-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TU9XFGJ8kI7P/2h7bgsZGmexkHXM2io7feJhcHjLd89Sy5SLlpPQQVIxpOlvIrqm /B0UxYyHN1LbXMZVqDP4jQ== 0001004740-07-000055.txt : 20070809 0001004740-07-000055.hdr.sgml : 20070809 20070809152632 ACCESSION NUMBER: 0001004740-07-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070809 FILED AS OF DATE: 20070809 DATE AS OF CHANGE: 20070809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL CORP OF THE WEST CENTRAL INDEX KEY: 0001004740 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770405791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27384 FILM NUMBER: 071040022 BUSINESS ADDRESS: STREET 1: 550 W MAIN STREET CITY: MERCED STATE: CA ZIP: 95340 BUSINESS PHONE: 2097252200 MAIL ADDRESS: STREET 1: 550 W MAIN STREET CITY: MERCED STATE: CA ZIP: 95340 10-Q 1 form10q.htm FORM 10Q Form 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2007
 
or
 
¨
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 registrant as specified in its charter)

 
California
  
77-0405791
(State or other jurisdiction of incorporation or organization)
  
IRS Employer ID Number

 
550 West Main, Merced, CA 95340
(Address of principal executive offices)

Registrant’s telephone number, including area code: (209) 725-2200

Former name, former address and former fiscal year, if changed since last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The number of shares outstanding of the registrant’s common stock, no par value, as of August 6, 2007 was 10,789,944. No shares of preferred stock, no par value, were outstanding at August 6, 2007.

-1-

Capital Corp of the West
Table of Contents
 
PART I. -- FINANCIAL INFORMATION


PART II. -- OTHER INFORMATION



-2-

Consolidated Balance Sheets
(Unaudited)
   
As of June 30,
  
As of December 31,
  
(Dollars in thousands)
  
2007
  
2006
  
           
ASSETS:
         
Cash and non-interest-bearing deposits in other banks
  
$
42,425
  
$
44,853
  
Federal funds sold
    
28,225
    
150,680
  
Time deposits at other financial institutions
    
100
    
350
  
Investment securities available for sale, at fair value
    
233,565
    
256,538
  
Investment securities held to maturity, at cost; fair value of $157,256 and $166,266 at June 30, 2007 and December 31, 2006
    
162,074
    
168,058
  
Loans, net of allowance for loan losses of $17,661 and $14,031 at June 30, 2007 and December 31, 2006
    
1,293,433
    
1,210,730
  
Interest receivable
    
9,178
    
9,819
  
Premises and equipment, net
    
46,549
    
42,320
  
Goodwill
    
1,405
    
1,405
  
Cash value of life insurance
   
43,890
    
43,051
  
Investment in housing tax credit limited partnerships
    
9,653
    
10,082
  
Other assets
    
19,993
    
23,653
  
Total assets:
  
$
1,890,490
  
$
1,961,539
  
               
LIABILITIES:
              
Deposits:
              
Non-interest-bearing demand
  
$
234,062
  
$
287,723
  
Negotiable orders of withdrawal
    
248,084
    
225,481
  
Savings
    
418,255
    
436,494
  
Time, under $100,000
    
344,369
    
299,409
  
Time, $100,000 and over
    
269,273
    
366,234
  
Total deposits
    
1,514,043
    
1,615,341
  
               
Other borrowings
    
182,309
    
151,697
  
Junior subordinated debentures
    
31,960
    
31,960
  
Accrued interest, taxes and other liabilities
    
13,301
    
14,961
  
Total liabilities
    
1,741,613
    
1,813,959
  
               
SHAREHOLDERS’ EQUITY:
              
Preferred stock, no par value; 10,000,000 shares authorized; none outstanding
    
-
   
-
 
Common stock, no par value; 20,000,000 shares authorized; 10,789,944 and 10,760,762 issued and outstanding at June 30, 2007 and December 31, 2006
    
65,874
    
64,586
  
Retained earnings
   
87,180
    
84,614
  
Accumulated other comprehensive loss, net
    
(4,177
)
  
(1,620
)
Total shareholders’ equity
    
148,877
    
147,580
  
               
Total liabilities and shareholders’ equity
  
$
1,890,490
  
$
1,961,539
  
See accompanying notes to consolidated financial statements
 
-3-

Consolidated Statements of Income
(Unaudited)
   
For the three months ended June 30,
  
For the six months ended June 30,
  
(Dollars in thousands, except per share data)
  
2007
  
2006
  
2007
  
2006
  
Interest income:
                  
Interest and fees on loans
  
$
26,367
  
$
25,208
  
$
51,646
  
$
47,431
  
Interest on deposits with other financial institutions
    
3
    
4
    
8
    
9
  
Interest on investments held to maturity:
                          
Taxable
    
822
    
899
    
1,635
    
1,841
  
Non-taxable
    
893
    
942
    
1,813
    
1,883
  
Interest on investments available for sale:
                          
Taxable
    
2,903
    
3,287
    
5,855
    
6,763
  
Non-taxable
    
11
    
22
    
22
    
33
  
Interest on federal funds sold
    
298
    
44
    
1,533
    
93
  
Total interest income
    
31,297
    
30,406
    
62,512
    
58,053
  
                           
Interest expense:
                          
Interest on negotiable orders of withdrawal
    
837
    
305
    
1,422
    
665
  
Interest on savings deposits
    
3,510
    
1,913
    
7,020
    
3,782
  
Interest on time deposits, under $100
    
4,169
    
2,889
    
7,828
    
4,777
  
Interest on time deposits, $100 and over
    
3,251
    
3,081
    
7,435
    
5,465
  
Interest of federal funds purchased
    
5
    
432
   
5
    
874
 
Interest on other borrowings
    
1,853
    
1,912
    
3,711
    
3,883
  
Interest on junior subordinated debentures
    
675
    
398
    
1,350
    
773
  
Total interest expense
    
14,300
    
10,930
    
28,771
    
20,219
  
                           
Net interest income
    
16,997
    
19,476
    
33,741
    
37,834
  
Provision for loan losses
    
3,713
   
200
   
3,913
   
200
 
Net interest income after provision for loan losses
    
13,284
    
19,276
    
29,828
    
37,634
  
                           
Noninterest income:
                          
Service charges on deposit accounts
    
2,089
    
1,504
    
3,794
    
2,925
  
Gain on sale of securities
    
-
    
622
    
-
    
622
  
Increase in cash value of life insurance
    
431
    
294
    
840
    
600
  
Other
    
1,114
    
1,002
    
1,959
    
1,907
  
Total noninterest income
    
3,634
    
3,422
    
6,593
    
6,054
  
                           
Noninterest expenses:
                          
Salaries and related expenses
    
7,468
    
7,335
    
15,276
    
14,194
  
Premises and occupancy
    
1,760
    
1,255
    
3,305
    
2,444
  
Equipment
    
1,296
    
1,042
    
2,480
    
2,033
  
Professional fees
   
859
    
554
    
1,670
    
1,474
  
Supplies
   
268
    
303
    
497
    
539
  
Marketing
    
607
    
466
    
920
    
853
  
Community support donations
    
188
    
291
    
368
    
509
  
Intangible amortization
    
-
    
12
    
-
    
23
  
Communications
    
416
    
381
    
764
    
731
  
Other
    
3,283
    
1,467
    
4,772
    
2,782
  
Total noninterest expenses
    
16,145
    
13,106
    
30,052
    
25,582
  
                           
Income before provision for income taxes
    
773
    
9,592
    
6,369
    
18,106
  
Provision for income taxes
    
131
    
3,338
    
1,751
    
6,295
  
Net income
 
$
642
  
$
6,254
  
$
4,618
  
$
11,811
  
Basic earnings per share
  
$
0.06
  
$
0.59
  
$
0.43
  
$
1.11
  
Diluted earnings per share
  
$
0.06
  
$
0.57
  
$
0.42
  
$
1.08
  
See accompanying notes to consolidated financial statements

-4-

Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
   
Common Stock
      
Accumulated other
      
 
(Amounts in thousands)
  
Number of shares
  
Amounts
  
Retained earnings
  
Comprehensive (loss) gain
  
Total
  
Balance, December 31, 2005
    
10,575
  
$
59,785
  
$
65,049
  
$
(2,589
)
$
122,245
  
Exercise of stock options, including tax benefit of $879
    
145
    
3,056
    
-
    
-
    
3,056
  
Effect of share-based payment expense
    
-
    
435
    
-
    
-
    
435
  
Net change in fair value of available for sale investment securities, net of tax effect of $2,155(1)
    
-
    
-
    
-
    
(2,893
)
  
(2,893
)
Net change in fair value of interest rate floor, net of tax benefit of $215(2)
    
-
    
-
    
-
    
(296
)
  
(296
)
Cash dividends
    
-
    
-
    
(1,387
)
  
-
    
(1,387
)
Net income
    
-
    
-
    
11,811
    
-
    
11,811
  
Balance, June 30, 2006
    
10,720
  
$
63,276
  
$
75,473
  
$
(5,778
)
$
132,971
  
                                 
Balance, December 31, 2006
    
10,761
  
$
64,586
  
$
84,614
  
$
(1,620
)
$
147,580
  
Exercise of stock options, including tax benefit of $23
    
29
    
438
    
-
    
-
    
438
  
Effect of share-based payment expense
    
-
    
850
    
-
    
-
    
850
  
Net change in fair value of available for sale investment securities, net of tax effect of $1,865
    
-
    
-
    
-
    
(2,577
)
  
(2,577
)
Net change in fair value of interest rate floor, net of tax effect of $15(3)
    
-
    
-
    
-
    
20
    
20
  
Cash dividends
    
-
    
-
    
(2,052
)
  
-
    
(2,052
)
Net income
    
-
    
-
    
4,618
    
-
    
4,618
  
Balance, June 30, 2007
    
10,790
   $
65,874
   $
87,180
   $
(4,177
)
 $
148,877
  
(1)  Includes reclassification adjustment for net gains included in net income of $361 (net of $261 tax expense).
(2)  Includes reclassification adjustment for net losses included in net income of $5 (net of $3 tax benefit).
(3)  Includes reclassification adjustment for net losses included in net income of $116 (net of $83 tax benefit).
See accompanying notes to consolidated financial statements

-5-

Consolidated Statements of Comprehensive Income
(Unaudited)
   
For the six months ended June 30,
  
(Amounts in thousands)
  
2007
  
2006
  
Net income
  
$
4,618
  
$
11,811
  
Unrealized gain (loss) on securities arising during the year, net
    
(2,577
)
  
(2,532
)
Unrealized gain (loss) on interest rate floor arising during the year, net
    
(96
)
  
(301
)
Reclassification adjustment for losses realized in net income, net of tax (benefit of $83 in 2007 and expense of $258 in 2006 for the time periods presented)
    
116
    
(356
)
Comprehensive income
  
$
2,061
  
$
8,622
  
See accompanying notes to consolidated financial statements

-6-

Consolidated Statements of Cash Flows
(Unaudited)
   
Six months ended June 30,
  
(Dollars in thousands)
    
2007
 
 
2006
  
Operating activities:
              
Net income
 
$
4,618
  
$
11,811
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Provision for loan losses
    
3,913
    
200
  
Depreciation, amortization and accretion, net
    
4,247
    
3,545
  
Origination of loans held for sale
    
(4,589
)
  
(2,236
)
Proceeds from sales of loans
    
4,810
    
1,543
  
Gain on sale of loans
    
(254
)
  
(112
)
Gain on sale of AFS securities
    
-
    
(622
)
Increase in cash value of life insurance
    
(839
)
  
(600
)
Non-cash share based payment expense
    
850
    
435
  
Net decrease in interest receivable & other assets
    
6,665
    
14,569
  
Gain on sale of other real estate owned
    
(102
)
  
-
  
Net (increase) decrease in accrued interest, taxes and other liabilities
    
(1,660
)
  
2,282
  
Net cash provided by operating activities
    
17,659
    
30,815
  
               
Investing activities:
              
