**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D. C. 20549





**FORM
      10-K**





**þ**  **ANNUAL
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**


For
      the
      Fiscal Year Ended December 31, 2005





** ̈**  **TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**


For
      the
      Transition Period From ________ to ________





Commission
      File Number: 0-27384





**CAPITAL
      CORP OF THE WEST**


(Exact
      name of registrant as specified in its charter)





California
            
            77-0405791(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**550
                West Main Street,****Merced,
                California**
            
            **95340**(Address
                of principal executive offices)
            
            (Zip
                Code)**(209)
                725-2269**(Registrant's
                telephone number, including area
                code)





Securities
      registered under Section 12(b) of the Act:


**None**





Securities
      registered under Section 12(g) of the Act (Title of Class):


**Common
      Stock, no par value;**


**Preferred
      Share Purchase Rights**





Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes  ̈
        No
þ





Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes  ̈
        No
þ





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 and (2) has been subject to such filing requirements
        for the
        past 90 days. Yes þ
        No
 ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈





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





Large
        accelerated filer  ̈ Accelerated filer þ Non-accelerated filer  ̈










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




Aggregate
      market value of the voting stock held by nonaffiliates of the Registrant was
      $271,967,260.50 (based on the $27.75 average of bid and ask prices per common
      share on June 30, 2005).





The
      number of shares outstanding of the Registrant's common stock, no par value,
      as
      of February 1, 2006 was 10,575,361.





Documents
      incorporated by reference:


Portions
      of the definitive proxy statement for the 2006 Annual Meeting of Shareholders
      to
      be filed with the Securities and Exchange Commission pursuant to Regulation
      14A
      are incorporated by reference in Part III, Items 10 through 14 and portions
      of
      the Annual Report to Shareholders for 2005 are incorporated by reference in
      Part
      II, Item 5 through 8.





-2-





**Capital
      Corp of the West**


Table
      of
      Contents


Page
            Reference


**PART
      I**


ITEM
                1.
            BUSINESS
            4ITEM
                1A.
            RISK
                FACTORS
            24ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS
            24ITEM
                2.
            PROPERTIES
            25ITEM
                3.
            LEGAL
                PROCEEDINGS
            25ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            25


**PART
      II**


ITEM
                5.
            MARKET
                FOR REGISTRANT'S COMMON EQUITY AND ISSUER PURCHASES
                OF EQUITY SECURITIES
            25
            Page
                15 of 2005 Annual ReportITEM
                6.
            SELECTED
                FINANCIAL DATA
            26
            Page
                2 of 2005 Annual ReportITEM
                7.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS
            26
            Pages
                3 through 15 of 2005 Annual ReportITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            26
            Pages
                3 through 15 of 2005 Annual ReportITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA
            27
            Pages
                17 through 46 of 2005 Annual ReportITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE
            27ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            27ITEM
                9B.
            OTHER
                INFORMATION
            27
            N/A


**PART
      III**


ITEM****10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT
            28
            Proxy
                Statement for 2006 Annual MeetingITEM
                11.
            EXECUTIVE
                COMPENSATION
            28
            Proxy
                Statement for 2006 Annual MeetingITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENTAND RELATED STOCKHOLDER MATTERS
            28
            Proxy
                Statement for 2006 Annual MeetingITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            28
            Proxy
                Statement for 2006 Annual MeetingITEM
                14.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            28
            Proxy
                Statement for 2006 Annual Meeting


**PART
      IV**


ITEM
                15
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES
            29SIGNATURES
            
            30EXHIBIT
                INDEX
            
            E-1




-3-




**PART
      I**




**ITEM****1****.****BUSINESS**





**Forward-Looking
      Statements**





In
      addition to historical information, this discussion and analysis includes
      certain 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”, 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 Annual Report and Form 10-K should not rely solely on forward
      looking statements and should consider all uncertainties and risks discussed under
      "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS-Critical Accounting Policies and Estimates” and “-Risk Factors” on
      pages 40 through 41, and pages 53 through 55, respectively, of
      the Company's 2005 Annual Report to Shareholders, as well as elsewhere throughout
      this report. These statements are representative only on the date hereof, and
      the Company undertakes no obligation to update any forward-looking statements
      made. Some possible events or factors that could occur that may cause
      differences from expected results include the following: the Company’s loan
      growth is dependent on economic conditions, as well as various discretionary
      factors, such as decisions to sell, or purchase certain loans or loan
      portfolios; or sell or buy participations of loans; the quality and adequacy
      of
      management of the borrower, developments in the industry the borrower is
      involved in, product and geographic concentrations and the mix of the loan
      portfolio. The rate of charge-offs and provision expense can be affected by
      local, regional and international economic and market conditions, concentrations
      of borrowers, industries, products and geographical conditions, the mix of
      the
      loan portfolio and management’s judgements regarding the collectibility of
      loans. Liquidity requirements may change as a result of fluctuations in assets
      and liabilities and off-balance sheet exposures, which will impact the capital
      and debt financing needs of the Company and the mix of funding sources.
      Decisions to purchase, hold, or sell securities are also dependent on liquidity
      requirements and market volatility, as well as on and off-balance sheet
      positions. Factors that may impact interest rate risk include local, regional
      and international economic conditions, levels, mix, maturities, yields or rates
      of assets and liabilities and the wholesale and retail funding sources of the
      Company. The Company is also exposed to the potential of losses arising from
      adverse changes in market rates and prices which can adversely impact the value
      of financial products, including securities, loans, and deposits. In addition,
      the banking industry in general is subject to various monetary and fiscal
      policies and regulations, which include those determined by the Federal Reserve
      Board, the Federal Deposit Insurance Corporation and state regulators, whose
      policies and regulations could affect the Company’s results.





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





-4-
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          of Contents




***General
      Development of the Company***





General


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. 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 is
      the Bank **** and
      the
      Bank is the Company's primary source of income. As of February 1, 2006, the
      Company had outstanding 10,575,361 shares of Common Stock, no par value, held
      by
      approximately 2,700 shareholders. There were no preferred shares outstanding
      at
      February 1, 2006. The Company has one wholly-owned inactive nonbank subsidiary,
      Capital West Group (“CWG”) at December 31, 2005. The Bank has three wholly-owned
      subsidiaries, Merced Area Investment & Development, Inc. (“MAID”), County
      Asset Advisors (“CAA”) and County Investment Trust (“REIT”). CAA is currently
      inactive. All references herein to the Company includes direct subsidiaries
      of
      the Company as well as the Bank and the Bank's subsidiaries, unless the context
      otherwise requires.





***Information
      about Commercial Banking & General Business of the Company and its
      Subsidiaries***





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





Industry
      & Market Area


The
      Bank
      engages in general commercial banking business primarily in Fresno, Madera,
      Mariposa, Merced, Sacramento, San Francisco, San Joaquin, Stanislaus, and
      Tuolomne counties. The Bank has twenty-two full service branch offices; two
      of
      which are located in Merced with the branch located in downtown Merced currently
      serving as both a branch and as administrative headquarters. There are offices
      in Atwater, Hilmar, Los Banos, Sacramento, Sonora, Stockton, two offices in
      Modesto and two offices in Turlock. In 1997, the Bank also opened an office
      in
      Madera and purchased three branch offices from Bank of America in Livingston,
      Dos Palos and Mariposa. During 1999, the Bank opened its first office in Fresno,
      and in 2000 expanded its presence in Fresno by adding an additional office.
      On
      January 18, 2001 the Bank opened a loan production office in San Francisco
      that
      during 2001 was converted into a full service branch. During 2003 and 2004,
      the
      Bank added one full service branch facility in Fresno each year. During 2005
      the
      Bank opened a loan production office in Sacramento which was converted into
      a
      full service branch and opened a full service branch in Clovis. The Bank’s
      administrative headquarters also provides accommodations for the activities
      of
      MAID, the Bank's wholly-owned real estate subsidiary.


(See
      "ITEM 2. PROPERTIES")





Competition


The
      Company's primary market area consists of Fresno, Madera, Mariposa, Merced,
      Sacramento, San Francisco, San Joaquin, Stanislaus, and Tuolumne counties and
      nearby communities. The banking business in California generally, and
      specifically in the Company's primary market area, is highly competitive with
      respect to both loans and deposits. The banking business is dominated by a
      relatively small number of major banks which have many offices operating over
      wide geographic areas. Many of the major commercial banks offer certain services
      (such as international, trust and securities brokerage services) which are
      not
      offered directly by the Company or through its correspondent banks. By virtue
      of
      their greater total capitalization, such banks have substantially higher lending
      limits than the Company and substantial advertising and promotional
      budgets.




Smaller
      independent financial institutions, savings and loans and credit unions also
      serve as competition in our service area. In the past, the Bank's principal
      competi-tors for deposits and loans have been other banks (particu-larly major
      banks), savings and loan associations and credit unions. To a lesser extent,
      competition was also provided by thrift and loans, mortgage brokerage companies
      and insurance companies. Other institutions, such as brokerage houses, credit
      card companies, and even retail establishments offer investment vehicles, such
      as money-market funds, which also compete with banks. The direction of federal
      legislation in recent years seems to favor competition between different types
      of financial institu-tions and to foster new entrants into the financial
      services market, and it is anticipated that this trend will
      continue.





-5-
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          of Contents




To
      compete effectively in our service area, the Bank relies upon specialized
      services, responsive handling of customer needs, local promotional activity,
      and
      personal contacts by its officers, directors and staff. For customers whose
      loan
      demands exceed the Bank's lending limits, the Bank seeks to arrange funding
      for
      such loans on a par-tici-pation basis with its correspondent banks or other
      independent commercial banks. The Bank also assists customers requiring services
      not offered by the Bank to obtain such services from its correspondent
      banks.





See
      also
      the discussion under “Regulation and Supervision - Financial
      Services Modernization Legislation.”





***Bank's
      Services and Markets***





Bank


The
      Bank
      conducts a general commercial banking business including the acceptance of
      demand (includes interest bearing), savings and time deposits. The Bank also
      offers commercial, agriculture, real estate, personal, home improvement, home
      mortgage, automobile, credit card and other installment and term loans. The
      Bank
      offers travelers' checks, safe deposit boxes, banking-by-mail, drive-up
      facilities, 24-hour automated teller machines, trust services, and other
      customary banking services to its customers.




The
      five
      general areas in which the Bank has directed its lendable assets are
      (i) real estate mortgage loans, (ii) commercial loans,
      (iii) agricultural loans, (iv) real estate construction loans, and
      (v) consumer loans. As of December 31, 2005, these five categories
      accounted for approximately 44%, 25%, 7%, 16% and 8%, respectively, of the
      Bank's loan portfolio.





In
      1994,
      the Bank organized a department to originate loans within the underwriting
      standards of the Small Business Administration ("SBA"). The Bank originates,
      packages and subsequently sells these loans in the secondary market and retains
      servicing rights on these loans.





The
      Bank's deposits are attracted primarily from individuals and small and
      medium-sized business-related sources. The Bank also attracts some deposits
      from
      municipalities and other governmental agencies and entities. In connection
      with
      the deposits of municipalities or other governmental agencies, the Bank is
      generally required to pledge securities to secure such deposits, except when
      the
      depositor signs a waiver with respect to the first $100,000 of such deposits,
      which amount is insured by the FDIC.





The
      principal sources of the Bank's revenues are (i) interest and fees on loans,
      (ii) interest on investment securities (principally U.S. government agency
      securities, mortgage-backed securities, collateralized mortgage obligations,
      municipal and corporate bonds), and (iii) service charges on deposit accounts
      and other noninterest income. For the year ended December 31, 2005, these
      sources comprised approximately 72%, 18%, and 10% respectively, of the Bank's
      total interest and noninterest income.





Most
      of
      the Bank's business originates from individuals, businesses and professional
      firms located in its service area. The Bank is not dependent upon a single
      customer or group of related customers for a material portion of its deposits,
      nor is a material portion of the Bank's loans concentrated within a single
      industry or group of related industries. The quality of Bank assets and Bank
      earnings could be adversely affected by a downturn in the local economy,
      including the agricultural sector.





Bank's
      Real Estate Subsidiary (MAID)


California
      state-chartered banks previously were allowed, under state law, to engage in
      real estate development activities either directly or through investment in
      a
      wholly-owned subsidiary. Pursuant to this authorization, the Bank established
      MAID, its wholly-owned subsidiary, as a California corporation on
      February 18, 1987. MAID engaged in real estate development activities for
      approximately seven years.





-6-
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          of Contents




Federal
      law now precludes banks from engaging in real estate development. At December
      31, 2005, MAID held no real estate investments for sale. The last remaining
      real
      estate parcel held by MAID was sold during 2000. MAID does not currently intend
      to purchase or develop any new investment properties for sale or lease. During
      2005, MAID owned, operated, and maintained the County Bank Merced downtown
      branch and County Bank administration building. MAID may only serve as owner
      for
      additional branch premise properties in the future. The state regulatory charter
      for MAID was changed in 2001 to only allow MAID to invest in additional branch
      premises property.





County
      Investment Trust (REIT)


The
      County Investment Trust is a real estate investment trust that invests in loan
      participations serviced by the Bank. The REIT provides the Bank with another
      vehicle in which business may be conducted and equity capital could be raised.
      While the Bank owns 100% of the common equity of the REIT, approximately 120
      officers and employees of the Bank own a minority interest in the REIT in the
      aggregate amount of $31,000.





***Employees***





As
      of
      December 31, 2005, the Company employed a total of 370 full-time equivalent
      employees. The Company believes that employee relations are
      excellent.





***Seasonal
      Trends in the Company's Business***





Although
      the Company does experience some immaterial seasonal trends in deposit growth
      and funding of its agricultural and construction loan portfolios, in general
      the
      Company's business is not seasonal.





***Operations
      in Foreign Countries***





The
      Company conducts no operations in any foreign country.





***Other
      Financial Information:***





***Recently
      Issued Accounting Standards***





In
      December 2004, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), *Share-Based
      Payment* .
      The
      statement requires that compensation cost relating to share-based payment
      transactions be recognized in financial statements and that this cost be
      measured based on the fair value of the equity or liability instruments issued.
      SFAS No. 123 (Revised 2004) covers a wide range of share-based compensation
      arrangements including share options, restricted share plans, performance-based
      awards, share appreciation rights, and employee share purchase plans. The
      Company adopted SFAS No 123 (Revised 2004) on January 1, 2006 which becomes
      effective for accounting periods beginning January 1, 2006. The Company is
      currently evaluating the impact the adoption of the standard will have on the
      Company's results of operations. The impact on prior years is discussed in
      Note
      1 under the section titled “Stock Option Plan”.




In
      May
      2005, the FASB issued SFAS No. 154 *Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3.* The
      Statement requires retrospective application to prior periods’ financial
      statements of voluntary changes in accounting principle, unless it is
      impracticable to determine either the period - specific effects of the
      cumulative effect of the change. When it is impracticable to determine the
      period - specific effects of an accounting change on one or more individual
      prior periods presented, the new accounting principle is to be applied to the
      balances of assets and liabilities as of the beginning of the earliest period
      for which retrospective application is practicable, with a corresponding
      adjustment made to the opening balance of retained earnings or other components
      of equity for that period. If it is impracticable to determine the cumulative
      effect of applying a change in accounting principle, the new accounting
      principle is to be applied prospectively from the earliest date practicable.
      If
      retrospective application for all periods is impracticable, the method used
      to
      report the change and the reason that retrospective application is impracticable
      are to be disclosed. The Company adopted SFAS No. 154 on December 15, 2005.
      The
      Company does not expect the adoption of SFAS No. 154 to have a significant
      effect on the Company’s Consolidated Financial Statements.




-7-
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          of Contents




**REGULATION
      AND SUPERVISION**





REGULATORY
      ENVIRONMENT


The
      banking and financial services industry is heavily regulated. Regulations,
      statutes and policies affecting the industry are frequently under review by
      Congress and state legislatures, and by the federal and state agencies charged
      with supervisory and examination authority over banking institutions. Changes
      in
      the banking and financial services industry can be expected to occur in the
      future. These changes may create new competitors in geographic and product
      markets which have historically been limited by law to bank institutions, such
      as the Bank. Changes in the regulation, statutes or policies that impact the
      Company and the Bank cannot necessarily be predicted and may have a material
      effect on their business and earnings.




The
      operations of bank holding companies and their subsidiaries are affected by
      the
      regulatory oversight and the credit and monetary policies of the Federal Reserve
      Board (FRB). An important function of the FRB is to regulate the national supply
      of bank credit. Among the instruments of monetary policy used by the FRB to
      implement its objectives are open market operations in U.S. government
      securities, changes in the discount rate on bank borrowings and changes in
      reserve requirements on bank deposits. These instruments of monetary policy
      are
      used in varying combinations to influence the overall level of bank loans,
      investments and deposits, the interest rates charged on loans and paid for
      deposits, the price of the dollar in foreign exchange markets, and the level
      of
      inflation. The credit and monetary policies of the FRB will continue to have
      a
      significant effect on the Bank and on the Company.




Set
      forth
      below is a summary of significant statutes, regulations and policies that apply
      to the operation of banking institutions. This summary is qualified in its
      entirety by reference to the full text of such statutes, regulations and
      policies.





