 0-27384** |
|-------------------------------------|

 

**CAPITAL CORP OF THE WEST**

(Exact name of registrantas specified in its charter)

 

| **California**                                                                                              | **77-0405791**         |
|-------------------------------------------------------------------------------------------------------------|------------------------|
| (State or other  jurisdiction of incorporation or organization)                                             | IRS Employer ID Number |
|                                                                                                        |
| **550  West Main, Merced, CA  95340**                                                                  |
| (Address of principal  executive offices)                                                                   |
|                                                                                                        |
| Registrant’s telephone number, including area  code:    **(209) 725-2200**         |
|                                                                                                        |
| Former name, former address and former fiscal year, if changed since  last report: ** Not applicable** |

 

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

Yes   ý   No   o

 

Thenumber of shares outstanding of the registrant’s common stock, no par value, asof March 31, 2002 was 4,975,308.  Noshares of preferred stock, no par value, were outstanding at March 31, 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                                  |
|                                                                                                       |                                                                    |
| 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                                                                                                 |
|                                                                                                            |                                                                         |  |

 

2

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Capital Corp of the West

Consolidated Balance Sheets

(Unaudited)

 
|                                                                                                                                                  |   | **March 31,  2002**         |    | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|-------------------------|--------|
|                                                                                                                                                  |   | **(Dollars  in thousands)** |    |
| **Assets**                                                                                                                                            |   |                        |    |                    |   |
| Cash and noninterest-bearing deposits in other banks                                                                                                  |   | $                           | 27,021  |                    | $      | 38,003 |   |
| Federal funds sold                                                                                                                                    |   | 9,525                       |    | 11,285                  |   |
| Time deposits at other financial institutions                                                                                                         |   | 500                         |    | 500                     |   |
| Investment securities available for sale, at fair  value                                                                                              |   | 232,032                     |    | 229,852                 |   |
| Investment securities held to maturity at cost, fair  value of  $66,538,000, and $42,185,000 at March 31, 2002 and December 31, 2000                  |   | 66,611                      |    | 41,559                  |   |
| Loans, net of allowance for loan losses of  $10,229,000 and $9,743,000 at  March 31, 2002 and December 31, 2001                                  |   | 537,522                     |    | 522,677                 |   |
| Interest receivable                                                                                                                                   |   | 5,906                       |    | 5,757                   |   |
| Premises and equipment, net                                                                                                                           |   | 12,944                      |    | 13,143                  |   |
| Intangible assets                                                                                                                                     |   | 3,323                       |    | 3,493                   |   |
| Other assets                                                                                                                                          |   | 29,774                      |    | 28,058                  |   |
|                                                                                                                                                  |   |                        |    |                    |   |
| Total assets                                                                                                                                          |   | $                           | 925,158 |                    | $      | 894,327 |   |
|                                                                                                                                                  |   |                        |    |                    |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                        |   |                        |    |                    |   |
| Deposits                                                                                                                                              |   |                        |    |                    |   |
| Noninterest-bearing demand                                                                                                                            |   | $                           | 123,444 |                    | $      | 132,496 |   |
| Negotiable orders of withdrawal                                                                                                                       |   | 99,067                      |    | 102,055                 |   |
| Savings                                                                                                                                               |   | 222,138                     |    | 203,721                 |   |
| Time, under $100,000                                                                                                                                  |   | 149,563                     |    | 163,195                 |   |
| Time, $100,000 and over                                                                                                                               |   | 137,331                     |    | 131,174                 |   |
| Total deposits                                                                                                                                        |   | 731,543                     |    | 732,641                 |   |
|                                                                                                                                                  |   |                        |    |                    |   |
| Borrowed funds                                                                                                                                        |   | 116,636                     |    | 80,685                  |   |
| Accrued interest, taxes and other liabilities                                                                                                         |   | 5,538                       |    | 10,881                  |   |
| Total liabilities                                                                                                                                     |   | 853,717                     |    | 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;  4,975,308 and 4,927,465 issued & outstanding at March 31, 2002  and December 31, 2001 |   | 40,541                      |    | 40,089                  |   |
| Retained earnings                                                                                                                                     |   | 24,596                      |    | 22,372                  |   |
| Accumulated other comprehensive income                                                                                                                |   | 273                         |    | 1,659                   |   |
|                                                                                                                                                  |   |                        |    |                    |   |
| Total shareholders’ equity                                                                                                                       |   | 65,410                      |    | 64,120                  |   |
| Total liabilities, Capital Securities and minority  interests and   shareholders’ equity                                                         |   | $                           | 925,158 |                    | $      | 894,327 |   |

 

See accompanying notes

 

3

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Capital Corp of the West

Consolidated Statementsof Income and Comprehensive Income

(Unaudited)

 
|                                                            |   | **For the  three months  ended March 31,** |       |
|-----------------------------------------------------------------|--------|--------------------------------------------|------------|
| (Dollars in  thousands, except per share data)                  |   | **2002**                                   |       | **2001** | ** ** |
| **Interest  income:**                                           |   |                                       | ** ** |   | ** ** |
| Interest and fees on loans                                      |   | $                                          | 10,137     |   | $ | 10,780 |   |
| Interest on deposits with other financial  institutions         |   | 2                                          |       | 2 |   |
| Interest on investments held to maturity:                       |   |                                       |       |   |   |
| Taxable                                                         |   | 927                                        |       | 576 |   |
| Non-taxable                                                     |   | 55                                         |       | 56 |   |
| Interest on investments available for sale:                     |   |                                       |       |   |   |
| Taxable                                                         |   | 2,472                                      |       | 2,256 |   |
| Non-taxable                                                     |   | 272                                        |       | 272 |   |
| Interest on federal funds sold                                  |   | 12                                         |       | 344 |   |
| Total interest income                                           |   | 13,877                                     |       | 14,286 |   |
|                                                            |   |                                       |       |   |   |
| **Interest  expense:**                                          |   |                                       |       |   |   |
| Interest on negotiable orders of withdrawal                     |   | 54                                         |       | 91 |   |
| Interest on savings deposits                                    |   | 831                                        |       | 1,807 |   |
| Interest on time deposits, under $100,000                       |   | 1,539                                      |       | 1,491 |   |
| Interest on time deposits, $100,000 and over                    |   | 1,179                                      |       | 2,092 |   |
| Interest on other borrowings                                    |   | 948                                        |       | 390 |   |
| Total interest expense                                          |   | 4,551                                      |       | 5,871 |   |
|                                                            |   |                                       |       |   |   |
| Net interest income                                             |   | 9,326                                      |       | 8,415 |   |
| Provision for loan losses                                       |   | 780                                        |       | 750 |   |
| Net interest income after provision for loan losses             |   | 8,546                                      |       | 7,665 |   |
|                                                            |   |                                       |       |   |   |
| **Noninterest  income:**                                        |   |                                       |       |   |   |
| Service charges on deposit accounts                             |   | 1,127                                      |       | 902 |   |
| Other                                                           |   | 652                                        |       | 451 |   |
| Total noninterest income                                        |   | 1,779                                      |       | 1,353 |   |
|                                                            |   |                                       |       |   |   |
| **Noninterest  expenses:**                                      |   |                                       |       |   |   |
| Salaries and related benefits                                   |   | 3,944                                      |       | 3,313 |   |
| Premises and occupancy                                          |   | 569                                        |       | 465 |   |
| Equipment                                                       |   | 716                                        |       | 624 |   |
| Professional fees                                               |   | 253                                        |       | 117 |   |
| Marketing                                                       |   | 188                                        |       | 211 |   |
| Goodwill and intangible amortization                            |   | 170                                        |       | 198 |   |
| Supplies                                                        |   | 186                                        |       | 202 |   |
| Dividend Expense on Capital Securities                          |   | 154                                        |       | 63 |   |
| Other                                                           |   | 1,245                                      |       | 1,146 |   |
| Total noninterest expenses                                      |   | 7,425                                      |       | 6,339 |   |
|                                                            |   |                                       |       |   |   |
| Income before income taxes                                      |   | 2,900                                      |       | 2,679 |   |
| Provision for income taxes                                      |   | 676                                        |       | 767 |   |
| Net income                                                      |   | $                                          | 2,224      |   | $ | 1,912 |   |
| Comprehensive Income:                                           |   |                                       |       |   |   |
| Unrealized (loss) gain on securities arising during  the period |   | (1,386                                     | )          | 1,215 |   |
| Comprehensive Income                                            |   | $                                          | 838        |   | $ | 3,127 |   |
| Basic earnings per share                                        |   | $                                          | 0.43       |   | $ | 0.38 |   |
| Diluted earnings per share                                      |   | $                                          | 0.42       |   | $ | 0.37 |   |

 

See accompanying notes

 

4

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Capital Corp of the West

Consolidated Statement ofChanges in Shareholders’ Equity

(Unaudited)

 
|                                                                                         |   | **Common  Stock**     |   | **Retained  earnings** |   | **Accumulated  other** |                      |   |      |
|----------------------------------------------------------------------------------------------|--------|-----------------------|--------|------------------------|--------|------------------------|---------------------------|--------|-----------|
| (Amounts in  thousands)                                                                      |   | **Number of  shares** |   | **Amounts**            |   |                   | **comprehensive  income** |   | **Total** |   |
|                                                                                         |   |                  |   |                   |   |                   |                      |   |      |   |   |
| Balance, December 31, 2001                                                                   |   | 4,927                 |   | $                      | 40,089 |                   | $                         | 22,372 |      | $ | 1,659 |   | $ | 64,120 |   |
|                                                                                         |   |                  |   |                   |   |                   |                      |   |      |   |   |
| Exercise of stock options                                                                    |   | 28                    |   | 139                    |   | —                 |                      | — |      | 139 |   |
|                                                                                         |   |                  |   |                   |   |                   |                      |   |      |   |   |
| Issuance of shares pursuant to 401K and ESOP plans                                           |   | 20                    |   | 313                    |   | —                 |                      | — |      | 313 |   |
|                                                                                         |   |                  |   |                   |   |                   |                      |   |      |   |   |
| Net Change in fair market value of investment  securities, net of tax benefit of   $924 |   | —                |   | —                 |   | —                 |                      | (1,386 | )         | (1,386 | ) |
|                                                                                         |   |                  |   |                   |   |                   |                      |   |      |   |   |
| Net income                                                                                   |   | —                |   | —                 |   | 2,224                  |                      | — |      | 2,224 |   |
|                                                                                         |   |                  |   |                   |   |                   |                      |   |      |   |   |
| Balance, March 31, 2002                                                                      |   | 4,975                 |   | $                      | 40,541 |                   | $                         | 24,596 |      | $ | 273 |   | $ | 65,410 |   |