Investment securities purchased - available for sale securities
    
(196
)
  
(2,762
)
Investment securities purchased - held to maturity securities
    
-
    
(3,659
)
Proceeds from maturities of available for sale investment securities
    
16,899
    
28,713
  
Proceeds from maturities of held to maturity investment securities
    
5,642
    
8,196
  
Proceeds from sales of available for sale securities
    
1,917
    
19,368
  
Net decrease in time deposits at other institutions
    
250
    
-
  
Proceeds from the sale of other real estate owned
    
102
    
-
  
Loans purchased
    
(9,577
)
  
(30,015
)
Net increase in loans
    
(79,003
)
  
(99,360
)
Purchases of premises and equipment
    
(6,276
)
  
(8,332
)
Net cash used in investing activities
    
(70,242
)
  
(87,851
)
               
Financing activities:
              
Net (decrease) increase in demand, NOW and savings deposits
    
(49,297
)
  
(128,051
)
Net (decrease) increase in certificates of deposit
    
(52,001
)
  
198,285
  
Net increase (decrease) in other borrowings
    
30,612
    
(46,337
)
Issuance of subordinated debentures
    
-
    
15,464
  
Payment of cash dividends
    
(2,052
)
  
(1,387
)
Exercise of stock options
    
415
    
2,177
  
Tax benefits related to exercise of stock options
    
23
    
879
  
Net cash (used in) provided by financing activities
    
(72,300
)
  
41,030
  
               
Net decrease in cash and cash equivalents
    
(124,883
)
  
(16,006
)
               
Cash and cash equivalents at beginning of period
    
195,533
    
91,581
  
Cash and cash equivalents at end of period
  
$
70,650
  
$
75,575
  
               
Supplemental disclosure of noncash investing and financing activities:
              
Interest rate floor unrealized gain (loss), net of taxes
  
$
20
  
$
(296
)
Interest paid
    
27,218
    
19,758
  
Income tax payments
    
1,900
    
5,200
  
Investment securities unrealized gain (loss), net of tax
  
$
(2,577
)
$
(2,893
)
See accompanying notes to consolidated financial statements

-7-

Notes to Consolidated Financial Statements
June 30, 2007 and December 31, 2006
(Unaudited)

GENERAL COMPANY

Capital Corp of the West (the “Company”) is a bank holding company incorporated under the laws of the State of California on April 26, 1995. The Company at June 30, 2007 had total assets of $1.89 billion and total shareholders’ equity of $148.877 million. On November 1, 1995, the Company became registered as a bank holding company and is the holder of all of the capital stock of County Bank (the “Bank”). The Company's primary asset and source of income is the Bank. As of August 7, 2007, the Company had outstanding 10,789,944 shares of Common Stock, no par value, held by approximately 1,700 shareholders. There were no preferred shares outstanding at August 7, 2007. The Company has one wholly-owned inactive non-bank subsidiary, Capital West Group (“CWG”). The Bank has two wholly-owned subsidiaries, Merced Area Investment & Development, Inc. (“MAID”) a real estate company and County Asset Advisors (“CAA”), CAA is currently inactive, and MAID has limited operations serving as the owner of certain bank properties. All references herein to the Company includes all subsidiaries of the Company, the Bank and the Bank's subsidiaries, unless the context otherwise requires. The Company is also the parent of County Statutory Trust I, County Statutory Trust II, and County Statutory Trust III, which are all trust subsidiaries established to facilitate the issuance of trust preferred securities.

GENERAL BANK

The Bank was organized on August 1, 1977, as County Bank of Merced, a California state banking corporation. The Bank commenced operations in 1977. In November 1992, the Bank changed its legal name to County Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits. The Bank is a member of the Federal Reserve System.

INDUSTRY AND MARKET AREA

 
County Bank is a community bank with operations located mainly in the San Joaquin Valley of Central California with small operations in the San Francisco Bay Area. The corporate headquarters of the Company and the Bank’s main branch facility are located at 550 West Main Street, Merced, California. In addition to this facility, there are three support centers in downtown Merced with an additional square footage of 33,000 square feet of office space.

The Bank currently has 27 branch operations located in the Central Valley, 1 branch operation in San Francisco, and 1 branch operation in San Jose. The Central Valley operations include branches located in: Merced (2), Atwater, Los Banos, Hilmar, Sacramento, Sonora, Turlock (2), Modesto (2), Riverbank, Ceres, Newman, Dos Palos, Livingston, Mariposa, Madera, Clovis (2), Fresno (5), Delhi, and Stockton. The Bank owns eleven of these branch facilities and the remaining eighteen facilities are leased. The Management of the Bank believes that the facilities will be adequate to accommodate operations for the foreseeable future.

OTHER FINANCIAL NOTES

All adjustments which in the opinion of Management are necessary for a fair presentation of the Company’s financial position at June 30, 2007 and December 31, 2006 and the results of operations for the three and six month periods ended June 30, 2007 and 2006, and the statements of cash flows for the three and six months ended June 30, 2007 and 2006 have been included therein. The interim results for the six and three months ended June 30, 2007 are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2006.

-8-

In the opinion of management, the accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.

Cash and cash equivalents on the Consolidated Statement of Cash Flows include cash, noninterest bearing deposits in other banks, and federal funds sold.

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

The following table provides a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation of the three and six month periods ended June 30, 2007 and 2006:

   
For The Three Months
  
For The Six Months
  
   
Ended June 30,
  
Ended June 30,
  
(Dollars in thousands, except per share data)
  
2007
  
2006
  
2007
  
2006
  
Basic EPS computation:
                  
Net income
  
$
642
  
$
6,254
  
$
4,618
  
$
11,811
  
Average common shares outstanding
    
10,783
    
10,687
    
10,779
    
10,643
  
Basic EPS
  
$
0.06
  
$
0.59
  
$
0.43
  
$
1.11
  
                           
Diluted EPS Computations:
                          
Net income
  
$
642
  
$
6,254
  
$
4,618
  
$
11,811
  
Average common shares outstanding
   
10,783
    
10,687
    
10,779
    
10,643
  
Effect of stock options
    
166
    
264
    
179
    
292
  
     
10,949
    
10,951
    
10,958
    
10,935
  
Diluted EPS
  
$
0.06
  
$
0.57
  
$
0.42
  
$
1.08
  

BORROWED FUNDS

For the six months ended June 30, 2007, the Company increased other borrowings which were obtained primarily from the Federal Home Loan Bank. The increase in other borrowings of $30,612,000 was used to fund a portion of the decrease in the Bank’s brokered deposit balances and an increase in the Bank’s gross loan balances.

-9-

SHARE-BASED PAYMENT

The Company maintains a stock option plan for certain directors, executives, and officers. The plan stipulates that (i) all options have an exercise price equal to the fair market value on the date of grant; (ii) all options have a ten-year term and become exercisable as follows: 25% at date of issuance and 25% per year for the subsequent three years; and (iii) all must be exercised within 90 days following termination of employment or they expire. The Company’s stock option plan is designed to provide equity compensation to officers and directors that is based on Company stock price performance. The shares issued pursuant to the Company’s plan are newly issued, registered and non-restrictive.

On January 1, 2006, the Company began recording share-based payment expense in accordance with Statement of Financial Accounting Standards No. 123-R, Share-based Payment, (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified prospective transition method provided for under SFAS 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock option awards now includes quarterly amortization of the remaining unvested portion of stock options outstanding prior to January 1, 2006. Share-based payment expense was recorded as a non-cash expense increase in salaries and benefits expense, which had the effect of reducing net income, earnings per share, and diluted earnings per share. Share-based payment expense is recorded on a ratable basis in the period in which the stock option vests. The Company uses the Black-Scholes-Merton closed form model, an acceptable model under SFAS 123R, for estimating the fair value of stock options. For the valuation of stock options, the Company used the following assumptions: a risk free rate of 5.1%; a volatility rate of 26.63%; an expected dividend rate of 1.64%; and an expected term of 6.32 years for the three months ended June 30, 2007 and a risk free rate of 4.82%; a volatility rate of 31.86%; an expected dividend rate of 0.85%; and an expected term of 5.88 years for the three months ended June 30, 2006.

Information as Reported in the Financial Statements

The following table presents the stock option compensation expense included in the Company’s Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2007 and June 30, 2006:

   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2007
  
June 30, 2006
  
June 30, 2007
  
June 30, 2006
  
(Dollars in thousands except per share data)
                  
Stock option compensation expense
  
$
301
  
$
209
  
$
850
  
$
435
  
Tax benefit recorded related to stock option compensation expense
    
(37
)
  
(18
)
  
(128
)
  
(28
)
Decrease in net income
  
$
264
  
$
191
  
$
722
  
$
407
  
Effect on:
                          
Net income per share - basic
  
$
(0.02
)
$
(0.02
)
$
(0.07
)
$
(0.04
)
Net income per share - diluted
  
$
(0.02
)
$
(0.02
)
$
(0.07
)
$
(0.04
)
 
Options activity during the first six months of 2007 is as follows:

(Shares in thousands)
  
# of shares
  
Weighted-Average exercise price per share
  
Outstanding at January 1, 2007
    
680
  
$
20.73
  
Options granted
    
181
  
$ 
29.46
  
Options exercised
    
(29
)
 $
14.23
  
Options forfeited
    
-
  
$ 
-
  
Outstanding at June 30, 2007
    
832
   $ 
22.85
  
Exercisable at June 30, 2007
    
608
   $ 
19.91
  
 
-10-

Options grants during the first six months of 2007:

   
June 30,
  
(Shares in thousands)
  
2007
  
2006
  
   
# of shares
  
Weighted-Average fair value per share
  
# of shares
  
Weighted-Average fair value per share
  
Options granted
    
181
  
$
9.32
    
99
  
$
11.83
  

Option vesting activity that occurred during the first six months of 2007:

(Shares in thousands)
  
# of shares
  
Weighted-Average fair value per share
  
Nonvested options at January 1, 2007
    
115
  
$
11.17
  
Options granted
    
181
  
$
9.32
  
Options vested
    
(72
)
$
10.15
  
Options forfeited
    
-
  
$ 
-
  
Nonvested options at June 30, 2007
    
224
  
$
10.00
  
 
Vested option summary information as of June 30, 2007 is as follows:
 
(Shares and dollars in thousands, except per share data)
  
# of shares
  
Aggregate intrinsic value
  
Weighted-Average remaining contractual life in years
  
Weighted-Average exercise price per share
  
Vested options exercisable at June 30, 2007
    
608
  
$
2,462
    
6.31
  
$
19.91
  
Total options outstanding at June 30, 2007
    
832
  
$
924
    
7.11
  
$
22.85
  

The vesting schedule for each option holder’s stock option contract is identical to the exercise schedule for each option contract. The total intrinsic value of options exercised was $402,000 and $1,021,000 for the six months ended June 30, 2007 and June 30, 2006. Intrinsic value is defined as positive difference between the current market price for the underlying stock and the strike price of an option. The exercise price must be less than the current market price of the underlying stock to have intrinsic value. The total fair value of shares vested was $731,000 and $296,000 for the six months ended June 30, 2007 and 2006. Total future compensation expense related to non-vested awards was $1,895,000 with a weighted average period to be recognized of 2.22 years as of June 30, 2007. There are 642,000 authorized shares remaining available for future grant under the Company’s stock option plan.
 
