##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Quarterly Period Ended June 30, 2008
 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
  California
    
    77-0405791(State or other jurisdiction of
incorporation or organization)
    
    IRS
Employer ID Number
 (Address of principal executive offices)
 (209) 725-2200
 Not
applicable
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



Capital Corp of the West
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets (unaudited)
    
    
    3Condensed Consolidated Statements of Operations (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in
Shareholders Equity (unaudited)
    
    
    5Condensed
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    7Notes to the Condensed Consolidated Financial Statements
(unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    48PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    49Item 1A. Risk Factors
    
    
    49Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 3. Defaults Upon Senior Securities
    
    
    53Item 4. Submission of Matters to a Vote of Security Holders
    
    
    53Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    53SIGNATURES
    
    
    54Exhibit Index
    
    
    55Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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##### Table of Contents



PART 1  Financial Information
 
 Item 1. Financial Statements (unaudited)
 Capital Corp of the West
 
 Condensed Consolidated Balance Sheets
  As of June 30,
    
    
    As of December 31,(Amounts in thousands, except share data)
    
    2008
    
    
    2007ASSETSCash and non - interest bearing deposits in other banks
    
    $
    64,722
    
    
    $
    66,708Federal funds sold
    
    
    70,955
    
    
    
    17,165Time deposits at other financial institutions
    
    
    100
    
    
    
    100Investment securities available for sale, at fair value
    
    
    344,059
    
    
    
    223,016Investment securities held to maturity, at cost: fair
value of $155,767 at December 31, 2007
    
    
    
    
    
    
    155,483Loans held for sale
    
    
    85,640
    
    
    
    Loans, net of allowance for loan losses of
$29,810 and $35,800 at June 30, 2008 and
December 31, 2007
    
    
    1,320,486
    
    
    
    1,458,881Interest receivable
    
    
    8,635
    
    
    
    10,541Premises and equipment, net
    
    
    53,234
    
    
    
    54,192Goodwill
    
    
    34,313
    
    
    
    34,313Other intangibles
    
    
    6,280
    
    
    
    6,940Cash value of life insurance
    
    
    44,863
    
    
    
    43,677Investment in housing tax credit limited partnerships
    
    
    5,835
    
    
    
    6,186Other real estate owned
    
    
    1,895
    
    
    
    7,550Other assets
    
    
    38,388
    
    
    
    23,987Total assets:
    
    $
    2,079,405
    
    
    $
    2,108,739LIABILITIES:Deposits:Non - interest bearing demand
    
    $
    272,277
    
    
    $
    310,622Negotiable orders of withdrawal
    
    
    235,712
    
    
    
    254,735Savings
    
    
    440,900
    
    
    
    471,016Time, under $100,000
    
    
    452,610
    
    
    
    368,765Time, $100,000 and over
    
    
    201,299
    
    
    
    270,127Total deposits:
    
    
    1,602,798
    
    
    
    1,675,265Other borrowings
    
    
    268,760
    
    
    
    217,816Junior subordinated debentures
    
    
    57,734
    
    
    
    57,734Accrued interest, taxes and other liabilities
    
    
    20,641
    
    
    
    16,197Total liabilities:
    
    
    1,949,933
    
    
    
    1,967,012Commitments and contingencies (see Note 10)
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, no par value: 10,000,000 shares
authorized; none outstanding
    
    
    
    
    
    
    Common stock, no par value 54,000,000 shares
authorized: 10,815,756 and 10,804,588 issued and
outstanding at June 30, 2008 and December 31, 2007
    
    
    67,343
    
    
    
    66,599Retained earnings
    
    
    63,686
    
    
    
    74,757Accumulated other comprehensive income (loss), net
    
    
    (1,557
    )
    
    
    371Total shareholders equity:
    
    
    129,472
    
    
    
    141,727Total liabilities and shareholders equity:
    
    $
    2,079,405
    
    
    $
    2,108,739
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Condensed Consolidated Statements of Operations
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,(Amounts in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    25,791
    
    
    $
    26,367
    
    
    $
    54,261
    
    
    $
    51,646Interest on time deposits with other financial institutions
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    8Interest on Investment Securities Held to Maturity:Taxable:
    
    
    722
    
    
    
    822
    
    
    
    1,470
    
    
    
    1,635Non taxable:
    
    
    833
    
    
    
    893
    
    
    
    1,679
    
    
    
    1,813Interest on Investment Securities Available for Sale:Taxable:
    
    
    2,677
    
    
    
    2,903
    
    
    
    5,351
    
    
    
    5,855Non taxable:
    
    
    6
    
    
    
    11
    
    
    
    15
    
    
    
    22Interest on federal funds sold
    
    
    73
    
    
    
    298
    
    
    
    252
    
    
    
    1,533Total Interest Income
    
    
    30,103
    
    
    
    31,297
    
    
    
    63,029
    
    
    
    62,512INTEREST EXPENSE:Deposits:Negotiable orders of withdrawal
    
    
    287
    
    
    
    837
    
    
    
    752
    
    
    
    1,422Savings
    
    
    1,825
    
    
    
    3,510
    
    
    
    4,849
    
    
    
    7,020Time, under $100,000
    
    
    4,035
    
    
    
    4,169
    
    
    
    7,824
    
    
    
    7,828Time, $100,000 and over
    
    
    1,914
    
    
    
    3,251
    
    
    
    4,479
    
    
    
    7,435Total Interest on Deposits
    
    
    8,061
    
    
    
    11,767
    
    
    
    17,904
    
    
    
    23,705Interest on federal funds purchased
    
    
    41
    
    
    
    5
    
    
    
    80
    
    
    
    5Interest on junior subordinated debentures
    
    
    899
    
    
    
    675
    
    
    
    1,796
    
    
    
    1,350Interest on other borrowings
    
    
    1,653
    
    
    
    1,853
    
    
    
    4,039
    
    
    
    3,711Total Interest Expense
    
    
    10,654
    
    
    
    14,300
    
    
    
    23,819
    
    
    
    28,771Net interest income
    
    
    19,449
    
    
    
    16,997
    
    
    
    39,210
    
    
    
    33,741Provision for loan losses
    
    
    13,920
    
    
    
    3,713
    
    
    
    15,327
    
    
    
    3,913Net Interest Income after Provision for Loan
Losses
    
    
    5,529
    
    
    
    13,284
    
    
    
    23,883
    
    
    
    29,828NON-INTEREST INCOME:Service charges on deposit accounts
    
    
    2,512
    
    
    
    2,089
    
    
    
    4,752
    
    
    
    3,794Gain on sale of available for sale securities
    
    
    261
    
    
    
    
    
    
    
    994
    
    
    
    Impairment of available for sale securities
    
    
    (1,564
    )
    
    
    
    
    
    
    (1,564
    )
    
    
    Increase in cash surrender value of life insurance policies
    
    
    416
    
    
    
    431
    
    
    
    1,186
    
    
    
    840Other
    
    
    755
    
    
    
    1,114
    
    
    
    1,600
    
    
    
    1,959Total Non-Interest Income
    
    
    2,380
    
    
    
    3,634
    
    
    
    6,968
    
    
    
    6,593NON-INTEREST EXPENSE:Salaries and related benefits
    
    
    9,721
    
    
    
    7,468
    
    
    
    19,908
    
    
    
    15,276Premises and occupancy
    
    
    1,812
    
    
    
    1,760
    
    
    
    3,697
    
    
    
    3,305Equipment
    
    
    1,740
    
    
    
    1,296
    
    
    
    3,447
    
    
    
    2,480Professional fees
    
    
    1,996
    
    
    
    859
    
    
    
    3,574
    
    
    
    1,670Supplies
    
    
    162
    
    
    
    268
    
    
    
    371
    
    
    
    497Marketing
    
    
    745
    
    
    
    607
    
    
    
    1,449
    
    
    
    920Intangible amortization
    
    
    353
    
    
    
    
    
    
    
    659
    
    
    
    Charitable donations
    
    
    91
    
    
    
    188
    
    
    
    225
    
    
    
    368Communications
    
    
    444
    
    
    
    416
    
    
    
    891
    
    
    
    764Other real estate owned
    
    
    5,897
    
    
    
    8
    
    
    
    6,055
    
    
    
    16Write down of loans held for sale
    
    
    1,751
    
    
    
    
    
    
    
    1,751
    
    
    
    Provision for unfunded loan commitments
    
    
    2,184
    
    
    
    1,595
    
    
    
    2,050
    
    
    
    1,595Federal deposit insurance
    
    
    723
    
    
    
    85
    
    
    
    1,183
    
    
    
    169Other
    
    
    3,228
    
    
    
    1,595
    
    
    
    5,350
    
    
    
    2,992Total Non-Interest Expenses
    
    
    30,847
    
    
    
    16,145
    
    
    
    50,610
    
    
    
    30,052Income (loss) before provision for (benefit from) income taxes
    
    
    (22,938
    )
    
    
    773
    
    
    
    (19,759
    )
    
    
    6,369Provision for (benefit from) income taxes
    
    
    (10,934
    )
    
    
    131
    
    
    
    (10,065
    )
    
    
    1,751Net Income (Loss)
    
    $
    (12,004
    )
    
    $
    642
    
    
    $
    (9,694
    )
    
