**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 June  30, 2003**                                                                                                                                                                              |
|                                                                                                                                                                                                                           |
| **or**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                          | **Transition  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
| **for the Transition Period from                   to                 ** |

 

**Commission File Number: 0-27384**

 

**CAPITAL CORP OF THE WEST**

(Exact name of 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 sincelast 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

 

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

 

Thenumber of shares outstanding of the registrant’s common stock, no par value, asof June 30, 2003 was 5,604,309.  Noshares of preferred stock, no par value, were outstanding at June 30, 2003.

 

 

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**CapitalCorp of the West**Table of Contents

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

 

2

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CapitalCorp of the WestConsolidated Balance Sheets(Unaudited)

 
|                                                                                                                                               |   | **June 30,  2003**          |      | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|-------------------------|--------|
|                                                                                                                                               |   | **(Dollars  in thousands)** |      |
| **Assets**                                                                                                                                         |   |                        |      |                    |   |
| Cash and noninterest-bearing deposits in other banks                                                                                               |   | $                           | 41,856    |                    | $      | 46,628 |   |
| Federal funds sold                                                                                                                                 |   | 21,910                      |      | 26,555                  |   |
| Time deposits at other financial institutions                                                                                                      |   | 600                         |      | 500                     |   |
| Investment securities available for sale, at fair  value                                                                                           |   | 240,900                     |      | 231,392                 |   |
| Investment securities held to maturity at cost, fair  value of $86,598 and $57,905 at June 30, 2003 and December 31, 2002                          |   | 84,539                      |      | 55,628                  |   |
| Loans, net of allowance for loan losses of  $12,626 and $12,134 at June 30, 2003 and  December 31, 2002                                       |   | 681,209                     |      | 621,639                 |   |
| Interest receivable                                                                                                                                |   | 5,789                       |      | 5,532                   |   |
| Premises and equipment, net                                                                                                                        |   | 15,153                      |      | 13,942                  |   |
| Intangible assets                                                                                                                                  |   | 2,985                       |      | 3,325                   |   |
| Other assets                                                                                                                                       |   | 36,062                      |      | 29,069                  |   |
|                                                                                                                                               |   |                        |      |                    |   |
| Total assets                                                                                                                                       |   | $                           | 1,131,003 |                    | $      | 1,034,210 |   |
|                                                                                                                                               |   |                        |      |                    |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                     |   |                        |      |                    |   |
| Deposits                                                                                                                                           |   |                        |      |                    |   |
| Noninterest-bearing demand                                                                                                                         |   | $                           | 171,634   |                    | $      | 164,852 |   |
| Negotiable orders of withdrawal                                                                                                                    |   | 116,190                     |      | 120,449                 |   |
| Savings                                                                                                                                            |   | 280,493                     |      | 223,404                 |   |
| Time, under $100,000                                                                                                                               |   | 173,558                     |      | 164,959                 |   |
| Time, $100,000 and over                                                                                                                            |   | 200,228                     |      | 160,715                 |   |
| Total deposits                                                                                                                                     |   | 942,103                     |      | 834,379                 |   |
|                                                                                                                                               |   |                        |      |                    |   |
| Borrowed funds                                                                                                                                     |   | 92,356                      |      | 110,204                 |   |
| Accrued interest, taxes and other liabilities                                                                                                      |   | 7,408                       |      | 6,458                   |   |
| Total liabilities                                                                                                                                  |   | 1,041,867                   |      | 951,041                 |   |
|                                                                                                                                               |   |                        |      |                    |   |
|   Capital  Securities and minority interests                                                                                                  |   | 6,000                       |      | 6,000                   |   |
|                                                                                                                                               |   |                        |      |                    |   |
| Preferred Stock, no par value; 10,000,000 shares  authorized;  None outstanding                                                               |   | —                      |      | —                  |   |
| Common stock, no par value; 20,000,000 shares  authorized;5,604,329 and 5,591,336 issued & outstanding at June 30, 2003  and December 31, 2002 |   | 53,219                      |      | 46,436                  |   |
| Retained earnings                                                                                                                                  |   | 27,600                      |      | 27,824                  |   |
| Accumulated other comprehensive income                                                                                                             |   | 2,317                       |      | 2,909                   |   |
|                                                                                                                                               |   |                        |      |                    |   |
| Total shareholders’ equity                                                                                                                    |   | 83,136                      |      | 77,169                  |   |
|                                                                                                                                               |   |                        |      |                    |   |
| Total liabilities, Capital Securities and minority  interests and shareholders’ equity                                                        |   | $                           | 1,131,003 |                    | $      | 1,034,210 |   |

 

See accompanying notes

 

3

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

 
|                                                                 |   | **For the  Three Months  Ended June 30,**  |   | **For the  Six Months  Ended June 30,** |   |
|----------------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------|--------|
|                                                                 |   | **2003**                                   |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                                                 |   | **(In  thousands, except per share data)** |   |
| Interest income:                                                     |   |                                       |   |                                    |   |   |   |   |   |
| Interest and fees on loans                                           |   | $                                          | 12,086 |                                    | $      | 10,678 |   | $ | 23,419 |   | $ | 20,815 |   |
| Interest on deposits with other financial  institutions              |   | 3                                          |   | 3                                       |   | 5 |   | 5 |   |
| Interest on investments held to maturity:                            |   |                                       |   |                                    |   |   |   |   |   |
| Taxable                                                              |   | 714                                        |   | 968                                     |   | 1,480 |   | 1,895 |   |
| Non-taxable                                                          |   | 55                                         |   | 55                                      |   | 110 |   | 110 |   |
| Interest on investments available for sale:                          |   |                                       |   |                                    |   |   |   |   |   |
| Taxable                                                              |   | 2,319                                      |   | 2,526                                   |   | 4,495 |   | 4,998 |   |
| Non-taxable                                                          |   | 273                                        |   | 273                                     |   | 545 |   | 545 |   |
| Interest on federal funds sold                                       |   | 51                                         |   | 87                                      |   | 90 |   | 99 |   |
| Total interest income                                                |   | 15,501                                     |   | 14,590                                  |   | 30,144 |   | 28,467 |   |
|                                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Interest expense:                                                    |   |                                       |   |                                    |   |   |   |   |   |
| Interest on negotiable orders of withdrawal                          |   | 14                                         |   | 58                                      |   | 28 |   | 112 |   |
| Interest on savings deposits                                         |   | 643                                        |   | 859                                     |   | 1,223 |   | 1,690 |   |
| Interest on time deposits, under $100,000                            |   | 1,104                                      |   | 1,345                                   |   | 2,224 |   | 2,884 |   |
| Interest on time, $100,000 and over                                  |   | 1,061                                      |   | 1,169                                   |   | 2,050 |   | 2,348 |   |
| Interest on other borrowings                                         |   | 1,193                                      |   | 1,226                                   |   | 2,344 |   | 2,174 |   |
| Total interest expense                                               |   | 4,015                                      |   | 4,657                                   |   | 7,869 |   | 9,208 |   |
|                                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Net interest income                                                  |   | 11,486                                     |   | 9,933                                   |   | 22,275 |   | 19,259 |   |
| Provision for loan losses                                            |   | 482                                        |   | 1,451                                   |   | 1,153 |   | 2,231 |   |
| Net interest income after provision for loan losses                  |   | 11,004                                     |   | 8,482                                   |   | 21,122 |   | 17,028 |   |
|                                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Noninterest income:                                                  |   |                                       |   |                                    |   |   |   |   |   |
| Service charges on deposit accounts                                  |   | 1,357                                      |   | 1,279                                   |   | 2,634 |   | 2,406 |   |
| Other                                                                |   | 1,039                                      |   | 851                                     |   | 2,088 |   | 1,503 |   |
| Total noninterest income                                             |   | 2,396                                      |   | 2,130                                   |   | 4,722 |   | 3,909 |   |
|                                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Noninterest Expense:                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Salaries and related benefits                                        |   | 4,934                                      |   | 3,839                                   |   | 9,437 |   | 7,783 |   |
| Equipment                                                            |   | 702                                        |   | 571                                     |   | 1,461 |   | 1,420 |   |
| Premises and occupancy                                               |   | 712                                        |   | 704                                     |   | 1,382 |   | 1,140 |   |
| Professional fees                                                    |   | 484                                        |   | 317                                     |   | 758 |   | 570 |   |
| Marketing                                                            |   | 248                                        |   | 219                                     |   | 508 |   | 407 |   |
| Intangible amortization                                              |   | 170                                        |   | 170                                     |   | 340 |   | 340 |   |
| Supplies                                                             |   | 197                                        |   | 171                                     |   | 432 |   | 357 |   |
| Dividend Expense on Capital Securities                               |   | 153                                        |   | 152                                     |   | 306 |   | 306 |   |
| Other                                                                |   | 1,391                                      |   | 1,370                                   |   | 2,880 |   | 2,615 |   |
| Total noninterest expense                                            |   | 8,991                                      |   | 7,513                                   |   | 17,504 |   | 14,938 |   |
|                                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Income before income taxes                                           |   | 4,409                                      |   | 3,099                                   |   | 8,340 |   | 5,999 |   |
| Provision for income taxes                                           |   | 1,014                                      |   | 715                                     |   | 1,918 |   | 1,391 |   |
| Net income                                                           |   | $                                          | 3,395  |                                    | $      | 2,384 |   | $ | 6,422 |   | $ | 4,608 |   |
| Comprehensive Income:                                                |   |                                       |   |                                    |   |   |   |   |   |
| Unrealized (loss) gain on securities arising during  the period, net |   | (237                                       | )      | 1,617                                   |   | (592 | ) | 231 |   |
| Comprehensive income                                                 |   | $                                          | 3,158  |                                    | $      | 4,001 |   | $ | 5,830 |   | $ | 4,839 |   |
|                                                                 |   |                                       |   |                                    |   |   |   |   |   |
| Basic earnings per share                                             |   | $                                          | 0.61   |                                    | $      | 0.43 |   | $ | 1.15 |   | $ | 0.84 |   |
| Diluted earnings per share                                           |   | $                                          | 0.59   |                                    | $      | 0.42 |   | $ | 1.11 |   | $ | 0.81 |   |