BANK
      HOLDING COMPANY ACT


The
      Company is registered as a bank holding company under the Bank Holding Company
      Act of 1956, as amended (“BHCA”). As a bank holding company, Capital Corp is
      subject to examination by the FRB. Pursuant to the BHCA, Capital Corp is also
      subject to limitations on the kinds of businesses in which it can engage
      directly or through subsidiaries. It may, of course, manage or control banks.
      Generally, however, it is prohibited, with certain exceptions, from acquiring
      direct or indirect ownership or control of more than five percent of any class
      of voting shares of an entity engaged in nonbanking activities, unless the
      FRB
      finds such activities to be "so closely related to banking" as to be deemed
      "a
      proper incident thereto" within the meaning of the BHCA. As a bank holding
      company, the Company may not acquire more than five percent of the voting shares
      of any domestic bank without the prior approval of (or, for “well managed”
companies, prior written notice to) the FRB.





The
      BHCA
      includes minimum capital requirements for bank holding companies. See section
      titled “Regulation and Supervision - Regulatory Capital Requirements”.
      Regulations and policies of the FRB also require a bank holding company to
      serve
      as a source of financial and managerial strength to its subsidiary banks. It
      is
      the FRB's policy that a bank holding company should stand ready to use available
      resources to provide adequate capital funds to a subsidiary bank during periods
      of financial stress or adversity and that it should maintain the financial
      flexibility and capital-raising capacity needed to obtain additional resources
      for assisting the subsidiary bank. Under certain conditions, the FRB may
      conclude that certain actions of a bank holding company, such as the payment
      of
      a cash dividend, would constitute an unsafe and unsound banking
      practice.





COUNTY
      BANK


County
      Bank is a California state-licensed bank. The Bank is a member of the Federal
      Reserve System. The Bank’s deposits are insured by the Federal Deposit Insurance
      Corporation (FDIC) and thus is subject to the rules and regulations of the
      FDIC
      pertaining to deposit insurance, including deposit insurance assessments. The
      Bank is subject to regulation and supervision by the FRB and the California
      Department of Financial Institutions (the "Department" or “DFI”). Applicable
      federal and state regulations address many aspects of the Bank's business and
      activities, including investments, loans, borrowings, transactions with
      affiliates, branching, reporting and other areas. County Bank may acquire other
      banks or branches of other banks with the approval of the FRB and the
      Department. County Bank is subject to examination by both the FRB and the
      Department.





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DIVIDENDS


The
      Company may make a distribution to its shareholders if the corporation's
      retained earnings equal at least the amount of the proposed distribution. In
      the
      event sufficient retained earnings are not available for the proposed
      distribution, the Company may nevertheless make a distribution to its
      shareholders if, after giving effect to the distribution, the Company's assets
      equal at least 125% of its liabilities and certain other conditions are met.
      Since the 125% ratio translates into a minimum capital ratio of 20%, most bank
      holding companies, including the Company, based on its current capital ratios,
      are unable to satisfy this second test.





The
      primary source of funds for payment of dividends by the Company to its
      shareholders is the receipt of dividends from the Bank. The Bank’s ability to
      pay dividends to the Company is limited by applicable state and federal law.
      A
      California state-licensed bank may not make a cash distribution to its
      shareholders in excess of the lesser of: (i) the bank's retained earnings,
      or
      (ii) the bank's net income for its last three fiscal years, less the amount
      of
      any distributions made by the bank to its shareholders during such period.
      However, with the approval of the Commissioner of Financial Institutions (the
      "Commissioner"), a California state-licensed bank may pay dividends in an amount
      not to exceed the greater of (i) the bank's retained earnings, (ii) its net
      income for its last fiscal year, or (iii) its net income for the current fiscal
      year.





The
      FRB,
      FDIC and the Commissioner have authority to prohibit a bank from engaging in
      practices which are considered to be unsafe and unsound. Depending on the
      financial condition of the Bank and upon other factors, the FRB or the
      Commissioner could determine that payment of dividends or other payments by
      the
      Bank might constitute an unsafe or unsound practice. Finally, any dividend
      that
      would cause a bank’s capital to fall below required regulatory capital levels
      could also be prohibited.





REGULATORY
      CAPITAL REQUIREMENTS


The
      Company and the Bank are both required to maintain a minimum risk-based capital
      ratio of 8% (at least 4% in the form of Tier 1 capital) of risk-weighted assets
      and off-balance sheet items. "Tier 1" capital consists of common equity,
      non-cumulative perpetual preferred stock and minority interests in the equity
      accounts of consolidated subsidiaries, and excludes goodwill. "Tier 2" capital
      consists of cumulative perpetual preferred stock, limited-life preferred stock,
      mandatory convertible securities, subordinated debt and (subject to a limit
      of
      1.25% of risk-weighted assets) general loan loss reserves. In calculating the
      relevant ratio, a bank's assets and off-balance sheet commitments are
      risk-weighted; thus, for example, loans are included at 100% of their book
      value
      while assets considered less risky are included at a percentage of their book
      value (20%, for example, for interbank obligations, and 0% for vault cash and
      U.S. Government securities).





The
      Company and the Bank are also subject to leverage capital ratio guidelines.
      The
      leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier
      1
      capital to total assets for the most highly rated organizations. Institutions
      that are less highly rated, anticipating significant growth or subject to other
      significant risks will be required to maintain capital levels ranging from
      1% to
      2% above the 3% minimum.





Federal
      regulation has established five tiers of capital measurement, ranging from
      "well
      capitalized" to "critically undercapitalized." Federal bank regulatory
      authorities are required to take prompt corrective action with respect to
      inadequately capitalized banks. If a bank does not meet the minimum capital
      requirements set by its regulators, the regulators are compelled to take certain
      actions, which may include a prohibition on the payment of dividends to a parent
      holding company and requiring adoption of an acceptable plan to restore capital
      to an acceptable level. Failure to comply will result in further sanctions,
      which may include orders to raise capital, merge with another institution,
      restrict transactions with affiliates, limit asset growth or reduce asset size,
      divest certain investments and /or elect new directors. It is the Company’s
      intention to maintain risk-based capital ratios for itself and for the Bank
      at
      above the minimum for the "well capitalized" level (6% Tier 1 risk-based; 10%
      total risk-based) and to maintain the leverage capital ratio for County Bank
      above the 5% minimum for "well-capitalized" banks. At December 31, 2005, the
      Company's leverage, Tier 1 risk-based and total risk-based capital ratios were
      8.57%, 10.01% and 11.13%, and the Bank's leverage, Tier 1 risk-based and total
      risk-based capital ratios were 7.80%, 9.12% and 10.24%. No assurance can be
      given that the Company or the Bank will be able to maintain capital ratios
      in
      the "well capitalized" level in the future.




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**Prompt
                Corrective Action**





The
      FDIC
      has authority: (a) to request that an institution’s primary regulatory
      agency take enforcement action against it based upon an examination by the
      FDIC
      or the agency, (b) if no action is taken within 60 days and the FDIC
      determines that the institution is in an unsafe and unsound condition or that
      failure to take the action will result in continuance of unsafe and unsound
      practices, to order that action be taken against the institution, and
      (c) to exercise this enforcement authority under “exigent circumstances”
merely upon notification to the institution’s primary regulatory agency. This
      authority gives the FDIC the same enforcement powers with respect to any
      institution and its subsidiaries and affiliates as the primary regulatory agency
      has with respect to those entities.





An
      undercapitalized institution is required to submit an acceptable capital
      restoration plan to its primary federal bank regulatory agency. The plan must
      specify (a) the steps the institution will take to become adequately
      capitalized, (b) the capital levels to be attained each year, (c) how
      the institution will comply with any regulatory sanctions then in effect against
      the institution and (d) the types and levels of activities in which the
      institution will engage. The banking agency may not accept a capital restoration
      plan unless the agency determines, among other things, that the plan “is based
      on realistic assumptions, and is likely to succeed in restoring the
      institution’s capital” and “would not appreciably increase the risk to
      which the institution is exposed.” A requisite element of an acceptable capital
      restoration plan for an undercapitalized institution is a guaranty by its parent
      holding company that the institution will comply with the capital restoration
      plan. Liability with respect to this guaranty is limited to the lesser of
      (i) 5% of the institution’s assets at the time when it becomes
      undercapitalized and (ii) the amount necessary to bring the institution
      into capital compliance with applicable capital standards as of the time when
      the institution fails to comply with the plan. The guaranty liability is limited
      to companies controlling the undercapitalized institution and does not affect
      other affiliates. In the event of a bank holding company’s bankruptcy, any
      commitment by the bank holding company to a federal bank regulatory agency
      to
      maintain the capital of a subsidiary bank will be assumed by the bankruptcy
      trustee and entitled to priority of payment over the claims of other creditors,
      including the holders of the company’s long-term debt.





The
      Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) provides
      that the appropriate federal regulatory agency must require an insured
      depository institution that is significantly undercapitalized, or that is
      undercapitalized and either fails to submit an acceptable capital restoration
      plan within the time period allowed by regulation or fails in any material
      respect to implement a capital restoration plan accepted by the appropriate
      federal banking agency, to take one or more of the following actions:
      (a) sell enough shares, including voting shares, to become adequately
      capitalized; (b) merge with (or be sold to) another institution (or holding
      company), but only if grounds exist for appointing a conservator or receiver;
      (c) restrict specified transactions with banking affiliates as if the
“sister bank” exception to the requirements of Section 23A of the Federal
      Reserve Act did not exist; (d) otherwise restrict transactions with bank or
      nonbank affiliates; (e) restrict interest rates that the institution pays
      on deposits to “prevailing rates” in the institution’s “region”;
      (f) restrict asset growth or reduce total assets; (g) alter, reduce or
      terminate activities; (h) hold a new election of directors;
      (i) dismiss any director or senior executive officer who held office for
      more than 180 days immediately before the institution became
      undercapitalized, provided that in requiring dismissal of a director or senior
      executive officer, the agency must comply with procedural requirements,
      including the opportunity for an appeal in which the director or officer will
      have the burden of proving his or her value to the institution; (j) employ
“qualified” senior executive officers; (k) cease accepting deposits from
      correspondent depository institutions; (l) divest nondepository affiliates
      which pose a danger to the institution; (m) be divested by a parent holding
      company; and (n) take any other action which the agency determines would
      better carry out the purposes of the prompt corrective action
      provisions.





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In
      addition to the foregoing sanctions, without the prior approval of the
      appropriate federal banking agency, a significantly undercapitalized institution
      may not pay any bonus to any senior executive officer or increase the rate
      of
      compensation for a senior executive officer without regulatory approval. If
      an
      undercapitalized institution has failed to submit or implement an acceptable
      capital restoration plan the appropriate federal banking agency is not permitted
      to approve the payment of a bonus to a senior executive officer. Not later
      than
      90 days after an institution becomes critically undercapitalized, the
      institution’s primary federal bank regulatory agency must appoint a receiver or
      a conservator, unless the agency, with the concurrence of the FDIC, determines
      that the purposes of the prompt corrective action provisions would be better
      served by another course of action. Any alternative determination must be
      documented by the agency and reassessed on a periodic basis. Notwithstanding
      the
      foregoing, a receiver must be appointed after 270 days unless the FDIC
      determines that the institution has positive net worth, is in compliance with
      a
      capital plan, is profitable or has a sustainable upward trend in earnings,
      and
      is reducing its ratio of non-performing loans to total loans, and unless the
      head of the appropriate federal banking agency and the chairperson of the FDIC
      certify that the institution is viable and not expected to fail.





The
      FDIC
      is required, by regulation or order, to restrict the activities of critically
      undercapitalized institutions. The restrictions must include prohibitions on
      the
      institution’s doing any of the following without prior FDIC approval: entering
      into any material transactions not in the usual course of business, extending
      credit for any highly leveraged transaction; engaging in any “covered
      transaction” (as defined in Section 23A of the Federal Reserve Act) with an
      affiliate; paying “excessive compensation or bonuses”; and paying interest on
“new or renewed liabilities” that would increase the institution’s average cost
      of funds to a level significantly exceeding prevailing rates in the
      market.




**Federal
                Reserve Borrowings**





A
      Federal
      Reserve Bank may not make advances to an undercapitalized institution for more
      than 60 days in any 120-day period without a viability certification by a
      federal bank regulatory agency or by the Chairman of the FRB after an
      examination by the FRB. If an institution is deemed critically undercapitalized,
      an extension of Federal Reserve Bank credit cannot continue for five days
      without demand for payment unless the Federal Reserve Bank is willing to accept
      responsibility for any resulting loss to the FDIC. As a practical matter, this
      provision is likely to mean that Federal Reserve Bank credit will not be
      extended beyond the limitations in this provision.




**Acquisitions
                of Control**





Under
      applicable federal and state laws, it is unlawful for a person to purchase
      or
      otherwise acquire beneficial ownership of shares of common or preferred stock
      of
      the Bank, without the prior approval of the Commissioner and a notice of
      non-disapproval from the FDIC, if the acquisition would give the person, or
      any
      group of persons acting together (a “Group”), control of the Bank. The
      applicable government regulations defined “control” for these purposes to mean
      the direct or indirect power (i) to vote 25% or more of the Bank’s outstanding
      shares, or (ii) to direct or cause the direction of the management and policies
      of the Bank, whether through ownership of voting securities, by contract or
      otherwise; provided that no individual will be deemed to control the Bank solely
      on accord of being a director, officer or employee of the Bank. Persons who
      directly or indirectly own or control 10% or more of a Bank’s outstanding shares
      are presumed to control the bank.




**Consumer
                Laws and Regulations**





In
      addition to the other laws and regulations discussed in this Offering Circular,
      the Bank must also comply with consumer laws and regulations that are designed
      to protect consumers in transactions with banks. While the list is not
      exhaustive, these laws and regulations include the Truth in Lending Act, the
      Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
      Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act,
      among others. These laws and regulations mandate disclosure requirements and
      regulate the manner in which financial institutions must deal with customers
      when taking deposits or making loans. The Bank must comply with the applicable
      provisions of these consumer protection laws and regulations as part of its
      ongoing regulatory compliance and customer relations efforts.




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**Exposure
                to and Management of Risk**





The
      federal banking agencies examine banks and bank holding companies with respect
      to their exposure to and management of different categories of risk. Categories
      of risk identified by the agencies include legal risk, operational risk, market
      risk, credit risk, interest rate risk, price risk, foreign exchange risk,
      transaction risk, compliance risk, strategic risk, credit risk, liquidity risk,
      and reputation risk. This examination approach causes bank regulators to focus
      on risk management procedures, rather than simply examining every asset and
      transaction. This approach supplements rather than replaces existing rating
      systems based on the evaluation of an institution’s capital, assets, management,
      earnings and liquidity. It is not clear what effect, if any, this examination
      approach will have on the Bank.




**Safety
                and Soundness Standards**





Federal
      banking regulators have adopted a Safety and Soundness Rule and Interagency
      Guidelines Prescribing Standards for Safety and Soundness (the “Guidelines”).
      The Guidelines create standards for a wide range of operational and managerial
      matters including (a) internal controls, information systems, and internal
      audit
      systems; (b) loan documentation; (c) credit underwriting; (d) interest rate
      exposure; (e) asset growth; (f) compensation and benefits; and (g) asset quality
      and earnings.





The
      Community Development Act required the agencies to prescribe standards
      prohibiting as an unsafe and unsound practice the payment of excessive
      compensation that could result in material financial loss to an institution,
      and
      to specify when compensation, fees or benefits become excessive. The Guidelines
      characterize compensation as excessive if it is unreasonable or disproportionate
      to the services actually performed by the executive officer, employee, director
      or principal shareholder being compensated.




Federal
      regulators have stated that the Guidelines are meant to be flexible and general
      enough to allow each institution to develop its own systems for compliance.
      With
      the exception of the standards for compensation and benefits, a failure to
      comply with the Guidelines’ standards does not necessarily constitute an unsafe
      and unsound practice or condition. On the other hand, an institution in
      conformance with the standards may still be found to be engaged in an unsafe
      and
      unsound practice or to be in an unsafe and unsound condition.





Although
      meant to be flexible, an institution that falls short of the Guidelines’
standards may be requested to submit a compliance plan or be subjected to
      regulatory enforcement actions. Generally, the federal banking agencies will
      request a compliance plan if an institution’s failure to meet one or more of the
      standards is of sufficient severity to threaten the safe and sound operation
      of
      the institution. An institution must file a compliance plan within 30 days
      of
      request by its primary federal regulator, which is the FDIC in the case of
      the
      Bank. The Guidelines provide for prior notice of and an opportunity to respond
      to the agency’s proposed order. An enforcement action may be commenced if, after
      being notified that it is in violation of a safety and soundness standard,
      the
      institution fails to submit an acceptable compliance plan or fails in any
      material respect to implement an accepted plan. The Federal Deposit Insurance
      Act provides the agencies with a wide range of enforcement powers. An agency
      may, for example, obtain an enforceable cease and desist order in the United
      States District Court, or may assess civil money penalties against an
      institution or its affiliated parties.




