##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Quarterly Period Ended September 30, 2008
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Transition Period from  to
 Commission
File Number: 0-27384
 CAPITAL CORP OF THE WEST
  California
    
    77-0405791(State or other jurisdiction of
    
    IRS Employer ID Numberincorporation or organization)
 (Address of principal executive offices)
 (209) 725-2200
 Not applicable
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non- accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



Capital Corp of the West
  
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets (unaudited)
    
    
    3Condensed Consolidated Statements of Operations (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Shareholders Equity (unaudited)
    
    
    5Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    7Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    50Item 4. Controls and Procedures
    
    
    50PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    52Item 1A. Risk Factors
    
    
    52Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 3. Defaults Upon Senior Securities
    
    
    55Item 4. Submission of Matters to a Vote of Security Holders
    
    
    55Item 5. Other Information
    
    
    55Item 6. Exhibits
    
    
    55SIGNATURES
    
    
    56Exhibit Index
    
    
    57EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART 1 Financial Information
 
 Item 1. Financial Statements (unaudited)
 Capital Corp of the West
 
 Condensed Consolidated Balance Sheets
  As of September 30,
    
    
    As of December 31,(in thousands, except shares)
    
    2008
    
    
    2007ASSETS:Cash and non- interest bearing deposits in other banks
    
    $
    51,867
    
    
    $
    66,708Federal funds sold
    
    
    7,095
    
    
    
    17,165Time deposits at other financial institutions
    
    
    150
    
    
    
    100Investment securities available for sale, at fair value
    
    
    315,240
    
    
    
    223,016Investment
securities held to maturity, at cost; fair
value of $155,767 at December 31, 2007
    
    
    
    
    
    
    155,483Loans held for sale
    
    
    84,631
    
    
    
    Loans, net of allowance for loan losses of
$35,310 and $35,800 at September 30, 2008
and December 31, 2007
    
    
    1,262,774
    
    
    
    1,458,881Interest receivable
    
    
    7,584
    
    
    
    10,541Premises and equipment, net
    
    
    52,924
    
    
    
    54,192Goodwill
    
    
    10,798
    
    
    
    34,313Other intangibles
    
    
    5,906
    
    
    
    6,940Cash value of life insurance
    
    
    45,336
    
    
    
    43,677Investment in housing tax credit limited partnerships
    
    
    5,714
    
    
    
    6,186Other real estate owned
    
    
    3,187
    
    
    
    7,550Other assets
    
    
    20,002
    
    
    
    23,987Total assets
    
    $
    1,873,208
    
    
    $
    2,108,739LIABILITIES:Deposits:Non - interest bearing demand
    
    $
    250,247
    
    
    $
    310,622Negotiable orders of withdrawal
    
    
    215,228
    
    
    
    254,735Savings
    
    
    373,212
    
    
    
    471,016Time, under $100,000
    
    
    427,597
    
    
    
    368,765Time, $100,000 and over
    
    
    163,166
    
    
    
    270,127Total deposits
    
    
    1,429,450
    
    
    
    1,675,265Other borrowings
    
    
    289,676
    
    
    
    217,816Junior subordinated debentures
    
    
    57,734
    
    
    
    57,734Accrued interest, taxes and other liabilities
    
    
    22,452
    
    
    
    16,197Total liabilities
    
    
    1,799,312
    
    
    
    1,967,012Commitments and contingencies (Note 11)
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, no par value: 10,000,000 shares
authorized; none outstanding
    
    
    
    
    
    
    Common stock, no par value 54,000,000 shares
authorized; 10,815,756 and 10,804,588 issued and
outstanding at September 30, 2008 and December
31, 2007
    
    
    67,557
    
    
    
    66,599Retained earnings
    
    
    9,122
    
    
    
    74,757Accumulated other comprehensive income (loss), net
    
    
    (2,783
    )
    
    
    371Total shareholders equity
    
    
    73,896
    
    
    
    141,727Total liabilities and shareholders equity
    
    $
    1,873,208
    
    
    $
    2,108,739
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Condensed Consolidated Statements of Operations
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    22,836
    
    
    $
    28,422
    
    
    $
    77,097
    
    
    $
    80,068Interest and fees on loans held for sale
    
    
    1,588
    
    
    
    
    
    
    
    1,588
    
    
    
    Interest on time deposits with other financial institutions
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    9Interest on Investment Securities Held to Maturity:Taxable
    
    
    
    
    
    
    855
    
    
    
    1,470
    
    
    
    1,708Non taxable
    
    
    
    
    
    
    842
    
    
    
    1,680
    
    
    
    2,655Interest on Investment Securities Available for Sale:Taxable
    
    
    3,201
    
    
    
    2,825
    
    
    
    8,551
    
    
    
    9,463Non taxable
    
    
    797
    
    
    
    11
    
    
    
    812
    
    
    
    33Interest on federal funds sold
    
    
    240
    
    
    
    223
    
    
    
    492
    
    
    
    1,756Total Interest Income
    
    
    28,663
    
    
    
    33,179
    
    
    
    91,692
    
    
    
    95,692INTEREST EXPENSE:Deposits:Negotiable orders of withdrawal
    
    
    249
    
    
    
    792
    
    
    
    1,000
    
    
    
    2,214Savings
    
    
    1,851
    
    
    
    3,778
    
    
    
    6,700
    
    
    
    10,798Time, under $100,000
    
    
    4,032
    
    
    
    4,191
    
    
    
    11,856
    
    
    
    12,019Time, $100,000 and over
    
    
    1,512
    
    
    
    2,995
    
    
    
    5,991
    
    
    
    10,430Total Interest on Deposits
    
    
    7,644
    
    
    
    11,756
    
    
    
    25,547
    
    
    
    35,461Interest on federal funds purchased
    
    
    2
    
    
    
    11
    
    
    
    83
    
    
    
    16Interest on junior subordinated debentures
    
    
    875
    
    
    
    620
    
    
    
    2,671
    
    
    
    1,971Interest on other borrowings
    
    
    1,761
    
    
    
    2,831
    
    
    
    5,799
    
    
    
    6,541Total Interest Expense
    
    
    10,282
    
    
    
    15,218
    
    
    
    34,100
    
    
    
    43,989Net interest income
    
    
    18,381
    
    
    
    17,961
    
    
    
    57,592
    
    
    
    51,703Provision for loan losses
    
    
    11,500
    
    
    
    732
    
    
    
    26,827
    
    
    
    4,645Net Interest Income after Provision for Loan
Losses
    
    
    6,881
    
    
    
    17,229
    
    
    
    30,765
    
    
    
    47,058NON-INTEREST INCOME:Service charges on deposit accounts
    
    
    2,625
    
    
    
    2,041
    
    
    
    7,377
    
    
    
    5,834Death benefit on BOLI policies
    
    
    349
    
    
    
    993
    
    
    
    349
    
    
    
    993Gain (loss) on sale of available for sale securities
    
    
    (364
    )
    
    
    835
    
    
    
    630
    
    
    
    835Impairment of available for sale securities
    
    
    
    
    
    
    
    
    
    
    (1,564
    )
    
    
    Increase in cash surrender value of life insurance policies
    
    
    473
    
    
    
    465
    
    
    
    1,659
    
    
    
    1,304Other
    
    
    745
    
    
    
    782
    
    
    
    2,345
    
    
    
    2,743Total Non-Interest Income
    
    
    3,828
    
    
    
    5,116
    
    
    
    10,796
    
    
    
    11,709NON-INTEREST EXPENSE:Salaries and related benefits
    
    
    10,308
    
    
    
    7,606
    
    
    
    30,216
    
    
    
    22,883Premises and occupancy
    
    
    1,877
    
    
    
    1,835
    
    
    
    5,574
    
    
    
    5,140Equipment
    
    
    1,891
    
    
    
    1,382
    
    
    
    5,339
    
    
    
    3,861Professional fees
    
    
    2,026
    
    
    
    1,225
    
    
    
    5,600
    
    
    
    2,895Supplies
    
    
    147
    
    
    
    222
    
    
    
    518
    
    
    
    719Marketing
    
    
    725
    
    
    
    588
    
    
    
    2,174
    
    
    
    1,507Intangible amortization
    
    
    374
    
    
    
    
    
    
    
    1,033
    
    
    
    Charitable donations
    
    
    227
    
    
    
    185
    
    
    
    452
    
    
    
    554Communications
    
    
    476
    
    
    
    415
    
    
    
    1,367
    
    
    
    1,179Impairment of goodwill
    
    
    23,515
    
    
    
    
    
    
    
    23,515
    
    
    
    Other real estate owned
    
    
    327
    
    
    
    
    
    
    
    6,382
    
    
    
    Write down of loans held for sale
    
    
    347
    
    
    
    
    
    
    
    2,098
    
    
    
    Provision for (recovery from) unfunded loan commitments
    
    
    (1,087
    )
    
    
    195
    
    
    
    963
    
    
    
    1,790FDIC and State regulatory fees
    
    
    1,856
    
    
    
    85
    
    
    
    3,039
    
    
    
    253Other
    
    
    2,055
    
    
    
    1,618
    
    
    
    7,405
    
    
    
    4,628Total Non-Interest Expenses
    
    
    45,064
    
    
    
    15,356
    
    
    
    95,675
    
    
    
    45,409Income (loss) before provision for income taxes
    
    
    (34,355
    )
    
    
    6,989
    
    
    
    (54,114
    )
    
    
    13,358Provision for income taxes
    
    
    20,208
    
    
    
