Capital Corp Of The West (CCOW) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2008

or

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

for the Transition Period from                      to                     

Commission File Number:0-27384

CAPITAL CORP OF THE WEST

(Exact name of registrant as specified in its charter)

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

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. Yesþ     Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non- accelerated filero(Do not check if a smaller reporting company) Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso     Noþ

The number of shares outstanding of the registrant’s common stock, no par value, as of November 12, 2008 was 10,815,756. No shares of preferred stock, no par value, were outstanding at November 12, 2008.

Capital Corp of the West
Table of Contents

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

2

PART 1—Financial Information

Item 1. Financial Statements (unaudited)

Capital Corp of the West

Condensed Consolidated Balance Sheets

(Unaudited)

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

See accompanying notes to condensed consolidated financial statements.

3

Capital Corp of the West

Condensed Consolidated Statements of Operations

(Unaudited)

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

See accompanying notes to condensed consolidated financial statements.

4

Capital Corp of the West

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

								Accumulated Other
	Number of				Retained			Comprehensive
(in thousands)	Shares		Amounts		Earnings			Income (Loss)			Total
Balance, December 31, 2006		10,761	$	64,586	$	82,803		$	(1,620	)	$	145,769
Exercise of stock options, including tax benefits of $23		29		438					—			438
Effect of share-based payment expense		—		1,066					—			1,066
Net change in fair value of available for sale investment securities, net of tax effect $1,865		—		—					(666	)		(666	)
Net change in fair value of interest rate floor, net of tax effect of $227 (1)		—		—					313			313
Cash dividends		—		—		(3,241	)		—			(3,241	)
Net income		—		—		10,614			—			10,614
Balance, September 30, 2007		10,790	$	66,090	$	90,176		$	(1,973	)	$	154,293
Balance January 1, 2008, before cumulative effect of change in accounting principle		10,805	$	66,599	$	74,757		$	371		$	141,727
Cumulative effect of change in accounting principle (Note 3)		—		—		(186	)		—			(186	)
Balance, January 1, 2008, after cumulative effect of change in accounting principle		10,805		66,599		74,571			371			141,541
Exercise of stock options		11		64								64
Effect of share-based payment expense				894								894
Net change in fair value of available for sale investment securities (2)									(3,305	)		(3,305	)
Amortization of interest rate floor									151			151
Cash dividends						(1,191	)					(1,191	)
Net loss						(64,258	)					(64,258	)
Balance, September 30, 2008		10,816	$	67,557	$	9,122		$	(2,783	)	$	73,896

(1)	Includes reclassification adjustment for net losses included in net income of $142 (net of $103 tax benefit).
(2)	Includes reclassification adjustment for net losses included in net loss of $934.

See accompanying notes to condensed consolidated financial statements.

5

Capital Corp of the West

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	For the Nine Months Ended
	September 30,
(in thousands)	2008			2007
Net income (loss)	$	(64,258	)	$	10,614
Unrealized loss on securities arising during the period		(4,239	)		(666	)
Reclassification adjustment for losses realized in net income (loss), net of tax benefit of $83 in 2007		934			171
Unrealized gain or amortization on interest rate floor arising during the period		151			142
Comprehensive income (loss)	$	(67,412	)	$	10,261

See accompanying notes to condensed consolidated financial statements.

6

Capital Corp of the West

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

See accompanying notes to condensed consolidated financial statements.

7

Capital Corp of the West

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

     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 September 30, 2008 has total assets of $1.9 billion and total shareholders’ equity of $73.9 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. The Bank has three wholly-owned subsidiaries, Merced Area Investment & Development, Inc. (“MAID”) a real estate company, County Asset Advisors (“CAA”) and 1977 Services Corporation, which was formed in 2007 to hold foreclosed real estate. CAA is currently inactive, and MAID has limited operations serving as the owner of certain bank properties. All references herein to the Company include 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, County Statutory Trust III, and County Statutory Trust IV, which are all trust subsidiaries, established to facilitate the issuance of trust preferred securities. On October 5, 2007, the Company acquired Bay View Funding, a factoring business headquartered in San Mateo, CA. On November 2, 2007, the Bank acquired eleven California branches of National Bank of Arizona dba The Stockmen’s Bank of California.

     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.

     The Bank is a community bank with operations located mainly in the San Joaquin Valley of Central California with additional business banking 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 two administrative centers in downtown Merced with an additional 33,000 square feet of office space. The Bank has 39 full-service branch offices, primarily in Fresno, Kings, Madera, Mariposa, Merced, Sacramento, San Bernardino, San Francisco, San Joaquin, Stanislaus, Santa Clara, Tulare and Tuolumne counties.

NOTE 2. REGULATORY MATTERS, CAPITAL ADEQUACY, LIQUIDITY AND GOING CONCERN RISK

     As a result of the deterioration in the economic climate in Central California and the banking industry overall, the Company recorded a net loss of $54,563,000 for the three months ended September 30, 2008. This loss was primarily the result of non-cash charges related to loan loss provisions of $11,500,000, goodwill impairment of $23,515,000 and an increase in the valuation allowance for deferred tax assets of $26,550,000 of which $25,225,000 directly contributed to the net loss and $1,325,000 was recorded through accumulated other comprehensive income, a component of stockholders’ equity. While the goodwill impairment had no effect on regulatory capital, the net loss together with prior quarter losses, has had a negative impact on operations, liquidity and capital adequacy. In addition, approximately $6,400,000 of the valuation allowance for deferred tax assets did not have an incremental impact on the Bank’s regulatory capital because it was previously disallowed due to regulatory limitations. The adverse operating results from prior quarters have also resulted in actions by the regulators to restrict the Company’s operations as described in the Regulatory Matters section below.

Regulatory Matters

     On July 17, 2008, the Company and its subsidiary County Bank entered into a formal agreement (the “Written Agreement”) with the Federal Reserve Bank of San Francisco to address regulatory concerns. Under the Written Agreement, the Company and the Bank agreed to take appropriate steps to improve board oversight and management; strengthen risk management practices; improve credit and loan administration policies and procedures; improve asset quality; maintain an adequate allowance for loan losses; submit a capital plan for achieving and maintaining acceptable capital levels; suspend cash dividends and payments on trust preferred securities without regulatory approval; not incur any new material debt or repurchase or redeem capital stock; submit an earnings plan and budget; submit an acceptable plan for liquidity and cash management; constitute a Compliance Committee to monitor and coordinate compliance with the Written Agreement; and submit progress reports on a regular basis. The Bank also entered into a similar agreement with the California Department of Financial Institutions. While progress has been achieved in many areas, the Company and Bank have not been successful in the most important requirement to raise capital in accordance with the capital plan adopted pursuant to these agreements.

8

Capital Adequacy

     The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can result in mandatory and possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

     Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the following table).

     The Company’s and Bank’s actual capital amounts and ratios as of September 30, 2008 are as follows:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt
	Actual					Purposes					Corrective Action
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
The Company:
Total capital (to risk weighted assets)	$	134,956		8.75	%	$	123,324		8	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)	$	84,841		5.50	%	$	61,662		4	%		N/A		N/A
Leverage ratio	$	84,841		4.24	%	$	80,037		4	%		N/A		N/A
The Bank:
Total capital (to risk weighted assets)	$	128,986		8.41	%	$	122,700		8	%	$	153,375		10	%
Tier 1 Capital (to risk weighted assets)	$	89,581		5.84	%	$	61,350		4	%	$	92,025		6	%
Leverage ratio	$	89,581		4.52	%	$	79,204		4	%	$	99,005		5	%

     The Company’s and Bank’s actual capital amounts and ratios as of December 31, 2007 are as follows:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt
	Actual					Purposes					Corrective Action
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
The Company:
Total capital (to risk weighted assets)	$	177,480		10.26	%	$	138,406		8	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)	$	142,122		8.21	%	$	69,203		4	%		N/A		N/A
Leverage ratio	$	142,122		6.97	%	$	81,510		4	%		N/A		N/A
The Bank:
Total capital (to risk weighted assets)	$	170,940		9.94	%	$	137,518		8	%	$	171,898		10	%
Tier 1 Capital (to risk weighted assets)	$	129,253		7.52	%	$	68,759		4	%	$	103,139		6	%
Leverage ratio	$	129,253		6.41	%	$	80,703		4	%	$	100,879		5	%

     As discussed under the Regulatory Matters section above, the Company is operating under a formal agreement with its primary regulator. Additional sources of capital are required under these agreements and the Company has engaged a financial advisor to explore strategic alternatives, including capital raises and the sale of the Bank and or Company. The Company has also applied to participate in the Capital Participation Plan, as part of the Troubled Asset Relief Program (TARP). However, there can be no assurance that the application will be approved.

     The Company and the Bank have aggressively pursued various capital alternatives; however they have not been able to raise capital in accordance with the capital plan adopted pursuant to these agreements. There can be no assurance that the Company will be able to arrange for sufficient capital to satisfy regulatory requirements.

9

Liquidity

     Negative publicity relating to the Company’s financial results and the financial results of other financial institutions, together with the seizure of other financial institutions by federal regulators, has caused a significant amount of customer deposit withdrawals, thus affecting the Company’s liquidity position. The Company’s adverse operating results for the third quarter have reduced capital ratios and the announcement of operating results may increase the Company’s need for funds to meet depositor withdrawals. Increased withdrawal demands or reduced funding sources would make it difficult to meet liquidity obligations as they occur.

     As of September 30, 2008, the Bank had no unsecured correspondent banking facilities with borrowing availability. Further, the Bank had no additional borrowing availability with the FHLB. However, the Bank has pledged commercial loans eligible as collateral to the Federal Reserve Bank to support additional borrowings, as needed. This line was put in place by the Bank in early April 2008. As of September 30, 2008, the Bank’s ability to borrow from the Federal Reserve Bank using eligible loans and investment securities as collateral was $162,940,000. The Bank considers this borrowing capacity as a secondary source of funding and had no borrowings outstanding under this arrangement at September 30, 2008. The Federal Reserve Bank of San Francisco is not obligated to lend to the Bank under this loan facility and has indicated that it might not lend or continue lending if the Bank is unable to raise capital.

     Liquidity risk is the risk to earnings or capital resulting from the inability to meet obligations when they occur without incurring unacceptable losses. Liquidity risk includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with a minimum loss of value or to access other sources of cash. The Company continues to carefully manage its liquidity and look for opportunities to increase liquidity wherever possible. The Company’s adverse operating results in the third quarter are likely to result in increased pressure on the Company’s ability to meet its liquidity needs. See Item 1A Risk Factors on page 49 of this report for additional discussion of liquidity risk.

Going Concern Risk

     The Company has determined that significant additional sources of liquidity and capital will be required for us to continue operations through 2008 and beyond. The Company has engaged a financial advisor to explore strategic alternatives to resolve the capital deficiency. However, there can be no assurance that the Company will be able to maintain sufficient liquidity or to raise additional capital to satisfy regulatory requirements and meet obligations as they occur. Further, the regulators are continually monitoring liquidity and capital adequacy and evaluating the Company’s ability to continue to operate in a safe and sound manner. The Bank’s regulators could, if deemed warranted, take further actions, including the assumption of control of the Bank, to protect the interests of depositors insured by the FDIC. The uncertainty regarding the Company’s ability to obtain additional capital or meet future liquidity requirements raises substantial doubt about the Company’s ability to continue as a going concern.

     The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of the Company’s inability to honor obligations or from any extraordinary regulatory action, either of which would affect the Company’s ability to continue as a going concern.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation:The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of results to be expected for any future periods. These interim condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”).

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     The accompanying condensed consolidated balance sheet as of December 31, 2007, which has been derived from audited financial statements, and unaudited interim condensed consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data-Note 1 (Summary of Significant Accounting Policies) under Part II, Item 8 of the Company’s 2007 Form 10-K.

     The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Consolidation:The accompanying condensed consolidated financial statements include the accounts of the Company, the Bank, MAID, CAA, 1977 Services Corporation and Bay View Funding. All significant intercompany balances and transactions have been eliminated in consolidation. As of September 30, 2008, the Company had 4 wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts. The Company has not consolidated the accounts of the Trusts in its condensed consolidated financial statements in accordance with FASB Interpretation 46R,Consolidation of Variable Interest Entities. As a result, the junior subordinated debentures issued by the Company to the Trusts are reflected on the Company’s condensed consolidated balance sheet as junior subordinated debentures.

     Investment Securities:Investment securities consist of federal agency securities, state and county municipal securities, mortgage-backed securities, collateralized mortgage obligations, agency preferred stock and equity securities. Investment securities may be classified into one of three categories. These categories include trading, available for sale, and held to maturity. The category of each security is determined based on the Company’s investment objectives, operational needs and intent on the date of purchase. The Company has not purchased securities with the intent of actively trading them. As of June 30, 2008, the Company transferred its entire held to maturity portfolio to available for sale at fair value, by recording the unrealized holding loss at the date of transfer in other comprehensive income, net of tax. At the date of transfer, the net unrealized loss of $1,338,000 was reported in other comprehensive income.

     Securities available for sale may be sold prior to maturity and are available for future liquidity requirements. These securities are carried at fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and reported net of tax as a separate component of shareholders’ equity until realized. Securities held to maturity are classified as such where the Company has the ability and positive intent to hold them to maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts.

     Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale or held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that there is other than temporary impairment and a new basis is then established for the security.

     The Company uses a taxable equivalent method to evaluate performance in its investment portfolio. The taxable equivalent method converts tax benefits into an equivalent pretax interest or dividend income on tax advantaged investment securities. This adjustment is made in order to make yield comparisons using a total economic benefit approach. Taxable equivalent interest income is equal to recorded interest income plus the interest income pretax equivalent of the tax benefit afforded certain investment securities, such as bank qualified state and municipal debt securities and corporate dividends received from certain equity securities. The tax rate used in calculating the taxable equivalent interest income was 35% for the three and nine months ended September 30, 2008 and 2007.

     The Company reviews its securities at least quarterly for indications of impairment, which requires significant judgment. Investments identified as having an indication of impairment are reviewed further to determine if the investment is other than temporarily impaired. The investment value is reduced when declines in value are considered to be other than temporary and the Company recognizes the estimated loss as a loss on investment securities, which is a component of noninterest income. Factors considered for impairment include: length of time and the extent to which market value has been less than cost, reasons for decline in market price — whether an industry issue or issuer specific, changes in the general market condition of the area or issuer’s industry, the issuer’s financial condition, capital strength, ability to make timely future payments and any changes in agencies’ ratings and any potential actions.

     Loans Held for Sale:Loans held for sale are carried at the lower of cost or estimated market value. At the time of transfer from loans held for investment to loans held for sale, any write-down in the loan’s cost basis attributable to its credit quality is reflected

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with a corresponding decrease in the allowance for loan losses. Net unrealized losses due to changes in market rates are recognized through a valuation allowance by charges to income. Gains or losses on the sales are recognized at the time of the sale and are determined by the difference between the net proceeds and the carrying value of the loans sold. Net gains and losses on sales of loans are included in non-interest income.

     On June 30, 2008, the Company made a decision to sell the indirect loan portfolio and transferred these loans to loans held for sale. The loans were valued at the lower of cost or fair value as of June 30, 2008. The fair value was based on the expected cash flows discounted by an appropriate interest rate. The Company recognized a partial charge-off of $985,000 against the allowance for loan losses, and a write down of $1,751,000 recorded as non-interest expense. On July 10, 2008, the Company discontinued its indirect loan program which financed consumer loans, principally secured by recreational vehicles.

     Loans:Loans are carried at the principal amount outstanding, net of unearned income, including deferred loan origination fees and other costs. Nonrefundable loan origination and commitment fees and the estimated direct labor costs associated with originating or acquiring the loans are deferred and amortized as an adjustment to interest income over the life of the related loan using a method that approximates the effective yield method. Interest income on loans is accrued as earned based on contract interest rates and principal amounts outstanding.

     Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection); or when we have determined, based upon currently known information, that the timely collection of principal or interest is doubtful; or when the loans otherwise become impaired under the provisions of SFAS No. 114.

     When a loan is placed on nonaccrual status, the accrued interest is reversed against interest income and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. Generally, a loan will be returned to accrual status when all delinquent principal and interest become current in accordance with the terms of the loan agreement and full collection of the principal and interest appears probable.