**Legislation
                and Proposed Changes**





From
      time
      to time, legislation is enacted which has the effect of increasing the cost
      of
      doing business, limiting or expanding permissible activities or affecting the
      competitive balance between banks and other financial institutions. Proposals
      to
      change the laws and regulations governing the operations and taxation of banks,
      bank holding companies and other financial institutions are frequently made
      in
      Congress, in the California legislature and before various bank regulatory
      agencies. For example, from time to time Congress has considered various
      proposals to eliminate the federal thrift charter, create a uniform financial
      institutions charter, conform holding company regulation, and abolish the Office
      of Thrift Supervision. Typically, the intent of this type of legislation is
      to
      strengthen the banking industry, even if it may on occasion prove to be a burden
      on management’s plans. No prediction can be made as to the likelihood of any
      major changes or the impact that new laws or regulations might have on the
      Bank.





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**LIMITATIONS
      ON ACTIVITIES**





On
      December 15, 2005 the Federal Reserve Bank of San Francisco (“FRBSF”) lifted the
      written agreement (“Agreement”) that was entered into on October 26, 2004 with
      County Bank. Under the Agreement, the Bank, among other actions taken, (i)
      developed a written program designed to improve the Bank's system of internal
      controls to ensure compliance with applicable provisions of the Bank Secrecy
      Act; (ii) developed an enhanced written customer due diligence program designed
      to reasonably ensure the identification and reporting of all known or suspected
      violations of law and suspicious transactions against or involving the Bank;
      (iii) established enhanced written policies and procedures designed to
      strengthen the Bank's internal controls and audit program, and (iv) submitted
      quarterly progress reports to the FRBSF detailing actions taken to secure
      compliance with the Agreement.





FDICIA
      prohibits state chartered banks and their subsidiaries from engaging, as
      principal, in activities not permissible by national banks and their
      subsidiaries, unless the bank’s primary federal regulator determines the
      activity poses no significant risk to the Bank Insurance Fund (“BIF”) and the
      state bank is and continues to be adequately capitalized. Similarly, state
      bank
      subsidiaries may not engage, as principal, in activities impermissible by
      subsidiaries of national banks. This prohibition extends to acquiring or
      retaining any investment, including those that would otherwise be permissible
      under California law.





The
      State
      Bank Parity Act, eliminates certain disparities between California state
      chartered banks and federally chartered national banks by authorizing the
      Commissioner to address such disparities through a streamlined rulemaking
      process. The Commissioner has taken action pursuant to the Parity Act to
      authorize, among other matters, previously impermissible share repurchases
      by
      state banks, subject to the prior approval of the Commissioner.





Under
      regulations of the Office of the Comptroller of the Currency (“OCC”) eligible
      institutions (those national banks that are well-capitalized, have a high
      overall rating and a satisfactory CRA rating, and are not subject to an
      enforcement order) may engage in activities related to banking through operating
      subsidiaries after going through a new expedited application process. In
      addition, the new regulations include a provision whereby a national bank may
      apply to the OCC to engage in an activity through a subsidiary in which the
      bank
      itself may not engage. In determining whether to permit the subsidiary to engage
      in the activity, the OCC will evaluate why the bank itself is not permitted
      to
      engage in the activity and whether a Congressional purpose will be frustrated
      if
      the OCC permits the subsidiary to engage in the activity. The State Bank Parity
      Act may permit state-licensed banks to engage in similar activities, subject
      to
      the discretion of the Commissioner.





TIE-IN
      ARRANGEMENTS AND TRANSACTIONS WITH AFFILIATED PERSONS


A
      bank is
      prohibited from certain tie-in arrangements in connection with any extension
      of
      credit, sale or lease of property or furnishing of services. For example, with
      certain exceptions, a bank may not condition an extension of credit on a promise
      by its customer to obtain other services provided by it, its holding company
      or
      other subsidiaries (if any), or on a promise by its customer not to obtain
      other
      services from a competitor.





Directors,
      officers and principal shareholders of the Company, and the companies with
      which
      they are associated, may conduct banking transactions with the Company in the
      ordinary course of business. Any loans and commitments to loans included in
      such
      transactions must be made in accordance with applicable law, on substantially
      the same terms, including interest rates and collateral, as those prevailing
      at
      the time for comparable transactions with other persons of similar
      creditworthiness, and on terms not involving more than the normal risk of
      collectibility or presenting other unfavorable features.





CROSS-INSTITUTION
      ASSESSMENTS


Any
      insured depository institution owned by the Company can be assessed for losses
      incurred by the FDIC in connection with assistance provided to, or the failure
      of, any other depository institution owned by the Company.





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INSURANCE
      PREMIUMS AND ASSESSMENTS


The
      FDIC
      has authority to impose a special assessment on members of the BIF to ensure
      that there will be sufficient assessment income for repayment of BIF obligations
      and for any other purpose which it deems necessary. The FDIC is authorized
      to
      set semi-annual assessment rates for BIF members at levels sufficient to
      maintain the BIF's reserve ratio to a designated level of 1.25% of insured
      deposits. The FDIC has developed a risk-based assessment system, under which
      the
      assessment rate for an insured depository institution varies according to the
      level of risk incurred in its activities. An institution's risk category is
      based upon whether the institution is “well capitalized,” “adequately
      capitalized,” or “undercapitalized.” Each insured depository institution is also
      assigned to "supervisory subgroup" A, B or C. Subgroup A institutions are
      financially sound institutions with no more than a few minor weaknesses;
      Subgroup B institutions are institutions that demonstrate weaknesses which,
      if
      not corrected, could result in significant deterioration; and Subgroup C
      institutions are institutions for which there is a substantial probability
      that
      the FDIC will suffer a loss in connection with the institution unless effective
      action is taken to correct the areas of weakness. The FDIC assigns each member
      institution an annual FDIC assessment rate which, as of the date of this report,
      varies between 0.0% per annum with a $2,000 minimum (for well capitalized
      Subgroup A institutions) and 0.27% per annum (for undercapitalized Subgroup
      C
      institutions). Insured institutions are not permitted to disclose their risk
      assessment classification.





AUDIT
      REQUIREMENTS


All
      insured depository institutions are required to have an annual, full-scope
      on-site examination. Depository institutions with assets greater than $500
      million are required to have annual independent audits, prepare financial
      statements in accordance with generally accepted accounting principles, and
      develop policies that ensure adequate internal controls over financial
      reporting. Insured depository institutions are also required to have an
      independent audit committee comprised entirely of outside
      directors.




COMMUNITY
      REINVESTMENT ACT


The
      Community Reinvestment Act ("CRA") requires banks to identify the communities
      served by the bank's offices and to identify the types of credit the bank is
      prepared to extend within such communities. It also requires the bank's
      regulators to assess the bank's performance in meeting the credit needs of
      its
      community and to take that assessment into consideration in reviewing
      applications for mergers, acquisitions and other transactions. During January,
      2005, a CRA examination was completed. The Bank was assigned a CRA rating of
      “outstanding” as of this examination.





BANK
      SECRECY ACT


The
      Bank
      Secrecy Act requires financial institutions to keep records and file reports
      regarding certain financial transactions that involve cash, and to implement
      counter-money laundering programs and compliance procedures.





SECURITIES
      AND EXCHANGE COMMISSION FILINGS


Under
      Section 13 of the Securities Exchange Act of 1934 (“Exchange Act”) and the SEC’s
      rules, the Company must electronically file periodic and current reports as
      well
      as proxy statements with the Securities and Exchange Commission (the “SEC”). The
      Company electronically files the following reports with the SEC: Form 10-K
      (Annual Report), Form 10-Q (Quarterly Report), and Form 8-K (Current Report).
      The Company may prepare additional filings and amendments to those as required.
      The SEC maintains an Internet site, http://www.sec.gov ,
      at
      which all forms filed electronically may be accessed. Our SEC filings are also
      available free of charge on our website at http://www.ccow.com .




POTENTIAL
      ENFORCEMENT ACTIONS


Banks
      and
      their institution-affiliated parties may be subject to potential enforcement
      actions by the bank regulatory agencies for unsafe or unsound practices in
      conducting their businesses, or for violations of any law, rule, regulation
      or
      provision, any consent order with any agency, any condition imposed in writing
      by an agency, or any written agreement with the agency. Enforcement actions
      may
      include the imposition of a conservator or receiver, cease-and-desist orders
      and
      written agreements, the termination of deposit insurance, the imposition of
      civil money penalties, and removal and prohibition orders against
      institution-affiliated parties. See " -- County Bank".





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INTERSTATE
      BANKING


Bank
      holding companies (including bank holding companies that also are financial
      holding companies) are required to obtain the prior approval of the Federal
      Reserve Board before acquiring more than five percent of any class of voting
      stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking
      and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching
      Act”), a bank holding company may acquire banks located in states other than its
      home state without regard to the permissibility of such acquisitions under
      state
      law, but subject to any state requirement that the bank has been organized
      and
      operating for a minimum period of time, not to exceed five years, and the
      requirement that the bank holding company, after the proposed acquisition,
      controls no more than 10 percent of the total amount of deposits of insured
      depository institutions in the United States and no more than 30 percent or
      such
      lesser or greater amount set by state law of such deposits in that
      state.





Subject
      to certain restrictions, the Interstate Banking and Branching Act also
      authorizes banks to merge across state lines to create interstate banks. The
      Interstate Banking and Branching Act also permits a bank to open new branches
      in
      a state in which it does not already have banking operations if such state
      enacts a law permitting de novo branching.





FINANCIAL
      SERVICES MODERNIZATION LEGISLATION


The
      Gramm-Leach-Bliley Act of 1999 (the “Modernization Act”) repealed two provisions
      of the Glass-Steagall Act: Section 20, which restricted the affiliation of
      Federal Reserve member banks with firms “engaged principally” in specified
      securities activities; and Section 32, which restricted officer, director,
      or
      employee interlocks between a member bank and any company or person “primarily
      engaged” in specified securities activities. In addition, the Modernization Act
      also expressly preempts any state law restricting the establishment of financial
      affiliations, primarily related to insurance. The law establishes a
      comprehensive framework to permit affiliations among commercial banks, insurance
      companies, securities firms, and other financial service providers by revising
      and expanding the BHC Act framework to permit a holding company and its
      subsidiaries to engage in a full range of financial activities through a new
      entity known as a Financial Holding Company. “Financial activities” is broadly
      defined to include not only banking, insurance, and securities activities,
      but
      also merchant banking and additional activities that the Federal Reserve, in
      conjunction with the Secretary of the Treasury, determine to be financial in
      nature, incidental to such financial activities, or complementary activities
      that do not pose a substantial risk to the safety and soundness of depository
      institutions or the financial system generally.





In
      order
      for the Company to take advantage of the authority provided by the Modernization
      Act to affiliate with other financial service providers, it must become a
“Financial Holding Company.” To do so, the Company would file a declaration with
      the FRB, electing to engage in activities permissible for Financial Holding
      Companies and certifying that it is eligible to do so because its insured
      depository institution subsidiary (the Bank) is well-capitalized and
      well-managed. In addition, the Federal Reserve must determine that an insured
      depository institution subsidiary has at least a “satisfactory” rating under the
      Community Reinvestment Act. The Company currently meets the requirements for
      Financial Holding Company status. The Company will continue to monitor its
      strategic business plan to determine whether, based on market conditions and
      other factors, the Company wishes to utilize any of its expanded powers provided
      in the Modernization Act.





The
      Modernization Act also includes a new section of the Federal Deposit Insurance
      Act which governs subsidiaries of state banks that engage in activities as
      principal that would only be permissible for a national bank to conduct in
      a
      financial subsidiary. The Act expressly preserves the ability of a state bank
      to
      retain all existing subsidiaries. Because California currently permits
      commercial banks chartered by the state to engage in any activity permissible
      for national banks, the Bank will be permitted to form subsidiaries to engage
      in
      the activities authorized by the Modernization Act to the same extent as a
      national bank. In order to form a financial subsidiary, the Bank must be
      well-capitalized, and the Bank would be subject to the same capital deduction,
      risk management and affiliate transaction rules as are applicable to national
      banks. In the opinion of management, the Bank currently meets those
      requirements.





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Under
      the
      Modernization Act, securities firms and insurance companies that elect to become
      Financial Holding Companies may acquire banks and other financial institutions.
      The Company does not believe that the Modernization Act will have a material
      adverse effect on its operations in the near-term. However, to the extent that
      it permits banks, securities firms, and insurance companies to affiliate, the
      financial services industry may experience further consolidation. The
      Modernization Act is intended to grant to community banks certain powers as
      a
      matter of right that larger institutions have accumulated on an ad hoc basis.
      Nevertheless, the Modernization Act may have the effect of increasing the amount
      of competition that the Company and the Bank face from larger institutions
      and
      other types of companies that offer financial products, many of which may have
      substantially more financial resources than the Company and the
      Bank.





INTERNATIONAL
      MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT OF 2001


The
      terrorist attacks in September, 2001, impacted the financial services industry
      and led to federal legislation that attempts to address certain issues involving
      financial institutions. On October 26, 2001, President Bush signed into law
      the
      Uniting and Strengthening America by Providing Appropriate Tools Required to
      Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT
      Act").





Part
      of
      the USA PATRIOT Act is the International Money Laundering Abatement and
      Financial Anti-Terrorism Act of 2001 ("IMLAFATA"). IMLAFATA authorizes the
      Secretary of the Treasury, in consultation with the heads of other government
      agencies, to adopt special measures applicable to banks, bank holding companies,
      and other financial institutions. These measures may include enhanced
      recordkeeping and reporting requirements for certain financial transactions
      that
      are of primary money laundering concern, due diligence requirements concerning
      the beneficial ownership of certain types of accounts, and restrictions or
      prohibitions on certain types of accounts with foreign financial
      institutions.





Among
      its
      other provisions, IMLAFATA requires each financial institution to: (i) establish
      an anti-money laundering program; (ii) establish due diligence policies,
      procedures and controls with respect to its private banking accounts and
      correspondent banking accounts involving foreign individuals and certain foreign
      banks; and (iii) avoid establishing, maintaining, administering, or managing
      correspondent accounts in the United States for, or on behalf of, a foreign
      bank
      that does not have a physical presence in any country. In addition, IMLAFATA
      contains a provision encouraging cooperation among financial institutions,
      regulatory authorities and law enforcement authorities with respect to
      individuals, entities and organizations engaged in, or reasonably suspected
      of
      engaging in, terrorist acts or money laundering activities. IMLAFATA expands
      the
      circumstances under which funds in a bank account may be forfeited and requires
      covered financial institutions to respond under certain circumstances to
      requests for information from federal banking agencies within 120 hours.
      IMLAFATA also amends the Bank Holding Company Act and the Bank Merger Act to
      require the federal banking agencies to consider the effectiveness of a
      financial institution's anti-money laundering activities when reviewing an
      application under these acts.





Treasury
      regulations implementing the due diligence requirements of IMLAFATA include
      standards to verify customer identity, to encourage cooperation among financial
      institutions, federal banking agencies, and law enforcement authorities
      regarding possible money laundering or terrorist activities, to prohibit the
      anonymous use of "concentration accounts," and to require all covered financial
      institutions to have in place a Bank Secrecy Act compliance
      program.





SARBANES-OXLEY
      ACT OF 2002


The
        stated goals of the Sarbanes-Oxley Act of 2002 (“SOX”) are to increase corporate
        responsibility, to provide for enhanced penalties for accounting and auditing
        improprieties at publicly-traded companies, and to protect investors by
        improving the accuracy and reliability of corporate disclosures made pursuant
        to
        the securities laws.


The
      SOX
      generally applies to all companies, both U.S. and non-U.S., that file or are
      required to file periodic reports with the SEC under the Exchange Act. The
      SOX
      includes very specific additional disclosure requirements and new corporate
      governance rules, requires the SEC and securities exchanges to adopt extensive
      additional disclosure, corporate governance and other related rules, and
      mandates further studies of certain issues by the SEC and the Comptroller
      General. The SOX represents significant federal involvement in matters
      traditionally left to state regulatory systems, such as the regulation of the
      accounting profession, and to state corporate law, such as the relationship
      between a board of directors and management and a board of directors and its
      committees.





-16-
 Table
          of Contents




The
      SOX
      addresses, among other matters: audit committees for all reporting companies;
      certification of financial statements by the chief executive officer and the
      chief financial officer; the forfeiture of bonuses or other incentive-based
      compensation and profits from the sale of an issuer’s securities by directors
      and senior officers in the twelve month period following initial publication
      of
      any financial statements that later require restatement; a prohibition on
      trading by officers and directors trading during certain black out periods
      under
      employee benefit plans; disclosure of off-balance sheet transactions; a
      prohibition on personal loans to directors and officers; expedited filing
      requirements for Form 4’s; disclosure of a code of ethics and filing of a Form
      8-K for a change or waiver of such code; “real time” filing of issuers’ periodic
      reports; the formation of a public accounting oversight board; auditor
      independence; and various increased criminal penalties for violation of
      securities laws. The SEC has adopted a number of rules designed to effectuate
      the provisions of the SOX.