-11-

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires that management make a determination as to whether each tax position is more-likely-than-not to be sustained under tax authority examination, based on the technical merits of the position. If the more-likely-than-not threshold is met, management must measure the benefit of each position to determine the amount of benefit to recognize in the financial statements. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in: (a) an increase in a liability for income taxes payable or a reduction in an income tax refund; (b) a reduction in a deferred tax asset or an increase in a deferred tax liability; or both. This interpretation was effective for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material impact on the Company’s Consolidated Financial Statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, "Employers’ Fair Value Measurements” which defines and establishes a framework for measuring fair value used in FASB pronouncements that require or permit fair value measurement. This statement expands disclosures using fair value to measure assets and liabilities in interim and annual periods subsequent to the period of initial recognition. SFAS No. 157 is effective for financial statements issued for fiscal years after November 15, 2007, and interim periods within those years. Management is currently evaluating the impact the adoption of SFAS 157 will have on its financial position and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), which creates an alternative measurement method for certain financial assets and liabilities. SFAS 159 permits fair value to be used for both the initial and subsequent measurements on a contract-by-contract election, with changes in fair value to be recognized in earnings as those changes occur. This election is referred to as the “fair value option”. SFAS 159 also requires additional disclosures to compensate for the lack of comparability that will arise from the use of the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted as of the beginning of a company’s fiscal year, provided the company has not yet issued financial statements for that fiscal year. Management is currently evaluating the impact the adoption of SFAS 159 will have on its financial position and results of operations and has decided not to early adopt SFAS 159.

-12-


The following Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, “intends,” “plans,” “assumes,” “projects,” “predicts,” “forecasts,” and variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements.

Readers of the Company’s Form 10-Q should not base their investment decisions solely on forward looking statements and should consider all uncertainties and risks discussed throughout this report, as well as those discussed in the Company’s 2006 Annual Report on Form 10-K filed on March 16, 2007. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made. Some possible events or factors that could occur that may cause differences from expected results include the following: the Company’s loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to sell, or purchase certain loans or loan portfolios; or sell or buy participations of loans; the quality and adequacy of management of our borrowers; industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographical conditions, the mix of the loan portfolio and management’s judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Company and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent on liquidity requirements and market volatility, as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities and the wholesale and retail funding sources of the Company.

The Company is also exposed to the potential of losses arising from adverse changes in market rates 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 various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation and state regulators, whose policies and regulations could affect the Company’s results.

Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local and regional banks, savings and loan associations, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities which offer financial services; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and their integration into the Company, civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences or acts of this type, outbreak or escalation of hostilities in which the United States is involved, any declaration of war by the U.S. Congress or any other national or international calamity, crisis or emergency changes in laws and regulations, recently issued accounting pronouncements, government policies, regulations, and their enforcement (including Bank Secrecy Act-related matters, taxing statutes and regulations); restrictions on dividends that our subsidiaries are allowed to pay to us; the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulation on internal control; and management’s ability to manage these and other risks. For additional information relating to the risks of the Company's business see "Risk Factors" in the Company's Annual Report on Form 10-K for 2006 and in Part II Item 1A of this report.

-13-

Critical accounting policies and estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses and reserve for unfunded loan commitments, valuation of deferred income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates. (See caption “Allowance for Loan Losses” below in the current Form 10-Q and in the Company’s 2006 annual report for a more detailed discussion).
 
The following discussion and analysis is designed to provide a better understanding of 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 the Consolidated Financial Statements of the Company and the Notes thereto included in the Company’s 2006 Annual Report and Form 10-K.
 
Results of Operations
 
Three and Six Months Ended June 30, 2007 Compared With Three and Six Months Ended June 30, 2006
 
OVERVIEW
 
For the three and six months ended June 30, 2007 the Company reported net income of $642,000 and $4,618,000. This compares to $6,254,000 and $11,811,000 for the comparative periods in 2006 and represents a decrease of $5,612,000 or 90% and $7,193,000 or 61%. Basic earnings per share were $0.06 and $0.43 and diluted earnings per share were $0.06 and $0.42 for the three and six months ended June 30, 2007. This compares to basic earnings per share of $0.59 and $1.11 and diluted earnings per share were $0.57 and $1.08 for the three and six months ended June 30, 2006. This was a decrease of $0.53 and $0.68 per share for basic and $0.51 and $0.66 for diluted earnings per share for the three and six months ended June 30, 2007. The decrease in net income is primarily attributable to an increase in the provision for loan losses recorded of $3,513,000 and $3,713,000 for the three and six months ended June 30, 2007 compared to the same time periods in 2006. The increase in the provision was primarily attributable to a specific reserve recorded against a housing development loan in Rocklin California, in the amount of $3,231,000. For more information related to the provision for loan losses, see the section titled “NONPERFORMING ASSETS” on page 27 of this report. The increase in the provision for loan loss was combined with a contraction in the net interest margin and an increase in noninterest expense which resulted in decreased net income for the three and six months ended June 30, 2007 compared to the same time periods in 2006. The decrease in net interest margin was primarily attributable to higher prevailing interest rates paid on deposits and a change in the deposit portfolio’s mix of deposits. The increase in noninterest expense has primarily been driven by a specific reserve of $1,519,000 related to the unfunded commitments recorded in the second quarter of 2007 related to the aforementioned housing development loan in Rocklin California, increased costs associated with branch expansion, and acquisition expenses. For more information related to the specific reserve recorded in noninterest expense, see the section titled “RESERVE FOR UNFUNDED COMMITMENTS” on page 32 of this report. The Bank has opened seven new branch facilities in eighteen months. These new branches have driven up salary and benefit costs by staffing needs, additional equipment costs, and depreciation of new facilities. The annualized return on average assets was 0.15% and .50% for the three and six months ended June 30, 2007 compared to 1.41% and 1.35% for the three and six months ended June 30, 2006. The Company's annualized return on average equity of 1.68% and 6.18% for the three and six months ended June 30, 2007 compared to 19.10% and 18.38% for the three and six months ended June 30, 2006.

-14-
 
NET INTEREST INCOME
 
The Company's primary source of income is net interest income and represents the difference between interest income and fees derived from earning assets and interest paid on interest bearing liabilities. The following table illustrates the results and changes in interest income and interest expense for the dates indicated.

   
For the three months ended June 30,
  
For the six months ended June 30,
  
(Dollars in thousands)
  
2007
  
2006
  
Percent change
  
2007
  
2006
  
Percent change
  
Total interest income
  
$
31,297
  
$
30,406
    
2.9
%
$
62,512
  
$
58,053
    
7.7
%
Total interest expense
    
14,300
    
10,930
    
30.8
%
  
28,771
    
20,219
    
42.3
%
Net interest income
  
$
16,997
  
$
19,476
    
(12.7
)%
$
33,741
  
$
37,834
    
(10.8
)%
 
The following table illustrates the average balances affecting interest income and expense, and interest earned or paid on those balances on a tax adjusted basis for the periods indicated.
 
   
For the three months ended June 30,
  
For the six months ended June 30,
  
(Dollars in thousands)
  
2007
  
2006
  
Percent change
  
2007
  
2006
  
Percent change
  
Average interest earning assets
  
$
1,681,495
  
$
1,639,847
    
2.5
%
$
1,709,628
  
$
1,621,885
    
5.4
%
Average interest bearing liabilities
  
$
1,430,610
  
$
1,340,360
    
6.7
%
$
1,452,184
  
$
1,325,693
    
9.5
%
Average interest rate earned
    
7.54
%
  
7.51
%
  
0.4
%
  
7.45
%
  
7.30
%
  
2.1
%
Average interest rate paid
    
4.01
%
  
3.27
%
  
22.6
%
  
4.00
%
  
3.08
%
  
29.9
%
Net interest margin
    
4.13
%
  
4.84
%
  
(14.7
)%
  
4.05
%
  
4.78
%
  
(15.3
)%
 
The level of interest income is affected by changes in volume of and rates earned on interest-earning assets. Interest-earning assets consist primarily of loans, investment securities and federal funds sold. The increase in total interest income for the three and six months ended June 30, 2007 was primarily the result of an increase in both the volume of interest-earning assets and the average interest rates earned. The increase in average interest earning assets during 2007 was made possible by increased asset generation from our existing branch network with funding being provided from the reduction in federal funds sold and the issuance of other borrowings. The increase in interest rates earned during 2007 compared to the same period in 2006 was primarily the result of an increase in prevailing market interest rates. Management believes that while deposit competition will likely continue, the dramatic increase in interest rates paid on deposits will likely slow. Short term interest rates for the three and six months ended June 30, 2007 as compared to the same period in 2006 have increased as a result of the Federal Reserve Board’s Open Market Committee actions that increased short term rates through June 2006.
 
Interest expense is a function of the volume and rates paid on interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. The increase in interest rates paid during the three and six months ended June 30, 2007 when compared to 2006 was primarily the result of an increase in prevailing interest rates and a change in the mix within the deposit portfolio. The increase in interest-bearing liabilities during 2007 when compared to the same period in 2006 was primarily the result of an increase in time and savings deposits. The increase in savings deposits was primarily the result of a decision the Bank made in September of 2006 to retain deposits that the Bank swept out at the end of the day to other depository institutions. This action allowed the Bank to retain $49,840,000 in savings deposits in September 2006, which grew to $91,152,000 at December 31, 2006 and has since contracted slightly to $80,098,000 as of June 30, 2007. Average savings deposits accounted for 28% and 27% of the average deposit portfolio for the three and six months ended June 30, 2007 compared to 24% and 26% for the same time periods in 2006. The increase in time deposits in 2007 was partially the result of customers reallocating funds from noninterest bearing demand deposit accounts to interest bearing time accounts. The Bank has also increased market penetration into existing markets and expanded into new markets, which has increased deposits in the savings and time segments of the deposit portfolio. Management decided to reduce the amount of federal funds sold allowing the Bank to reduce high cost brokered time deposits to $15,594,000 as of June 30, 2007 compared to $92,943,000 at December 31, 2006. Average time deposits accounted for 41% and 42% of the average deposit portfolio for the three and six months ended June 30, 2007 compared to 42% and 38% for the same time periods in 2006. The increase in the time and savings deposit segment of the deposit portfolio was coupled with declines in the demand deposit segment of the deposit portfolio causing the average interest rate paid on interest bearing liabilities to increase.

-15-
 
The net interest margin provides a measurement of the Company's ability to utilize funds profitably during the period of measurement. The Company's decrease in the net interest margin for the first three and six months ended June 30, 2007 when compared to the same period in 2006 was primarily attributable to a larger percentage increase in yields paid for deposits than yields earned on loans. Loans as a percentage of average interest-earning assets increased to 74% and 72% for the three and six months ended June 30, 2007 as compared with 71% and 70% for the same time period in 2006. The increase in loans as a percentage of interest-earning assets is mainly attributable to increased loan production generated through our branch network. For the three and six months ended June 30, 2007 average loans grew to $1,251,297,000 and $1,237,143,000 from $1,171,876,000 and $1,139,997,000. The increase in average loan growth equated to 6.8% and 8.5% respectively. The loan growth occurred primarily in the non-residential real estate mortgage loan segment of the portfolio. Net interest income and the net interest margin are presented in the table on pages 16 and 17 on a taxable-equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on a 35% marginal federal tax rate.
 
AVERAGE BALANCES AND RATES EARNED AND PAID
 
The following table presents condensed average balance sheet information for the Company, together with average interest rates earned and paid on the various sources and uses of its funds for each of the periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded.