    993
    
    
    
    10,144
    
    
    
    2,744Net Income (Loss)
    
    $
    (54,563
    )
    
    $
    5,996
    
    
    $
    (64,258
    )
    
    $
    10,614Basic earnings (loss) per share
    
    $
    (5.04
    )
    
    $
    0.56
    
    
    $
    (5.94
    )
    
    $
    0.98Diluted earnings (loss) per share
    
    $
    (5.04
    )
    
    $
    0.55
    
    
    $
    (5.94
    )
    
    $
    0.97
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Condensed Consolidated Statements of Changes in Shareholders Equity
  Accumulated OtherNumber of
    
    
    
    
    
    
    Retained
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Amounts
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2006
    
    
    10,761
    
    
    $
    64,586
    
    
    $
    82,803
    
    
    $
    (1,620
    )
    
    $
    145,769Exercise of stock options, including tax benefits of $23
    
    
    29
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    438Effect of share-based payment expense
    
    
    
    
    
    
    1,066
    
    
    
    
    
    
    
    
    
    
    
    1,066Net change in fair value of available for sale investment securities, net
of tax effect $1,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (666
    )
    
    
    (666
    )Net change in fair value of interest rate floor, net of tax effect of
$227 (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    313Cash dividends
    
    
    
    
    
    
    
    
    
    
    (3,241
    )
    
    
    
    
    
    
    (3,241
    )Net income
    
    
    
    
    
    
    
    
    
    
    10,614
    
    
    
    
    
    
    
    10,614Balance, September 30, 2007
    
    
    10,790
    
    
    $
    66,090
    
    
    $
    90,176
    
    
    $
    (1,973
    )
    
    $
    154,293Balance January 1, 2008, before cumulative effect of change in
accounting principle
    
    
    10,805
    
    
    $
    66,599
    
    
    $
    74,757
    
    
    $
    371
    
    
    $
    141,727Cumulative
effect of change in accounting principle (Note 3)
    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    (186
    )Balance, January 1, 2008, after cumulative effect of change in
accounting principle
    
    
    10,805
    
    
    
    66,599
    
    
    
    74,571
    
    
    
    371
    
    
    
    141,541Exercise of stock options
    
    
    11
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Effect of share-based payment expense
    
    
    
    
    
    
    894
    
    
    
    
    
    
    
    
    
    
    
    894Net change in fair value of available for sale investment securities (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,305
    )
    
    
    (3,305
    )Amortization of interest rate floor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    151Cash dividends
    
    
    
    
    
    
    
    
    
    
    (1,191
    )
    
    
    
    
    
    
    (1,191
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (64,258
    )
    
    
    
    
    
    
    (64,258
    )Balance, September 30, 2008
    
    
    10,816
    
    
    $
    67,557
    
    
    $
    9,122
    
    
    $
    (2,783
    )
    
    $
    73,896
 
 (1)
    
    Includes reclassification adjustment for net losses included in net income of $142 (net of
$103 tax benefit).(2)
    
    Includes reclassification adjustment for net losses included in net loss of $934. See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Condensed Consolidated Statements of Comprehensive Income (Loss)
  For the Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    
    2007Net income (loss)
    
    $
    (64,258
    )
    
    $
    10,614Unrealized loss on securities arising during the period
    
    
    (4,239
    )
    
    
    (666
    )Reclassification adjustment for losses realized in net income (loss), net of tax
benefit of $83 in 2007
    
    
    934
    
    
    
    171Unrealized gain or amortization on interest rate floor arising during the period
    
    
    151
    
    
    
    142Comprehensive income (loss)
    
    $
    (67,412
    )
    
    $
    10,261
 See accompanying notes to condensed consolidated financial statements.
 6




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##### Table of Contents



Capital Corp of the West
 
 Condensed Consolidated Statements of Cash Flows
  For the Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    
    2007OPERATING ACTIVITIES:Net income (loss)
    
    $
    (64,258
    )
    
    $
    10,614Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Provision for loan losses
    
    
    26,827
    
    
    
    4,645Impairment of available for sale securities
    
    
    1,564
    
    
    
    Impairment charges on other real estate owned
    
    
    5,655
    
    
    
    Write down on loans held for sale
    
    
    2,098
    
    
    
    Depreciation, amortization and accretion, net
    
    
    7,664
    
    
    
    6,555Origination of loans held for sale
    
    
    (8,164
    )
    
    
    (5,203
    )Impairment of goodwill
    
    
    23,515
    
    
    
    Proceeds from sale of loans
    
    
    17,575
    
    
    
    5,890Gain on sale of loans
    
    
    (378
    )
    
    
    (324
    )Gain on sale of available for sale securities
    
    
    (630
    )
    
    
    (835
    )Increase in cash value of bank owned life insurance
    
    
    (1,659
    )
    
    
    (1,304
    )Gain on death benefit from bank owned life insurance
    
    
    
    
    
    
    (993
    )Proceeds from death benefit of BOLI
    
    
    
    
    
    
    1,773Non-cash share-based payment expense
    
    
    894
    
    
    
    1,066Gain on sale of other real estate owned
    
    
    
    
    
    
    (102
    )Loss on interest rate derivative
    
    
    
    
    
    
    117Net
(increase) decrease in interest receivable and other assets
    
    
    6,777
    
    
    
    (6,706
    )Net increase (decrease) in accrued interest, taxes and other liabilities
    
    
    5,484
    
    
    
    (51
    )Net cash provided by operating activities
    
    
    22,964
    
    
    
    15,142INVESTING ACTIVITIES:Investment
securities purchased - available for sale securities
    
    
    (119,446
    )
    
    
    (2,454
    )Proceeds from maturities of available for sale securities
    
    
    30,813
    
    
    
    24,221Proceeds from maturities of held to maturity securities
    
    
    10,154
    
    
    
    9,986Proceeds from sales of available for sale securities
    
    
    138,013
    
    
    
    3,000Net (increase) decrease in time deposits at other institutions
    
    
    (50
    )
    
    
    250Proceeds from sale of other real estate owned
    
    
    
    
    
    
    102Net (increase) decrease in loans and loans held for sale
    
    
    70,267
    
    
    
    (155,270
    )Purchase of premises and equipment
    
    
    (2,544
    )
    
    
    (6,941
    )Net cash provided by (used in) investing activities
    
    
    127,207
    
    
    
    (127,106
    )FINANCING ACTIVITIES:Net decrease in demand, NOW and savings deposits
    
    
    (197,686
    )
    
    
    (18,933
    )Net decrease in certificates of deposit
    
    
    (48,129
    )
    
    
    (65,159
    )Net increase in short-term borrowings
    
    
    71,860
    
    
    
    61,595Payment of cash dividends
    
    
    (1,191
    )
    
    
    (3,241
    )Exercise of stock options
    
    
    62
    
    
    
    415Tax benefits related to exercise of stock options
    
    
    2
    
    
    
    23Net cash used in financing activities
    
    
    (175,082
    )
    
    
    (25,300
    )Net decrease in cash and cash equivalents
    
    
    (24,911
    )
    
    
    (137,264
    )Cash and cash equivalents at beginning of period
    
    
    83,873
    
    
    
    195,533Cash and cash equivalents at end of period
    
    $
    58,962
    
    
    $
    58,269SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:Loans transferred to other real estate owned
    
    $
    437
    
    
    $
    9,390Loans transferred to loans held for sale
    
    $
    85,640
    
    
    $
    Held to maturity securities transferred to available for sale securities
    
    $
    145,463
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



Capital Corp of the West
 
 Notes to Condensed Consolidated Financial Statements
        Regulatory Matters
  8




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##### Table of Contents



Capital Adequacy
    To Be Well CapitalizedFor Capital Adequacy
    
    
    Under PromptActual
    
    
    Purposes
    
    
    Corrective Action(dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioThe Company:Total capital (to risk weighted assets)
    
    $
    134,956
    
    
    
    8.75
    %
    
    $
    123,324
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)
    
    $
    84,841
    
    
    
    5.50
    %
    
    $
    61,662
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ALeverage ratio
    
    $
    84,841
    
    
    
    4.24
    %
    
    $
    80,037
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AThe Bank:Total capital (to risk weighted assets)
    
    $
    128,986
    
    
    
    8.41
    %
    
    $
    122,700
    
    
    
    8
    %
    
    $
    153,375
    
    
    
    10
    %Tier 1 Capital (to risk weighted assets)
    
    $
    89,581
    
    
    
    5.84
    %
    
    $
    61,350
    
    
    
    4
    %
    
    $
    92,025
    
    
    
    6
    %Leverage ratio
    
    $
    89,581
    
    
    
    4.52
    %
    
    $
    79,204
    
    
    
    4
    %
    
    $
    99,005
    
    
    
    5
    %
  To Be Well CapitalizedFor Capital Adequacy
    
    
    Under PromptActual
    
    
    Purposes
    
    
    Corrective Action(dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioThe Company:Total capital (to risk weighted assets)
    
    $
    177,480
    
    
    
    10.26
    %
    
    $
    138,406
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)
    
    $
    142,122
    
    
    
    8.21
    %
    
    $
    69,203
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ALeverage ratio
    
    $
    142,122
    
    
    
    6.97
    %
    
    $
    81,510
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AThe Bank:Total capital (to risk weighted assets)
    
    $
    170,940
    
    
    
    9.94
    %
    
    $
    137,518
    
    
    
    8
    %
    
    $
    171,898
    
    
    