REGULATION
      W


Transactions
      between a bank and its “affiliates” are quantitatively and qualitatively
      restricted under the Federal Reserve Act. The Federal Deposit Insurance Act
      (“FDIA”) applies Section 23A and 23B to insured nonmember banks in the same
      manner and to the same extent as if they were members of the Federal Reserve
      System. The FRB has also issued Regulation W, which codifies prior regulations
      under Section 23A and 23B of the Federal Reserve Act and provides interpretive
      guidance with respect to affiliate transactions. Regulation W incorporates
      the
      exemption from the affiliate transaction rules but expands the exemption to
      cover the purchase of any type of loan or extension of credit from an affiliate.
      Affiliates of a bank include, among other entities, the bank’s holding company
      and companies that are under common control with the bank. The Company is
      considered to be an affiliate of the Bank. In general, subject to certain
      specified exemptions, a bank or its subsidiaries are limited in their ability
      to
      engage in “covered transactions” with affiliates: (i) to an amount equal to 10%
      of the bank’s capital and surplus in the case of covered transactions with any
      one affiliate; and (ii) to an amount equal to 20% of the bank’s capital and
      surplus in the case of covered transactions with all affiliates. In addition,
      a
      bank and its subsidiaries may engage in covered transactions and other specified
      transactions only on terms and under circumstances that are substantially the
      same, or at least as favorable to the bank or its subsidiaries, as those
      prevailing at the time for comparable transactions with nonaffiliated companies.
      “Covered transactions” include: (i) a loan or extension of credit to an
      affiliate; (ii) a purchase of, or an investment in, securities issued by an
      affiliate; (iii) a purchase of assets from an affiliate, with some exceptions;
      (iv) the acceptance of securities issued by an affiliate as collateral for
      a
      loan or extension of credit to any party; and (v) the issuance of a guarantee,
      acceptance or letter of credit on behalf of an affiliate. Additionally, under
      Regulation W, a bank and its subsidiaries may not purchase a low-quality asset
      from an affiliate; covered transactions and other specified transactions between
      a bank or its subsidiaries and an affiliate must be on terms and conditions
      that
      are consistent with safe and sound banking practices; and with some exceptions,
      each loan or extension of credit by a bank to an affiliate must be secured
      by
      collateral with a market value ranging from 100% to 130%, depending on the
      type
      of collateral, of the amount of the loan or extension of credit.





Regulation
      W generally excludes all non-bank subsidiaries of the banks from treatment
      as
      affiliates, except to the extent that the Federal Reserve Board decides to
      treat
      these subsidiaries as affiliates.





Concurrent
      with the adoption of Regulation W, the Federal Reserve Board has proposed a
      regulation that would further limit the amount of loans that could be purchased
      by a bank from an affiliate to not more than 100% of the bank’s capital and
      surplus.





CONCLUSIONS


It
      is
      impossible to predict with any degree of accuracy the competitive impact the
      laws and regulations described above will have on commercial banking in general
      and on the business of the Company in particular. It is anticipated that the
      banking industry will continue to be a highly regulated industry. Additionally,
      there appears to be a continued lessening of the historical distinction between
      the services offered by financial institutions and other businesses offering
      financial services. Finally, the trend toward nationwide interstate banking
      is
      expected to continue. As a result of these factors, it is anticipated banks
      will
      experience increased competition for deposits and loans and, possibly, further
      increases in their cost of doing business.





-17-
 Table
          of Contents




***Selected
      Statistical Information***





The
      following tables on pages 17 through 23 present certain statistical information
      concerning the business of the Company. This informa-tion should be read in
      conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS" incorporated in ITEM 7 of this report by reference
      to
      pages 39 through 55 of the Company's 2005 Annual Report to Shareholders and
      with
      the Company's Consolidated Financial Statements and the Notes thereto
      incorporated in Item 8 of this report by reference to pages 59
      through 88 of the Company's 2005 Annual Report to Shareholders. The
      statistical information that follows is based on average daily amounts.





**Interest
      Rates and Margins:**




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 shareholder’s 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.




For
                the years ended December 31,2005
            
            2004
            
            2003Average
            
            
            
            
            
            Average
            
            
            
            
            
            Average(Dollars
                in thousands)
            
            Balance
            
            Interest
            
            Rate
            
            Balance
            
            Interest
            
            Rate
            
            Balance
            
            Interest
            
            RateAssetsFederal
                funds sold
            
            $
            10,981
            
            $
            401
            
            
            3.65
            %
            $
            16,604
            
            $
            266
            
            
            1.60
            %
            $
            26,673
            
            $
            274
            
            
            1.03
            %Time
                deposits at other financial institutions
            
            
            728
            
            
            20
            
            
            2.75
            
            
            670
            
            
            15
            
            
            2.24
            
            
            504
            
            
            8
            
            
            1.59Nontaxable
                investment securities(1)
            
            
            90,531
            
            
            4,581
            
            
            5.06
            
            
            56,057
            
            
            2,937
            
            
            5.24
            
            
            30,946
            
            
            1,793
            
            
            5.79Taxable
                investment securities(1)
            
            
            351,948
            
            
            14,478
            
            
            4.11
            
            
            325,933
            
            
            12,908
            
            
            3.96
            
            
            287,158
            
            
            11,965
            
            
            4.17Loans,
                gross (2)
            
            
            968,492
            
            
            71,924
            
            
            7.43
            
            
            813,050
            
            
            55,303
            
            
            6.80
            
            
            687,419
            
            
            48,948
            
            
            7.12Total
                interest-earning assets
            
            
            1,422,680
            
            
            91,404
            
            
            6.42
            
            
            1,212,314
            
            
            71,429
            
            
            5.89
            
            
            1,032,700
            
            
            62,988
            
            
            6.10Allowance
                for loan losses
            
            
            (13,937
            )
            
            
            
            
            
            
            
            (14,001
            )
            
            
            
            
            
            
            
            (13,413
            )Cash
                and due from banks
            
            
            45,142
            
            
            
            
            
            
            
            
            40,475
            
            
            
            
            
            
            
            
            35,454Premises
                and equipment, net
            
            
            25,264
            
            
            
            
            
            
            
            
            18,881
            
            
            
            
            
            
            
            
            15,069Interest
                receivable and other assets
            
            
            60,495
            
            
            
            
            
            
            
            
            51,854
            
            
            
            
            
            
            
            
            42,379Total
                assets
            
            $
            1,539,644
            
            
            
            
            
            
            
            $
            1,309,523
            
            
            
            
            
            
            
            $
            1,112,189Liabilities
                and shareholders' equityNegotiable
                orders of withdrawal
            
            $
            183,017
            
            $
            411
            
            
            0.22
            %
            $
            148,951
            
            $
            70
            
            
            0.05
            %
            $
            122,927
            
            $
            57
            
            
            0.05
            %Savings
                deposits
            
            
            372,292
            
            
            5,318
            
            
            1.43
            
            
            350,270
            
            
            3,165
            
            
            0.90
            
            
            274,988
            
            
            2,691
            
            
            0.98Time
                deposits
            
            
            410,974
            
            
            12,259
            
            
            2.98
            
            
            356,184
            
            
            8,053
            
            
            2.26
            
            
            349,223
            
            
            8,503
            
            
            2.43Subordinated
                debentures
            
            
            16,496
            
            
            1,351
            
            
            8.19
            
            
            16,496
            
            
            1,152
            
            
            6.98
            
            
            6,607
            
            
            648
            
            
            9.81Other
                borrowings
            
            
            156,807
            
            
            5,381
            
            
            3.43
            
            
            121,585
            
            
            4,657
            
            
            3.83
            
            
            104,920
            
            
            4,354
            
            
            4.15Total
                interest-bearing liabilities
            
            
            1,139,586
            
            
            24,720
            
            
            2.17
            
            
            993,486
            
            
            17,097
            
            
            1.72
            
            
            858,665
            
            
            16,253
            
            
            1.89Noninterest-bearing
                deposits
            
            
            274,750
            
            
            
            
            
            
            
            
            213,864
            
            
            
            
            
            
            
            
            164,919Accrued
                interest, taxes and other liabilities
            
            
            12,289
            
            
            
            
            
            
            
            
            5,081
            
            
            
            
            
            
            
            
            5,607Total
                liabilities
            
            
            1,426,625
            
            
            
            
            
            
            
            
            1,212,431
            
            
            
            
            
            
            
            
            1,029,191Total
                shareholders' equity
            
            
            113,019
            
            
            
            
            
            
            
            
            97,092
            
            
            
            
            
            
            
            
            82,998Total
                liabilities and shareholders’ equity
            
            $
            1,539,644
            
            
            
            
            
            
            
            $
            1,309,523
            
            
            
            
            
            
            
            $
            1,112,189Net
                interest income and margin (3)
            
            
            
            
            $
            66,684
            
            
            4.69
            %
            
            
            
            $
            54,332
            
            
            4.49
            %
            
            
            
            $
            46,735
            
            
            4.53
            %




(1)
                Tax-equivalent
                    adjustments recorded at the statutory rate of 35% that are included
                    in
                    nontaxable investment securities income totaled $1,116,000, $726,000,
                    and
                    $442,000 in 2005, 2004, and 2003, respectively. Tax equivalent
                    income
                    adjustments included in the nontaxable investment securities
                    income were
                    derived from nontaxable municipal interest income. Tax equivalent
                    income
                    adjustments recorded at the statutory federal rate of 35% that
                    are
                    included in taxable investment securities income were created
                    by a
                    dividends received deduction of $124,000, $132,000, and $133,000
                    in 2005,
                    2004, and 2003, respectively.


(2)
            Interest
                on non-accrual loans is recognized into income on a cash received
                basis.


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





-18-
 Table
          of Contents




The
      Company’s net interest income is affected by changes in the amount and mix of
      interest-earning assets and interest-bearing liabilities. It is also affected
      by
      changes in yields earned on interest-earning assets and rates paid on
      interest-bearing deposits and borrowed funds. The following table sets forth
      changes in interest income and interest expense for each major category of
      interest-earning asset and interest-bearing liability and the amount of change
      attributable to volume and rate changes for the years indicated. The changes
      due
      to both rate and volume have been allocated to rate and volume in proportion
      to
      the relationship of the absolute dollar amount of the change in each. Interest
      on non-accrual loans was recognized into income on a cash basis. Tax equivalent
      adjustments have been made to reflect the before tax interest income for tax
      advantaged investments.




(Dollars
                  in thousands)
              
              2005
                  Compared to 2004
              
              2004
                  Compared to 2003Net
                  Interest Income Variance Analysis
              
              Volume
              
              Rate
              
              Total
              
              Volume
              
              Rate
              
              TotalIncrease
                  (decrease) in interest income:Loans
              
              $
              11,229
              
              $
              5,392
              
              $
              16,621
              
              $
              6,903
              
              $
              (548
              )
              $
              6,355Taxable
                  investment securities
              
              
              1,057
              
              
              513
              
              
              1,570
              
              
              1,091
              
              
              (148
              )
              
              943Nontaxable
                  investment securities
              
              
              1,669
              
              
              (25
              )
              
              1,644
              
              
              1,187
              
              
              (43
              )
              
              1,144Federal
                  funds sold
              
              
              (7
              )
              
              142
              
              
              135
              
              
              (34
              )
              
              26
              
              
              (8
              )Time
                  deposits at other institutions
              
              
              1
              
              
              4
              
              
              5
              
              
              3
              
              
              4
              
              
              7Total
              
              
              13,949
              
              
              6,026
              
              
              19,975
              
              
              9,150
              
              
              (709
              )
              
              8,441Increase
                  (decrease) in interest expense:Interest-bearing
                  demand deposits
              
              
              19
              
              
              322
              
              
              341
              
              
              13
              
              
              -
              
              
              13Savings
                  deposits
              
              
              210
              
              
              1,943
              
              
              2,153
              
              
              526
              
              
              (52
              )
              
              474Time
                  deposits
              
              
              1,367
              
              
              2,839
              
              
              4,206
              
              
              42
              
              
              (492
              )
              
              (450
              )Subordinated
                  Debentures
              
              
              -
              
              
              199
              
              
              199
              
              
              588
              
              
              (84
              )
              
              504Other
                  borrowings
              
              
              845
              
              
              (121
              )
              
              724
              
              
              350
              
              
              (47
              )
              
              303Total
              
              
              2,441
              
              
              5,182
              
              
              7,623
              
              
              1,519
              
              
              (675
              )
              
              844Increase
                  (decrease) in net interest income
              
              $
              11,508
              
              $
              844
              
              $
              12,352
              
              $
              7,631
              
              $
              (34
              )
              $
              7,597





-19-
 Table
          of Contents




**Investment
      Portfolio Maturities**




The
      following table sets forth the maturities of debt securities at December 31,
      2005 and the weighted average yields of such securities calculated on a book
      value basis using the weighted average yield within each scheduled maturity
      grouping. Maturities of mortgage-backed securities and collateralized mortgage
      obligations are stipulated in their respective contracts, however, actual
      maturities may differ from contractual maturities because borrowers may have
      the
      right to call or prepay obligations with or without call prepayment penalties.
      Yields on municipal securities have not been calculated on a tax-equivalent
      basis.





Within
                One Year
            
            One
                to Five Years
            
            Five
                to Ten Years
            
            Over
                Ten Years(Dollars
                in thousands)
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Total**Available
                for sale debt securities:**U.S.
                Government agencies
            
            $
            -
            
            
            -
            %
            $
            30,449
            
            
            3.79
            %
            $
            9,785
            
            
            4.65
            %
            $
            -
            
            
            -
            %
            $
            40,234State
                and political subdivisions
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            253
            
            
            3.63
            
            
            1,033
            
            
            3.35
            
            
            1,286Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            7,639
            
            
            3.83
            
            
            47,818
            
            
            4.06
            
            
            152,714
            
            
            4.89
            
            
            208,171Collateralized
                Mortgage Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            32,416
            
            
            3.70
            
            
            32,416Corporate
                debt securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Held
                to maturity debt securities:**U.S.
                Government agencies
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -State
                and political subdivisions
            
            
            -
            
            
            -
            
            
            9,265
            
            
            4.30
            
            
            23,162
            
            
            4.23
            
            
            67,618
            
            
            3.50
            
            
            100,045Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            643
            
            
            7.27
            
            
            61,841
            
            
            4.94
            
            
            62,484Collateralized
                Mortgage Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            18,496
            
            
            4.01
            
            
            18,496Total
                debt securities
            
            $
            -
            
            
            -
            %
            $
            47,353
            
            
            3.90
            %
            $
            81,661
            
            
            4.20
            %
            $
            334,118
            
            
            4.45
            %
            $
            463,132





The
      Company does not own securities of a single issuer whose aggregate book value
      is
      in excess of 10% of its total equity.





**Asset
      / Liability Repricing**




The
      interest rate gaps reported in the table below arise when assets are funded
      with
      liabilities having different repricing intervals. Since these gaps are actively
      managed and change daily as adjustments are made in interest rate views and
      market outlook, positions at the end of any period may not reflect the Company's
      interest rate sensitivity in subsequent periods. Active management dictates
      that
      longer-term economic views are balanced against prospects for short-term
      interest rate changes in all repricing intervals. For purposes of the analysis
      below, repricing of fixed-rate instruments is based upon the contractual
      maturity of the applicable instruments. Actual payment patterns may differ
      from
      contractual payment patterns.





**By
                Repricing Interval As of December 31, 2005**(Dollars
                in thousands)
            
            Within
                three months
            
            After
                three months, within one year
            
            After
                one year, within
              five
                years
            
            After
                five years
            
            Noninterest-bearing
                Funds
            
            Total**Assets**Federal
                funds sold
            
            $
            30,250
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            30,250Time
                deposits at other institutions
            
            
            100
            
            
            250
            
            
            -
            
            
            -
            
            
            -
            
            
            350Investment
                securities
            
            
            7,191
            
            
            570
            
            
            56,842
            
            
            406,475
            
            
            28,102
            
            
            499,180Loans
            
            
            170,235
            
            
            275,175
            
            
            231,557
            
            
            391,929
            
            
            -
            
            
            1,068,896Noninterest-earning
                assets and allowance for loan losses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            158,080
            
            
            158,080Total
                assets
            
            $
            207,776
            
            $
            275,995
            
            $
            288,399
            
            $
            798,404
            
            $
            186,182
            
            $
            1,756,756**Liabilities
                and shareholders’ equity**Demand
                deposits
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            310,284
            
            $
            310,284Savings,
                money market & NOW deposits
            
            
            643,175
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            643,175Time
                deposits
            
            
            157,237
            
            
            139,552
            
            
            152,568
            
            
            1,684
            
            
            -
            
            
            451,041Other
                interest-bearing liabilities
            
            
            33,474
            
            
            8,884
            
            
            36,500
            
            
            122,870
            
            
            -
            
            
            201,728Subordinated
                Debentures
            
            
            -
            
            
            -
            
            
            -
            
            
            16,496
            
            
            -
            
            
            16,496Other
                liabilities and shareholders’ equity
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            134,032
            
            
            134,032Total
                liabilities and shareholders’ equity
            
            $
            833,886
            
            $
            148,436
            
            $
            189,068
            
            $
            141,050
            
            $
            444,316
            
            $
            1,756,756Interest
                rate sensitivity gap
            
            $
            (626,110
            )
            $
            127,559
            
            $
            99,331
            
            $
            657,354
            
            $
            (258,134
            )Cumulative
                interest rate sensitivity gap
            
            $
            (626,110
            )
            $
            (498,551
            )
            $
            (399,220
            )
            $
            258,134
            
            $
            -




-20-
 Table
          of Contents




**Loan
      Portfolio**




At
      December 31, 2005, the Company had approximately $495,313,000 in undisbursed
      loan commitments. This compares with $393,039,000 at December 31, 2004. Standby
      and performance letters of credit were $15,160,000 and $13,875,000, at December
      31, 2005 and 2004. For further information about the composition of the
      Company's loan portfolio see the information in "ITEM 7--MANAGEMENT'S DISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Risk
      Management and Asset Quality,” incorporated by reference to page 47 of the
      Company's 2005 Annual Report to Shareholders.