 

See accompanying notes

 

4

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CapitalCorp of the WestConsolidated Statement of Changesin Shareholders’ Equity(Unaudited)

 
| **(Amounts in thousands)**                                                                      |   | **Common Stock** |   | **Retained  earnings** |   | **Accumulated  other  comprehensive income (loss)** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------------|--------|-----------------------------------------------------|--------|-----------|--------|
| **Number of  shares**                                                                           |   | **Amounts**      |   |
|                                                                                            |   |             |   |                   |   |                                                |   |      |   |   |   |
| Balance, December 31, 2002                                                                      |   | 5,325            |   | $                      | 46,436 |                                                | $      | 27,824    |   | $ | 2,909 |   | $ | 77,169 |   |
|                                                                                            |   |             |   |                   |   |                                                |   |      |   |   |   |
| Exercise of stock options                                                                       |   | 13               |   | 151                    |   | —                                              |   | —    |   | 151 |   |
|                                                                                            |   |             |   |                   |   |                                                |   |      |   |   |   |
| Net Change in fair market value of investment  securities and swaps, net of tax benefit of $358 |   | —           |   | —                 |   | —                                              |   | (592      | )      | (592 | ) |
|                                                                                            |   |             |   |                   |   |                                                |   |      |   |   |   |
| 5% stock dividend, including cash payment for fractional  shares                                |   | 266              |   | 6,632                  |   | (6,646                                              | )      |      |   | (14 | )  |
|                                                                                            |   |             |   |                   |   |                                                |   |      |   |   |   |
| Net income                                                                                      |   | —           |   | —                 |   | 6,422                                               |   | —    |   | 6,422 |   |
|                                                                                            |   |             |   |                   |   |                                                |   |      |   |   |   |
| Balance, June 30, 2003                                                                          |   | 5,604            |   | $                      | 53,219 |                                                | $      | 27,600    |   | $ | 2,317 |   | $ | 83,136 |   |

 

See accompanying notes

 

5

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CapitalCorp of the WestConsolidated Statements of Cash Flows(Unaudited)

 
| **(Dollars in thousands)**                                                     |   | **6 months  ended  June 30,  2003** |   | **6 months  ended  June 30,  2002** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
| **Operating activities:**                                                      |   |                                |   |                                |   |
| Net income                                                                     |   | $                                   | 6,422  |                                | $      | 4,608 |   |
| Adjustments to reconcile net income to net cash  provided by                   |   |                                |   |                                |   |
| Operating activities:                                                          |   |                                |   |                                |   |
| Provision for loan losses                                                      |   | 1,153                               |   | 2,231                               |   |
| Depreciation, amortization and accretion, net                                  |   | 2,361                               |   | 1,829                               |   |
| Net increase in interest receivable & other  assets                        |   | (6,858                              | )      | (1,100                              | )      |
| Net increase in deferred loan fees                                             |   | 495                                 |   | 347                                 |   |
| Net increase (decrease) in accrued interest payable  & other liabilities   |   | 950                                 |   | (5,331                              | )      |
| Net cash provided by operating activities                                      |   | 4,523                               |   | 2,584                               |   |
|                                                                           |   |                                |   |                                |   |
| **Investing  activities:**                                                     |   |                                |   |                                |   |
| Investment securities purchases                                                |   | (96,349                             | )      | (56,227                             | )      |
| Proceeds from maturities of investment securities                              |   | 55,865                              |   | 25,727                              |   |
| Proceeds from sales of available for sale securities                           |   | 231                                 |   | 6,969                               |   |
| Net increase in time deposits in other financial  institutions                 |   | (100                                | )      | —                              |   |
| Proceeds from sales of  loans                                             |   | 2,497                               |   | 1,633                               |   |
| Net increase in loans                                                          |   | (64,078                             | )      | (54,002                             | )      |
| Purchase of premises and equipment                                             |   | (2,019                              | )      | (1,769                              | )      |
| Purchase of subsidiary                                                         |   | —                              |   | (520                                | )      |
| Net cash used in investing activities                                          |   | (103,953                            | )      | (78,189                             | )      |
|                                                                           |   |                                |   |                                |   |
| **Financing  activities:**                                                     |   |                                |   |                                |   |
| Net increase in demand, NOW and savings deposits                               |   | 59,612                              |   | 22,438                              |   |
| Net increase in certificates of deposit                                        |   | 48,112                              |   | 18,804                              |   |
| Net (repayments) proceeds from other borrowings                                |   | (17,848                             | )      | 39,922                              |   |
| Issuance of shares pursuant to 401K and ESOP plans                             |   | —                              |   | 387                                 |   |
| Exercise of stock options                                                      |   | 151                                 |   | 458                                 |   |
| Cash in lieu fractional shares from stock dividend                             |   | (14                                 | )      | (12                                 | )      |
| Net cash provided by financing activities                                      |   | 90,013                              |   | 81,997                              |   |
|                                                                           |   |                                |   |                                |   |
| Net (decrease) increase in cash and cash equivalents                           |   | (9,417                              | )      | 6,392                               |   |
|                                                                           |   |                                |   |                                |   |
| Cash and cash equivalents at beginning of period                               |   | 73,183                              |   | 49,288                              |   |
| Cash and cash equivalents at end of period                                     |   | $                                   | 63,766 |                                | $      | 55,680 |   |
|                                                                           |   |                                |   |                                |   |
| **Cash  paid during the quarter:**                                             |   |                                |   |                                |   |
| Interest paid                                                                  |   | $                                   | 7,782  |                                | $      | 7,107 |   |
| Income tax payments                                                            |   | 2,750                               |   | 1,775                               |   |
| **Supplemental  disclosure of noncash investing****and financing activities:** |   |                                |   |                                |   |
| Investment securities unrealized losses and swaps,  net of tax                 |   | (592                                | )      | 231                                 |   |
| Transfer of securities from available for sale to  held to matrity             |   | 24,557                              |   | —                              |   |

 

See accompanying notes

 

6

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CapitalCorp of the WestNotes to Consolidated FinancialStatementsJune 30, 2003 and December 31, 2002(Unaudited)

 

GENERAL - COMPANY

 

Capital Corp of the West (the “Company” or “Capital Corp”) is a bankholding company incorporated under the laws of the State of California on April26, 1995.  On November 1, 1995, theCompany became registered as a bank holding company, and is a holder of all ofthe capital stock of County Bank (the “Bank”). During 1998, the Company formed Capital West Group, a subsidiary thatengages in the financial institution advisory business but is currentlyinactive.  The Company’s primary assetis the Bank****and the Bank is the Company’s primary source of income.  The Company’s securities consist of20,000,000 shares of Common Stock, no par value, 10,000,000 shares ofAuthorized Preferred Stock, and 6,000,000 of Trust Preferred 10.20% CapitalSecurities which have a liquidation amount of $1,000 per capital security.  As of June 30, 2003 there were 5,604,309common shares outstanding, held of record by approximately 1,700shareholders.  There were no preferredshares outstanding at June 30, 2003. The Bank has three wholly owned subsidiaries, Merced Area Investment& Development, Inc. (“MAID”), County Asset Advisors (“CAA”), and CountyInvestment Trust (“REIT”).  CAA iscurrently inactive.  On April 26, 2002,the Company entered into an agreement to purchase Regency Investment Advisors,Inc (“RIA”).  The purchase of RIA wascompleted during the second quarter, 2002. The Company has two other wholly owned subsidiaries, County StatutoryTrust (“Trust”), and Capital West Group, Inc. The Trust is used in connection with the Capital Securities that havebeen issued by the Company.  CapitalWest Group, Inc. is currently inactive. All references herein to the “Company” include the Company, theCompany’s subsidiaries, the Bank and the Bank’s subsidiaries, unless thecontext otherwise requires.

 

GENERAL - BANK

 

The Bank 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.  The Bank is 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 nineteen 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, San Francisco, Sonora, Stockton, two offices in Modesto, three inFresno and two offices in Turlock.  TheBank’s administrative headquarters also provides accommodations for theactivities of Merced Area Investment & Development (“MAID”), the Bank’swholly owned real estate subsidiary.

