Results Of Operations

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2004

o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Transition Period from to

Commission File Number: 0-27384

CAPITAL CORP OF THE WEST

(Exact name of 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 ý No o

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

The number of shares outstanding of the registrant’s common stock, no par value, as of June 30, 2004 was 5,754,060. No shares of preferred stock, no par value, were outstanding at June 30, 2004.

Capital Corp of the West

Table of Contents

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
Consolidated Statements of Income and Comprehensive Income (unaudited)
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Consolidated Statements of Cash Flows (unaudited)
Notes to the Consolidated Financial Statements (unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

Exhibit Index

Capital Corp of the West

Consolidated Balance Sheets

(Unaudited)

	June 30, 2004			December 31, 2003
	(Dollars in thousands)
Assets
Cash and noninterest-bearing deposits in other banks	$	47,979		$	44,292
Federal funds sold	21,200			1,190
Time deposits at other financial institutions	350			350
Investment securities available for sale, at fair value	267,832			275,403
Investment securities held to maturity at cost, fair value of $98,089 and $97,295 at June 30, 2004 and December 31, 2003	99,929			96,612
Loans, net of allowance for loan losses of $13,757 and $13,263 at June 30, 2004 and December 31, 2003	803,974			750,989
Interest receivable	6,296			6,045
Premises and equipment, net	18,469			16,557
Goodwill and other intangible assets	2,315			2,649
Cash value of life insurance	27,616			24,138
Investment in housing tax credit limited partnerships	8,592			8,717
Other assets	9,628			7,600

Total assets	$	1,314,180		$	1,234,542

Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing demand	$	226,067		$	206,709
Negotiable orders of withdrawal	145,065			136,975
Savings	358,802			330,023
Time, under $100,000	183,689			182,363
Time, $100,000 and over	160,924			172,738
Total deposits	1,074,547			1,028,808

Borrowed funds	122,902			92,817
Junior subordinated debentures	16,496			16,496
Accrued interest, taxes and other liabilities	5,062			6,936
Total liabilities	1,219,007			1,145,057

Preferred stock, no par value; 10,000,000 shares authorized; None outstanding	—			—
Common stock, no par value; 20,000,000 shares authorized; 5,754,060 and 5,660,739 issued & outstanding at June 30, 2004 and December 31, 2003	55,750			54,228
Retained earnings	41,766			34,816
Accumulated other comprehensive income	(2,343		)	441

Total shareholders’ equity	95,173			89,485

Total liabilities and shareholders’ equity	$	1,314,180		$	1,234,542

See accompanying notes to consolidated financial statements

Capital Corp of the West

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2004			2003			2004			2003
	(In thousands, except per share data)
Interest income:
Interest and fees on loans	$	13,591		$	12,086		$	26,739		$	23,419
Interest on deposits with other financial institutions	2			3			4			5
Interest on investments held to maturity:
Taxable	564			714			1,165			1,480
Non-taxable	512			55			992			110
Interest on investments available for sale:
Taxable	2,585			2,319			5,238			4,495
Non-taxable	10			273			21			545
Interest on federal funds sold	30			51			41			90
Total interest income	17,294			15,501			34,200			30,144

Interest expense:
Interest on negotiable orders of withdrawal	17			14			32			28
Interest on savings deposits	753			643			1,518			1,223
Interest on time deposits, under $100,000	1,052			1,104			2,135			2,224
Interest on time, $100,000 and over	882			1,061			1,809			2,050
Interest on subordinated debentures	265			158			529			315
Interest on other borrowings	1,167			1,193			2,232			2,344
Total interest expense	4,136			4,173			8,255			8,184

Net interest income before provision for loan losses	13,158			11,328			25,945			21,960
Provision for loan losses	621			482			1,241			1,153
Net interest income after provision for loan losses	12,537			10,846			24,704			20,807

Noninterest income:
Service charges on deposit accounts	1,580			1,357			3,014			2,634
Increase in cash surrender value of life insurance policies	262			271			496			517
Other	749			773			1,521			1,580
Total noninterest income	2,591			2,401			5,031			4,731

Noninterest Expense:
Salaries and related benefits	5,438			4,934			10,494			9,437
Equipment	746			702			1,572			1,461
Premises and occupancy	764			712			1,543			1,382
Professional fees	398			484			768			758
Marketing	152			248			500			508
Intangible amortization	166			170			333			340
Supplies	178			197			400			432
Other	1,546			1,391			3,104			2,880
Total noninterest expense	9,388			8,838			18,714			17,198

Income before income taxes	5,740			4,409			11,021			8,340
Provision for income taxes	1,860			1,014			3,497			1,918
Net income	$	3,880		$	3,395		$	7,524		$	6,422
Comprehensive Income:
Unrealized loss on securities arising during the period, net	(3,829		)	(237		)	(2,784		)	(592		)
Comprehensive income	$	51		$	3,158		$	4,740		$	5,830

Basic earnings per share	$	0.68		$	0.61		$	1.32		$	1.15
Diluted earnings per share	$	0.66		$	0.59		$	1.27		$	1.11

See accompanying notes to consolidated financial statements

Capital Corp of the West

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

							Accumulated
	Common Stock						other
(Amounts in thousands)	Number of shares	Amounts		Retained earnings			comprehensive income (loss)			Total

Balance, December 31, 2003	5,661	$	54,228	$	34,816		$	441		$	89,485

Exercise of stock options	74	898		—			—			898

Issuance of shares pursuant to 401k and ESOP plans	19	624		—			—			624

Net Change in fair market value of investment securities and swaps, net of tax benefit of $1,807	—	—		—			(2,784		)	(2,784		)

Cash dividend	—	—		(574		)	(574		)

Net income	—	—		7,524			—			7,524

Balance, June 30, 2004	5,754	$	55,750	$	41,766		$	(2,343	)	$	95,173

See accompanying notes to consolidated financial statements

Capital Corp of the West

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	6 months ended June 30, 2004			6 months ended June 30, 2003
Operating activities:
Net income	$	7,524		$	6,422
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses	1,241			1,153
Depreciation, amortization and accretion, net	3,197			2,361
Net increase in interest receivable & other assets	(4,098		)	(6,858		)
Net increase in deferred loan fees	755			495
Net (decrease) increase in accrued interest, taxes & other liabilities	(1,874		)	950
Net cash provided by operating activities	6,745			4,523