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





(Dollars
                in thousands)
            
            December
                31,2005
            
            2004
            
            2003
            
            2002
            
            2001Amount
            
            Amount
            
            Amount
            
            Amount
            
            AmountCommercial
                and agricultural
            
            $
            347,104
            
            $
            298,122
            
            $
            288,138
            
            $
            242,157
            
            $
            215,115Real
                estate -construction
            
            
            167,992
            
            
            97,396
            
            
            89,652
            
            
            78,064
            
            
            57,989Real
                estate - mortgage
            
            
            471,266
            
            
            416,385
            
            
            318,624
            
            
            244,468
            
            
            187,586Consumer
                installment
            
            
            82,534
            
            
            73,190
            
            
            67,838
            
            
            69,084
            
            
            71,730Total
            
            $
            1,068,896
            
            $
            885,093
            
            $
            764,252
            
            $
            633,773
            
            $
            532,420





The
      table
      that follows shows the maturity distribution of the portfolio of commercial
      and
      agricultural, real estate construction, real estate mortgage and installment
      loans on December 31, 2005 by fixed and floating rate
      attributes:


December
                  31, 2005Within
              
              One
                  to
              
              Over(Dollars
                  in thousands)
              
              One
                  Year
              
              Five
                  Years
              
              Five
                  Years
              
              Total*Commercial
                  and agricultural*Loans
                  with floating rates(1)
              
              $
              183,185
              
              $
              71,723
              
              $
              21,976
              
              $
              276,884Loans
                  with predetermined rates
              
              
              28,988
              
              
              33,802
              
              
              7,430
              
              
              70,220Subtotal
              
              
              212,173
              
              
              105,525
              
              
              29,406
              
              
              347,104*Real
                  Estate—Construction*Loans
                  with floating rates
              
              
              140,302
              
              
              20,923
              
              
              304
              
              
              161,529Loans
                  with predetermined rates
              
              
              6,463
              
              
              -
              
              
              -
              
              
              6,463Subtotal
              
              
              146,765
              
              
              20,923
              
              
              304
              
              
              167,992*Real
                  Estate—Mortgage*Loans
                  with floating rates
              
              
              48,626
              
              
              65,151
              
              
              241,676
              
              
              355,453Loans
                  with predetermined rates
              
              
              7,793
              
              
              36,020
              
              
              72,000
              
              
              115,813Subtotal
              
              
              56,419
              
              
              101,171
              
              
              313,676
              
              
              471,266*Consumer
                  installment*Loans
                  with floating rates(1)
              
              
              960
              
              
              220
              
              
              45,428
              
              
              46,608Loans
                  with predetermined rates
              
              
              2,006
              
              
              9,126
              
              
              24,794
              
              
              35,926Subtotal
              
              
              2,966
              
              
              9,346
              
              
              70,222
              
              
              82,534Total
              
              $
              418,323
              
              $
              236,965
              
              $
              413,608
              
              $
              1,068,896


(1)
      All
      Cash Reserve loans that do not have a maturity date are included in “Over Five
      Years” category.





-21-
 Table
          of Contents




The
      Company seeks to mitigate the risks inherent in its loan portfolio by adhering
      to certain underwriting practices. They include analysis of prior credit
      histories, financial statements, tax returns and cash flow projections of its
      potential borrowers as well as obtaining independent appraisals on real and
      personal property taken as collateral and audits of accounts receivable or
      inventory pledged as security.





The
      Company also has an internal loan review process as well as periodic external
      reviews. The results of these reviews are assessed by the Company's audit
      committee. Collection of delinquent loans is generally the responsibility of
      the
      Company's credit administration staff. However, certain problem loans may be
      dealt with by the originating loan officer. The Directors Loan Committee reviews
      the status of delinquent and problem loans on a monthly basis. The Company's
      underwriting and review practices notwithstanding, in the normal course of
      business, the Company expects to incur loan losses in the future.





**Nonaccrual,
      Past Due and Restructured Loans**





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





(Dollars
                in thousands)
            
            December
                31,2005
            
            2004
            
            2003
            
            2002
            
            2001Amount
            
            Amount
            
            Amount
            
            Amount
            
            AmountNonaccrual
                loans
            
            $
            1,692
            
            $
            4,394
            
            $
            3,987
            
            $
            2,381
            
            $
            4,247Accruing
                loans past due 90 days or more
            
            
            208
            
            
            -
            
            
            -
            
            
            2
            
            
            609Total
                nonperforming loans
            
            $
            1,900
            
            $
            4,394
            
            $
            3,987
            
            $
            2,383
            
            $
            4,856Other
                real estate owned
            
            
            60
            
            
            60
            
            
            60
            
            
            60
            
            
            472Total
                nonperforming assets
            
            $
            1,960
            
            $
            4,454
            
            $
            4,047
            
            $
            2,443
            
            $
            5,328Nonperforming
                loans to total loans
            
            
            0.18
            %
            
            0.50
            %
            
            0.52
            %
            
            0.38
            %
            
            0.91
            %Nonperforming
                assets to total assets
            
            
            0.11
            %
            
            0.30
            %
            
            0.33
            %
            
            0.24
            %
            
            1.00
            %





Loans
      with significant potential problems or impaired loans are placed on nonaccrual
      status. Management defines impaired loans as those loans, regardless of past
      due
      status, in which management believes the collection of principal and interest
      is
      in doubt. The amount of gross interest income that would have been recorded
      on
      nonaccrual loans in the periods then ended if the loans had been current in
      accordance with the original terms and had been outstanding throughout the
      period or since origination, if held for part of the period, was $63,000,
      $4,000, $39,000, $131,000, and $170,000 in 2005, 2004, 2003, 2002,and 2001.
      The
      amount of interest income on nonaccrual loans that was included in net income
      was $88,000, $216,000, $231,000, $210,000, and $105,000 in 2005, 2004, 2003,
      2002, and 2001.




-22-
 Table
          of Contents




**Allocation
      of the Allowance for Loan Losses**


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:




(Dollars
                  in thousands)
              
              December
                  31,2005
              
              2004
              
              2003
              
              2002
              
              2001Amount
              
              Loans
                  % to totalloans
              
              Amount
              
              Loans
                  % to Totalloans
              
              Amount
              
              Loans
                  % to totalloans
              
              Amount
              
              Loans
                  % to totalloans
              
              Amount
              
              Loans
                  % to TotalloansCommercial
                  and agricultural
              
              $
              6,024
              
              
              32
              %
              $
              4,626
              
              
              34
              %
              
              4,759
              
              
              38
              %
              $
              4,438
              
              
              38
              %
              $
              3,751
              
              
              40
              %Real
                  estate -construction
              
              
              2,474
              
              
              16
              
              
              1,497
              
              
              11
              
              
              1,503
              
              
              12
              
              
              1,402
              
              
              12
              
              
              1,031
              
              
              11Real
                  estate - mortgage
              
              
              5,598
              
              
              44
              
              
              6,394
              
              
              47
              
              
              5,135
              
              
              41
              
              
              4,555
              
              
              39
              
              
              3,282
              
              
              35Installment
              
              
              680
              
              
              8
              
              
              1,088
              
              
              8
              
              
              1,127
              
              
              9
              
              
              1,285
              
              
              11
              
              
              1,313
              
              
              14Total
              
              $
              14,776
              
              
              100
              %
              $
              13,605
              
              
              100
              %
              $
              12,524
              
              
              100
              %
              $
              11,680
              
              
              100
              %
              $
              9,377
              
              
              100
              %




**Other
      Interest-Bearing Assets**




The
      following table relates to other interest bearing assets not disclosed above
      for
      the dates indicated. This item consists of a salary continuation plan for the
      Company's executive management and a deferred compensation plan for
      participating board members. The Company has discontinued the deferred
      compensation plan for board members and entered into “Director Elective Income
      Deferral Agreements”. The plans are informally linked with universal life
      insurance policies containing cash surrender values as listed in the following
      table:





December
                31(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003Cash
                surrender value of life insurance
            
            $
            31,796
            
            $
            28,362
            
            $
            24,138





During
      2005, 2004, and 2003 the Bank purchased $3,000,000, $3,175,000, and $6,000,000
      in new bank owned life insurance policies. This additional life insurance is
      in
      the form of single premium life policies covering bank officers. These policies
      have a variable rate of return that is reset annually by each insurer. The
      Bank
      is the owner of these policies and also the named beneficiary. During 2005,
      2004
      and 2003, the Company received $607,000, $0 and $0 in proceeds related to death
      benefits on bank owned life insurance.





**Deposits**





The
      following table sets forth the average balance and the average rate paid for
      the
      major categories of deposits for the years indicated:




For
                    the Year Ended December 31,(Dollars
                    in thousands)
                
                2005
                
                2004
                
                2003Amount
                
                Yield
                
                Amount
                
                Yield
                
                Amount
                
                YieldNoninterest-bearing
                    demand deposits
                
                $
                274,750
                
                
                -
                %
                $
                213,864
                
                
                -
                %
                $
                164,919
                
                
                -
                %Interest-bearing
                    demand deposits
                
                
                183,017
                
                
                0.22
                
                
                148,951
                
                
                0.05
                
                
                122,927
                
                
                0.05Savings
                    deposits
                
                
                372,292
                
                
                1.43
                
                
                350,270
                
                
                0.90
                
                
                274,988
                
                
                0.99Time
                    deposits under $100,000
                
                
                198,374
                
                
                2.91
                
                
                182,016
                
                
                2.35
                
                
                171,045
                
                
                2.58Time
                    deposits $100,000 and over
                
                
                212,600
                
                
                3.05
                
                
                174,168
                
                
                2.17
                
                
                178,178
                
                
                2.30




-23-
 Table
          of Contents




**Maturities
      of Time Certificates of Deposits of $100,000 or More**




Maturities
      of time certificates of deposits of $100,000
      or more outstanding at December 31, 2005 are summarized as follows:




(Dollars
                in thousands)Three
                months or less
            
            $
            99,460Over
                three to six months
            
            
            25,389Over
                six to twelve months
            
            
            41,864Over
                twelve months
            
            
            68,312Total
            
            $
            235,025




**Return
      on Equity and Assets**





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





**Return
      on Average Equity and Assets**





For
                the year endedDecember
                31,2005
            
            2004
            
            2003Return
                on average assets
            
            
            1.36
            %
            
            0.94
            %
            
            1.23
            %Return
                on average equity
            
            
            18.54
            
            
            12.69
            
            
            16.43Average
                equity to average assets
            
            
            7.34
            
            
            7.41
            
            
            7.46Dividend
                payout ratio
            
            
            9.0
            %
            
            9.4
            %
            
            -
            %





**ITEM
        1A.****RISK
        FACTORS**





See
        the
        information in "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS -Risk Factors” incorporated by reference to
        pages 53 through 55 of the Company's 2005 Annual Report to
        Shareholders





**ITEM
        1B.****UNRESOLVED
        STAFF COMMENTS**





None




-24-
 Table
          of Contents




**ITEM
      2.****PROPERTIES**





***The
      Bank***





Capital
      Corp of the West/County Bank is a community service bank with operations located
      mainly in the San Joaquin Valley of Central California. The corporate
      headquarters and main branch facility are located at 550 West Main Street,
      Merced, California in a three-story building with a two-story, attached parking
      garage and is approximately 29,000 square feet. In addition to this facility,
      there are three support centers in downtown Merced with an additional square
      footage of 33,000 square feet.





The
      Bank
      currently has 21 branch operations located in the central valley and 1 branch
      operation located in San Francisco. The central valley operations include
      branches located in: Merced (2), Atwater, Los Banos, Hilmar, Sacramento, Sonora,
      Turlock (2), Modesto (2), Dos Palos, Livingston, Mariposa, Madera, Clovis,
      Fresno (4), Stockton and San Francisco. The Bank owns eight of these branch
      facilities and the remaining fourteen facilities are leased. The Management
      of
      the Bank believes that the facilities will be adequate to accommodate operations
      for the foreseeable future.





**ITEM
      3.****LEGAL
      PROCEEDINGS**





As
      of
      March 14, 2006, the Company, is not a party to, nor is any of its properties
      the
      subject of, any material pending legal proceedings, nor are any such proceedings
      known to be contemplated by government authorities.





The
      Company is, however, exposed to certain potential claims encountered in the
      normal course of business. In the opinion of Management, the resolution of
      these
      matters will not have a material adverse effect on the Company's consolidated
      financial position or results of operations in the foreseeable
      future.





**ITEM
      4.****SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





The
      Company did not submit any matters to a vote of security holders in the quarter
      ended December 31, 2005.




-25-
 Table
          of Contents




**PART
      II**





**ITEM
      5.****MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**





For
      information concerning the market for the Company's common stock and related
      shareholder matters, see page 52
      of the Company's 2005 Annual Report to Shareholders incorporated herein by
      reference.





For
      information concerning the Company’s dividend policy, see the “Capital
      Resources” discussion on pages 51 through 52 of the Company’s 2005 Annual Report
      to Shareholders incorporated herein by reference.





**Market
      for Company's Common Stock and Related Stock Matters**





The
      Company’s stock is included for quotation on the Nasdaq National Market System
      with a stock quotation symbol of CCOW. The following table indicates the range
      of high and low bid prices for the period shown, based upon information provided
      by the Nasdaq National Market System. There were approximately 1,700 CCOW
      shareholders as of December 31, 2005.





2005*
            
            High
            
            Low4thquarter
            
            $
            35.52
            
            $
            29.603rdquarter
            
            $
            34.98
            
            $
            27.092ndquarter
            
            $
            28.14
            
            $
            24.001stquarter
            
            $
            26.64
            
            $
            23.622004*
            
            
            High
            
            
            Low4thquarter
            
            $
            28.75
            
            $
            23.313rdquarter
            
            $
            24.30
            
            $
            19.482ndquarter
            
            $
            22.50
            
            $
            18.321stquarter
            
            $
            22.26
            
            $
            20.81


*
        All stock prices are adjusted for the 9 for 5 split announced on March 29,
        2005.


**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**





For
      selected consolidated financial data concerning the Company, see page 38 of
      the Company's 2005 Annual Report to Shareholders incorporated herein by
      reference.





**ITEM7.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND****RESULTS
                OF OPERATIONS**





For
      management's discussion and analysis of financial condition and results of
      operations, see pages 39 through 55 of the Company's 2005 Annual Report to
      Shareholders incorporated herein by reference.





**ITEM7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET****RISK**





For
      management's discussion and analysis of market risk and interest rate risk
      management, see pages 49 through 50 of the Company's 2005 Annual
      Report to Shareholders incorporated herein by reference.





-26-
 Table
          of Contents




**ITEM8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**





Audited
      Consolidated Balance Sheets as of December 31, 2005 and 2004 and Audited
      Consolidated Statements of Income and Comprehensive Income, Shareholders' Equity
      and Cash Flows for the fiscal years ended December 31, 2005, 2004, and 2003
      appear on pages 59 through 62 of the Company's 2005 Annual Report to
      Shareholders incorporated herein by reference. Notes to the Consolidated
      Financial Statements appear on pages 63 through 88 of the Company's
      2005 Annual Report to Shareholders incorporated herein by reference. The
      Independent Auditors' Report appears on page 57 of the Company's 2005
      Annual Report to Shareholders incorporated herein by reference.





**ITEM9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING
                AND FINANCIAL DISCLOSURE**





There
      were no changes in and there were no disagreements with accountants on
      accounting and financial disclosure during 2005.




**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES


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





Based
        on
        the evaluation, the chief executive officer and chief financial officer
        concluded that as of December 31, 2005, the end
        of
        the period covered by this report , the
        disclosure controls and procedures were adequate and effective, and that
        the
        material information required to be included in this report, including
        information from the Company’s consolidated subsidiaries, was made
        known to the chief executive officer and chief financial officer by others
        within the Company in a timely manner, particularly during the period when
        this
        annual report on Form 10-K was being prepared.




**Management's
      Report on Internal Control over Financial Reporting.**




Based
      on
      their evaluation as of December 31, 2005, our Chief Executive Officer and Chief
      Financial Officer, have concluded that our disclosure controls and procedures
      (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
      Act of 1934, as amended) were sufficiently effective to ensure that the
      information required to be disclosed by us in this Annual Report on Form 10-K
      was recorded, processed, summarized and reported within the time periods
      specified within the SEC's rules and instructions for Form 10-K.




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Securities Exchange Act of 1934, as amended). Our management assessed the
      effectiveness of our internal control over financial reporting as of
      December 31, 2005. In making this assessment, our management used the
      criteria set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission ("COSO") in Internal Control-Integrated Framework. Our management
      has
      concluded that, as of December 31, 2005, our internal control over financial
      reporting is effective based on these criteria. Our independent registered
      public accounting firm, KPMG LLP, has issued an audit report on our assessment
      of our internal control over financial reporting, which is included herein.