     Allowance for loan losses:The allowance for loan losses is maintained at the level considered to be adequate to absorb probable inherent loan losses based on management’s assessment of various factors affecting the loan portfolio at the measurement date. The allowance for loan losses is established through a provision for loan losses charged to expense to provide for credit risk. Our allowance for loan losses is established for estimated loan losses that are probable but not yet realized. The process of estimating loan losses is imprecise. The evaluation process we use to estimate the required allowance for loan losses is described below.

     The allowance for loan losses represents management’s estimate of the amount of probable losses inherent in the loan portfolio as of the balance sheet date. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, uncertainties and conditions, all of which may be susceptible to significant change. In addition, bank regulatory authorities as part of their periodic examination of the Bank may require additional charges to the provision for loan losses if warranted as a result of their review.

     Management applies an evaluation process to the loan portfolio to estimate the required allowance for loan losses. It maintains a systematic process for the evaluation of individual loans for inherent risk of loan losses. Each loan is assigned a credit risk rating. Credit risk ratings are assigned on a 13 point scale, ranging from loans with a low risk of nonpayment to loans which have been charged-off. Each quarter, an analysis of all substandard loans exceeding $250,000 is prepared by the lending officer and reviewed by credit personnel. This credit risk evaluation process includes, but is not limited to, consideration of such factors as payment status, the financial condition of the borrower, borrower compliance with loan covenants, underlying collateral values, review of appraisal reports, potential loan concentrations, internal and external credit review, and general economic conditions. Bank policies require a committee of senior management to review, at least quarterly, credit relationships that exceed specific dollar values. The review process evaluates the appropriateness of the credit risk rating and allocation of the allowance for loan losses, as well as other account management functions. The allowance for loan losses includes an allowance for individual loans deemed to be impaired under the provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, a general allowance representing the estimated credit losses of segmented pools of loans, by type, and by behavioral characteristics, and a qualitative reserve. The factors considered when determining the qualitative reserve include more subjective measures that would likely cause the future loan losses to differ from the estimate of credit losses made according to the estimates for specific and general reserves. These factors include:

• changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices and resources,

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• changes in the national and local economic and business conditions and developments, including the condition of various market segments,

• changes in the nature and volume of the portfolio,

• changes in the experience, ability and depth of lending management staff,

• changes in the trend of the volume and severity of past due and classified loans, and trends in the volume of nonaccruals, troubled debt restructuring and other loan modifications,

• changes in the home lending construction industry and effect on the Company’s construction loans,

• changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors,

• the existence and effect of any concentrations of credit, and changes in the levels of concentrations, and

• the effect of external forces such as competitive and legal regulatory requirements on the level of estimated credit losses in the Company’s current portfolio.

     The evaluation process is designed to determine the adequacy of the allowance for loan losses. Management has developed a model based on historical loan losses to estimate an appropriate allowance for outstanding loan balances. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of the allowance for loan losses rely, to a great extent, on the judgment and experience of management.

     A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impairment of a loan based upon either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent, depending on the circumstances. If the measurement of impairment for the loan is less than the recorded investment in the loan, a valuation allowance is established with a corresponding charge to the provision for loan losses.

     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.

     Uncollectible Loans and Write-offs:Loans are considered for full or partial charge-offs in the event that principal or interest is over 180 days past due, the loan lacks sufficient collateral and it is not in the process of collection. We also consider writing off loans in the event of any of the following circumstances: 1) the impaired loan balances are not covered by the value of the source of repayment; 2) the loan has been identified for charge-off by regulatory authorities; 3) any overdrafts greater than 90 days; and 4) the loan is considered permanently impaired. All impaired loans are placed on nonaccrual.

     Reserve for Unfunded Loan Commitments:The level of the reserve for unfunded loan commitments is determined by reviewing the activity trends for individual lines of credit by loan type and estimating the percentage of funds to be advanced on a quarterly basis over the next four quarters. The advance estimates for the individual lines are aggregated by loan type to arrive at an overall quarterly advance rate. The total advance estimates projected for the upcoming 12 months is then multiplied by the loss factor assigned to each loan type. These are the same loss factors used in the calculation of the allowance for loan losses.

     Goodwill and Other Intangible Assets:Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite life are not amortized, but instead tested for impairment at least annually. Goodwill is the Company’s only intangible asset with an indefinite life. Intangible assets with estimable useful lives are amortized over such useful lives to their estimated residual values, and reviewed annually for impairment.

     Goodwill and intangible assets are reviewed annually for impairment. If impairment is indicated, the fair value of the asset is assessed based upon discounted net cash flows. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner

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similar to a purchase price allocation, in accordance with FASB Statement No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Management’s assumptions regarding fair value requires significant judgment about economic factors, business climate, and industry factors.

     Income Taxes:The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The realization of the net deferred tax assets is dependent upon the generation of sufficient taxable income or upon our intent and ability to hold available-for-sale debt securities until the recovery of any temporary unrealized losses. On a quarterly basis, the Company determines whether a valuation allowance is necessary. In doing so, management considers all evidence currently available, both positive and negative, in determining whether, based on the weight of that evidence, the net deferred tax asset will be realized and whether a valuation allowance is necessary. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company establishes a tax valuation allowance when it is more likely than not that a recorded tax benefit is not expected to be realized. The expense to create the tax valuation is recorded as an additional income tax expense in the period the tax valuation allowance is established.

     The Company files a federal consolidated income tax return for the U.S. Federal tax jurisdiction and a combined report in the state of California jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2004 and for California for years before 2003. The provision for income taxes includes federal income and state franchise taxes. Income tax expense is allocated to each entity of the Company based upon the analysis of the tax consequences of each company on a stand alone basis. Interest expense associated with unrecognized tax benefits is classified as income tax expense in the statement of income. Penalties associated with unrecognized tax benefits are classified as income tax expense in the statement of income.

     Postretirement Split-Dollar Life Insurance Arrangements: In September 2006, the FASB ratified EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The Company implemented EITF 06-4, on January 1, 2008 and is accruing, over the employees’ service period, a liability for the actuarial present value of the future death benefits as of the employees’ expected retirement dates. As part of this implementation, the Company recognized the effects of this change in accounting principle through a cumulative effect adjustment charge to retained earnings and benefit plan reserve liability of $186,000, and recorded an expense of $11,000 and $32,000 for the three and nine months ended September 30, 2008, respectively.

     Fair Value Measurements:In September 2006, the FASB issued SFAS No. 157, 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 beginning after November 15, 2007, and interim periods within those years. Management adopted this statement on January 1, 2008. The impact of adoption was not material to the Company’s financial condition or results of operations.

     Reclassifications:Certain prior period amounts have been reclassified to conform to the current period presentations.

     Recent Accounting Pronouncement: On October 10, 2008, the FASB issued FSP FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective immediately, and includes prior period financial statements that have not yet been issued, and therefore the Company is subject to the provision of the FSP effective September 30, 2008. The impact of adoption was not material to the Company’s financial condition or results of operations.

NOTE 4. DIVIDENDS AND EARNINGS (LOSS) PER SHARE

     On January 30, 2007, the Board of Directors authorized $0.08 cash dividends payable on February 28, 2007. On April 30, 2007, August 7, 2007, October 23, 2007 and February 7, 2008, the Board of Directors authorized $0.11 cash dividends, payable on June 1, 2007, August 30, 2007, December 5, 2007 and March 5, 2008, respectively. In March 2008, the Company announced the suspension of common stock dividends as a measure to conserve capital. As described in Note 2 to these condensed consolidated financial statements, the Company may not pay any dividends without the prior written regulatory approval.

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     Basic earnings per share (EPS) are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. For the three and nine months ended September 30, 2008, there were no adjustments for the effect of stock options since any adjustment would be anti-dilutive to the Company’s net loss.

     The following table provides a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computation for the periods presented:

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
(in thousands, except per share amounts)	2008			2007		2008			2007
Basic Earnings (Loss) per Share Computation:
Net income (loss)	$	(54,563	)	$	5,996	$	(64,258	)	$	10,614
Average Common Share Outstanding		10,816			10,790		10,811			10,783
Basic Earnings (Loss) per Share	$	(5.04	)	$	0.56	$	(5.94	)	$	0.98
Diluted Earnings (Loss) per Share Computation:
Net income (loss)	$	(54,563	)	$	5,996	$	(64,258	)	$	10,614
Average Common Share Outstanding		10,816			10,790		10,811			10,783
Effect of Stock Options		—			130		—			162
		10,816			10,920		10,811			10,945
Diluted Earnings (Loss) per Share	$	(5.04	)	$	0.55	$	(5.94	)	$	0.97

NOTE 5. 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 term not to exceed 10 years and become exercisable as provided in each individual grant, generally a percentage vesting at date of issuance and the balance ratably over the subsequent three to five years; and (iii) all must be exercised within 90 days following termination of employment, one year after death or disability 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-restricted.

     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, 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 2.27%; a volatility rate of 112.82%; an expected dividend rate of 0%; and an expected term of 1.59 years for the quarter ended September 30, 2008 and a risk free rate of 4.18%; a volatility rate of 27.63%; an expected dividend rate of 2.30%; and an expected term of 6.27 years for the quarter ended September 30, 2007.

     The following table presents the stock option compensation expense included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2008 and 2007:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(in thousands, except per share amounts)	2008			2007			2008			2007
Stock option compensation expense	$	214		$	217		$	894		$	1,066
Tax benefits related to stock option compensation expense		—			(24	)		—			(152	)
Decrease in net income	$	214		$	193		$	894		$	914
Effect on:
Net income per share — basic	$	(0.02	)	$	(0.02	)	$	(0.08	)	$	(0.08	)
Net income per share — diluted	$	(0.02	)	$	(0.02	)	$	(0.08	)	$	(0.08	)

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     Options activity during the first nine months of 2008 is as follows:

	For the Nine Months Ended
	September 30, 2008
				Weighted
				Average
	Number of			Exercise Price
(in thousands, except per share amounts)	Shares			per Share
Outstanding at January 1, 2008		849		$	22.51
Options granted		405		$	9.53
Options exercised		(11	)	$	5.54
Options forfeited		(168	)	$	18.59
Options expired		(6	)	$	3.81
Outstanding at September 30, 2008		1,069		$	18.44
Exercisable at September 30, 2008		685		$	19.90

     Options grants during the first nine months of 2008 and 2007:

	For the Nine Months Ended
	September 30, 2008				September 30, 2007
			Weighted-				Weighted-
			Average Fair				Average Fair
	Number of		Value per		Number of		Value per
(in thousands, except per share amounts)	Shares		Share		Shares		Share
Options granted		405	$	3.85		192	$	9.09

     Option vesting activity that occurred during the first nine months of 2008:

				Weighted
				Average Fair
	Number of			Value per
(in thousands, except per share amounts)	Shares			Share
Non vested options exercisable at January 1, 2008		239		$	9.10
Options granted		405		$	3.85
Options vested		(154	)	$	6.80
Options forfeited		(106	)	$	5.92
Non vested options at September 30, 2008		384		$	5.27

     Vested option summary information as of September 30, 2008 is as follows:

					Weighted
					Average
			Aggregate		Remaining		Weighted
	Number of		Intrinsic		Contractual		Average
(in thousands, except per share amounts)	Shares		Value		Life in Years		Exercise Price
Vested options exercisable at September 30, 2008		685	$	—		6.92	$	19.90
Total options outstanding at September 30, 2008		1,069	$	26		5.67	$	18.44

     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 $11,000 and $402,000 for the nine months ended September 30, 2008 and 2007, respectively. 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 $973,000 and $686,000 for the nine months ended September 30, 2008 and 2007, respectively. Total future compensation expense related to non-vested awards was $1,459,000 with a weighted average period to be recognized of approximately 1.8 years as of September 30, 2008. There are approximately 374,000 shares issuable under the plan at September 30, 2008.

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NOTE 6. FAIR VALUE MEASUREMENTS

     SFAS No. 157,Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•	Level 1	inputs to the valuation methodology are quoted priced (unadjusted) for identical assets or liabilities in active markets.
•	Level 2	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•	Level 3	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

     The following is a description of the valuation methodologies used by management for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

ASSETS

Securities

     Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. An example of an instrument type that would be classified as a level 1 security would be an equity investment that is actively traded. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, included certain collateralized mortgage and debt obligations, agency preferred stock and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. The Company’s current portfolio does not have level 3 securities as of September 30, 2008. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Loans held for sale

     Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Market value of loans held for sale at September 30, 2008 was determined by calculating the present value using a discounted cash flow model. Assumptions for the model include estimates of average life, prepayment speeds and discount rates.

Impaired loans

     SFAS No. 157 requires loans to be measured for impairment using methodologies as detailed by SFAS No. 114,Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), discounted cash flow, or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the estimated costs to sell the collateral. All impaired loans as of September 30, 2008 were subject to SFAS 114 analysis.

Other Real Estate Owned

     Certain assets such as other real estate owned (OREO) are carried at the lower of cost or fair value less cost to sell. The Company determined the fair value of OREO at September 30, 2008 from recently obtained appraisals.

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     The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2008:

			Fair Value Measurements at Reporting Date Using
					Significant
			Quoted Price in		Other		Significant
			Active Markets for		Observable		Unobservable
	September 30,		Identical Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Available for Sale Securities:
U.S. government agencies	$	2,002	$	—	$	2,002	$	—
State and political subdivisions		67,684		—		67,684		—
Mortgage-backed securities		217,895		—		217,895		—
Collateralized mortgage obligations		14,814		—		14,814		—
Equity securities		12,845		12,845		—		—
Total	$	315,240	$	12,845	$	302,395	$	—

     Additionally, from time to time, certain assets are measured at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2008.

	Fair Value at September 30, 2008
Description	Total		Level 1		Level 2		Level 3
	(in thousands)
Impaired loans (1)	$	115,320		—	$	109,709	$	5,611
Other real estate owned	$	3,187		—	$	3,187	$	—
Loans held for sale	$	84,631		—	$	—	$	84,631

(1) Represents carrying value of impaired loans net of corresponding specific reserve in ALLL.

     Level 3 impaired loans are not secured by collateral estimated by appraisals and consist of commercial loans with fair values determined based on discounted cash flow or discounted valuation of collateral.

     As of June 30, 2008, the Company discontinued its indirect consumer loan program, principally securing recreational vehicles, and transferred the portfolio of these loans, $85,640,000, from its held for investment portfolio to the held for sale category. As a result, the Company recognized a write down of $1,751,000 to non-interest expense and recognized a partial charge-off of $985,000 against the allowance for loan losses for the three months ended June 30, 2008. These loans were valued at the lower of cost or fair value, based on the expected cash flows discounted by an appropriate interest rate as of September 30, 2008.

LIABILITIES

     The Company did not identify any liabilities that are required to be presented at fair value.

NOTE 7. INVESTMENT SECURITIES

     The amortized cost and estimated market value of investment securities at September 30, 2008 and December 31, 2007 are summarized below.

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

     On June 30, 2008, the Company reclassified its entire held to maturity securities portfolio to the available for sale category. The reclassification of this portion of the portfolio resulted from management’s decision to enhance the ability to manage the total investment portfolio prospectively, as well as to periodically restructure the portfolio mix in response to changing economic conditions. In accordance with SFAS 115, the securities transferred were accounted for at fair value, as of the date of transfer. At June 30, 2008, the net carrying amount of $145,463,000 was transferred to the available for sale category. The unrealized loss of $1,338,000 was reported in other comprehensive income.

     As a member of the Federal Home Loan Bank of San Francisco (FHLB), the Bank is required to maintain an investment in the capital stock of the FHLB. The amount of investment is also affected by the outstanding advances under the line of credit the Bank maintains with the FHLB. At September 30, 2008 and December 31, 2007, investment securities with carrying values of approximately $297,867,000 and $324,973,000, respectively, were pledged as collateral for advances from the FHLB, deposits of public funds, government deposits, the Bank’s use of the Federal Reserve Bank’s discount window and other borrowings. As of September 30, 2008 and December 31, 2007, the Bank carried balances of FHLB stock, stated at cost, of $9,151,000 and $6,067,000, respectively. The Bank is also a member of the Federal Reserve Bank. As of September 30, 2008 and December 31, 2007, the Bank carried balances of Federal Reserve Bank stock of $1,502,000 and $1,247,000, respectively.