 

See accompanying notes

 

5

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Capital Corp of the West

Consolidated Statements of Cash Flows

(Unaudited)

 
| (Dollars in  thousands)                                                                   |   | **3 months  ended   March 31,  2002** |   | **3 months  ended  March 31  2001** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| **Operating  activities:**                                                                |   |                                  |   |                                |   |
| Net income                                                                                |   | $                                     | 2,224  |                                | $      | 1,912 |   |
| Adjustments to reconcile net income to net cash  (used) provided by Operating activities: |   |                                  |   |                                |   |
| Provision for loan losses                                                                 |   | 780                                   |   | 750                                 |   |
| Depreciation, amortization and accretion, net                                             |   | 846                                   |   | 503                                 |   |
| Net increase in interest receivable & other  assets                                   |   | (1,527                                | )      | (2,796                              | )      |
| Net increase (decrease) in deferred loan fees                                             |   | 114                                   |   | (8                                  | )      |
| Net decrease in accrued interest payable & other  liabilities                         |   | (5,343                                | )      | (42                                 | )      |
| Net cash (used) provided by operating activities                                          |   | (2,906                                | )      | 319                                 |   |
|                                                                                      |   |                                  |   |                                |   |
| **Investing  activities:**                                                                |   |                                  |   |                                |   |
| Investment securities purchases                                                           |   | (45,653                               | )      | (32,987                             | )      |
| Proceeds from maturities of investment securities                                         |   | 16,499                                |   | 6,605                               |   |
| Net increase in time deposits in other financial  institutions                            |   | —                                |   | (250                                | )      |
| Proceeds from sales of commercial and real estate  loans                                  |   | 1,200                                 |   | 967                                 |   |
| Net increase in loans                                                                     |   | (16,936                               | )      | (5,636                              | )      |
| Purchases of premises and equipment                                                       |   | (282                                  | )      | (275                                | )      |
| Net cash used in investing activities                                                     |   | (45,172                               | )      | (31,576                             | )      |
|                                                                                      |   |                                  |   |                                |   |
| **Financing  activities:**                                                                |   |                                  |   |                                |   |
| Net increase (decrease) in demand, NOW and savings  deposits                              |   | 6,377                                 |   | (5,006                              | )      |
| Net (decrease) increase in certificates of deposit                                        |   | (7,475                                | )      | 27,967                              |   |
| Net proceeds from other borrowings                                                        |   | 35,951                                |   | 13,715                              |   |
| Issuance of Capital Securities and increase in  minority interests                        |   | 31                                    |   | 6,000                               |   |
| Issuance of shares pursuant to 401K and ESOP plans                                        |   | 313                                   |   | 323                                 |   |
| Exercise of stock options                                                                 |   | 139                                   |   | 139                                 |   |
| Cash in lieu fractional shares from stock dividend                                        |   | —                                |   | (7                                  | )      |
| Net cash provided by financing activities                                                 |   | 35,336                                |   | 43,131                              |   |
|                                                                                      |   |                                  |   |                                |   |
| Net (decrease) increase in cash and cash equivalents                                      |   | (12,742                               | )      | 11,874                              |   |
|                                                                                      |   |                                  |   |                                |   |
| Cash and cash equivalents at beginning of period                                          |   | 49,288                                |   | 47,768                              |   |
| Cash and cash equivalents at end of period                                                |   | $                                     | 36,546 |                                | $      | 59,642 |   |
|                                                                                      |   |                                  |   |                                |   |
| **Cash  paid during the quarter:**                                                        |   |                                  |   |                                |   |
| Interest paid                                                                             |   | $                                     | 4,623  |                                | $      | 5,809 |   |
| Income tax payments                                                                       |   | —                                |   | 1,425                               |   |
| **Supplemental  disclosure of noncash investing****and financing activities:**            |   |                                  |   |                                |   |
| Investment securities unrealized (losses) gains, net  of tax                              |   | (1,386                                | )      | $                                   | 1,215  |   |

 

See accompanying notes

 

6

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Capital Corp of the West

Notes to ConsolidatedFinancial Statements

March 31, 2002 and December31, 2001

(Unaudited)

 

GENERAL - COMPANY

 

Capital Corp of the West (the “Company” or“Capital Corp”) is a bank holding company incorporated under the laws of theState of California on April 26, 1995. On November 1, 1995, the Company became registered as a bank holdingcompany, and is a holder of all of the capital stock of County Bank (the“Bank”).  During 1998, the Companyformed Capital West Group, a subsidiary that engages in the financialinstitution 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 March 31, 2002 there were 4,975,308 common shares outstanding,held of record by approximately 1,700 shareholders.  There were no preferred shares outstanding at March 31,2002.  The Bank has four wholly ownedsubsidiaries, Merced Area Investment & Development, Inc. (“MAID”), CountyAsset Advisors (“CAA”), County Investment Trust (“REIT”), and County InvestmentII (“REIT 2”).  During January 2002, theboard approved the dissolution of REIT 2. It is anticipated that REIT 2 will be completely liquidated anddissolved by the end of the second quarter of 2002.  CAA is currently inactive.  On April 26, 2002, the Company entered into an agreement to purchaseRegency Investment Advisor’s, Inc (“RIA”). The purchase of RIA is scheduled for completion by the end of the secondquarter, 2002.  All references herein tothe “Company” include the Bank and the Bank’s subsidiaries, unless the contextotherwise requires.

 

GENERAL - BANK

 

The Bank wasorganized on August 1, 1977, as County Bank of Merced, a California statebanking corporation.  The Bank commencedoperations on December 22, 1977.  InNovember 1992, the Bank changed its legal name to County Bank.  The Bank’s securities consist of one classof Common Stock, no par value and is wholly owned by the Company.  The Bank’s deposits are insured under theFederal Deposit Insurance Act by the Federal Deposit Insurance Corporation(“FDIC”) up to applicable limits stated therein.  Like most state-chartered banks of its size in California, it isnot a member of the Federal Reserve System.

 

INDUSTRY AND MARKET AREA

 

The Bank engagesin general commercial banking business primarily in Fresno, Madera, Mariposa,Merced, San Francisco, San Joaquin, Stanislaus and Tuolomne counties.  The Bank has eighteen full service branchoffices; two of which are located in Merced with the branch located in downtownMerced currently serving as both a branch and as administrative headquarters.There are offices in Atwater, Dos Palos, Hilmar, Livingston, Los Banos, Madera,Mariposa, Sonora, two offices in Modesto, two in Fresno and two offices inTurlock.  On January 18, 2001 the Bankopened a loan production office in San Francisco that during 2001 was convertedinto a full service branch.  In July,2001, the Stockton branch was opened. The Bank’s administrative headquartersalso provides accommodations for the activities of Merced Area Investment &Development (“MAID”), the Bank’s wholly owned real estate subsidiary.

 

7

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OTHER FINANCIAL NOTES

 

All adjustmentswhich in the opinion of Management are necessary for a fair presentation of theCompany’s financial position at March 31, 2002 and December 2001 and theresults of operations for the three month periods ended March 31, 2002 and2001, and the statements of cash flows for the three months ended March 31,2002 and 2001 have been included. Earnings per share have been adjusted to reflect the affect of the 5%stock dividend that was paid April 26, 2002 to shareholders of record on April5, 2002.  The interim results for thethree months ended March 31, 2001 and 2000 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 accompanyingunaudited financial statements have been prepared on a basis consistent with thegenerally accepted accounting principles and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X.

 

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

 

The followingtable provides a reconciliation of the numerator and denominator of the basicand diluted earnings per share computation of the three month periods endedMarch 31, 2002 and 2001:

 

|                                           |   | **For The  Three Months  Ended March 31,** |   |
|------------------------------------------------|--------|--------------------------------------------|--------|
| (Dollars in thousands,  except per share data) |   | **2002**                                   |   | **2001** |   |
|                                           |   |                                       |   |   |   |
| Basic EPS computation:                         |   |                                       |   |   |   |
| Net income                                     |   | $                                          | 2,224  |   | $ | 1,912 |   |
| Average common shares outstanding              |   | 4,948                                      |   | 4,805 |   |
| 5% Stock Dividend in April, 2002               |   | 247                                        |   | 240 |   |
| Average common shares outstanding              |   | 5,195                                      |   | 5,045 |   |
| Basic EPS                                      |   | $                                          | 0.43   |   | $ | 0.38 |   |
|                                           |   |                                       |   |   |   |
| Diluted EPS Computations:                      |   |                                       |   |   |   |
| Net income                                     |   | $                                          | 2,224  |   | $ | 1,912 |   |
| Average common shares outstanding              |   | 4,948                                      |   | 4,805 |   |
| 5% Stock Dividend in April, 2002               |   | 247                                        |   | 240 |   |
| Effect of stock options                        |   | 160                                        |   | 141 |   |
|                                           |   | 5,355                                      |   | 5,186 |   |
| Diluted EPS                                    |   | $                                          | 0.42   |   | $ | 0.37 |   |

 

On February 22,2001, the Company issued $6,000,000 in Capital Securities through its 100%ownership position in the County Statutory Trust I.  The Capital Securities pay quarterly cumulative cash distributionsat an annual rate of 10.2% of the liquidation value of $1,000 per share.  The Capital

 

8

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Securities representundivided beneficial interests in the Trust. The Company owns all of the issued and outstanding common securities ofthe Trust.  Proceeds from the offeringand from the issuance of common securities were invested in the Trust in theCompany’s 10.2% Junior Subordinated Deferrable Interest Debentures due February22, 2031 with an aggregate principal amount of $6,000,000.  The primary asset of the Trust is the JuniorDebentures.  The obligations of theTrust with respect to the Capital Securities are fully and unconditionallyguaranteed by the Company to the extent provided in the Guarantee Agreementwith respect to the Capital Securities. The proceeds are to be used for general corporate purposes.  The all-in costs of the Capital Securitieswas 10.39%.  The Capital Securities havethe added benefit of qualifying as Tier 1 capital for regulatory purposes.