**ITEM9B.**
            **OTHER
                INFORMATION**





None





-27-
 Table
          of Contents




**PART
      III**





**ITEM10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**





As
      permitted by the Securities and Exchange Commission’s rules relating to Form
      10-K, the information called for by this item is incorporated by reference
      from
      the section of the Company's 2005 Proxy Statement titled "Election of
      Directors," which is to be filed on or about March 14, 2006.





**ITEM11.**
            **EXECUTIVE
                COMPENSATION**





As
      permitted by the Securities and Exchange Commission, the information called
      for
      by this item is incorporated by reference from the section of the Company's
      2005
      Proxy Statement titled "Information Pertaining to Election of Directors," which
      is to be filed on or about March 14, 2006.




**ITEM12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT
                AND RELATED STOCKHOLDER
                MATTERS**





As
      permitted by the Securities and Exchange Commission’s rules relating to Form
      10-K, the information called for by this item is incorporated by reference
      from
      the sections of the Company's 2005 Proxy Statement, titled “Beneficial Ownership
      of Management” and “Principal Shareholders” which is to be filed on or about
      March 1 4,
      2006.





**Securities
      authorized for issuance under equity compensation plans.**


(a)
      The
      information in the following table is provided as of the end of the fiscal
      year
      ended December 2005 with respect to compensation plans (including individual
      compensation arrangements) under which equity securities are
      issuable:





**Equity
      Compensation Plan Information**


(a)
            (b)
            (c)Plan
                category
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            Weighted-average
                exercise price of outstanding options, warrants and rights
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                A)Equity
                compensation plans approved by security holders
            753,481
            $17.46
            335,365Equity
                compensation plans not approved by security holders
            -
            -
            -Total
            753,481
            $17.46
            335,365




**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**





As
      permitted by the Securities and Exchange Commission’s rules relating to Form
      10-K, the information called for by this item is incorporated by reference
      from
      the Company's Proxy Statement, which was filed on or about March 14,
      2006.





**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTING FEES AND
                SERVICES**





As
      permitted by the Securities and Exchange Commission, the information called
      for
      by this item is incorporated by reference from the section of the Company’s 2005
      Proxy Statement titled “Auditor Fees,” which is to be filed on or about March
      14, 2006.




-28-
 Table
          of Contents




**PART
      IV**





**ITEM
                15.**
            **EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES, AND REPORTS****ON
                FORM 8-K.**





(a) **Financial
      Statements and Schedules**


An
      index
      of all financial statements and schedules filed as part of this Form 10-K
      appears below and the material which begins on the pages of the Company's Annual
      Report to Shareholders for the year ended December 31, 2005 listed, are
      incorporated herein by reference in response to Item 8 of this
      report.





Financial
                Statements:
            
            Page*Report
                of Registered Independent Public Accounting Firm on
                Financial Statements
            
            57Report
                of Registered Independent Public Accounting Firm
                Regarding Internal Controls
            
            58Consolidated
                Balance Sheets at December 31, 2005 and
                2004
            
            59Consolidated
                Statements of Income and Comprehensive Income for
                the years ended December 31, 2005, 2004 and 2003
            
            60Consolidated
                Statements of Shareholders’ Equity for the
                years ended December 31, 2005, 2004 and 2003
            
            61Consolidated
                Statements of Cash Flows for the years ended
                December 31, 2005, 2004 and 2003
            
            62Notes
                to Consolidated Financial
                Statements
            
            63*Incorporated
                by reference from the indicated pages of the 2005 Annual
                Report.Schedules:None




(b) **Exhibits**  **(Numbered
      in accordance with Item 601 of Regulation S-K)**


The
      Exhibit Index is located on the final page of this report on Form
      10-K.





(c) **Financial
      Statement Schedules**


All
      other
      supporting schedules are omitted because they are not applicable, not required,
      or the information required to be set forth therein is included in the financial
      statements or notes thereto incorporated herein by reference.





-29-
 Table
            of Contents





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) 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, on the 14th day of March,
      2006.





**CAPITAL
      CORP OF THE WEST**









Date:
                March 14, 2006
            By:
                /s/ Thomas T. HawkerTHOMAS
                T. HAWKERPresident
                and Chief Executive Officer(Principal
                Executive Officer)












Date:
                March 14, 2006
            By:
                /s/ R. Dale McKinneyR.
                DALE MCKINNEYExecutive
                Vice President andChief
                Financial Officer and Principal Accounting Officer(Principal
                Financial and Accounting Officer)




Pursuant
      to the requirements of the Securities Exchange
      Act of 1934, this report has been signed below by the following persons on
      behalf of the registrant and in the capacities and on the dates
      indicated.




-30-
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          of Contents




Signature
            
            Capacity
            
            Date/s/
                Dorothy L. Bizzini
            
            Director
            
            March
                14, 2006DOROTHY
                L. BIZZINI/s/
                Tom A. L. Van Groningen
            
            Director
            
            March
                14, 2006TOM
                A.L. VAN GRONINGEN/s/
                John Fawcett
            
            Director
            
            March
                14, 2006JOHN
                FAWCETT/s/
                G. Michael Graves
            
            Director
            
            March
                14, 2006G
                MICHAEL GRAVES/s/
                Thomas T. Hawker
            
            Director/CEO
                and
            
            March
                14, 2006THOMAS
                T. HAWKER
            
            Principal
                Executive Officer/s/
                R. Dale McKinney
            
            Chief
                Financial Officer
            
            March
                14, 2006R.
                DALE MCKINNEY
            
            Principal
                Financial andAccounting
                Officer/s/
                Curtis Riggs
            
            Director
            
            March
                14, 2006CURTIS
                RIGGS/s/
                Jerry Tahajian
            
            Director
            
            March
                14, 2006JERRY
                TAHAJIAN/s/
                Curtis R. Grant
            
            Director
            
            March
                14, 2006CURTIS
                R. GRANT/s/
                Jerry E. Callister
            
            Chairman
                of the
            
            March
                14, 2006JERRY
                E. CALLISTER
            
            Board
                of Directors





-31-
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            of Contents





**Exhibit
      Index**


The
          following is a list of all exhibits required by Item 601 of Regulation
          S-K to be
          filed as part of this 10-K:
  ExhibitNumber
                Exhibit3.1
                Articles
                    of Incorporation as in effect on April 8, 2005 (incorporated
                    by reference
                    to Exhibit 3.2 of Amendment No. 1 to the registrant's Quarterly
                    Report on
                    Form 10-Q for the quarter ended March 31, 2005)3.2
                Bylaws
                    (incorporated by reference to Exhibit 3.2 of the registrant's
                    Quarterly
                    Report on Form 10-Q for the quarter ended September 30, 1996)3.3
                Rights
                    Agreement between Capital Corp of the West and Harris Trust Company
                    of
                    California dated as of September 26, 1997, including Form of
                    Right
                    Certificate attached thereto as Exhibit B (incorporated by reference
                    to
                    Exhibit 4 to the registrant’s Registration Statement on Form 8-A filed
                    with the SEC on October 1, 1997)4.1
                Indenture,
                    dated as of February 22, 2001 between Capital Corp of the West, as
                    Issuer, and State Street Bank and Trust Company of Connecticut,
                    National
                    Association, as Trustee (incorporated by reference to Exhibit 4.1 to
                    Quarterly Report on Form 10-Q of the registrant for the quarter
                    ended
                    September 30, 2003)4.2
                Amended
                    and Restated Declaration of Trust by and between State Street
                    Bank and
                    Trust Company of Connecticut, National Association, as Trustee,
                    and
                    Capital Corp of the West, as Sponsor (incorporated by reference
                    to
                    Exhibit 4.2 to Quarterly Report on Form 10-Q of the registrant for
                    the quarter ended September 30, 2003)4.3
                Indenture,
                    dated as of December 17, 2003 between Capital Corp of the West, as
                    Issuer, and U S. Bank National Association as Trustee (incorporated
                    by reference to Exhibit 4.3 to Annual Report on Form 10-K of the
                    registrant for the year ended December 31, 2003)4.4
                Amended
                    and Restated Declaration of Trust by and among U. S. Bank National
                    Association, as Institutional Trustee, and Capital Corp of the
                    West, as
                    Sponsor and Kenneth K. Lee, Janey Cabral, and David Curtis, as
                    Administrators, dated as of December 17, 2003 (incorporated by
                    reference to Exhibit 4.4 to Annual Report on Form 10-K of the
                    registrant for the year ended December 31, 2003)10.1
                Employment
                    Agreement between Thomas T. Hawker and Capital Corp. of the West
                    dated
                    January 1, 2002 (incorporated by reference to Exhibit 10 to Quarterly
                    Report on Form 10-Q of the registrant for the Quarter Ended March
                    31,
                    2004)
                *10.2
                Employment
                    Agreement between Thomas T. Hawker and Capital Corp. of the West
                    dated
                    January 1, 2005 (incorporated by reference to Exhibit 10 to Current
                    Report
                    on Form 8-K of the registrant dated November 4, 2004)
                *10.3
                Form
                    of Severance Agreement for certain executive officers of the
                    registrant
                    (incorporated by reference to Exhibit 99.1 to Current Report
                    on Form 8-K
                    of the registrant dated December 27, 2004)
                *10.4
                Director
                    Elective Income Deferral Agreement (incorporated by reference
                    to Exhibit
                    99.1 to Current Report on Form 8-K of the registrant dated December
                    23,
                    2004)
                *10.5
                Director
                    Deferred Compensation Elections (incorporated by reference to
                    Exhibit 99.2
                    to Current Report on Form 8-K of the registrant dated December
                    23,
                    2004)
                *10.6
                1992
                    Stock Option Plan (incorporated by reference to Exhibit 10.6
                    of the Annual
                    Report on Form 10-K of the registrant for the year ended December
                    31,
                    1995)
                *10.7
                2002
                    Stock Option Plan (incorporated by reference to Exhibit A to
                    the
                    registrant’s proxy statement dated March 13, 2002)
                *
  -32-
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              of Contents
 
 ExhibitNumber
                Exhibit10.8
                Salary
                    Continuation Agreement****dated
                    July 20, 2005, between Capital Corp of the West and John J. Incandela,
                    Executive Vice President and Chief Credit Officer of the Bank
                    (filed as
                    Exhibit 99.1 to Current Report on Form 8-K of the registrant
                    dated
                    February 16, 2006)
                *10.9
                Severance
                    Agreement dated June 20, 2005 between Capital Corp of the West
                    and John J.
                    Incandela (Filed as Exhibit 99.2 to Current Report on Form 8-K
                    of the
                    registrant dated February 16, 2006)
                *10.10
                Change-in-Control
                    Agreement between R. Dale McKinney and Capital Corp of the West
                    (filed as
                    Exhibit 10.6 of the Annual Report on Form 10-K of the registrant
                    for the
                    year ended December 31, 1999)
                *10.11
                [Reserved]10.12
                Amended
                    Executive Salary Continuation Agreement between senior executive
                    management and Capital Corp of the West. (incorporated by reference
                    to
                    Exhibit 10.10 to Quarterly Report on Form 10-Q of the registrant
                    for the
                    quarter ended September 30, 2003)
                *10.13
                Press
                    Release of the registrant dated November 29, 2005 announcing
                    acceleration
                    of stock option vesting (incorporated by reference to Exhibit
                    99.1 to
                    Current Report on Form 8-K of the registrant dated November 29,
                    2005)
                *11
                Statement
                    Regarding the Computation of Earnings Per Share (incorporated
                    herein by
                    reference from Note 1 of the Company's Consolidated Financial
                    Statements, filed as Exhibit 13 to this report)13
                Annual
                    Report to Security Holders for 200414
                Code
                    of Ethics (incorporated by reference to Exhibit 99.1 to Current
                    Report on
                    Form 8-K of the registrant dated December 7, 2004)21
                List
                    of Subsidiaries23.1
                Independent
                    Registered Public Accounting Firm’s Consent Regarding Financial
                    Statements23.2
                Independent
                    Registered Public Accounting Firm’s Consent Regarding Internal
                    Control31.1
                Certification
                    of Registrant’s Chief Executive Officer Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.2
                Certification
                    of Registrant’s Chief Financial Officer Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200232.1
                Certification
                    of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section
                    135032.2
                Certification
                    of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section
                    1350*
                Denotes
                    management contract or compensatory plan arrangement


E-1





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**Capital
                Corp of the West****Selected
                Financial Data**(Amounts
                in thousands, except per share data)
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001**Summary
                income data:**Interest
                income
            
            $
            90,164
            
            $
            70,571
            
            $
            62,413
            
            $
            58,811
            
            $
            58,167Interest
                expense
            
            
            24,720
            
            
            17,097
            
            
            16,253
            
            
            18,854
            
            
            23,240Net
                interest income
            
            
            65,444
            
            
            53,474
            
            
            46,160
            
            
            39,957
            
            
            34,927Provision
                for loan losses
            
            
            2,051
            
            
            2,731
            
            
            2,170
            
            
            4,063
            
            
            4,027Noninterest
                income
            
            
            10,202
            
            
            6,405
            
            
            10,177
            
            
            8,164
            
            
            6,290Noninterest
                expense
            
            
            42,679
            
            
            37,675
            
            
            35,670
            
            
            31,175
            
            
            26,460Income
                before provision for income taxes
            
            
            30,916
            
            
            19,473
            
            
            18,497
            
            
            12,883
            
            
            10,730Provision
                for income taxes
            
            
            9,962
            
            
            7,150
            
            
            4,857
            
            
            2,455
            
            
            2,819Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640
            
            $
            10,428
            
            $
            7,911**Share
                Data:**Average
                common shares outstanding
            
            
            10,500
            
            
            10,323
            
            
            10,102
            
            
            9,968
            
            
            9,621Basic
                earnings per share
            
            $
            2.00
            
            $
            1.19
            
            $
            1.35
            
            $
            1.04
            
            $
            0.82Diluted
                earnings per share
            
            
            1.94
            
            
            1.15
            
            
            1.30
            
            
            1.02
            
            
            0.80Book
                value per share
            
            
            11.56
            
            
            9.92
            
            
            8.78
            
            
            7.67
            
            
            6.56Tangible
                book value per share
            
            $
            11.42
            
            $
            9.78
            
            $
            8.52
            
            $
            7.34
            
            $
            6.20**Balance
                Sheet Data:**Total
                assets
            
            $
            1,756,756
            
            $
            1,448,447
            
            $
            1,235,281
            
            $
            1,034,850
            
            $
            894,693Total
                securities
            
            
            499,180
            
            
            436,176
            
            
            372,015
            
            
            287,020
            
            
            271,411Total
                loans
            
            
            1,068,896
            
            
            885,093
            
            
            764,252
            
            
            633,773
            
            
            532,420Total
                deposits
            
            
            1,404,500
            
            
            1,154,157
            
            
            1,028,808
            
            
            834,379
            
            
            732,641Shareholders'
                equity
            
            $
            122,245
            
            $
            103,481
            
            $
            89,485
            
            $
            77,169
            
            $
            64,120**Operating
                Ratios:**Return
                on average equity
            
            
            18.54
            %
            
            12.69
            %
            
            16.43
            %
            
            14.94
            %
            
            13.40
            %Return
                on average assets
            
            
            1.36
            
            
            0.94
            
            
            1.23
            
            
            1.09
            
            
            1.03Average
                equity to average assets ratio
            
            
            7.34
            
            
            7.41
            
            
            7.46
            
            
            7.29
            
            
            7.69Net
                interest margin
            
            
            4.69
            
            
            4.49
            
            
            4.53
            
            
            4.58
            
            
            5.04**Credit
                Quality Ratios:**Nonperforming
                loans to total loans (1)
            
            
            0.18
            %
            
            0.50
            %
            
            0.52
            %
            
            0.38
            %
            
            0.91
            %Allowance
                for loan losses to total loans
            
            
            1.38
            
            
            1.54
            
            
            1.64
            
            
            1.84
            
            
            1.76Allowance
                for loan losses to nonperforming loans
            
            
            777.68
            
            
            309.63
            
            
            314.12
            
            
            490.14
            
            
            193.10**Capital
                Ratios:**Risk-based
                tier 1 capital
            
            
            10.01
            %
            
            10.30
            %
            
            10.31
            %
            
            9.49
            %
            
            9.49
            %Total
                risk-based capital
            
            
            11.13
            
            
            11.55
            
            
            11.57
            
            
            10.74
            
            
            10.74Leverage
                ratio
            
            
            8.57
            
            
            8.46
            
            
            8.55
            
            
            7.68
            
            
            7.72Dividend
                payout ratio
            
            
            9.0
            %
            
            9.4
            %
            
            -
            %
            
            -
            %
            
            -
            %


(1)
            Nonperforming
                loans consist of loans on nonaccrual, loans past due 90 days or more
                and
                restructured loans.




-38-
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**Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations**




The
      following discussion and analysis is designed to provide a better understanding
      of the significant changes and trends related to Capital Corp of the West (the
      “Company”). The following discussion should be read in conjunction with the
      consolidated financial statements of the Company and the notes thereto. The
      consolidated financial statements of the Company include its subsidiaries,
      County Bank (the "Bank"), and Capital West Group (“CWG”). It also includes the
      Bank's subsidiaries, Merced Area Investment Development, Inc. ("MAID"), County
      Asset Advisor, Inc. (“CAA”) and County Investment Trust (“REIT”). Regency
      Investment Advisors (“RIA”) was a wholly owned subsidiary of the Company from
      its purchase date in June, 2002 until it was sold in October, 2004.