Investing activities:
Investment securities purchases – available for sale securities	(40,632		)	(48,199		)
Investment securities purchases – held to maturity securities	(9,283		)	(48,150		)
Proceeds from maturities of available for sale investment securities	36,830			22,645
Proceeds from maturities of held to maturity investment securities	5,966			33,220
Proceeds from sales of available for sale securities	5,940			231
Net increase in time deposits in other financial institutions	—			(100		)
Proceeds from sales of loans	1,707			2,497
Net increase in loans	(57,625		)	(64,078		)
Purchase of premises and equipment	(2,723		)	(2,019		)
Net cash used in investing activities	(59,820		)	(103,953		)

Financing activities:
Net increase in demand, NOW and savings deposits	56,227			59,612
Net (decrease) increase in certificates of deposit	(10,488		)	48,112
Net proceeds (repayments) from other borrowings	30,085			(17,848		)
Payment of cash dividends	(574		)	—
Issuance of shares pursuant to 401K and ESOP plans	624			—
Exercise of stock options	898			151
Cash in lieu fractional shares from stock dividend	—			(14		)
Net cash provided by financing activities	76,772			90,013

Net increase (decrease) in cash and cash equivalents	23,697			(9,417		)

Cash and cash equivalents at beginning of period	45,482			73,183
Cash and cash equivalents at end of period	$	69,179		$	63,766

Cash paid during the quarter:
Interest paid	$	7,647		$	7,782
Income tax payments	7,561			2,750
Supplemental disclosure of noncash investing and financing activities:
Investment securities unrealized losses and swaps, net of tax	(2,784		)	(592		)
Transfer of securities from available for sale to held to maturity	—			24,557

See accompanying notes to consolidated financial statements

Capital Corp of the West

Notes to Consolidated Financial Statements

June 30, 2004 and December 31, 2003

(Unaudited)

GENERAL - COMPANY

Capital Corp of the West (the “Company” or “Capital Corp”) is a bank holding company incorporated under the laws of the State of California on April 26, 1995. On November 1, 1995, the Company became registered as a bank holding company, and is a holder of all of the capital stock of County Bank (the “Bank”). During 1998, the Company formed Capital West Group, a subsidiary that engages in the financial institution advisory business but is currently inactive. The Company’s primary asset is the Bank and the Bank is the Company’s primary source of income. The Company’s securities consist of 20,000,000 shares of Common Stock, no par value, 10,000,000 shares of Authorized Preferred Stock, and 6,000,000 of Trust Preferred 10.20% Capital Securities which have a liquidation amount of $1,000 per capital security. As of June 30, 2004 there were 5,754,060 common shares outstanding, held of record by approximately 1,700 shareholders. There were no preferred shares outstanding at June 30, 2004. The Bank has three wholly owned subsidiaries, Merced Area Investment & Development, Inc. (“MAID”), County Asset Advisors (“CAA”), and County Investment Trust (“REIT”). CAA is currently inactive. On April 26, 2002, the Company entered into an agreement to purchase Regency Investment Advisors, Inc (“RIA”). The purchase of RIA was completed during the second quarter, 2002. The Company has two other wholly owned subsidiaries, County Statutory Trust (“Trust”), and Capital West Group, Inc. The Trust is used in connection with the Capital Securities that have been issued by the Company. Capital West Group, Inc. is currently inactive. All references herein to the “Company” include the Company, the Company’s subsidiaries, the Bank and the Bank’s subsidiaries, unless the context otherwise requires.

GENERAL - BANK

The Bank was organized on August 1, 1977, as County Bank of Merced, a California state banking corporation. The Bank commenced operations on December 22, 1977. In November 1992, the Bank changed its legal name to County Bank. The Bank’s securities consist of one class of Common Stock, no par value and is wholly owned by the Company. The Bank’s deposits are insured under the Federal Deposit Insurance Act by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits stated therein. The Bank is a member of the Federal Reserve System.

INDUSTRY AND MARKET AREA

The Bank engages in general commercial banking business primarily in Fresno, Madera, Mariposa, Merced, San Francisco, San Joaquin, Stanislaus and Tuolomne counties. The Bank has twenty full service branch offices; two of which are located in Merced with the branch located in downtown Merced currently serving as both a branch and as administrative headquarters. There are offices in Atwater, Dos Palos, Hilmar, Livingston, Los Banos, Madera, Mariposa, San Francisco, Sonora, Stockton, two offices in Modesto, four in Fresno and two offices in Turlock. The Bank’s administrative headquarters also provides accommodations for the activities of MAID, the Bank’s wholly owned real estate subsidiary.

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, 2004 and December 31, 2003 and the results of operations for

the three and six month periods ended June 30, 2004 and 2003, and the statements of cash flows for the six months ended June 30, 2004 and 2003 have been included. The interim results for the three and six months ended June 30, 2004 are not necessarily indicative of results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and the notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income available to 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 plus 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 tables provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for the three and six month periods ended June 30, 2004 and 2003:

	For The Three Months Ended June 30,				For The Six Months Ended June 30,
(Dollars in thousands, except per share data)	2004		2003		2004		2003

Basic EPS computation:
Net income	$	3,880	$	3,395	$	7,524	$	6,422
Average common shares outstanding	5,716		5,602		5,695		5,597
Basic EPS	$	0.68	$	0.61	$	1.32	$	1.15

Diluted EPS Computations:
Net income	$	3,880	$	3,395	$	7,524	$	6,422
Average common shares outstanding	5,716		5,602		5,695		5,597
Effect of stock options	202		196		218		190
	5,918		5,798		5,913		5,787
Diluted EPS	$	0.66	$	0.59	$	1.27	$	1.11

INTANGIBLE ASSETS

The Company has intangible assets consisting of core deposit premiums and goodwill. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to goodwill are no longer amortized after December 31, 2001 but are reviewed periodically for potential impairment. During 2004, management has determined there was no impairment of goodwill. As of June 30, 2004 and December 31, 2003, the Company had unamortized core deposit premiums of $391,000 and $724,000, respectively. Amortization of core deposit premiums and other intangibles was $166,000 and $170,000 during the second quarter of 2004 and 2003 and $333,000 and $340,000 for the six months ended June 30, 2004 and 2003. Core deposit premiums and other intangibles are scheduled to amortize at a rate of approximately $167,000 per quarter through the quarter ending December 31, 2004 and at a rate of $56,000 during the first quarter of 2005. Core deposit premiums of $460,000 and $4,340,000 were initially recorded as a result of purchasing deposits from Town and Country Finance and Thrift in July, 1996 and from the purchase of three branches from Bank of America in December, 1997, respectively.