 

OTHER FINANCIAL NOTES

 

All adjustmentswhich in the opinion of Management are necessary for a fair presentation of theCompany’s financial position at June 30, 2003 and December 2002 and the resultsof operations for the 

 

7

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three and six monthperiods ended June 30, 2003 and 2002, and the statements of cash flows for thesix months ended June 30, 2003 and 2002 have been included.  Earnings per share have been adjusted toreflect the affect of the 5% stock dividend that was paid April 25, 2003 toshareholders of record on April 1, 2003. The interim results for the three and six months ended June 30, 2003 arenot necessarily indicative of results to be expected for the full year.  These financial statements should be read inconjunction with the financial statements and the notes included in theCompany’s Annual Report on From 10-K for the year ended December 31, 2002.

 

The accompanyingunaudited financial statements have been prepared on a basis consistent withgenerally accepted accounting principles and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X.

 

EARNINGS PER SHARE

 

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 followingtables provide a reconciliation of the numerator and denominator of the basicand diluted earnings per share computation for the three and six month periods endedJune 30, 2003 and 2002:

 
|                                              |   | **For The  Three Months  Ended June 30,** |   | **For The  Six Months  Ended June 30,** |   |
|---------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
| **(Dollars in thousands, except per share data)** |   | **2003**                                  |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                              |   |                                      |   |                                    |   |   |   |   |   |
| Basic EPS computation:                            |   |                                      |   |                                    |   |   |   |   |   |
| Net income                                        |   | $                                         | 3,395  |                                    | $      | 2,384 |   | $ | 6,422 |   | $ | 4,608 |   |
| Average common shares outstanding                 |   | 5,602                                     |   | 5,543                                   |   | 5,597 |   | 5,500 |   |
| Basic EPS                                         |   | $                                         | 0.61   |                                    | $      | 0.43 |   | $ | 1.15 |   | $ | 0.84 |   |
|                                              |   |                                      |   |                                    |   |   |   |   |   |
| Diluted EPS Computations:                         |   |                                      |   |                                    |   |   |   |   |   |
| Net income                                        |   | $                                         | 3,395  |                                    | $      | 2,384 |   | $ | 6,422 |   | $ | 4,608 |   |
| Average common shares outstanding                 |   | 5,602                                     |   | 5,543                                   |   | 5,597 |   | 5,500 |   |
| Effect of stock options                           |   | 196                                       |   | 157                                     |   | 190 |   | 162 |   |
|                                              |   | 5,798                                     |   | 5,700                                   |   | 5,787 |   | 5,662 |   |
| Diluted EPS                                       |   | $                                         | 0.59   |                                    | $      | 0.42 |   | $ | 1.11 |   | $ | 0.81 |   |

 

8

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INTANGIBLE ASSETS

 

The Company has intangible assets consisting of coredeposit premiums and goodwill.  Coredeposit premiums are amortized using an accelerated method over a period of tenyears.  Intangible assets related togoodwill are no longer amortized after December 31, 2001 but will be reviewedfor potential impairment.  Managementhas determined there was no impairment of goodwill as of December 31,2002.  Additionally, there have been noevents that have occurred during the first six months of 2003 that wouldrequire another assessment.  As of June30, 2003 and December 31, 2002, the Company had unamortized core depositpremiums of $1,057,000 and $1,390,000, respectively.  Amortization of core deposit premiums and other intangibles was$170,000 during the second quarter of 2003 and 2002 and $340,000 for the sixmonths ended June 30, 2003 and 2002. Core deposit premiums and other intangibles are scheduled to amortize ata rate of approximately $170,000 per quarter through the quarter endedSeptember 30, 2004 and at a rate of $47,000 during the fourth quarter of2004.  Core deposit premiums of $460,000and $4,340,000 were initially recorded as a result of purchasing deposits fromTown and Country Finance and Thrift in July, 1996 and from the purchase of threebranches from Bank of America in December, 1997, respectively.

 

STOCK COMPENSATION

 

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

 

9

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Had compensation cost for the Company’s option plans been determined inaccordance with SFAS 123, the Company’s net income and earnings per share wouldhave been reduced to the pro forma amounts indicated as follows:

 
|                                                                                          |   | **For the  three months  ended June 30,** |   | **For the  six months  ended June 30,** |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
| **(dollars  in thousands except per share amounts)**                                          |   | **2003**                                  |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                                                                          |   |                                      |   |                                    |   |   |   |   |   |
| Net income:                                                                                   |   |                                      |   |                                    |   |   |   |   |   |
| As reported                                                                                   |   | $                                         | 3,395  |                                    | $      | 2,384 |   | $ | 6,422 |   | $ | 4,608 |   |
| Pro forma                                                                                     |   | $                                         | 3,282  |                                    | $      | 2,260 |   | $ | 6,134 |   | $ | 4,364 |   |
|                                                                                          |   |                                      |   |                                    |   |   |   |   |   |
| Basic earnings  per share:                                                                    |   |                                      |   |                                    |   |   |   |   |   |
| As reported                                                                                   |   | $                                         | 0.61   |                                    | $      | 0.43 |   | $ | 1.15 |   | $ | 0.84 |   |
| Pro forma                                                                                     |   | $                                         | 0.59   |                                    | $      | 0.41 |   | $ | 1.10 |   | $ | 0.82 |   |
|                                                                                          |   |                                      |   |                                    |   |   |   |   |   |
| Diluted earnings  per share:                                                                  |   |                                      |   |                                    |   |   |   |   |   |
| As reported                                                                                   |   | $                                         | 0.59   |                                    | $      | 0.42 |   | $ | 1.11 |   | $ | 0.81 |   |
| Pro forma                                                                                     |   | $                                         | 0.57   |                                    | $      | 0.40 |   | $ | 1.06 |   | $ | 0.79 |   |
|                                                                                          |   |                                      |   |                                    |   |   |   |   |   |
| Stock-based  employee compensation cost included in salaries and related benefits:            |   |                                      |   |                                    |   |   |   |   |   |
| As reported                                                                                   |   | $                                         | — |                                    | $      | — |   | $ | — |   | $ | — |   |
| Pro forma                                                                                     |   | $                                         | 118    |                                    | $      | 130 |   | $ | 296 |   | $ | 256 |   |
|                                                                                          |   |                                      |   |                                    |   |   |   |   |   |
| Stock-based  employee compensation cost, net of related tax effects, included in net  income: |   |                                      |   |                                    |   |   |   |   |   |
| As reported                                                                                   |   | $                                         | — |                                    | $      | — |   | $ | — |   | $ | — |   |
| Pro forma                                                                                     |   | $                                         | 113    |                                    | $      | 124 |   | $ | 288 |   | $ | 244 |   |

 

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SUBSEQUENTEVENT

 

During June, 2003, the Bank signed a tentative agreement to enter into asale-leaseback arrangement involving a single branch premise property locatedon Geer Road in Turlock, California. The arrangement is contingent on the buyer obtaining the necessaryfinancing and depositing into escrow sufficient cash deposits to complete thetransaction.  Management intends to movethe branch’s operation into a larger facility nearby.  The sales price was determined by recent comparable real estatesales transactions, an independent appraisal, and in the opinion of management,was priced at market value.  The leasebackperiod is for twelve months, with lease payments comparable with similarproperties for lease in the area.  Theleaseback period coincides with the expected availability of the largerreplacement facility.  The agreed uponsales price is expected to produce a pretax loss of approximately $275,000 thatwill be recorded in the third quarter of 2003.

 

PROSPECTIVEACCOUNTING PRONOUNCEMETS

 

InJanuary 2003, the FASB issued FIN 46, which clarifies the application ofAccounting Research Bulletin (“ARB”) 51, consolidated financial statements, tocertain entities (called variable interest entities) in which equity investorsdo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. The disclosurerequirements of this Interpretation are effective for all financial statementsissued after January 31, 2003. The consolidation requirements apply to allvariable interest entities created after January 31, 2003. In addition, publiccompanies must apply the consolidation requirements to variable interestentities that existed prior to February 1, 2003 and remain in existence as ofthe beginning of annual or interim periods beginning after June 15, 2003.  Management does not expect thisInterpretation to have a material impact to the consolidated financialstatements.

 

In May of 2003, the FASBissued Statement No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.  The provisions of this Statement are effective for financialinstruments entered into or modified after May 31, 2003, and otherwise areeffective at the beginning of the first interim period beginning after June 15,2003, except for mandatorily redeemable financial instruments of nonpublicentities.  It is to be implemented byreporting the cumulative effect of a change in an accounting principle forfinancial instruments created before May 15, 2003 and still existing at thebeginning of the interim period of adoption. Restatement is not permitted.  Management does not expect this Statement tohave a material impact to the consolidated financial statements other than thereclassification of Capital Securities and minority interests as a component oftotal liabilities and the related dividend expense to be classified as interestexpense on a prospective basis beginning July 1,

2003.

 

11

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**Item2.****          ****Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations**

 

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

 

Readers of theCompany’s Form 10-Q should not rely solely on forward looking statements andshould consider all uncertainties and risks discussed throughout this report,as well as those discussed in the Company’s 2002 Annual Report on Form 10-Kfiled March 27, 2003.  These statementsare representative only on the date hereof, and the Company undertakes noobligation to update any forward-looking statements made.  Some possible events or factors that couldoccur that may cause differences from expected results include the following:the Company’s loan growth is dependent on economic conditions, as well asvarious discretionary factors, such as decisions to sell, or purchase certainloans or loan portfolios; participations of loans and the management ofborrower, industry, product and geographic concentrations and the mix of theloan portfolio.  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 theCompany and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent onliquidity requirements and market volatility, as well as on and off-balancesheet positions.  Factors that mayimpact interest rate risk include local, regional and international economicconditions, levels, mix, maturities, yields or rates of assets and liabilitiesand the wholesale and retail funding sources of the Company.