**Forward-Looking
      Statements**




In
      addition to historical information, this discussion and analysis includes
      certain 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,” 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
      assess. 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 Annual Report and Form 10-K should not rely solely on forward
      looking statements and should consider all uncertainties and risks discussed
      throughout this report, including the matter discussed under “Risk Factors”
below. These statements are representative only on the date hereof, and the
      Company undertakes no obligation to update any forward-looking statements made.
      Some possible events or factors that could occur that may cause differences
      from
      expected results include the following: the Company’s loan growth is dependent
      on , among other things, economic conditions, as well as various discretionary
      factors, such as decisions to sell, or purchase certain loans or loan
      portfolios; or sell or buy participations of loans; the quality and adequacy
      of
      management of the borrower; developments in the industry the borrower is
      involved in, product and geographic concentrations and the mix of the loan
      portfolio. The rate of charge-offs and provision expense can be affected by
      local, regional and international economic and market conditions, concentrations
      of borrowers, industries, products and geographical conditions, the mix of
      the
      loan portfolio and management’s judgments regarding the collectibility of loans.
      Liquidity requirements may change as a result of fluctuations in assets and
      liabilities and off-balance sheet exposures, which will impact the capital
      and
      debt financing needs of the Company and the mix of funding sources. Decisions
      to
      purchase, hold, or sell securities are also dependent on liquidity requirements
      and market volatility, as well as on, and any off balance sheet positions.
      Factors that may impact interest rate risk include local, regional and
      international economic conditions, levels, mix, maturities, yields or rates
      of
      assets and liabilities and the wholesale and retail funding sources of the
      Company. The Company is also exposed to the potential of losses arising from
      adverse changes in market rates and prices which can adversely impact the value
      of financial products, including securities, loans, and deposits. In addition,
      the banking industry in general is subject to various monetary and fiscal
      policies and regulations, which include those determined by the Federal Reserve
      Board, the Federal Deposit Insurance Corporation and state regulators, whose
      policies and regulations affect the Company’s results.




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




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          of Contents




**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. 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 on-going
      basis, the Company monitors and revises its estimates where appropriate,
      including those related to the adequacy of the allowance for loan losses,
      investments, 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.




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. The policies related to the adequacy of the allowance for loan losses
      can be found in Note 1 to the financial statements, the section titled
“Allowance for Loan Losses” as well as in Note 3, titled “Loans” in this
      report.




A
      decline
      in the fair value of any securities that is considered other than temporarily
      impaired is recorded in our consolidated statements of income in the period
      in
      which the impairment occurs. The cost basis of the underlying security is
      written down to fair value as a new basis. Management considers the Company’s
      other than temporary impairment accounting policies to be critical, as the
      timing and amount of income, if any, from these instruments typically depend
      upon factors beyond the Company’s control. These factors include the general
      condition of the public equity markets, levels of mergers and acquisitions
      activity, fluctuations in the market prices of the underlying common stock
      of
      these companies, and legal and contractual restrictions on the Company’s ability
      to sell the underlying securities. The policies related to the valuation of
      the
      investment securities can be found in Note 1, the section titled “Investment
      Securities” in this report as well as Note 2 “Investment
      Securities”.




Goodwill,
      which arises from the Company’s purchase price exceeding the fair value of the
      net assets of an acquired business or other assets. Goodwill represents the
      value attributable to intangible elements acquired. The value of this goodwill
      is supported ultimately by profit from the acquired businesses. A decline in
      earnings could lead to impairment, which would be recorded as a write-down
      in
      the Company’s consolidated statements of income. Events that may indicate
      goodwill impairment include significant or adverse changes in results of
      operations of the acquired business or asset, economic or political climate;
      an
      adverse action or assessment by a regulator; unanticipated competition; and
      a
      more likely-than-not expectation that a reporting unit will be sold or disposed
      of at a loss. The policies related to the adequacy of the goodwill and other
      intangible assets can be found in Note 1, the section titled “Goodwill” and
“Other Intangibles”, and “Impairment of Long-Lived Assets and Long-Lived Assets
      to be Disposed Of” in this report.




Management
      must use estimates in accounting for derivative securities. The accounting
      for
      changes in fair value depends on whether the derivative instrument is designated
      and qualifies as part of a hedging relationship and, if so, the nature of the
      hedging activity. Changes in the fair value of derivatives that do not qualify
      for hedge treatment, as well as the ineffective portion of a particular hedge,
      must be recognized in earnings. For derivative instruments that are designated
      and qualify as a fair value hedge, the gain or loss on the derivative instrument
      and the offsetting gain or loss on the hedged item attributable to the hedged
      risk are recognized in earnings in the current period, unless the derivative
      instrument meets the qualification for the short—cut treatment, as defiled by
      SFAS No. 133. For derivative instruments that are designated and qualify as
      a
      cash flow hedge, changes in the fair value of the effective portion of the
      derivative instrument are recognized in other comprehensive income (OCI). These
      amounts are reclassified from OCI and recognized in earnings when either the
      forecasted transaction occurs or it becomes probable that the forecasted
      transaction will not occur.




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The
      Company files a consolidated federal income tax return, and consolidated,
      combined, or separate state income tax returns as appropriate. The Company’s
      federal and state income tax provisions are based upon taxes payable for the
      current year as well as current year changes in deferred taxes related to
      temporary differences between the tax basis and financial statement balances
      of
      assets and liabilities. Deferred tax assets and liabilities are included in
      the
      consolidated financial statements at currently enacted income tax rates
      applicable to the period in which the deferred tax assets and liabilities are
      expected to be realized. As changes in tax laws or rates are enacted, deferred
      tax assets and liabilities are adjusted through the provision for income taxes.




**Overview**




The
      earnings increase from $12,323,000 in 2004 to $20,954,000 in 2005 was primarily
      the result of increased net interest income and the absence of an other than
      temporary impairment charge that was taken in 2004. The earnings decrease in
      2004 when compared to 2003 levels, was primarily the result of the following
      transactions in 2004; an other-than-temporary impairment charge of $3,709,000;
      the write-off of tax benefits related to the Company’s REIT consent dividend tax
      benefit of $1,229,000 which resulted to a higher effective tax rate; and
      increases in noninterest expenses of $2,005,000 which were partially offset
      by
      an increase in net interest income of $7,314,000. The growth in assets in 2005
      and 2004 was primarily funded through increases in the deposit portfolio as
      well
      as increased borrowings. Loan growth was obtained primarily from increased
      loan
      production within our existing branch network. The increase in deposits was
      obtained primarily from increased deposit gathering within our existing branch
      network. In the opinion of management the Company is well capitalized in
      accordance with regulatory definitions.




The
      table
      below highlights some of the important Consolidated Balance Sheets amounts
      and
      their change from 2004 to 2005:




Years
                Ended December 31,(Dollars
                in thousands except per share data)
            
            2005
            
            2004
            
            Change
                During 2005
            
            %
                Change During 2005Total
                Assets
            
            $
            1,756,756
            
            $
            1,448,447
            
            $
            308,309
            
            
            21
            %Net
                Loans
            
            
            1,054,120
            
            
            871,488
            
            
            182,632
            
            
            21Deposits
            
            
            1,404,500
            
            
            1,154,157
            
            
            250,343
            
            
            22Shareholders
                equity
            
            $
            122,245
            
            $
            103,481
            
            $
            18,764
            
            
            18
            %




The
      table
      below highlights some of the important Consolidated Statements of Income and
      Comprehensive Income information and their change from 2003 to
      2005:




Years
                Ended December 31,(Dollars
                in thousands except per share data)
            
            2005
            
            2004
            
            Change
                in 2005
            
            %
                Change in 2005
            
            2003
            
            Change
                during 2004
            
            %
                Change during 2004Net
                Income
            
            $
            20,954
            
            $
            12,323
            
            $
            8,631
            
            
            70
            %
            $
            13,640
            
            $
            (1,317
            )
            
            (10
            )%Basic
                earnings per share
            
            $
            2.00
            
            $
            1.19
            
            $
            0.81
            
            
            68
            %
            $
            1.35
            
            $
            (0.16
            )
            
            (12
            )%Diluted
                earnings per share
            
            $
            1.94
            
            $
            1.15
            
            $
            0.79
            
            
            69
            %
            $
            1.30
            
            $
            (0.15
            )
            
            (12
            )%




**Results
      of Operations**




The
      Company’s earnings during 2005 were driven primarily by an increase in net
      interest income. The Company's primary source of revenue is net interest income,
      which is the difference between interest income and fees derived from earning
      assets and interest paid on interest-bearing liabilities. The level of interest
      income is affected by changes in the volume of, and the rates earned on,
      interest-earning assets. During 2005, the increase in interest income was
      primarily due to an increase in average earning assets with increased yields
      on
      those assets compared to 2004. The primary cause for the increase in rates
      on
      interest-earning assets was higher prevailing market rates that were available
      for reinvestments in 2005 when compared to 2004. During 2004, increases in
      interest income over 2003 levels were caused primarily by volume increases
      in
      average interest earning assets.




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 Table
          of Contents




Interest
      expense is a function of the volume of, and rates paid on, interest-bearing
      liabilities. Interest-bearing liabilities consist primarily of certain deposits
      and borrowed funds. The increase in volume was primarily attributable to
      increased market penetration within the Bank’s our existing branch network. If
      the current interest rate environment remains unchanged during 2006, it is
      anticipated that the average interest paid on certificates of deposit should
      stay about the same as maturing accounts “reprice” at their maturities to an
      anticipated current equivalent interest rate level. If prevailing market
      interest rates increase or decrease in 2006, then it is anticipated that the
      average interest paid on certificates of deposit should follow this change
      in
      market rates, either up or down, as maturing accounts reprice at their
      maturities to a market interest rate level.




The
      Company's net interest margin percentage is the ratio of net interest income
      to
      average interest-earning assets. The increase in net interest margin during
      2005
      was primarily the result of increased volumes of interest earning assets coupled
      with rising short term interest rates earned during much of 2005. If the current
      interest rate environment continues throughout 2006, it is anticipated the
      Company’s overall net interest margin should be in the 4.45% to 4.70% range. A
      modest
      increase in rates should cause the Company’s net interest margin to slightly
      increase. A modest
      decrease in rates should cause the Company’s net interest margin to slightly
      decrease. In 2005, loans comprised 68% of average interest-earning assets as
      compared with 67% in both 2004 and 2003. Securities comprised 31% of average
      interest-earning in 2005 compared with 32% and 31% in 2004 and 2003. Loans
      earn
      at a higher interest rate than securities therefore, a higher loan concentration
      will increase net interest margin.




The
      Company's net interest income is affected by changes in the volume and mix
      of
      interest-earning assets and interest-bearing liabilities. It is also affected
      by
      changes in yields earned on interest-earning assets and rates paid on
      interest-bearing deposits and other borrowed funds. The changes due to both
      rate
      and volume have been allocated to rate and volume in proportion to the
      relationship of the absolute dollar amount of the change in each.




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 is 35% in 2005, 2004, and 2003.




The
      increase in taxable equivalent interest income of $19,975,000 in 2005 is
      comprised of a $13,885,000 volume increase primarily attributable to an increase
      in interest-earning assets between 2004 and 2005 that was combined with a
      $6,090,000 increase attributable to rate improvement during this same period.
      The increase in total interest expense of $7,623,000 in 2005 related to a
      $2,441,000 volume increase attributable to an increase in average
      interest-bearing liabilities during 2005 when compared to 2004 that was
      partially offset with a $5,182,000 increase attributable to rate increases
      during this same period.




The
      increase in taxable equivalent interest income of $8,441,000 in 2004 is
      comprised of a $9,150,000 volume increase attributable to an increase in
      interest-earning assets between 2003 and 2004 that was partially offset by
      a
      $709,000 rate decrease during this same period. The increase in total interest
      expense of $844,000 in 2004 related to a $1,519,000 volume increase attributable
      to an increase in average interest-bearing liabilities during 2004 when compared
      to 2003 that was partially offset by a $675,000 **** rate
      decrease during this same period. Interest rate declines were greater for
      interest earning assets than interest bearing liabilities during
      2004.




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 Table
          of Contents




**Provision
      for Loan Losses**





The
      Company maintains an allowance for loan losses 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. The provision for loan losses for the year ended
      December 31, 2005 was $2,051,000 compared to $2,731,000 in 2004 and $2,170,000
      in 2003. The decreased level of provision for loan losses in 2005 when compared
      to 2004 was primarily the result of decreased classified credits and decreased
      nonperforming loan which were partially offset by the reserves that were
      assigned to higher loan volumes at expected loss experience rates. The increased
      level of provision for loan losses in 2004 when compared to 2003 was primarily
      the result of increased loan balances and loan volume. The methodology used
      to
      determine the level of provision for loan losses includes an analysis of
      relevant risk factors within the entire loan portfolio, including nonperforming
      loans. The methodology is based, in part, on management’s use of an internally
      developed loan grading and classification system. The Bank’s management grades
      its loans through internal reviews and periodically subjects loans to external
      reviews. When performed, these external reviews are presented to, and assessed
      by, the Bank’s management and the director’s loan committee. In addition, the
      Audit Committee provides oversight to the external loan review process. Credit
      reviews are performed three times per year and the quality grading process
      occurs on a monthly basis. For more information related to the provision for
      loan loss see the “Allowance for Loan Losses” section.




**Noninterest
      Income**




The
      following table summarizes noninterest income for the years ended December
      31,




(Dollars
                in thousands)
            
            2005
            
            2004
            
            Change
                in 2005
            
            %
                Change in 2005
            
            2003
            
            Change
                in 2004
            
            %
                Change in 2004Noninterest
                Income:Deposit
                service charges
            
            $
            5,924
            
            $
            6,134
            
            $
            (210
            )
            
            (3
            )%
            $
            5,480
            
            $
            654
            
            
            12
            %Income
                from sale of real estate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            608
            
            
            (608
            )
            
            (100
            )Increase
                in cash surrender value of bank owned insurance
            
            
            1,041
            
            
            1,066
            
            
            (25
            )
            
            (2
            )
            
            1,003
            
            
            63
            
            
            6Loan
                packaging fees
            
            
            589
            
            
            398
            
            
            191
            
            
            48
            
            
            538
            
            
            (140
            )
            
            (26
            )Gain
                on sale of loans
            
            
            235
            
            
            251
            
            
            (16
            )
            
            (6
            )
            
            296
            
            
            (45
            )
            
            (15
            )Retail
                investment income
            
            
            109
            
            
            873
            
            
            (764
            )
            
            (88
            )
            
            914
            
            
            (41
            )
            
            (4
            )Loss
                on sale or impairment of securities
            
            
            -
            
            
            (3,665
            )
            
            3,665
            
            
            100
            
            
            -
            
            
            (3,665
            )
            
            -Bank
                owned life insurance death benefit
            
            
            541
            
            
            -
            
            
            541
            
            
            100
            
            
            -
            
            
            -
            
            
            -Other
            
            
            1,763
            
            
            1,348
            
            
            415
            
            
            31
            
            
            1,338
            
            
            10
            
            
            1Total
                noninterest income
            
            $
            10,202
            
            $
            6,405
            
            $
            3,797
            
            
            59
            %
            $
            10,177
            
            $
            (3,772
            )
            
            (37
            )%




The
      increase in 2005 was primarily the result of increased other noninterest income
      and the absence of an other than temporary impairment on securities in 2005
      compared to 2004 where an other than temporary impairment occurred in the fourth
      quarter. The expense decrease in 2004 was caused primarily by an increase in
      other than temporary impairment of investment securities that was recorded
      in
      the fourth quarter of 2004. The 2004 decrease in noninterest income when
      compared to 2003 results was also negatively affected by the fact there were
      no
      real estate sales in 2004. The decrease in deposit service charges in 2005
      was
      primarily caused by greater balances being held by the Bank’s customers in their
      commercial demand deposit and NOW accounts that resulted in less fees per
      account being assessed. The increase in deposit service charges in 2004 and
      2003
      was primarily the result of an increase in demand deposit and NOW accounts
      in
      each of these years. Loan packaging fees increased in 2005 primarily due to
      a
      strong mortgage market and more affordable terms in that market. Retail
      investment income declined in 2005 primarily due to the October 15, 2004
      divesture of Regency Investment Advisors (“RIA”). Other income includes letters
      of credit commitment fees, operating recoveries, miscellaneous income and ATM
      fee income.