     Proceeds from the sale of available for sale securities were $138,013,000 and $3,000,000 for the nine months ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2008 and 2007, recognized gross realized gains on sale of available for sale securities were $933,000 and $835,000, respectively and gross realized losses on available for sale securities were $1,297,000 and $0, respectively. During the nine months ended September 30, 2008 and 2007, recognized gross realized gains on sale of available for sale securities were $2,012,000 and $835,000, respectively and gross realized losses on available for sale securities were $1,382,000 and $0, respectively.

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     Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2008 were as follows:

	Less Than Twelve Months				12 months or More				Total
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		Value
	(in thousands)
Available for Sale Securities:
U.S. government agencies	$	5	$	2,002	$	—	$	—	$	5	$	2,002
State and political subdivisions		886		36,365		2		60		888		36,425
Mortgage-backed securities		1,339		93,998		621		21,665		1,960		115,663
Collateralized mortgage obligations		116		10,383		78		3,357		194		13,740
Equity securities		—		—		520		2,011		520		2,011
Total	$	2,346	$	142,748	$	1,221	$	27,093	$	3,567	$	169,841

     Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 were as follows:

	Less Than Twelve Months				12 months or More				Total
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		Value
	(in thousands)
Available for Sale Securities:
U.S. government agencies	$	—	$	—	$	54	$	15,018	$	54	$	15,018
Mortgage-backed securities		—		—		724		64,873		724		64,873
Collateralized mortgage obligations		—		—		164		9,900		164		9,900
Equity securities		—		—		742		4,789		742		4,789
Total	$	—	$	—	$	1,684	$	94,580	$	1,684	$	94,580
Held to Maturity Securities:
State and political subdivisions	$	—	$	—	$	65	$	14,546	$	65	$	14,546
Mortgage-backed securities		—		—		867		41,077		867		41,077
Collateralized mortgage obligations		—		—		128		10,702		128		10,702
Total	$	—	$	—	$	1,060	$	66,325	$	1,060	$	66,325

     The Company held one equity security in an unrealized loss position for 12 months or more at September 30, 2008 and two equity securities in an unrealized loss position for 12 months or more at December 31, 2007. The security at September 30, 2008 was an investment in a bank stock that had fair market value of $2,011,000. The securities at December 31, 2007 included investments in a CRA mutual fund and in a bank stock that had fair market value of $2,944,000 and $1,845,000, respectively. During the quarter ended June 30, 2008, the Company sold its CRA mutual fund investment for a realized loss of $84,000. At September 30, 2008, the unrealized loss for the bank stock security was $520,000.

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NOTE 8. LOANS AND ALLOWANCE FOR LOAN LOSSES

     Loans at September 30, 2008 and December 31, 2007 consist of:

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

     Non-consumer loans are net of deferred loan fees of $3,311,000 and $4,022,000, as of September 30, 2008 and December 31, 2007, respectively. In June 2008, the Company transferred its indirect consumer loan portfolio to the held-for-sale category. It has eliminated deferred loan fee costs associated with originating and servicing these loans as part of this transfer at the lower of cost or fair value. Consumer deferred loan costs were $68,000 and $2,702,000 as of September 30, 2008 and December 31, 2007. At September 30, 2008 and December 31, 2007, the Bank pledged loans as collateral with the value of $320,796,000 and $384,196,000, respectively, for its borrowing line with the Federal Home Loan Bank. At September 30, 2008, the Bank pledged loans with a value of $226,748,000 as collateral for its potential use of the discount window at the Federal Reserve Bank of San Francisco. At December 31, 2007, no such loans were pledged to the Federal Reserve Bank of San Francisco.

     Factoring receivables totaled $20,690,000 and $22,555,000 at September 30, 2008 and December 31, 2007, respectively. The Company receives fees from factoring operations, which consist primarily of financing fees. Other income is earned from origination, due diligence, termination, over advance and service fees and forfeited deposits. Fee income was $2,206,000 and $6,557,000, respectively, for the three and nine months ended September 30, 2008 and is displayed in the Statement of Operations as interest income. The Company did not have any income from factoring for the three and nine months ended September 30, 2007, as it acquired this business in the fourth quarter of 2007.

     Nonaccrual loans totaled $136,278,000 and $53,621,000 at September 30, 2008 and December 31, 2007, respectively. Accruing loans past due 90 days or more were $2,405,000, at September 30, 2008, as compared to $583,000 at December 31, 2007.

     At September 30, 2008 and December 31, 2007, the recorded investment in impaired loans was $136,278,000 and $53,621,000. The Company had $20,958,000 of specific allowance for loan losses on impaired loans of $59,370,000 at September 30, 2008 as compared to $21,432,000 of specific allowance for loan losses on impaired loans of $47,499,000 at December 31, 2007. The average outstanding balance of impaired loans for the three months ended September 30, 2008 and 2007 was $124,768,000 and $5,733,000, respectively, on which $23,000 and $2,000, respectively, was recognized as interest income on a cash basis.

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     At September 30, 2008 and December 31, 2007, the collateral value method was used to measure impairment for substantially all loans classified as impaired. The following table shows the recorded investment in impaired loans by loan category:

	September 30,		December 31,
	2008		2007
	(in thousands)
Real estate construction	$	64,958	$	32,715
Real estate mortgage		53,690		15,403
Total real estate impaired loans		118,648		48,118
Commercial and agricultural		17,472		5,376
Consumer installment		158		127
Total	$	136,278	$	53,621

     The following is a summary of changes in the allowance for loan losses for the nine months ended September 30:

	September 30,			September 30,
	2008			2007
	(in thousands)
Balance at the beginning of the year	$	35,800		$	14,031
Write down of loans transferred to loans held for sale		(985	)		—
Loans charged-off		(26,638	)		(3,772	)
Recoveries of loans previously charged- off		306			381
Provision for loan losses		26,827			4,645
Balance at end of period	$	35,310		$	15,285

NOTE 9. GOODWILL AND OTHER INTANGIBLES

     The Company recorded goodwill of $10,798,000 related to the acquisition of Bay View Funding in October 2007 and $23,515,000 relating to the acquisition of the California branches of the California Stockmen’s Bank (“Stockmen’s”) in November 2007. The Company’s annual impairment testing of goodwill as required by SFAS 142 was performed during the third quarter of 2008. In this regard, the Company engaged an independent firm to test the Company’s reporting units for goodwill impairment. Based on the results of the step one testing procedures for the Bay View Funding reporting unit, it was determined that the fair value exceeds the book value therefore goodwill of the reporting unit is not impaired.  The Company’s other reporting unit primarily represents the Bank and the bulk of the Company’s operations.  Based on the results of the step one testing procedures for the Bank reporting unit, it was determined that the carrying amount exceeds the fair value, thus requiring the Company to be subjected to the step two “implied fair value” methodology.  Based on the results of the step two testing, it was determined that the fair value of the Bank reporting unit cannot support any amount of goodwill. As such, an impairment charge of $23,515,000 was recorded for the entire amount of goodwill associated with the Stockmen’s acquisition. Goodwill was $10,798,000 at September 30, 2008 and $34,313,000 at December 31, 2007.

     The Company recorded core deposit intangible assets, representing the excess of fair value of core deposits acquired over their book values at acquisition date, upon the acquisitions of the Stockmen’s branches. Core deposit intangibles are being amortized over ten years, based on the expected runoff of the core deposit portfolios. The Company recorded at fair value a customer relationship intangible asset upon the acquisition of Bay View Funding. This intangible asset is being amortized over a six year period, based on the expected attrition rate of the customer base. Amortization of intangible assets totaled $374,000 and $0 for the three months ended September 30, 2008 and 2007, respectively, and $1,033,000 and $0 for the nine months ended September 30, 2008 and 2007, respectively.

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NOTE 10. OTHER BORROWINGS

     The following is a summary of other borrowings:

			September 30, 2008					December 31, 2007
					Weighted Average					Weighted Average
(Dollars in thousands)	Maturity Dates		Amount		Interest Rate			Amount		Interest Rate
FHLB advances	2008 to 2011		$	185,000		1.61 - 3.40	%	$	107,500		4.44 - 4.76	%
Repurchase agreement		2010		100,000		2.82	%		100,000		5.73	%
Treasury tax loan		2008		2,126		1.30	%		4,912		4.00	%
Mortgage note		—		—		—			2,711		7.80	%
Other interest-bearing obligations	2008 to 2010			2,550		7.00	%		2,693		7.00	%
Total borrowings			$	289,676				$	217,816

NOTE 11. COMMITMENTS, CONTINGENCIES, AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK

     In the ordinary course of business, the Company enters into various types of transactions which involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit and are not reflected in the accompanying balance sheets. These transactions may involve, to varying degrees, credit and interest risk in excess of the amount, if any, recognized in the balance sheets.

     The Company’s off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process. Additionally, commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans.

Financial Instruments Whose Contractual Amount represents Risk:

	As of		As of
	September 30,		December
	2008		31, 2007
	(in thousands)
Commitments to extend credit	$	297,788	$	477,619
Standby letters of credit		4,335		6,505
Total	$	302,123	$	484,124

     Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates, but may be terminated by the Company if certain conditions of the contract are violated. Further, commitments to extend credit are broken into 2 categories: (1) commitments where performance is required by the customer and approval by the Bank is required to draw on the line and (2) commitments in which customers can draw without any requirement of performance. Although currently subject to draw down, many of these commitments are expected to expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but may include securities, equipment, inventory and real estate.

     Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s credit worthiness, but may include cash, equipment, inventory and securities.

     As a holding company, a substantial portion of the Company’s cash flow typically comes from dividends paid by the Bank. Various statutory provisions restrict the amount of dividends the Bank can pay to the Company without regulatory approval. The Company’s banking regulators have restricted the Bank’s payment of dividends without regulatory consent. Without dividends from the Bank, the Company will be limited in its ability to pay cash dividends to its shareholders or to make scheduled payments on junior subordinated debentures. The Company has determined to suspend common stock dividends as a measure to conserve capital.

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NOTE 12. JUNIOR SUBORDINATED DEBENTURES

     At September 30, 2008 the Company had four wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts. After adoption of FASB Interpretation Number 46R in 2004, the Company does not consolidate the Trusts. There was $57,734,000 of junior subordinated debentures issued and outstanding as of September 30, 2008 and December 31, 2007, reflected as debt in the condensed consolidated balance sheets at September 30, 2008 and December 31, 2007.

     During the quarter ended June 30, 2008, the Company gave notice to the trustees of its four series of junior subordinated debentures or trust preferred securities of its intent to exercise its right to defer quarterly and semi-annual interest payments under those debentures. The indentures for these securities permit deferral for up to 20 quarters or 10 semi-annual periods. As a result of discussions with federal and state bank regulatory agencies, the Company determined that deferral of trust preferred payments would be in the best interests of the Company and its subsidiary, County Bank, until their capital position improves in relation to their overall risk. In addition, the written agreement among the Federal Reserve Bank of San Francisco, the Company and County Bank dated July 17, 2008 prohibits trust preferred payments without the Federal Reserve’s consent. Until interest payments are paid, the indentures prohibit the Company from declaring or paying any dividends or distributions on, or redeeming, purchasing, acquiring, or making a liquidation payment with respect to, any of the Company’s capital stock, subject to certain limited exceptions.

NOTE 13. INCOME TAXES

     At September 30, 2008, the Company had $29,673,000 of net deferred tax assets which were comprised of tax-affected cumulative timing differences, which have resulted, to a large extent, from the significant increase in the provision for loan losses. In evaluating the need for a valuation allowance, the Company considered all of the events and evidence available, including the Company’s three-year cumulative loss position, the carryback and carryforward availability, the difficulty in predicting potential unsettled circumstances, and our intent and ability to hold available-for-sale securities. Management concluded that it is more likely than not that the majority of the net deferred tax assets will not be utilized in light of uncertainties surrounding our ability to generate sufficient taxable income. This determination was a result of recent events in the market and our difficulty in forecasting future profit levels on a continuing basis. Therefore, at September 30, 2008, the Company increased the valuation allowance from $1,233,000 at June 30, 2008, to $27,783,000 and reduced the deferred tax asset to an amount management deems more likely than not to be realized through the carryback of tax losses to prior years’ federal income tax returns. The Company incurred an income tax provision of $20,208,000 for the three months ended September 30, 2008, primarily as a result of increasing the valuation allowance against net deferred tax assets.

     To the extent that the Company can generate taxable income in the future sufficient to offset the tax deductions represented by the net deferred tax asset, the non-cash valuation allowance that has been established may be reduced. If the valuation allowance is reduced, future tax benefits would be recognized that would have a positive impact on the Company’s net income and stockholders’ equity.

     The Company had no tax reserve for uncertain positions at September 30, 2008. The Company does not anticipate providing a reserve for uncertain positions in the next twelve months. The Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense. During the three and nine months ended September 30, 2008 and 2007, the Company did not have an accrual for interest and/or penalties associated with uncertain tax positions.

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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 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 2007 Annual Report on Form 10-K. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made.

     Among the factors that may cause future performance to vary significantly from current expectations are uncertainties in the following areas: local, national and international economic conditions; volatility in the credit, equity and other markets; competition; volatility of real estate values and difficulties in obtaining current information on values; the Company’s credit quality and the adequacy of its allowance for loan losses; actions by banking regulators in response to the Company’s loan losses; deposit customer confidence in the Company and the sufficiency of the Company’s cash and liquid assets to meet high levels of withdrawal requests resulting from announcement of unfavorable operating results; availability of borrowings from the Federal Reserve Bank and Federal Home Loan Bank; risks in integrating acquired businesses and branches; regional weather and natural disasters; the possible adverse effect of concentrations in the loan portfolio; whether the Company’s application to participate in the TARP Capital Program is approved and the ability of the Company to complete the investment transaction if the application is approved; the Company’s ability or inability to raise capital; if it is unable to raise capital, the Company’s ability to continue as a going concern; potential adverse changes in market interest rates; the effect of existing and future regulation of the banking industry and the Company in particular; civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences or acts of this type; and 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. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements.

     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 2007 and in Part II Item 1A of this report.

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 disclosures related thereto, including those regarding contingent assets and liabilities. On an ongoing basis, the Company monitors and revises its estimates where appropriate, including those related to the adequacy of the allowance for loan losses, investments, deferred tax assets and intangible assets. The Company bases its estimates on historical experience, applicable risk factors and on various other assessments 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 depending on the future circumstances actually encountered.

     In 2007, Management identified a material weakness in internal controls over financial reporting which specifically included accounting policies, procedures and practices that were not consistently developed, maintained or updated in a manner ensuring that financial statements were prepared in accordance with GAAP as well as a material weakness in internal controls related to establishing the allowance for loan losses. Item 9A — Controls and Procedures in the Company’s 2007 Form 10-K provides further discussion surrounding these internal control weaknesses. See Item 4, Changes in Internal Control over Financial Reporting, for a discussion of remediation steps underway at the Company.

     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 2007 Form 10-K.

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FINANCIAL OVERVIEW

     The Company’s operating results have deteriorated dramatically over the past twelve months as the economic climate in the Central Valley of California has undergone a violent correction. While the economic environment globally and throughout the United States has been challenged, the Central Valley appears to be the epicenter for residential real estate foreclosures due to the sudden decline in values that became evident very late in 2007. While the Company’s direct exposure to residential real estate loans is minimal, the Company does have significant exposure to construction and partially developed land for residential development purposes and has received numerous real estate appraisals that indicate declines in appraised values of more than 50% and declines of 70% or more in certain instances.

     These economic events have negatively impacted our profitability by requiring additional loan loss provisions, the incurring of costs and impairment charges associated with foreclosed property (OREO) as well as lost interest income revenue from loans placed on nonaccrual status. During the third quarter of 2008, we wrote off the entire amount of goodwill relating to our 2007 acquisition of the Stockmen’s branches, totaling $23,515,000 after an independent analysis determined that the goodwill on this investment was impaired. This non cash expense does not have any impact on our regulatory capital. During the quarter, we recorded a tax expense of $20,208,000. This expense arose as a result of $26,550,000 increase to the deferred tax valuation allowance as we concluded that it was more likely than not that the majority of the net deferred tax assets would not be fully utilized in light of uncertainties surrounding the Company’s ability to generate future taxable income. Furthermore, costs related to consulting and external loan evaluation assistance, appraisal costs associated with impaired loans, increased professional fees and expanded internal resources to address these matters all have contributed to our losses. During the second quarter of 2008, other events occurred that further reduced our profitability. These included the decision to position and fair value certain indirect consumer loans for sale and a further write-down of down-graded agency preferred securities.