    10
    %Tier 1 Capital (to risk weighted assets)
    
    $
    129,253
    
    
    
    7.52
    %
    
    $
    68,759
    
    
    
    4
    %
    
    $
    103,139
    
    
    
    6
    %Leverage ratio
    
    $
    129,253
    
    
    
    6.41
    %
    
    $
    80,703
    
    
    
    4
    %
    
    $
    100,879
    
    
    
    5
    %
   9




---



##### Table of Contents



Liquidity
    Going Concern Risk
    Basis of Presentation :
 10




---



##### Table of Contents



Consolidation: Consolidation of Variable Interest Entities
 Investment Securities:
     Loans Held for Sale:
 11




---



##### Table of Contents



Loans:
   Allowance for loan losses:
   
    
    changes in lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices and resources,
 12




---



##### Table of Contents




    
    changes in the national and local economic and business conditions and developments,
including the condition of various market segments,
    
    changes in the nature and volume of the portfolio,
    
    changes in the experience, ability and depth of lending management staff,
    
    changes in the trend of the volume and severity of past due and classified loans, and
trends in the volume of nonaccruals, troubled debt restructuring and other loan
modifications,
    
    changes in the home lending construction industry and effect on the Companys
construction loans,
    
    changes in the quality of the Companys loan review system and the degree of oversight by
the Companys Board of Directors,
    
    the existence and effect of any concentrations of credit, and changes in the levels of
concentrations, and
    
    the effect of external forces such as competitive and legal regulatory requirements on
the level of estimated credit losses in the Companys current portfolio.
    Uncollectible Loans and Write-offs:
 Reserve for Unfunded Loan Commitments:
 Goodwill and Other Intangible Assets:
  13




---



##### Table of Contents



Business Combinations
 Income Taxes:
  Postretirement Split-Dollar Life Insurance Arrangements
 Fair Value Measurements:
 Reclassifications:
 Recent Accounting Pronouncement Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
   14




---



##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Basic Earnings (Loss) per Share Computation:Net income (loss)
    
    $
    (54,563
    )
    
    $
    5,996
    
    
    $
    (64,258
    )
    
    $
    10,614Average Common Share Outstanding
    
    
    10,816
    
    
    
    10,790
    
    
    
    10,811
    
    
    
    10,783Basic Earnings (Loss) per Share
    
    $
    (5.04
    )
    
    $
    0.56
    
    
    $
    (5.94
    )
    
    $
    0.98Diluted Earnings (Loss) per Share Computation:Net income (loss)
    
    $
    (54,563
    )
    
    $
    5,996
    
    
    $
    (64,258
    )
    
    $
    10,614Average Common Share Outstanding
    
    
    10,816
    
    
    
    10,790
    
    
    
    10,811
    
    
    
    10,783Effect of Stock Options
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    16210,816
    
    
    
    10,920
    
    
    
    10,811
    
    
    
    10,945Diluted Earnings (Loss) per Share
    
    $
    (5.04
    )
    
    $
    0.55
    
    
    $
    (5.94
    )
    
    $
    0.97
     For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Stock option compensation expense
    
    $
    214
    
    
    $
    217
    
    
    $
    894
    
    
    $
    1,066Tax benefits related to stock option compensation expense
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    (152
    )Decrease in net income
    
    $
    214
    
    
    $
    193
    
    
    $
    894
    
    
    $
    914Effect on:Net income per share  basic
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.08
    )Net income per share  diluted
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.08
    )
 15




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##### Table of Contents



For the Nine Months EndedSeptember 30, 2008WeightedAverageNumber of
    
    Exercise Price(in thousands, except per share amounts)
    
    Shares
    
    per ShareOutstanding at January 1, 2008
    
    
    849
    
    
    $
    22.51Options granted
    
    
    405
    
    
    $
    9.53Options exercised
    
    
    (11
    )
    
    $
    5.54Options forfeited
    
    
    (168
    )
    
    $
    18.59Options expired
    
    
    (6
    )
    
    $
    3.81Outstanding at September 30, 2008
    
    
    1,069
    
    
    $
    18.44Exercisable at September 30, 2008
    
    
    685
    
    
    $
    19.90
  For the Nine Months EndedSeptember 30, 2008
    
    September 30, 2007Weighted-
    
    
    
    
    
    Weighted-Average Fair
    
    
    
    
    
    Average FairNumber of
    
    Value per
    
    Number of
    
    Value per(in thousands, except per share amounts)
    
    Shares
    
    Share
    
    Shares
    
    ShareOptions granted
    
    
    405
    
    
    $
    3.85
    
    
    
    192
    
    
    $
    9.09
  WeightedAverage FairNumber of
    
    Value per(in thousands, except per share amounts)
    
    Shares
    
    ShareNon vested options exercisable at January 1, 2008
    
    
    239
    
    
    $
    9.10Options granted
    
    
    405
    
    
    $
    3.85Options vested
    
    
    (154
    )
    
    $
    6.80Options forfeited
    
    
    (106
    )
    
    $
    5.92Non vested options at September 30, 2008
    
    
    384
    
    
    $
    5.27
  WeightedAverageAggregate
    
    Remaining
    
    WeightedNumber of
    
    Intrinsic
    
    Contractual
    
    Average(in thousands, except per share amounts)
    
    Shares
    
    Value
    
    Life in Years
    
    Exercise PriceVested options exercisable at September 30, 2008
    
    
    685
    
    
    $
    
    
    
    
    6.92
    
    
    $
    19.90Total options outstanding at September 30, 2008
    
    
    1,069
    
    
    $
    26
    
    
    
    5.67
    
    
    $
    18.44
  16




---



##### Table of Contents



Fair Value Measurements
 
    
    Level 1
    
    inputs to the valuation methodology are quoted priced (unadjusted) for
identical assets or liabilities in active markets.
    
    Level 2
    
    inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument.
    
    Level 3
    
    inputs to the valuation methodology are unobservable and significant to the
fair value measurement.
   Securities
  Loans held for sale
  Impaired loans
 Accounting by Creditors for Impairment of a Loan
 Other Real Estate Owned
  17




---



##### Table of Contents



Fair Value Measurements at Reporting Date UsingSignificantQuoted Price in
    
    
    Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)Available for Sale Securities:U.S. government agencies
    
    $
    2,002
    
    
    $
    
    
    
    $
    2,002
    
    
    $
    State and political subdivisions
    
    
    67,684
    
    
    
    
    
    
    
    67,684
    
    
    
    Mortgage-backed securities
    
    
    217,895
    
    
    
    
    
    
    
    217,895
    
    
    
    Collateralized mortgage
obligations
    
    
    14,814
    
    
    
    
    
    
    
    14,814
    
    
    
    Equity securities
    
    
    12,845
    
    
    
    12,845
    
    
    
    
    
    
    
    Total
    
    $
    315,240
    
    
    $
    12,845
    
    
    $
    302,395
    
    
    $
    
  Fair Value at September 30, 2008Description
    
    Total
    
    Level 1
    
    Level 2
    
    Level 3(in thousands)Impaired loans (1)
    
    $
    115,320
    
    
    
    
    
    
    $
    109,709
    
    
    $
    5,611Other real estate owned
    
    $
    3,187
    
    
    
    
    
    
    $
    3,187
    
    
    $
    Loans held for sale
    
    $
    84,631
    
    
    
    
    
    
    $
    
    
    
    $
    84,631
 
 (1)
    
    Represents carrying value of impaired loans net of corresponding specific reserve in ALLL.       18




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(in thousands)September 30, 2008Available for Sale Securities:U.S. government agencies
    
    $
    2,007
    
    
    $
    
    
    
    $
    5
    
    
    $
    2,002State and political subdivisions
    
    
    68,315
    
    
    
    257
    
    
    
    888
    
    
    
    67,684Mortgage-backed securities
    
    
    219,370
    
    
    
    485
    
    
    
    1,960
    
    
    
    217,895Collateralized mortgage obligations
    
    
    15,008
    
    
    
    
    
    
    
    194
    
    
    
    14,814Total Debt Securities
    
    
    304,700
    
    
    
    742
    
    
    
    3,047
    
    
    
    302,395Equity securities
    
    
    13,365
    
    
    
    
    
    
    
    520
    
    
    
    12,845Total Available for Sale Securities
    
    $
    318,065
    
    
    $
    742
    
    
    $
    3,567
    
    
    $
    315,240December 31, 2007Available for Sale Securities:U.S. government agencies
    
    $
    35,529
    
    
    $
    454
    
    
    $
    54
    
    
    $
    35,929State and political subdivisions
    
    
    1,250
    
    
    
    6
    
    
    
    
    
    
    
    1,256Mortgage-backed securities
    
    
    159,006
    
    
    
    1,119
    
    
    
    724
    
    
    
    159,401Collateralized mortgage obligations
    
    
    10,064
    
    
    
    
    
    
    
    164
    
    
    
    9,900Total Debt Securities
    
    
    205,849
    
    
    
    1,579
    
    
    
    942
    
    
    
    206,486Agency preferred stock
    
    
    4,116
    
    
    
    
    
    
    
    
    
    
    
    4,116Equity securities
    
    
    13,156
    
    
    
    
    
    
    
    742
    
    
    
    12,414Total Available for Sale Securities
    
    $
    223,121
    
    
    $
    1,579
    
    
    $
    1,684
    
    
    $
    223,016Held to Maturity Securities:State and political subdivisions
    
    $
    94,346
    
    
    $
    946
    
    
    $
    65
    
    
    $
    95,227Mortgage-backed securities
    
    
    50,307
    
    
    