 

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

 

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

 

12

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

 

**Criticalaccounting policies and estimates**

 

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

 

13

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Thefollowing discussion and analysis is designed to provide a better understandingof the significant 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**

 

**Threeand Six Months Ended June 30, 2003 Compared With Three and Six Months EndedJune 30, 2002**

 

*Overview.* For the three and six months ended June 30, 2003 the Company reportedrecord net income of $3,395,000 and $6,422,000.  This compares to $2,384,000 and $4,608,000 for the same periodsin 2002 and represents an increase of $1,011,000 and $1,814,000 or 42% and39%.  Basic earnings per share were $.61and $1.15 for the three and six months ended June 30, 2003.  Fully diluted earnings per share were $.59and $1.11 for the three and six months ended June 30, 2003.  This compares to basic and fully dilutedearnings per share of $.43 and $.42 for the three months and $.84 and $.81 forthe six months ended June 30, 2002 and represents an increase of $0.18 and $0.17per share for basic and fully diluted earnings per share for the three monthsand $.31 and $.30 per share for the six months ended June 30, 2003.  The basic and fully diluted earnings pershare reflect the 5% stock dividend paid in April, 2003.  The annualized return on average assets was1.24% and 1.22% for the first three and six months of 2003 which compares with1.01% for both the three and six months ended June 30, 2002.  The Company’s annualized return on averageequity was 16.61% and 16.00% for the three and six months ended June 30, 2003which compares with 14.10% and 13.87% for the same periods in 2002.  The increased return on assets and increasedreturn on equity were primarily achieved through an increase in interestearning assets and a reduction in the provision for loan losses.

 

*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 and six months ended June 30, 2003 rose 16% during both time periodsto a total of $11,486,000 and $22,275,000 and represented an increase of$1,553,000 and $3,016,000 when compared to the $9,933,000 and $19,259,000achieved during the three and six months ended June 30, 2002.

 

Totalinterest and fees on earning assets were $15,501,000 and $30,144,000 for thethree and six months ended June 30, 2003, rising 6% during both time periods or$911,000 and $1,677,000 when compared to the $14,590,000 and $28,467,000achieved during the three and six months ended June 30, 2002.  Total interest income is affected by changesin volume of and rates earned on interest-earning assets.  Interest-earning assets consist primarily ofloans, investment securities and federal funds sold.  The increase in total interest income for the three and sixmonths ended June 30, 2003 was primarily the result of an increase in volume ofinterest earning assets.  Averageinterest-earning assets for the three and six months ended June 30, 2003 were$1,017,352,000 and $976,310,000 compared with $876,327,000 and $843,946,000 forthe three and six months ended June 30, 2002, an increase of $141,025,000 and$132,364,000 or 16% during both time periods.

 

InJune, 2003, state and municipal debt securities with a market value of$26,204,000 were transferred from the available for sale portfolio to the heldto maturity portfolio at market value. The Company made the decision based on management’s to hold thesesecurities to maturity.  The unrealizedholding gain at the date of transfer is reported as a separate component ofshareholder’s equity, amortized over the remaining life of the securities as anadjustment of yield in a manner consistent with the amortization of a premiumor discount.

 

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 $4,015,000 and$7,869,000 for the three and six months ended June 30, 2003, compared with$4,657,000 and $9,208,000 for the three and six months ended June 30, 2002, adecrease of $642,000 and $1,339,000 or 14% and 15%. This decrease was primarilythe result of a decrease in the 

14

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interest rate paid on interest-bearing liabilities.Average interest-bearing liabilities were $850,587,000 and $810,178,000 for thethree and six months ended June 30, 2003 compared with $741,766,000 and$714,701,000 for the same three and six months in 2002, an increase of108,821,000 and $95,477,000 or 15% and 13%. Average interest rates paid on interest-bearing liabilities were 1.89%and 1.96% for the three and six months ended June 30, 2003 compared with 2.52%and 2.60% for the same three and six months of 2002, a decrease in interestrates paid of 63 and 64 basis points or 25% for both periods.

 

Theincrease in interest-earning assets and interest-bearing liabilities is primarilythe result of increased market penetration within our target markets,accomplished by increasing the loan and deposit production of existingfacilities and the addition of one new retail banking facility in Fresno,California.

 

TheCompany’s taxable equivalent net interest margin, the ratio of net interestincome to average interest-earning assets, was 4.58% and 4.66% for the threeand six months ended June 30, 2003 compared with 4.61% and 4.67% for the sameperiods in 2002.  Net interest margin providesa measurement of the Company’s ability to employ funds profitably during theperiod being measured.  The Company’sdecrease in net interest margin was primarily attributable to a drop in overallyields that was partially offset by an increase in volume in earningassets.  Loans as a percentage ofaverage interest-earning assets increased to 66% and 67% for the three and sixmonths ended June 30, 2003 compared with 64% and 65% for the three and sixmonths ended June 30, 2002.

 

15

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

 

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTERESTEARNINGS

 
|                                             |   | **Three  months ended  June 30, 2003** |      | **Three  months ended  June 30, 2002** |   |
|--------------------------------------------------|--------|----------------------------------------|-----------|----------------------------------------|--------|
|                                             |   | **Average  Balance**                   |      | **Taxable  Equivalent  Interest**      |   | **Taxable  Equivalent  Yield/rate** |   | **Average  Balance** |   | **Taxable  Equivalent  Interest** |   | **Taxable  Equivalent  Yield/rate** |   |
|                                             |   | **(Dollars  in thousands)**            |      |
| **Assets**                                       |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                              |   | $                                      | 16,945    |                                   | $      | 51 |   | 1.21 | % | $ | 20,576 |   | $ | 87 |   | 1.70 | % |
| Time deposits at  other financial institutions   |   | 600                                    |      | 3                                      |   | 2.01 |   | 500 |   | 3 |   | 2.41 |   |
| Taxable  investment securities (1)               |   | 294,620                                |      | 3,065                                  |   | 4.17 |   | 264,050 |   | 3,525 |   | 5.35 |   |
| Nontaxable investment  securities (1)            |   | 29,139                                 |      | 433                                    |   | 5.96 |   | 28,946 |   | 429 |   | 5.94 |   |
| Loans, gross:  (2)                               |   | 676,048                                |      | 12,086                                 |   | 7.17 |   | 562,255 |   | 10,678 |   | 7.62 |   |
| Total  interest-earning assets:                  |   | 1,017,352                              |      | 15,638                                 |   | 6.17 |   | 876,327 |   | 14,722 |   | 6.81 |   |
| Allowance for  loan losses                       |   | (12,845                                | )         |                                   |   |   |   | (10,655 | ) |   |   |   |   |
| Cash and due  from banks                         |   | 34,589                                 |      |                                   |   |   |   | 28,337 |   |   |   |   |   |
| Premises and  equipment, net                     |   | 15,261                                 |      |                                   |   |   |   | 13,044 |   |   |   |   |   |
| Interest  receivable and other assets            |   | 42,167                                 |      |                                   |   |   |   | 38,721 |   |   |   |   |   |
| Total assets                                     |   | $                                      | 1,096,524 |                                   |   |   |   |   | $ | 945,774 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| **Liabilities And Shareholders’  Equity**   |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Negotiable order  of withdrawal                  |   | $                                      | 117,697   |                                   | $      | 14 |   | 0.05 |   | $ | 101,901 |   | $ | 58 |   | 0.23 |   |
| Savings deposits                                 |   | 247,854                                |      | 643                                    |   | 1.04 |   | 217,504 |   | 859 |   | 1.58 |   |
| Time deposits                                    |   | 350,961                                |      | 2,165                                  |   | 2.47 |   | 304,922 |   | 2,514 |   | 3.31 |   |
| Other borrowings                                 |   | 134,075                                |      | 1,193                                  |   | 3.57 |   | 117,439 |   | 1,226 |   | 4.19 |   |
| Total  interest-bearing liabilities              |   | 850,587                                |      | 4,015                                  |   | 1.89 |   | 741,766 |   | 4,657 |   | 2.52 |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |   | 152,415                                |      |                                   |   |   |   | 124,917 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities   |   | 5,792                                  |      |                                   |   |   |   | 5,461 |   |   |   |   |   |
| Total  liabilities                               |   | 1,008,794                              |      |                                   |   |   |   | 872,144 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Capital  Securities and other minority interests |   | 6,000                                  |      |                                   |   |   |   | 6,000 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity                 |   | 81,730                                 |      |                                   |   |   |   | 67,630 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | $                                      | 1,096,524 |                                   |   |   |   |   | $ | 945,774 |   |   |   |   |   |
|                                             |   |                                   |      |                                   |   |   |   |   |   |   |   |   |   |
| Net interest  income and margin (3)              |   |                                   |      | $                                      | 11,623 |   | 4.58 | % |   |   | $ | 10,065 |   | 4.61 | % |

 

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(1)                                  Tax-equivalentadjustments included in the nontaxable investment securities portfolio are$105,000 and $101,000 for the three months ended June 30, 2003 and 2002,respectively.  Tax equivalentadjustments included in the taxable investment securities created by adividends received deduction were $32,000 and $31,000 for the three monthsended June 30, 2003 and 2002, respectively.