Going Concern Risk

     The Company has determined that significant additional sources of liquidity and capital will be required for us to continue operations through 2008 and beyond.  The Company has engaged a financial advisor to explore strategic alternatives to resolve the capital deficiency. However, there can be no assurance that the Company will be able to maintain sufficient liquidity or to raise additional capital to satisfy regulatory requirements and meet obligations as they occur. Further, the regulators are continually monitoring liquidity and capital adequacy and evaluating the Company’s ability to continue to operate in a safe and sound manner. The Bank’s regulators could, if deemed warranted, take further actions, including the assumption of control of the Bank, to protect the interests of depositors insured by the FDIC. The uncertainty regarding the Company’s ability to obtain additional capital or meet future liquidity requirements raises substantial doubt about the Company’s ability to continue as a going concern.

FINANCIAL HIGHLIGHTS

     The Company reported a net loss of $54,563,000 for the quarter ended September 30, 2008 compared with net income of $5,996,000 for same quarter in 2007. The net loss for the first nine months of 2008 was $64,258,000 compared to net income of $10,614,000 for the nine months ended September 30, 2007. Several significant financial events, discussed in greater depth throughout the Management Discussion and Analysis below, impacted our third quarter and first nine months of 2008 operating results and contributed to the reported loss:

• The Company incurred an impairment charge of $23,515,000 in the third quarter of 2008 in relation to the goodwill recorded on the 2007 acquisition of eleven branches of The California Stockmen’s Bank. The impairment charge resulted from a comprehensive analysis carried out by an independent valuation firm, as part of the Company’s annual testing for impairment. This non-cash expense has no impact on regulatory capital.

• Although the Company incurred pre-tax losses in the third quarter and first nine months of 2008, there is no net tax benefit for these losses. Instead, a provision for income taxes was recorded of $20,208,000 and $10,144,000 for the three months and nine months ended September 30, 2008, respectively. These amounts reflect the impact of a non-cash charge of $26,550,000 to increase the deferred tax valuation allowance to $27,783,000 at September 30, 2008, as we

26

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

27

RESULTS OF OPERATIONS

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

     For the three months ended September 30, 2008 and 2007, the Company reported a net loss of $54,563,000 and net income of $5,996,000, respectively. This represents a decrease of $60,559,000 from the third quarter of 2007. Basic (loss) earnings per share were $(5.04) and $0.56 for the three months ended September 30, 2008 and 2007, respectively and diluted (loss) earnings per share were $(5.04) and $0.55 for the three months ended September 30, 2008 and 2007, respectively. This was a decrease of $5.60 per share for basic and $5.59 per share for diluted (loss) earnings per share for the three months ended September 30, 2008 compared with the same period for 2007.

     For the nine months ended September 30, 2008 and 2007, the Company reported a net loss of $64,258,000 and net income of $10,614,000, respectively. This represents a decrease of $74,872,000 from the same period in 2007. Basic (loss) earnings per share were $(5.94) and $0.98 and diluted (loss) earnings per share were $(5.94) and $0.97 for the nine months ended September 30, 2008 and 2007, respectively. This was a decrease of $6.92 per share for basic and $6.91 per share for diluted (loss) earnings (loss) per share for the nine months ended September 30, 2008 compared with the same period for 2007.

     The decrease in net income for the three and nine months ended September 30, 2008 compared to same periods in 2007 is mainly attributable to an impairment charge for goodwill of $23,515,000, the establishment of a valuation allowance of $27,783,000 on the deferred tax asset account, increases in the provision for loan losses of $10,768,000 and $22,182,000, respectively, as well as increases of $6,193,000 and $26,751,000, respectively, in other non-interest expenses. These increases in expense were partially offset by increases in net interest income of $420,000 and $5,889,000 for the three and nine months ended September 30, 2008, respectively. Non-interest income decreased $1,288,000 in the third quarter of 2008 and decreased $913,000 for the nine months ended September 30, 2008 compared to prior year periods.

     During the second and third quarters of 2008, the Company obtained updated appraisals on a substantial portion of the collateral supporting its loan portfolio, especially the construction and land development loans, which have shown continued decline in value due to the absence of home or land sales in the Bank’s market area and the resulting pessimistic outlook on property and land values. The Company performed an intensive review of its loan portfolio, independent loan consultants reviewed the portfolio during the quarter, and the loan portfolio was also reviewed during a regulatory examination conducted in July and early August 2008. As a result of these reviews, the Company charged-off loans totaling $26,638,000 in the nine months ended September 30 2008, to eliminate much of the shortfall in collateral values identified. Accordingly, specific allowances on the remainder of the impaired portfolio did not grow in line with the increase in total impaired loans at September 30, 2008. The additional provision for loan losses was necessary due to the continued deterioration in real estate values in the Company’s market area. The Bank continues to order new appraisals in accordance with established policies and procedures. If these appraisals show continued deterioration in real estate values, additional reserves will be required.

     The increase in net interest income is primarily due to the expanded activities of the Company arising from the acquisitions of The California Stockmen’s Bank (Stockmen’s) and Bay View Funding in the fourth quarter of 2007 and by lower interest rates paid on deposits and borrowings. The decrease in non-interest income for the quarter ended September 30, 2008 is primarily due to the decrease in the death benefit on BOLI policies of $644,000 and the decrease in the gain on sale of available for sale securities of $1,199,000. The increase in non-interest expense for the quarter ended September 30, 2008 is primarily due to goodwill impairment of $23,515,000, professional fees increasing of $801,000, an increase in FDIC and State Regulatory fees of $1,771,000 and expanded activities from the acquisitions.

     The Bank opened five new branch facilities and acquired 11 branches of The California Stockmen’s Bank in 2007. These new branches resulted in increased net interest income, non-interest income and on-going costs in 2008, including salary and benefit costs attributable to the staffing for these branches, and the additional depreciation expense of capitalized equipment and new facilities. During the second quarter of 2008, the Bank closed two of the 11 branches acquired from Stockmen’s which are located in Dos Palos and Merced. The closure resulted from marketing overlap with an existing branch in the same city.

     The annualized (loss) return on average assets was (10.75)% and (4.18)% for the three and nine months ended September 30, 2008, respectively, compared to 1.25% and 0.76% for the three and nine months ended September 30, 2007, respectively. The Company’s annualized (loss) return on average equity was (169.57)% and (61.56)% for the three and nine months ended September 30, 2008, respectively, compared to 15.66% and 9.39% for the three and nine months ended September 30, 2007, respectively.

28

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 periods indicated.

	For the Three Months Ended September30,							For the Nine Months EndedSeptember 30,
					Percent							Percent
(Dollars in thousands)	2008		2007		Change			2008		2007		Change
Total interest income	$	28,663	$	33,179		(13.61	)%	$	91,692	$	95,692		(4.18	)%
Total interest expense		10,282		15,218		(32.44	)%		34,100		43,989		(22.48	)%
Net Interest Income	$	18,381	$	17,961		2.34	%	$	57,592	$	51,703		11.39	%

     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 September 30,									For the Nine Months Ended September 30,
							Percent									Percent
(Dollars in thousands)	2008			2007			Change			2008			2007			Change
Average interest-earning assets	$	1,804,853		$	1,744,977			3.43	%	$	1,846,857		$	1,721,541			7.28	%
Average interest-earning assets acquired	$	144,890		$	—			NM		$	143,968		$	—			NM
Average interest-bearing liabilities	$	1,613,849		$	1,496,922			7.81	%	$	1,626,658		$	1,467,260			10.86	%
Average interest-bearing liabilities acquired	$	186,093		$	—			NM		$	187,355		$	—			NM
Average interest rate earned		6.36	%		7.61	%		(16.41	)%		6.68	%		7.50	%		(10.97)	%
Average interest rate paid		2.53	%		4.03	%		(37.28	)%		2.79	%		4.01	%		(30.36)	%
Net interest margin		4.10	%		4.15	%		(1.18	)%		4.22	%		4.09	%		3.13	%

     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. Total interest income for the three and nine months ended September 30, 2008 decreased compared to those in the same periods in 2007 because of a decrease in average interest rates earned offset by an increase in average interest-earning assets. The increase in average interest earning assets during the three and nine months ended September 30, 2008 compared to the same periods in the prior year was due to interest earning assets acquired from Stockmen’s and Bay View Funding, which averaged $144,890,000 and $143,968,000 in the third quarter and first nine months of 2008, respectively, offset by a decline in investment securities which were sold or matured and were not replaced. The decrease in interest rates earned during the three and nine months ended September 30, 2008 compared to the same periods in 2007 was primarily the result of a decrease in prevailing market interest rates and the increased level of non-accruing loans. Short term interest rates for the three and nine months ended September 30, 2008 as compared to the same period in 2007 have decreased as a result of the Federal Reserve Board’s Open Market Committee (FRBOMC) actions that decreased short term rates significantly starting in September 2007. The FRBOMC reduced the fed funds target rate by a total of 275 basis points from September 30, 2007 to September 30, 2008. Of these reductions, 225 basis points occurred in the first nine months of 2008.

     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 decrease in interest rates paid during the three and nine months ended September 30, 2008 when compared to the same periods in 2007 was primarily the result of a decrease in prevailing interest rates. This decrease assisted in reducing all levels of interest expense, from interest bearing checking accounts to borrowed funds. The increase in interest-bearing liabilities during the three and nine months ended September 30, 2008 when compared to the same periods in 2007 was primarily the result of an increase in other borrowings and subordinated debt, and an increase in deposits due to the acquisition of the Stockmen’s branches, which averaged $186,093,000 and $187,355,000 in the third quarter and first nine months of 2008, offset by reduced deposit levels which occurred in the first nine months of 2008. The increase in other borrowings resulted from an increase in outstanding advances from the Federal Home Loan Bank to offset deposit declines. Average time deposits accounted for 41% and 40%, respectively, of the average deposit portfolio for the three and nine months ended September 30, 2008 compared to 40% and 41%, respectively, for the same time periods in 2007. The decrease in prevailing rates contributed to the average interest rate paid on interest bearing liabilities decreasing to 2.53% and 2.79%, respectively, for the three and nine months ended September 30, 2008 compared to 4.03% and 4.01%, respectively, for the same periods in 2007.

29

      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 three months ended September 30, 2008 when compared to the same period in 2007 was primarily attributable to a larger percentage increase in average interest bearing liabilities compared to average interest bearing assets. In addition, the increase in non-accrual loans during the period has negatively impacted the net interest margin. The Company’s increase in the net interest margin for the nine months ended September 30, 2008 when compared to the same period in 2007 was primarily the attributable to a larger percentage decrease in rates paid for interest bearing liabilities compared to yields earned on interest earning assets. Loans, including loans held for sale, as a percentage of average interest-earning assets increased to 79% for the three and nine months ended September 30, 2008 as compared with 77% and 74% for the same time periods in 2007. The increase in loans as a percentage of interest-earning assets is mainly attributable to the loans acquired from Stockmen’s and Bay View Funding as well as decreases in other interest-earning assets, primarily investment securities. Average loans for the nine months ended September 30, 2008 grew to $1,433,775,000 from $1,270,114,000, or 12.9%, from the same period a year earlier. Net interest income and the net interest margin are presented in the tables below 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.

30

INTEREST RATES AND MARGINS (Fully Taxable-Equivalent Basis)

     Managing interest rates and margins is essential to the Company in order to maintain profitability. The following table presents, for the periods indicated, the distribution of average assets, liabilities and shareholders’ equity, as well as the total dollar amount of interest income from average interest-earning assets and resultant yields and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and rates. Interest income on nontaxable investments is displayed on a tax equivalent basis.

	Three Months EndedSeptember 30,2008								Three Months EndedSeptember 30,2007
						Yield/			Average
(Dollars in thousands)	Average Balance			Interest		Rate			Balance			Interest		Yield/ Rate
ASSETS:
Federal funds sold	$	48,367		$	240		1.97	%	$	17,862		$	223		4.95	%
Time deposits at other financial institutions		127			1		3.12	%		100			1		3.97	%
Taxable investment securities		251,068			3,224		5.09	%		294,858			3,712		4.99	%
Nontaxable investment securities (1)		85,539			1,049		4.87	%		97,176			1,124		4.59	%
Loans held for sale		85,557			1,588		7.36	%		—			—		—
Loans, gross (2),(3)		1,334,195			22,836		6.79	%		1,334,981			28,422		8.45	%
Total Interest-Earning Assets		1,804,853			28,938		6.36	%		1,744,977			33,482		7.61	%
Allowance for loan losses		(30,240	)							(15,547	)
Cash and due from banks		47,994								44,731
Premises and equipment, net		53,400								46,371
Interest receivable and other assets		136,856								86,596
Total Assets	$	2,012,863							$	1,907,128
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Negotiable orders of withdrawal	$	229,509		$	249		0.43	%	$	232,859		$	792		1.35	%
Savings deposits		413,936			1,851		1.77	%		430,562			3,778		3.48	%
Time deposits		627,994			5,544		3.50	%		597,518			7,186		4.77	%
Junior subordinated debentures		57,734			875		6.01	%		31,960			620		7.70	%
Federal funds purchased		340			2		2.33	%		816			11		5.35	%
Other borrowings		284,336			1,761		2.46	%		203,207			2,831		5.53	%
Total Interest-Bearing Liabilities		1,613,849			10,282		2.53	%		1,496,922			15,218		4.03	%
Non interest-bearing deposits		252,376								243,145
Accrued interest, taxes and other		18,978								15,176
Total Liabilities		1,885,203								1,755,243
Total shareholders’ equity		127,660								151,885
Total liabilities and shareholders’ equity	$	2,012,863							$	1,907,128
Net interest income and margin (4)				$	18,656		4.10	%				$	18,264		4.15	%

(1)	Tax equivalent adjustments recorded at the statutory rate of 35% that are included in nontaxable investment securities portfolio are $252,000 and $271,000 for the three months ended September 30, 2008 and 2007, respectively. Tax equivalent adjustments included in the nontaxable investment securities portfolio were derived from nontaxable municipal interest income. Tax equivalent adjustments recorded at the statutory federal rate of 35% that are included in taxable investment securities portfolio were created by a dividends received deduction of $0 and $32,000 for the three months ended September 30, 2008 and 2007, respectively. Tax equivalent income adjustments recorded at the statutory federal rate of 35% that are included in taxable investment securities income were created by a qualified zone academy bond of $23,000 in the third quarter of 2008.
(2)	Interest on nonaccrual loans is generally recognized into income on a cash received basis.
(3)	Amounts of interest earned included net loan fees of $1,191,000 and $1,011,000 for the three months ended September 30, 2008 and 2007, respectively.
(4)	Net interest margin is computed by dividing net interest income by total average interest-earning assets.