    $
    4,618Basic earnings (loss) per share
    
    $
    (1.11
    )
    
    $
    0.06
    
    
    $
    (0.90
    )
    
    $
    0.43Diluted earnings (loss) per share
    
    $
    (1.11
    )
    
    $
    0.06
    
    
    $
    (0.90
    )
    
    $
    0.42
 See accompanying notes to condensed consolidated financial statements.
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Capital Corp of the West
 
 Condensed Consolidated Statement of Changes in Shareholders Equity
  AccumulatedOtherNumber of
    
    
    
    
    
    
    Retained
    
    
    Comprehensive(Amounts in thousands)
    
    Shares
    
    
    Amounts
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2006
    
    
    10,761
    
    
    $
    64,586
    
    
    $
    82,803
    
    
    $
    (1,620
    )
    
    $
    145,769Exercise of stock options, including tax benefits of $23
    
    
    29
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    438Effect of share-based payment expense
    
    
    
    
    
    
    850
    
    
    
    
    
    
    
    
    
    
    
    850Net change in fair value of available for sale investment
securities, net
of tax effect $1,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,577
    )
    
    
    (2,577
    )Net change in fair value of interest rate floor, net of tax
effect of $15 (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Cash dividends
    
    
    
    
    
    
    
    
    
    
    (2,052
    )
    
    
    
    
    
    
    (2,052
    )Net income
    
    
    
    
    
    
    
    
    
    
    4,618
    
    
    
    
    
    
    
    4,618Balance, June 30, 2007
    
    
    10,790
    
    
    $
    65,874
    
    
    $
    85,369
    
    
    $
    (4,177
    )
    
    $
    147,066Balance January 1, 2008, before cumulative effect of change in
accounting principle
    
    
    10,805
    
    
    $
    66,599
    
    
    $
    74,757
    
    
    $
    371
    
    
    $
    141,727Cumulative effect of change in accounting principle (See Note
2)
    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    (186
    )Balance, January 1, 2008, after cumulative effect of change in
accounting principle
    
    
    10,805
    
    
    
    66,599
    
    
    
    74,571
    
    
    
    371
    
    
    
    141,541Exercise of stock options, including tax benefit of $2
    
    
    11
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Effect of share-based payment expense
    
    
    
    
    
    
    680
    
    
    
    
    
    
    
    
    
    
    
    680Net change in fair value of available for sale investment
securities, net
of tax effect of $1,503 (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,076
    )
    
    
    (2,076
    )Amortization of interest rate floor, net of tax effect of $107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    148Cash dividends
    
    
    
    
    
    
    
    
    
    
    (1,191
    )
    
    
    
    
    
    
    (1,191
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (9,694
    )
    
    
    
    
    
    
    (9,694
    )Balance, June 30, 2008
    
    
    10,816
    
    
    $
    67,343
    
    
    $
    63,686
    
    
    $
    (1,557
    )
    
    $
    129,472
 
 (1)
    
    Includes reclassification `adjustment for net losses included in net income of $116 (net of $83
tax benefit).(2)
    
    Includes reclassification adjustment for net losses included
in net loss of $331 (net of $61
tax expense). See accompanying notes to condensed consolidated financial statements.
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Capital Corp of the West
 
 Condensed Consolidated Statements of Comprehensive Income (Loss)
  For the Six Months Ended June 30,(Amounts in thousands)
    
    2008
    
    
    2007Net income (loss)
    
    $
    (9,694
    )
    
    $
    4,618Unrealized loss on securities arising during the period, net
    
    
    (2,407
    )
    
    
    (2,577
    )Reclassification adjustment for losses realized in net
income, net of tax
(expense of $61 in 2008 and benefit of $83 in 2007)
    
    
    331
    
    
    
    116Unrealized gain or amortization on interest rate floor
arising during the period
    
    
    148
    
    
    
    (96
    )Comprehensive income (loss)
    
    $
    (11,622
    )
    
    $
    2,061
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Condensed Consolidated Statements of Cash Flows
  For the Six Months EndedJune 30,(Amounts in thousands)
    
    2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (9,694
    )
    
    $
    4,618Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Provision for loan losses
    
    
    15,327
    
    
    
    3,913Impairment of available for sale securities
    
    
    1,564
    
    
    
    Impairment charges on other real estate owned
    
    
    5,655
    
    
    
    Write down on loans held for sale
    
    
    1,751
    
    
    
    Depreciation, amortization and accretion, net
    
    
    5,362
    
    
    
    4,247Origination of loans held for sale
    
    
    (3,658
    )
    
    
    (4,589
    )Proceeds from sale of loans
    
    
    15,338
    
    
    
    4,810Gain on sale of loans
    
    
    (306
    )
    
    
    (254
    )Gain on sale of available for sale securities
    
    
    (994
    )
    
    
    Increase in cash value of bank owned life insurance
    
    
    (1,186
    )
    
    
    (839
    )Non-cash share-based payment expense
    
    
    680
    
    
    
    850Net (increase) decrease in interest receivable and other assets
    
    
    (12,762
    )
    
    
    6,665Gain on sale of other real estate owned
    
    
    
    
    
    
    (102
    )Net increase (decrease) in accrued interest, taxes and other liabilities
    
    
    5,176
    
    
    
    (1,660
    )Net cash provided by operating activities:
    
    
    22,253
    
    
    
    17,659Investing activities:Investment securities purchased  available for sale securities
    
    
    (35,225
    )
    
    
    (196
    )Proceeds from maturities of available for sale securities
    
    
    21,243
    
    
    
    16,899Proceeds from maturities of held to maturity securities
    
    
    10,154
    
    
    
    5,642Proceeds from sales of available for sale securities
    
    
    34,620
    
    
    
    1,917Net decrease in time deposits at other institutions
    
    
    
    
    
    
    250Proceeds from sale of other real estate owned
    
    
    
    
    
    
    102Loans purchased
    
    
    
    
    
    
    (9,577
    )Net (increase) decrease in loans
    
    
    22,989
    
    
    
    (79,003
    )Purchase of premises and equipment
    
    
    (1,580
    )
    
    
    (6,276
    )Net cash provided by (used in) investing activities:
    
    
    52,201
    
    
    
    (70,242
    )Financing activities:Net decrease in demand, NOW and savings deposits
    
    
    (87,484
    )
    
    
    (49,297
    )Net increase (decrease) in certificates of deposit
    
    
    15,017
    
    
    
    (52,001
    )Net increase in short-term borrowings
    
    
    50,944
    
    
    
    30,612Payment of cash dividends
    
    
    (1,191
    )
    
    
    (2,052
    )Exercise of stock options
    
    
    62
    
    
    
    415Tax benefits related to exercise of stock options
    
    
    2
    
    
    
    23Net cash used in financing activities:
    
    
    (22,650
    )
    
    
    (72,300
    )Net increase (decrease) in cash and cash equivalents
    
    
    51,804
    
    
    
    (124,883
    )Cash and cash equivalents at beginning of period
    
    
    83,873
    
    
    
    195,533Cash and cash equivalents at end of period
    
    $
    135,677
    
    
    $
    70,650
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Notes to Condensed Consolidated Financial Statements
       Basis of Presentation :
   8




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##### Table of Contents



Consolidation: Consolidation of Variable Interest Entities
 Investment Securities:
     Loans Held for Sale:
 9




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##### Table of Contents



Loans:
   Allowance for loan losses:
   
    
    changes in lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices and resources,
 10




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##### Table of Contents




    
    changes in the national and local economic and business conditions and developments,
including the condition of various market segments,
    
    changes in the nature and volume of the portfolio,
    
    changes in the experience, ability and depth of lending management staff,
    
    changes in the trend of the volume and severity of past due and classified loans, and
trends in the volume of nonaccruals, troubled debt restructuring and other loan
modifications,
    
    changes in the home lending construction industry and effect on the Companys
construction loans,
    
    changes in the quality of the Companys loan review system and the degree of oversight by
the Companys Board of Directors,
    
    the existence and effect of any concentrations of credit, and changes in the levels of
concentrations, and
    
    the effect of external forces such as competitive and legal regulatory requirements on
the level of estimated credit losses in the Companys current portfolio.
    Uncollectible Loans and Write-offs:
 Reserve for Unfunded Loan Commitments:
 Goodwill and Other Intangible Assets:
  11




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##### Table of Contents



Business Combinations
 Income Taxes:
  Postretirement Split-Dollar Life Insurance Arrangements
 Fair Value Measurements:
 Reclassifications:
 Recent Accounting Pronouncements
 Business Combinations
 12




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial
Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities.
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles
    13




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For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,(Amounts in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Basic Earnings (Loss) per Share Computation:Net income (loss)
    
    $
    (12,004
    )
    
    $
    642
    
    
    $
    (9,694
    )
    
    $
    4,618Average Common Share Outstanding
    
    
    10,811
    
    
    
    10,783
    
    
    
    10,808
    
    
    
    10,779Basic Earnings (Loss) per Share
    
    $
    (1.11
    )
    
    $
    0.06
    
    
    $
    (0.90
    )
    
    $
    0.43Diluted Earnings (Loss) per Share Computation:Net income (loss)
    
    $
    (12,004
    )
    
    $
    642
    
    
    $
    (9,694
    )
    