(2)                                  Amountsof interest earned includes loan fees of $739,000 and $477,000 for the threemonths ended June 30, 2003 and 2002, respectively.

(3)                                  Netinterest margin is computed by dividing net interest income by total averageinterest-earning assets.

 

16

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AVERAGE BALANCE SHEET & ANALYSIS OF NET INTERESTEARNINGS

 
|                                             |   | **Six months  ended  June 30, 2003** |      | **Six months  ended  June 30, 2002** |   |
|--------------------------------------------------|--------|--------------------------------------|-----------|--------------------------------------|--------|
|                                             |   | **Average  Balance**                 |      | **Taxable  Equivalent  Interest**    |   | **Taxable  Equivalent  Yield/rate** |   | **Average  Balance** |   | **Taxable  Equivalent  Interest** |   | **Taxable  Equivalent  Yield/rate** |   |
|                                             |   | **(Dollars  in thousands)**          |      |
| **Assets**                                       |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                              |   | $                                    | 15,157    |                                 | $      | 90 |   | 1.20 | % | $ | 11,755 |   | $ | 99 |   | 1.70 | % |
| Time deposits at  other financial institutions   |   | 580                                  |      | 5                                    |   | 1.74 |   | 500 |   | 5 |   | 2.02 |   |
| Taxable  investment securities (1)               |   | 275,867                              |      | 6,042                                |   | 4.42 |   | 256,416 |   | 6,969 |   | 5.48 |   |
| Nontaxable  investment securities (1)            |   | 29,024                               |      | 867                                  |   | 6.02 |   | 28,951 |   | 857 |   | 5.97 |   |
| Loans, gross:  (2)                               |   | 655,682                              |      | 23,419                               |   | 7.20 |   | 546,324 |   | 20,815 |   | 7.68 |   |
| Total  interest-earning assets:                  |   | 976,310                              |      | 30,423                               |   | 6.28 |   | 843,946 |   | 28,745 |   | 6.77 |   |
| Allowance for  loan losses                       |   | (12,619                              | )         |                                 |   |   |   | (10,351 | ) |   |   |   |   |
| Cash and due  from banks                         |   | 33,588                               |      |                                 |   |   |   | 28,214 |   |   |   |   |   |
| Premises and  equipment, net                     |   | 14,805                               |      |                                 |   |   |   | 13,086 |   |   |   |   |   |
| Interest  receivable and other assets            |   | 40,562                               |      |                                 |   |   |   | 38,698 |   |   |   |   |   |
| Total assets                                     |   | $                                    | 1,052,646 |                                 |   |   |   |   | $ | 913,593 |   |   |   |   |   |
|                                             |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| **Liabilities And Shareholders’  Equity**   |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| Negotiable order  of withdrawal                  |   | $                                    | 117,606   |                                 | $      | 28 |   | 0.05 |   | $ | 99,771 |   | $ | 112 |   | 0.23 |   |
| Savings deposits                                 |   | 236,040                              |      | 1,223                                |   | 1.04 |   | 213,989 |   | 1,690 |   | 1.59 |   |
| Time deposits                                    |   | 333,255                              |      | 4,274                                |   | 2.59 |   | 294,715 |   | 5,232 |   | 3.58 |   |
| Other borrowings                                 |   | 123,277                              |      | 2,344                                |   | 3.83 |   | 106,226 |   | 2,174 |   | 4.13 |   |
| Total  interest-bearing liabilities              |   | 810,178                              |      | 7,869                                |   | 1.96 |   | 714,701 |   | 9,208 |   | 2.60 |   |
|                                             |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |   | 150,432                              |      |                                 |   |   |   | 120,760 |   |   |   |   |   |
| Accrued  interest, taxes and other liabilities   |   | 5,763                                |      |                                 |   |   |   | 5,701 |   |   |   |   |   |
| Total  liabilities                               |   | 966,373                              |      |                                 |   |   |   | 841,162 |   |   |   |   |   |
|                                             |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| Capital  Securities and other minority interests |   | 6,000                                |      |                                 |   |   |   | 6,000 |   |   |   |   |   |
|                                             |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity                 |   | 80,273                               |      |                                 |   |   |   | 66,431 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | $                                    | 1,052,646 |                                 |   |   |   |   | $ | 913,593 |   |   |   |   |   |
|                                             |   |                                 |      |                                 |   |   |   |   |   |   |   |   |   |
| Net interest  income and margin (3)              |   |                                 |      | $                                    | 22,554 |   | 4.66 | % |   |   | $ | 19,537 |   | 4.67 | % |

 

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(1)                                  Tax-equivalentadjustments included in the nontaxable investment securities portfolio are$212,000 and $202,000 for  the sixmonths ended June 30, 2003 and 2002, respectively.  Tax equivalent adjustments included in the taxable investmentsecurities created by a dividends received deduction were $67,000 and $76,000for the six months ended June 30, 2003 and 2002, respectively.

(2)                                  Amountsof interest earned includes loan fees of $1,100,000 and $695,000 for the sixmonths ended June 30, 2003 and 2002, respectively.

(3)                                  Netinterest margin is computed by dividing net interest income by total averageinterest-earning assets.

 

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

 

Net Interest Income Variance Analysis:

 

|                                           |   | **Three  months ended  June 30, 2003 compared to June 30, 2002** |   |
|------------------------------------------------|--------|------------------------------------------------------------------|--------|
| **(Dollar in  thousands)**                     |   | **Volume**                                                       |   | **Rate** |   | **Total** |   |
|                                           |   |                                                             |   |   |   |   |   |
| Increase  (decrease) in interest income:       |   |                                                             |   |   |   |   |   |
| Federal funds  sold                            |   | $                                                                | (3     | ) | $ | (33 | ) | $ | (36 | ) |
| Time deposits at  other financial institutions |   | 1                                                                |   | (1 | ) | — |   |
| Taxable  investment securities                 |   | 670                                                              |   | (1,130 | ) | (460 | ) |
| Tax-exempt  investment securities              |   | 2                                                                |   | 2 |   | 4 |   |
| Loans                                          |   | 2,065                                                            |   | (657 | ) | 1,408 |   |
| Total:                                         |   | $                                                                | 2,735  |   | $ | (1,819 | ) | $ | 916 |   |
|                                           |   |                                                             |   |   |   |   |   |
| Increase  (decrease) in interest expense:      |   |                                                             |   |   |   |   |   |
| Interest bearing  demand                       |   | $                                                                | 8      |   | $ | (52 | ) | $ | (44 | ) |
| Savings deposits                               |   | 108                                                              |   | (324 | ) | (216 | ) |
| Time deposits                                  |   | 345                                                              |   | (694 | ) | (349 | ) |
| Other borrowings                               |   | 162                                                              |   | (195 | ) | (33 | ) |
| Total:                                         |   | $                                                                | 623    |   | $ | (1,265 | ) | $ | (642 | ) |
|                                           |   |                                                             |   |   |   |   |   |
| Increase  (decrease) in net interest income    |   | $                                                                | 2,112  |   | $ | (554 | ) | $ | 1,558 |   |

* *

|                                           |   | **Six months  ended  June 30, 2003 compared to June 30, 2002** |   |
|------------------------------------------------|--------|----------------------------------------------------------------|--------|
| **(Dollar in  thousands)**                     |   | **Volume**                                                     |   | **Rate** |   | **Total** |   |
|                                           |   |                                                           |   |   |   |   |   |
| Increase  (decrease) in interest income:       |   |                                                           |   |   |   |   |   |
| Federal funds  sold                            |   | $                                                              | 54     |   | $ | (63 | ) | $ | (9 | ) |
| Time deposits at  other financial institutions |   | 1                                                              |   | (1 | ) | — |   |
| Taxable  investment securities                 |   | 1,273                                                          |   | (2,200 | ) | (927 | ) |
| Tax-exempt  investment securities              |   | 2                                                              |   | 8 |   | 10 |   |
| Loans                                          |   | 5,985                                                          |   | (3,381 | ) | 2,604 |   |
| Total:                                         |   | $                                                              | 7,315  |   | $ | (5,637 | ) | $ | 1,678 |   |
|                                           |   |                                                           |   |   |   |   |   |
| Increase  (decrease) in interest expense:      |   |                                                           |   |   |   |   |   |
| Interest bearing  demand                       |   | $                                                              | 50     |   | $ | (134 | ) | $ | (84 | ) |
| Savings deposits                               |   | 433                                                            |   | (900 | ) | (467 | ) |
| Time deposits                                  |   | 1,569                                                          |   | (2,527 | ) | (958 | ) |
| Other borrowings                               |   | 549                                                            |   | (379 | ) | 170 |   |
| Total:                                         |   | $                                                              | 2,601  |   | $ | (3,940 | ) | $ | (1,339 | ) |
|                                           |   |                                                           |   |   |   |   |   |
| Increase  (decrease) in net interest income    |   | $                                                              | 4,714  |   | $ | (1,697 | ) | $ | 3,017 |   |

 