STOCK COMPENSATION

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

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

	For the three months ended June 30,				For the six months ended June 30,
(dollars in thousands except per share amounts)	2004		2003		2004		2003
Net income:
As reported	$	3,880	$	3,395	$	7,524	$	6,422
Pro forma	$	3,734	$	3,282	$	7,019	$	6,134

Basic earnings per share:
As reported	$	0.68	$	0.61	$	1.32	$	1.15
Pro forma	$	0.65	$	0.59	$	1.23	$	1.10

Diluted earnings per share:
As reported	$	0.66	$	0.59	$	1.27	$	1.11
Pro forma	$	0.63	$	0.57	$	1.19	$	1.06

Stock-based employee compensation cost included in salaries and related benefits:
As reported	$	—	$	—	$	—	$	—
Pro forma	$	163	$	118	$	578	$	296

Stock-based employee compensation cost, net of related tax effects of $17, included in net income:
As reported	$	—	$	—	$	—	$	—
Pro forma	$	146	$	113	$	505	$	288

RECENT ACCOUNTING PRONOUNCEMETS

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in a “Variable Interest Entity” (“VIE”) through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE.

The Company has adopted FIN 46R and applied it to existing VIEs in which the Company has variable interests. As a result of adopting FIN 46R, the balance sheet line items related to Capital Securities and the related income statement effect of dividends on Capital Securities in the June 30, 2003 consolidated financial statements have been reclassified to conform with the 2004 presentation. The junior subordinated debentures issued to the Trusts as VIEs were reflected as long-term debt in the consolidated balance sheets at June 30, 2004 and December 31, 2003. Prior to December 31, 2003, the Trusts were consolidated subsidiaries and were included in liabilities in the consolidated balance sheet, as “Capital Securities”. The common securities and debentures, along with the related income effects were eliminated in the consolidated financial statements.

In December 2003, FASB issued Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This Statement prescribes employers’ disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans. The Statement retains and revises the disclosure requirements contained in the original Statement 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit plans and other postretiment benefit plans. The Statement generally is effective for fiscal years ending after December 15, 2003. The Company currently does not have any postretirement benefit plans that are within the scope of this Statement.

In March, 2004, the Emerging Issues Task Force (“EITF”) Issue No. 03-1 “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” consensus was published. Issue No. 03-1 contained new guidance effectively codifying the provisions of SEC Staff Accounting Bulletin No. 59 and creates a new model that calls for new judgments and additional evidence gathering. This EITF Issue has not had an impact on the Company’s Consolidated Financial Statements.

Investment Securities. At June 30, 2004 equity securities included $14.7 million 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 indexes 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. At June 30, 2004, the unrealized loss on these securities totaled $2.7 million compared to $1.8 million at December 31, 2003. It is expected that these investments will increase in value as short term interest rates rise towards their historical levels.

In March 2004, the FASB issued Emerging Issues Task Force Issue No. 03-1. “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. This EITF describes a model involving three steps: (1) determine whether an investment is impaired, (2) determine whether the impairment is other-than -temporary, and (3) recognize the impairment loss in earnings. The EITF also requires several additional disclosures for cost-method investments. The EITF’s impairment accounting guidance was effective for reporting periods beginning after June 15, 2004. The Company expects the adoption of this EITF will not have a material impact on its consolidated financial statements.

At June 30, 2004, management believes the impairments described above are tomporary and, accordingly, no impairment loss has been recognized in the Company’s consolidated statement of income.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains 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”, 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 rely 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 2003 Annual Report on Form 10-K filed on March 15, 2004. These statements are representative only on the date of which they are made, 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; participations of loans and the management of borrower, 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 judgements 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, and management’s ability to manage these and other risks.

Critical accounting policies and estimates

The company’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 of America. 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, intangible assets, 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 may differ from these estimates under different assumptions or conditions. (See caption “Allowance for Loan Losses” for a more detailed discussion).

During 2003, California enacted tax legislation that added new penalties for institutions that engaged in strategies and transactions that the Franchise Tax Board (“FTB”) defined as abusive tax shelters. The FTB gave taxpayers until April 15, 2004 to take advantage of a voluntary compliance initiative (“VCI”) that would allow taxpayers to amend prior year filings without being subject to the new tax shelter penalties. On April 15, 2004, the Company took advantage of the VCI, amended tax returns for the tax years ended December 31, 2001 and 2002, and paid the FTB $2,411,000. As part of this process, the Company maintained the legal rights to pursue a claim of refund from the FTB for a portion of the amounts paid, and has every intention of doing so. As of June 30, 2004, the Company has a recorded income tax receivable of $1,563,000 based on a claim of refund pertaining to REIT benefits. Company management believes the strategy used is lawful and defensible, and intends to defend the tax position taken. If the company is ultimately unsuccessful in its claims against California, it would adversely affect the Company’s financial condition and results of operations and the Company could be held liable for additional accuracy related penalties.

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.