    $
    4,618Average Common Share Outstanding
    
    
    10,811
    
    
    
    10,783
    
    
    
    10,808
    
    
    
    10,779Effect of Stock Options
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    17910,811
    
    
    
    10,949
    
    
    
    10,808
    
    
    
    10,958Diluted Earnings (Loss) per Share
    
    $
    (1.11
    )
    
    $
    0.06
    
    
    $
    (0.90
    )
    
    $
    0.42
     14




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##### Table of Contents



For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,(Amounts in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Stock option compensation expense
    
    
    323
    
    
    $
    301
    
    
    $
    680
    
    
    $
    850Tax benefits related
to stock
option compensation expense
    
    
    (64
    )
    
    
    (37
    )
    
    
    (146
    )
    
    
    (128
    )Decrease in net income
    
    $
    259
    
    
    $
    264
    
    
    $
    534
    
    
    $
    722Effect on:Net income per share  basic
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.05
    )
    
    $
    0.07Net income per share  diluted
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.05
    )
    
    $
    0.07
  For the Six Months EndedJune 30, 2008WeightedAverageExerciseNumber of
    
    Price per(Shares in thousands)
    
    Shares
    
    ShareOutstanding at January 1, 2008
    
    
    849
    
    
    $
    22.55Options granted
    
    
    302
    
    
    $
    11.49Options exercised
    
    
    (11
    )
    
    $
    5.54Options forfeited
    
    
    (66
    )
    
    $
    24.93Outstanding at June 30, 2008
    
    
    1,074
    
    
    $
    19.47Exercisable at June 30, 2008
    
    
    702
    
    
    $
    20.20
  For the Six Months EndedJune 30, 2008
    
    June 30, 2007Weighted-
    
    
    
    
    
    Weighted-Average Fair
    
    
    
    
    
    Average FairNumber of
    
    Value per
    
    Number of
    
    Value per(Shares in thousands)
    
    Shares
    
    Share
    
    Shares
    
    ShareOptions granted
    
    
    302
    
    
    $
    4.50
    
    
    
    181
    
    
    $
    9.32
  WeightedAverage FairNumber of
    
    Value per(Shares in thousands)
    
    Shares
    
    ShareNon vested options exercisable at January 1, 2008
    
    
    239
    
    
    $
    9.10Options granted
    
    
    302
    
    
    $
    4.50Options vested
    
    
    (139
    )
    
    $
    6.92Options forfeited
    
    
    (30
    )
    
    $
    8.46Non vested options at June 30, 2008
    
    
    372
    
    
    $
    6.08
  15




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##### Table of Contents



WeightedAverage
    
    WeightedAggregate
    
    Remaining
    
    AverageNumber of
    
    Intrinsic
    
    Contractual
    
    Exercise(Shares and dollars in thousands, except per share data)
    
    Shares
    
    Value
    
    Life in Years
    
    PriceVested options
exercisable at June
30, 2008
    
    
    702
    
    
    $
    
    
    
    
    5.90
    
    
    $
    20.20Total options
outstanding at June 30, 2008
    
    
    1,075
    
    
    $
    
    
    
    
    6.87
    
    
    $
    19.47
   Fair Value Measurements
 
    
    Level 1
    
    inputs to the valuation methodology are quoted priced
(unadjusted) for identical assets or liabilities in
active markets.
    
    Level 2
    
    inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full
term of the financial instrument.
    
    Level 3
    
    inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
  ASSETS
 Securities
  Loans held for sale
  16




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##### Table of Contents



Impaired loans
 Accounting by Creditors for Impairment of a Loan
 Other Real Estate Owned
   Fair Value Measurements at Reporting Date UsingQuoted Price in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsJune 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Amounts in thousands)Available for Sale Securities:State and political subdivisions
    
    $
    88,646
    
    
    $
    
    
    
    $
    88,646
    
    
    $
    Mortgage-backed securities
    
    
    234,431
    
    
    
    
    
    
    
    234,431
    
    
    
    Collateralized mortgage obligations
    
    
    4,786
    
    
    
    
    
    
    
    4,786
    
    
    
    Agency preferred stock
    
    
    3,215
    
    
    
    
    
    
    
    3,215
    
    
    
    Equity securities
    
    
    12,981
    
    
    
    12,981
    
    
    
    
    
    
    
    Total
    
    $
    344,059
    
    
    $
    12,981
    
    
    $
    331,078
    
    
    $
    
  Fair Value at June 30, 2008Description
    
    Total
    
    Level 1
    
    Level 2
    
    Level 3(Amounts in thousands)Impaired loans
    
    $
    122,202
    
    
    
    
    
    
    $
    111,928
    
    
    $
    10,274Other real estate owned
    
    $
    1,895
    
    
    
    
    
    
    $
    1,895
    
    
    $
    Loans held for sale
    
    $
    85,640
    
    
    
    
    
    
    $
    
    
    
    $
    85,640
   17




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##### Table of Contents



LIABILITIES
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueJune 30, 2008AVAILABLE FOR SALE SECURITIES:State and political subdivisions
    
    $
    88,578
    
    
    $
    533
    
    
    $
    465
    
    
    $
    88,646Mortgage-backed securities
    
    
    237,670
    
    
    
    547
    
    
    
    3,786
    
    
    
    234,431Collateralized mortgage obligations
    
    
    4,982
    
    
    
    
    
    
    
    196
    
    
    
    4,786Total Debt Securities
    
    
    331,230
    
    
    
    1,080
    
    
    
    4,447
    
    
    
    327,863Agency preferred stock
    
    
    2,546
    
    
    
    669
    
    
    
    
    
    
    
    3,215Equity securities
    
    
    13,383
    
    
    
    
    
    
    
    402
    
    
    
    12,981Total Available for Sale Securities
    
    $
    347,159
    
    
    $
    1,749
    
    
    $
    4,849
    
    
    $
    344,059December 31, 2007AVAILABLE FOR SALE SECURITIES:U.S. government agencies
    
    $
    35,529
    
    
    $
    454
    
    
    $
    54
    
    
    $
    35,929State and political subdivisions
    
    
    1,250
    
    
    
    6
    
    
    
    
    
    
    
    1,256Mortgage-backed securities
    
    
    159,006
    
    
    
    1,119
    
    
    
    724
    
    
    
    159,401Collateralized mortgage obligations
    
    
    10,064
    
    
    
    
    
    
    
    164
    
    
    
    9,900Total Debt Securities
    
    
    205,849
    
    
    
    1,579
    
    
    
    942
    
    
    
    206,486Agency preferred stock
    
    
    4,116
    
    
    
    
    
    
    
    
    
    
    
    4,116Equity securities
    
    
    13,156
    
    
    
    
    
    
    
    742
    
    
    
    12,414Total Available for Sale Securities
    
    $
    223,121
    
    
    $
    1,579
    
    
    $
    1,684
    
    
    $
    223,016HELD TO MATURITY SECURITIES:State and political subdivisions
    
    $
    94,346
    
    
    $
    946
    
    
    $
    65
    
    
    $
    95,227Mortgage-backed securities
    
    
    50,307
    
    
    
    398
    
    
    
    867
    
    
    
    49,838Collateralized mortgage obligations
    
    
    10,830
    
    
    
    
    
    
    
    128
    
    
    
    10,702Total Held to Maturity Securities
    
    $
    155,483
    
    
    $
    1,344
    
    
    $
    1,060
    
    
    $
    155,767
   18




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##### Table of Contents



Less Than Twelve Months
    
    12 months or More
    
    TotalUnrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    FairLosses
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value(Amounts in thousands)AVAILABLE FOR SALE SECURITIES:State and political subdivisions
    
    $
    393
    
    
    $
    28,002
    
    
    $
    72
    
    
    $
    1,210
    
    
    $
    465
    
    
    $
    29,212Mortgage-backed securities
    
    
    2,773
    
    
    
    176,805
    
    
    
    1,013
    
    
    
    25,585
    
    
    
    3,786
    
    
    
    202,390Collateralized mortgage obligations
    
    
    196
    
    
    
    4,786
    
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    4,786Equity securities
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    2,129
    
    
    
    402
    
    
    
    2,129Total
    
    $
    3,362
    
    
    $
    209,593
    
    
    $
    1,487
    
    
    $
    28,924
    
    
    $
    4,849
    
    
    $
    238,517
  Less Than Twelve Months
    
    
    12 months or More
    
    
    TotalUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value(Amounts in thousands)AVAILABLE FOR SALE SECURITIES:U.S. government agencies
    
    $
    
    
    
    $
    
    
    
    $
    54
    
    
    $
    15,018
    
    
    $
    54
    
    
    $
    15,018Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    724
    
    
    
    64,873
    
    
    
    724
    
    
    
    64,873Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    9,900
    
    
    
    164
    
    
    
    9,900Equity securities
    
    
    
    
    
    
    
    
    
    
    742
    
    
    
    4,789
    
    
    
    742
    
    
    
    4,789Total
    
    $
    
    
    
    $
    
    
    
    $
    1,684
    
    
    $
    94,580
    
    
    $
    1,684
    
    
    $
    94,580HELD TO MATURITY SECURITIES:State and political subdivisions
    
    $
    
    
    
    $
    
    
    