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*ProvisionFor Loan Losses.*** **The provision for loan losses for the three and sixmonths ended June 30, 2003 was $482,000 and $1,153,000 compared with $1,451,000and $2,231,000 for the three and six months ended June 30, 2002, a decrease of$969,000 and $1,078,000 or 67% and 48%. See “Allowance for Loan Losses” contained herein.  As of June 30, 2003 the allowance for loanlosses was $12,626,000 or 1.82% of total loans which compares to the allowancefor loan losses of $12,134,000 or 1.91% of total loans as of December 31,2002.  At June 30, 2003, nonperformingassets totaled $1,466,000 or 0.13% of total assets, nonperforming loans totaled$1,406,000 or 0.20% of total loans and the allowance for loan losses totaled899% of nonperforming loans.  AtDecember 31, 2002, nonperforming assets totaled $2,443,000 or 0.24% of totalassets, nonperforming loans totaled $2,383,000 or 0.38% of total loans and theallowance for loan losses totaled 509% 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 $266,000 and $813,000 or 12% and 21% to $2,396,000 and$4,722,000 for the three and six months ended June 30, 2003 compared with$2,130,000 and $3,909,000 for the same periods during 2002.  Service charges on deposit accountsincreased by $78,000 and $228,000 or 6% and 9% to $1,357,000 and $2,634,000 forthe three and six months ended June 30, 2003 compared with $1,279,000 and$2,406,000 achieved during for the same period in 2002.  The increase in fees is the result ofincreased customer use of existing fee based products.  Other income increased by $188,000 and$585,000 or 22% and 39% for the three and six month periods ended June 30, 2003when compared to the same periods in 2002. The primary source of this increased other income is the sale of theconsumer credit card portfolio in March, 2003 for a gain of $82,000, the gainon sale of foreclosure property with a book basis of $0 for an $81,000 gain,and the $126,000 and $253,000 in fees generated by Regency Investment Advisors,Incorporated for the three and six months ended June 30, 2003.  Regency Investment Advisors, Incorporatedwas acquired in June, 2002.

 

*NoninterestExpense.*** **Noninterestexpenses increased by $1,478,000 and $2,566,000 or 20% and 17% to $8,991,000and $17,504,000 for the three and six months ended June 30, 2003 compared withthe $7,513,000 and $14,938,000 recorded during for the same periods in2002.  The primary components ofnoninterest expenses were salaries and employee benefits, premises andoccupancy expense, equipment expense, professional fees, marketing expense,supplies expense and other operating expenses.

 

Forthe three and six months ended June 30, 2003, salaries and related benefitsincreased by $1,095,000 and $1,654,000 or 29% and 21% to $4,934,000 and$9,437,000 from the $3,839,000 and $7,783,000 recorded for the same period in2002. The salary expense increase was primarily the result of normal salaryprogression and incentive bonus payments. Equipment expense increased by $131,000 and $41,000 or 23% and 3% to$702,000 and $1,461,000 for the three and six months ended June 30, 2003 fromthe $571,000 and $1,420,000 recorded during the same periods in 2002.  The increased equipment costs were relatedto branch equipment upgrades and increased technology spending.  Premises and occupancy expenses increased by$8,000 and $242,00 to $712,000 and $1,382,000 for the three and six monthsended June 30, 2003 from $704,000 and $1,140,000 during the same periods in2002.  The primary reason for theincrease in occupancy costs in 2003 is related to retrofit charges for branchfacilities in Atwater, Fresno, and Merced, and the addition of a new retailbanking facility in Fresno.  Whencomparing the results of the three and six months ended June 30, 2003 to threeand six months ended June 30, 2002, professional fees increased by $167,000 and$188,000 or 53% and 33%, marketing expenses increased by $29,000 and $101,000or 13% and 25%, goodwill and intangible amortization expense were constant at$170,000 and $340,000, supplies expense increased by $26,000 and $75,000 or 15%and 21%, dividend expense on Capital Securities increased $1,000 for the threemonths ended June 30, 2003 and remained constant for the six months ended June30, 2003 and 2002 and other expenses 

 

19

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increased $21,000 and $265,000 or 2% and 10% from 2002levels. Increased professional fees in 2003 were the result of an increased useof consultants used to identify new business profitability strategies andpotential business combinations.  Theincreased other expenses were the result of increased telephone and networkingcosts related to Company growth during the period.

 

*ProvisionFor Income Taxes.*** **The Company recorded an increase in the income taxprovision of $299,000 and $527,000 or 42% and 38% to $1,014,000 and $1,918,000for the three and six months ended June 30, 2003 compared to $715,000 and$1,391,000 recorded for the same period in 2002.  During the three and six months ended June 30, 2003 and 2002, theCompany achieved an effective tax rate of 23%. The effective tax rate was constant, with the increase in provision forincome taxes caused primarily by a volume increase in pretax income.  Effective tax rates below statutory tax ratelevels have been achieved primarily through the continued utilization of a realestate investment trust established during the fourth quarter of 2001 thatprovides the Company with a means to potentially generate future additionalcapital for the Bank as well as to currently reduce state income tax expense.

 

**FinancialCondition**

 

Totalassets at June 30, 2003 were $1,131,003,000, an increase of $96,793,000 or 9%compared with total assets of $1,034,210,000 at December 31, 2002.  Net loans were $681,209,000 at June 30,2003, an increase of $59,570,000 or 10% compared with net loans of $621,639,000at December 31, 2002.  Deposits were$942,103,000 at June 30, 2003, an increase of $107,724,000 or 13% compared withdeposits of $834,379,000 at December 31, 2002. The increase in total assets of the Company between December 31, 2002and June 30, 2003 was primarily the result of an increase in savings andcertificate deposits that were obtained to fund additional purchases ofinterest earning assets.

 

Totalshareholders’ equity was $83,136,000 at June 30, 2003, an increase of$5,967,000 or 8% from the $77,169,000 at December 31, 2002. The growth inshareholders’ equity between December 31, 2002 and June 30, 2003 was achieved throughthe retention of accumulated earnings which was partially offset by a declinein other comprehensive income.  Othercomprehensive income consists of changes in the fair market value compared tobook value of available for sale investment securities and valuation changes inthe Bank’s interest rate swap, net of estimated federal and state income taxes.

 

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

 

| **(Dollars  in thousands)**   |   | **June 30,  2003** |    | **December  31,  2002** |   |
|-------------------------------|--------|--------------------|---------|-------------------------|--------|
|                          |   |               |    |                    |   |
| Letters of  credit            |   | $                  | 9,989   |                    | $      | 6,522 |   |
| Commitments to  extend credit |   | 302,970            |    | 235,140                 |   |
| Total                         |   | $                  | 312,959 |                    | $      | 241,662 |   |

 

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*OtherInterest-Earning Assets. *The following table relates to the cashsurrender value of life insurance policies that are carried in other assets atthe dates indicated.  The insurancepolices are associated with a salary continuation plan for the Company’sexecutive management and deferred retirement benefits for participating boardmembers.  The plan is informally linkedwith universal life insurance policies for the salary continuation plan.  Income from these policies is reflected innoninterest income.

 
| **(Dollars in  thousands)**             |   | **At June  30,  2003** |   | **At  December 31,  2002** |   |
|-----------------------------------------|--------|------------------------|--------|---------------------------------|--------|
|                                    |   |                   |   |                            |   |
| Cash surrender  value of life insurance |   | $                      | 20,706 |                            | $      | 17,240 |   |
|                                         |        |                        |        |                                 |        |  |  |

 

*NonperformingAssets. *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 asinterest income or return of principal depending upon management’s opinion ofthe ultimate risk of loss on the individual loan.  Cash payments are treated as interest income where managementbelieves the remaining principal balance is fully collectible.  Additional loans not 90 days past due mayalso be placed on nonaccrual status if management reasonably believes theborrower will not be able to comply with the contractual loan repayment termsand collection of principal 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.

 

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Thefollowing table summarizes nonperforming assets of the Company at June 30, 2003and December 31, 2002:

 

| **(Dollars in thousands)**               |   | **June 30,  2003** |   | **December  31,  2002** |   |
|------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                     |   |               |   |                    |   |
| Nonaccrual loans                         |   | $                  | 1,370  |                    | $      | 2,381 |   |
| Accruing loans  past due 90 days or more |   | 36                 |   | 2                       |   |
| Total  nonperforming loans               |   | 1,406              |   | 2,383                   |   |
| Other real  estate owned                 |   | 60                 |   | 60                      |   |
| Total  nonperforming assets              |   | $                  | 1,466  |                    | $      | 2,443 |   |
|                                     |   |               |   |                    |   |
| Nonperforming  loans to total loans      |   | 0.20               | %      | 0.38                    | %      |
| Nonperforming  assets to total assets    |   | 0.13               | %      | 0.24                    | %      |

 

Contractualaccrued interest income on loans on nonaccrual status as of June 30, 2003 and2002, that would have been recognized if the loans had been current inaccordance with their original terms was approximately $39,000 and $129,000,respectively.

 

AtJune 30, 2003, nonperforming assets represented .13% of total assets, adecrease of 11 basis points when compared to the .24% at December 31,2002.  Nonperforming loans represented..20% of total loans at June 30, 2003, a decrease of 18 basis points compared tothe .38% at December 31, 2002. Nonperforming loans that were secured by first deeds of trust on realproperty were $0 at June 30, 2003 and December 31, 2002.   Other forms of collateral such as inventoryand equipment secured the nonperforming loans as of each date.  No assurance can be given that thecollateral securing nonperforming loans will be sufficient to prevent losses onsuch loans.