Votes For

Votes Against

Votes Abstained

Broker Non-Votes

3,095,917

294,494

46,229

917,620

Three and Six Months Ended June 30, 2004 Compared With Three and Six Months Ended June 30, 2003

Overview. For the three and six months ended June 30, 2004 the Company reported record net income of $3,880,000 and $7,524,000. This compares to $3,395,000 and $6,422,000 for the same periods in 2003 and represents an increase of $485,000 and $1,102,000 or 14% and 17% over the prior year periods. Basic earnings per share were $0.68 and $1.32 for the three and six months ended June 30, 2004. This compares to $0.61 and $1.15 for the prior year period. Fully diluted earnings per share were $0.66 and $1.27 for the three and six months ended June 30, 2004. This compares to $0.59 and $1.11 for the prior year periods. The changes represent an increase of $0.07 per share for basic and fully diluted earnings per share for the three months and $0.17 and $0.16 per share for basic and fully diluted earnings per share for the six months ended June 30, 2004, over the same periods of 2003. The annualized return on average assets was 1.20% and 1.19% for the first three and six months of 2004 which compares with 1.24% and 1.22% for the three and six months ended June 30, 2003 respectively. The Company’s annualized return on average equity was 16.34% and 16.09% for the three and six months ended June 30, 2004 which compares with 16.61% and 16.00% for the same periods in 2003. The decreased return on assets and increased return on equity were primarily the result of a small increase in interest earning assets that was more than offset by an increase in the Company’s effective tax rate.

Net Interest Income. The Company’s primary source of income is net interest income and is determined by the difference between interest income and fees derived from earning assets and interest paid on interest bearing liabilities. Net interest income for the three month period ended June 30, 2004 rose 16% and for the six month period ended June 30, 2004 rose 18% to a total of $13,158,000 and $25,945,000 and represented an increase of $1,830,000 and $3,985,000 when compared to the $11,328,000 and $21,960,000 achieved during the three and six months ended June 30, 2003.

Total interest and fees on earning assets were $17,294,000 and $34,200,000 for the three and six months ended June 30, 2004, rising 12% or $1,793,000 for the three month period ended June 30, 2004 and rising 13% or $4,056,000 for the six month period ended June 30, 2004 when compared to the $15,501,000 and $30,144,000 achieved during the three and six months ended June 30, 2003. Total 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, 2004 was primarily the result of an increase in volume of interest earning assets. Average interest-earning assets for the three and six months ended June 30, 2004 were $1,198,896,000 and $1,174,503,000 compared with $1,017,352,000 and $976,310,000 for the three and six months ended June 30, 2003, an increase of $181,544,000 or 18% and $198,193,000 or 20% during both time periods.

Interest expense is a function of the volume of and the rates paid on interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Total interest expense was $4,136,000 and $8,255,000 for the three and six months ended June 30, 2004, compared with $4,173,000 and $8,184,000 for the three and six months ended June 30, 2003, a decrease of $37,000

or 1% and an increase of $71,000 or 1%. These modest changes were primarily the result of a decrease in the interest rate paid on interest-bearing liabilities that was offset by increase in average outstanding interest-bearing liabilities. Average interest-bearing liabilities were $987,596,000 and $969,855,000 for the three and six months ended June 30, 2004 compared with $856,773,000 and $816,364,000 for the same three and six months in 2003, an increase of 130,823,000 and $153,491,000 or 15% and 19%. Average interest rates paid on interest-bearing liabilities were 1.68% and 1.71% for the three and six months ended June 30, 2004 compared with 1.98% and 2.02% for the same three and six months of 2003, a decrease in interest rates paid of 30 and 31 basis points.

The increase in interest-earning assets and interest-bearing liabilities is primarily the result of increased market penetration within our target markets, accomplished by increasing the loan and deposit production of existing facilities and the addition of one new retail banking facility in Fresno, California in June 2003.

The Company’s taxable equivalent net interest margin, the ratio of net interest income to average interest-earning assets, was 4.48% and 4.51% for the three and six months ended June 30, 2004 compared with 4.57% and 4.59% for the same periods in 2003. Net interest margin provides a measurement of the Company’s ability to employ funds profitably during the period being measured. The Company’s decrease in net interest margin was primarily attributable to a larger drop in overall interest –earning asset yields than the corresponding drop in interest-bearing liabilities.

Average Balances And Rates Earned And Paid. The following table presents condensed average balance sheet information for the Company, together with 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, 2004							Three months ended June 30, 2003
	Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate		Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate
	(Dollars in thousands)
Assets
Federal funds sold	$	12,286		$	30	.98	%	$	16,945		$	51	1.22	%
Time deposits at other financial institutions	350			2		2.29		600			3		2.03
Taxable investment securities (1)	334,739			3,175		3.80		294,620			3,065		4.22
Nontaxable investment securities (1)	52,905			695		5.27		29,139			433		6.03
Loans, gross: (2)	798,616			13,591		6.83		676,048			12,086		7.25
Total interest-earning assets:	1,198,896			17,493		5.85		1,017,352			15,638		6.23
Allowance for loan losses	(13,847		)					(12,845		)
Cash and due from banks	39,503							34,589
Premises and equipment, net	18,053							15,261
Interest receivable and other assets	50,534							42,353
Total assets	$	1,293,139						$	1,096,710

Liabilities And Shareholders’ Equity
Negotiable order of withdrawal	$	143,762		$	17	0.05	%	$	117,697		$	14	0.05	%
Savings deposits	352,525			753		.86		247,854			643		1.05
Time deposits	351,422			1,934		2.21		350,961			2,165		2.50
Other borrowings	123,391			1,167		3.79		134,075			1,193		3.61
Subordinated Debentures	16,496			265		6.44		6,186			158		10.36
Total interest-bearing liabilities	987,596			4,136		1.68		856,773			4,173		1.98

Noninterest-bearing deposits	207,103							152,415
Accrued interest, taxes and other liabilities	3,432							5,792
Total liabilities	1,198,131							1,014,980

Total shareholders’ equity	95,008							81,730
Total liabilities and shareholders’ equity	$	1,293,139						$	1,096,710

Net interest income and margin (3)				$	13,357	4.48	%				$	11,465	4.57	%

(1) Tax-equivalent adjustments included in the nontaxable investment securities portfolio are $173,000 and $105,000 for the three months ended June 30, 2004 and 2003, respectively. Tax equivalent adjustments included in the taxable investment securities created by a dividends received deduction were $26,000 and $32,000 for the three months ended June 30, 2004 and 2003, respectively.