    398
    
    
    
    867
    
    
    
    49,838Collateralized mortgage obligations
    
    
    10,830
    
    
    
    
    
    
    
    128
    
    
    
    10,702Total Held to Maturity Securities
    
    $
    155,483
    
    
    $
    1,344
    
    
    $
    1,060
    
    
    $
    155,767
    19




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##### Table of Contents



Less Than Twelve Months
    
    12 months or More
    
    TotalUnrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    FairLosses
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value(in thousands)Available for Sale Securities:U.S. government agencies
    
    $
    5
    
    
    $
    2,002
    
    
    $
    
    
    
    $
    
    
    
    $
    5
    
    
    $
    2,002State and political subdivisions
    
    
    886
    
    
    
    36,365
    
    
    
    2
    
    
    
    60
    
    
    
    888
    
    
    
    36,425Mortgage-backed securities
    
    
    1,339
    
    
    
    93,998
    
    
    
    621
    
    
    
    21,665
    
    
    
    1,960
    
    
    
    115,663Collateralized mortgage obligations
    
    
    116
    
    
    
    10,383
    
    
    
    78
    
    
    
    3,357
    
    
    
    194
    
    
    
    13,740Equity securities
    
    
    
    
    
    
    
    
    
    
    520
    
    
    
    2,011
    
    
    
    520
    
    
    
    2,011Total
    
    $
    2,346
    
    
    $
    142,748
    
    
    $
    1,221
    
    
    $
    27,093
    
    
    $
    3,567
    
    
    $
    169,841
  Less Than Twelve Months
    
    
    12 months or More
    
    
    TotalUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value(in thousands)Available for Sale Securities:U.S. government agencies
    
    $
    
    
    
    $
    
    
    
    $
    54
    
    
    $
    15,018
    
    
    $
    54
    
    
    $
    15,018Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    724
    
    
    
    64,873
    
    
    
    724
    
    
    
    64,873Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    9,900
    
    
    
    164
    
    
    
    9,900Equity securities
    
    
    
    
    
    
    
    
    
    
    742
    
    
    
    4,789
    
    
    
    742
    
    
    
    4,789Total
    
    $
    
    
    
    $
    
    
    
    $
    1,684
    
    
    $
    94,580
    
    
    $
    1,684
    
    
    $
    94,580Held to Maturity Securities:State and political subdivisions
    
    $
    
    
    
    $
    
    
    
    $
    65
    
    
    $
    14,546
    
    
    $
    65
    
    
    $
    14,546Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    867
    
    
    
    41,077
    
    
    
    867
    
    
    
    41,077Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    10,702
    
    
    
    128
    
    
    
    10,702Total
    
    $
    
    
    
    $
    
    
    
    $
    1,060
    
    
    $
    66,325
    
    
    $
    1,060
    
    
    $
    66,325
  20




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Real estate loans:Real estate construction, non-residential
    
    $
    93,688
    
    
    $
    120,570Real estate construction, residential
    
    
    21,463
    
    
    
    31,796Real estate mortgage, non-residential
    
    
    660,999
    
    
    
    725,262Real estate mortgage, residential
    
    
    36,903
    
    
    
    33,846Total real estate loans
    
    
    813,053
    
    
    
    911,474Other loans:Commercial and agricultural
    
    
    447,065
    
    
    
    458,705Factoring receivables
    
    
    20,690
    
    
    
    22,555Consumer installment
    
    
    17,276
    
    
    
    101,947Total other loans
    
    
    485,031
    
    
    
    583,207Total gross loans
    
    
    1,298,084
    
    
    
    1,494,681Less: Allowance for loan losses
    
    
    (35,310
    )
    
    
    (35,800
    )Net loans
    
    $
    1,262,774
    
    
    $
    1,458,881
     21




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Real estate construction
    
    $
    64,958
    
    
    $
    32,715Real estate mortgage
    
    
    53,690
    
    
    
    15,403Total real estate impaired loans
    
    
    118,648
    
    
    
    48,118Commercial and agricultural
    
    
    17,472
    
    
    
    5,376Consumer installment
    
    
    158
    
    
    
    127Total
    
    $
    136,278
    
    
    $
    53,621
  September 30,
    
    
    September 30,2008
    
    
    2007(in thousands)Balance at the beginning of the year
    
    $
    35,800
    
    
    $
    14,031Write down of loans transferred to loans held for sale
    
    
    (985
    )
    
    
    Loans charged-off
    
    
    (26,638
    )
    
    
    (3,772
    )Recoveries of loans previously charged- off
    
    
    306
    
    
    
    381Provision for loan losses
    
    
    26,827
    
    
    
    4,645Balance at
end of period
    
    $
    35,310
    
    
    $
    15,285
    22




---



##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Weighted Average
    
    
    
    
    
    
    Weighted Average(Dollars in thousands)
    
    Maturity Dates
    
    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest RateFHLB advances
    
    2008         to   2011
    
    $
    185,000
    
    
    
    1.61    -       3.40
    %
    
    $
    107,500
    
    
    
    4.44           -       4.76
    %Repurchase agreement
    
    
    2010
    
    
    
    100,000
    
    
    
    2.82
    %
    
    
    100,000
    
    
    
    5.73
    %Treasury tax loan
    
    
    2008
    
    
    
    2,126
    
    
    
    1.30
    %
    
    
    4,912
    
    
    
    4.00
    %Mortgage note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,711
    
    
    
    7.80
    %Other interest-bearing obligations
    
    2008       to   2010
    
    
    2,550
    
    
    
    7.00
    %
    
    
    2,693
    
    
    
    7.00
    %Total borrowings
    
    
    
    
    
    $
    289,676
    
    
    
    
    
    
    $
    217,816
    Financial Instruments Whose Contractual Amount represents Risk:
 As of
    
    
    As ofSeptember 30,
    
    
    December2008
    
    
    31, 2007(in thousands)Commitments to extend credit
    
    $
    297,788
    
    
    $
    477,619Standby letters of credit
    
    
    4,335
    
    
    
    6,505Total
    
    $
    302,123
    
    
    $
    484,124
    23




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##### Table of Contents



24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Form 10-K
 Critical Accounting Policies and Estimates
    25




---



##### Table of Contents



Going Concern Risk
    
    
    The Company incurred an impairment charge of $23,515,000 in the third quarter
of 2008 in relation to the goodwill recorded on the 2007 acquisition of eleven
branches of The California Stockmens Bank. The impairment charge resulted from a
comprehensive analysis carried out by an independent valuation firm, as part of the
Companys annual testing for impairment. This non-cash expense has no impact on
regulatory capital.
    
    Although the Company incurred pre-tax losses in the third quarter and first
nine months of 2008, there is no net tax benefit for these losses. Instead, a
provision for income taxes was recorded of $20,208,000 and $10,144,000 for the three
months and nine months ended September 30, 2008, respectively. These amounts reflect
the impact of a non-cash charge of $26,550,000 to increase the deferred tax valuation
allowance to $27,783,000 at September 30, 2008, as we
 26




---



##### Table of Contents



concluded that it was more likely than not that the majority of the net deferred tax
assets would not be fully utilized in light of uncertainties surrounding our ability to
generate future taxable income. Of this increase, $25,225,000 was
charged to tax expense and $1,325,000 was recorded through
accumulated other comprehensive income, a component of
stockholders equity.
    
    The Company provided $11,500,000 for loan losses in the third quarter of
2008, compared with $732,000 in the same period in 2007. For the nine months ended
September 30, 2008, the Company recorded a provision for loan losses of $26,827,000
compared with $4,645,000 for the first nine months of 2007. Net loans charged-off
totaled $6,000,000 in the third quarter of 2008. The additional provisions for loan
losses were necessary after extensive reviews of the loan portfolio were made by
internal credit resources and external loan specialists. Collateral valuations
supporting the Companys construction and land development loans continue to decline
due to the continued deterioration in real estate values in the Companys market area.
Furthermore, interest foregone on nonaccrual loans totaled approximately $2.6 million
for the three months ended September 30, 2008.
    
    During the third quarter of 2008 we incurred approximately $500,000 of
one-time expenses due to the severance costs related to 21 employee positions that
were eliminated.
    
    Gross loans decreased by $52,212,000 and $196,597,000 during the three and
nine months ended September 30, 2008, respectively, compared to levels at prior period
ends.
    
    The allowance for loan losses declined by $490,000 during the nine months
ended September 30, 2008, to $35,310,000, compared to $35,800,000 at December 31,
2007. The September 30, 2008 allowance reflects the balance after net loan charge-offs
of $6,000,000 during the third quarter and $26,332,000 during the nine month period
ended September 30, 2008.
    
    Impaired non-earning loans at September 30, 2008 were $136,278,000 compared
with $53,621,000 at December 31, 2007 and $122,202,000 at June 30, 2008. New loans
placed on non-accrual during the third quarter of 2008 totaled $24,390,000 thereby
increasing impaired non-earning loans. Charge-offs of non-accrual
loans of $5,593,000, loans transferred to
OREO of $437,000, and loans paid down or removed from non-accrual status during the
third quarter of 2008 of $4,284,000 totaled $10,314,000 and reduced the impaired
non-earning loans at September 30, 2008. As discussed in the introduction above and
elsewhere herein, this growth in non-earning loans is directly related to the
deteriorating economic and real estate environment in the Central Valley, the
Companys primary market.
    