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
   
Three months ended June 30, 2007
  
Three months ended June 30, 2006
  
(Dollars in thousands)
  
Average Balance
  
Taxable Equivalent Interest
  
Taxable Equivalent Yield/rate
  
Average Balance
  
Taxable Equivalent Interest
  
Taxable Equivalent Yield/rate
  
Assets
                          
Federal funds sold
  
$
22,513
  
$
298
    
5.31
%
$
3,511
  
$
44
    
5.03
%
Time deposits at other financial institutions
    
221
    
3
    
5.44
    
350
    
4
    
4.58
  
Taxable investment securities (1)
    
308,193
    
3,736
    
4.86
    
360,428
    
4,204
    
4.68
  
Nontaxable investment securities (1)
    
99,271
    
1,194
    
4.82
    
103,682
    
1,259
    
4.87
  
Loans, gross: (2)
    
1,251,297
    
26,367
    
8.45
    
1,171,876
    
25,208
    
8.63
  
Total interest-earning assets
    
1,681,495
    
31,598
    
7.54
  
$
1,639,847
  
$
30,719
    
7.51
  
Allowance for loan losses
    
(14,278
)
              
(15,188
)
            
Cash and due from banks
    
42,218
                
45,724
              
Premises and equipment, net
    
46,218
                
33,536
              
Interest receivable and other assets
    
77,076
                
67,550
              
Total assets
  
$
1,832,729
              
$
1,771,469
              
                                       
Liabilities And Shareholders' Equity
                                      
Negotiable order of withdrawal
  
$
239,261
  
$
837
    
1.40
%
$
203,459
  
$
305
    
0.60
  %
Savings deposits
    
414,123
    
3,510
    
3.40
    
341,294
    
1,913
    
2.25
  
Time deposits
    
615,893
    
7,420
    
4.83
    
588,581
    
5,970
    
4.07
  
Total interest-bearing deposits
    
1,269,277
    
11,767
    
3.72
    
1,133,334
    
8,188
    
2.92
  
Federal funds purchased
    
336
    
5
    
5.97
    
-
    
-
    
-
  
Other borrowings
    
129,037
    
1,853
    
5.76
    
189,171
    
2,344
    
4.97
  
Junior subordinated debentures
    
31,960
    
675
    
8.47
    
17,855
    
398
    
8.94
  
Total interest-bearing liabilities
    
1,430,610
    
14,300
    
4.01
  
$
1,340,360
  
$
10,930
    
3.27
  
                                       
Noninterest-bearing deposits
    
234,545
                
284,520
              
Accrued interest, taxes and other liabilities
    
14,986
                
15,611
              
Total liabilities
    
1,680,141
              
$
1,640,491
              
                                       
Total shareholders' equity
    
152,588
                
130,978
              
Total liabilities and shareholders' equity
  
$
1,832,729
              
$
1,771,469
              
                                       
Net interest income and margin (3)
        
$
17,298
    
4.13
%
      
$
19,789
    
4.84
%
 
(1) Tax-equivalent adjustments included in the nontaxable investment securities portfolio are $290,000 and $295,000 for the three months ended June 30, 2007 and 2006. Tax equivalent adjustments included in the taxable investment securities created by a dividends received deduction were $11,000 and $18,000 for the three months ended June 30, 2007 and 2006.
(2) Amounts of interest earned included net loan fees of $1,004,000 and $833,000 for the three months ended June 30, 2007 and 2006, respectively.
(3) Net interest margin is computed by dividing net interest income by total average interest-earning assets.

-16-

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
   
Six months ended June 30, 2007
  
Six months ended June 30, 2006
  
 
(Dollars in thousands)
  
Average
Balance
  
Taxable
Equivalent
Interest
  
Taxable
Equivalent
Yield/Rate
  
Average
Balance
  
Taxable
Equivalent Interest
  
Taxable
Equivalent Yield/Rate
  
Assets
                          
Federal funds sold
  
$
58,703
  
$
1,533
    
5.27
%
$
4,049
  
$
93
    
4.63
%
Time deposits at other financial institutions
    
285
    
8
    
5.66
    
350
    
9
    
5.19
  
Taxable investment securities
   
313,532
    
7,522
    
4.84
    
375,431
    
8,650
    
4.65
  
Nontaxable investment securities
   
99,965
    
2,424
    
4.89
    
102,058
    
2,507
    
4.95
  
Loans, gross:
   
1,237,143
    
51,646
    
8.42
    
1,139,997
    
47,431
    
8.39
  
Total interest-earning assets
  
$
1,709,628
  
$
63,133
    
7.45
  
$
1,621,885
  
$
58,690
    
7.30
  
Allowance for loan losses
    
(14,152
)
              
(15,178
)
            
Cash and due from banks
    
43,164
                
47,605
              
Premises and equipment, net
    
45,179
                
31,743
              
Interest receivable and other assets
    
76,866
                
67,522
              
Total assets
  
$
1,860,685
              
$
1,753,577
              
                                       
Liabilities And Shareholders' Equity
                                      
Negotiable order of withdrawal
  
$
229,651
  
$
1,422
    
1.25
%
$
209,104
  
$
665
    
0.64
%
Savings deposits
    
413,734
    
7,020
    
3.42
    
363,106
    
3,782
    
2.10
  
Time deposits
    
641,697
    
15,263
    
4.80
    
532,460
    
10,242
    
3.88
  
Total interest bearing deposits
    
1,285,082
    
23,705
    
3.72
    
1,104,670
    
14,689
    
2.70
  
Federal funds purchased
    
169
    
5
    
5.97
    
-
    
-
    
-
  
Other borrowings
    
134,973
    
3,711
    
5.54
    
203,844
    
4,757
    
4.71
  
Subordinated Debentures
    
31,960
    
1,350
    
8.52
    
17,179
    
773
    
9.07
  
Total interest-bearing liabilities
  
$
1,452,184
  
$
28,771
    
4.00
  
$
1,325,693
  
$
20,219
    
3.08
  
                                       
Non-interest bearing deposits
    
242,804
                
284,321
              
Accrued interest, taxes and other liabilities
    
14,940
                
15,014
              
Total liabilities
  
$
1,709,928
              
$
1,625,028
              
                                       
Total shareholders' equity
    
150,757
                
128,549
              
Total liabilities and shareholders' equity
  
$
1,860,685
              
$
1,753,577
              
                                       
Net interest income and margin
       
$
34,362
    
4.05
%
      
$
38,471
    
4.78
%
 
(1) Tax-equivalent adjustments included in the nontaxable investment securities portfolio are $589,000 and $591,000 for the six months ended June 30, 2007 and 2006. Tax equivalent adjustments included in the taxable investment securities created by a dividends received deduction were $32,000 and $46,000 for the six months ended June 30, 2007 and 2006.
(2) Amounts of interest earned included net loan fees of $1,742,000 and $1,630,000 for the six months ended June 30, 2007 and 2006, respectively.
(3) Net interest margin is computed by dividing net interest income by total average interest-earning assets.

-17-
 
NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
 
The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in average asset and liability balances (Volume) and changes in average interest rates (Rate) and the total net change in interest income and expenses on a tax equivalent basis. The changes in interest due to both rate and volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

Net Interest Income Variance Analysis:
 
   
Three months ended
  
   
June 30, 2007 compared to June 30, 2006
  
(Dollars in thousands)
  
Rate
  
Volume
  
Total
  
Increase (decrease) in interest income:
              
Federal funds sold
  
$
3
  
$
251
  
$
254
  
Time deposits at other institutions
    
-
    
(1
)
  
(1
)
Taxable investment securities
    
162
    
(630
)
  
(468
)
Tax-exempt investment securities
    
(12
)
  
(53
)
  
(65
)
Loans
    
(525
)
  
1,684
    
1,159
  
Total:
  
$
(372
)
$
1,251
  
$
879
  
                     
Increase in interest expense:
                    
Interest bearing demand
  
$
470
  
$
62
  
$
532
  
Savings deposits
    
1,127
    
470
    
1,597
  
Time deposits
    
1,163
    
287
    
1,450
  
Federal funds purchased
    
-
    
5
    
5
  
Other borrowings
    
334
    
(825
)
  
(491
)
Junior subordinated debentures
    
(22
)
  
299
    
277
  
Total:
    
3,072
    
298
    
3,370
  
Increase in net interest income
  
$
(3,444
)
$
953
  
$
(2,491
)
 

   
Six months ended
  
   
June 30, 2007 compared to June 30, 2006
  
(Dollars in thousands)
  
Rate
  
Volume
  
Total
  
Increase (decrease) in interest income:
              
Federal funds sold
  
$
14
  
$
1,426
  
$
1,440
  
Time deposits at other institutions
    
-
    
(1
)
  
(1
)
Taxable investment securities
    
62
    
(1,190
)
  
(1,128
)
Tax-exempt investment securities
    
(32
)
  
(51
)
  
(83
)
Loans
    
160
    
4,055
    
4,215
  
Total:
  
$
204
  
$
4,239
  
$
4,443
  
                     
Increase in interest expense:
                    
Interest bearing demand
   $
686
   $
71
   $
757
  
Savings deposits
    
2,650
    
588
    
3,238
  
Time deposits
    
2,689
    
2,332
    
5,021
  
Federal funds purchased
    
-
    
5
    
5
  
Other borrowings
    
198
    
(1,244
)
  
(1,046
)
Junior subordinated debentures
    
(6
)
  
583
    
577
  
Total:
    
6,217
    
2,335
    
8,552
  
Increase in net interest income
  
$
(6,013
)
$
1,904
  
$
(4,109
)
 
-18-
 
PROVISION FOR LOAN LOSSES
 
The provision for loan losses was $3,713,000 and $3,913,000 for the three and six months ended June 30, 2007 and $200,000 and $200,000 for the three and six months ended June 30, 2006, an increase of $3,513,000 and $3,713,000 in 2007. For an explanation of the increase in the provision for loan losses during 2007, see "ALLOWANCE FOR LOAN LOSSES" elsewhere herein. As of June 30, 2007 the allowance for loan losses was $17,661,000 or 1.35% of total loans compared to $14,031,000 or 1.15% of total loans as of December 31, 2006. At June 30, 2007, nonperforming assets totaled $14,300,000 or 0.76% of total assets, nonperforming loans totaled $14,240,000 or 1.09% of total gross loans and the allowance for loan losses totaled 124.02% of nonperforming loans. At December 31, 2006, nonperforming assets totaled $2,435,000 or 0.12% of total assets, nonperforming loans totaled $2,375,000 or 0.19% of total gross loans and the allowance for loan losses totaled 590.78% of nonperforming loans. No assurance can be given that nonperforming loans will not increase or that the allowance for loan losses will be adequate to cover losses inherent in the loan portfolio. For more information related to nonperforming loans, see the section titled “NONPERFORMING ASSETS” elsewhere herein.
 
NONINTEREST INCOME

Non-interest income increased by $212,000 and $539,000 or 6% and 9% to $3,634,000 and $6,593,000 for the three and six months ended June 30, 2007, respectively, compared to the same time periods in 2006. Service charges on deposit accounts increased by $585,000 and $869,000 or 39% and 30% to $2,089,000 and $3,794,000 for the three and six months ended June 30, 2007, respectively, compared with the same periods in 2006. The increase in service charges on deposit accounts for the three and six month period was the result of increased Bank focus on service charges as a way to increase noninterest income and a greater number of accounts opened than closed that incur service charges. The decrease in the gain on sale of securities was the result of a gain taken in the second quarter of 2006 of $622,000 on securities that were available for sale that did not reoccur in 2007. The increase of $137,000 and $240,000 for the three and six months ended June 30, 2007 in cash surrender value of life insurance policies was the result of higher average earning balances compared to the same time periods in 2006. Other categories of noninterest income had normal fluctuations in the ordinary course of business.

NONINTEREST EXPENSE

Noninterest expenses increased by $3,039,000 and $4,470,000 or 23% and 17% to $16,145,000 and $30,052,000 for the three and six months ended June 30, 2007 compared to the same time periods in 2006. The primary components of non-interest expenses were salaries and employee benefits, premises and occupancy expenses, equipment expenses, professional fees, supplies expenses, marketing expenses, intangible amortization and other operating expenses which includes the provision for unfunded commitments.