 

During January,2002, the County Investment Trust real estate investment trust (“REIT”) issued$31,000 in Preferred Stock to 123 individual investors that was accounted foron the balance sheet as other minority interests.  County Bank owns 100% of the common stock of the REIT.  The REIT may issue, at management’sdiscretion, Preferred Stock or other capital instruments in the future in thenormal course of operations.  Managementhas no such plans to issue additional common or preferred stock in the REIT atthis time.  The REIT’s primary businesspurpose is to invest in mortgage related assets of the Bank and to providemanagement with an additional channel through which equity capital may beraised in the future.

 

Effective January 1, 2002, the Company was required to adopt theprovisions of SFAS 141 and SFAS 142. Accordingly, any goodwill and anyintangible asset determined to have an indefinite useful life that are acquiredin a purchase business combination will not be amortized, but will continue tobe evaluated for impairment in accordance with the appropriate accountingliterature. The Company was also required to reassess the useful lives andresidual values of all such intangible assets and make any necessaryamortization period adjustments by March 31, 2002. As a result of thisassessment, management determined that no accounting adjustments werenecessary. As of March 31, 2002 and December 31, 2001, the Company had recordedgoodwill of $1,405,000.  The recordingof goodwill occurred with the acquisition of Town and Country Finance andThrift in June, 1996.  The originalamount of recorded goodwill at the time of acquisition was $2,023,000.  From July 1, 1996 through December 31, 2001,goodwill was amortized at a rate of $98,000 per quarter. During the firstquarter of 2001, the goodwill amortization lowered earnings by $98,000 or $0.01per share on an after tax basis.

 

As of the date of adoption, the Company had identifiable intangibleassets consisting of core deposit premiums and goodwill.  Core deposit premiums are amortized using anaccelerated method over a period of ten years. Intangible assets related togoodwill will no longer be amortized after December 31, 2001

 

9

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but willbe reviewed for potential impairment. Management has determined there was no impairment of goodwill as ofJanuary 1, 2002. As of March 31, 2002 and December 31, 2001, the Company hadunamortized core deposit premiums of $1,918,000 and $2,088,000, respectively.  Amortization of core deposit premiums was$170,000 during the first quarter of 2002 and 2001.  Core deposit premiums are scheduled to amortize at a rate ofapproximately $170,000 per quarter through the quarter ended September 30, 2004and at a rate of  $47,000 during thefourth quarter of 2004.  Core depositpremiums of $460,000 and $4,340,000 were initially recorded as the result ofpurchasing deposits from Town and Country Finance and Thrift in July, 1996 andfrom the purchase of three branches from Bank of America in December, 1997,respectively.

 

10

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**Item2.      Management’s Discussion AndAnalysis Of Financial Condition And ResultsOf Operations**

 

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

 

Readers of the Company’s Form 10-Q should not rely solely on forwardlooking statements and should consider all uncertainties and risks discussedthroughout this report, as well as those discussed in the Company’s 2001 AnnualReport on Form 10-K filed March 29, 2002. These statements are representative only on the date hereof, and theCompany undertakes no obligation to update any forward-looking statementsmade.  Some possible events or factorsthat could occur that may cause differences from expected results include thefollowing: the Company’s loan growth is dependent on economic conditions, aswell as various discretionary factors, such as decisions to sell, or purchasecertain loans or loan portfolios; participations of loans and the management ofborrower, industry, product and geographic concentrations and the mix of theloan portfolio.  The rate of charge-offsand 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 the Companyand the mix of funding sources.  Decisionsto purchase, hold, or sell securities are also dependent on liquidityrequirements and market volatility, as well as on and off-balance sheetpositions.  Factors that may impactinterest rate risk include local, regional and international economic conditions,levels, mix, maturities, yields or rates of assets and liabilities and thewholesale and retail funding sources of the Company.

 

The Company is also exposed to the potential of losses arising fromadverse changes in market rates and prices which can adversely impact the valueof financial products, including securities, loans, and deposits.  In addition, the banking industry in generalis subject to various monetary and fiscal policies and regulations, which includethose determined by the Federal Reserve Board, the Federal Deposit InsuranceCorporation and state regulators, whose policies and regulations could affectthe Company’s results.

 

Other factors that may cause actual results to differ from theforward-looking statements include the following: competition with other localand regional banks, savings and loan associations, credit unions and othernonbank financial institutions, such as investment banking firms, investmentadvisory firms, brokerage firms, mutual funds and insurance companies, as wellas other entities which offer financial services; interest rate, market andmonetary fluctuations; inflation; market volatility; general economicconditions; introduction and acceptance of new banking-related products,services and enhancements; fee pricing strategies, mergers and acquisitions andtheir integration into the Company and management’s ability to manage these andother risks.

 

11

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**Critical accounting policies and estimates**

 

The company’s discussionand analysis of its financial condition and results of operations are basedupon the Company’s consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to the adequacy of the allowance forloan losses, investments, intangible assets, income taxes 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).

 

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

# ** **

# **Results Of Operations**

** **

**ThreeMonths Ended March 31, 2002 Compared With Three Months Ended March 31, 2001**

* *

*Overview.* For the three months ended March 31, 2002 the Company reported recordnet income of $2,224,000.  This comparesto $1,912,000 for the same period in 2001 and represents an increase of$312,000 or 16%.  Basic and fullydiluted earnings per share were $.43 and $.42 for the three months ended March31, 2002. This compares to basic and fully diluted earnings per share of $.38and $.37 for the three months ending March 31, 2001 and represents an increaseof $0.05 per share for both basic and fully diluted earnings per share. Thebasic and fully diluted earnings per share are reflective of the 5% stockdividend paid in April, 2002.  Theannualized return on average assets was 1.01% and 1.11% for the first threemonths of 2002 and 2001.  The Company’sannualized return on average equity was 13.64% and 13.93% for the three monthsended March 31, 2002 and 2001.

* *

*NetInterest Income.*  The Company’s primary source of income isnet interest income and is determined by the difference between interest incomeand fees derived from earning assets and interest paid on interest bearingliabilities.  Net interest income forthe three months ended March 31, 2002 totaled $9,326,000 and represented anincrease of $911,000 or 11% when compared to the $8,415,000 achieved during thethree months ended March 31, 2001.

 

Totalinterest and fees on earning assets were $13,877,000 for the three months endedMarch 31, 2002, a decrease of $409,000 or 3% from the $14,286,000 for the sameperiod in 2001.  The level of interestincome is affected by changes in volume of and rates earned on interest–earningassets.  Interest–earning assetsconsist primarily of loans, investment securities and federal funds sold.  The decrease in total interest income forthe three months ended March 31, 2002 was primarily the result of a decrease inthe rates earned on interest–earning assets.  Average interest–earning assets for the three months endedMarch 31, 2002 were $811,208,000 compared with $631,842,000 for the threemonths ended March 31, 2001, an increase of $179,366,000 or 28%.

 

Interestexpense is a function of the volume of and the rates paid on interest–bearingliabilities.  Interest–bearingliabilities consist primarily of certain deposits and borrowed funds.  Total interest expense was $4,551,000 forthe three months ended March 31, 2002, compared with $5,871,000 for the threemonths ended March 31, 2001, a decrease of $1,320,000 or 22%. This decrease wasprimarily the result of a decrease in the interest rate paid on interest–bearingliabilities. Average interest–bearing liabilities were $687,335,000 forthe three months ended March 31, 2002 compared with $529,844,000 for the samethree months in 2001, an increase of $157,491,000 or 30%.  Average interest rates paid oninterest-bearing liabilities were 2.65% for the three months ending March 31,2002 compared with 4.43% for the same three months of 2001, a decrease ininterest rates paid of 178 basis points or 40%.

 

Theincrease in interest-earning assets and interest-bearing liabilities isprimarily the result of increased market penetration within our target marketswhich has been accomplished by increasing the utilization of existingfacilities and adding new branches in San Francisco and Stockton, California.

 

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TheCompany’s taxable equivalent net interest margin, the ratio of net interestincome to average interest–earning assets, was 4.66% for the three monthsended March 31, 2002 compared with 5.36% for the same period in 2001.  Net interest margin provides a measurementof the Company’s ability to employ funds profitably during the period beingmeasured.  The Company’s decrease in netinterest margin was primarily attributable to a decrease in prevailing marketinterest rates.  Loans as a percentageof average interest-earning assets remained stable at 65% for the three monthsended March 31, 2002 equaling the 65% for the three months ended March 31,2001.