    During the third quarter, two properties totaling $437,000 were transferred
to other real estate owned. In the second quarter of 2008, an impairment charge of
$5,655,000 was required due to a write down to fair value of certain other real estate
owned resulting from a recent re-appraisal of the property.
    
    The Company transferred a portfolio of indirect consumer loans aggregating a
fair value $85,640,000 to loans held for sale at June 30, 2008. This transfer required
the recognition in the second quarter of 2008 of a $1,751,000 write down which is
included in other non-interest expense, due to changes in market rates. This also
required a partial charge-off in the allowance for loan losses of $985,000,
attributable to the portfolios credit quality. During the third quarter, the Company
recognized an additional write down of $347,000 of indirect consumer loans included in
other non-interest expense. The Company continues to seek buyers for this portfolio;
however, based on the current economic environment, the market for loan sales has
dramatically contracted.
    
    During the third quarter, the Company sold the remaining investment in
preferred stock issued by the FHLMC for $1,682,000 and incurred a loss on sale of
$864,000. During the second quarter, the Company incurred an other-than-temporary
impairment charge of $1,564,000 resulting from a write-down to fair value of preferred
stock issued by FHLMC.
    
    Professional fees increased by $801,000 or 65% for the three months ended
September 30, 2008 and $2,705,000 or 93% for the nine months ended September 30, 2008
compared to the same periods in 2007. These increases were directly attributable to
increased professional fees related to identification of problem loans and the general
monitoring and resolution of impaired loans.
    
    Capital is a critical factor for the Company. Historically the Company has
generated capital through the retention of earnings and the issuance of junior
subordinated debentures. The recent losses incurred have reduced the Banks
Risk-Based Capital level to adequately capitalized under the regulatory framework for
prompt corrective action. The Company is pursuing a Capital Plan to return the Bank to
a well capitalized status. The Risk-Based Capital computations for the Company and the
Bank are complex and are impacted by operating losses and various limitations
including loan loss reserves, which are limited to 125% of risk-based assets as well
as deferred income taxes which generally cannot exceed 10% of risk-based capital.
Further, the regulatory guidelines for risk-based capital are scheduled to be modified
in 2009 which will likely reduce the current capital ratios for the Company.
 27




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Three and Nine Months Ended September 30, 2008 Compared With Three and Nine Months Ended September,
30 2007
        28




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##### Table of Contents



For the Three Months Ended September 30,
    
    

For the Nine Months Ended September 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeTotal interest income
    
    $
    28,663
    
    
    $
    33,179
    
    
    
    (13.61
    )%
    
    $
    91,692
    
    
    $
    95,692
    
    
    
    (4.18
    )%Total interest expense
    
    
    10,282
    
    
    
    15,218
    
    
    
    (32.44
    )%
    
    
    34,100
    
    
    
    43,989
    
    
    
    (22.48
    )%Net Interest Income
    
    $
    18,381
    
    
    $
    17,961
    
    
    
    2.34
    %
    
    $
    57,592
    
    
    $
    51,703
    
    
    
    11.39
    %
  For the Three Months Ended September 30,
    
    For the Nine Months Ended September 30,Percent
    
    
    
    
    
    
    
    
    
    Percent(Dollars in thousands)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeAverage interest-earning assets
    
    $
    1,804,853
    
    
    $
    1,744,977
    
    
    
    3.43
    %
    
    $
    1,846,857
    
    
    $
    1,721,541
    
    
    
    7.28
    %Average interest-earning assets acquired
    
    $
    144,890
    
    
    $
    
    
    
    
    NM
    
    
    $
    143,968
    
    
    $
    
    
    
    
    NMAverage interest-bearing liabilities
    
    $
    1,613,849
    
    
    $
    1,496,922
    
    
    
    7.81
    %
    
    $
    1,626,658
    
    
    $
    1,467,260
    
    
    
    10.86
    %Average interest-bearing liabilities acquired
    
    $
    186,093
    
    
    $
    
    
    
    
    NM
    
    
    $
    187,355
    
    
    $
    
    
    
    
    NMAverage interest rate earned
    
    
    6.36
    %
    
    
    7.61
    %
    
    
    (16.41
    )%
    
    
    6.68
    %
    
    
    7.50
    %
    
    
    (10.97)
    %Average interest rate paid
    
    
    2.53
    %
    
    
    4.03
    %
    
    
    (37.28
    )%
    
    
    2.79
    %
    
    
    4.01
    %
    
    
    (30.36)
    %Net interest margin
    
    
    4.10
    %
    
    
    4.15
    %
    
    
    (1.18
    )%
    
    
    4.22
    %
    
    
    4.09
    %
    
    
    3.13
    %
   29




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30




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Three Months Ended September 30, 2008
    
    

Three Months Ended September 30,2007Yield/
    
    
    Average(Dollars in thousands)
    
    Average Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/ RateASSETS:Federal funds sold
    
    $
    48,367
    
    
    $
    240
    
    
    
    1.97
    %
    
    $
    17,862
    
    
    $
    223
    
    
    
    4.95
    %Time deposits at other financial institutions
    
    
    127
    
    
    
    1
    
    
    
    3.12
    %
    
    
    100
    
    
    
    1
    
    
    
    3.97
    %Taxable investment securities
    
    
    251,068
    
    
    
    3,224
    
    
    
    5.09
    %
    
    
    294,858
    
    
    
    3,712
    
    
    
    4.99
    %Nontaxable investment securities (1)
    
    
    85,539
    
    
    
    1,049
    
    
    
    4.87
    %
    
    
    97,176
    
    
    
    1,124
    
    
    
    4.59
    %Loans held for sale
    
    
    85,557
    
    
    
    1,588
    
    
    
    7.36
    %
    
    
    
    
    
    
    
    
    
    
    Loans, gross (2),(3)
    
    
    1,334,195
    
    
    
    22,836
    
    
    
    6.79
    %
    
    
    1,334,981
    
    
    
    28,422
    
    
    
    8.45
    %Total Interest-Earning Assets
    
    
    1,804,853
    
    
    
    28,938
    
    
    
    6.36
    %
    
    
    1,744,977
    
    
    
    33,482
    
    
    
    7.61
    %Allowance for loan losses
    
    
    (30,240
    )
    
    
    
    
    
    
    
    
    
    
    (15,547
    )Cash and due from banks
    
    
    47,994
    
    
    
    
    
    
    
    
    
    
    
    44,731Premises and equipment, net
    
    
    53,400
    
    
    
    
    
    
    
    
    
    
    
    46,371Interest receivable and other assets
    
    
    136,856
    
    
    
    
    
    
    
    
    
    
    
    86,596Total Assets
    
    $
    2,012,863
    
    
    
    
    
    
    
    
    
    
    $
    1,907,128LIABILITIES AND SHAREHOLDERS EQUITY:Negotiable orders of withdrawal
    
    $
    229,509
    
    
    $
    249
    
    
    
    0.43
    %
    
    $
    232,859
    
    
    $
    792
    
    
    
    1.35
    %Savings deposits
    
    
    413,936
    
    
    
    1,851
    
    
    
    1.77
    %
    
    
    430,562
    
    
    
    3,778
    
    
    
    3.48
    %Time deposits
    
    
    627,994
    
    
    
    5,544
    
    
    
    3.50
    %
    
    
    597,518
    
    
    
    7,186
    
    
    
    4.77
    %Junior subordinated debentures
    
    
    57,734
    
    
    
    875
    
    
    
    6.01
    %
    
    
    31,960
    
    
    
    620
    
    
    
    7.70
    %Federal funds purchased
    
    
    340
    
    
    
    2
    
    
    
    2.33
    %
    
    
    816
    
    
    
    11
    
    
    
    5.35
    %Other borrowings
    
    
    284,336
    
    
    
    1,761
    
    
    
    2.46
    %
    
    
    203,207
    
    
    
    2,831
    
    
    
    5.53
    %Total Interest-Bearing Liabilities
    
    
    1,613,849
    
    
    
    10,282
    
    
    
    2.53
    %
    
    
    1,496,922
    
    
    
    15,218
    
    
    
    4.03
    %Non interest-bearing deposits
    
    
    252,376
    
    
    
    
    
    
    
    
    
    
    
    243,145Accrued interest, taxes and other
    
    
    18,978
    
    
    
    
    
    
    
    
    
    
    
    15,176Total Liabilities
    
    
    1,885,203
    
    
    
    
    
    
    
    
    
    
    
    1,755,243Total shareholders equity
    
    
    127,660
    
    
    
    
    
    
    
    
    
    
    
    151,885Total liabilities and shareholders equity
    
    $
    2,012,863
    
    
    
    
    
    
    
    
    
    
    $
    1,907,128Net interest income and margin (4)
    
    
    
    
    
    $
    18,656
    
    
    
    4.10
    %
    
    
    
    
    
    $
    18,264
    
    
    
    4.15
    %
 
 (1)
    
    Tax equivalent adjustments recorded at the statutory rate of 35% that are included in
nontaxable investment securities portfolio are $252,000 and $271,000 for the three months
ended September 30, 2008 and 2007, respectively. Tax equivalent adjustments included in the
nontaxable investment securities portfolio were derived from nontaxable municipal interest
income. Tax equivalent adjustments recorded at the statutory federal rate of 35% that are
included in taxable investment securities portfolio
were created by a dividends received deduction of $0 and $32,000 for the three months ended
September 30, 2008 and 2007, respectively. Tax equivalent income adjustments recorded at the
statutory federal rate of 35% that are included in taxable investment securities income were
created by a qualified zone academy bond of $23,000 in the third quarter of 2008.(2)
    