31

	Nine Months EndedSeptember 30,2008								Nine Months EndedSeptember 30,2007
	Average					Yield/			Average
(Dollars in thousands)	Balance			Interest		Rate			Balance			Interest		Yield/ Rate
ASSETS
Federal funds sold	$	27,911		$	492		2.35	%	$	44,939		$	1,756		5.22	%
Time deposits at other financial institutions		109			2		2.44	%		223			9		5.40	%
Taxable investment securities		266,071			10,129		5.07	%		307,240			11,235		4.89	%
Nontaxable investment securities (1)		89,951			3,271		4.84	%		99,025			3,548		4.79	%
Loans held for sale		29,040			1,588		7.28	%		—			—		—
Loans, gross (2),(3)		1,433,775			77,097		7.16	%		1,270,114			80,068		8.43	%
Total Interest-Earning Assets		1,846,857			92,579		6.68	%		1,721,541			96,616		7.50	%
Allowance for loan losses		(34,201	)							(14,622	)
Cash and due from banks		51,313								43,692
Premises and equipment, net		53,652								45,581					��
Interest receivable and other assets		131,884								80,144
Total Assets		2,049,504							$	1,876,336
LIABILITIES AND SHAREHOLDERS’ EQUITY
Negotiable orders of withdrawal	$	240,014		$	1,000		0.56	%	$	230,732		$	2,214		1.28	%
Savings deposits		428,930			6,700		2.08	%		419,405			10,798		3.44	%
Time deposits		634,403			17,847		3.75	%		626,809			22,450		4.79	%
Junior subordinated debentures		57,734			2,671		6.16	%		31,960			1,971		8.25	%
Federal funds purchased		4,733			83		2.34	%		387			16		5.53	%
Other borrowings		260,844			5,799		2.96	%		157,967			6,540		5.54	%
Total Interest-Bearing Liabilities		1,626,658			34,100		2.79	%		1,467,260			43,989		4.01	%
Non interest-bearing deposits		267,686								242,919
Accrued interest, taxes and other		16,115								15,020
Total Liabilities		1,910,459								1,725,199
Total shareholders’ equity		139,046								151,137
Total liabilities and shareholders’ equity	$	2,049,505							$	1,876,336
Net interest income and margin (4)				$	58,479		4.22	%				$	52,627		4.09	%

(1)	Tax equivalent adjustments recorded at the statutory rate of 35% that are included in nontaxable investment securities portfolio are $779,000 and $860,000 for the nine months ended September 30, 2008 and 2007, respectively. Tax equivalent adjustments included in the nontaxable investment securities portfolio were derived from nontaxable municipal interest income. Tax equivalent adjustments recorded at the statutory federal rate of 35% that are included in taxable investment securities portfolio were created by a dividends received deduction of $38,000 and $52,000 for the nine months ended September 30, 2008 and 2007, respectively. Tax equivalent income adjustments recorded at the statutory federal rate of 35% that are included in taxable investment securities income were created by a qualified zone academy bond of $70,000 in the first nine months of 2008.
(2)	Interest on nonaccrual loans is generally recognized into income on a cash received basis.
(3)	Amounts of interest earned included net loan fees of $2,886,000 and $3,013,000 for the nine months ended September 30, 2008 and 2007, respectively.
(4)	Net interest margin is computed by dividing net interest income by total average interest-earning assets.

32

NET INTEREST INCOME VARIANCE ANALYSIS (Fully Taxable-Equivalent Basis)

     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 interest rates (Rate) and changes in average asset and liability balances (Volume) 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 rate and volume changes in proportion to the relationship of the absolute dollar amount of the change in each.

	Three Months Ended September 30, 2008
	Compared to September 30, 2007
(in thousands)	Rate			Volume			Total
Increase (decrease) in interest income:
Federal funds sold	$	(364	)	$	381		$	17
Time deposits at other financial institutions		—			—			—
Taxable investment securities		63			(551	)		(488	)
Nontaxable investment securities		60			(135	)		(75	)
Loans held for sale		—			1,588			1,588
Loans		(5,569	)		(17	)		(5,586	)
Total	$	(5,810	)	$	1,266		$	(4,544	)
Increase (decrease) in interest expense:
Interest bearing demand	$	(532	)	$	(11	)	$	(543	)
Savings deposits		(1,781	)		(146	)		(1,927	)
Time deposits		(2,009	)		367			(1,642	)
Federal funds purchased		(3	)		(6	)		(9	)
Other borrowings		(2,200	)		1,130			(1,070	)
Junior subordinated debentures		(245	)		500			255
Total	$	(6,770	)	$	1,834		$	(4,936	)
Increase in net interest income	$	960		$	(568	)	$	392

	Nine Months Ended September 30, 2008
	Compared to September 30, 2007
(in thousands)	Rate			Volume			Total
Increase (decrease) in interest income:
Federal funds sold	$	(599	)	$	(665	)	$	(1,264	)
Time deposits at other financial institutions		(2	)		(5	)		(7	)
Taxable investment securities		399			(1,505	)		(1,106	)
Nontaxable investment securities		48			(325	)		(277	)
Loans held for sale		—			1,588			1,588
Loans		(13,288	)		10,317			(2,971	)
Total	$	(13,442	)	$	9,405		$	(4,037	)
Increase (decrease) in interest expense:								—
Interest bearing demand	$	(1,303	)	$	89		$	(1,214	)
Savings deposits		(4,343	)		245			(4,098	)
Time deposits		(4,875	)		272			(4,603	)
Federal funds purchased		(113	)		180			67
Other borrowings		(5,000	)		4,259			(741	)
Junior subordinated debentures		(889	)		1,589			700
Total	$	(16,523	)	$	6,634		$	(9,889	)
Increase in net interest income	$	3,081		$	2,771		$	5,852

33

PROVISION FOR LOAN LOSSES

     The Company reviews the adequacy of its allowance for loan losses on a quarterly basis and maintains the allowance at a level considered by management to be sufficient to absorb the probable losses inherent in its loan portfolio. The provision for loan losses is charged against income and increases the allowance for loan losses. For the three and nine months ended September 30, 2008, the provision for loan losses was $11,500,000 and $26,827,000, respectively, compared to $732,000 and $4,645,000, respectively, for the three and nine months ended September 30, 2007. The increase in the provision for the three and nine months ended September 20, 2008 was primarily due to specific reserves required on collateral dependent impaired loans. $23,560,000 of the provision for the nine months ended September 30, 2008 related to required specific reserves on impaired loans and $3,267,000 related to general reserves on performing loans. Despite a $279,000,000 decrease in loans that are included in the calculation of the general reserves, a provision for general reserves of $3,267,000 was required based on the Management’s evaluation of certain qualitative factors, primarily the downturn in the local and national economic environment.

     As a result of the continuing worsening trends in home prices and construction delinquencies prevalent in Central California, the Company has updated its credit review process to include an internal credit review of all construction loans and all land loans in excess of $250,000. External loan specialists independently reviewed the portfolio during the second and third quarters of 2008, as well as the Bank’s regulators during their periodic examination. Based on these evaluations and recommendations of its consultants, the Company charged-off significant portions of impaired construction loan balances, considered non collectible as the underlying collateral value was not considered probable of full recovery. As a result of receiving updated appraisals, the Company determined that several of its loans required a more adverse classification, but that several of these loans, while impaired, were still performing and the borrowers had granted the Company additional collateral, reducing the need for a significantly greater allowance for loan losses than had been established at December 31, 2007.

     The Company charged off $6,000,000, net, in the third quarter of 2008, and $26,332,000, net, in the nine months ended September 30, 2008, of loans, principally real estate construction loans. It increased its allowance for loan losses by making a provision for loan losses of $11,500,000 and $26,827,000, respectively, for the three months and nine months ended September 30, 2008. In addition, the Company recognized a partial charge-off of $985,000 for the indirect consumer loans transferred to loans held for sale during the second quarter of 2008. The allowance for loan losses included $20,958,000 of specific reserves for impaired loans at September 30, 2008.

     The Company engaged a third party to review estimated selling costs associated with the disposition of impaired loans. This study recommended that the Company utilize an 8% estimate for selling costs. At December 31, 2007, the Company utilized 10%. The impact of this change in estimate was to reduce reserves previously established at December 31, 2007 by an estimated $1,070,000. Additional analysis of nonperforming loans is discussed below.

NON-INTEREST INCOME

     Non-interest income decreased by $1,288,000 or 25% to $3,828,000 for the three months ended September 30, 2008, compared to the same time period in 2007. The decrease was primarily due to the reduction in income on bank owned life insurance policy of $644,000 and a change of gains to losses on sale of available for sale securities of $1,199,000. These decreases were partially offset by an increase in service charges on deposit accounts of $584,000 or 29% to $2,625,000 for the three months ended September 30, 2008, compared with the same period in 2007. In the third quarter of 2008, the Company recognized a gain of $349,000, upon the death of an employee covered by the Bank owned life insurance policies. This compares with $993,000 received in the prior year period. The increase in service charges on deposit accounts for the three month periods was the result of the acquisition of the Stockmen branches as well as increased Bank fees and reduced waivers on service charges. Other categories of noninterest income had normal fluctuations in the ordinary course of business.

     Non-interest income decreased by $913,000 or 8% to $10,796,000 for the nine months ended September 30, 2008, compared to the same time period in 2007. The decrease was primarily due to the other-than-temporary impairment charge recognized on available for sale securities at September 30, 2008 of $1,564,000 and a decrease in income related to the death benefit for bank owned life insurance policies of $644,000 for the nine months ended September 30, 2008. The impairment charge was related to the Company’s holding of agency preferred stock issued by the FHLMC. There was no impairment charge for the same period in 2007. These decreases were partially offset by an increase in service charges on deposit accounts of $1,543,000 or 26% to $7,377,000 for the nine months ended September 30, 2008, compared with the same period in 2007. The increase in service charges on deposit accounts for the nine month period was the result of the acquisition of the Stockmen branches as well as increased Bank fees and reduced waivers on service charges. In addition, the increase in cash surrender value of life insurance policies of $355,000 for the nine months ended September 30, 2008 was primarily due to the $375,000 reimbursement of costs associated with the transfer of multiple insurance contracts into a single account contract with one carrier. Other categories of noninterest income had normal fluctuations in the ordinary course of business.

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NON-INTEREST EXPENSE

Goodwill Impairment

     The Company recorded goodwill of $10,798,000 related to the acquisition of Bay View Funding in October 2007 and $23,515,000 relating to the acquisition of the California branches of the California Stockmen’s Bank (“Stockmen’s”) in November 2007. The Company’s annual impairment testing of goodwill as required by SFAS 142 was performed during the third quarter of 2008. In this regard, the Company engaged an independent firm to test both of the Company’s reporting units for goodwill impairment. Based on the results of the step one testing procedures for the Bay View Funding reporting unit, it was determined that the fair value exceeds the book value therefore goodwill of the reporting unit is not impaired.  The Company’s other reporting unit primarily represents the Bank and the bulk of the Company’s operations.  Based on the results of the step one testing procedures for the Bank reporting unit, it was determined that the carrying amount exceeds the fair value, thus requiring the Company to be subjected to the step two “implied fair value” methodology.  Based on the results of the step two testing, it was determined that the fair value of the Bank reporting unit cannot support any amount of goodwill. As such, an impairment charge of $23,515,000 was recorded for the entire amount of goodwill associated with the Stockmen’s acquisition. Goodwill was $10,798,000 at September 30, 2008 and $34,313,000 at December 31, 2007.

     Non-interest expenses, excluding the goodwill impairment described above, increased by $6,193,000, or 40%, to $21,549,000 for the three months ended September 30, 2008 compared to the same period in 2007. The primary components of these non-interest expenses were salaries and employee benefits, premises and occupancy expenses, equipment depreciation expense, FDIC and state regulatory fees, professional fees, marketing expenses and other operating expenses which include the provision for unfunded commitments. Non-interest expenses, excluding the goodwill impairment, increased by $26,751,000, or 59%, to $72,160,000 for the nine months ended September 30, 2008 compared to the same period in 2007.

     The Company opened five new branches in 2007. In October and November 2007, it acquired Bay View Funding and eleven branches of The California Stockmen’s Bank. These expansion activities were principal factors in the 40% and 59% increases in non-interest expenses for the three and nine months ended September 30, 2008, respectively, compared to the same period in 2007. The following table displays the effect of the acquisitions on certain non-interest expenses.

	For the Three Months Ended September 30,
	2008								2007
	Stockmen’s		Bay View
(in thousands)	Branches		Funding		All Other		Total		Total
Salaries and benefits	$	690	$	876	$	8,742	$	10,308	$	7,606
Premises and occupancy expense		169		50		1,658		1,877		1,835
Equipment expense		78		34		1,779		1,891		1,382

	For the Nine Months Ended September 30,
	2008								2007
	Stockmen’s		Bay View
(in thousands)	Branches		Funding		All Other		Total		Total
Salaries and benefits	$	2,226	$	2,633	$	25,357	$	30,216	$	22,883
Premises and occupancy expense		499		170		4,905		5,574		5,140
Equipment expense		221		93		5,025		5,339		3,861

     The Company’s professional fees include legal, consulting, audit and accounting fees. The increase in the Company’s professional fees of $801,000 or 65% and $2,705,000 or 93%, respectively, for the three and nine months ended September 30, 2008, was primarily due to increased audit fees and utilization of independent credit specialists to assist in evaluating the loan loss reserve. Beginning in 2007, the Company increased its marketing activities, resulting in an increase of $137,000 and $667,000, respectively, for the three and nine months ended September 30, 2008 compared to the same period in 2007. These marketing activities include actively promoting various deposits to assist in attracting new customers and retaining existing customers. The Company incurred an increase in FDIC and state regulatory fees of approximately $1,771,000 and $2,786,000, respectively, in the third quarter and first nine months of 2008 over the 2007 level, due to a rate increase charged by the FDIC and the effect of the additional insured deposits resulting from acquisitions and expansion. The Company incurred OREO expenses of $327,000 and $6,382,000, respectively, in the third quarter and first nine months of 2008 relating to the foreclosed real estate construction loans, primarily a project in Rocklin, California. No such

35

expenses were incurred in the same period in 2007. In the three and nine months ended September 30, 2008, the Company incurred approximately $51,000 and $840,000, respectively, charged to other non-interest expense, to obtain updated appraisals on properties securing its construction and land development loans. There were no such charges to non-interest expense in 2007. The decrease in provision for unfunded loan commitments of $1,087,000 during the three months ended September 30, 2008 was primarily due to the reversal of a provision of $980,000 resulting from the full pay down of the related loan.

PROVISION FOR INCOME TAXES

     Although the Company incurred pre-tax losses in the third quarter and first nine months of 2008, there is no net tax benefit for these losses. Instead, a provision for income taxes was recorded of $20,208,000 and $10,144,000, respectively, for the three and nine months ended September 30, 2008, compared to a provision for income taxes of $993,000 and $2,744,000, respectively, for the same periods in 2007. The provision for federal and state income taxes in the third quarter of 2008 resulted from increasing the valuation allowance from $1,233,000 at June 30, 2008 to $27,783,000 at September 30, 2008, against the majority of the Company’s net deferred tax assets. Of this increase, $25,225,000 was charged to tax expense and $1,325,000 was recorded through accumulated other comprehensive income, a component of stockholder’s equity. In evaluating our need for a valuation allowance, the Company considered all of the events and evidence available, including the Company’s three-year cumulative loss position, the carryback and carryforward availability, the difficulty in predicting potential unsettled circumstances, and our intent and ability to hold available-for-sale securities. Management has concluded that it is more likely than not that the net deferred tax assets will not be utilized in light of the uncertainties surrounding the Company’s ability to generate sufficient taxable income. To the extent that the Company can generate sufficient future taxable income, the Company may be able to utilize these amounts to reduce future tax obligations in future periods and reduce the valuation allowance. Any reductions in the deferred tax valuation allowance in future periods would have a positive impact on the Company’s net income, regulatory capital and stockholders’ equity. The deferred tax asset has been reduced to an amount that can be realized only through the carryback of tax losses to prior year federal tax returns.

FINANCIAL CONDITION

INVESTMENT SECURITIES

     On June 30, 2008, the Company reclassified its entire held to maturity securities portfolio to the available for sale category. The reclassification of this portion of the portfolio resulted from management’s decision to enhance the ability to manage the total investment portfolio prospectively, as well as to periodically restructure the portfolio mix in response to changing economic conditions.

     The Company’s investment portfolio consists of mortgage backed securities (MBS), US Government Agencies, collateralized mortgage obligations (CMO), municipal securities and equity securities. The majority of the Company’s investments are with government sponsored entities, specifically GNMA, FHLMC, FNMA, FHLB and FFCB. All of our MBS and CMOs, except for the whole loan CMOs, are issued by government sponsored entities (GNMA, FHLMC or FNMA). The investment securities portfolio has declined over the past several years as the proceeds have been used elsewhere. The Company reviews its investment portfolio for credit deterioration and completes an impairment analysis on a quarterly basis. As of September 30, 2008, there was no impairment as a result of this analysis.