* *

*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 INTERESTEARNINGS

 
|                                             |   | **Three months ended  March 31, 2002** |    | **Three months ended  March 31, 2001** |   |
|--------------------------------------------------|--------|----------------------------------------|---------|----------------------------------------|--------|
|                                             |   | **Average  Balance**                   |    | **Taxable****EquivalentInterest**      |   | **Taxable****EquivalentYield/rate** |   | **Average****Balance** |   | **Taxable****Equivalent  Interest** |   | **Taxable****EquivalentYield/rate** |   |
|                                             |   | **(Dollars in thousands)**             |    |
| **Assets**                                       |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                              |   | $                                      | 2,837   |                                   | $      | 12 |   | 1.69 | % | $ | 24,786 |   | $ | 344 |   | 5.55 | % |
| Time deposits  at other financial institutions   |   | 500                                    |    | 2                                      |   | 1.60 |   | 108 |   | 2 |   | 7.41 |   |
| Taxable  investment securities (1)               |   | 248,697                                |    | 3,443                                  |   | 5.54 |   | 167,391 |   | 2,840 |   | 6.79 |   |
| Nontaxable  investment securities (1)            |   | 28,958                                 |    | 398                                    |   | 5.50 |   | 29,003 |   | 374 |   | 5.14 |   |
| Loans, gross:  (2)                               |   | 530,216                                |    | 10,137                                 |   | 7.65 |   | 410,554 |   | 10,780 |   | 10.50 |   |
| Total  interest-earning assets:                  |   | 811,208                                |    | 13,992                                 |   | 6.90 |   | 631,842 |   | 14,340 |   | 9.08 |   |
| Allowance for  loan losses                       |   | (10,044                                | )       |                                   |   |   |   | (8,402 | ) |   |   |   |   |
| Cash and due  from banks                         |   | 28,090                                 |    |                                   |   |   |   | 22,678 |   |   |   |   |   |
| Premises and  equipment, net                     |   | 13,128                                 |    |                                   |   |   |   | 13,055 |   |   |   |   |   |
| Interest  receivable and other assets            |   | 38,672                                 |    |                                   |   |   |   | 30,694 |   |   |   |   |   |
| Total assets                                     |   | $                                      | 881,054 |                                   |   |   |   |   | $ | 689,867 |   |   |   |   |   |
|                                             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| **Liabilities And  Shareholders’ Equity**   |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Negotiable  order of withdrawal                  |   | $                                      | 97,617  |                                   | $      | 54 |   | 0.22 |   | $ | 80,445 |   | $ | 91 |   | 0.45 |   |
| Savings  deposits                                |   | 210,435                                |    | 831                                    |   | 1.58 |   | 186,824 |   | 1,807 |   | 3.87 |   |
| Time deposits                                    |   | 284,395                                |    | 2,718                                  |   | 3.82 |   | 236,951 |   | 3,583 |   | 6.05 |   |
| Other  borrowings                                |   | 94,888                                 |    | 948                                    |   | 4.00 |   | 25,624 |   | 390 |   | 6.09 |   |
| Total  interest-bearing liabilities              |   | 687,335                                |    | 4,551                                  |   | 2.65 |   | 529,844 |   | 5,871 |   | 4.43 |   |
|                                             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |   | 116,556                                |    |                                   |   |   |   | 96,684 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities   |   | 5,929                                  |    |                                   |   |   |   | 5,920 |   |   |   |   |   |
| Total  liabilities                               |   | 809,820                                |    |                                   |   |   |   | 632,448 |   |   |   |   |   |
|                                             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Capital  Securities and other minority interests |   | 6,000                                  |    |                                   |   |   |   | 2,533 |   |   |   |   |   |
|                                             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity                 |   | 65,234                                 |    |                                   |   |   |   | 54,886 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | $                                      | 881,054 |                                   |   |   |   |   | $ | 689,867 |   |   |   |   |   |
|                                             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Net interest  income and margin (3)              |   |                                   |    | $                                      | 9,441  |   | 4.66 | % |   |   | $ | 8,469 |   | 5.36 | % |
|                                                  |        |                                        |         |                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Tax-equivalent adjustments included in thenontaxable investment securities portfolio are $71,000 and $46,000 for  the three months ended March 31, 2002 and2001, respectively.  Tax equivalent adjustmentsincluded in the taxable investment securities created by a dividends receiveddeduction were $44,000 and $8,000 for the three months ended March 31, 2002 and2001

(2)                                  Amounts of interest earned includes loan fees of$197,000 and $267,000 for March 31, 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 VarianceAnalysis:

 
|                                           |   | **Three  months ended**                        |       |
|------------------------------------------------|--------|------------------------------------------------|------------|
|                                           |   | **March 31,  2002 compared to March 31, 2001** |       |
| (Dollar in thousands)                          |   | **Volume**                                     | ** ** | **Rate** | ** ** | **Total** |   |
|                                           |   |                                           |       |   |   |   |   |
| Increase  (decrease) in interest  income: |   |                                           |       |   |   |   |   |
| Federal funds  sold                            |   | $                                              | (186       | ) | $ | (146 | ) | $ | (332 | ) |
| Time deposits  at other financial institutions |   | 10                                             |       | (10 | ) | — |   |
| Taxable  investment securities                 |   | 3,469                                          |       | (2,866 | ) | 603 |   |
| Tax-exempt  investment securities              |   | (4                                             | )          | 28 |   | 24 |   |
| Loans                                          |   | 11,798                                         |       | (12,441 | ) | (643 | ) |
| Total:                                         |   | $                                              | 15,087     |   | $ | (15,435 | ) | $ | (348 | ) |
|                                           |   |                                           |       |   |   |   |   |
| Increase  (decrease) in interest expense:      |   |                                           |       |   |   |   |   |
| Interest  bearing demand                       |   | $                                              | 99         |   | $ | (136 | ) | $ | (37 | ) |
| Savings  deposits                              |   | 1,334                                          |       | (2,310 | ) | (976 | ) |
| Time deposits                                  |   | 3,412                                          |       | (4,277 | ) | (865 | ) |
| Other  borrowings                              |   | 1,446                                          |       | (888 | ) | 558 |   |
| Total:                                         |   | $                                              | 6,291      |   | $ | (7,611 | ) | $ | (1,320 | ) |
|                                           |   |                                           |       |   |   |   |   |
| Increase  (decrease) in net interest income    |   | $                                              | 8,796      |   | $ | (7,824 | ) | $ | 972 |   |

 

*Provision For Loan Losses.*** **The provision for loan losses for the three months ended March 31, 2002was $780,000 compared with $750,000 for the three months ended March 31, 2001,an increase of $30,000 or 4%. See “Allowance for Loan Losses” containedherein.  As of March 31, 2002 the allowance for loan losses was$10,229,000 or 1.87% of total loans which compares to the allowance for loanlosses of $9,743,000 or 1.83% as of December 31, 2001.  At March 31, 2002, nonperforming assetstotaled $5,606,000 or 0.61% of total assets, nonperforming loans totaled$5,134,000 or 0.94% of total loans and the allowance for loan losses totaled199% 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 $426,000 or 31% to $1,779,000 for the three months endedMarch 31, 2002 compared with $1,353,000 in the same period in 2001.  Service charges on deposit accountsincreased by $225,000 or 25% to $1,127,000 for the three months ended March 31,2002 compared with $902,000 for the same period in 2001.  The increase in fees is the result ofincreased customer use of fee based products. Other income increased by $201,000 or 45% for the three month periodended March 31, 2002 when compared to the same period in 2001.  The primary source of this increased other incomeis an increase in the cash surrender value of bank owned life insurance.  The increase in cash surrender value for thethree months ended March 31, 2002 totaled $241,000, and increase of $155,000over the $86,000 achieved during the same period in 2001.  The

 

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average balance outstanding of cash surrender valuelife insurance policies during the first quarter of 2002 and 2001 was$16,271,000 and $6,483,000, respectively.

 

*NoninterestExpense.*** **Noninterestexpenses increased by $1,086,000 or 17% to $7,425,000 for the three monthsended March 31, 2002 compared with $6,339,000 for the same period in 2001.  The primary components of noninterestexpenses were salaries and employee benefits, furniture and equipment expenses,occupancy expenses, professional fees, marketing supplies, and other operatingexpenses.

 

Forthe three months ended March 31, 2002, salaries and related benefits increasedby $631,000 or 19% to $3,944,000 from the $3,313,000 recorded for the sameperiod in 2001. The salary expense increase was primarily the result ofincreased staffing levels needed for branch expansion into the San Franciscoand Stockton markets and normal salary progression.  Premises and occupancy expenses increased by $104,000 or 22% to$569,000 for the three months ending March 31, 2002 from $465,000 during thesame period in 2001.  The primary reasonfor the increase in occupancy costs in 2002 is related to retrofit charges forbranch facilities in Atwater, Fresno, and Merced and the branch expansion intoStockton and San Francisco.  Equipmentexpenses increased by $92,000 or 15% to $716,000 during the three months endedMarch 31, 2002 from the $624,000 experienced during the same period in2001.  When comparing the results of thethree months ending March 31, 2002 to three months ending March 31, 2001,professional fees increased by $136,000 or 116%, marketing expenses decreasedby $23,000 or 11%, goodwill and intangible amortization expense decreased by$28,000 or 14%, supplies expense decreased by $16,000 or 8%, dividend expenseon Capital Securities increased by $91,000 or 144% and other expenses increased$99,000 or 9% from 2001 levels. Increased professional fees in 2002 were theresult of an increased use of consultants used to identify new businessprofitability and tax saving strategies. The increased dividend expense on Capital Securities during 2002 was dueto the fact that the securities were issued during the latter part of the firstquarter of 2001 and therefore were only outstanding during a small portion ofthat quarter.

 

*ProvisionFor Income Taxes.*** **The Company recorded a decrease of $91,000 or 12% inthe income tax provision to $676,000 for the three months ended March 31, 2002compared to the $767,000 recorded for the same period in 2001.  During the first quarter of 2002, theCompany achieved an effective tax rate of 23% compared to 29% recorded for thesame period in 2001. During 2002, the reduced effective tax rate was madepossible by the continued utilization of a real estate investment trustestablished during the fourth quarter of 2001 that provides the Company with ameans to potentially generate future additional capital for the Bank as well asto currently reduce state income tax expense.