-19-

Salaries and related expenses increased by $133,000 and $1,082,000 or 2% and 8% to $7,468,000 and $15,276,000 for the three and six months ended June 30, 2007. This compares to the $7,335,000 and $14,194,000 for the same time periods in 2006. The increase was primarily the result of normal salary progression, increased support staff used to support branch operations, the staffing of new branch offices, regulatory compliance support functions, and increased expense in 2007 associated with share-based payment as part of salaries and related benefits. Share-based payment expense increased $82,000 and $415,000 for the three and six months ended June 30, 2007 compared to the same time periods in 2006. Premises and occupancy expense increased by $505,000 and $861,000 or 40% and 35% for the three and six months ended June 30, 2007 compared to the same time periods in 2006. The primary reason for the increase in 2007 was related to the opening of new branch facilities in 2006 and 2007. Equipment expense increased by $254,000 and $447,000 or 24% and 22% for the three and six months ended June 30, 2007 compared to the same time periods in 2006. The increase in equipment depreciation expense is related to the opening of new facilities and equipment upgrades in existing facilities. When comparing the results for the three and six months ended June 30, 2007 to the same periods in 2006, professional fees increased by $305,000 and $196,000 or 55% and 13%, respectively. The increase in professional fees is primarily attributable to increased fees associated with merger and acquisition activity which did not occur in 2006. Legal and consulting fees associated with merger and acquisition activity was $244,000 for the quarter ended June 30, 2007. Marketing expense increased primarily due to a marketing campaign of the thirty year anniversary of the Bank and certain time deposit promotions. Supplies expense decreased primarily because of increased attention to use of supplies and conservation. Other expenses increased primarily due to the provision for unfunded commitments increasing by $1,572,000 and $1,583,000 to $1,595,000 for the three and six months ended June 30, 2007 compared to $23,000 and $12,000 recorded for the three and six months ended June 30, 2006. The increase in the provision for unfunded commitments was driven primarily by a $1,519,000 reserve being recorded for mechanics liens that have been placed against property that secures a nonperforming construction loan based out of Rocklin California. For more information related to the nonperforming construction loan, see the section titled “NONPERFORMING ASSETS” on page 25 or for more information related to the provision for unfunded commitments, see the section titled “RESERVE FOR UNFUNDED COMMITMENTS” on page 29. Community support donations decreased primarily because they are provided as a percentage of income and have decreased as earnings have decreased.
 
PROVISION FOR INCOME TAXES
 
The Company recorded a decrease in the provision for income taxes of $3,207,000 and $4,544,000 or 96% and 72% for the three and six months ended June 30, 2007 compared to the expense recorded for the same time period in 2006. The Company recorded an effective tax rate of 17% and 27% for the three and six months ended June 30, 2007. For the same time periods in 2006, the Company recorded an effective tax rate of 35%. The decrease in the effective tax rate is the result of nontaxable income representing a greater percentage of income before taxes and the recognition of increasing tax credits related to investments in housing tax credit limited partnerships.
 
Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. We recognize both interest and penalties as a component of income tax expense. The Company did not have any accrued interest or penalties due to tax authorities at adoption or June 30, 2007. The Company has not recorded any cumulative effects of applying this interpretation as those positions that do not meet the threshold are not material to the Company's financial statements and due to management’s belief that all of the Company’s material tax positions are more-likely-than-not to be upheld, and fully realized upon audit. The Company files a consolidated federal income tax return and the Company files income tax returns in the State of California. We are not subject to federal income tax examinations for taxable years prior to 2003, or state examinations prior to 2002.

-20-
 
Financial Condition
 
Total assets at June 30, 2007 were $1,890,490,000, a decrease of $71,049,000 or 4% compared with total assets of $1,961,539,000 at December 31, 2006. Net loans were $1,293,433,000 at June 30, 2007, an increase of $82,703,000 or 7% compared with net loans of $1,210,730,000 at December 31, 2006. Deposits were $1,514,043,000 at June 30, 2007, a decrease of $101,298,000 or 6% compared with deposits of $1,615,341,000 at December 31, 2006. The decrease in total assets of the Company between December 31, 2006 and June 30, 2007 was primarily the result of federal funds sold being reduced by $122,455,000 to retire brokered deposits and fund reductions in other areas of the deposit portfolio. For further information on the reduction of brokered deposits, see the “NET INTEREST INCOME” section on page 15 of this report.
 
Total shareholders' equity was $148,877,000 at June 30, 2007, an increase of $1,297,000 or 1% from the $147,580,000 at December 31, 2006. The growth in shareholders’ equity between December 31, 2006 and June 30, 2007 was primarily achieved through the retention of accumulated earnings.
 
OFF-BALANCE SHEET COMMITMENTS
 
The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated.

   
June 30,
  
December 31,
  
(In thousands)
  
2007
  
2006
  
Letters of credit
  
$
6,939
  
$
6,739
  
Commitments to extend credit
    
445,272
    
445,189
  
Total
  
$
452,211
  
$
451,928
  

As a financial services provider; the Bank routinely commits to extend credit, including loan commitments, standby letters of credit and financial guarantees. A significant portion of commitments to extend credit may expire without being drawn upon. These commitments are subject to the same credit policies and approval process used for the Bank’s loans.

RETIREMENT PLANS

The Company has a supplemental retirement plan covering current and former executive officers. This plan is a nonqualified defined benefit plan and is unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the death benefits of these policies to offset the related retirement obligations. For more information on the life insurance plans, see the section titled “CASH VALUE OF LIFE INSURANCE” contained in this report.

The following table sets forth the net periodic benefit cost recognized for the plan:

(Dollars in thousands)
  
Three Months Ended June 30, 2007
  
Six Months Ended June 30, 2007
  
Net pension cost included the following components:
          
Service cost-benefits earned during the period
  
$
79
  
$
158
  
Interest cost on projected benefit obligation
    
53
    
106
  
Net periodic pension cost
  
$
132
  
$
264
  

During the six months ended June 30, 2007, the Company contributed and paid out as benefits $75,000 to participants under the plan. For the year ending December 31, 2007, the Company expects to contribute and pay out as benefits $150,000 to participants under the plans.

-21-

CASH VALUE OF LIFE INSURANCE
 
The Bank maintains certain cash surrender value life insurance policies to, among other things, partially offset the cost of employee and director benefit programs. The policies are also associated with a supplemental retirement plan for the Company's executive management and deferred retirement benefits for participating board members. The Company has purchased insurance on the lives of the participants and intends to hold these policies until their death to obtain the death proceeds associated with the policies. Income from these policies is reflected in non-interest income. At June 30, 2007, the Bank held $43,890,000 in cash surrender value of life insurance, an increase of $839,000 from the $43,051,000 maintained at December 31, 2006.
 
INVESTMENT IN HOUSING TAX CREDIT LIMITED PARTNERSHIPS
 
The Bank invests in housing tax credit limited partnerships to help meet the Bank’s Community Reinvestment Act low income housing investment requirements as well as to obtain federal and state income tax credits. These partnerships provide the funding for low-income housing projects that might not otherwise be built. The Bank had invested $12,254,000 and was committed to invest an additional amount of $1,546,000 in these partnerships as of June 30, 2007.

INVESTMENT SECURITIES

At June 30, 2007 the Bank’s investment securities included $5,093,000 of preferred stock issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These issues of preferred stock are tied to various short term indices ranging from the one year LIBOR interest rate to the five year U.S. Treasury rate. These securities have AA- credit ratings from the securities rating agencies and are callable by the issuer at par.

DERIVIATIVE INSTRUMENTS

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. To qualify for hedge accounting, the Company must comply with the detailed rules and strict documentation requirements at the inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship.

-22-

The Company’s objective in using derivatives is to reduce its exposure to variability in cash flows relating to receipts on its prime-based variable-rate loans. To accomplish this objective, the Company uses an interest rate floor contract to protect the Company against movements in interest rates below the floor’s strike rate over the life of the agreement. The interest rate floor contract is with Wachovia Bank that is effective from October 1, 2005 until September 1, 2010. The contract’s cost was $1,270,000, and that cost is being amortized over the life of the contract. The notional amount of the floor is $100,000,000 with a strike rate of 6.5% vs. the prime rate as published in the H15 bulletin from the Federal Reserve Bank for the first of each month. The interest rate floor contract is designated as a cash flow hedge of the overall changes in cash flows below the interest floor contract’s strike rate of 6.5% on the Company’s designated prime-based interest receipts. The hedged transactions are the forecasted interest receipts of the first prime-based interest payments received by the Company on designated prime-based loans each calendar month that, in aggregate for each month, are interest payments on $100 million principal of the Company’s then-existing pool of designated prime-based loans that reset on the first of every month. With respect to the $100 million principal of the Company’s then existing pool of designated prime-based loans, the interest floor contract specifically designates the hedged transaction to be (i) the forecasted interest receipts of the first prime-based interest receipts on $75 million principal of the Company loans with a specified spread to prime over 1% and (ii) the first prime-base interest receipts on $25 million principal of the Company loans with a specified spread to prime over 0.5%. The designation described above is consistent with the approach outlined in DIG Issue No. G25. DIG Issue No. G25 addresses the “first-payments-received technique” for identifying the hedged forecasted transactions in a cash flow hedge of the variable prime-based or other variable non-benchmark-rate-based interest payments for a rolling portfolio of prepayable interest-bearing financial assets or liabilities. The pool of designated prime-based loans being hedged contain no optionality (no embedded caps or floors). During 2007 and 2006, the floor was used to hedge the variable cash flows associated with existing variable-rate loan assets that are based on the prime rate. For accounting purposes, the interest floor contract is designated as a cash flow hedge of the overall changes in cash flows on the first prime-based interest payments received by the Company each calendar month during the term of the hedge that, in aggregate for each period, are interest payments on principal from specified portfolios equal to the notional amount of the floor. For more information on the interest rate floor see the Note 1 in the derivative instruments and hedging activities section of the Company’s 2006 Annual Report and Form 10-K.

Both prospective and retrospective assessments of hedge effectiveness are based on the approach described in SFAS 133 Implementation Issue No. G20, “Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge” (Issue G20) at inception and on an ongoing basis. Under this approach, the assessment of hedge effectiveness is based on total changes in the option’s cash flows. The Company performs its effectiveness assessments and measures ineffectiveness by comparing the actual option with a hypothetically perfect option, as discussed in Issue G20. Prospective and retrospective assessments of hedge effectiveness and measurements of hedge ineffectiveness are performed on a quarterly basis, when financial statements are reported. The effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings (“interest and fees on loans” for the hedging relationship described above) when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge, if any, is recorded as a gain or loss in the consolidated statement of income and comprehensive income as part of noninterest income or noninterest expense. The Company also monitors the risk of counterparty default on an ongoing basis.

Prepayments in hedged loan portfolios are treated in a manner consistent with the guidance in SFAS 133 Implementation Issue No. G25, “Cash Flow hedges: Using the First-Payments-Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans,” which allows the designated forecasted transactions to be the variable prime-rate-based interest payments on a rolling portfolio of prepayable interest-bearing loans using the first-payments-received technique, thereby allowing interest payments from prime-based loans that prepay to be replaced with interest payments from newly originated prime-based loans.

As of June 30, 2007, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes.

To the extent the hedging relationship is effective, changes in the fair value of the floor each period will be deferred in accumulated other comprehensive income (AOCI), and the floor purchase price will be reclassified from AOCI to earnings (amortized) as adjustments to interest income on loans.

-23-

The decrease of $165,000 or 53% in the fair value of the interest rate floor between December 31, 2006 and June 30, 2007 was primarily the result of a changing interest rate environment which caused a corresponding decrease in the probability that the Company will receive future cash inflows related to this contract. The Company recorded a reduction of interest income of $45,000 and $82,000 for the three and six month ended June 30, 2007 related to the amortization of the interest rate floor. The Company recorded the reduction as a reclassification from other comprehensive income of $48,000 with a tax benefit of $34,000 for the six months ended June 30, 2007. The Company recorded a reduction of interest income in the first half of 2006 of $8,000 related to the amortization of the interest rate floor. The Company recorded the reduction as a reclassification from other comprehensive income of $5,000 with a tax benefit of $3,000. In the second quarter of 2007 the hedge became partially ineffective, requiring the Company under SFAS 133 to record a charge of $117,000 in noninterest expense. The Company recorded the expense as a reclassification from AOCI of $68,000 with a tax benefit of $49,000.

Management is currently working to redesignate the hedge, in order to expand the scope of loans which can be included in the loan pools. This redesignation is expected to allow the hedge to remain 100% effective. If the hedge becomes ineffective in the future, management will evaluate the options available at that time, and take appropriate action based on the facts.

The fair value and notional amounts for the cash flow hedge at June 30, 2007 and December 31, 2006 are presented below.
 