 

Thedecrease in nonperforming loans and nonperforming assets as of June 30, 2003compared with their levels as of December 31, 2002, was due to a slightdecrease in the nonperforming agricultural segment of the loan portfolio.

 

AtJune 30, 2003 and December 31, 2002, the Company had $60,000 invested in oneproperty, respectively, that had been acquired through foreclosure.  The property was carried at the lower of itsestimated market value, as evidenced by an independent appraisal, or therecorded investment in the related loan, less estimated selling expenses.  At foreclosure, if the fair value of the realestate is less than the Company’s recorded investment in the related loan, acharge is made to the allowance for loan losses.  The Company expects to sell most of these properties within atwelve month period.  During the firstquarter of 2003, one foreclosure property was acquired and sold for $81,000that had no assigned book value for a gain on sale of $81,000.  No assurance can be given that the Companywill sell the remaining property during 2003 or at any time or the amount forwhich the property might be sold.

 

Managementdefines impaired loans, regardless of past due status on loans, as those onwhich principal and interest are not expected to be collected under theoriginal contractual loan repayment terms. An impaired loan is charged off at the time management believes thecollection process has been exhausted. At June 30, 2003 and December 31, 2002, impaired loans were measuredbased on the present value of future cash flows discounted at the loan’seffective rate, the loan’s observable market price or the fair value ofcollateral if the loan is collateral-dependent.  Impaired loans at June 30, 2003 

 

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were $1,406,000 for which the Company made provisionsto the allowance for loan losses of approximately $247,000.

 

Exceptfor loans that are disclosed above, there were no assets as of June 30, 2003,where known information about possible credit problems of borrower causesmanagement to have serious doubts as to the ability of the borrower to complywith the present loan repayment terms and which may become nonperformingassets.  Given the magnitude of theCompany’s loan portfolio, however, it is always possible that current creditproblems may exist that may not have been discovered by management.

 

**Allowancefor Loan Losses**

 

The following table summarizes the loan lossexperience of the Company for the six months ended June 30, 2003 and 2002, andfor the year ended December 31, 2002.

 
|                                         |   | **June 30**                 |    | **December  31** |   |
|----------------------------------------------|--------|-----------------------------|---------|------------------|--------|
|                                         |   | **2003**                    |    | **2002**         |   | **2002** |   |
|                                         |   | **(Dollars  in thousands)** |    |
| **Allowance for Loan Losses:**               |   |                        |    |             |   |   |   |
| Balance at  beginning of period              |   | $                           | 12,134  |             | $      | 9,743 |   | $ | 9,743 |   |
| Provision for  loan losses                   |   | 1,153                       |    | 2,231            |   | 4,151 |   |
| Charge-offs:                                 |   |                        |    |             |   |   |   |
| Commercial  and  agricultural           |   | 476                         |    | 572              |   | 1,504 |   |
| Consumer                                     |   | 493                         |    | 560              |   | 1,085 |   |
| Total  charge-offs                           |   | 969                         |    | 1,132            |   | 2,589 |   |
| Recoveries                                   |   |                        |    |             |   |   |   |
| Commercial and  agricultural                 |   | 88                          |    | 133              |   | 233 |   |
| Consumer                                     |   | 220                         |    | 186              |   | 596 |   |
| Total recoveries                             |   | 308                         |    | 419              |   | 829 |   |
| Net charge-offs                              |   | 661                         |    | 713              |   | 1,760 |   |
| Balance at end  of period                    |   | $                           | 12,626  |             | $      | 11,261 |   | $ | 12,134 |   |
|                                         |   |                        |    |             |   |   |   |
| Loans  outstanding at period-end             |   | $                           | 693,835 |             | $      | 583,625 |   | $ | 633,733 |   |
| Average loans  outstanding                   |   | $                           | 655,682 |             | $      | 546,324 |   | $ | 576,156 |   |
|                                         |   |                        |    |             |   |   |   |
| Annualized  net charge-offs to average loans |   | 0.20                        | %       | 0.26             | %      | 0.31 | % |
| Allowance for  loan losses                   |   |                        |    |             |   |   |   |
| To total loans                               |   | 1.82                        | %       | 1.93             | %      | 1.91 | % |
| To nonperforming  assets                     |   | 898.51                      | %       | 165.97           | %      | 496.56 | % |

 

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 

 

23

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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 a provision for loanlosses of $482,000 and $1,153,000 for the three and six months ended June 30,2003 compared with 1,451,000 and $2,231,000 during the same periods of 2002.The decrease in loan loss provision during the first six months of 2003 wasrecorded to coincide with the lower level of charge-offs experienced andreduced nonperforming loan levels during the first six months of 2003 whencompared to the same period in 2002. The Company’s charge-offs, net of recoveries, were $661,000 for the sixmonths ended June 30, 2003 compared with $713,000 for the same six months in2002.  The decrease in net charge-offsfor the first six months of 2003 was primarily due to decreased charge-offsthat occurred within the commercial and agricultural segment and increasedrecoveries within the consumer loan segment of the loan portfolio.

 

Asof June 30, 2003, the allowance for loan losses was $12,626,000 or 1.82% of totalloans outstanding, compared with $12,134,000 or 1.91% of total loansoutstanding as of December 31, 2002 and $11,261,000 or 1.93% of total loansoutstanding as of June 30, 2002.

 

TheCompany uses a method developed by management for determining the appropriatelevel of its allowance for loan losses. This method applies relevant risk factors to the entire loan portfolio,including nonperforming loans.  Themethodology is based, in part, on the Company’s loan grading and classificationsystem.  The Company grades its loansthrough internal reviews and periodically subjects loans to external reviewswhich then are assessed by the Company’s audit committee and management.  Credit reviews are performed on a monthly basisand 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.

 

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

 

24

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Theallocation of the allowance to loan categories is an estimate by management ofthe relative 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.

 

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

 

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

 

Partsof California have experienced significant floods in the late 1990s. Noassurance can be given that future flooding will not have an adverse impact onthe Company and its borrowers and depositors.

 

*Liquidity.*In order tomaintain adequate liquidity, the Company must have sufficient resourcesavailable at all times to meet its cash flow requirements.  The need for liquidity in a bankinginstitution arises principally to provide for deposit withdrawals, the creditneeds of its customers and to take advantage of investment opportunities as theyarise.  The Company may achieve desiredliquidity from both assets and liabilities. The Company considers cash and deposits held in other banks, federalfunds sold, other short term investments, maturing loans and investments,payments of principal and interest on loans and investments and potential loansales as sources of asset liquidity. Deposit growth and access to credit lines established with correspondentbanks and market sources of funds are considered by the Company as sources ofliability liquidity.  The holdingcompany’s primary source of liquidity is from dividends received from theBank.  Dividends from the Bank aresubject to certain regulatory restrictions.

 

TheCompany reviews 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 $305,266,000 and $305,075,000 on June 30, 2003 and December 31, 2002,respectively, and constituted 27% and 29% of total assets on those dates.  Liquidity is also affected by the collateralrequirements of its public deposits and certain borrowings.  Total pledged securities were $285,672,000at June 30, 2003 compared with $193,962,000 at December 31, 2002.

 

Althoughthe Company’s primary sources of liquidity include liquid assets and a stabledeposit base, the Company maintains lines of credit with the Federal ReserveBank of San Francisco, Federal Home Loan Bank of San Francisco, Pacific CoastBankers’ Bank, Union Bank of California, Wells Fargo 

 

25

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Bank and First Tennessee Bank aggregating $192,872,000of which $86,663,000 was outstanding as of June 30, 2003 and $100,841,000 wasoutstanding as of December 31, 2002. The increase in borrowings outstandingduring the first quarter of 2003 produced an inflow of funds that were used topurchase additional investment securities. Management believes that the Company maintains adequate amounts ofliquid assets to meet its liquidity needs. The Company’s liquidity might be insufficient if deposit withdrawalswere to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financialdifficulties or receives adverse publicity for other reasons, or if itspricing, products or services are not competitive with those offered by otherinstitutions.

 

*CapitalResources. *Capital serves as a source of funds andhelps protect depositors against potential losses.  The primary source of capital for the Company has been internallygenerated capital through retained earnings. The Company’s shareholders’ equity increased by $5,967,000 or 7.7% fromDecember 31, 2002 to June 30, 2003.

 

TheCompany is subject to various regulatory capital requirements administered bythe federal banking agencies.  Failureto meet minimum capital requirements can initiate mandatory and possiblyadditional discretionary actions by the regulators that, if undertaken, couldhave a material adverse effect on the Company’s financial statements.  Management believes, as of June 30, 2003,that the Company and the Bank met all applicable capital requirements.  The Company’s leverage capital ratio at June30, 2003 was 7.53% as compared with 7.68% as of December 31, 2002.  The Company’s total risk based capital ratioat June 30, 2003 was 10.52% as compared to 10.74% as of December 31, 2002.