 

**InterestRate Risk**

 

Interestrate risk is an integral part of managing a banking institution’s primarysource of income, net interest income. The Company manages the balance between rate–sensitive assets andrate–sensitive liabilities being repriced in any given period with theobjective of stabilizing net interest income during periods of fluctuatinginterest rates.  The Company considersits rate–sensitive assets to be those which either contain a provision toadjust the interest rate periodically or mature within one year.  These assets include certain loans andinvestment securities and federal funds sold. Rate–sensitive liabilities are those which allow for periodicinterest rate changes within one year and include maturing time certificates,certain savings deposits and interest–bearing demand deposits.  The difference between the aggregate amountof assets and liabilities that reprice at various time frames is called the“gap.” Generally, if repricing assets exceed repricing liabilities in a time periodthe Company would be deemed to be asset–sensitive.  If repricing liabilities exceed repricingassets in a time period the Company would be

 

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deemed to be liability-sensitive.  Generally, the Company seeks to maintain abalanced position whereby there is no significant asset or liabilitysensitivity within a one-year period to ensure net interest margin stability intimes of volatile interest rates.  Thisis accomplished through maintaining a significant level of loans, investmentsecurities and deposits available for repricing within one year.

 

Thefollowing tables set forth the interest rate sensitivity of the Company’sinterest–earning assets and interest–bearing liabilities as ofMarch 31, 2002 using the interest rate sensitivity gap ratio.  For purposes of the following table, anasset or liability is considered rate-sensitive within a specified period whenit can be repriced or matures within its contractual terms.  

 
|                                                                 |   | **At March  31, 2002**      |     |
|----------------------------------------------------------------------|--------|-----------------------------|----------|
|                                                                 |   | **Within   3 Months**       |     | **After 3  But Within   12 Months** |   | **After 1  Year  But Within  5 Years** |   | **After  5 Years** |   | **Noninterest-  Bearing** |   | **Total** |   |
|                                                                 |   | **(Dollars  In Thousands)** |     |
| **Assets**                                                           |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| Time deposits at other banks                                         |   | $                           | 500      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 500 |   |
| Federal funds  sold                                                  |   | 9,525                       |     | — |   | — |   | — |   | — |   | 9,525 |   |
| Investment  securities                                               |   | 5,606                       |     | 6,513 |   | 86,357 |   | 177,774 |   | 22,393 |   | 298,643 |   |
| Loans                                                                |   | 295,613                     |     | 60,190 |   | 133,396 |   | 58,552 |   | — |   | 547,751 |   |
| Total earning  assets                                                |   | 311,244                     |     | 66,703 |   | 219,753 |   | 236,326 |   | 22,393 |   | 856,419 |   |
| Noninterest-earning  assets and allowances for loan losses           |   | —                      |     | — |   | — |   | — |   | 68,739 |   | 68,739 |   |
| Total assets                                                         |   | $                           | 311,244  |   | $ | 66,703 |   | $ | 219,753 |   | $ | 236,326 |   | $ | 91,132 |   | $ | 925,158 |   |
|                                                                 |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| **Liabilities And****Shareholders’ Equity**                     |   |                        |     |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                      |   | $                           | —   |   | $ | — |   | $ | — |   | $ | — |   | $ | 123,444 |   | $ | 123,444 |   |
| Savings, money  market and NOW deposits                              |   | 321,205                     |     | — |   | — |   | — |   | — |   | 321,205 |   |
| Time deposits                                                        |   | 78,101                      |     | 190,036 |   | 18,757 |   | — |   | — |   | 286,894 |   |
| Other  interest-bearing liabilities                                  |   | 17,075                      |     | 18,700 |   | 65,260 |   | 15,601 |   | — |   | 116,636 |   |
| Other  liabilities, capital securities and shareholders’ equity |   | —                      |     | — |   | — |   | 6,031 |   | 70,948 |   | 76,979 |   |
| Total  liabilities, capital securities and shareholders’ equity |   | 416,381                     |     | 208,736 |   | 84,017 |   | 21,632 |   | 194,392 |   | $ | 925,158 |   |
| Incremental gap                                                      |   | (105,137                    | )        | (142,033 | ) | 135,736 |   | 214,694 |   | (103,260 | ) |   |   |
| Cumulative gap                                                       |   | $                           | (105,137 | ) | $ | (247,170 | ) | $ | (111,434 | ) | $ | 103,260 |   | $ | — |   |   |   |
| Cumulative gap  as a % of earning assets                             |   | (12.28                      | )%       | (28.86 | )% | (13.01 | )% | 12.06 | % |   |   |   |   |
|                                                                      |        |                             |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany was liability-sensitive with a negative cumulative one-year gap of$(247,170,000) or (28.86)% of interest-earning assets at March 31, 2002.  In general, based upon the Company’s mix ofdeposits, loans and investments, increases in interest rates would be expectedto result in an increase in the Company’s net interest margin.

 

Theinterest rate gaps reported in the tables arise when assets are funded withliabilities having different repricing intervals.  Since these gaps are actively managed and change daily asadjustments are made in interest rate views and market outlook, positions atthe end of any period may not be reflective of the Company’s interest ratesensitivity in subsequent periods. Active management dictates that longer–term economic views are balancedagainst prospects for short–term interest rate changes in all repricingintervals.  For purposes of the analysisabove, repricing of fixed-rate instruments is based upon

 

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the contractual maturity of the applicableinstruments.  Actual payment patternsmay differ from contractual payment patterns. The change in net interest income may not always follow the generalexpectations of an asset-sensitive or liability-sensitive balance sheet duringperiods of changing interest rates, because interest rates earned or paid maychange by differing increments and at different time intervals for each type ofinterest–sensitive asset and liability. As a result of these factors, at any given time, the Company may be moresensitive or less sensitive to changes in interest rates than indicated in theabove tables.  Greater sensitivity wouldhave a more adverse effect on net interest margin if market interest rates wereto increase, and a more favorable effect if rates were to decrease.

 

Anadditional measure of interest rate sensitivity that the Company monitorsthrough a detailed model is its expected change in net interest income.  This model’s estimate of interest ratesensitivity takes into account the differing time intervals and differing ratechange increments of each type of interest–sensitive asset andliability.  It then measures theprojected impact of changes in market interest rates on the Company’s netinterest income.  Based upon the March31, 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 $503,000 or 1% of net interest income. No assurance can be given that the actual net interest income would notdecrease by more than $503,000 or 1% in response to a 1% increase in marketinterest rates or that actual net interest income would not decreasesubstantially if market interest rates decreased by more than 1%.

** **

**Financial Condition**

 

Totalassets at March 31, 2002 were $925,158,000, an increase of $30,831,000 or 3%compared with total assets of $894,327,000 at December 31, 2001.  Net loans were $537,522,000 at March 31,2002, an increase of $14,845,000 or 3% compared with net loans of $522,677,000on December 31, 2001.  Deposits were$731,543,000 at March 31, 2002, a decrease of $1,098,000 or less than 1%compared with deposits of $732,641,000 at December 31, 2001.  The increase in total assets of the Companybetween December 31, 2001 and March 31, 2002 was primarily the result of anincrease in leverage that was maintained in the Company’s investment portfoliothat were funded with increased borrowed funds and increased cash utilization.

 

On February 22,2001, the Company issued $6,000,000 in Capital Securities through its 100%ownership position in the County Statutory Trust I.  The Capital Securities pay quarterly cumulative cashdistributions at an annual rate of 10.2% of the liquidation value of $1,000 pershare.  The Capital Securities representundivided beneficial interests in the Trust. The Company owns all of the issued and outstanding common securities ofthe Trust.  Proceeds from the offeringand from the issuance of common securities were invested in the Trust in theCompany’s 10.2% Junior Subordinated Deferrable Interest Debentures due February22, 2031 with an aggregate principal amount of $6,000,000.  The primary asset of the Trust is the JuniorDebentures.  The obligations of theTrust with respect to the Capital Securities are fully and unconditionallyguaranteed by us to the extent provided in the Guarantee Agreement with respectto the Capital Securities.  The proceedswere used for general corporate purposes. The all-in costs of the Capital Securities was 10.39%.  The Capital Securities have the addedbenefit of qualifying as Tier 1 capital for regulatory purposes.

 

Totalshareholders’ equity was $65,410,000 at March 31, 2002, an increase of$1,290,000 or 2% from $64,120,000 at December 31, 2001. The growth inshareholders’ equity between December 31, 2001 and March 31, 2002 was achievedthrough the retention of accumulated earnings which was partially offset by adecline in other comprehensive income. Other comprehensive income consists of changes in the fair market valuecompared to book value of available for sale investment securities andvaluation changes in the Bank’s interest rate swap, net of estimated federaland state income taxes.

 

18

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*Investment Portfolio.*  The following table sets forth the carryingamount (fair value) of available for sale investment securities as of March 31,2002 and December 31, 2001.

 

| (Dollars in  thousands)                                |   | **March 31  2002** |    | **December  31  2001** |   |
|--------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                   |   |               |    |                   |   |
| Available for  sale securities:                        |   |               |    |                   |   |
| U.S.  Treasury and U.S.  Government agencies |   | $                  | 73,047  |                   | $      | 78,712 |   |
| State and  political subdivisions                      |   | 24,500             |    | 24,269                 |   |
| Mortgage-backed  securities                            |   | 63,153             |    | 54,797                 |   |
| Collateralized  mortgage obligations                   |   | 30,616             |    | 33,346                 |   |
| Corporate debt  securities                             |   | 13,450             |    | 13,560                 |   |
| Total debt  securities                                 |   | 204,766            |    | 204,684                |   |
| Agency  preferred stock                                |   | 14,970             |    | 15,011                 |   |
| Trust Preferred  Stock                                 |   | 4,873              |    | 4,898                  |   |
| Equity  securities                                     |   | 7,423              |    | 5,259                  |   |
| Carrying amount  and fair value                        |   | $                  | 232,032 |                   | $      | 229,852 |   |

 

The followingtable sets forth the carrying amount (amortized cost) and fair value of held tomaturity securities at March 31, 2002 and December 31, 2001.