    $
    65
    
    
    $
    14,546
    
    
    $
    65
    
    
    $
    14,546Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    867
    
    
    
    41,077
    
    
    
    867
    
    
    
    41,077Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    10,702
    
    
    
    128
    
    
    
    10,702Total
    
    $
    
    
    
    $
    
    
    
    $
    1,060
    
    
    $
    66,325
    
    
    $
    1,060
    
    
    $
    66,325
  19




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##### Table of Contents



June 30,
    
    
    December2008
    
    
    31, 2007(Amounts in thousands)Real estate loans:Real estate construction, non-residential
    
    $
    104,159
    
    
    $
    120,659Real estate construction, residential
    
    
    27,900
    
    
    
    31,707Real estate mortgage, non-residential
    
    
    683,094
    
    
    
    725,262Real estate mortgage, residential
    
    
    34,955
    
    
    
    33,846Total real estate loans
    
    
    850,108
    
    
    
    911,474Other loans:Commercial and agricultural
    
    
    463,545
    
    
    
    458,705Factoring receivables
    
    
    19,525
    
    
    
    22,555Consumer installment
    
    
    17,118
    
    
    
    101,947Total other loans
    
    
    500,188
    
    
    
    583,207Total gross loans
    
    
    1,350,296
    
    
    
    1,494,681Less: Allowance for loan losses
    
    
    (29,810
    )
    
    
    (35,800
    )Net loans
    
    $
    1,320,486
    
    
    $
    1,458,881
     20




---



##### Table of Contents



June 30,
    
    
    December2008
    
    
    31, 2007(Amounts in thousands)Real estate construction
    
    $
    63,202
    
    
    $
    32,715Real estate
mortgage
    
    
    42,130
    
    
    
    15,403Total real estate impaired loans
    
    
    105,332
    
    
    
    48,118Commercial and agricultural
    
    
    16,706
    
    
    
    5,376Consumer installment
    
    
    164
    
    
    
    127Total
    
    $
    122,202
    
    
    $
    53,621
  June 30,
    
    
    June 30,2008
    
    
    2007Balance at the beginning of the year
    
    $
    35,800
    
    
    $
    14,031Write down of loans transferred to loans held for sale
    
    
    (985
    )
    
    
    Loans charged-off
    
    
    (20,475
    )
    
    
    (554
    )Recoveries of loans previously charged- off
    
    
    143
    
    
    
    271Provision for loan losses
    
    
    15,327
    
    
    
    3,913Balance at end of quarter
    
    $
    29,810
    
    
    $
    17,661
    21




---



##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage Interest
    
    
    
    
    
    
    Average InterestMaturity Dates
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateFHLB advances
    
    
    2008 to 2011
    
    
    $
    165,000
    
    
    
    2.32  3.59
    %
    
    $
    107,500
    
    
    
    4.44  4.76
    %Repurchase agreement
    
    
    2010
    
    
    
    100,000
    
    
    
    3.31
    %
    
    
    100,000
    
    
    
    5.73
    %Treasury tax loan
    
    
    2008
    
    
    
    1,219
    
    
    
    1.77
    %
    
    
    4,912
    
    
    
    4.00
    %Mortgage note
    
    
    2008
    
    
    
    
    
    
    
    0.00
    %
    
    
    2,711
    
    
    
    7.80
    %Other interest-bearing obligations
    
    
    2008 to 2010
    
    
    
    2,541
    
    
    
    7.00
    %
    
    
    2,693
    
    
    
    7.00
    %Total borrowings
    
    
    
    
    
    $
    268,760
    
    
    
    
    
    
    $
    217,816
    Financial Instruments Whose Contractual Amount represents Risk:
 As of
    
    
    As ofJune 30,
    
    
    December2008
    
    
    31, 2007(Amounts in thousands)Commitments to extend credit
    
    $
    335,085
    
    
    $
    477,619Standby letters of credit
    
    
    6,757
    
    
    
    6,505Total
    
    $
    341,842
    
    
    $
    484,124
      22




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##### Table of Contents



23




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
     24




---



##### Table of Contents



Critical Accounting Policies and Estimates
         25




---



##### Table of Contents




    
    The Company provided $13,920,000 for loan losses in the second quarter of 2008,
compared with $3,713,000 in the same period in 2007. For the six months ended June 30,
2008, the Company recorded a provision for loan losses of $15,327,000, compared with
$3,913,000 for the first six months of 2007. Loans charged-off totaled $19,542,000 in
the second quarter of 2008. The additional provisions for loan losses were necessary
after extensive reviews of the loan portfolio were made by internal credit resources
and external loan specialists. Collateral valuations supporting the Companys
construction and land development loans continue to decline due to the continued
deterioration in real estate values in the Companys market area. Furthermore,
interest foregone on nonaccrual loans totaled approximately $2.7 million for the three
months ended June 30, 2008.
    
    In the second quarter of 2008, an impairment charge of $5,655,000 was required
due to a write down to fair value of certain other real estate owned resulting from a
recent re-appraisal of the property.
    
    The Company transferred a portfolio of indirect consumer loans aggregating a fair
value $85,640,000 to loans held for sale at June 30, 2008. This transfer required the
recognition in the second quarter of 2008 of a $1,751,000 write down which is included in other non-interest
expense, due to changes in market rates. This also required a partial charge-off in
the allowance for loan losses of $985,000, attributable to the portfolios credit
quality.
    
    The Company incurred an other-than-temporary impairment charge of $1,564,000
resulting from a write-down to fair value of agency preferred securities that were
recently downgraded by one of three rating agencies.
    
    Gross loans decreased by $151,550,000 and
$144,385,000 during the second quarter and first half of 2008, respectively, compared
to levels at prior period ends, partially due to the transfer of the
portfolio of indirect consumer loans of $85,640,000 discussed above.
    
    The allowance for loan losses declined by $5,990,000 during the six months ended
June 30, 2008, to $29,810,000, compared to $35,800,000 at December 31, 2007. The June 30, 2008
allowance reflects the balance after net loan charge-offs of $19,425,000 during the
second quarter and $20,332,000 during the six month period ended June 30, 2008.
    
    Impaired non-earning loans at June 30, 2008 were $122,202,000 compared with
$53,621,000 at December 31, 2007 and $77,296,000 at March 31, 2008. New loans placed
on non-accrual during the second quarter of 2008 totaled $72,668,000 thereby increasing impaired
non-earning loans. Charge-offs of $19,542,000 and loans removed from non-accrual
status during the second quarter of 2008 of $8,220,000 totaled $27,762,000 and reduced the impaired
non-earning loans at June 30, 2008. As discussed in the Introduction above and
elsewhere herein, this growth in non-earning loans is directly related to the
deteriorating economic and real estate environment in the Central Valley, the Companys
primary market.
    
    The Company has recorded a tax benefit of $10,934,000 for the three months ended
June 30, 2008 and $10,065,000 for the six months ended June 30, 2008. These amounts
have been recorded as tax refunds for back taxes paid or are being carried forward to
offset future taxable income expected to be generated by the Company. The Company has
not recorded a valuation allowance at June 30, 2008 for the future realization of these
tax benefits as it believes it is more likely than not that these tax benefits will
ultimately be realized. Prospective losses could require the Company to establish a
valuation allowance to the extent that the future collectability of these amounts
becomes uncertain.
    
    Professional fees increased by $1,137,000 or 132% for the three months ended June
30, 2008 and $1,904,000 or 114% for the six months ended
June 30, 2008 compared to the same periods in 2007. These
increases were directly attributable
 26




---



##### Table of Contents



to increased audit fees and consulting assistance
related to identification of problem loans and the general monitoring and resolution of
impaired loans.
 
    
    Capital is a critical factor for the Company. Historically the Company has
generated capital through the retention of earnings and the issuance
of junior
subordinated debentures. The recent losses incurred have reduced the Companys
Risk-Based Capital level to adequately capitalized. The Company is in the process of
implementing a Capital Plan to return the Company to a well capitalized status. The
Risk-Based Capital computations for the Company are complex and are impacted by
operating losses and various limitations including loan loss reserves which are limited
to 125% of risk-based loans as well as deferred income taxes which generally cannot
exceed 10% of risk-based capital. Further, the regulatory guidelines for risk-based
capital are scheduled to be modified in 2009 which will likely reduce the current
capital ratios for the Company.
  Three and Six Months Ended June 30, 2008 Compared With Three and Six Months Ended June 30,
2007
      27




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##### Table of Contents



For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent(Amounts in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeTotal interest income
    
    $
    30,103
    
    
    $
    31,297
    
    
    
    (3.82
    )%
    
    $
    63,029
    
    
    $
    62,512
    
    
    
    0.83
    %Total interest expense
    
    
    10,654
    
    
    
    14,300
    
    
    
    (25.50
    )%
    
    
    23,819
    
    
    
    28,771
    
    
    
    (17.21
    )%Net Interest Income
    
    $
    19,449
    
    
    $
    16,997
    
    
    
    14.43
    %
    
    $
    39,210
    
    
    $
    33,741
    
    
    
    16.21
    %
  For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,Percent
    
    
    
    
    
    
    
    
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeAverage interest-earning assets
    
    $
    1,861,568
    
    
    $
    1,681,495
    
    
    
    10.71
    %
    
    $
    1,868,089
    
    
    $
    1,709,628
    
    
    