     During the third quarter of 2008, the Company purchased approximately $2 million of US Government Agencies, and $82 million of GNMA mortgage backed securities. The Company also sold approximately $19 million in municipal securities, $82 million in FNMA mortgage backed securities, and the entire portfolio of preferred stock. These transactions were completed in conjunction with the Company’s overall strategies to enhance our liquidity and capital positions. The repositioning of the mortgage backed securities portfolio resulted in lower risk weightings for our risk based capital calculations.

     The Company holds a municipal bond portfolio of approximately $68 million as of September 30, 2008. This portfolio is reviewed for credit deterioration each quarter. As of September 30, 2008, 94% of the municipal portfolio is investment grade. None of the municipal bond portfolio is considered impaired at September 30, 2008.

     During the third quarter, the Company sold the remaining investment in preferred stock issued by the FHLMC for $1,682,000 and incurred a loss on sale of $864,000. During the second quarter, the Company incurred an other-than-temporary impairment charge of $1,564,000 resulting from a write-down to fair value of preferred stock issued by FHLMC that were downgraded by one of three rating agencies.

LOANS

     The Company concentrates its lending activities in four principal areas: 1) commercial and agricultural, 2) real estate construction, 3) real estate mortgage and 4) factoring receivables. At the end of June 2008, the Company discontinued its indirect loan program which financed consumer loans, principally secured by recreational vehicles and transferred these loans to held-for-sale. Interest rates charged for loans made by the Company vary with the degree of risk, the size and term of the loan, borrowers’ depository

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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, Kings, Madera, Mariposa, Merced, Sacramento, San Bernardino, San Francisco, San Joaquin, Stanislaus, Santa Clara, Tulare and Tuolumne in the State of California. Real estate secured loans, represented by commercial real estate mortgage loans, real estate construction loans and mortgage real estate loans, comprise the largest portion of the loan portfolio.

     Commercial and agriculture borrowers consist of a diverse group of businesses and agricultural concerns located in the Bank’s market area. The consumer and small business loan portfolio consists of loans to small businesses, home equity and credit cards. Individual loans and lines of credit are made in a variety of ways. In most cases collateral such as real estate and equipment are used to support the extension of credit and reduce the Bank’s credit risk. Each loan is submitted to an individual risk grading process but the borrowers’ ability to repay is dependent, in part, upon factors affecting the local and national economies.

     The following table shows the composition of the loan portfolio of the Company by type of loan on the dates indicated:

	September 30, 2008						December 31, 2007
(dollars in thousands)	Amount			Percent of Loans			Amount			Percent ofLoans
Real estate construction, non-residential	$	93,688			7	%	$	120,570			8	%
Real estate construction, residential		21,463			2			31,796			2
Real estate mortgage, non residential		660,999			51			725,262			49
Real estate mortgage, residential		36,903			3			33,846			2
Total real estate loans		813,053			63			911,474			61
Commercial		356,178			27			373,512			25
Agricultural		90,887			7			85,193			6
Factoring		20,690			2			22,555			1
Consumer		17,276			1			101,947			7
Total		1,298,084			100	%		1,494,681			100	%
Less allowance for loan losses		(35,310	)					(35,800	)
Net loans	$	1,262,774					$	1,458,881

     The non-residential real estate construction and real estate mortgage loan portfolios include loans for land development, including both land held for development and land in development, of $138.1 million and $182.8 million as of September 30, 2008 and December 31, 2007, respectively. 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 subprime residential loans in its portfolio. Our total residential real estate exposure totals $58 million ($29 million in home equity lines and residential construction loans of $29 million), or 4.5% of our loans at September 30, 2008.

     The table that follows shows the regional distribution of real estate loans at September 30, 2008:

	San
	Francisco		Merced/		Stockton/				Fresno/
(in thousands)	Bay Area		Mariposa		Modesto		Sacramento		Bakersfield		All Other		Total
Real estate construction, non-residential	$	5,522	$	24,546	$	21,218	$	12,970	$	29,432	$	—	$	93,688
Real estate construction, residential		2,960		2,895		1,978		5,618		8,012		—		21,463
Real estate mortgage, non-residential		77,227		171,249		160,149		46,534		194,381		11,459		660,999
Real estate mortgage, residential		775		15,113		8,250		433		9,859		2,473		36,903
Total	$	86,484	$	213,803	$	191,595	$	65,555	$	241,684	$	13,932	$	813,053

NONPERFORMING ASSETS

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

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     Nonperforming loans are those in which the borrower fails to perform in accordance with the original terms of the obligation and are categorized as loans on nonaccrual status, loans past due 90 days or more and restructured loans. Interest received on nonaccrual loans is credited against loan principal. The Company had no restructured loans as of September 30, 2008 or December 31, 2007.

     The following table summarizes nonperforming assets of the Company as of the dates indicated:

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

     Nonperforming assets represented 7.57% and 2.93% of total assets, at September 30, 2008 and December 31, 2007, respectively. Nonperforming loans represented 10.68% and 3.63% of total gross loans at September 30, 2008 and December 31, 2007, respectively, and were secured by first deeds of trust on real property totaling $117,182,000 and $45,136,000. The increase in nonperforming loans at September 30, 2008 is attributable primarily to deterioration in home prices and construction delinquencies in Central California. During the second quarter of 2008, the Company obtained updated appraisals, and it updated its credit review process to include an internal credit review of all construction loans and all land loans in excess of $250,000. External loan specialists independently reviewed the portfolio, as well as the Bank’s regulators during their periodic examination. During the third quarter of 2008, the Company continued to obtain updated appraisals on its construction and land development loans and arranged for another independent loan review which focused on a portfolio of $510.6 million of loans not previously reviewed during the recent regulatory examination. Specific loans identified for review totaled $104.9 million and were comprised of borrowing relationships with balances greater that $1 million, including both classified and pass grade loans. After reviewing the updated appraisals during the second and third quarters of 2008 and recommendations from its consultants, the Company determined that several of its loans required a more adverse classification than previously made. No assurance can be given that the collateral securing nonperforming loans will be sufficient to prevent losses on such loans in the future.

     The Company has maintained accrual status on one loan which had just exceeded the 90 day overdue threshold, as it believes that this loan will regain its current status. Subsequent to the quarter end, this loan was paid in full by the customer.

Impaired and Nonaccrual Loans

     The level of nonperforming loans and real estate acquired through foreclosure are two indicators of asset quality. A loan that is classified may be either a “performing” or “nonperforming” loan. A performing loan is one wherein the borrower is making all payments as required by the loan agreements. Nonperforming loans are those in which the borrower fails to perform under the original contractual terms of the obligation and are categorized as loans past due 90 days or more but still accruing, loans on nonaccrual status and restructured loans. Loans are generally placed on nonaccrual status and accrued but unpaid interest is reversed against current year income when interest or principal payments become 90 days past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, are deemed to be in the process of collection. Loans that are 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 the collection of principal or interest is in question.

     A loan is generally considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts (i.e., including both interest and principal payments) due according to the contractual terms of the loan agreement. An impaired loan is charged off at the time management believes the collection of principal and interest process has been exhausted. Partial charge-offs are recorded when portions of impaired loans are deemed uncollectible. At September 30, 2008 and December 31, 2007, impaired loans were measured either based upon the present value of expected future cash flows discounted at the loan’s effective rate or the fair value of collateral if the loan is collateral dependent.

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     The following table shows the change in nonaccrual loans from December 31, 2007 to September 30, 2008:

	(in thousands)
Balance at December 31, 2007	$	53,621
Add: Loans placed on nonaccrual status		127,091
Less: Loans removed from non-accrual status due to additional collateral or principal payments		(17,929	)
Charge-offs during the period		(26,068	)
Transfer to OREO		(437	)
Balance at September 30, 2008	$	136,278

     The following table presents nonaccrual loans by loan type, as of the dates indicated:

	September 30, 2008		December 31, 2007
	(in thousands)
Real estate construction, non-residential	$	51,138	$	27,284
Real estate construction, residential		13,820		5,431
Real estate mortgage, non-residential		53,507		15,403
Real estate, residential		183		—
Total real estate nonaccrual loans		118,648		48,118
Commercial		16,397		5,012
All other		1,233		491
Total	$	136,278	$	53,621

     The following table presents nonaccrual loans by classification or type of collateral securing the loans, as required in the Company’s regulatory filings, as of the dates indicated:

	September 30, 2008		December 31, 2007
	(in thousands)
Construction of single /multi family residence	$	13,820	$	5,431
Construction and land development		92,671		40,372
Single/multi family residence		6,116		1,006
Farm land		3,697		—
Non-farm, non-residential property		2,640		1,500
Commercial property		9,892		5,028
Agricultural production and farming		1,047		157
Personal property		60		127
Unsecured		6,335		—
Total	$	136,278	$	53,621

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     The following table presents nonaccrual loans by type of business in which the borrowers are engaged, as of the dates indicated:

	September 30, 2008		December 31, 2007
	(in thousands)
Land subdivision	$	49,247	$	16,047
Construction of new single family housing		22,345		16,767
Real estate agent and broker offices		20,642		3,812
Lessors of non-residential buildings		8,841		—
Other activities relating to real estate		15,344		4,976
Wholesale/retail		6,865		5,544
Lessors of residential buildings		4,806		1,006
Medical offices		4,354		4,300
Other		3,834		1,169
Total	$	136,278	$	53,621

     Impaired loans as of September 30, 2008 are considered to be either collateral impaired and not performing, collateral impaired and performing, collateral adequate and not performing or collateral adequate and performing. All of these loans have been placed on nonaccrual for accounting purposes. These four nonaccrual loan categories are defined as follows:

Collateral Impaired and Not Performing:

     Loans where the collateral is impaired and the loan is not performing (that is, not current as to interest or principal payments).

Collateral Impaired and Performing:

     Loans where the collateral is impaired but the interest obligations are being funded directly by the borrower, and the Company is utilizing these funds to reduce the borrower’s loan balance.

Collateral Adequate and Not Performing :

     Loans for which sufficient additional collateral has been received from the borrower and the loan is not performing (that is, not current as to interest or principal payments).

Collateral Adequate and Performing :

     Loans for which sufficient additional collateral has been received from the borrower and we are monitoring the borrower’s ability to fund interest costs before returning the loan to accrual status. This category includes loans which may be returned to accrual status in the near future.

Impaired loans

     The following table presents additional information about impaired loans, as of September 30, 2008:

	September 30, 2008
	(in thousands)
Collateral impaired and not performing	$	64,404
Collateral impaired and performing		18,112
Collateral adequate and not performing		27,028
Collateral adequate and performing		26,734
	$	136,278

     The Company had impaired loans at September 30, 2008 of $136,278,000 compared to $53,621,000 at December 31, 2007. The Company had $20,958,000 of specific allowance for loan losses on impaired loans of $59,370,000 at September 30, 2008 as compared to $21,432,000 of specific allowance for loan losses on impaired loans of $47,499,000 at December 31, 2007. Other forms of collateral, such as inventory, chattel, and equipment secure the remaining secured nonperforming loans as of each date. Management believes the overall increase in impaired loans in the past year is primarily attributable to the rapid decline in real estate values in California’s Central Valley beginning in the fourth quarter of 2007.

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Other Real Estate Owned

     At December 31, 2007, the Company had $7,550,000 invested in two properties acquired through foreclosure. The largest property is described in the following paragraph. In September 2008, the Company foreclosed on two more properties totaling $437,000. At September 30, 2008, the carrying value of the four properties was $3,187,000. 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. No assurance can be given that the Company will sell the properties during 2008 or at any time or for an amount that will be sufficient to recover the Company’s investment in these properties.

     An independent bank participated with the Company in a construction loan for a development project located in Rocklin, CA. In July 2007, the Company foreclosed on the loan and recorded the property as other real estate owned at a net realizable value of $9,390,000, based on a third party appraisal for its share of the property. The project is comprised of over 120 townhomes with a completed common area. Eleven of the units have been partially completed. In 2007, the Company took an impairment charge of $1,900,000 on its share of the property to reduce the value to estimated realizable value of $7,490,000 at December 31, 2007. In May 2008, the Company ordered a new appraisal and engaged a second firm to conduct a review of the appraisal received. These analyses indicated further erosion in the value of the property, so the Company recorded an impairment charge of $5,655,000 during the second quarter. During the third quarter of 2008, the Company paid the participating bank $950,000 to settle various claims between the Company and the participating bank and to cancel any claims the participating bank had on the property. As a result of the settlement, the carrying value of the property was increased by the amount formerly allocated to the participating bank, which increased the carrying value of the property to the estimated realizable value of the property which was $2,690,000 at September 30, 2008.

     In addition, a specific reserve was recorded in the reserve for unfunded commitments included in accrued interest, taxes and other liabilities on the Balance Sheet, to recognize the Company’s estimate of liability for mechanic liens placed against the Rocklin property. After settlement of several of these liens in 2007 and into 2008, the balance in the specific reserve was $477,000 at September 30, 2008 and $756,000 at December 31, 2007.

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ALLOWANCE FOR LOAN LOSSES

     The following table summarizes the loan loss experience of the Company for the nine months ended September 30, 2008 and 2007, and for the year ended December 31, 2007.

	September 30,						December 31
	2008			2007			2007
	(dollars in thousands)
Balance at beginning of period	$	35,800		$	14,031		$	14,031
Allowance from the California Stockmen’s Bank		—						1,900
Provision for loan losses		26,827			4,645			29,803
Write down of loans transferred to loans held for sale		(985	)		—			—
Charge-offs
Commercial and agricultural		(7,193	)		(3,273	)		(1,128	)
Real estate construction		(18,733	)		—			(8,357	)
Consumer		(712	)		(499	)		(934	)
Total charge-offs		(26,638	)		(3,772	)		(10,419	)
Recoveries
Commercial and agricultural		164			275			364
Real estate mortgage		4			—			—
Consumer		138			106			121
Total recoveries		306			381			485
Net charge-offs		(26,332	)		(3,391	)		(9,934	)
Balance at end of period	$	35,310		$	15,285		$	35,800
Loans outstanding at period-end	$	1,298,084		$	1,364,238		$	1,494,681
Average loans outstanding	$	1,433,775		$	1,270,114		$	1,320,594
Annualized net charge-offs to average loans		2.46	%		0.36	%		0.75	%
Allowance for loan losses:
To total loans		2.72	%		1.12	%		2.40	%
To nonperforming loans		25.46	%		465.44	%		66.05	%
To nonperforming assets		24.89	%		120.03	%		57.97	%

     In determining the adequacy of the allowance for loan losses, management takes into consideration the growth trend in the portfolio, results of examinations by financial institution supervisory authorities, internal and external credit reviews, prior loss experience of the Company, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment, and collateral values. The allowance for loan losses is based on estimates and ultimate 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 actual loan losses to exceed the current allowance for loan losses.

     The balance in the allowance for loan losses was 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 to the allowance of $11,500,000 and $26,827,000 for the three and nine months ended September 30, 2008 as compared to $732,000 and $4,645,000 for the same periods in 2007. As of September 30, 2008, management has recorded provisions for loan losses where known information about possible credit problems of the borrower or deterioration in collateral values cause management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become non-performing assets. See “Results of Operations — Provision for Loan Losses.”

Charge-offs

     For the nine months ended September 30, 2008, the increase in level of gross charge-offs of $22,866,000, compared to the same period in 2007 was primarily due to further deterioration in collateral values associated with the Company’s real estate construction loan portfolio as well as nonperformance in the commercial and consumer loan portfolios.

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ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

     The allocation of the allowance for loan losses to loan categories is an estimate by credit officers, supported by third party consultants, 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.

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

	September 30, 2008					December 31, 2007
			Loans % to					Loans % to
(dollars in thousands)	Amount		Total Loans			Amount		Total Loans
Commercial and agricultural	$	12,257		36	%	$	7,757		32	%
Real estate construction		12,081		9			17,413		10
Real estate mortgage		9,872		54			8,940		51
Installment		1,100		1			1,690		7
Total	$	35,310		100	%	$	35,800		100	%

     The following table displays the allocation of the allowance for loan losses between specific reserves on impaired loans and the general component, as of the dates indicated:

	September 30,		December 31,
(in thousands)	2008		2007
Specific allowance established for impaired loans	$	20,958	$	21,432
General component of allowance for loan losses		14,352		14,368
Total	$	35,310	$	35,800

     The following table shows the change in the specific allowance for loan losses from December 31, 2007 to September 30, 2008:

(in thousands)
Balance at December 31, 2007	$	21,432
New reserves required for specifically identified loans		42,427
Impact of reduction in estimate for selling costs from 10% to 8%		(1,070	)
Reduction in reserves from charge-offs		(24,034	)
Reduction of specific reserves from additional collateral or repayment by customers		(17,797	)
Balance at September 30, 2008	$	20,958

     The specific element of the allowance for loan losses declined during the period because of charge-offs, totaling $24,034,000, and the impact of additional reserves necessary due to the reduced valuations of collateral was offset by the improved credit position of other customers who provided additional collateral or made significant repayments.