 

TheCompany’s and Bank’s actual capital amounts and ratios met all regulatoryrequirements as of June 30, 2003 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 June 30, 2003                       |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| Total capital  (to risk weighted assets)  |   | $          | 93,409 |                                | 10.52  | %                                                                         | $      | 71,010 |   | 8.0 | % | $ | 88,763 |   | 10.0 | % |
| Tier 1 capital  (to risk weighted assets) |   | 82,488     |   | 9.27                                |   | 35,505                                                                    |   | 4.0 |   | 53,258 |   | 6.0 |   |
| Leverage ratio*                           |   | 82,488     |   | 7.53                                |   | 43,742                                                                    |   | 4.0 |   | 54,680 |   | 5.0 |   |
|                                      |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| The Bank:                                 |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| As of June 30,  2003                      |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| Total capital  (to risk weighted assets)  |   | $          | 91,762 |                                | 10.38  | %                                                                         | $      | 70,741 |   | 8.0 | % | $ | 88,426 |   | 10.0 | % |
| Tier 1 capital  (to risk weighted assets) |   | 80,689     |   | 9.13                                |   | 35,370                                                                    |   | 4.0 |   | 53,056 |   | 6.0 |   |
| Leverage ratio*                           |   | 80,689     |   | 7.39                                |   | 43,682                                                                    |   | 4.0 |   | 54,603 |   | 5.0 |   |

 

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

 

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

 

*Deposits.* Deposits are the Company’s primary source of funds.  At June 30, 2003, the Company had a depositmix of 30% in savings deposits, 40% in time deposits, 12% in interest-bearingchecking 

 

26

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accounts and 18% in noninterest-bearing demandaccounts.  Noninterest-bearing demanddeposits enhance the Company’s net interest income by lowering its costs offunds.

 

TheCompany obtains deposits primarily from the communities it serves.  No material portion of its deposits has beenobtained from or is dependent on any one person or industry.  The Company’s business is not seasonal innature.  The Company accepts deposits inexcess of $100,000 from customers. These deposits are priced to remain competitive.  At June 30, 2003, the Company had brokereddeposits of $54,272,000.

 

Maturitiesof time certificates of deposits of $100,000 or more outstanding at June 30,2003 and December 31, 2002 are summarized as follows:

 
|                       |   | **June 30,  2003**          |    | **December  31, 2002** |   |
|----------------------------|--------|-----------------------------|---------|------------------------|--------|
|                       |   | **(Dollars  in thousands)** |    |
|                       |   |                        |    |                   |   |
| Three months or  less      |   | $                           | 42,004  |                   | $      | 69,661 |   |
| Over three to  six months  |   | 70,626                      |    | 38,863                 |   |
| Over six to  twelve months |   | 57,137                      |    | 23,319                 |   |
| Over twelve  months        |   | 30,461                      |    | 28,872                 |   |
| Total                      |   | $                           | 200,228 |                   | $      | 160,715 |   |

 

**BorrowedFunds**

 

Thedecrease in other borrowings during the second quarter of 2003 was primarilydue to the payment at maturity of short-term FHLB borrowings funded by newsavings and certificate of deposit inflows from public agencies and waterdistricts.

 

**Returnon Equity and Assets**

 
|                                 |   | **Three  months ended  June 30  2003** |   | **Three  months ended  June 30  2002** |   | **Year ended  December 31  2002** |   |
|--------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|
|                                 |   |                                   |   |                                   |   |                              |   |
| Annualized  return on average assets |   | 1.24                                   | %      | 1.01                                   | %      | 1.09                              | %      |
| Annualized  return on average equity |   | 16.61                                  | %      | 14.10                                  | %      | 14.94                             | %      |
| Average equity  to average assets    |   | 7.63                                   | %      | 7.27                                   | %      | 7.29                              | %      |

 

**Impactof Inflation**

 

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

 

27

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**Item 3.****        Quantitativeand Qualitative Disclosures about Market Risk**

 

In the normal courseof business, the Company is exposed to market risk which includes both priceand liquidity risk.  Price risk iscreated from fluctuations in interest rates and the mismatch in repricingcharacteristics of assets, liabilities, and off balance sheet instruments at aspecified point in time.  Mismatches ininterest rate repricing among assets and liabilities arise primarily throughthe interaction of the various types of loans versus the types of deposits thatare maintained as well as from management’s discretionary investment and fundsgathering activities.  Liquidity riskarises from the possibility that the Company may not be able to satisfy currentand future financial commitments or that the Company may not be able toliquidate financial instruments at market prices.  Risk management policies and procedures have been established andare utilized to manage the Company’s exposure to market risk.  Quarterly testing of the Company’s assetsand liabilities under both increasing and decreasing interest rate environmentsare performed to insure the Company does not assume a magnitude of risk that isoutside approved policy limits.

 

The Company’s success is largely dependent upon its ability to manageinterest rate risk.  Interest rate riskcan be defined as the exposure of the Company’s net interest income to adversemovements in interest rates.  Althoughthe Company manages other risks, such as credit and liquidity risk in thenormal course of its business, management considers interest rate risk to beits most significant market risk and could potentially have the largestmaterial effect on the Company’s financial condition and results ofoperations.  Correspondingly, theoverall strategy of the Company is to manage interest rate risk, throughbalance sheet structure, to be interest rate neutral.

 

The Company’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 the opinionof management there has been no material change in the Company’s market riskduring the six months ended June 30, 2003 when compared to the level of marketrisk at December 31, 2002.  If interestrates were to suddenly and materially fall from levels experienced during thesecond quarter of 2003, the Company could become susceptible to an increasedlevel of market risk.

 

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**Item4.****        Controlsand Procedures**

 

Evaluation Of Disclosure Controls And Procedures

 

We carried out an evaluation, under the supervisionand with the participation of our management, including our principal executiveofficer and our principal financial officer, of the effectiveness of the designand operation of our disclosure controls and procedures as of the end of theperiod covered by this report, pursuant to Rule 13a — b under the SecuritiesExchange Act of 1934.

 

Based on their review of our disclosure controls andprocedures, the principal executive officer and principal financial officerhave concluded our disclosure controls and procedures are effective in timelyalerting them to material information relating to us that is required to beincluded in our periodic SEC filings.

 

Changes In Internal Controls

 

There were no changes in our internal controls overfinancial reporting identified in connection with the evaluation of ourdisclosure controls and procedures described above that occurred during ourlast fiscal quarter that has materially affected, or is reasonably likely tomaterially effect, our internal controls over financial reporting.

 

29

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**PART II - Other Information**

 

**Item1.****                                                       ****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 inSecurities and Use of Proceeds.**

 

None.

 

**Item3.****                                                          ****DefaultsUpon Senior Securities.**

 

None.

 

**Item4.****                                                          ****Submissionof Matters to a Vote of Securities Holders.**

 

(a.)                               Annual Meeting was held April 16, 2003.  The number of shares represented in personor by proxy and constituting a quorum was 4,095,790 which equaled approximately73% of the shares outstanding.

 
| (b.)   | **Election of directors** |   | **Votes For** |   | **Votes  Withheld** |
|--------|---------------------------|--------|---------------|--------|---------------------|
|   | Dorothy L. Bizzini        |   | 4,054.238     |   | 41,552              |
|   | Jerry E. Callister        |   | 4,085,889     |   | 9,901               |
|   | Gerald L. Tahajian        |   | 4,088,802     |   | 6,988               |

 

**Item5.****                                                          ****OtherInformation.**

 

None

 

30

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**Item6.****          ****Exhibitsand 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).                                                                                      |   | * |

 

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| 10.9 |   |   | Executive Salary Continuation Agreement between  senior executive management and Capital Corp of the West (filed as Exhibit  10.9 of the Company’s 2001 Form 10-K with the SEC on or about March 29,  2002). |   | *      |
|------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 11   |   |   | Statement Regarding the Computation of Earnings Per  Share is incorporated herein by reference from Note 1 of the Company’s  Consolidated Financial Statements.                                         |   |   |
| 31.1 |   |   | Certification of Registrant’s Chief Executive  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003                                                                                             |   |   |
| 31.2 |   |   | Certification of Registrant’s Chief Financial  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003                                                                                             |   |   |
| 32.1 |   |   | Certification of Registrant’s Chief Executive  Officer Pursuant to 18 U.S.C. Section 1350                                                                                                                    |   |   |
| 32.2 |   |   | Certification of Registrant’s Chief Financial  Officer Pursuant to 18 U.S.C. Section 1350                                                                                                                    |   |   |
|      |   |   |
| *    |   |   | Denotes management contract or compensatory plan  arrangement.                                                                                                                                                    |   |   |

 

The exhibit list is incorporated by reference to the exhibit index inthis report.

 

**Reportson Form 8-K**

 

None

 

32

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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)              |
|                        |                      |
|                        |                      |
| Date:  August 12, 2003 | By                   | /s/ | Thomas T. Hawker |   |
|                        |                      | Thomas T. Hawker  President and  Chief Executive Officer |
|                        |                      |   |
|                        |                      |   |
| Date:  August 12, 2003 | By                   | /s/ | R. Dale McKinney |   |
|                        |                      | R. Dale McKinney  Chief Financial Officer |

 

33

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Exhibit Index

 
| **Exhibit** |   | **Description**                                                                                                       |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                  |
| 31.1        |   | Certification of Registrant’s Chief Executive  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 |
|        |   |                                                                                                                  |
| 31.2        |   | Certification of Registrant’s Chief Financial  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 |
|        |   |                                                                                                                  |
| 32.1        |   | Certification of Registrant’s Chief Executive  Officer Pursuant to 18 U.S.C. Section 1350                        |
|        |   |                                                                                                                  |
| 32.2        |   | Certification of  Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350                        |

 

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