    9.27
    %Average interest-earning assets acquired
    
    $
    139,066
    
    
    $
    
    
    
    NM
    
    $
    143,502
    
    
    $
    
    
    
    NMAverage interest-bearing liabilities
    
    $
    1,638,330
    
    
    $
    1,430,610
    
    
    
    14.52
    %
    
    $
    1,633,132
    
    
    $
    1,452,184
    
    
    
    12.46
    %Average interest-bearing liabilities acquired
    
    $
    188,570
    
    
    $
    
    
    
    NM
    
    $
    187,994
    
    
    $
    
    
    
    NMAverage interest rate earned
    
    
    6.55
    %
    
    
    7.54
    %
    
    
    (13.09
    )%
    
    
    6.83
    %
    
    
    7.45
    %
    
    
    (8.29
    )%Average interest rate paid
    
    
    2.61
    %
    
    
    4.01
    %
    
    
    (34.95
    )%
    
    
    2.92
    %
    
    
    4.00
    %
    
    
    (26.88
    )%Net interest margin
    
    
    4.26
    %
    
    
    4.13
    %
    
    
    3.09
    %
    
    
    4.28
    %
    
    
    4.05
    %
    
    
    5.56
    %
  28




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29




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INTEREST RATES AND MARGINS (Fully Taxable-Equivalent Basis)
  Three Months Ended June 30, 2008
    
    
    Three Months Ended June 30, 2007Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateASSETS:Federal funds sold
    
    $
    14,520
    
    
    $
    73
    
    
    
    2.02
    %
    
    $
    22,513
    
    
    $
    298
    
    
    
    5.31
    %Time deposits at other financial institutions
    
    
    100
    
    
    
    1
    
    
    
    4.01
    %
    
    
    221
    
    
    
    3
    
    
    
    5.44
    %Taxable investment securities
    
    
    268,409
    
    
    
    3,446
    
    
    
    5.15
    %
    
    
    308,193
    
    
    
    3,736
    
    
    
    4.86
    %Nontaxable investment securities (1)
    
    
    90,956
    
    
    
    1,103
    
    
    
    4.86
    %
    
    
    99,271
    
    
    
    1,194
    
    
    
    4.82
    %Loans held for sale
    
    
    941
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Loans, gross (2),(3)
    
    
    1,486,642
    
    
    
    25,791
    
    
    
    6.96
    %
    
    
    1,251,297
    
    
    
    26,367
    
    
    
    8.45
    %Total Interest-Earning Assets
    
    
    1,861,568
    
    
    
    30,414
    
    
    
    6.55
    %
    
    
    1,681,495
    
    
    
    31,598
    
    
    
    7.54
    %Allowance for loan losses
    
    
    (36,130
    )
    
    
    
    
    
    
    
    
    
    
    (14,278
    )Cash and due from banks
    
    
    52,186
    
    
    
    
    
    
    
    
    
    
    
    42,218Premises and equipment, net
    
    
    53,472
    
    
    
    
    
    
    
    
    
    
    
    46,218Interest receivable and other assets
    
    
    129,162
    
    
    
    
    
    
    
    
    
    
    
    77,076Total Assets
    
    $
    2,060,258
    
    
    
    
    
    
    
    
    
    
    $
    1,832,729LIABILITIES AND SHAREHOLDERS EQUITY:Negotiable orders of withdrawal
    
    $
    240,010
    
    
    
    287
    
    
    
    0.48
    %
    
    $
    239,261
    
    
    
    837
    
    
    
    1.40
    %Savings deposits
    
    
    404,353
    
    
    
    1,825
    
    
    
    1.81
    %
    
    
    414,123
    
    
    
    3,510
    
    
    
    3.40
    %Time deposits
    
    
    653,012
    
    
    
    5,949
    
    
    
    3.65
    %
    
    
    615,893
    
    
    
    7,420
    
    
    
    4.83
    %Junior subordinated debentures
    
    
    57,734
    
    
    
    899
    
    
    
    6.25
    %
    
    
    31,960
    
    
    
    675
    
    
    
    8.47
    %Federal funds purchased
    
    
    8,208
    
    
    
    41
    
    
    
    2.00
    %
    
    
    336
    
    
    
    5
    
    
    
    5.97
    %Other borrowings
    
    
    275,013
    
    
    
    1,653
    
    
    
    2.41
    %
    
    
    129,037
    
    
    
    1,853
    
    
    
    5.76
    %Total Interest-Bearing Liabilities
    
    
    1,638,330
    
    
    
    10,654
    
    
    
    2.61
    %
    
    
    1,430,610
    
    
    
    14,300
    
    
    
    4.01
    %Noninterest-bearing deposits
    
    
    261,566
    
    
    
    
    
    
    
    
    
    
    
    234,545Accrued interest, taxes and other
    
    
    15,413
    
    
    
    
    
    
    
    
    
    
    
    14,986Total Liabilities
    
    
    1,915,309
    
    
    
    
    
    
    
    
    
    
    
    1,680,141Total shareholders equity
    
    
    144,949
    
    
    
    
    
    
    
    
    
    
    
    152,588Total liabilities and shareholders equity
    
    $
    2,060,258
    
    
    
    
    
    
    
    
    
    
    $
    1,832,729Net interest income and margin (4)
    
    
    
    
    
    $
    19,760
    
    
    
    4.26
    %
    
    
    
    
    
    $
    17,298
    
    
    
    4.13
    %
 
 (1)
    
    Tax equivalent adjustments recorded at the statutory rate of 35% that are included in
nontaxable investment securities portfolio are $264,000 and $290,000 for the three months
ended June 30, 2008 and 2007, respectively. Tax equivalent adjustments included in the
nontaxable investment securities portfolio were derived from nontaxable municipal interest
income. Tax equivalent adjustments recorded at the statutory federal rate of 35% that are
included in taxable investment securities portfolio were created by a dividends received
deduction of $23,000 and $11,000 for the three months ended June 30, 2008 and 2007,
respectively. Tax equivalent income adjustments recorded at the statutory federal rate of 35%
that are
included in taxable investment securities income were created by a qualified zone academy
bond of $24,000 in the second quarter of 2008.(2)
    
    Interest on nonaccrual loans is recognized into income on a cash received basis.(3)
    
    Amounts of interest earned included net loan fees of $1,024,000 and $1,004,000 for the three
months ended June 30, 2008 and 2007, respectively.(4)
    
    Net interest margin is computed by dividing net interest income by total average
interest-earning assets. 30




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Six Months Ended June 30, 2008
    
    
    Six Months Ended June 30, 2007Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Amounts in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateASSETS:Federal funds sold
    
    $
    17,571
    
    
    $
    252
    
    
    
    2.88
    %
    
    $
    58,703
    
    
    $
    1,533
    
    
    
    5.27
    %Time deposits at other financial institutions
    
    
    100
    
    
    
    1
    
    
    
    2.01
    %
    
    
    285
    
    
    
    8
    
    
    
    5.66
    %Taxable investment securities
    
    
    273,654
    
    
    
    6,906
    
    
    
    5.06
    %
    
    
    313,532
    
    
    
    7,522
    
    
    
    4.84
    %Nontaxable investment securities (1)
    
    
    92,181
    
    
    
    2,221
    
    
    
    4.83
    %
    
    
    99,965
    
    
    
    2,424
    
    
    
    4.89
    %Loans held for sale
    
    
    470
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Loans, gross (2),(3)
    
    
    1,484,113
    
    
    
    54,261
    
    
    
    7.33
    %
    
    
    1,237,143
    
    
    
    51,646
    
    
    
    8.42
    %Total Interest-Earning Assets
    
    
    1,868,089
    
    
    
    63,641
    
    
    
    6.83
    %
    
    
    1,709,628
    
    
    
    63,133
    
    
    
    7.45
    %Allowance for loan losses
    
    
    (36,204
    )
    
    
    
    
    
    
    
    
    
    
    (14,152
    )Cash and due from banks
    
    
    52,991
    
    
    
    
    
    
    
    
    
    
    
    43,164Premises and equipment, net
    
    
    53,780
    
    
    
    
    
    
    
    
    
    
    
    45,179Interest receivable and other assets
    
    
    129,423
    
    
    
    
    
    
    
    
    
    
    
    76,866Total Assets
    
    
    2,068,079
    
    
    
    
    
    
    
    
    
    
    $
    1,860,685LIABILITIES AND SHAREHOLDERS EQUITY:Negotiable orders of withdrawal
    
    $
    245,324
    
    
    $
    752
    
    
    
    0.61
    %
    
    $
    229,651
    
    
    $
    1,422
    
    
    
    1.25
    %Savings deposits
    
    
    436,509
    
    
    
    4,849
    
    
    
    2.23
    %
    
    
    413,734
    
    
    
    7,020
    
    
    
    3.42
    %Time deposits
    
    
    637,643
    
    
    
    12,303
    
    
    
    3.87
    %
    
    
    641,697
    
    
    
    15,263
    
    
    
    4.80
    %Junior subordinated debentures
    
    
    57,734
    
    
    
    1,796
    
    
    
    6.24
    %
    
    
    31,960
    
    
    
    1,350
    
    
    
    8.52
    %Federal funds purchased
    
    
    6,954
    
    
    