  
June 30, 2007
  
December 31, 2006
  
(Dollars in thousands)
  
Fair Value
  
Notional Amount
  
Fair Value
  
Notional Amount
  
Purchased option, interest rate floor
  
$
149
  
$
100,000
  
$
314
  
$
100,000
  

LOANS

The Company concentrates its lending activities in five principal areas: commercial, agricultural, real estate construction, real estate mortgage, and consumer loans. Interest rates charged for loans made by the Company vary with the degree of risk, the size and term of the loan, borrowers’ depository relationships with the Company and prevailing market rates.

As a result of the Company’s loan portfolio mix, the future quality of these assets could be affected by any adverse trends in its geographic market or in the broader economy. These trends are beyond the control of the Company.

The Bank’s business activity is with customers located primarily in the counties of Fresno, Madera, Mariposa, Merced, Sacramento, San Francisco, San Joaquin, Stanislaus, Santa Clara and Tuolumne in the state of California. The consumer and small business loan portfolio consists of loans to small businesses, home equity, credit cards and the purchase of financing contracts principally from automobile and recreational vehicle dealers. Individual loans and lines of credit are made in a variety of ways. In many cases collateral such as real estate, automobiles and equipment are used to support the extension of credit. Repayment, however, is largely dependent upon the borrower’s personal cash flow.

Commercial lending activities are spread across a wide spectrum of customers including loans to businesses, construction and permanent real estate financing, short and long term agricultural loans for production and real estate purposes and SBA financing. In most cases, collateral is taken to secure and reduce the Bank’s credit risk. Each loan is submitted to an individual risk grading process as part of the Bank’s underwriting, but the borrowers’ ability to repay is dependent, in part, upon factors affecting the local and national economies.

-24-

The following table shows the composition of the loan portfolio of the Company by type of loan on the dates indicated:
(Dollars in thousands)
  
June 30, 2007
 
December 31, 2006
  
Loan Categories:
  
Dollar Amount
  
Percent of loans
  
Dollar Amount
  
Percent of loans
  
Commercial
  
$
337,633
    
26
%
$
320,121
    
26
%
Agricultural
    
90,870
    
7
    
81,568
    
7
  
Real estate construction
    
146,191
    
11
    
136,152
    
11
  
Real estate construction residential
    
41,664
    
3
    
41,081
    
3
  
Real estate mortgage
    
578,960
    
44
    
502,355
    
41
  
Real estate mortgage residential
    
24,516
    
2
    
39,725
    
3
  
Consumer
    
91,260
    
7
    
103,759
    
9
  
Total
    
1,311,094
    
100
%
  
1,224,761
    
100
%
Less allowance for loan losses
    
(17,661
)
        
(14,031
)
      
Net loans
  
$
1,293,433
        
$
1,210,730
        

The Bank’s loan portfolio continues to be well diversified in terms of loan products and geography. The Bank does not originate single family residential loans for the loan portfolio but merely functions in a loan brokerage capacity. The Bank does not carry any sub-prime residential loans in its portfolio. Our total residential real estate exposure totals $66 million (residential mortgages and liens on residential properties of $4 million, $20 million in home equity lines and residential construction loans of $42 million) or 5% of our loans. The Bank’s agricultural loans aggregate $91 million or 7% of our loans and include no citrus or poultry exposures as of June 30, 2007. While we are headquartered in Merced County, more than 71% of our real estate loans, by dollar amount, are actually located outside of Merced County.

The table that follows shows the regional distribution of the portfolio of real estate construction, real estate residential construction, real estate mortgage, and real estate residential mortgage on June 30, 2007.

(Dollars in thousands)
  
San Francisco Bay Area
  
Merced/
Mariposa
  
Stockton/
Modesto
  
Sacramento
  
Fresno/
Bakersfield
  
All Other
  
Total
  
Real estate construction
  
$
22,036
  
$
26,343
  
$
32,761
  
$
28,967
  
$
36,084
  
$
-
  
$
146,191
  
Real estate construction residential
    
4,975
    
5,956
    
6,263
    
8,209
    
16,261
    
-
    
41,664
  
Real estate mortgage
    
58,502
    
180,969
    
168,508
    
45,739
    
95,043
    
30,199
    
578,960
  
Real estate mortgage residential
    
1,063
    
11,835
    
7,931
    
582
    
3,105
    
-
    
24,516
  
Total
  
$
86,576
  
$
225,103
  
$
215,463
  
$
83,497
  
$
150,493
  
$
30,199
  
$
791,331
  
Owner occupied
    
26,502
    
102,454
    
79,945
    
33,021
    
64,098
    
10,771
    
316,791
  
Non-owner occupied
  
$
60,074
  
$
122,649
  
$
135,518
  
$
50,476
  
$
86,395
  
$
19,428
  
$
474,540
  

NONPERFORMING ASSETS

Nonperforming assets include non-accrual loans, loans 90 days or more past due, restructured loans and other real estate owned.
 
Nonperforming loans are those in which the borrower fails to perform in accordance with the original terms of the obligation and include loans on non-accrual status, loans past due 90 days or more and restructured loans. The Bank generally places loans on non-accrual status and accrued but unpaid interest is reversed against the current year's income when interest or principal payments become 90 days or more past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, is deemed in the process of collection. Interest income on non-accrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principal depending upon management's opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible. Additional loans not 90 days past due may also be placed on non-accrual status if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question.

-25-
 
A "restructured loan" is a loan on which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is reported on a cash basis until the borrower's ability to service the restructured loan in accordance with its terms is reestablished. The Company had no restructured loans as of the dates indicated in the table below.
 
The following table summarizes nonperforming assets of the Company at June 30, 2007 and December 31, 2006:

   
June 30, 2007
  
December 31, 2006
  
(Dollars in thousands)
          
Non-accrual loans
  
$
14,240
  
$
2,375
  
Accruing loans past due 90 days or more
    
-
    
-
  
Total nonperforming loans
    
14,240
    
2,375
  
Other real estate owned
    
60
    
60
  
Total nonperforming assets
  
$
14,300
  
$
2,435
  
               
Nonperforming loans to total loans
    
1.09
%
  
0.19
%
Nonperforming assets to total assets
    
0.76
%
  
0.12
%

During the first six months of 2007, six customers with loans that totaled $13,766,000 were placed on non-accrual status, while twelve customers with loans that totaled approximately $1,901,000 were removed from non-accrual status.
 
The increase in non-accrual loans of $11,865,000 between June 30, 2007 and December 31, 2006 was primarily the result of a problem with one specific customer and not a general degradation of overall credit quality in the portfolio. During the second quarter of 2007, the Bank recorded a specific reserve of $3,231,000 in the allowance for loan losses and a specific reserve of $1,519,000 in unfunded commitments related to a construction loan in Rocklin California. The specific reserve related to unfunded commitments was recorded to recognize the Bank’s liability for mechanic liens placed against the property. For more information on the specific reserve related to the mechanic liens, see the section titled “RESERVE FOR UNFUNDED COMMITMENTS” on page 29 of this report. Management received a third party appraisal on this property and concluded that a reserve should be established for this property based on the market value which is what willing market participants would pay for the property at the time. Subsequent to the end of the quarter, the Bank foreclosed on the property on July 25, 2007 and charged-off the specific reserve recorded in the second quarter related to the allowance for loan losses.
 
Contractual accrued interest income on loans on non-accrual status as of June 30, 2007 and December 31, 2006, which would have been recognized if the loans had been current in accordance with their original terms, was approximately $1,020,000 and $137,000, respectively.
 
At June 30, 2007, nonperforming assets represented 0.76% of total assets an increase of 64 basis points when compared to the 0.12% at December 31, 2006. Nonperforming loans represented 1.09% of total gross loans at June 30, 2007, an increase of 90 basis points compared to the 0.19% at December 31, 2006. Nonperforming loans that were secured by first deeds of trust on real property were $13,506,000 and $473,000 at June 30, 2007 and December 31, 2006. The increase in nonperforming loans that were secured by first deeds of trust on real property was primarily the result of one customer adding $12,994,000 of loan balances to this category. Other forms of collateral such as inventory and equipment secured a portion of the nonperforming loans as of each date. No assurance can be given that the collateral securing nonperforming loans will be sufficient to prevent losses on such loans.

-26-
 
At June 30, 2007 the Company had $60,000 invested in one real estate property that was acquired through foreclosure. At December 31, 2006, the Company had $60,000 invested in two real estate properties that was acquired through foreclosure. These properties were carried at the lower of their estimated market value, as evidenced by an independent appraisal, or the recorded investment in the related loan, less estimated selling expenses. At foreclosure, if the fair value of the real estate is less than the Company's recorded investment in the related loan, a charge is made to the allowance for loan losses. The Company expects to sell the remaining property within the next twelve month period. No assurance can be given that the Company will sell the properties during 2007 or at any time or for an amount that will be sufficient to recover the Company’s investment in these properties.
 
Management defines impaired loans, regardless of past due status on loans, as those on which principal and interest are not expected to be collected under the original contractual loan repayment terms. An impaired loan is charged off at the time management believes the collection process has been exhausted. At June 30, 2007 and December 31, 2006, impaired loans were measured based on the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price or the fair value of collateral if the loan is collateral-dependent. Impaired loans at June 30, 2007 were $14,240,000.
 
Except for loans that are disclosed above, there were no assets as of June 30, 2007, where known information about possible credit problems of the borrower causes management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become nonperforming assets. Given the scope and extent of the Company's loan portfolio, however, it is always possible that current credit problems may exist that may not have yet been identified by the Bank’s credit officers.
 
Allowance for Loan Losses

The following table summarizes the loan loss experience of the Company for the three months ended June 30, 2007 and 2006, and for the year ended December 31, 2006.

   
June 30,
  
December 31,
  
(Dollars in thousands)
  
2007
  
2006
  
2006
  
Allowance for Loan Losses:
              
Balance at beginning of period
  
$
14,031
  
$
14,776
  
$
14,776
  
Provision for loan losses
    
3,913
    
200
    
400
  
Charge-offs:
                    
Commercial and agricultural
    
142
    
377
    
2,134
  
Real estate - mortgage
    
-
    
-
    
-
  
Consumer
    
412
    
265
    
495
  
Total charge-offs
    
554
    
642
    
2,629
  
Recoveries
                    
Commercial and agricultural
    
214
    
649
    
1,337
  
Real-Estate - mortgage
    
-
    
-
    
-
  
Consumer
    
57
    
101
    
147
  
Total recoveries
   
271
    
750
    
1,484
  
Net (charge-offs) recoveries
    
(283
)
  
108
    
(1,145
)
Balance at end of period
  
$
17,661
  
$
15,084
  
$
14,031
  
                     
Loans outstanding at period-end
  
$
1,311,094
  
$
1,197,442
  
$
1,224,761
  
Average loans outstanding
 
$
1,237,143
  
$
1,139,997
  
$
1,187,156
  
                     
Annualized net charge-offs to average loans
    
0.05
%
  
(0.02
)%
  
0.10
%
Allowance for loan losses
                    
To total loans
    
1.35
%
  
1.26
%
  
1.15
%
To nonperforming loans
    
124.02
%
  
946.89
%
  
590.78
%
To nonperforming assets
    
123.50
%
  
711.85
%
  
576.22
%

-27-
 
The Company maintains an allowance for loan losses at a level considered by management to be sufficient to cover the inherent risks of loss associated with its loan portfolio under prevailing economic conditions. In determining the adequacy of the allowance for loan losses, management takes into consideration, among other things, growth trends in the portfolio, examination by financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, specific credit risks, general economic conditions, the interest rate environment and internal and external credit reviews. In addition, the risks management considers vary depending on the nature of the loan. The normal risks considered by management with respect to agricultural loans include, among other things, the fluctuating value of the collateral, changes in weather conditions and the availability of adequate water resources in the Company's local market area. The normal risks considered by management with respect to real estate construction loans include, among other things, fluctuation in real estate values, the demand for improved commercial and industrial properties and housing, the availability of permanent financing in the Company's market area and borrowers' ability to obtain permanent financing. The normal risks considered by management with respect to real estate mortgage loans include, among other things, fluctuations in the value of real estate. Additionally, the Company relies on data obtained through independent appraisals for significant properties to determine loss exposure on nonperforming loans.
 