 

| (Dollars in  thousands)              |   | **March 31  2002** |   | **December  31  2001** |   |
|--------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                 |   |               |   |                   |   |
| Held To  Maturity Securities:        |   |               |   |                   |   |
| Carrying amount  (amortized cost):   |   |               |   |                   |   |
| U.S.  Government agency         |   | $                  | 4,616  |                   | $      | 4,611 |   |
| State and  political subdivisions    |   | 4,313              |   | 4,361                  |   |
| Mortgage-backed  securities          |   | 57,469             |   | 31,900                 |   |
| Collateralized  mortgage obligations |   | 213                |   | 687                    |   |
|                                 |   | $                  | 66,611 |                   | $      | 41,559 |   |
| Fair Value:                          |   |               |   |                   |   |
| U.S. Government  agency              |   | $                  | 4,767  |                   | $      | 4,809 |   |
| State and  political subdivisions    |   | 4,369              |   | 4,394                  |   |
| Mortgage-backed  securities          |   | 57,189             |   | 32,280                 |   |
| Collateralized  mortgage obligations |   | 213                |   | 702                    |   |
|                                 |   | $                  | 66,538 |                   | $      | 42,185 |   |

 

19

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The following table sets forth the maturities of theCompany’s debt security investments at March 31, 2002 and the weighted averageyields of such securities calculated on a book value basis using the weightedaverage yields within each scheduled maturity grouping. Maturities of mortgage–backedsecurities and collateralized mortgage obligations are stipulated in theirrespective contracts.  However, actualmaturities may differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call prepaymentpenalties.  Yields on municipalsecurities have been recalculated on a tax–equivalent basis.

 
|                                 |   | **At March 31, 2002** |   |
|--------------------------------------|--------|-----------------------|--------|
|                                 |   | **Within One Year**   |   | **One To  5 Years** |   | **Five To Ten Years** |   | **Over Ten Years** |   | **Total** |   |
|                                 |   | **Amount**            |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   |
| (Dollars  in thousands)              |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available  for Sale Securities:      |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Treasury  and U.S. Government agency |   | $                     | — |   | — | % | $ | 62,750 |   | 4.81 | % | $ | 10,297 |   | 7.16 | % | $ | — |   | — | % | $ | 73,047 |   |
| State  and political                 |   | —                |   | — |   | — |   | — |   | 13,452 |   | 5.29 |   | 11,048 |   | 5.47 |   | 24,500 |   |
| Mortgage-backed  securities          |   | 2                     |   | 9.40 |   | 7 |   | 9.42 |   | 5,045 |   | 5.98 |   | 58,099 |   | 6.13 |   | 63,153 |   |
| Collateralized mortgage  obligations |   | —                |   | — |   | — |   | — |   | — |   | — |   | 30,616 |   | 4.92 |   | 30,616 |   |
| Corporate debt securities            |   | 3,731                 |   | 5.70 |   | 9,719 |   | 5.83 |   | — |   | — |   | — |   | — |   | 13,450 |   |
| Carrying amount and fair  value      |   | 3,733                 |   | 5.70 |   | 72,476 |   | 4.94 |   | 28,794 |   | 6.08 |   | 99,763 |   | 5.69 |   | 204,766 |   |
|                                 |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to maturity securities:         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Treasury and U.S. Government  agency |   | —                |   | — |   | — |   | — |   | 4,616 |   | 6.70 |   | — |   | — |   | 4,616 |   |
| State and political                  |   | —                |   | — |   | — |   | — |   | — |   | — |   | 4,313 |   | 6.24 |   | 4,313 |   |
| Mortgage-backed securities           |   | —                |   | — |   | — |   | — |   | — |   | — |   | 57,469 |   | 6.28 |   | 57,469 |   |
| Collateralized mortgage  obligations |   | —                |   | — |   | — |   | — |   | — |   | — |   | 213 |   | 6.29 |   | 213 |   |
| Carrying amount (amortized  cost)    |   | —                |   | — |   | — |   | — |   | 4,616 |   | — |   | 61,995 |   | 6.28 |   | 66,611 |   |
|                                 |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total debt securities                |   | $                     | 3,733  |   | 5.70 | % | $ | 72,476 |   | 4.94 | % | $ | 33,410 |   | 6.64 | % | $ | 161,758 |   | 5.92 | % | $ | 271,377 |   |
|                                      |        |                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Inthe preceding table, mortgage–backed securities and collateralizedmortgage obligations are shown repricing at the time of maturity rather than inaccordance with their principal amortization schedules.  The Company does not own securities of asingle issuer whose aggregate book value is in excess of 10% of its totalequity.

 

*Loan Portfolio.*The following table shows thecomposition of the Company’s loan portfolioat the dates indicated.

 
| (Dollars in thousands)          |   | **At March  31,  2002** |    | **At  December 31,  2001** |   |
|---------------------------------|--------|-------------------------|---------|----------------------------|--------|
|                            |   | **Dollar  Amount**      |    | **Percent  of loans**      |   | **Dollar  Amount** |   | **Percent  of loans** |   |
| Loan Categories:                |   |                    |    |                       |   |   |   |   |   |
| Commercial                      |   | $                       | 125,852 |                       | 23     | % | $ | 118,626 |   | 22 | % |
| Agricultural                    |   | 88,662                  |    | 16                         |   | 96,489 |   | 18 |   |
| Real estate  construction       |   | 62,262                  |    | 11                         |   | 57,989 |   | 11 |   |
| Real estate  mortgage           |   | 202,380                 |    | 37                         |   | 187,586 |   | 35 |   |
| Consumer                        |   | 68,595                  |    | 13                         |   | 71,730 |   | 14 |   |
| Total                           |   | 547,751                 |    | 100                        | %      | 532,420 |   | 100 | % |
| Less allowance  for loan losses |   | (10,229                 | )       |                       |   | (9,743 | )  |   |   |
| Net loans                       |   | $                       | 537,522 |                       |   |   | $ | 522,677 |   |   |   |

 

20

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Thetable that follows shows the maturity distribution of the portfolio ofcommercial, agricultural, real estate construction, real estate mortgage, andconsumer loans at March 31, 2002: 

 
|                                |   | **At March  31, 2002** |       |
|-------------------------------------|--------|------------------------|------------|
| (Dollars in  thousands)             |   | **Within 1  year**     | ** ** | **After 1  but  Within 5 years** | ** ** | **After 5  years** | ** ** | **Total** | ** ** |
|                                |   |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| *Commercial and  agricultural*      |   |                   |       |   |   |   |   |   |   |
| Loans with  floating interest rates |   | $                      | 91,899     |   | $ | 37,686 |   | $ | 29,286 |   | $ | 158,871 |   |
| Loans with  fixed interest rates    |   | 13,442                 |       | 26,841 |   | 15,360 |   | 55,643 |   |
| Subtotal                            |   | 105,341                |       | 64,527 |   | 44,646 |   | 214,514 |   |
|                                |   |                   |       |   |   |   |   |   |   |
| *Real estate  construction*         |   |                   |       |   |   |   |   |   |   |
| Loans with  floating interest rates |   | 19,194                 |       | 25,683 |   | 11,201 |   | 56,078 |   |
| Loans with  fixed interest rates    |   | 3,618                  |       | 1,996 |   | 570 |   | 6,184 |   |
| Subtotal                            |   | 22,812                 |       | 27,679 |   | 11,771 |   | 62,262 |   |
|                                |   |                   |       |   |   |   |   |   |   |
| *Real estate  mortgage*             |   |                   |       |   |   |   |   |   |   |
| Loans with  floating interest rates |   | 17,705                 |       | 21,581 |   | 96,434 |   | 135,720 |   |
| Loans with  fixed interest rates    |   | 184                    |       | 19,291 |   | 47,185 |   | 66,660 |   |
| Subtotal                            |   | 17,889                 |       | 40,872 |   | 143,619 |   | 202,380 |   |
|                                |   |                   |       |   |   |   |   |   |   |
| *Consumer  Installment*             |   |                   |       |   |   |   |   |   |   |
| Loans with  floating interest rates |   | 21,624                 |       | 7,990 |   | — |   | 29,614 |   |
| Loans with  fixed interest rates    |   | 2,087                  |       | 33,244 |   | 3,650 |   | 38,981 |   |
| Subtotal                            |   | 23,711                 |       | 41,234 |   | 3,650 |   | 68,595 |   |
|                                |   |                   |       |   |   |   |   |   |   |
| Total                               |   | $                      | 169,753    |   | $ | 174,312 |   | $ | 203,686 |   | $ | 547,751 |   |

* *

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

 

| (Dollars in  thousands)       |   | **March 31,  2002** |    | **December  31,  2001** |   |
|-------------------------------|--------|---------------------|---------|-------------------------|--------|
|                          |   |                |    |                    |   |
| Letters of  credit            |   | $                   | 4,195   |                    | $      | 3,852 |   |
| Commitments to  extend credit |   | 199,645             |    | 188,802                 |   |
| Total                         |   | $                   | 203,840 |                    | $      | 192,654 |   |

* *

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

 

| (Dollars in  thousands)                 |   | **At March  31,  2002**                                                                    |   | **At  December 31,  2001** |   |
|-----------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                    |   |                                                                                       |   |                            |   |
| Cash surrender  value of life insurance |   |                 | 16,382 |                            | $      | 16,160 |   |
|                                         |        |                                                                                            |        |                                 |        |  |  |

 

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

 

Nonperformingloans are those which the borrower fails to perform in accordance with theoriginal terms of the obligation and include loans on nonaccrual status, loanspast due 90 days or more and restructured loans.  The Company generally places loans on nonaccrual status andaccrued but unpaid interest is reversed against the current year’s income wheninterest or principal payments become 90 days or more past due unless theoutstanding principal and interest is adequately secured and, in the opinion ofmanagement, is deemed in the process of collection.  Interest income on nonaccrual loans is recorded on a cashbasis.  Payments may be treated as interestincome or return of principal depending upon management’s opinion of theultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believesthe remaining principal balance is fully collectible.  Additional loans not 90 days past due may also be placed onnonaccrual status if management reasonably believes the borrower will not beable to comply with the contractual loan repayment terms and collection ofprincipal or interest is in question.

 

A“restructured loan” is a loan on which interest accrues at a below market rateor upon which certain principal has been forgiven so as to aid the borrower inthe final repayment of the loan, with any interest previously accrued, but notyet collected, being reversed against current income.  Interest is reported on a cash basis until the borrower’s abilityto service the restructured loan in accordance with its terms isestablished.  The Company had norestructured loans as of the dates indicated in the table below.