    80
    
    
    
    2.31
    %
    
    
    169
    
    
    
    5
    
    
    
    5.97
    %Other borrowings
    
    
    248,968
    
    
    
    4,039
    
    
    
    3.25
    %
    
    
    134,973
    
    
    
    3,711
    
    
    
    5.54
    %Total Interest-Bearing Liabilities
    
    
    1,633,132
    
    
    
    23,819
    
    
    
    2.92
    %
    
    
    1,452,184
    
    
    
    28,771
    
    
    
    4.00
    %Noninterest-bearing deposits
    
    
    275,425
    
    
    
    
    
    
    
    
    
    
    
    242,804Accrued interest, taxes and other
    
    
    14,721
    
    
    
    
    
    
    
    
    
    
    
    14,940Total Liabilities
    
    
    1,923,278
    
    
    
    
    
    
    
    
    
    
    
    1,709,928Total shareholders equity
    
    
    144,801
    
    
    
    
    
    
    
    
    
    
    
    150,757Total liabilities and shareholders equity
    
    $
    2,068,079
    
    
    
    
    
    
    
    
    
    
    $
    1,860,685Net interest income and margin (4)
    
    
    
    
    
    $
    39,822
    
    
    
    4.28
    %
    
    
    
    
    
    $
    34,362
    
    
    
    4.05
    %
 
 (1)
    
    Tax equivalent adjustments recorded at the statutory rate of 35% that are included in
nontaxable investment securities portfolio are $527,000 and $589,000 for the six months ended
June 30, 2008 and 2007, respectively. Tax equivalent adjustments included in the nontaxable
investment securities portfolio were derived from nontaxable municipal interest income. Tax
equivalent adjustments recorded at the statutory federal rate of 35% that are included in
taxable investment securities portfolio were created by a dividends received deduction of
$38,000 and $32,000 for the six months ended June 30, 2008 and 2007, respectively. Tax
equivalent income adjustments recorded at the statutory federal rate of 35% that are included
in taxable investment securities income were created by a qualified zone academy bond of
$47,000 in the first six months of 2008.(2)
    
    Interest on nonaccrual loans is recognized into income on a cash received basis.(3)
    
    Amounts of interest earned included net loan fees of $1,695,000 and $1,742,000 for the six
months ended June 30, 2008 and 2007, respectively.(4)
    
    Net interest margin is computed by dividing net interest income by total average
interest-earning assets. 31




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NET INTEREST INCOME VARIANCE ANALYSIS (Fully Taxable-Equivalent Basis)
  Three Months Ended June 30, 2008Compared to June 30, 2007(Amounts in thousands)
    
    Rate
    
    
    Volume
    
    
    TotalIncrease (decrease) in interest income:Federal funds sold
    
    $
    (119
    )
    
    $
    (106
    )
    
    $
    (225
    )Time deposits at other financial institutions
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Taxable investment securities
    
    
    192
    
    
    
    (482
    )
    
    
    (290
    )Tax-exempt investment securities
    
    
    9
    
    
    
    (100
    )
    
    
    (91
    )Loans
    
    
    (5,535
    )
    
    
    4,959
    
    
    
    (576
    )Total:
    
    $
    (5,453
    )
    
    $
    4,269
    
    
    $
    (1,184
    )Increase (decrease) in interest expense:Interest bearing demand
    
    $
    (553
    )
    
    $
    3
    
    
    $
    (550
    )Savings deposits
    
    
    (1,602
    )
    
    
    (83
    )
    
    
    (1,685
    )Time deposits
    
    
    (1,918
    )
    
    
    447
    
    
    
    (1,471
    )Federal funds purchased
    
    
    (81
    )
    
    
    117
    
    
    
    36Other borrowings
    
    
    (2,296
    )
    
    
    2,096
    
    
    
    (200
    )Junior subordinated debentures
    
    
    (320
    )
    
    
    544
    
    
    
    224Total:
    
    $
    (6,770
    )
    
    $
    3,124
    
    
    $
    (3,646
    )Increase in net interest income:
    
    $
    1,317
    
    
    $
    1,145
    
    
    $
    2,462
 Six Months Ended June 30, 2008Compared to June 30, 2007(Amounts in thousands)
    
    Rate
    
    
    Volume
    
    
    TotalIncrease (decrease) in interest income:Federal funds sold
    
    $
    (207
    )
    
    $
    (1,074
    )
    
    $
    (1,281
    )Time deposits at other financial institutions
    
    
    (2
    )
    
    
    (5
    )
    
    
    (7
    )Taxable investment securities
    
    
    341
    
    
    
    (957
    )
    
    
    (616
    )Tax-exempt investment securities
    
    
    (14
    )
    
    
    (189
    )
    
    
    (203
    )Loans
    
    
    (7,695
    )
    
    
    10,310
    
    
    
    2,615Total:
    
    $
    (7,577
    )
    
    $
    8,085
    
    
    $
    508Increase (decrease) in interest expense:Interest bearing demand
    
    $
    (767
    )
    
    $
    97
    
    
    $
    (670
    )Savings deposits
    
    
    (2,557
    )
    
    
    386
    
    
    
    (2,171
    )Time deposits
    
    
    (2,864
    )
    
    
    (96
    )
    
    
    (2,960
    )Federal funds purchased
    
    
    (126
    )
    
    
    201
    
    
    
    75Other borrowings
    
    
    (2,806
    )
    
    
    3,134
    
    
    
    328Junior subordinated debentures
    
    
    (643
    )
    
    
    1,089
    
    
    
    446Total:
    
    $
    (9,763
    )
    
    $
    4,811
    
    
    $
    (4,952
    )Increase in net interest income:
    
    $
    2,186
    
    
    $
    3,274
    
    
    $
    5,460
   32




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33




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For the Three Months Ended June 30,2008
    
    2007Stockmens
    
    Bay View(Amounts in thousands)
    
    Branches
    
    Funding
    
    All Other
    
    Total
    
    TotalSalaries and benefits
    
    $
    781
    
    
    $
    849
    
    
    $
    8,091
    
    
    $
    9,721
    
    
    
    7,468Premises and occupancy expense
    
    
    156
    
    
    
    83
    
    
    
    1,573
    
    
    
    1,812
    
    
    
    1,760Equipment expense
    
    
    67
    
    
    
    30
    
    
    
    1,643
    
    
    
    1,740
    
    
    
    1,296
 For the Six Months Ended June 30,2008
    
    2007Stockmens
    
    Bay View(Amounts in thousands)
    
    Branches
    
    Funding
    
    All Other
    
    Total
    
    TotalSalaries and benefits
    
    $
    1,534
    
    
    $
    1,757
    
    
    $
    16,617
    
    
    $
    19,908
    
    
    
    15,276Premises and occupancy expense
    
    
    330
    
    
    
    120
    
    
    
    3,247
    
    
    
    3,697
    
    
    
    3,305Equipment expense
    
    
    143
    
    
    
    58
    
    
    
    3,246
    
    
    
    3,447
    
    
    
    2,480
    Financial Condition
   34




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35




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Percent of
    
    
    
    
    
    
    Percent of(Dollars in thousands)
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansReal estate construction, non-residential
    
    $
    104,159
    
    
    
    8
    %
    
    $
    120,570
    
    
    
    8
    %Real estate construction, residential
    
    
    27,900
    
    
    
    2
    
    
    
    31,796
    
    
    
    2Real estate mortgage, non residential
    
    
    683,094
    
    
    
    51
    
    
    
    725,262
    
    
    
    49Real estate mortgage, residential
    
    
    34,955
    
    
    
    2
    
    
    
    33,846
    
    
    
    2Total real estate loans
    
    
    850,108
    
    
    
    63
    
    
    
    911,474
    
    
    
    61Commercial
    
    
    388,999
    
    
    
    29
    
    
    
    373,512
    
    
    
    25Agricultural
    
    
    74,546
    
    
    
    6
    
    
    
    85,193
    
    
    
    6Factoring
    
    
    19,525
    
    
    
    1
    
    
    
    22,555
    
    
    
    1Consumer
    
    
    17,118
    
    
    
    1
    
    
    
    101,947
    
    
    
    7Total
    
    
    1,350,296
    
    
    
    100
    %
    
    
    1,494,681
    
    
    
    100
    %Less allowance for loan losses
    
    
    (29,810
    )
    
    
    
    
    
    
    (35,800
    )Net loans
    
    $
    1,320,486
    
    
    
    
    
    
    $
    1,458,881
   SanFrancisco
    
    
    Merced/
    
    

    Stockton/
    
    
    
    
    
    
    Fresno/(Dollars in Thousands)
    
    Bay Area
    
    
    Mariposa
    
    
    Modesto
    
    
    Sacramento
    
    
    Bakersfield
    
    
    All Other
    
    
    TotalReal estate construction, non-residential
    
    $
    5,712
    
    
    $
    23,997
    
    
    $
    23,103
    
    
    $
    15,790
    
    
    $
    35,557
    
    
    $
    
    
    
    $
    104,159Real estate construction, residential
    
    
    4,621
    
    
    
    3,483
    
    
    
    3,315
    
    
    
    6,364
    
    
    
    10,117
    
    
    
    
    
    
    