The balance 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 loan losses of $3,713,000 and 3,913,000 in the three and six months ended June 30, 2007 compared with $200,000 and $200,000 in the same time periods of 2006. During the second quarter of 2007, the Bank recorded a specific reserve of $3,231,000 in the allowance for loan losses related to a construction loan in Rocklin California. For more information related to the construction loan in Rocklin California, see the section titled “NONPERFORMING ASSETS” on page 25 of this report. The Company had net charge-offs of $283,000 for the six months ended June 30, 2007 compared with net recoveries of $108,000 for the same six months in 2006. The increased charge-offs occurred primarily within the consumer segment of the loan portfolio.
 
During the third quarter of 2006, the Company enhanced its methodology used to compute the adequacy of the Allowance for Loan Losses. Prior to the third quarter 2006, the Company utilized regulatory guidance as a measuring metric to determine the level of the allowance for loan losses required.
 
In the third quarter of 2006, management completed their data collection and historical loss calculations, and began using documented historical net loss experience by loan type to develop a statistically relevant model to reserve for inherent losses in the loan portfolio. This new methodology resulted in an allowance that was materially the equivalent of the figure developed under the prior method. There was no provision adjustment recorded relevant to this change in methodology.
 
The allowance for loan losses is based on estimates and ultimate future losses may vary from current estimates. It is possible that future economic or other factors may adversely affect the Company's borrowers, and thereby cause loan losses to exceed the current allowance and require the Company to make additional provisions to the allowance for loan losses. In addition, there can be no assurance that future economic or other factors will not adversely affect the Company's borrowers, or that the Company's asset quality may not deteriorate through rapid growth, failure to enforce underwriting standards, failure to maintain appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, failure to identify and monitor potential problem loans or for other reasons, and thereby cause loan losses to exceed the current allowance.
 
The allocation of the allowance for loan losses to loan categories is an estimate by credit officers of the relative risk characteristics of loans in those categories. No assurance can be given that losses in one or more loan categories will not exceed the portion of the allowance allocated to that category or even exceed the entire allowance.

-28-
 
The following table summarizes a breakdown of the allowance for loan losses by category and the percentage by loan category of total loans for the dates indicated.

   
June 30, 2007
  
December 31, 2006
  
December 31, 2005
  
(Dollars in thousands)
  
Amount
  
Loans % to total loans
  
Amount
  
Loans % to total loans
  
Amount
  
Loans % to total loans
  
Commercial and Agricultural
  
$
4,003
    
33
%
$
4,983
    
33
%
$
6,024
    
32
%
Real Estate (Construction)
    
4,474
    
14
    
1,658
    
15
    
2,474
    
16
  
Real Estate (Mortgage)
    
6,311
    
46
    
3,882
    
44
    
5,598
    
44
  
Consumer
    
2,873
    
7
    
3,508
    
8
    
680
    
8
  
Total
   $
17,661
    
100
%
$
14,031
    
100
%
$
14,776
    
100
%
 
OTHER ASSETS

At June 30, 2007, the Company recorded a balance in other assets of $19,993,000 and $23,653,000 at December 31, 2006, a decrease of 15%. The primary reason for the change in other assets is due to a $4,666,000 and $8,665,000 loan participation funding receivable at June 30, 2007 and December 31, 2006, respectively. During January 2007 and July 2007, respectively, those funding receivables were collected from the participating banks.

RESERVE FOR UNFUNDED COMMITMENTS

The reserve for unfunded commitments included in other liabilities at June 30, 2007 and 2006, and December 31, 2006, is presented below.

   
June 30, 2007
  
December 31,
  
(Dollars in thousands)
  
2007
  
2006
  
2006
  
Balance at the beginning of period
  
$
710
  
$
717
  
$
717
  
Provision for credit losses
    
1,595
    
(11
)
  
(7
)
Balance at the end of period
  
$
2,305
  
$
706
  
$
710
  
 
During the second quarter of 2007, the Bank recorded a specific reserve of $1,519,000 in unfunded commitments related to a construction loan in Rocklin California. The specific reserve related to unfunded commitments was recorded to recognize the Bank’s estimate of liability for mechanic liens placed against the property. For more information related to the specific reserve related to this loan, see the section titled “NONPERFORMING ASSETS” on page 25 of this report.
 
EXTERNAL FACTORS AFFECTING ASSET QUALITY
 
For a discussion on external factors affecting asset quality, see Part II Item 1A. Risk Factors in this report.

-29-
 
LIQUIDITY
 
In order to maintain adequate liquidity, the Company must have sufficient resources available at all times to meet its cash flow requirements. The need for liquidity in a banking institution arises principally to provide for deposit withdrawals, the credit needs of its customers and to take advantage of investment opportunities as they arise. The Company may achieve desired liquidity from both assets and liabilities. The Company considers cash and deposits held in other banks, federal funds sold, other short term investments, maturing loans and investments, payments of principal and interest on loans and investments and potential loan sales as sources of asset liquidity. The Company also has the ability to access significant amounts of asset liquidity through borrowings from the Federal Home Loan Bank secured by pledged loans. Deposit growth and access to credit lines established with correspondent banks and market sources of funds are considered by the Company as additional sources of liability liquidity. The Company’s primary source of liquidity is from dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.
 
The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. These assets include cash and deposits in other banks, time deposits at other financial institutions, available-for-sale securities and federal funds sold. The Company's liquid assets totaled $304,315,000 and $452,421,000 on June 30, 2007 and December 31, 2006, respectively, and constituted 16% and 23% of total assets on both those dates. Liquidity is also affected by the collateral requirements of its public deposits and certain borrowings. Total market value of pledged securities was $270,061,000 at June 30, 2007 compared with $280,182,000 at December 31, 2006.
 
Although the Company's primary sources of liquidity include liquid assets and the Bank’s deposit base, the Company maintains lines of credit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco, Pacific Coast Banker’s Bank, Union Bank of California, Wells Fargo Bank and First Tennessee Bank aggregating $295,069,000 of which $77,500,000 was outstanding as of June 30, 2007 and $239,289,000 of which $46,500,000 was outstanding as of December 31, 2006. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financial difficulties or receives adverse publicity for other reasons, or if its pricing, products or services are not competitive with those offered by other institutions.
 
CAPITAL RESOURCES
 
Capital serves as a source of funds and helps protect depositors against potential losses. The primary source of capital for the Company has been generated through retention retained earnings. The Company's shareholders' equity increased by $1,297,000 or 1% between June 30, 2007 and December 31, 2006. This increase was achieved through the retention of accumulated earnings and the exercise of stock options.
 
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material adverse effect on the Company’s consolidated financial statements. Management believes, as of June 30, 2007, that the Company and the Bank met all applicable capital requirements. The Company’s leverage capital ratio at June 30, 2007 was 9.97% as compared with 9.33% as of December 31, 2006. The Company’s total risk based capital ratio at June 30, 2007 was 12.41% as compared to 12.49% as of December 31, 2006.
 
The Company has announced the acquisitions of The Stockmen’s Bank of California and Bay View Funding, pending regulatory approval. Management anticipates the Company will remain well capitalized after the acquisitions by issuing additional trust preferred securities to meet the regulatory requirements.

-30-

 
In the opinion of management, the Company’s and Bank’s actual capital amounts and ratios met all regulatory requirements as of June 30, 2007 and are summarized as follows:
 
(Dollars in thousands)
  
Actual
  
For Regulatory Capital Adequacy Purposes
  
To Be Well Capitalized Under Prompt Corrective Action Provisions:
  
The Company:
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Total capital (to risk weighted assets)
  
$
202,737
    
12.41
%
$
130,742
    
8
%
$
163,427
    
10
%
Tier 1 capital (to risk weighted assets)
  
$
182,618
    
11.17
%
$
65,371
    
4
%
$
98,056
    
6
%
Leverage ratio(1)
  
$
182,618
    
9.97
%
$
73,253
    
4
%
$
91,566
    
5
%
The Bank:
                                      
Total capital (to risk weighted assets)
  
$
177,770
    
10.93
%
$
130,142
    
8
%
$
162,677
    
10
%
Tier 1 capital (to risk weighted assets)
  
$
157,651
    
9.69
%
$
65,071
    
4
%
$
97,606
    
6
%
Leverage ratio(1)
  
$
157,651
    
8.65
%
$
72,889
    
4
%
$
91,111
    
5
%
(1) The leverage ratio consists of Tier 1 capital divided by adjusted quarterly average assets. The minimum leverage ratio allowed by bank regulators is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality and in general, are considered top-rated banks.

 
The Company’s and Bank’s actual capital amounts and ratios met all regulatory requirements as of December 31, 2006 and were summarized as follows:
 
(Dollars in thousands)
  
Actual
  
For Regulatory Capital Adequacy Purposes
  
To Be Well Capitalized Under Prompt Corrective Action Provisions
  
The Company:
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Total capital (to risk weighted assets)
  
$
193,721
    
12.49
%
$
124,119
    
8
%
$
155,148
    
10
%
Tier I capital (to risk weighted assets)
  
$
178,764
    
11.52
%
$
62,059
    
4
%
$
93,089
    
6
%
Leverage ratio(1)
  
$
178,764
    
9.33
%
$
76,644
    
4
%
$
95,806
    
5
%
The Bank:
                                      
Total capital (to risk weighted assets)
  
$
167,238
    
10.83
%
$
123,523
    
8
%
$
154,404
    
10
%
Tier I capital (to risk weighted assets)
  
$
152,281
    
9.86
%
$
61,762
    
4
%
$
92,643
    
6
%
Leverage ratio(1)
  
$
152,281
    
7.98
%
$
76,313
    
4
%
$
95,392
    
5
%
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio allowed by bank regulators is 3 percent for banking organizations that do not anticipate significant growth and that have well diversified risk, excellent asset quality and in general, are considered top-rated banks.
 
The Company declares dividends solely at the discretion of the Company’s Board of Directors, subject to compliance with regulatory requirements. In order to pay any cash dividends, the Company must receive payments of dividends or management fees from the Bank. There are certain regulatory limitations on the payment of cash dividends by banks.
 
DEPOSITS
 
Deposits are the Company's primary source of funds. At June 30, 2007, the Company had a deposit mix of 28% in savings deposits, 41% in time deposits, 16% in interest-bearing checking accounts and 15% in noninterest-bearing demand accounts compared to 27% in savings deposits, 41% in time deposits, 14% in interest-bearing checking accounts and 18% in noninterest-bearing demand accounts at December 31, 2006. Noninterest-bearing demand deposits enhance the Company's net interest income by lowering its cost of funds.

-31-

The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company's business is not seasonal in nature. The Company accepts time deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At June 30, 2007, the Company had brokered deposits of $15,594,000. At December 31, 2006, the Company’s brokered deposits totaled $92,943,000. The decrease in brokered deposits during 2007 was related to management’s decision to allow these high cost funds to mature without renewal. The Bank has a policy target for brokered deposits of no more than 15% of the Bank’s asset base. Brokered deposits did not exceed the policy limit as of June 30, 2007.

Maturities of time certificates of deposits of $100,000 or more outstanding at June 30, 2007 and December 31, 2006 are summarized as follows:

(Dollars in thousands)
  
June 30, 2007
  
December 31, 2006
  
Three months or less
  
$
150,102
  
$
190,565
  
Over three to six months
    
40,512
    
103,261
  
Over six to twelve months
    
41,311
    
50,555
  
Over twelve months
    
37,348
    
21,853
  
Total
  
$
269,273
  
$
366,234
  

Federal Funds Purchased and Other Borrowed Funds
 
The total of federal funds purchased remained at $0 for the six months ended June 30, 2007 from December 31, 2006. Other borrowed funds have increased primarily by the to secure liquidity for future anticipated growth

In December 2005, the Bank entered into a repurchase agreement with an embedded LIBOR floor for $100,000,000 with J.P. Morgan. This agreement has a maturity date of December 15, 2010. The repurchase agreement will help to insulate the Company from the effects of a downward rate environment. For more information about the agreement, see Note 5 on “Other Borrowings” in the Company’s 2006 Annual Report and Form 10-K.