    Interest on nonaccrual loans is generally recognized into income on a cash received basis.(3)
    
    Amounts of interest earned included net loan fees of $1,191,000 and $1,011,000 for the three
months ended September 30, 2008 and 2007, respectively.(4)
    
    Net interest margin is computed by dividing net interest income by total average
interest-earning assets. 31




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##### Table of Contents



Nine Months Ended September 30, 2008
    
    

Nine Months Ended September
30, 2007Average
    
    
    
    
    
    
    Yield/
    
    
    Average(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/ RateASSETSFederal funds sold
    
    $
    27,911
    
    
    $
    492
    
    
    
    2.35
    %
    
    $
    44,939
    
    
    $
    1,756
    
    
    
    5.22
    %Time deposits at other financial institutions
    
    
    109
    
    
    
    2
    
    
    
    2.44
    %
    
    
    223
    
    
    
    9
    
    
    
    5.40
    %Taxable investment securities
    
    
    266,071
    
    
    
    10,129
    
    
    
    5.07
    %
    
    
    307,240
    
    
    
    11,235
    
    
    
    4.89
    %Nontaxable investment securities (1)
    
    
    89,951
    
    
    
    3,271
    
    
    
    4.84
    %
    
    
    99,025
    
    
    
    3,548
    
    
    
    4.79
    %Loans held for sale
    
    
    29,040
    
    
    
    1,588
    
    
    
    7.28
    %
    
    
    
    
    
    
    
    
    
    
    Loans, gross (2),(3)
    
    
    1,433,775
    
    
    
    77,097
    
    
    
    7.16
    %
    
    
    1,270,114
    
    
    
    80,068
    
    
    
    8.43
    %Total Interest-Earning Assets
    
    
    1,846,857
    
    
    
    92,579
    
    
    
    6.68
    %
    
    
    1,721,541
    
    
    
    96,616
    
    
    
    7.50
    %Allowance for loan losses
    
    
    (34,201
    )
    
    
    
    
    
    
    
    
    
    
    (14,622
    )Cash and due from banks
    
    
    51,313
    
    
    
    
    
    
    
    
    
    
    
    43,692Premises and equipment, net
    
    
    53,652
    
    
    
    
    
    
    
    
    
    
    
    45,581Interest receivable and other assets
    
    
    131,884
    
    
    
    
    
    
    
    
    
    
    
    80,144Total Assets
    
    
    2,049,504
    
    
    
    
    
    
    
    
    
    
    $
    1,876,336LIABILITIES AND SHAREHOLDERS EQUITYNegotiable orders of withdrawal
    
    $
    240,014
    
    
    $
    1,000
    
    
    
    0.56
    %
    
    $
    230,732
    
    
    $
    2,214
    
    
    
    1.28
    %Savings deposits
    
    
    428,930
    
    
    
    6,700
    
    
    
    2.08
    %
    
    
    419,405
    
    
    
    10,798
    
    
    
    3.44
    %Time deposits
    
    
    634,403
    
    
    
    17,847
    
    
    
    3.75
    %
    
    
    626,809
    
    
    
    22,450
    
    
    
    4.79
    %Junior subordinated debentures
    
    
    57,734
    
    
    
    2,671
    
    
    
    6.16
    %
    
    
    31,960
    
    
    
    1,971
    
    
    
    8.25
    %Federal funds purchased
    
    
    4,733
    
    
    
    83
    
    
    
    2.34
    %
    
    
    387
    
    
    
    16
    
    
    
    5.53
    %Other borrowings
    
    
    260,844
    
    
    
    5,799
    
    
    
    2.96
    %
    
    
    157,967
    
    
    
    6,540
    
    
    
    5.54
    %Total Interest-Bearing Liabilities
    
    
    1,626,658
    
    
    
    34,100
    
    
    
    2.79
    %
    
    
    1,467,260
    
    
    
    43,989
    
    
    
    4.01
    %Non interest-bearing deposits
    
    
    267,686
    
    
    
    
    
    
    
    
    
    
    
    242,919Accrued interest, taxes and other
    
    
    16,115
    
    
    
    
    
    
    
    
    
    
    
    15,020Total Liabilities
    
    
    1,910,459
    
    
    
    
    
    
    
    
    
    
    
    1,725,199Total shareholders equity
    
    
    139,046
    
    
    
    
    
    
    
    
    
    
    
    151,137Total liabilities and shareholders equity
    
    $
    2,049,505
    
    
    
    
    
    
    
    
    
    
    $
    1,876,336Net interest income and margin (4)
    
    
    
    
    
    $
    58,479
    
    
    
    4.22
    %
    
    
    
    
    
    $
    52,627
    
    
    
    4.09
    %
 
 (1)
    
    Tax equivalent adjustments recorded at the statutory rate of 35% that are included in
nontaxable investment securities portfolio are $779,000 and $860,000 for the nine months ended
September 30, 2008 and 2007, respectively. Tax equivalent adjustments
included in the nontaxable investment securities portfolio were derived from nontaxable
municipal interest income. Tax equivalent adjustments recorded at the statutory federal rate of
35% that are included in taxable investment securities portfolio were created by a dividends
received deduction of $38,000 and $52,000 for the nine months ended September 30, 2008 and 2007,
respectively. Tax equivalent income adjustments recorded at the statutory federal rate of 35%
that are included in taxable investment securities income were created by a qualified zone
academy bond of $70,000 in the first nine months of 2008.(2)
    
    Interest on nonaccrual loans is generally recognized into income on a cash received basis.(3)
    
    Amounts of interest earned included net loan fees of $2,886,000 and $3,013,000 for the nine
months ended September 30, 2008 and 2007, respectively.(4)
    
    Net interest margin is computed by dividing net interest income by total average
interest-earning assets. 32




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##### Table of Contents



Three Months Ended September 30, 2008Compared to September 30, 2007(in thousands)
    
    Rate
    
    
    Volume
    
    
    TotalIncrease (decrease) in interest income:Federal funds sold
    
    $
    (364
    )
    
    $
    381
    
    
    $
    17Time deposits at other financial institutions
    
    
    
    
    
    
    
    
    
    
    Taxable investment securities
    
    
    63
    
    
    
    (551
    )
    
    
    (488
    )Nontaxable investment securities
    
    
    60
    
    
    
    (135
    )
    
    
    (75
    )Loans held for sale
    
    
    
    
    
    
    1,588
    
    
    
    1,588Loans
    
    
    (5,569
    )
    
    
    (17
    )
    
    
    (5,586
    )Total
    
    $
    (5,810
    )
    
    $
    1,266
    
    
    $
    (4,544
    )Increase (decrease) in interest expense:Interest bearing demand
    
    $
    (532
    )
    
    $
    (11
    )
    
    $
    (543
    )Savings deposits
    
    
    (1,781
    )
    
    
    (146
    )
    
    
    (1,927
    )Time deposits
    
    
    (2,009
    )
    
    
    367
    
    
    
    (1,642
    )Federal funds purchased
    
    
    (3
    )
    
    
    (6
    )
    
    
    (9
    )Other borrowings
    
    
    (2,200
    )
    
    
    1,130
    
    
    
    (1,070
    )Junior subordinated debentures
    
    
    (245
    )
    
    
    500
    
    
    
    255Total
    
    $
    (6,770
    )
    
    $
    1,834
    
    
    $
    (4,936
    )Increase in net interest income
    
    $
    960
    
    
    $
    (568
    )
    
    $
    392
 Nine Months Ended September 30, 2008Compared to September 30, 2007(in thousands)
    
    Rate
    
    
    Volume
    
    
    TotalIncrease (decrease) in interest income:Federal funds sold
    
    $
    (599
    )
    
    $
    (665
    )
    
    $
    (1,264
    )Time deposits at other financial institutions
    
    
    (2
    )
    
    
    (5
    )
    
    
    (7
    )Taxable investment securities
    
    
    399
    
    
    
    (1,505
    )
    
    
    (1,106
    )Nontaxable investment securities
    
    
    48
    
    
    
    (325
    )
    
    
    (277
    )Loans held for sale
    
    
    
    
    
    
    1,588
    
    
    
    1,588Loans
    
    
    (13,288
    )
    
    
    10,317
    
    
    
    (2,971
    )Total
    
    $
    (13,442
    )
    
    $
    9,405
    
    
    $
    (4,037
    )Increase (decrease) in interest expense:
    
    
    
    
    
    
    
    
    
    
    Interest bearing demand
    
    $
    (1,303
    )
    
    $
    89
    
    
    $
    (1,214
    )Savings deposits
    
    
    (4,343
    )
    
    
    245
    
    
    
    (4,098
    )Time deposits
    
    
    (4,875
    )
    
    
    272
    
    
    
    (4,603
    )Federal funds purchased
    
    
    (113
    )
    
    
    180
    
    
    
    67Other borrowings
    
    
    (5,000
    )
    
    
    4,259
    
    
    
    (741
    )Junior subordinated debentures
    
    
    (889
    )
    
    
    1,589
    
    
    
    700Total
    
    $
    (16,523
    )
    
    $
    6,634
    
    
    $
    (9,889
    )Increase in net interest income
    
    $
    3,081
    
    
    $
    2,771
    
    
    $
    5,852
 33




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34




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##### Table of Contents



Goodwill Impairment
    For the Three Months Ended September 30,2008
    
    2007Stockmens
    
    Bay View(in thousands)
    