    27,900Real estate mortgage, 
non-residential
    
    
    77,882
    
    
    
    183,630
    
    
    
    168,955
    
    
    
    47,197
    
    
    
    197,392
    
    
    
    8,038
    
    
    
    683,094Real estate mortgage, residential
    
    
    1,170
    
    
    
    13,407
    
    
    
    7,816
    
    
    
    435
    
    
    
    9,680
    
    
    
    2,447
    
    
    
    34,955Total
    
    $
    89,385
    
    
    $
    224,517
    
    
    $
    203,189
    
    
    $
    69,786
    
    
    $
    252,746
    
    
    $
    10,485
    
    
    $
    850,108
    36




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##### Table of Contents



(Dollars in thousands)
    
    June 30, 2008
    
    
    December 31, 2007Nonaccrual loans
    
    $
    122,202
    
    
    $
    53,621Accruing loans past due 90 days or more
    
    
    22,201
    
    
    
    583Total nonperforming loans
    
    
    144,403
    
    
    
    54,204Other real estate owned
    
    
    1,895
    
    
    
    7,550Total nonperforming assets
    
    $
    146,298
    
    
    $
    61,754Nonperforming loans to total loans
    
    
    10.69
    %
    
    
    3.63
    %Nonperforming assets to total assets
    
    
    7.04
    %
    
    
    2.93
    %
   Impaired and Nonaccrual Loans
   37




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##### Table of Contents



(Amounts in thousands)Balance at December 31, 2007
    
    $
    53,621Add: Loans placed on nonaccrual status
    
    
    102,701Less: Loans removed from non-accrual status due to additional
collateral or principal payments
    
    
    (13,645
    )Charge-offs during the period
    
    
    (20,475
    )Balance at June 30, 2008
    
    $
    122,202
  June 30, 2008
    
    
    December 31, 2007(Amounts in thousands)Real estate construction, non-residential
    
    $
    48,716
    
    
    $
    27,284Real estate construction, residential
    
    
    14,486
    
    
    
    5,431Real estate mortgage, non-residential
    
    
    42,130
    
    
    
    15,403Real estate, residential
    
    
    97
    
    
    
    Total real estate nonaccrual loans
    
    
    105,429
    
    
    
    48,118Commercial
    
    
    16,462
    
    
    
    5,012All other
    
    
    311
    
    
    
    491Total
    
    $
    122,202
    
    
    $
    53,621
  June 30, 2008
    
    
    December 31, 2007(Amounts in thousands)Construction of single /multi family residence
    
    $
    14,486
    
    
    
    5,431Construction and land development
    
    
    81,905
    
    
    
    40,372Single/multi family residence
    
    
    6,471
    
    
    
    1,006Non-farm, non-residential property
    
    
    2,866
    
    
    
    1,500Commercial property
    
    
    9,232
    
    
    
    5,028Agricultural production and farming
    
    
    1,192
    
    
    
    157Personal property
    
    
    68
    
    
    
    127Unsecured
    
    
    5,982
    
    
    
    Total
    
    $
    122,202
    
    
    $
    53,621
 38




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007(Amounts in thousands)Land subdivision
    
    $
    38,541
    
    
    $
    16,047Construction of new single family housing
    
    
    20,792
    
    
    
    16,767Real estate agent and broker offices
    
    
    22,714
    
    
    
    3,812Lessors of non-residential buildings
    
    
    11,604
    
    
    
    Other activities relating to real estate
    
    
    9,875
    
    
    
    4,976Wholesale/retail
    
    
    6,773
    
    
    
    5,544Lessors of residential buildings
    
    
    4,729
    
    
    
    1,006Medical offices
    
    
    4,454
    
    
    
    4,300Other
    
    
    2,720
    
    
    
    1,169Total
    
    $
    122,202
    
    
    $
    53,621
  Collateral Impaired and Not Performing:
  Collateral Impaired and Performing:
  Collateral Adequate and Not Performing :
  Collateral Adequate and Performing :
  Impaired loans
 June 30, 2008(Amounts in thousands)Collateral impaired and not performing
    
    $
    65,778Collateral impaired and performing
    
    
    21,693Collateral adequate and not performing
    
    
    23,705Collateral adequate and performing
    
    
    11,026$
    122,202
  39




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##### Table of Contents



Other Real Estate Owned
    40




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##### Table of Contents



ALLOWANCE FOR LOAN LOSSES
  June 30,
    
    
    December 312008
    
    
    2007
    
    
    2007(Amounts in thousands)Balance at beginning of period
    
    $
    35,800
    
    
    $
    14,031
    
    
    $
    14,031Allowance from the California Stockmens Bank
    
    
    
    
    
    
    
    
    
    
    1,900Provision for loan losses
    
    
    15,327
    
    
    
    3,913
    
    
    
    29,803Write down of loans transferred to loans held for sale
    
    
    (985
    )
    
    
    
    
    
    
    Charge-offsCommercial and agricultural
    
    
    (778
    )
    
    
    (142
    )
    
    
    (1,128
    )Real estate construction
    
    
    (19,129
    )
    
    
    
    
    
    
    (8,357
    )Consumer
    
    
    (568
    )
    
    
    (412
    )
    
    
    (934
    )Total charge-offs
    
    
    (20,475
    )
    
    
    (554
    )
    
    
    (10,419
    )RecoveriesCommercial and agricultural
    
    
    47
    
    
    
    214
    
    
    
    364Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    96
    
    
    
    57
    
    
    
    121Total recoveries
    
    
    143
    
    
    
    271
    
    
    
    485Net (charge-offs) recoveries
    
    
    (20,332
    )
    
    
    (283
    )
    
    
    (9,934
    )Balance at end of period
    
    $
    29,810
    
    
    $
    17,661
    
    
    $
    35,800Loans outstanding at period-end
    
    $
    1,350,296
    
    
    $
    1,311,094
    
    
    $
    1,494,681Average loans outstanding
    
    $
    1,484,113
    
    
    $
    1,237,143
    
    
    $
    1,320,594Annualized
net charge-offs to average loans
    
    
    2.88
    %
    
    
    0.05
    %
    
    
    0.75
    %Allowance for loan losses:To total loans
    
    
    2.21
    %
    
    
    1.35
    %
    
    
    2.40
    %To nonperforming loans
    
    
    20.64
    %
    
    
    124.02
    %
    
    
    66.05
    %To nonperforming assets
    
    
    20.38
    %
    
    
    123.50
    %
    
    
    57.97
    %
   Charge-offs
  41




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ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
   June 30, 2008
    
    
    December 31, 2007Loans % to
    
    
    
    
    
    
    Loans % to(Amounts in thousands)
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    

Total LoansCommercial and
agricultural
    
    $
    8,958
    
    
    
    36
    %
    
    $
    7,757
    
    
    
    32
    %Real estate construction
    
    
    9,341
    
    
    
    10
    
    
    
    17,413
    
    
    
    10Real estate mortgage
    
    
    10,684
    
    
    
    53
    
    
    
    8,940
    
    
    
    51Installment
    
    
    827
    
    
    
    1
    
    
    
    1,690
    
    
    
    7Total
    
    $
    29,810
    
    
    
    100
    %
    
    $
    35,800
    
    
    
    100
    %
  (Dollars in thousands)
    
    June 30, 2008
    
    
    December 31, 2007Specific allowance established for impaired loans
    
    $
    15,508
    
    
    $
    21,432General component of allowance for loan losses
    
    
    14,302
    
    
    
    14,368Total
    
    $
    29,810
    
    
    $
    35,800
  Balance at December 31, 2007
    
    $
    21,432New reserves required for specifically identified loans
    
    
    27,483Impact of reduction in estimate for selling costs from 10% to 8%
    
    
    (1,070
    )Reduction in reserves from charge-offs
    
    
    (19,198
    )Less release resulting from additional collateral or repayment by customers
    
    
    (13,139
    )Balance at June 30, 2008
    
    $
    15,508
  CREDIT RISK MANAGEMENT AND ASSET QUALITY
  42




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OTHER EARNING ASSETS
  June 30, 2008
    
    December 31, 2007(Amounts in thousands)Cash surrender value of life insurance
    
    $
    44,863
    
    
    $
    43,677
  DEPOSITS
  43




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007(Amounts in thousands)Three months or less
    
    $
    86,299
    
    
    $
    157,659Over three to six months
    
    
    43,067
    
    
    
    44,511Over six to twelve months
    
    
    55,348
    
    
    
    26,175Over twelve months
    
    
    16,585
    
    
    
    41,782Total
    
    $
    201,299
    
    
    $
    270,127
 RESERVE FOR COMMITMENTS
  For the six
    
    
    For the yearmonths ended
    
    
    EndedJune 30,
    
    
    December 31,2008
    
    
    2007(Amounts in thousands)Balance at the beginning of the period
    
    $
    1,800
    
    
    $
    710Provision for credit losses
    
    
    2,329
    
    
    
    334Provision (credit) for mechanics liens and
bonded stop notices
    
    
    (279
    )
    
    
    1,840Payment of mechanic liens and bonded stop notices
    
    
    
    
    
    
    (1,084
    )Balance at the end of the period
    
    $
    3,850
    
    
    $
    1,800
     44




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45




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##### Table of Contents



Income Taxes:
 Deferred Taxes:
 Capital Losses:
    To Be Well CapitalizedUnder PromptFor Capital Adequacy
    