 

Thefollowing table summarizes nonperforming assets of the Company at March 31,2002 and December 31, 2001:

 

| (Dollars in thousands)                   |   | **March 31,  2002** |   | **December  31,  2001** |   |
|------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                     |   |                |   |                    |   |
| Nonaccrual  loans                        |   | $                   | 4,699  |                    | $      | 4,247 |   |
| Accruing loans  past due 90 days or more |   | 435                 |   | 609                     |   |
| Total  nonperforming loans               |   | 5,134               |   | 4,856                   |   |
| Other real estate  owned                 |   | 472                 |   | 472                     |   |
| Total  nonperforming assets              |   | $                   | 5,606  |                    | $      | 5,328 |   |
|                                     |   |                |   |                    |   |
| Nonperforming  loans to total loans      |   | 0.94                | %      | 0.91                    | %      |
| Nonperforming  assets to total assets    |   | 0.61                | %      | 0.60                    | %      |

 

Contractual accrued interest income on loans onnonaccrual status as of March 31, 2002 and 2001, that would have beenrecognized if the loans had been current in accordance with their originalterms was approximately $267,000 and $276,000, respectively.

 

At March 31, 2002, nonperforming assets represented..61% of total assets, an increase of 1 basis point when compared to the .60% atDecember 31, 2001.  Nonperforming loansrepresented .94% of total loans at March 31, 2002, an increase of 3 basispoints compared to the .91% at December 31, 2001.  Nonperforming loans that were secured by first deeds of trust onreal property were $0 at March 31, 2002 and December 31, 2001.   Other forms of collateral such as inventoryand equipment secured the remaining nonperforming loans as of each date.  No assurance can be given that the collateralsecuring nonperforming loans will be sufficient to prevent losses on suchloans.

 

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The increase in nonperforming loans and nonperformingassets as of March 31, 2002 compared with their levels as of December 31, 2001,was due to a growth in nonperforming loans in the agricultural segment of theloan portfolio.

 

At March 31, 2002, the Company had $472,000 investedin three properties acquired through foreclosure.  Each property is carried at the lower of its estimated marketvalue, as evidenced by an independent appraisal, or the recorded investment inthe related loan, less estimated selling expenses.  At foreclosure, if the fair value of the real estate is less thanthe Company’s recorded investment in the related loan, a charge is made to theallowance for loan losses.  The Companyexpects to sell most of these properties within a twelve month period.  No assurance can be given that the Companywill sell such properties during 2002 or at any time or the amount for whichsuch property might be sold.

 

Management defines impaired loans, regardless of pastdue status on loans, as those on which principal and interest are not expectedto be collected under the original contractual loan repayment terms.  An impaired loan is charged off at the timemanagement believes the collection process has been exhausted.  At March 31, 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 March 31, 2002 were$5,134,000 on account of which the Company had made provisions to the allowancefor loan losses of approximately $642,000.

 

Except for loans that are disclosed above, there wereno assets as of March 31, 2002, where known information about possible creditproblems of borrower causes management to have serious doubts as to the abilityof the borrower to comply with the present loan repayment terms and which maybecome nonperforming assets.  Given themagnitude of the Company’s loan portfolio, however, it is always possible thatcurrent credit problems may exist that may not have been discovered bymanagement.

 

23

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**Allowancefor Loan Losses**

 

The following table summarizesthe loan loss experience of the Company for the three months ended March 31,2002 and 2001, and for the year ended December 31, 2001.

** **
|                                         |   | **March 31**                |    | **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                   |   | 780                         |    | 750              |   | 4,115 |   |
| Charge-offs:                                 |   |                        |    |             |   |   |   |
| Commercial and  agricultural                 |   | 218                         |    | 155              |   | 864 |   |
| Consumer                                     |   | 262                         |    | 511              |   | 2,288 |   |
| Total  charge-offs                           |   | 480                         |    | 666              |   | 3,152 |   |
| Recoveries                                   |   |                        |    |             |   |   |   |
| Commercial and  agricultural                 |   | 19                          |    | 5                |   | 159 |   |
| Consumer                                     |   | 167                         |    | 93               |   | 414 |   |
| Total  recoveries                            |   | 186                         |    | 98               |   | 573 |   |
| Net charge-offs                              |   | 294                         |    | 568              |   | 2,579 |   |
| Balance at end  of period                    |   | $                           | 10,229  |             | $      | 8,389 |   | $ | 9,743 |   |
|                                         |   |                        |    |             |   |   |   |
| Loans  outstanding at period-end             |   | $                           | 547,751 |             | $      | 416,786 |   | $ | 532,420 |   |
| Average loans  outstanding                   |   | $                           | 530,216 |             | $      | 410,554 |   | $ | 453,503 |   |
|                                         |   |                        |    |             |   |   |   |
| Annualized net charge-offs  to average loans |   | 0.22                        | %       | 0.55             | %      | 0.57 | % |
| Allowance for  loan losses                   |   |                        |    |             |   |   |   |
| To total loans                               |   | 1.87                        | %       | 2.01             | %      | 1.83 | % |
| To  nonperforming assets                     |   | 182.47                      | %       | 302.63           | %      | 182.85 | % |

 

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

 

Thebalance in the allowance is affected by the amounts provided from operations,amounts charged off and recoveries of loans previously charged off.  The Company recorded provisions for loanlosses in the first three months of 2002 of $780,000 compared with $750,000 inthe same period of 2001.

 

24

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The increase in loan lossprovisions in 2002 was recorded to adequately provide for the general loangrowth of the Company that has occurred during the quarter.

 

The Company’scharge-offs, net of recoveries, were $294,000 for the three months ended March31, 2002 compared with $568,000 for the same three months in 2001.  The decrease in net charge-offs for thefirst quarter of 2002 was primarily due to decreased charge-offs that occurredwithin the consumer installment segment of the loan portfolio.  The decreased charge-offs in this segment ofthe portfolio are primarily attributable to a tightening of the creditstandards in the indirect automobile contract segment of the loan portfoliothat occurred in the second half of 2001.

 

As of March31, 2002, the allowance for loan losses was $10,229,000 or 1.87% of total loansoutstanding, compared with $9,743,000 or 1.83% of total loans outstanding as ofDecember 31, 2001 and $8,389,000 or 2.01% of total loans outstanding as ofMarch 31, 2001.  Between March 31, 2001and 2002, the allowance for loan loss increased $1,840,000 or 22%.

 

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

 

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

 

The allocationof the allowance to loan categories is an estimate by management of therelative risk characteristics of loans in those categories.  No assurance can be given that losses in oneor more loan categories will not exceed the portion of the allowance allocatedto that category or even exceed the entire allowance.

 

25

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*External Factors Affecting AssetQuality. *As aresult of the Company’s loan portfolio mix, the future quality of its assetscould be affected by adverse economic trends in its region or in theagricultural community.  These trendsare beyond the control of the Company.

 

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

 

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

 

*Liquidity.*In orderto maintain adequate liquidity, the Company must have sufficient resourcesavailable at all times to meet its cash flow requirements.  The need for liquidity in a bankinginstitution arises principally to provide for deposit withdrawals, the creditneeds of its customers and to take advantage of investment opportunities asthey arise.  The Company may achievedesired liquidity from both assets and liabilities.  The Company considers cash and deposits held in other banks,federal funds sold, other short term investments, maturing loans andinvestments, payments of principal and interest on loans and investments andpotential loan sales as sources of asset liquidity.  Deposit growth and access to credit lines established withcorrespondent banks and market sources of funds are considered by the Companyas sources of liability liquidity.  Theholding company’s primary source of liquidity is from dividends received fromthe Bank.  Dividends from the Bank aresubject to certain regulatory restrictions.

 

The Companyreviews its liquidity position on a regular basis based upon its currentposition and expected trends of loans and deposits. These assets include cashand deposits in other banks, available-for-sale securities and federal fundssold.  The Company’s liquid assetstotaled $269,078,000 and $279,640,000 on March 31, 2002 and December 31, 2001,respectively, and constituted 29% and 31% of total assets on those dates.  Liquidity is also affected by the collateralrequirements of its public deposits and certain borrowings.  Total pledged securities were $203,157,000at March 31, 2002 compared with $141,386,000 at December 31, 2001.

 

Although theCompany’s primary sources of liquidity include liquid assets and a stabledeposit base, the Company maintains lines of credit with the Federal ReserveBank of San Francisco, Federal Home Loan Bank of San Francisco and PacificCoast Bankers’ Bank aggregating $141,527,000 of which $106,535,000 wasoutstanding as of March 31, 2002 and $73,759,000 was outstanding as of December31, 2001. The increase in borrowings outstanding during the first quarter of2002 produced an inflow of funds that were used to purchase additionalinvestment securities.  Managementbelieves that the Company maintains adequate amounts of liquid assets to meetits liquidity needs.  The Company’sliquidity might be insufficient if deposit withdrawals were to exceedanticipated levels.  Deposit

 

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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.

 

*Capital Resources. *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 $1,290,000 or 2% fromDecember 31, 2001 to March 31, 2002.

 

The Company issubject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meetminimum capital requirements can initiate mandatory and possibly additionaldiscretionary actions by the regulators that, if undertaken, could have amaterial adverse effect on the Company’s financial statements.  Management believes, as of March 31, 2002,that the Company and the Bank met all applicable capital requirements.  The Company’s leverage capital ratio atMarch 31, 2002 was 7.93% as compared with 7.72% as of December 31, 2001.  The Company’s total risk based capital ratioat March 31, 2002 was 11.15% as compared to 10.74% as of December 31, 2001.