(2) Amounts of interest earned includes loan fees of $629,000 and $739,000 for the three months ended June 30, 2004 and 2003, respectively.

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

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS

	Six months ended June 30, 2004							Six months ended June 30, 2003
	Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate		Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate
	(Dollars in thousands)
Assets
Federal funds sold	$	8,251		$	41	1.00	%	$	15,157		$	90	1.20	%
Time deposits at other financial institutions	350			4		1.72		580			5		1.74
Taxable investment securities (1)	330,265			6,459		3.92		275,867			6,042		4.42
Nontaxable investment securities (1)	50,830			1,346		5.31		29,024			867		6.02
Loans, gross: (2)	784,807			26,739		6.83		655,682			23,419		7.20
Total interest-earning assets:	1,174,503			34,589		5.91		976,310			30,423		6.28
Allowance for loan losses	(13,659		)					(12,619		)
Cash and due from banks	39,410							33,588
Premises and equipment, net	17,460							14,805
Interest receivable and other assets	49,310							40,748
Total assets	$	1,267,024						$	1,052,832

Liabilities And Shareholders’ Equity
Negotiable order of withdrawal	$	139,220		$	32	0.05		$	117,606		$	28	0.05
Savings deposits	346,485			1,518		.88		236,040			1,223		1.04
Time deposits	356,538			3,944		2.22		333,255			4,274		2.59
Other borrowings	111,116			2,232		4.03		123,277			2,344		3.83
Subordinated Debentures	16,496			529		6.43		6,186			315		10.28
Total interest-bearing liabilities	969,855			8,255		1.71		816,364			8,184		2.02

Noninterest-bearing deposits	198,844							150,432
Accrued interest, taxes and other liabilities	4,770							5,763
Total liabilities	1,173,469							972,559

Total shareholders’ equity	93,555							80,273
Total liabilities and shareholders’ equity	$	1,267,024						$	1,052,832

Net interest income and margin (3)				$	26,334	4.51	%				$	22,239	4.59	%

(1) Tax-equivalent adjustments included in the nontaxable investment securities portfolio are $333,000 and $212,000 for the six months ended June 30, 2004 and 2003, respectively. Tax equivalent adjustments included in the taxable investment securities created by a dividends received deduction were $57,000 and $67,000 for the six months ended June 30, 2004 and 2003, respectively.

(2) Amounts of interest earned includes loan fees of $1,140,000 and $1,100,000 for the six months ended June 30, 2004 and 2003, respectively.

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

Net Interest Income Changes Due To Volume And Rate. The following table sets forth, for the periods indicated, a summary of the changes in average asset and liability balances and interest earned and interest paid resulting from changes in average asset and liability balances (volume) and changes in average interest rates and the total net change in interest income and expenses. 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, 2004 compared to June 30, 2003
(Dollar in thousands)	Volume			Rate			Total

Increase (decrease) in interest income:
Federal funds sold	$	(12	)	$	(9	)	$	(21	)
Time deposits at other financial institutions	(1		)	—			(1		)
Taxable investment securities	419			(309		)	110
Tax-exempt investment securities	323			(61		)	262
Loans	2,222			(717		)	1,505
Total:	$	2,951		$	(1,096	)	$	1,855

Increase (decrease) in interest expense:
Interest bearing demand	$	3		$	—		$	3
Savings deposits	245			(135		)	110
Time deposits	3			(234		)	(231		)
Other borrowings	(91		)	65			(26		)
Subordinated Debentures	186			(79		)	107
Total:	$	346		$	(383	)	$	(37	)

Increase (decrease) in net interest income	$	2,605		$	(713	)	$	1,892

	Six months ended June 30, 2004 compared to June 30, 2003
(Dollar in thousands)	Volume			Rate			Total

Increase (decrease) in interest income:
Federal funds sold	$	(36	)	$	(13	)	$	(49	)
Time deposits at other financial institutions	(2		)	—			(2		)
Taxable investment securities	701			(283		)	418
Tax-exempt investment securities	503			(24		)	479
Loans	3,595			(275		)	3,320
Total:	$	4,761		$	(595	)	$	4,166

Increase (decrease) in interest expense:
Interest bearing demand	$	4		$	—		$	4
Savings deposits	367			(72		)	295
Time deposits	93			(423		)	(330		)
Other borrowings	(153		)	41			(112		)
Subordinated debentures	272			(58		)	214
Total:	$	583		$	(512	)	$	71

Increase (decrease) in net interest income	$	4,178		$	(83	)	$	4,095

Provision For Loan Losses. The provision for loan losses for the three and six months ended June 30, 2004 was $621,000 and $1,241,000 compared with $482,000 and $1,153,000 for the three and six months ended June 30, 2003, an increase of $139,000 and $88,000 or 29% and 8%. See “Allowance for Loan Losses” contained herein. As of June 30, 2004 the allowance for loan losses was $13,757,000 or 1.68% of total loans which compares to the allowance for loan losses of $13,263,000 or 1.74% of total loans as of December 31, 2003. At June 30, 2004, nonperforming assets totaled $5,001,000 or 0.38% of total assets, nonperforming loans totaled $4,941,000 or 0.60% of total loans and the allowance for loan losses totaled 278% of nonperforming loans. At December 31, 2003, nonperforming assets totaled $4,047,000 or 0.33% of total assets, nonperforming loans totaled $3,987,000 or 0.52% of total loans and the allowance for loan losses totaled 333% 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.

Noninterest Income. Noninterest income increased by $190,000 and $300,000 or 8% and 6% to $2,591,000 and $5,031,000 for the three and six months ended June 30, 2004 compared with $2,401,000 and $4,731,000 for the same periods during 2003. Service charges on deposit accounts increased by $223,000 and $380,000 or 16% and 14% to $1,580,000 and $3,014,000 for the three and six months ended June 30, 2004 compared with $1,357,000 and $2,634,000 achieved during for the same period in 2003. The increase in fees is the result of increased customer use of existing fee based products. Other income decreased by $24,000 and $59,000 or 3% and 4% for the three and six month periods ended June 30, 2004 when compared to the same periods in 2003. The primary source of this modest decrease in other income is the sale of the consumer credit card portfolio in March, 2003 for a gain of $82,000, the gain on sale of foreclosure property with a book basis of $0 for an $81,000 gain in February 2003, and modestly reduced mortgage packaging fees. These decreases are partially offset by increases in retail investment fees and fees generated by Regency Investment Advisors, Incorporated for the three and six months ended June 30, 2004.