    
    Corrective ActionActual
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Amounts in thousands)The Company:Total capital (to risk weighted assets)
    
    $
    159,687
    
    
    
    9.56
    %
    
    $
    133,686
    
    
    
    8
    %
    
    $
    167,108
    
    
    
    10
    %Tier 1 Capital (to risks weighted assets)
    
    $
    124,460
    
    
    
    7.45
    %
    
    $
    66,843
    
    
    
    4
    %
    
    $
    100,265
    
    
    
    6
    %Leverage ratio (1)
    
    $
    124,460
    
    
    
    6.18
    %
    
    $
    80,511
    
    
    
    4
    %
    
    $
    100,639
    
    
    
    5
    %The Bank:Total capital (to risk weighted assets)
    
    $
    152,523
    
    
    
    9.17
    %
    
    $
    133,031
    
    
    
    8
    %
    
    $
    166,289
    
    
    
    10
    %Tier 1 Capital (to risk weighted assets)
    
    $
    111,274
    
    
    
    6.69
    %
    
    $
    66,516
    
    
    
    4
    %
    
    $
    99,774
    
    
    
    6
    %Leverage ratio (1)
    
    $
    111,274
    
    
    
    5.55
    %
    
    $
    80,152
    
    
    
    4
    %
    
    $
    100,190
    
    
    
    5
    %
 
 (1)
    
    The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The
minimum leverage ratio is 3 percent for banking organizations that do not anticipate
significant growth and that have well diversified risk, excellent asset quality and in
general, are considered top-rated banks. 46




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##### Table of Contents



To Be Well CapitalizedUnder PromptFor Capital Adequacy
    
    
    Corrective ActionActual
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Amounts in thousands)The Company:Total capital (to risk weighted assets)
    
    $
    177,480
    
    
    
    10.26
    %
    
    $
    138,406
    
    
    
    8
    %
    
    $
    173,008
    
    
    
    10
    %Tier 1 Capital (to risks weighted assets)
    
    $
    142,122
    
    
    
    8.21
    %
    
    $
    69,203
    
    
    
    4
    %
    
    $
    103,805
    
    
    
    6
    %Leverage ratio (1)
    
    $
    142,122
    
    
    
    6.97
    %
    
    $
    81,510
    
    
    
    4
    %
    
    $
    101,887
    
    
    
    5
    %The Bank:Total capital (to risk weighted assets)
    
    $
    170,940
    
    
    
    9.94
    %
    
    $
    137,518
    
    
    
    8
    %
    
    $
    171,898
    
    
    
    10
    %Tier 1 Capital (to risk weighted assets)
    
    $
    129,253
    
    
    
    7.52
    %
    
    $
    68,759
    
    
    
    4
    %
    
    $
    103,139
    
    
    
    6
    %Leverage ratio (1)
    
    $
    129,253
    
    
    
    6.41
    %
    
    $
    80,703
    
    
    
    4
    %
    
    $
    100,879
    
    
    
    5
    %
 
 (1)
    
    The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum
leverage ratio is 3 percent for banking organizations that do not anticipate significant growth
and that have well diversified risk, excellent asset quality and in general, are considered
top-rated banks.  RETURN ON EQUITY AND ASSETS
  Six Months Ended June 30,2008
    
    2007Annualized return on average assets
    
    
    (0.94
    )%
    
    
    0.50
    %Annualized return on average equity
    
    
    (13.43
    )%
    
    
    6.18
    %Average equity to average assets
    
    
    7.00
    %
    
    
    8.10
    %Dividend payout ratio
    
    NM
    
    
    
    44.43
    %
 IMPACT OF INFLATION
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    47




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##### Table of Contents



Item 4. Controls and Procedures
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  §
    
    Hiring of Chief Risk Officer to implement a risk management plan, including enhanced
policies and procedures to identify, assess, manage and monitor risk exposures;§
    
    Engaging independent credit specialists to evaluate a substantial portion of the
commercial, real estate and construction loan portfolios;§
    
    Establishing a Special Assets Department to monitor and control nonperforming credits.§
    
    Ensuring via review by qualified senior management that managements assessment of loans
requiring impairment analysis in accordance with SFAS 114 is supported by comprehensive
documentation;§
    
    Training of lending and credit personnel to ensure that loans are appropriately
classified and that problem loans are identified and communicated to Credit Administration
on a timely basis;§
    
    Involving the Accounting Department in the preparation and review of comprehensive
documentation developed by Credit Administration to support the loan loss provisioning and
the adequacy of the allowance for loan losses;§
    
    Hiring of additional accounting and credit personnel, including a chief accounting
officer and assistant controller, to ensure that personnel with adequate experience, skills
and knowledge particularly in relation to complex or non-routine transactions are directly
involved in the review and accounting evaluation of such transactions;§
    
    Engaging an independent company to review progress in implementing the enhancements to
procedures and
 48




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##### Table of Contents



to report to the Audit Committee of the Board;§
    
    Documenting of processes and procedures, along with appropriate training, to ensure that
the accounting policies, conform to GAAP and are consistently applied prospectively; and§
    
    Ensuring through appropriate review by senior level personnel that managements analysis
of the appropriate accounting treatment for Affordable Housing
Partnership investments, Other Real Estate Owned and minimum lease
commitments, are
supported by comprehensive documentation.§
    
Engaging an independent accounting firm to review newly
implemented control processes and procedures related to the
accounting for certain non-routine transactions.
   
 PART II  Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
    Market and Interest Rate Risk
 We will need to raise additional capital in the near future, but capital may not be available or
may be available only on unfavorable terms.
  49




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##### Table of Contents



Liquidity risk could impair our ability to fund operations and jeopardize our financial
condition.
  Risks related to the nature and geographical location of Capital Corp of the Wests business
 We determined that our methodology for grading loans and establishing the level of the allowance
for loan losses had material weaknesses.
  Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan
portfolio.
  50




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##### Table of Contents



Our dependence on loans secured by real estate subjects us to risks relating to fluctuations in the
real estate market.
  Our concentration in real estate construction loans subjects us to additional risks.
  Continuation of local economic conditions could hurt our profitability.
  Risks associated with acquisitions or divestitures or restructuring may adversely affect us.
  51




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##### Table of Contents



Regulatory Risks
 Restrictions on dividends and other distributions could limit amounts payable to us.
  We
may be subject to further regulatory action.




Systems, Accounting and Internal Control Risks


The accuracy of the Companys judgments and estimates about financial and accounting matters will
impact operating results and financial condition




The Companys information systems may experience an interruption or breach in security.




The Companys controls and procedures may fail or be circumvented.




52



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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
 (a.)
    
    Our Annual Meeting of Shareholders for 2008 was held June 19, 2008. The Meeting was
adjourned in order to solicit additional proxies in favor of proposal 2, the Amended and
Restated 2002 Stock Plan and reconvened on July 1, 2008. The number of shares represented in
person or by proxy and constituting a quorum was 8,857,282 which equaled approximately 82% of
the shares outstanding.Shareholders re-elected the four current members to the Board of Directors whose terms were
expiring this year to serve three-year terms until the Companys 2011 annual meeting and
until their successors have been elected and qualified. Also, shareholders ratified the
appointment of Perry-Smith, LLP as independent auditors of the Company for 2008 but rejected
the Amended and Restated 2002 Stock Plan.(b.)
    
    The following are the results of the election of directors in Class III of the Board:
 Election of directors
    
    Votes For
    
    Votes WithheldDavid X. Bonnar
    
    
    5,597,282
    
    
    
    3,260,000Donald T. Briggs Jr.
    
    
    6,360,775
    
    
    
    2,496,507Curtis R. Grant
    
    
    5,591,632
    
    
    
    3,265,650G. Michael Graves
    
    
    5,666,350
    
    
    
    3,190,932
 (c.)
    
    The following are the results of the vote on proposal 2, to approve the Capital Corp of the
West Amended and Restated 2002 Stock Plan:
 Votes For
    
    Votes Against
    
    Votes Abstain
    
    Non-Votes2,878,305
    
    
    3,726,244
    
    
    
    169,481
    
    
    
    2,083,252
 (d.)
    
    The following are the results of the vote on proposal 3, to ratify the selection of
Perry-Smith LLP as the Companys independent accountants for 2008:
 Votes For
    
    Votes Against
    
    Votes Abstain
    
    Non-Votes8,674,775
    
    
    171,086
    
    
    
    11,421
    
    
    
    
 
 Item 5. Other Information.
  
 Item 6. Exhibits
  53




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##### Table of Contents



SIGNATURES
  CAPITAL CORP OF THE WEST
(Registrant)Date: August 11, 2008
    By
    
    /s/   Thomas T. HawkerThomas T. HawkerPresident and
Chief Executive Officer Date: August 11, 2008
    By
    
    /s/   David A. HeaberlinDavid A. HeaberlinChief Financial Officer/Treasurer 54




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##### Table of Contents



Exhibit
    
    Description10.1
    
    Written Agreement dated July 17, 2008 among Capital Corp of the West, County Bank and
the Federal Reserve Bank of San Francisco.31.1
    
    Certification of Registrants Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Registrants Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Registrants Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Registrants Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
 55