 

The Company’sand Bank’s actual capital amounts and ratios met all regulatory requirements asof March 31, 2002 and were summarized as follows:

 
| Dollars in  thousands                     |   | **Actual** |   | **For Capital****Adequacy Purposes** |   | **To Be Well Capitalized  Under Prompt  Corrective****Action Provisions:** |   |
|-------------------------------------------|--------|------------|--------|--------------------------------------|--------|----------------------------------------------------------------------------|--------|
|                                      |   | **Amount** |   | **Ratio**                            |   | **Amount**                                                                 |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| Consolidated                              |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| As of March 31,  2002                     |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| Total capital  (to risk weighted assets)  |   | $          | 78,421 |                                 | 11.15  | %                                                                          | $      | 52,267 |   | 8.0 | % | $ | 70,334 |   | 10.0 | % |
| Tier 1 capital  (to risk weighted assets) |   | 69,612     |   | 9.90                                 |   | 28,134                                                                     |   | 4.0 |   | 42,200 |   | 6.0 |   |
| Leverage ratio*                           |   | 69,612     |   | 7.93                                 |   | 35,109                                                                     |   | 4.0 |   | 43,887 |   | 5.0 |   |
|                                      |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| The Bank:                                 |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| As of March 31,  2002                     |   |       |   |                                 |   |                                                                       |   |   |   |   |   |   |   |
| Total capital  (to risk weighted assets)  |   | $          | 74,310 |                                 | 10.59  | %                                                                          | $      | 56,156 |   | 8.0 | % | $ | 70,195 |   | 10.0 | % |
| Tier 1 capital  (to risk weighted assets) |   | 65,518     |   | 9.33                                 |   | 28,078                                                                     |   | 4.0 |   | 42,117 |   | 6.0 |   |
| Leverage ratio*                           |   | 65,518     |   | 7.49                                 |   | 34,996                                                                     |   | 4.0 |   | 43,745 |   | 5.0 |   |

 

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*  The leverage ratio consists of Tier 1capital divided by adjusted quarterly average assets.  The minimum leverage ratio is 3 percent for banking organizationsthat do not anticipate significant growth and that have well-diversified risk,excellent asset quality and in general, are considered top-rated banks.

 

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

 

*Deposits.*  Deposits are the Company’s primary source offunds.  At March 31, 2002, the Companyhad a deposit mix of 30% in savings deposits, 39% in time deposits, 17% ininterest-bearing checking accounts and 14% in noninterest-bearing demandaccounts.  Noninterest-bearing demanddeposits enhance the Company’s net interest income by lowering its costs offunds.

 

The Companyobtains deposits primarily from the communities it serves.  No material portion of its deposits has beenobtained from or is dependent on any one person or industry.  The Company’s

 

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business is not seasonal innature.  The Company accepts deposits inexcess of $100,000 from customers. These deposits are priced to remain competitive.  At March 31, 2002, the Company had brokereddeposits of $15,792,000.

 

Maturities oftime certificates of deposits of $100,000 or more outstanding at March 31, 2002and December 31, 2001 are summarized as follows:

 
|                      |   | **March 31, 2002**         |    | **December 31, 2001** |   |
|---------------------------|--------|----------------------------|---------|-----------------------|--------|
|                      |   | **(Dollars in thousands)** |    |
|                      |   |                       |    |                  |   |
| Three months or less      |   | $                          | 46,619  |                  | $      | 53,879 |   |
| Over three to six months  |   | 44,985                     |    | 37,358                |   |
| Over six to twelve months |   | 37,282                     |    | 30,776                |   |
| Over twelve months        |   | 8,445                      |    | 9,161                 |   |
| Total                     |   | $                          | 137,331 |                  | $      | 131,174 |   |

 

**Borrowed Funds**

 

The increasein other borrowings during the first quarter of 2002 was primarily due to theuse of a leveraged investment strategy that uses additional FHLB borrowings tofund purchases of investment securities within the Bank’s investment portfolio.

 

**Returnon Equity and Assets**

 
|                                |   | **Three months ended  March 31  2002** |   | **Three months ended  March 31  2001** |   | **Year ended  December 31  2001** |   |
|-------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|
|                                |   |                                   |   |                                   |   |                              |   |
| Annualized return on average assets |   | 1.01                                   | %      | 1.11                                   | %      | 1.03                              | %      |
| Annualized return on average equity |   | 13.64                                  | %      | 13.93                                  | %      | 13.40                             | %      |
| Average equity to average assets    |   | 7.40                                   | %      | 7.96                                   | %      | 7.69                              | %      |

 

**Impactof Inflation**

 

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

 

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**Item 3.     Quantitative and Qualitative Disclosures about Market Risk**

 

In the normal course of business, the Company isexposed to market risk which includes both price and liquidity risk.  Price risk is created from fluctuations ininterest rates and the mismatch in repricing characteristics of assets,liabilities, and off balance sheet instruments at a specified point in time.  Mismatches in interest rate repricing amongassets and liabilities arise primarily through the interaction of the varioustypes of loans versus the types of deposits that are maintained as well as frommanagement’s discretionary investment and funds gathering activities.  Liquidity risk arises from the possibility thatthe Company may not be able to satisfy current and future financial commitmentsor that the Company may not be able to liquidate financial instruments atmarket prices.  Risk management policiesand procedures have been established and are utilized to manage the Company’sexposure to market risk.  Quarterlytesting of the Company’s assets and liabilities under both increasing anddecreasing interest rate environments are performed to insure the Company doesnot assume a magnitude of risk that is outside approved policy limits.

 

The Company’ssuccess is largely dependent upon its ability to manage interest raterisk.  Interest rate risk can be definedas the exposure of the Company’s net interest income to adverse movements ininterest rates.  Although the Companymanages other risks, such as credit and liquidity risk in the normal course ofits business, management considers interest rate risk to be its mostsignificant market risk and could potentially have the largest material effecton the Company’s financial condition and results of operations.  Correspondingly, the overall strategy of theCompany is to manage interest rate risk, through balance sheet structure, to beinterest rate neutral.

 

The Company’sinterest rate risk management is the responsibility of the Asset/LiabilityManagement Committee (ALCO), which reports to the Board of Directors.  ALCO establishes policies that monitors andcoordinates the Company’s sources, uses and pricing of funds.  ALCO is also involved in formulating theeconomic projections for the Company’s budget and strategic plan.  ALCO sets specific rate sensitivity limitsfor the Company.  ALCO monitors andadjusts the Company’s exposure to changes in interest rates to achievepredetermined risk targets that it believes are consistent with current andexpected market conditions.  Balancesheet management personnel monitor the asset and liability changes on anongoing basis and provide report information and recommendations to the ALCOcommittee in regards to those changes.

 

It is theopinion of management that there has been no material change in the Company'smarket risk during the first quarter of 2002 when compared to the level ofmarket risk at December 31, 2001.  Ifinterest rates were to suddenly and materially fall from levels experiencedduring the first quarter of 2002, the Company could become susceptible to anincreased level of market risk.

 

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**PART II - Other Information**

** **

**Item 1.    LegalProceedings**

 

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

 

**Item2.    Changes in Securities and Use of Proceeds.**

 

None.

 

**Item3.    Defaults Upon Senior Securities.**

 

None.

 

**Item4.    Submission of Matters to a Vote of SecuritiesHolders.**

 

None.

 

**Item 5.    OtherInformation.**

 

Inthe opinion of management, there is no additional information relating to theseperiods being reported which warrants inclusion in the report.

 

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

 

(a)                                  Exhibits.

 
| **Exhibit  Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                        |   |   |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1                 |   | Articles of  Incorporation (filed as Exhibit 3.1 of the Company’s September 30, 1996 Form  10-Q filed with the SEC on or about November 14, 1996).                                                                                                                                                            |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 3.2                 |   | Bylaws  (filed as Exhibit 3.2 of the Company’s September 30, 1996 Form 10-Q filed  with the SEC on or about November 14, 1996)                                                                                                                                                                                |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 3.3                 |   | Rights  Agreement between Capital Corp of the West and Harris Trust Company of  California dated as of September 26, 1997, including Form of Right  Certificate attached thereto as Exhibit B (filed as Exhibit 4 to the Company’s  Registration Statement on Form 8-A filed with the SEC on October 1, 1997. |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10                  |   | Employment  Agreement between Thomas T. Hawker and Capital Corp. of the West (Filed as  Exhibit 10 of the Company’s 1996 form 10K filed with the SEC on or about June  30, 1997)                                                                                                                              |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.1                |   | Administration  Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10-K  filed with the SEC on or about March 31, 1996).                                                                                                                                                                |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.2                |   | Stock Option  Plan (filed as Exhibit 10.6 of the Company’s 1995 Form 10-K filed with the  SEC on or about March 31, 1996).                                                                                                                                                                                    |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.3                |   | 401(k Plan  (filed as Exhibit 10.7 of the Company’s 1995 Form 10-K filed with the SEC on  or about March 31, 1996).                                                                                                                                                                                           |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.4                |   | Employee  Stock Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10-K  filed with the SEC on or about March 31, 1996).                                                                                                                                                                        |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.5                |   | Purchase  Agreement for three branches from Bank of America is incorporated herein by  reference from Exhibit 2.1 Registration Statement on Form S-2 filed July 14,  1997, File No. 333-31193.                                                                                                                     |   |   |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.6                |   | Change-in-Control  Agreement between R. Dale McKinney and Capital Corp of the West (filed as  Exhibit 10.6 of the Company’s 1999 Form   10-K with the SEC on or about March 17, 2000).                                                                                                                   |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.7                |   | Deferred  Compensation Agreement between members of the board of directors and Capital  Corp of the West (filed as exhibit 10.7 of the Company’s 1999 Form 10-K with  the SEC on or about March 17, 2000).                                                                                                    |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 10.8                |   | Executive  Salary Continuation Agreement between certain members of executive management  and Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999  Form 10-K with the SEC in or about March 17, 2000).                                                                                      |   | *      |
|                |   |                                                                                                                                                                                                                                                                                                               |   |   |
| 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.                                                                                                                                                                                                                                                                                |   |   |

 

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* Denotes management contract or compensatory plan arrangement.

 

**Reportson Form 8-K**

 

None

 

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**SIGNATURES**

 

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

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

 

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