Return on Equity and Assets

   
Six Months Ended June 30,
  
Year ended December 31
  
   
2007
  
2006
  
2006
  
Annualized return on average assets
    
0.50
%
  
1.36
%
  
1.25
%
Annualized return on average equity
    
6.18
%
  
18.53
%
  
16.85
%
Average equity to average assets
    
8.10
%
  
7.33
%
  
7.44
%
Dividend payout ratio
    
44.43
%
  
11.71
%
  
13.7
%
 
Impact of Inflation
 
The primary impact of inflation on the Company is its effect on interest rates. The Company’s primary source of income is net interest income which is affected by changes in interest rates. The Company attempts to limit inflation’s impact on its net interest margin through management of rate sensitive assets and liabilities and the analysis of interest rate sensitivity.
 
Subsequent Events
 
On July 25, 2007, the Bank foreclosed on a property in Rocklin California which was collateral for a residential construction loan. During the second quarter a specific reserve was recorded in the allowance for loan losses based on a third party appraisal of the property. At completion of the foreclosure on July 25, 2007, the specific reserve related to this loan was charged-off and the market value of the property of $9,253,000 was recorded into other real estate owned. The specific reserve related to the mechanic liens will remain recorded until a resolution with third parties is complete. For more information related to the aforementioned loan see the section titled “NONPERFORMING ASSETS” included herein.

-32-
 
On July 20, 2007, the Company announced that it entered into a materially definitive agreement to purchase Bay View Funding (”BVF”), a factoring business based in San Mateo California. The Company will acquire all of the assets and liabilities of BVF. The assets consist primarily of receivables of approximately $26,000,000 to $28,000,000. The purchase price of approximately $14 million represents a 3.25 multiple of BVF’s EBITDA with $11.7 million (85%) payable at closing and an additional 5% payable one year after the closing and the remaining 10% due two years after the closing (assuming certain indemnified events have not occurred). In addition, BVF can earn up to an additional .75 multiple of EBITDA (roughly $3 million) over the next two years if a 15% growth in revenue and EBITDA is achieved. For more information related to this announcement, see the Company’s website at www.ccow.com under the news and events section.


In the normal course of business, the Company is exposed to market risk which includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and the mismatch in repricing characteristics of assets, liabilities, and off balance sheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities arise primarily through the interaction of the various types of loans versus the types of deposits that are maintained as well as from management's discretionary investment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not be able to satisfy current and future financial commitments or that the Company may not be able to liquidate financial instruments at market prices. Risk management policies and procedures have been established and are utilized to manage the Company's exposure to market risk. Quarterly testing of the Company’s assets and liabilities under both increasing and decreasing interest rate environments are performed to insure the Company does not assume a magnitude of risk that is outside approved policy limits.

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

The Company’s interest rate risk management is the responsibility of the Asset/Liability Management Committee (ALCO), which provides monthly reports to the Board of Directors. ALCO establishes policies that monitor and coordinate the Company’s sources, uses and pricing of funds. ALCO is also involved in formulating the economic projections for the Company’s budget and strategic plan. ALCO sets specific rate sensitivity limits for the Company. ALCO monitors and adjusts the Company’s exposure to changes in interest rates to achieve predetermined risk targets that it believes are consistent with current and expected market conditions. Management monitors the asset and liability changes on an ongoing basis and provides report information and recommendations to the ALCO committee in regards to those changes.

It is the opinion of management that there has been no material change in the Company’s market risk during the first six months of 2007 when compared to the level of market risk at December 31, 2006. If interest rates were to suddenly and materially fall from levels experienced during the six three months of 2007, the Company could become susceptible to an increased level of market risk.

-33-


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934.

Based on the evaluation, the chief executive officer and chief financial officer concluded that as of the end of the period covered by this report the disclosure controls and procedures were adequate and effective, and that the material information required to be included in this report, including information from the Company’s consolidated subsidiaries, was properly recorded, processed, summarized and reported, and was made known to the chief executive officer and chief financial officer by others within the Company in a timely manner, particularly during the period when this quarterly report on Form 10-Q was being prepared.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
 
PART II - Other Information
 
 
The Company is a party to routine litigation in the ordinary course of its business. The Company is also party to legal proceedings related to foreclosed property of which the Company has already recorded a specific reserve. In the opinion of management, pending and threatened litigation, where liabilities have not been reserved, have a remote likelihood of having a material adverse effect on the financial condition or results of operations of the Company.

 
Readers and prospective investors in our securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report.

The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s securities could decline significantly, and shareholders could lose all or part of their investment.

-34-

Market and Interest Rate Risk

Changes in interest rates could reduce income and cash flow

The discussion in this report under “Market and Interest Rate Risk Management” and “Earnings Sensitivity” is incorporated by reference in this paragraph. The Company’s income and cash flow depend to a great extent on the difference between the interest earned on loans and investment securities, and the interest paid on deposits and other borrowings. We cannot control or prevent changes in the level of interest rates. They fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the FRB. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits and other liabilities.

Risks related to the nature and geographical location of Capital Corp of the West’s business

Capital Corp of the West invests in loans that contain inherent credit risks that may cause us to incur losses

The Company closely monitors the markets in which it conducts its lending operations and adjusts its strategy to control exposure to loans with higher credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. We can provide no assurance that the credit quality of our loans will not deteriorate in the future and that such deterioration will not adversely affect Capital Corp of the West.

Deterioration of local economic conditions could hurt our profitability.
 
Our operations are primarily located in the Central Valley of California. As a result of this geographic concentration, our financial results depend largely upon economic conditions in these areas. The local economy relies heavily on real estate, agriculture and ranching. A significant downturn in any or all of these industries could result in a decline in the local economy in general, which could in turn negatively impact us. Poor economic conditions could cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Also, if there were significant recessionary conditions in our market area, our financial condition would be negatively impacted.
 
The markets in which Capital Corp of the West operates are subject to the risk of earthquakes and other natural disasters

Most of the properties of Capital Corp of the West are located in California. Also, most of the real and personal properties which currently secure the Company's loans are located in California. California is a state which is prone to earthquakes, brush fires, drought, flooding and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major earthquake, flood or other natural disaster, Capital Corp of the West faces the risk that many of its borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. A major earthquake, flood or other natural disaster in California could have a material adverse effect on Capital Corp of the West's business, financial condition, results of operations and cash flows.

Substantial competition in the California banking market could adversely affect us

Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California. Our competitors include a large number of state and national banks, thrift institutions and credit unions, as well as many financial and non-financial firms that offer services similar to those offered by us. Other competitors include large financial institutions that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively.

-35-

Risks associated with potential acquisitions or divestitures or restructuring may adversely affect us

We may seek to acquire or invest in financial and non-financial companies, technologies, services or products that complement our business. There can be no assurance that we will be successful in completing any such acquisition or investment as this will depend on the availability of prospective target opportunities at valuation levels which we find attractive and the competition for such opportunities from other bidders. In addition, we continue to evaluate the performance of all of our subsidiaries, businesses and business lines and may sell, liquidate or otherwise divest a subsidiary, business or business line. Any acquisitions, divestitures or restructuring may result in the issuance of potentially dilutive equity securities, significant write-offs, including those related to goodwill and other intangible assets, and/or the incurrence of debt, any of which could have a material adverse effect on our business, financial condition and results of operations. Acquisitions, divestitures or restructuring could involve numerous additional risks including difficulties in obtaining any required regulatory approvals and in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, higher than expected deposit attrition (run-off), divestitures required by regulatory authorities, the disruption of our business, and the potential loss of key employees. There can be no assurance that we will be successful in addressing these or any other significant risks encountered.

Regulatory Risks

Restrictions on dividends and other distributions could limit amounts payable to us

As a holding Company, a substantial portion of our cash flow typically comes from dividends of our Bank. Various statutory provisions restrict the amount of dividends our Bank can pay to us without regulatory approval.

Adverse effects of, or changes in, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us

We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies, including accounting standards and interpretations currently affecting us and our subsidiaries, may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, including legislative and regulatory reactions to acts of terrorism, and major U.S. corporate bankruptcies and reports of accounting irregularities at U.S. public companies.

Additionally, our business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the U.S. Under long-standing policy of the FRB, the Company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates of borrowings by depository institutions, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on our business, results of operations and financial condition.

Systems, Accounting and Internal Control Risks

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

The discussion under “Critical Accounting Policies and Estimates” in this report and the information referred to in that discussion is incorporated by reference in this paragraph. The Company’s makes certain estimates and judgments in preparing its financial statements. The quality and accuracy of those estimates and judgments will have an impact on the Company’s operating results and financial condition.

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

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management and systems. There can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately corrected by the Company. The occurrence of any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s controls and procedures may fail or be circumvented

Management regularly reviews and updates the Company’s internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
 
 
None.
 
 
None.
 
 
(a.)  
Our Annual Meeting of Shareholders for 2007 was held May 22, 2007. The number of shares represented in person or by proxy and constituting a quorum was approximately 8,875,000 which equaled approximately 82% of the shares outstanding.
 
(b.)  
The following are the results of the election of directors in Class II of the Board:
 
Election of directors
 
Votes For
 
Votes Withheld
John D. Fawcett
6,673,607
2,201,154
Thomas T. Hawker
6,757,757
2,117,014
Curtis A. Riggs
6,726,447
2,116,490

(c.)  
The following are the results of the vote on proposal 2, to increase the number of shares available for grants of stock options pursuant to the Capital Corp of the West 2002 Stock Option Plan:

Votes For
Votes Against
4,645,414
2,207,142
 
 
In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report.
 
 
See Exhibit Index

-36-
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
CAPITAL CORP OF THE WEST
 
(Registrant)
 

Date: August 9, 2007
By /s/ Thomas T. Hawker
 
Thomas T. Hawker
 
President and
 
Chief Executive Officer


Date: August 9, 2007
By /s/ David A. Heaberlin
 
David A. Heaberlin
 
Chief Financial Officer/Treasurer

-37-



-38-


 EX-31.1 2 exhibit311.htm EXHIBIT 31.1 Exhibit 31.1
Exhibit 31.1
CERTIFICATIONS
I, Thomas T. Hawker, certify that:

1.  
I have reviewed this report on Form 10-Q of Capital Corp of the West (“Registrant”) for the second quarter of 2007;

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

3.  
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second quarter of 2007 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007
By: /s/ Thomas T. Hawker 
 
Thomas T. Hawker
 
President and
 
Chief Executive Officer

EX-31.2 3 exhibit312.htm EXHIBIT 31.2 Exhibit 31.2
Exhibit 31.2 
CERTIFICATIONS
I, David A. Heaberlin, certify that:

1.  
I have reviewed this report on Form 10-Q of Capital Corp of the West (“Registrant”) for the second quarter of 2007;

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

3.  
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second quarter of 2007 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 9, 2007
By: /s/ David A. Heaberlin
 
David A. Heaberlin
 
Chief Financial Officer

EX-32.1 4 exhibit321.htm EXHIBIT 32.1 Exhibit 32.1
Exhibit 32.1



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002




In connection with the Quarterly Report of Capital Corp of the West (the "Company") on Form 10-Q for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas T. Hawker, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




Date: August 9, 2007
By: /s/ Thomas T. Hawker 
 
Thomas T. Hawker
 
President and
 
Chief Executive Officer

EX-32.2 5 exhibit322.htm EXHIBIT 32.2 Exhibit 32.2
Exhibit 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capital Corp of the West (the "Company") on Form 10-Q for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Heaberlin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.





Date: August 9, 2007
By: /s/ David A. Heaberlin
 
David A. Heaberlin
 
Chief Financial Officer
 


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