Noninterest Expense. Noninterest expenses increased by $550,000 and $1,516,000 or 6% and 9% to $9,388,000 and $18,714,000 for the three and six months ended June 30, 2004 compared with the $8,838,000 and $17,198,000 recorded during for the same periods in 2003. The primary components of noninterest expenses were salaries and employee benefits, premises and occupancy expense, equipment expense, professional fees, marketing expense, supplies expense and other operating expenses.

For the three and six months ended June 30, 2004, salaries and related benefits increased by $504,000 and $1,057,000 or 10% and 11% to $5,438,000 and $10,494,000 from the $4,934,000 and $9,437,000 recorded for the same period in 2003. The salary expense increase was primarily the result of normal salary progression and incentive bonus payments. Equipment expense increased by $44,000 and $111,000 or 6% and 8% to $746,000 and $1,572,000 for the three and six months ended June 30, 2004 from the $702,000 and $1,461,000 recorded during the same periods in 2003. The increased equipment costs were related to branch equipment upgrades and increased technology spending. Premises and occupancy expenses increased by $52,000 and $161,000 to $764,000 and $1,543,000 for the three and six months ended June 30, 2004 from $712,000 and $1,382,000 during the same periods in 2003. The primary reason for the increase in occupancy costs in 2004 is related to general Company growth and branch site improvements and the addition of a new retail banking facility in Fresno in June 2003. When comparing the results of the three and six months ended June 30, 2004 to three and six months ended June 30, 2003, professional fees decreased by $86,000 or 18% for the three month period and increased $10,000 or 1% for the six month period, marketing expenses decreased by $96,000 and $8,000 or 39% and 2%, goodwill and intangible amortization expense decreased by $4,000 and $7,000 or 2%, supplies

expense decreased by $19,000 and $32,000 or 10% and 7%, and other expenses increased $155,000 and $224,000 or 11% and 8% from 2003 levels. These general and administrative expense changes were the result of general growth of the Company during the period, and the timing between first and second quarters as to when these expenses were incurred.

Provision For Income Taxes. The Company recorded an increase in the income tax provision of $846,000 and $1,579,000 or 83% and 82% to $1,860,000 and $3,497,000 for the three and six months ended June 30, 2004 compared to $1,014,000 and $1,918,000 recorded for the same period in 2003. During the three and six months ended June 30, 2004 the Company achieved an effective tax rate of 32% which compares to 23% for the three and six months ended June 30, 2003. During 2004, the effective tax rate has increased 9% over 2003 levels. The effective tax rate for the second quarter of 2003 includes a REIT benefit that was reversed in the fourth quarter of 2003 when the Franchise Tax Board listed certain REIT transactions as abusive tax shelters. For the full year 2003, the Company’s effective tax rate was 26%. The increase in the effective tax rate in 2004 was primarily the result of the elimination of a recorded tax benefit related to the Bank’s REIT as well as increased levels of fully taxable earnings. The Company’s effective tax rate of 32% in 2004 and 26% in 2003 is also lowered due to the Bank’s investment in such as investments as limited partnerships which own low income housing projects that generate federal and state income tax credits and other investments which earnings provide the Company with tax exemptions such as municipal securities and single premium universal life policies.

Financial Condition

Total assets at June 30, 2004 were $1,314,180,000, an increase of $79,638,000 or 6% compared with total assets of $1,234,542,000 at December 31, 2003. Net loans were $803,974,000 at June 30, 2004, an increase of $52,985,000 or 7% compared with net loans of $750,989,000 at December 31, 2003. Deposits were $1,074,547,000 at June 30, 2004, an increase of $45,739,000 or 4% compared with deposits of $1,028,808,000 at December 31, 2003. The increase in total assets of the Company between December 31, 2003 and June 30, 2004 was primarily the result of an increase in deposits and other borrowed funds that were obtained to fund additional purchases of interest earning assets.

Total shareholders’ equity was $95,173,000 at June 30, 2004, an increase of $5,688,000 or 6% from the $89,485,000 at December 31, 2003. The growth in shareholders’ equity between December 31, 2003 and June 30, 2004 was achieved through the retention of accumulated earnings which was partially offset by a decline in other comprehensive income. Other comprehensive income consists of changes in the fair market value compared to book value of available for sale investment securities and valuation changes in the Bank’s interest rate swap, net of estimated federal and state income taxes.

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,
(Dollars in thousands)	2004		2003

Letters of credit	$	13,311	$	7,380
Commitments to extend credit	311,500		348,282
Total	$	324,811	$	355,662

Other Interest-Earning Assets. The following table relates to the cash surrender value of life insurance policies that are carried in other assets at the dates indicated. The insurance polices are associated with a salary continuation plan for the Company’s executive management and deferred retirement benefits for participating board members. The plan is informally linked with universal life insurance policies for the salary continuation plan. Income from these policies is reflected in noninterest income.

	At June 30,		At December 31,
(Dollars in thousands)	2004		2003

Cash surrender value of life insurance	$	27,616	$	24,138

Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, restructured loans and other real estate owned.

Nonperforming loans are those which the borrower fails to perform in accordance with the original terms of the obligation and include loans on nonaccrual status, loans past due 90 days or more and restructured loans. The Company generally places loans on nonaccrual 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 nonaccrual 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 nonaccrual 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.