CREDIT RISK MANAGEMENT AND ASSET QUALITY

     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. Assets receiving lesser grades may become “classified assets” which include all nonperforming assets and potential problem loans and receive an elevated level of attention to improve the likelihood of collection. The policy of the Company is to review each loan in the portfolio over $250,000 to identify problem credits. There are three classifications for classified loans: “substandard,” “doubtful” and “loss.” Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is considered uncollectible and its continuance as an asset is not warranted.

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     During the fourth quarter of 2007, the Bank recognized an acceleration of the deterioration of real estate property values and began to witness a sharp increase in delinquencies. In addition, due to the fact that most of the real estate loans made by the Bank are secured by these properties, the collateral has become insufficient to mitigate the Bank’s credit risk and conform to its underwriting standards. The Company performed its own extensive internal review and contracted with independent credit consultants to perform reviews in early 2008 of a significant portion of the loan portfolio as of December 31, 2007. As a result of these reviews which continued to March 2008, management made the determination to charge-off $6.6 million in the fourth quarter of 2007 and increase the allowance for loan losses to $35.8 million.

     During the first quarter of 2008, the Company expanded its credit review process to include a credit review of all construction loans, and all land loans in excess of $250,000. This process resulted in fourteen customers with loans that totaled $29.5 million being placed on non-accrual status, while nine customers with loans that totaled approximately $5.4 million were removed from nonaccrual status as a result of an increase in collateral to acceptable levels or repayment. As of March 31, 2008, the Company determined that certain of these loans, while impaired, were still performing and the borrowers had granted the Company additional collateral, reducing the need for a significantly greater allowance for loan losses than had been established at December 31, 2007.

     During the second quarter of 2008, the Company obtained updated appraisals on a substantial portion of the collateral supporting its loan portfolio, especially the construction and land development loans, which have shown continued decline in value due to the absence of home or land sales in the Company’s market area and the resulting pessimistic outlook on property and land values. The Company performed an intensive review of its loan portfolio, independent loan consultants reviewed the portfolio during the quarter, and the loan portfolio was also reviewed during a regulatory examination conducted in July and August 2008. As a result of these reviews and recommendations of its consultants, the Company placed twenty-seven customers with loans of approximately $73.3 million on nonaccrual and the Company charged-off loans of approximately $19.2 million in the second quarter to eliminate much of the shortfall in collateral values identified. Accordingly, specific allowances on the remainder of the impaired portfolio did not grow in line with the increase in total impaired loans at June 30, 2008.

     During the third quarter of 2008, the Company continued to obtain updated appraisals on its construction and land development loans and arranged for another independent loan review which focused on a portfolio of $510.6 million of loans not previously reviewed during the recent regulatory examination. Specific loans identified for review totaled $104.9 million and were comprised of borrowing relationships with balances greater that $1 million, including both classified and pass grade loans. For the quarter ended September 30, 2008, the Company placed twenty-one customers with loans of approximately $24.4 million on nonaccrual and charged-off loans of approximately $5.6 million.

     The Company concluded that it had material weaknesses in its credit/lending functions at December 31, 2007. In response to the identification of this material weakness, several reviews of the commercial and real estate loan portfolios have been performed by the Company and independent credit consultants, as summarized above. Remediation of the controls continues and will not be viewed as completed until two consecutive calendar quarters of effective controls and procedures have been achieved. For additional information, see Part I, Item 4 Controls and Procedures of this report.

OTHER EARNING ASSETS

     The Company has purchased single premium universal life insurance on the lives of certain officers and Board members. Initially, these policies were purchased for investment purposes and to offset the cost of employee benefit programs, the executive management salary continuation plan and the director deferred compensation plan. Subsequently the program was expanded to assist in offsetting costs of general employee benefit programs. The Company is the owner and beneficiary of these policies, except for a $25,000 benefit accruing to each insured individual, and intends to hold them until the death of the insured, with cash surrender values as listed in the following table:

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

     As of January 1, 2008, pursuant to EITF Issue No. 06-4, the Company recorded cumulative effect of a change in accounting principle for recognizing a liability for postretirement cost of insurance for endorsement split-dollar life insurance coverage with split-dollar life arrangement for employees and non-employee directors in the amount of $186,000 as a reduction of equity. On a monthly basis, the Company records benefit expense of such insurance coverage. Benefit expense for the three and nine months ended September 30, 2008 was $11,000 and $32,000, respectively. For the nine months ended September 30, 2008 and 2007, the Company

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recorded increases in cash surrender values on these life insurance contracts of $1,659,000 and $1,304,000. The increase of $355,000 in cash surrender value of life insurance policies for the nine months ended September 30, 2008 compared to the same period in 2007 was primarily due to the $375,000 reimbursement of costs associated with the transfer of multiple insurance contracts into a single account contract with one carrier.

DEPOSITS

     Deposits are the Company’s primary source of funds. At September 30, 2008, the Company had a deposit mix of 26% in savings deposits, 41% in time deposits, 15% in interest-bearing checking accounts and 18% in noninterest-bearing demand accounts compared to 28% in savings deposits, 41% in time deposits, 15% in interest-bearing checking accounts and 16% in noninterest-bearing demand accounts at December 31, 2007. Noninterest-bearing demand deposits enhance the Company’s net interest income by lowering its cost 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 time deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. As a result of the Bank’s capital position falling to below well-capitalized, the Bank is subject to certain pricing restrictions compared to its local market. When deposit rates exceed these pricing constraints, the deposits must be classified as brokered deposits in regulatory reports. During the second quarter of 2008, the Bank established the appropriate measurement for this pricing constraint and determined that $93 million of deposits originated in 2008 must be reclassified to brokered deposits. Of this amount $23 million are deposits gathered outside its local market and $70 million are deposits gathered from within the Bank’s normal market area. The Bank has a policy target for brokered deposits of no more than 15% of the Bank’s asset base. However, the Bank must seek regulatory approval to gather any additional brokered deposits until such time that the Bank is considered well capitalized.

     The Bank continues to work with depositors in an effort to reduce uninsured exposure. During the third quarter the Bank implemented a new marketing strategy to attract new deposit accounts in effort to improved liquidity and offset time deposits maturing which may not be renewed.

     Maturities of time certificates of deposits of $100,000 or more outstanding at September 30, 2008 and December 31, 2007 are summarized as follows:

	September 30, 2008		December 31, 2007
	(in thousands)
Three months or less	$	64,277	$	157,659
Over three to six months		51,234		44,511
Over six to twelve months		32,371		26,175
Over twelve months		15,284		41,782
Total	$	163,166	$	270,127

RESERVE FOR COMMITMENTS

     The reserve for commitments included in other liabilities at September 30, 2008 and December 31, 2007, is presented below.

	For the nine
	months ended			For the year
	September 30,			ended December
	2008			31, 2007
	(in thousands)
Balance at the beginning of the period	$	1,800		$	710
Provision for credit losses		1,242			334
Provision (credit) for mechanics liens and bonded stop notices		(279	)		1,840
Payment of mechanic liens and bonded stop notices		—			(1,084	)
Balance at the end of the period	$	2,763		$	1,800

     The reserve for commitments for the nine months ended September 30, 2008 compared to December 31, 2007 was increased by $963,000 to a total of $2,763,000, as an estimate of probable future credit losses resulting from unfunded loan commitments being funded and subsequently charged off, as well as the credit for mechanics liens and bonded stop notices. The decrease in provision for unfunded loan commitments of $1,087,000 during the three months ended September 30, 2008 was primarily due to the reversal of a specific provision of $980,000 resulting from the full pay off of the related loan.

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     In 2007, the Bank recorded a specific reserve for commitments related to other real estate owned property in Rocklin, California to recognize the Bank’s estimate of liability for mechanic liens placed against the property. During the first nine months of 2008 and the fourth quarter of 2007, payments of $0 and $1,084,000, respectively, were made, as well as a credit to the reserve of $279,000 for the first nine months of 2008, leaving a remaining specific reserve balance of $477,000 and $756,000 at September 30, 2008 and December 31, 2007, respectively.

EXTERNAL FACTORS AFFECTING ASSET QUALITY

     For a discussion on external factors affecting asset quality, see Part II Item 1A. Risk Factors in this report.

LIQUIDITY

     The objective of liquidity management is to ensure that funds are available in a timely manner to meet the Company’s financial needs including paying creditors, meeting depositors’ needs, accommodating loan demand and growth, funding investments, paying off borrowing commitments and other capital needs, without causing an undue amount of cost or risk and without causing a disruption to normal operating conditions.

     Liquidity risk is the risk to earnings or capital resulting from our inability to meet our obligations when they occur without incurring unacceptable losses. Liquidity risk includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect our ability to liquidate assets quickly and with a minimum loss of value or to access other sources of cash. Factors considered in liquidity risk management are stability of the deposit base, marketability, maturity, and pledging of investments, alternative sources of funds, and the demand for credit.

     The management of liquidity risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for liquidity risk management to the Asset and Liability Management Committee (“ALCO”), which is composed of the Bank’s senior executives and other designated officers. ALCO provides oversight to the liquidity management process and courses of action to address our actual and projected liquidity needs. It regularly assesses the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, projected individual client funding needs, projected investment cash flows and borrowing maturities and existing and planned business activities.

     With the credit crisis also giving rise to a liquidity crisis, the tightened flow of funds has affected Wall Street, banks and consumers. The Company has focused on managing liquidity by controlling loan growth, emphasizing core deposit growth, and maximizing the sources of liquidity. Alternative funding sources have been an important part of liquidity management.

     Historically the Bank has attracted a stable, low-cost deposit base, which has been a primary source of stability to the Company’s balance sheet. The Company recognizes that its adverse operating results, as well as recent U.S. and global market events, may have and may continue to result in a decreased level of customer confidence in the Company and the Bank. During the third quarter of 2008, the Company experienced an elevated level of deposit withdrawals. In an effort to prepare for lower deposit levels, the Bank has taken steps to address current conditions in an effort to stabilize the Bank’s liquidity position, including an increase in pledged assets as collateral for our borrowing arrangements described below. On the asset side, the Bank has focused on reductions in new loan originations, loan sales and loan participation activities as a means to improve its liquidity position.

     The Company is currently operating under a contingency liquidity plan that has been approved by the Board of Directors. As a function of this plan, management and members of ALCO closely monitor the Company’s liquidity position in several aspects. ALCO monitors deposit behavior and outflows, large customer relationships, uninsured deposit levels and retail strategies as a means to anticipate potential deposit behavior and maintain appropriate levels of liquidity. ALCO also carefully monitors and projects potential changes in loan activities to include anticipated loan sales or participations. It also determines the appropriate level and composition of the investment portfolio and if security sales would assist in liquidity management. Credit lines with external sources are also monitored. Currently, the Company’s liquidity position is monitored on a daily basis and ALCO meets on a weekly basis to review its position and strategies.

     The Company’s liquidity requirements may be met through the use of its portfolio of liquid assets. These assets include cash, demand and time deposits in other banks, investment securities eligible and available to pledge or otherwise access and federal funds sold. Liquid assets totaled $69,728,000 and $137,499,000, and were 3.6% and 6.5% of total assets at September 30, 2008 and December 31, 2007, respectively. The reduction in liquid assets is primarily the result of a reduction in the Bank’s federal funds sold position and the level of investment securities eligible and available to pledge or otherwise access.

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     As supplemental sources of liquidity, the Company maintains lines of credit with certain correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank. These lines total $347,940,000 of which $185,000,000 was outstanding as of September 30, 2008. This compares with lines of credit of $337,242,000 of which $107,500,000 was outstanding as of December 31, 2007. The increase in advances outstanding on these lines of credit at September 30, 2008 compared to December 31, 2007 is primarily due to increased advances from the Federal Home Loan Bank of San Francisco to offset the reduction in the Bank’s deposits during the same period. This borrowing line is supported by eligible loan and investment securities collateral. The advance rate from the Federal Home Loan Bank of San Francisco varies based on which type of qualifying collateral is offered by the Bank.

     The Bank pledged commercial loans eligible as collateral to the Federal Reserve Bank to support additional borrowings, if needed. This line was put in place by the Bank in early April 2008. As of September 30, 2008, the Bank’s ability to borrow from the Federal Reserve Bank using eligible loans and investment securities as collateral was $162,940,000. The Bank considers this borrowing capacity as a secondary source of funding and had no borrowings outstanding under this arrangement at September 30, 2008. The Federal Reserve Bank of San Francisco is not obligated to lend to the Bank under this loan facility and has indicated that it might not lend or continue lending if the Bank is unable to raise capital.

     In early October 2008, the FDIC approved a temporary increased insurance limit of $250,000 per individual account that was part of the financial rescue legislation. In addition, non-interest bearing deposit accounts have unlimited FDIC insurance through 2009 under this legislation. It is not clear how depositors will respond regarding the increase in insurance coverage.

     On October 14, 2008, the United States Department of the Treasury announced its Capital Participation Program, or CPP, as part of the Troubled Asset Relief Program, or TARP, pursuant to the Emergency Economic Stabilization Act of 2008. Under the CPP, the government would provide capital to qualifying financial institutions that choose to participate in the program in exchange for senior preferred securities. In addition to the preferred securities, the government would also receive a warrant exercisable for shares of common stock in each participating financial institution with a market value equal to 15% of the principal value of the preferred securities. The rules and complete terms of the CPP have not yet been finalized. The Company has applied to participate in the CPP. There can be no assurance that the government will approve an investment in the Company, or at the level requested.

     The Company is the sole shareholder of the Bank. While the Company has historically maintained its own capital and liquid assets, it also depends on its ability to receive dividends and management fees from the Bank for liquidity purposes. Dividends from the Bank are subject to certain regulatory limitations. The formal agreement among the Company, the Bank and the FRB prohibits the Bank from paying cash dividends to the Company except with the prior consent of the regulatory agencies. . The Company is permitted to defer payments on the junior subordinated debentures for up to 20 quarters under certain circumstances. The Company has elected to suspend dividends and deferred payments on the junior subordinated debentures (effective May 23, 2008) in order to increase liquidity.

     The Company continues to carefully manage its liquidity and look for opportunities to increase liquidity options in future periods. The Company’s adverse operating results in the third quarter are likely to result in increased pressure on the Company’s ability to meet its liquidity needs. See Item 1A Risk Factors for additional discussion of liquidity risk.

CAPITAL RESOURCES

     Capital is a critical factor for the Company. Historically the Company has generated capital through the retention of earnings and the issuance of junior subordinated debentures. The recent losses incurred have reduced the Company’s Risk-Based Capital level to adequately capitalized. The Company is in the process of implementing a Capital Plan to return the Company to a well capitalized status. The Risk-Based Capital computations for the Company are complex and are impacted by operating losses and various limitations including loan loss reserves which are limited to 125% of risk-based loans as well as deferred income taxes which generally cannot exceed 10% of risk-based capital. Further, the regulatory guidelines for risk-based capital are scheduled to be modified in 2009 which will likely reduce the current capital ratios for the Company.

     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 of retained earnings. The Company’s shareholders’ equity decreased by $67,831,000 or 47.9% between December 31, 2007 and September 30, 2008. This decrease was primarily due to a $23,515,000 goodwill impairment charge, the establishment of a deferred tax valuation allowance of $27,783,000, and a loan loss provision of $26,827,000. In computing total risk-based capital, Management is required to take into consideration the deferred tax assets that may not be fully utilized. Specifically, Tier 1 capital will be reduced by an amount of deferred tax assets that Management does not expect to realize beyond the next twelve months.