    Branches
    
    Funding
    
    All Other
    
    Total
    
    TotalSalaries and benefits
    
    $
    690
    
    
    $
    876
    
    
    $
    8,742
    
    
    $
    10,308
    
    
    $
    7,606Premises and occupancy expense
    
    
    169
    
    
    
    50
    
    
    
    1,658
    
    
    
    1,877
    
    
    
    1,835Equipment expense
    
    
    78
    
    
    
    34
    
    
    
    1,779
    
    
    
    1,891
    
    
    
    1,382
 For the Nine Months Ended September 30,2008
    
    2007Stockmens
    
    Bay View(in thousands)
    
    Branches
    
    Funding
    
    All Other
    
    Total
    
    TotalSalaries and benefits
    
    $
    2,226
    
    
    $
    2,633
    
    
    $
    25,357
    
    
    $
    30,216
    
    
    $
    22,883Premises and occupancy expense
    
    
    499
    
    
    
    170
    
    
    
    4,905
    
    
    
    5,574
    
    
    
    5,140Equipment expense
    
    
    221
    
    
    
    93
    
    
    
    5,025
    
    
    
    5,339
    
    
    
    3,861
  35




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36




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September 30, 2008
    
    
    December 31, 2007(dollars in thousands)
    
    Amount
    
    
    Percent of Loans
    
    
    Amount
    
    

Percent of LoansReal estate construction, non-residential
    
    $
    93,688
    
    
    
    7
    %
    
    $
    120,570
    
    
    
    8
    %Real estate construction, residential
    
    
    21,463
    
    
    
    2
    
    
    
    31,796
    
    
    
    2Real estate mortgage, non residential
    
    
    660,999
    
    
    
    51
    
    
    
    725,262
    
    
    
    49Real estate mortgage, residential
    
    
    36,903
    
    
    
    3
    
    
    
    33,846
    
    
    
    2Total real estate loans
    
    
    813,053
    
    
    
    63
    
    
    
    911,474
    
    
    
    61Commercial
    
    
    356,178
    
    
    
    27
    
    
    
    373,512
    
    
    
    25Agricultural
    
    
    90,887
    
    
    
    7
    
    
    
    85,193
    
    
    
    6Factoring
    
    
    20,690
    
    
    
    2
    
    
    
    22,555
    
    
    
    1Consumer
    
    
    17,276
    
    
    
    1
    
    
    
    101,947
    
    
    
    7Total
    
    
    1,298,084
    
    
    
    100
    %
    
    
    1,494,681
    
    
    
    100
    %Less allowance for loan losses
    
    
    (35,310
    )
    
    
    
    
    
    
    (35,800
    )Net loans
    
    $
    1,262,774
    
    
    
    
    
    
    $
    1,458,881
   SanFrancisco
    
    
    Merced/
    
    
    Stockton/
    
    
    
    
    
    
    Fresno/(in thousands)
    
    Bay Area
    
    
    Mariposa
    
    
    Modesto
    
    
    Sacramento
    
    
    Bakersfield
    
    
    All Other
    
    
    TotalReal estate construction, 
non-residential
    
    $
    5,522
    
    
    $
    24,546
    
    
    $
    21,218
    
    
    $
    12,970
    
    
    $
    29,432
    
    
    $
    
    
    
    $
    93,688Real estate construction, 
residential
    
    
    2,960
    
    
    
    2,895
    
    
    
    1,978
    
    
    
    5,618
    
    
    
    8,012
    
    
    
    
    
    
    
    21,463Real estate mortgage, 
non-residential
    
    
    77,227
    
    
    
    171,249
    
    
    
    160,149
    
    
    
    46,534
    
    
    
    194,381
    
    
    
    11,459
    
    
    
    660,999Real estate mortgage, 
residential
    
    
    775
    
    
    
    15,113
    
    
    
    8,250
    
    
    
    433
    
    
    
    9,859
    
    
    
    2,473
    
    
    
    36,903Total
    
    $
    86,484
    
    
    $
    213,803
    
    
    $
    191,595
    
    
    $
    65,555
    
    
    $
    241,684
    
    
    $
    13,932
    
    
    $
    813,053
   37




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##### Table of Contents



(dollars in thousands)
    
    September 30, 2008
    
    
    December 31, 2007Nonaccrual loans
    
    $
    136,278
    
    
    $
    53,621Accruing loans past due 90 days or more
    
    
    2,405
    
    
    
    583Total nonperforming loans
    
    
    138,683
    
    
    
    54,204Other real estate owned
    
    
    3,187
    
    
    
    7,550Total nonperforming assets
    
    $
    141,870
    
    
    $
    61,754Nonperforming loans to total loans
    
    
    10.68
    %
    
    
    3.63
    %Nonperforming assets to total assets
    
    
    7.57
    %
    
    
    2.93
    %Loan-to-deposit ratio
    
    
    90.81
    %
    
    
    89.22
    %
   Impaired and Nonaccrual Loans
   38




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##### Table of Contents



(in thousands)Balance at December 31, 2007
    
    $
    53,621Add: Loans placed on nonaccrual status
    
    
    127,091Less: Loans removed from non-accrual status due to additional
collateral or principal payments
    
    
    (17,929
    )Charge-offs during the period
    
    
    (26,068
    )Transfer to OREO
    
    
    (437
    )Balance at September 30, 2008
    
    $
    136,278
  September 30, 2008
    
    
    December 31, 2007(in thousands)Real estate construction, non-residential
    
    $
    51,138
    
    
    $
    27,284Real estate construction, residential
    
    
    13,820
    
    
    
    5,431Real estate mortgage, non-residential
    
    
    53,507
    
    
    
    15,403Real estate, residential
    
    
    183
    
    
    
    Total real estate nonaccrual loans
    
    
    118,648
    
    
    
    48,118Commercial
    
    
    16,397
    
    
    
    5,012All other
    
    
    1,233
    
    
    
    491Total
    
    $
    136,278
    
    
    $
    53,621
  September 30, 2008
    
    
    December 31, 2007(in thousands)Construction
of single /multi family residence
    
    $
    13,820
    
    
    $
    5,431Construction and land development
    
    
    92,671
    
    
    
    40,372Single/multi family residence
    
    
    6,116
    
    
    
    1,006Farm land
    
    
    3,697
    
    
    
    Non-farm, non-residential property
    
    
    2,640
    
    
    
    1,500Commercial property
    
    
    9,892
    
    
    
    5,028Agricultural production and farming
    
    
    1,047
    
    
    
    157Personal property
    
    
    60
    
    
    
    127Unsecured
    
    
    6,335
    
    
    
    Total
    
    $
    136,278
    
    
    $
    53,621
 39




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##### Table of Contents



September 30, 2008
    
    
    December 31, 2007(in thousands)Land subdivision
    
    $
    49,247
    
    
    $
    16,047Construction of new single family housing
    
    
    22,345
    
    
    
    16,767Real estate agent and broker offices
    
    
    20,642
    
    
    
    3,812Lessors of non-residential buildings
    
    
    8,841
    
    
    
    Other activities relating to real estate
    
    
    15,344
    
    
    
    4,976Wholesale/retail
    
    
    6,865
    
    
    
    5,544Lessors of residential buildings
    
    
    4,806
    
    
    
    1,006Medical offices
    
    
    4,354
    
    
    
    4,300Other
    
    
    3,834
    
    
    
    1,169Total
    
    $
    136,278
    
    
    $
    53,621
  Collateral Impaired and Not Performing:
  Collateral Impaired and Performing:
  Collateral Adequate and Not Performing :
  Collateral Adequate and Performing :
  Impaired loans
  September 30, 2008(in thousands)Collateral impaired and not performing
    
    $
    64,404Collateral impaired and performing
    
    
    18,112Collateral adequate and not performing
    
    
    27,028Collateral adequate and performing
    
    
    26,734$
    136,278
  40




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Other Real Estate Owned
    41




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##### Table of Contents



September 30,
    
    
    December 312008
    
    
    2007
    
    
    2007(dollars in thousands)Balance at beginning of period
    
    $
    35,800
    
    
    $
    14,031
    
    
    $
    14,031Allowance from the California Stockmens Bank
    
    
    
    
    
    
    
    
    
    
    1,900Provision for loan losses
    
    
    26,827
    
    
    
    4,645
    
    
    
    29,803Write down of loans transferred to loans held for sale
    
    
    (985
    )
    
    
    
    
    
    
    Charge-offsCommercial and agricultural
    
    
    (7,193
    )
    
    
    (3,273
    )
    
    
    (1,128
    )Real estate construction
    
    
    (18,733
    )
    
    
    
    
    
    
    (8,357
    )Consumer
    
    
    (712
    )
    
    
    (499
    )
    
    
    (934
    )Total charge-offs
    
    
    (26,638
    )
    
    
    (3,772
    )
    
    
    (10,419
    )RecoveriesCommercial and agricultural
    
    
    164
    
    
    
    275
    
    
    
    364Real estate mortgage
    
    
    4
    
    
    
    
    
    
    
    Consumer
    
    
    138
    
    
    
    106
    
    
    
    121Total recoveries
    
    
    306
    
    
    
    381
    
    
    
    485Net charge-offs
    
    
    (26,332
    )
    
    
    (3,391
    )
    