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 established. 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, 2004 and December 31, 2003:

(Dollars in thousands)	June 30, 2004			December 31, 2003

Nonaccrual loans	$	4,874		$	3,987
Accruing loans past due 90 days or more	67			—
Total nonperforming loans	4,941			3,987
Other real estate owned	60			60
Total nonperforming assets	$	5,001		$	4,047

Nonperforming loans to total loans	0.60		%	0.52		%
Nonperforming assets to total assets	0.38		%	0.33		%

Contractual accrued interest income on loans on nonaccrual status as of June 30, 2004 and 2003, that would have been recognized if the loans had been current in accordance with their original terms was approximately $115,000 and $39,000, respectively.

At June 30, 2004, nonperforming assets represented .38% of total assets, an increase of 5 basis points when compared to the .33% at December 31, 2003. Nonperforming loans represented .60% of total loans at June 30, 2004, an increase of 8 basis points compared to the .52% at December 31, 2003. Nonperforming loans that were secured by first deeds of trust on real property were $0 at June 30, 2004 and December 31, 2003. Other forms of collateral such as inventory and equipment secured 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.

The increase in nonperforming loans and nonperforming assets as of June 30, 2004 compared with their levels as of December 31, 2003, was due to a slight increase in the nonperforming commercial segment of the loan portfolio.

At June 30, 2004 and December 31, 2003, the Company had $60,000 invested in one property, respectively, that had been acquired through foreclosure. The property was carried at the lower of its 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 most of these properties within a twelve month period. No assurance can be given that the Company will sell the remaining property during 2004 or at any time or the amount for which the property might be sold.

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, 2004 and December 31, 2003, 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, 2004 were $4,941,000 for which the Company made provisions to the allowance for loan losses of approximately $553,000.

Except for loans that are disclosed above, there were no assets as of June 30, 2004, where known information about possible credit problems of 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 magnitude of the Company’s loan portfolio, however, it is always possible that current credit problems may exist that may not have been discovered by management.

Allowance for Loan Losses

The following table summarizes the loan loss experience of the Company for the six months ended June 30, 2004 and 2003, and for the year ended December 31, 2003.

	June 30						December 31
	2004			2003			2003
	(Dollars in thousands)
Allowance for Loan Losses:
Balance at beginning of period	$	13,263		$	12,134		$	12,134
Provision for loan losses	1,241			1,153			2,455
Charge-offs:
Commercial and agricultural	878			476			1,010
Real estate mortgage	—			—			29
Consumer	152			493			956
Total charge-offs	1,030			969			1,995
Recoveries
Commercial and agricultural	143			88			302
Consumer	140			220			367
Total recoveries	283			308			669
Net charge-offs	747			661			1,326
Balance at end of period	$	13,757		$	12,626		$	13,263

Loans outstanding at period-end	$	817,731		$	693,835		$	764,252
Average loans outstanding	$	784,807		$	655,682		$	687,419

Annualized net charge-offs to average loans	0.19		%	0.20		%	0.19		%
Allowance for loan losses
To total loans	1.68		%	1.82		%	1.74		%
To nonperforming loans	278.42		%	898.51		%	332.70		%
To nonperforming assets	275.06		%	861.48		%	327.74		%

The Company maintains an allowance for loan losses at a level considered by management to be adequate to cover the inherent risks of loss associated with its loan portfolio under prevailing and anticipated economic conditions. In determining the adequacy of the allowance for loan losses, management takes into consideration growth trends in the portfolio, examination of financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, 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 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 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 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 $621,000 and $1,241,000 for the three and six months ended June 30, 2004 compared with $482,000 and $1,153,000 during the same periods of 2003. The increase in loan loss provision during the first six months of 2004 was recorded to coincide with the modestly higher level of charge-offs experienced and modestly increased nonperforming loan levels during the first six months of 2004 when compared to the same period in 2003. The Company’s charge-offs, net of recoveries, were $747,000 for the six months ended June 30, 2004 compared with $661,000 for the same six months in 2003. The increase in net charge-offs for the first six months of 2004 was primarily due to increased charge-offs that occurred within the commercial and agricultural segment and decreased recoveries within the consumer loan segment of the loan portfolio.

As of June 30, 2004, the allowance for loan losses was $13,757,000 or 1.68% of total loans outstanding, compared with $13,263,000 or 1.74% of total loans outstanding as of December 31, 2003 and $12,626,000 or 1.82% of total loans outstanding as of June 30, 2003.

The Company uses a method developed by management for determining the appropriate level of its allowance for loan losses. This method applies relevant risk factors to the entire loan portfolio, including nonperforming loans. The methodology is based, in part, on the Company’s loan grading and classification system. The Company grades its loans through internal reviews and periodically subjects loans to external reviews which then are assessed by the Company’s audit committee and management. Credit reviews are performed on a monthly basis and the quality grading process occurs on a quarterly basis. Risk factors applied to the performing loan portfolio are based on the Company’s past loss history considering the current portfolio’s characteristics, current economic conditions and other relevant factors. General reserves are applied to various categories of loans at percentages ranging up to 1.8% based on the Company’s assessment of credit risks for each category. Risk factors are applied to the carrying value of each classified loan: (i) loans internally graded “Watch” or “Special Mention” carry a risk factor from 1.0% to 2.0%; (ii) ”Substandard” loans carry a risk factor from 15% to 40% depending on collateral securing the loan, if any; (iii) “Doubtful” loans carry a 50% risk factor; and (iv) “Loss” loans are charged off 100%. In addition, a portion of the allowance is specially allocated to identified problem credits. The analysis also includes reference to factors such as the delinquency status of the loan portfolio, inherent risk by type of loans, industry statistical data, recommendations made by the Company’s regulatory authorities and outside loan reviewers, and current economic environment. Important components of the overall credit rating process are the asset quality rating process and the internal loan review process.

The allowance is based on estimates and ultimate future losses may vary from current estimates. It is always possible that future economic or other factors may adversely affect the Company’s borrowers, and thereby cause loan losses to exceed the current allowance. In addition, there can be no assurance 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 to loan categories is an estimate by management 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.

External Factors Affecting Asset Quality. As a result of the Company’s loan portfolio mix, the future quality of its assets could be affected by adverse economic trends in its region or in the agricultural community. These trends are beyond the control of the Company.

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

Parts of California have experienced significant floods in the late 1990s. No assurance can be given that future flooding will not have an adverse impact on the Company and its borrowers and depositors.