     The Company and Bank are 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

47

undertaken, could have a material adverse effect on the Company’s consolidated financial statements. Management believes, as of September 30, 2008, that the Company and the Bank met all applicable capital requirements. As of September 30, 2008, the Bank’s total risk-based capital ratios and leverage capital ratios are considered “adequately-capitalized”. As a result of being “adequately-capitalized”, the Bank cannot accept brokered deposits and is limited in its ability to offer customers interest rates above certain levels.

     Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the following table).

     The Company’s and Bank’s actual capital amounts and ratios as of September 30, 2008 are as follows:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt
	Actual					Purposes					Corrective Action
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
The Company:
Total capital (to risk weighted assets)	$	134,956		8.75	%	$	123,324		8	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)	$	84,841		5.50	%	$	61,662		4	%		N/A		N/A
Leverage ratio	$	84,841		4.24	%	$	80,037		4	%		N/A		N/A
The Bank:
Total capital (to risk weighted assets)	$	128,986		8.41	%	$	122,700		8	%	$	153,375		10	%
Tier 1 Capital (to risk weighted assets)	$	89,581		5.84	%	$	61,350		4	%	$	92,025		6	%
Leverage ratio	$	89,581		4.52	%	$	79,204		4	%	$	99,005		5	%

     The Company’s and Bank’s actual capital amounts and ratios as of December 31, 2007 are as follows:

											To Be Well Capitalized
						For Capital Adequacy					Under Prompt
	Actual					Purposes					Corrective Action
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
The Company:
Total capital (to risk weighted assets)	$	177,480		10.26	%	$	138,406		8	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)	$	142,122		8.21	%	$	69,203		4	%		N/A		N/A
Leverage ratio	$	142,122		6.97	%	$	81,510		4	%		N/A		N/A
The Bank:
Total capital (to risk weighted assets)	$	170,940		9.94	%	$	137,518		8	%	$	171,898		10	%
Tier 1 Capital (to risk weighted assets)	$	129,253		7.52	%	$	68,759		4	%	$	103,139		6	%
Leverage ratio	$	129,253		6.41	%	$	80,703		4	%	$	100,879		5	%

     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. Banking regulators have restricted the Company’s and the Bank’s payment of dividends without their approval. Without dividends from the Bank the Company will be limited in its ability to pay cash dividends to its shareholders or scheduled payments on the junior subordinated debentures. The Company has elected to defer payments on the junior subordinated debentures as a measure to conserve capital.

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RETURN ON EQUITY AND ASSETS

     The following table sets forth certain financial ratios for the periods indicated (averages are computed using actual daily figures):

							Year Ended
	Nine Months Ended September30,						December 31,
	2008			2007			2007
Annualized return on average assets		(4.18	)%		0.76	%		(0.19	)%
Annualized return on average equity		(61.56	)%		9.39	%		(2.36	)%
Average equity to average assets		6.78	%		8.05	%		7.93	%
Dividend payout ratio		NM			21.19	%		NM

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 non-interest expenses, has not been significant for the periods covered in this report.

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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 modeling 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 dependent in part 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. Management considers interest rate risk to be a significant market risk, and it 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 a material change in the Company’s market risk during the first nine months of 2008 when compared to the level of market risk at December 31, 2007, as discussed in the Liquidity section above and in Part II Item 1A. Risk Factors in this report. If interest rates were to suddenly and materially rise from levels experienced during the first nine months of 2008 or if the Company were subjected to a substantial decline in depositor confidence, the Company could become susceptible to an increased level of market risk.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2008 pursuant to Exchange Act Rule 13a-15b. Based on that evaluation and the identification of the material weaknesses in the Company’s internal control over financial reporting as described below under “Changes in Internal Control over Financial Reporting”, the Chief Executive Officer and Chief Financial Officer have concluded that while the Company’s disclosure controls and procedures were effective at September 30, 2008, the material weaknesses related to these controls will not be viewed as remediated until two consecutive calendar quarters of effective controls and procedures have been achieved. Assuming effective controls and procedures are maintained during the quarter ending December 31, 2008, the Company expects to view the related material weaknesses as remediated.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

     The Company reported, in its financial statements and Form 10-K for the year ended December 31, 2007, the identification of material weaknesses related to the allowance for loan losses and the completeness and accuracy of the provision for loan losses, and insufficient levels of appropriately qualified and trained personnel in our financial reporting processes. These weaknesses led to a material error in the provision for loan losses and the allowance for loan losses, the absence of entity-level controls to ensure that the appropriate accounting policies are selected, followed and updated as circumstances change, and resulted in ineffective analysis, implementation, monitoring and documentation of accounting policies. The Company has taken the following steps to address the aforementioned material weaknesses:

• Hiring of Chief Risk Officer to implement a risk management plan, including enhanced policies and procedures to identify, assess, manage and monitor risk exposures;

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• Engaging independent credit specialists to evaluate a substantial portion of the commercial, real estate and construction loan portfolios;

• Establishing a Special Assets Department to monitor and control nonperforming credits;

• Ensuring via review by qualified senior management that management’s assessment of loans requiring impairment analysis in accordance with SFAS 114 is supported by comprehensive documentation;

• Training of lending and credit personnel to ensure that loans are appropriately classified and that problem loans are identified and communicated to Credit Administration on a timely basis;

• Involving the Accounting Department in the preparation and review of comprehensive documentation developed by Credit Administration to support the loan loss provisioning and the adequacy of the allowance for loan losses;

• Hiring of additional accounting and credit personnel, including a chief accounting officer, assistant controller and SEC reporting manager to ensure that personnel with adequate experience, skills and knowledge particularly in relation to complex and non-routine transactions are directly involved in the review and accounting evaluation of such transactions;

• Engaging an independent company to review progress in implementing the enhancements to procedures and to report to the Audit Committee of the Board;

• Documenting of processes and procedures, along with appropriate training, to ensure that the accounting policies, conform to GAAP and are consistently applied prospectively;

• Ensuring through appropriate review by senior level personnel that management’s analysis of the appropriate accounting treatment for Affordable Housing Partnership investments, Other Real Estate Owned and minimum lease commitments, are supported by comprehensive documentation; and

• Engaging an independent accounting firm to review newly implemented control processes and procedures related to the accounting for certain non-routine transactions.

     We have been executing the remediation plans identified above since the first quarter of 2008, and we believe our controls and procedures were effective at September 30, 2008. However, the material weaknesses related to these controls will not be viewed as remediated until two consecutive calendar quarters of effective controls and procedures have been achieved. Assuming effective controls and procedures are maintained during the quarter ending December 31, 2008, the Company expects to view the related material weaknesses as remediated.

     Except as discussed above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

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PART II — Other Information

Item 1. Legal Proceedings

     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 of $477,000 related to the Company’s best estimate of probable loss on this legal matter. The Company’s maximum exposure related to this matter is $3 million. 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.

Item 1A. Risk Factors

     Current and prospective investors in our securities should carefully consider the risk factors reported in our 2007 Form 10-K as well as those described below and the other information contained or incorporated by reference in this report. These 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 risks described in our 2007 Form 10-K or in this report 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.

     The Company is not aware of any material changes in the risk factors described in the Company’s most recent Form 10-K except as set forth below.

GOING CONCERN RISK

It is uncertain if we will be able to continue as a going concern.

     We have been unable to raise capital as required by the capital plan adopted under the formal agreements with the Federal Reserve Bank of San Francisco and California Department of Financial Institutions. The Company’s adverse operating results for the third quarter have reduced our capital ratios, and the announcement of results may increase the Company’s need for funds to meet depositor withdrawals. Increased withdrawal demands or reduced funding sources would make it difficult to meet our payment obligations as they arise. These and the other factors discussed below raise doubt as to our ability to continue as a going concern.

MARKET AND INTEREST RATE RISK

We will need to raise additional capital in the near future, but capital may not be available or may be available only on unfavorable terms.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Before year-end 2007, we were “well capitalized” under federal guidelines. The losses recognized and additional reserves established in the fourth quarter of 2007 and the first three quarters of 2008 brought the Bank’s capital below “well capitalized” minimums and into “adequately capitalized” levels. However, as a result of the deficiencies identified by our banking regulators, it is possible that federal regulators will downgrade our status. As a result of these deficiencies, we have entered into a written agreement with the Federal Reserve Bank of San Francisco relating to capital, assets, earnings, management, liquidity, sensitivity to market risk and restrictions on our activities and payment of dividends. See Note 2 to the Condensed Consolidated Financial Statements included herein. We need to raise additional capital to meet regulatory requirements and to provide an appropriate cushion against potential losses. Our ability to raise additional capital depends in part on conditions in the capital markets, which are outside of our control. At present the market for new capital for community banks is very limited. Accordingly, we cannot be certain of our ability to raise additional capital in the future or on terms acceptable to us. If we are able to raise capital, it will most likely be on terms that will be substantially dilutive to current shareholders. We have retained Keefe, Bruyette & Woods to seek to raise capital and evaluate other strategic alternatives for the Company. In addition, the use of brokered deposits without regulatory approval is limited to banks that are “well capitalized” under applicable federal regulations. With our capital levels below “well capitalized” minimums, we may not have access to a significant source of funding, which would force us to use more expensive sources of funding or to sell loans or other assets at a time when pricing for such assets is unfavorable. If we cannot raise additional capital, our results of operations and financial condition could be adversely affected.

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Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

All depository institutions require access to cash and liquid assets that are convertible to cash to meet their operating needs. Those needs include payment of operating expenses, meeting customers’ withdrawal requests and funding loans. Negative perceptions of our prospects among our customer base resulting from unfavorable operating results in 2007 and 2008 could cause customers to withdraw their deposits at accelerated rates. If our deposit customers should make requests for withdrawal of their deposits substantially in excess of expected withdrawal levels (and in excess of the levels of our liquid assets), we would be required to borrow additional funds or sell other long-term assets in order to raise cash. No assurance can be given as to whether depositors will withdraw funds in excess of the amount of our liquid assets. Additionally, the Company has borrowings outstanding supported by eligible loan collateral with the Federal Home Loan Bank, or FHLB. The deterioration in credit quality of the assets pledged could impact the level of availability for future advances with FHLB. Furthermore, time deposits maturing may not be renewed and our inability to accept brokered deposits may negatively affect our ability to meet these obligations as they come due.

RISKS RELATED TO THE NATURE AND GEOGRAPHICAL LOCATION OF CAPITAL CORP OF THE WEST’S BUSINESS

We determined that our methodology for grading loans and establishing the level of the allowance for loan losses had material weaknesses.

After filing our year-end call report on January 30, 2008 we determined, in working with our bank regulators and independent credit consultants, that many of our loans required a more adverse classification and greater reserves against losses than we had established in the course of our regular operations. As a result, we increased our allowance for loan losses by $25 million more than we had thought necessary at the end of 2007. An adjustment of this magnitude indicated that we had a material weakness in our methodology for classifying loans and establishing the level of our allowance for loan losses. We were also required to amend our call report for the period ended September 30, 2008 to report additional problem loans and reserves. Although we have taken steps to address this weakness by adding additional levels of loan file review with the assistance of independent consultants, we cannot assure you that we have eliminated or mitigated this weakness.

Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio.

Like all financial institutions, every loan we make carries a risk that it will not be repaid in accordance with its terms, or that collateral for the loan will not be sufficient to assure repayment. This risk is affected by, among other things: cash flow of the borrower and/or the project being financed; in the case of a secured loan, the changes and uncertainties as to the value of the collateral; the creditworthiness of a particular borrower; changes in economic and industry conditions; and the duration of the loan. Our allowance for loan losses as a percentage of total loans outstanding was 2.72% as of September 30, 2008 and 2.40% as of December 31, 2007 but as a percentage of nonperforming assets was 24.89% as of September 30, 2008, down from 57.97% as of December 31, 2007. During the first nine months of 2008, nonperforming loans increased by $84.5 million, and our allowance for loan losses decreased by a net amount of $0.5 million. Although management believes the level of our loan loss allowance is now adequate to absorb probable losses in our loan portfolio, management cannot predict these losses or whether the allowance will be adequate or whether we will be required to increase this allowance. Any of these occurrences could adversely affect our business, financial condition and results of operations.

Our dependence on loans secured by real estate subjects us to risks relating to fluctuations in the real estate market.

Approximately 63% of our loan portfolio was secured by commercial or, to a lesser extent, residential and agricultural real estate at September 30, 2008. Our markets experienced an increase in real estate values in recent years before 2007, in part as the result of historically low interest rates. During late 2007 and into 2008, real estate markets in California and elsewhere experienced a slowdown in appreciation and, in some cases, a significant depreciation. The current subprime mortgage crisis has caused a substantial increase in real property foreclosures and downward pressure on real estate values. The recent decline in economic conditions and real estate values could continue to have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans, and the value of real estate owned by us, as well as on our financial condition and results of operations in general.

Our concentration in real estate construction loans subjects us to additional risks.

We have a concentration in real estate construction loans. Approximately 9% of our lending portfolio was classified as real estate construction loans as of September 30, 2008. Approval and terms of real estate construction loans depend in part on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction lending involves greater risks than permanent mortgage lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, the market value of the completed project and the

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effects of governmental regulation of real property, it is relatively difficult to accurately determine the total funds required to complete a project and its actual market value. Construction lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, generally during the term of a construction loan, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. Repayment is substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or if real estate values decline during the construction process or if a project suffers substantial delays, we may have inadequate security for the repayment of the loan upon completion of construction and may incur a loss. A slumping real estate market will may make it difficult for us to complete and dispose of the foreclosed Rocklin condominium project without additional loss or reserves. The housing market in Central California where our construction loan accounts are located is overbuilt and depressed, and it will be difficult to sell or refinance units in these projects for the foreseeable future.

Continuation of local economic conditions could hurt our profitability.

Most of our operations are located in the Central Valley of California. As a result of this geographic concentration, our financial results depend largely on economic conditions in this region. The local economy relies heavily on real estate, agriculture and ranching and has experienced a significant downturn in these industries. This deterioration is characterized by falling real estate values and increasing unemployment. Poor economic conditions could cause us to continue to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. If these conditions continue in our market area, they would have an adverse effect on our borrowers and on our financial condition and results of operations.

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

We regularly seek to acquire or invest in financial and non-financial companies, technologies, services or products that complement our business. In 2007 we made two significant acquisitions: Bay View Funding, a factoring company with headquarters in San Mateo, California, and all 11 California branches of National Bank of Arizona dba The California Stockmen’s Bank. We recorded aggregate goodwill of approximately $34 million upon completing these acquisitions. We have not previously engaged in the factoring business. The success of the Bay View acquisition will depend on retaining the key personnel of Bay View; maintaining and increasing transaction volume and credit quality; integrating the business, personnel and systems with those of the Company; and successful oversight by the Company’s management of a new line of business. The Stockmen’s acquisition increased our branch network by approximately 37%, from 30 to 41. The success of that acquisition will depend on retaining deposit and loan customers; integrating the banking products, personnel and systems of the new branches with those of the Company; and successful oversight by the Company’s management. There can be no assurance that we will be successful in integrating these two acquisitions or in completing any other acquisition or investment. The completion of future acquisitions 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 restructurings 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 paid by our Bank. Various statutory provisions restrict the amount of dividends our Bank can pay to us without regulatory approval. Our banking regulators have restricted the Company’s and the Bank’s payment of dividends without the Federal Reserve Bank consent. Without dividends from the Bank the Company is limited in its ability to pay cash dividends to its shareholders or to make scheduled payments on junior subordinated debentures. The Company has elected to defer payments on junior subordinated debentures as a measure to conserve capital.

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We may be subject to further regulatory action.

The Federal Reserve Bank of San Francisco required the Company and the Bank to enter into a written agreement described above. No assurance can be given that state or federal regulators will not take further enforcement action against us.

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 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits

See Exhibit Index

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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: November 17, 2008	By	/s/ Richard S. Cupp
		Richard S. Cupp
		President and Chief Executive Officer
Date: November 17, 2008	By	/s/ David A. Heaberlin
		David A. Heaberlin
		Chief Financial Officer/Treasurer

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Exhibit Index

Exhibit	Description
10.1	Employment Agreement between Richard S. Cupp and Capital Corp. of the West effective August 15, 2008 dated October 27, 2008
31.1	Certification of Registrant’s Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Registrant’s Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2	Certification of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

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