    
    (9,934
    )Balance at end of period
    
    $
    35,310
    
    
    $
    15,285
    
    
    $
    35,800Loans outstanding at period-end
    
    $
    1,298,084
    
    
    $
    1,364,238
    
    
    $
    1,494,681Average loans outstanding
    
    $
    1,433,775
    
    
    $
    1,270,114
    
    
    $
    1,320,594Annualized net charge-offs to average loans
    
    
    2.46
    %
    
    
    0.36
    %
    
    
    0.75
    %Allowance for loan losses:To total loans
    
    
    2.72
    %
    
    
    1.12
    %
    
    
    2.40
    %To nonperforming loans
    
    
    25.46
    %
    
    
    465.44
    %
    
    
    66.05
    %To nonperforming assets
    
    
    24.89
    %
    
    
    120.03
    %
    
    
    57.97
    %
   Charge-offs
  42




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##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Loans % to
    
    
    
    
    
    
    Loans % to(dollars in thousands)
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansCommercial and agricultural
    
    $
    12,257
    
    
    
    36
    %
    
    $
    7,757
    
    
    
    32
    %Real estate construction
    
    
    12,081
    
    
    
    9
    
    
    
    17,413
    
    
    
    10Real estate mortgage
    
    
    9,872
    
    
    
    54
    
    
    
    8,940
    
    
    
    51Installment
    
    
    1,100
    
    
    
    1
    
    
    
    1,690
    
    
    
    7Total
    
    $
    35,310
    
    
    
    100
    %
    
    $
    35,800
    
    
    
    100
    %
  September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Specific allowance established for impaired loans
    
    $
    20,958
    
    
    $
    21,432General component of allowance for loan losses
    
    
    14,352
    
    
    
    14,368Total
    
    $
    35,310
    
    
    $
    35,800
  (in thousands)Balance at December 31, 2007
    
    $
    21,432New reserves required for specifically identified loans
    
    
    42,427Impact of reduction in estimate for selling costs from 10% to 8%
    
    
    (1,070
    )Reduction in reserves from charge-offs
    
    
    (24,034
    )Reduction of specific reserves from additional collateral or repayment by customers
    
    
    (17,797
    )Balance at September 30, 2008
    
    $
    20,958
    43




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##### Table of Contents



September 30, 2008
    
    December 31, 2007(in thousands)Cash surrender value of life insurance
    
    $
    45,336
    
    
    $
    43,677
  44




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##### Table of Contents



September 30, 2008
    
    
    December 31, 2007(in thousands)Three months or less
    
    $
    64,277
    
    
    $
    157,659Over three to six months
    
    
    51,234
    
    
    
    44,511Over six to twelve months
    
    
    32,371
    
    
    
    26,175Over twelve months
    
    
    15,284
    
    
    
    41,782Total
    
    $
    163,166
    
    
    $
    270,127
   For the ninemonths ended
    
    
    For the yearSeptember 30,
    
    
    ended December2008
    
    
    31, 2007(in thousands)Balance at the beginning of the period
    
    $
    1,800
    
    
    $
    710Provision for credit losses
    
    
    1,242
    
    
    
    334Provision (credit) for mechanics liens and bonded stop notices
    
    
    (279
    )
    
    
    1,840Payment of mechanic liens and bonded stop notices
    
    
    
    
    
    
    (1,084
    )Balance at the end of the period
    
    $
    2,763
    
    
    $
    1,800
  45




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46




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##### Table of Contents



47




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##### Table of Contents



To Be Well CapitalizedFor Capital Adequacy
    
    
    Under PromptActual
    
    
    Purposes
    
    
    Corrective Action(dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioThe Company:Total capital (to risk weighted assets)
    
    $
    134,956
    
    
    
    8.75
    %
    
    $
    123,324
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)
    
    $
    84,841
    
    
    
    5.50
    %
    
    $
    61,662
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ALeverage ratio
    
    $
    84,841
    
    
    
    4.24
    %
    
    $
    80,037
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AThe Bank:Total capital (to risk weighted assets)
    
    $
    128,986
    
    
    
    8.41
    %
    
    $
    122,700
    
    
    
    8
    %
    
    $
    153,375
    
    
    
    10
    %Tier 1 Capital (to risk weighted assets)
    
    $
    89,581
    
    
    
    5.84
    %
    
    $
    61,350
    
    
    
    4
    %
    
    $
    92,025
    
    
    
    6
    %Leverage ratio
    
    $
    89,581
    
    
    
    4.52
    %
    
    $
    79,204
    
    
    
    4
    %
    
    $
    99,005
    
    
    
    5
    %
  To Be Well CapitalizedFor Capital Adequacy
    
    
    Under PromptActual
    
    
    Purposes
    
    
    Corrective Action(dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioThe Company:Total capital (to risk weighted assets)
    
    $
    177,480
    
    
    
    10.26
    %
    
    $
    138,406
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)
    
    $
    142,122
    
    
    
    8.21
    %
    
    $
    69,203
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ALeverage ratio
    
    $
    142,122
    
    
    
    6.97
    %
    
    $
    81,510
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AThe Bank:Total capital (to risk weighted assets)
    
    $
    170,940
    
    
    
    9.94
    %
    
    $
    137,518
    
    
    
    8
    %
    
    $
    171,898
    
    
    
    10
    %Tier 1 Capital (to risk weighted assets)
    
    $
    129,253
    
    
    
    7.52
    %
    
    $
    68,759
    
    
    
    4
    %
    
    $
    103,139
    
    
    
    6
    %Leverage ratio
    
    $
    129,253
    
    
    
    6.41
    %
    
    $
    80,703
    
    
    
    4
    %
    
    $
    100,879
    
    
    
    5
    %
  48




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##### Table of Contents



Year EndedNine Months Ended September 30,
    
    December 31,2008
    
    2007
    
    2007Annualized return on average assets
    
    
    (4.18
    )%
    
    
    0.76
    %
    
    
    (0.19
    )%Annualized return on average equity
    
    
    (61.56
    )%
    
    
    9.39
    %
    
    
    (2.36
    )%Average equity to average assets
    
    
    6.78
    %
    
    
    8.05
    %
    
    
    7.93
    %Dividend payout ratio
    
    
    NM
    
    
    
    21.19
    %
    
    
    NM
   49




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4. Controls and Procedures
     
    
    Hiring of Chief Risk Officer to implement a risk management plan, including enhanced
policies and procedures to identify, assess, manage and monitor risk exposures;
 50




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##### Table of Contents




    
    Engaging independent credit specialists to evaluate a substantial portion of the
commercial, real estate and construction loan portfolios;
    
    Establishing a Special Assets Department to monitor and control nonperforming credits;
    
    Ensuring via review by qualified senior management that managements assessment of loans
requiring impairment analysis in accordance with SFAS 114 is supported by comprehensive
documentation;
    
    Training of lending and credit personnel to ensure that loans are appropriately
classified and that problem loans are identified and communicated to Credit Administration
on a timely basis;
    
    Involving the Accounting Department in the preparation and review of comprehensive
documentation developed by Credit Administration to support the loan loss provisioning and
the adequacy of the allowance for loan losses;
    
    Hiring of additional accounting and credit personnel, including a chief accounting
officer, assistant controller and SEC reporting manager to ensure that personnel
with adequate experience, skills and knowledge particularly in relation to complex and
non-routine transactions are directly involved in the review and accounting evaluation of
such transactions;
    
    Engaging an independent company to review progress in implementing the enhancements to
procedures and to report to the Audit Committee of the Board;
    
    Documenting of processes and procedures, along with appropriate training, to ensure that
the accounting policies, conform to GAAP and are consistently applied prospectively;
    
    Ensuring through appropriate review by senior level personnel that managements analysis
of the appropriate accounting treatment for Affordable Housing Partnership investments,
Other Real Estate Owned and minimum lease commitments, are supported by comprehensive
documentation; and
    
    Engaging an independent accounting firm to review newly implemented control processes and
procedures related to the accounting for certain non-routine transactions.
   51




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##### Table of Contents



PART II  Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
     It is uncertain if we will be able to continue as a going concern
   We will need to raise additional capital in the near future, but capital may not be available or
may be available only on unfavorable terms.
  52




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##### Table of Contents



Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
   We determined that our methodology for grading loans and establishing the level of the allowance
for loan losses had material weaknesses.
  Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan
portfolio.
  Our dependence on loans secured by real estate subjects us to risks relating to fluctuations in the
real estate market.
  Our concentration in real estate construction loans subjects us to additional risks.
  53




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##### Table of Contents



Continuation of local economic conditions could hurt our profitability.
  Risks associated with acquisitions or divestitures or restructuring may adversely affect us.
   Restrictions on dividends and other distributions could limit amounts payable to us.
  54




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##### Table of Contents



We may be subject to further regulatory action.
   The accuracy of the Companys judgments and estimates about financial and accounting matters will
impact operating results and financial condition
  The Companys information systems may experience an interruption or breach in security.
  The Companys controls and procedures may fail or be circumvented.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits
  55




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##### Table of Contents



SIGNATURES
  CAPITAL CORP OF THE WEST
(Registrant)Date: November 17, 2008
    By
    /s/ Richard S. CuppRichard S. CuppPresident and Chief Executive OfficerDate: November 17, 2008
    By
    /s/ David A. HeaberlinDavid A. HeaberlinChief Financial Officer/Treasurer 56




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##### Table of Contents



Exhibit
    
    Description10.1
    
    Employment Agreement between Richard S. Cupp and Capital Corp. of the West effective August 15, 2008 dated
October 27, 200831.1
    
    Certification of Registrants Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Registrants Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Registrants Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Registrants Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
 57