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. Deposit growth and access to credit lines established with correspondent banks and market sources of funds are considered by the Company as sources of liability liquidity. The holding 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, available-for-sale securities and federal funds sold. The Company’s liquid assets totaled $337,361,000 and $321,235,000 on June 30, 2004 and December 31, 2003, respectively, and constituted 26% of total assets on those dates. Liquidity is also affected by the collateral requirements of its public deposits and certain borrowings. Total pledged securities were $289,040,000 at June 30, 2004 compared with $295,024,000 at December 31, 2003.

Although the Company’s primary sources of liquidity include liquid assets and a stable 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 Bankers’ Bank, Union Bank of California, Wells Fargo Bank and First Tennessee Bank aggregating $175,043,000 of which $113,426,000 was outstanding as of June 30, 2004 and $83,346,000 was outstanding as of December 31, 2003. The increase in borrowings

outstanding during 2004 produced an inflow of funds that were used to purchase additional investment securities and allowed the Bank to allow $20,000,000 in brokered deposits to mature. 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 internally generated capital through retained earnings. The Company’s shareholders’ equity increased by $5,688,000 or 6% from December 31, 2003 to June 30, 2004.

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 financial statements. Management believes, as of June 30, 2004, that the Company and the Bank met all applicable capital requirements. The Company’s leverage capital ratio at June 30, 2004 was 8.48% as compared with 8.55% as of December 31, 2003. The Company’s total risk based capital ratio at June 30, 2004 was 11.61% as compared to 11.57% as of December 31, 2003.

The Company’s and Bank’s actual capital amounts and ratios met all regulatory requirements as of June 30, 2004 and were summarized as follows:

Dollars in thousands	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions:
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Consolidated
As of June 30, 2004
Total capital (to risk weighted assets)	$	122,641	11.61	%	$	84,513	8.0	%	$	105,641	10.0	%
Tier 1 capital (to risk weighted assets)	109,429		10.36		42,256		4.0		63,384		6.0
Leverage ratio*	109,429		8.48		51,633		4.0		64,541		5.0

The Bank:
As of June 30, 2004
Total capital (to risk weighted assets)	$	111,328	10.57	%	$	84,264	8.0	%	$	105,330	10.0	%
Tier 1 capital (to risk weighted assets)	98,154		9.32		42,132		4.0		63,198		6.0
Leverage ratio*	98,154		7.62		51,518		4.0		64,399		5.0

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

The Company has no formal dividend policy, and dividends are issued 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, 2004, the Company had a deposit mix of 33% in savings deposits, 32% in time deposits, 14% in interest-bearing checking

accounts and 21% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company’s net interest income by lowering its costs of funds.

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 deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At June 30, 2004, the Company had brokered deposits of $299,000.

Maturities of time certificates of deposits of $100,000 or more outstanding at June 30, 2004 and December 31, 2003 are summarized as follows:

	June 30, 2004		December 31, 2003
	(Dollars in thousands)

Three months or less	$	65,380	$	68,249
Over three to six months	25,710		37,829
Over six to twelve months	29,429		31,060
Over twelve months	40,405		35,600
Total	$	160,924	$	172,738

Borrowed Funds

Borrowed funds increased by $30,085,000 or 32% to $122,902,000 at June 30, 2004 compared to the $92,817,000 outstanding at December 31, 2003. The increase in borrowed funds during 2004 was primarily used to purchase new investment securities and to allow $20,000,000 in brokered certificates of deposit to mature.

Return on Equity and Assets

	Three months ended		Three months ended		Year ended
	June 30		June 30		December 31
	2004		2003		2003

Annualized return on average assets	1.20	%	1.24	%	1.23	%
Annualized return on average equity	16.34	%	16.61	%	16.43	%
Dividend payout ratio	7.58	%	—		—
Average equity to average assets	7.35	%	7.45	%	7.46	%

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. The effect of inflation on premises and equipment, as well as on interest expenses, has not been significant for the periods covered in this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 reports to the Board of Directors. ALCO establishes policies that monitors and coordinates 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. Balance sheet management personnel monitor the asset and liability changes on an ongoing basis and provide report information and recommendations to the ALCO committee in regards to those changes.

It is the opinion of management there has been no material change in the Company’s market risk during the six months ended June 30, 2004 when compared to the level of market risk at December 31, 2003. If interest rates were to suddenly and materially fall from levels anticipated in the third quarter of 2004, the Company could become susceptible to an increased level of market risk.

Item 4. Controls and Procedures

Evaluation Of Disclosure Controls And Procedures

Under the supervision and with the participation of the Company’s management, including its chief executive office 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 Rules 13a – 15 under the Securities Exchange Act of 1934.

Based on the evaluation, the chief executive officer and chief financial officer concluded that as of the Evaluation Date 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 Controls

There were no significant changes in our internal over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - Other Information

Item 1. Legal Proceedings

The Company is a party to routine litigation in the ordinary course of its business. In the opinion of management, pending and threatened litigation is not likely to have a material adverse effect on the financial condition or results of operations of the Company.

Item 2. Changes in Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Securities Holders.

(a.) Our Annual Meeting of Shareholders for 2004 was held April 13, 2004. The number of shares represented in person or by proxy and constituting a quorum was 4,354,260, which equaled approximately 76% 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	4,315,150	39,110
Thomas T. Hawker	4,304,418	49,842
Curtis A. Riggs	4,211,510	142,750
Roberto Salazar	4,240,308	113,952

(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:

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form 8-K.

See Exhibit Index

Reports on Form 8-K

The registrant filed a report on Form 8-K dated April 28, 2004 (Item 5)

SIGNATURES

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, 2004		By		/s/		Thomas T. Hawker
						Thomas T. Hawker
						President and
						Chief Executive Officer

Date: August 9, 2004	By		/s/		R. Dale McKinney
						R. Dale McKinney
						Chief Financial Officer

Exhibit Index

Exhibit		Description

31.1		Certification of Registrant’s Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003

31.2		Certification of Registrant’s Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003

32.1		Certification of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2		Certification of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350