-43-
 Table
          of Contents




**Noninterest
      Expense**




The
      following table summarizes noninterest expense and change for the years ended
      December 31,




(Dollars
                in thousands)
            
            2005
            
            2004
            
            Change
                in 2005
            
            %
                Change in 2005
            
            2003
            
            Change
                in 2004
            
            %
                Change in 2004Noninterest
                expense:Salaries
                and benefits
            
            $
            22,763
            
            $
            20,697
            
            $
            2,066
            
            
            10
            %
            $
            19,071
            
            
            1,626
            
            
            9
            %Premises
                and occupancy
            
            
            4,498
            
            
            3,446
            
            
            1,052
            
            
            31
            
            
            2,946
            
            
            500
            
            
            17Equipment
            
            
            3,961
            
            
            3,186
            
            
            775
            
            
            24
            
            
            3,335
            
            
            (149
            )
            
            (4
            )Professional
                fees
            
            
            2,310
            
            
            1,671
            
            
            639
            
            
            38
            
            
            1,662
            
            
            9
            
            
            1Supplies
            
            
            1,057
            
            
            873
            
            
            184
            
            
            21
            
            
            794
            
            
            79
            
            
            10Marketing
                expense
            
            
            1,165
            
            
            1,062
            
            
            103
            
            
            10
            
            
            963
            
            
            99
            
            
            10Intangible
                amortization
            
            
            46
            
            
            655
            
            
            (609
            )
            
            (93
            )
            
            676
            
            
            (21
            )
            
            (3
            )Charitable
                donations
            
            
            859
            
            
            584
            
            
            275
            
            
            47
            
            
            583
            
            
            1
            
            
            -Other
            
            
            6,020
            
            
            5,501
            
            
            519
            
            
            9
            
            
            5,640
            
            
            (139
            )
            
            (2
            )Total
                noninterest expense
            
            $
            42,679
            
            $
            37,675
            
            $
            5,004
            
            
            13
            %
            $
            35,670
            
            $
            2,005
            
            
            6
            %




Salary
      increases were primarily due to staff additions to support growth and normal
      salary progression. Premises and occupancy increases in 2005 and 2004 were
      caused primarily **** by
      the
      addition of new branch facilities, an operations center, and improvements in
      existing branch facilities. The increase **** in
      equipment expenses in 2005 was primarily due to the addition of new equipment
      costs within the branch network and general growth of the Company. The Company’s
      professional fees include legal, consulting, audit and accounting fees. The
      Company’s professional fees increased primarily by the retention of an internal
      auditing consultant whose fees where greater then the prior consultant and
      increased external auditor fees. The increase in 2004 over 2003 was primarily
      the result of the implementation and scope of the Sarbanes-Oxley act of 2002.
      Intangible amortization declined in 2005 primarily because of the full
      amortization of core deposit premiums on branches purchased from Bank of America
      in 1997.




The
      Company’s supplies expense has increased for the last three years in response to
      branch office growth, changes in regulations and product disclosures, and with
      paper transaction volumes. Supply expense increases were partially offset by
      decreases due to an ongoing transition from paper-based to electronic deposit
      transactions. Generally, as more banking transactions are delivered
      electronically, paper costs are reduced. Marketing expenses have increased
      over
      the past few years as the Company has actively promoted various deposit and
      loan
      products using television, newspaper, and other media sources to assist in
      attracting new, and retaining, existing customers. Also in-branch marketing
      expenditures have increased steadily during 2004 and 2005. The decrease in
      intangible amortization was attributable to the full amortization in 2004 of
      the
      core deposit premium paid in 1977 for the purchase of three branch offices
      from
      Bank of America. Charitable donations have increased in 2005 due to increased
      giving to the communities we served. Growth in other noninterest expense in
      2005
      was due to increased costs related to the growth of the Company, which include
      increased costs related to postage, travel, and telephone expenses. The decrease
      between 2004 and 2003 was related to a decrease in the expenses related to
      reserves for off balance sheet loan commitments recorded in 2004 when compared
      to 2003 levels.




-44-
 Table
          of Contents




**Provision
      for Income Taxes**




The
      Company's provision for income taxes was $9,962,000 **** in
      2005
      compared to a provision for income taxes of $7,150,000 and $4,857,000 in 2004
      and 2003. The effective income tax rates (computed as income taxes as a
      percentage of income before income taxes) were 32%, 37%, and 26% for 2005,
      2004,
      and 2003. During 2003 and 2005 the tax rate was lower than the statutory rate
      due in part, to tax credits earned from an investment in low-income housing
      partnerships that qualify for housing tax credits under Internal Revenue Code
      Section 42. **** Also in
      2003, the effective tax rate was positively affected by the partial recognition
      of a REIT consent dividend benefit. No such benefit was recorded in 2004 or
      2005. In 2004, the tax rate was in excess of the statutory rate due primarily
      to
      the payment of $2,411,000 in state income taxes in conjunction with the State
      of
      California’s Voluntary Compliance Initiative in April of 2004. Total housing tax
      credits for 2005, 2004, and 2003 were approximately $980,000 , **** $1,028 ,000 ,
      and
      $975,000. In addition, during 2005, 2004, and 2003, the Company realized tax
      benefits of approximately $1,116,000 **,** $726,000,
      and $442,000 from nontaxable interest income received from bank qualified
      municipal securities.




During
      2003, California enacted tax legislation that added new penalties for taxpayers
      that engaged in strategies and transactions that the Franchise Tax Board defined
      as abusive tax shelters. The new tax shelter regulations gave taxpayers until
      April 30, 2004 to take advantage of an amnesty period that would allow taxpayers
      to amend prior year tax filings without being subject to the new tax shelter
      penalties. Similar to other California based banks, the Company utilized a
      Real
      Estate Investment Trust (“REIT”) which had achieved tax savings. Subsequent to
      our investment, this activity was classified by the California Franchise Tax
      Board as an abusive tax shelter. Company management believes the strategy used
      was lawful and defensible, and intends to defend the tax positions taken. This
      position resulted in a cumulative total of $1,229,000 in recorded tax benefits
      from the REIT from January 1, 2001 through December 31, 2002. Because of the
      position taken by the Franchise Tax Board regarding the REIT related state
      income tax benefits, management decided that all recorded book tax benefits
      should be completely expensed in 2004.




**Securities**




The
      following table sets forth the carrying amount (fair value) of available for
      sale securities at December 31,


(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003U.S.
                Government agencies
            
            $
            40,234
            
            $
            25,128
            
            $
            55,269State
                and political subdivisions
            
            
            1,286
            
            
            1,325
            
            
            1,073Mortgage-backed
                securities
            
            
            208,171
            
            
            138,081
            
            
            130,182Collateralized
                mortgage obligations
            
            
            32,416
            
            
            61,882
            
            
            45,267Corporate
                securities
            
            
            -
            
            
            -
            
            
            3,078Total
                debt securities
            
            
            282,107
            
            
            226,416
            
            
            234,869Agency
                preferred stock
            
            
            10,946
            
            
            18,001
            
            
            13,008Trust
                preferred stock
            
            
            -
            
            
            -
            
            
            5,023Equity
                securities
            
            
            25,102
            
            
            24,772
            
            
            22,503Total
                carrying value and fair value
            
            $
            318,155
            
            $
            269,189
            
            $
            275,403




-45-
 Table
          of Contents




The
      following table sets forth the carrying amount (amortized cost) and fair value
      of held to maturity securities at December 31,


(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003State
                and political subdivisions
            
            $
            100,045
            
            $
            69,894
            
            $
            42,482Mortgage-backed
                securities
            
            
            62,484
            
            
            72,713
            
            
            40,185Collateralized
                mortgage obligations
            
            
            18,496
            
            
            24,380
            
            
            13,945Carrying
                amount (amortized cost)
            
            $
            181,025
            
            $
            166,987
            
            $
            96,612Fair
                value
            
            $
            178,233
            
            $
            168,265
            
            $
            97,295




Available
        for sale securities increased **** $48,966,000 **** or
        18% **** to
        $318,155,000 at December 31, 2005 compared with a balance of $269,189,000
        at
        December 31, 2004. Held to maturity securities increased $14,038,000 **** or
        8% to
        $181,025,000 **** at
        December 31, 2005 compared to $166,987,000 outstanding at December 31, 2004.
        The
        increase achieved within the available for sale and held to maturity segment
        of
        the securities portfolio were made possible by increased deposit inflows
        and
        increased Company borrowings that were used to fund increased purchases of
        investment securities. The single largest component of the Company’s investment
        portfolio during the last three years has been mortgage-backed securities,
        which
        generally provide a higher yielding investment return, but contain a longer
        maturity than the other types of securities contained within the investment
        portfolios. At December 31, 2005 and 2004 the Company did not hold any
        structured notes. See Note 1 and 2 to the Company’s Consolidated Financial
        Statements for further information concerning the securities portfolio.




**Loans**




Total
      loans increased due to, among other things, increased penetration within
      existing geographic markets. T he
      Company concentrates its lending activities in five principal areas: commercial,
      agricultural, real estate construction, real estate mortgage, and consumer
      loans. In the first quarter of 2006 the Company purchased an asset based lending
      portfolio from Heritage Bank of Commerce for approximately $30,015,000 at the
      note amount. Interest rates charged for loans made by the Company vary with
      the
      degree of risk, the size and term of the loan, and borrowers' depository
      relationships with the Company and prevailing market rates.




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




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




Commercial
      lending activities are spread across a wide spectrum of customers including
      loans to businesses, construction and permanent real estate financing, short
      and
      long term agricultural loans for production and real estate purposes and SBA
      financing. Where appropriate, collateral is taken to secure 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.




-46-
 Table
          of Contents




**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
      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 to identify problem credits. There are three classifications
      for
      problem 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. The level of
      nonperforming loans and real estate acquired through foreclosure are two
      indicators of asset quality. Nonperforming loans are those in which the borrower
      fails to perform under the original 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.




Management
      defines impaired loans as those loans, regardless of past due status, in which
      principal and interest are not expected to be collected under the original
      contractual loan repayment terms. An impaired loan is charged off at the time
      management believes the collection of principal and interest process has been
      exhausted. Partial charge-offs are recorded when portions of impaired loans
      are
      deemed uncollectable. At December 31, 2005 and 2004, impaired loans were
      measured based upon the present value of future cash flows discounted at the
      loan's effective rate, the loan's observable market price, or the fair value
      of
      collateral if the loan is collateral dependent.




The
      Company had impaired loans at December 31, 2005 of $1,692,000 as compared with
      $4,394,000 at December 31, 2004. The Company recorded $254,000 in specific
      allowance for loan losses against impaired loans at December 31, 2005 as
      compared to $704,000 at December 31, 2004. Other forms of collateral, such
      as
      inventory, chattel, and equipment secure the remaining nonperforming loans
      as of
      each date. The primary reason for the decline in impaired loans between 2004
      and
      2005 was the strong commercial and residential real estate market that pushed
      real estate appraised values up to levels not previously experienced in our
      market area.




At
      December 31, 2005 and 2004 the Bank had $60,000 **** of
      real
      estate acquired through foreclosure, which consisted of one residential
      foreclosure property.




**Allowance
      for Loan Losses**




In
      determining the adequacy of the allowance for loan losses, management takes
      into
      consideration the growth trend in the portfolio, examinations by financial
      institution supervisory authorities, internal and external credit reviews,
      prior
      loan 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 loan losses to exceed the current allowance for loan
      losses.




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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 had provisions to the allowance in 2005 of $2,051,000 as
      compared to $2,731,000 and $2,170,000 in 2004 and 2003. See “Results of
      Operations - Provision for Loan Losses.”




The
      following table summarizes the loan loss experience of the Company for the
      years
      ended December 31,


(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Allowance
                for loan losses:Balance
                at beginning of year
            
            $
            13,605
            
            $
            12,524
            
            $
            11,680
            
            $
            9,377
            
            $
            7,929Provision
                for loan losses
            
            
            2,051
            
            
            2,731
            
            
            2,170
            
            
            4,063
            
            
            4,027Charge-offs:Commercial
                and agricultural
            
            
            1,664
            
            
            1,860
            
            
            1,010
            
            
            1,504
            
            
            864Real-estate
                - mortgage
            
            
            -
            
            
            -
            
            
            29
            
            
            -
            
            
            -Consumer
            
            
            318
            
            
            436
            
            
            956
            
            
            1,085
            
            
            2,288Total
                charge-offs
            
            
            1,982
            
            
            2,296
            
            
            1,995
            
            
            2,589
            
            
            3,152Recoveries:Commercial
                and agricultural
            
            
            903
            
            
            344
            
            
            302
            
            
            233
            
            
            159Real-estate
                - mortgage
            
            
            -
            
            
            12
            
            
            -
            
            
            -
            
            
            -Consumer
            
            
            199
            
            
            290
            
            
            367
            
            
            596
            
            
            414Total
                recoveries
            
            
            1,102
            
            
            646
            
            
            669
            
            
            829
            
            
            573Net
                charge-offs
            
            
            880
            
            
            1,650
            
            
            1,326
            
            
            1,760
            
            
            2,579Balance
                at end of year
            
            $
            14,776
            
            $
            13,605
            
            $
            12,524
            
            $
            11,680
            
            $
            9,377Loans
                outstanding at year-end
            
            $
            1,068,896
            
            $
            885,093
            
            $
            764,252
            
            $
            633,773
            
            $
            532,420Average
                loans outstanding
            
            
            968,492
            
            
            813,050
            
            
            687,419
            
            
            576,156
            
            
            453,503Net
                charge-offs to average loans
            
            
            0.09
            %
            
            0.20
            %
            
            0.19
            %
            
            0.31
            %
            
            0.57
            %Allowance
                for loan lossesTo
                total loans
            
            
            1.38
            %
            
            1.54
            %
            
            1.64
            %
            
            1.84
            %
            
            1.76
            %To
                nonperforming loans
            
            
            777.68
            %
            
            309.63
            %
            
            314.12
            %
            
            490.14
            %
            
            193.10
            %To
                nonperforming assets
            
            
            753.88
            %
            
            305.46
            %
            
            309.46
            %
            
            478.10
            %
            
            175.99
            %




**Net
      Charge-Offs**




The
      decline in charge-offs was driven primarily by a decline in charge-offs of
      $1,317,000 in the business, construction, and agricultural segments of the
      loan
      portfolio. This decline was partially offset by an increase in charge-offs
      of
      $572,000 in the lease segment of the Bank’s loan portfolio. A strong real estate
      market, increased collateral values, and strong profit margin in agriculture
      have contributed to the overall decline in net charge-offs.  Commercial
      real estate values have increased in 2005 in our market area, which has helped
      keep net charge-off rates lower in 2005 than those experienced in 2004.




**Liquidity**




To
      maintain adequate liquidity requires that sufficient resources be available
      at
      all times to meet cash flow requirements of the Company. The need for liquidity
      in a banking institution arises principally to provide for deposit withdrawals,
      the credit needs of customers and to take advantage of investment opportunities
      as they arise. The Company may achieve desired liquidity from both assets and
      liabilities. The Company considers cash and deposits held in other banks,
      federal funds sold, other increases in short term investments, maturing loans
      and investments, receipts of principal and interest on loans, available for
      sale
      investments and potential loan sales as sources of asset liquidity. Deposit
      growth and access to credit lines established with correspondent banks and
      market sources of funds are considered by the Company as sources of liquidity.
      The Company is the sole shareholder of the Bank, and derives its primary source
      of liquidity from its ability to receive dividends from the Bank. Dividends
      from
      the Bank are subject to certain regulatory limitations.




-48-
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          of Contents




The
      Company reviews its liquidity position regularly based upon its current position
      and expected trends of loans and deposits. Management believes that the Company
      maintains adequate amounts of liquid assets to meet its liquidity needs. These
      assets include cash, demand and time deposits in other banks, available for
      sale
      securities and federal funds sold. The Company's liquid assets totaled
      $410,086,000 and $330,358,000 at December 31, 2005 and 2004 and were 23% of
      total assets on December 31, 2005 and 2004. Cash and noninterest-bearing
      deposits in other banks increased $20,877,000 or 52% to $61,331,000 at December
      31, 2005, compared to $40,454,000 at December 31, 2004. The increase in the
      2005
      cash position when compared to 2004 was the result of increased cash letters
      in
      process of collection at the end of December 2005 when compared to the same
      period in 2004. Liquidity is also affected by collateral requirements of the
      Bank’s public agency deposits and certain borrowings. Total pledged securities
      were $ 452,337,000 and
      $321,688,000 at December 31, 2005 and 2004.




Although
      the Company's primary sources of liquidity include liquid assets and a stable
      deposit base, the Company maintains lines of credit with certain correspondent
      banks, the Federal Reserve Bank, and the Federal Home Loan Bank aggregating
      $260,684,000 of which $93,384,000 was outstanding as of December 31, 2005.
      This
      compares with lines of credit of $217,832,000 of which $155,326,000 was
      outstanding as of December 31, 2004.




The
      following table sets forth known contractual obligations of the Company at
      December 31, 2005:


(Dollars
                in thousands)
            
            Within
                One Year
            
            One
                to Three Years
            
            Three
                To Five Years
            
            After
                Five Years
            
            TotalBorrowings
            
            $
            42,359
            
            $
            29,369
            
            $
            110,000
            
            $
            20,000
            
            $
            201,728Junior
                subordinated debentures
            
            
            -
            
            
            -
            
            
            -
            
            
            16,496
            
            
            16,496Operating
                leases
            
            
            1,825
            
            
            3,232
            
            
            2,735
            
            
            6,765
            
            
            14,557Purchase
                obligations
            
            
            3,366
            
            
            -
            
            
            -
            
            
            -
            
            
            3,366$
            47,550
            
            $
            32,601
            
            $
            112,735
            
            $
            43,261
            
            $
            236,147





Borrowings,
      junior subordinated debentures, operating lease obligations and purchase
      obligations are discussed in the consolidated financial statements at Notes
      5,
      6, and 9, respectively. The purchase obligation consists of one contract to
      build a retail branch office in Fresno, California and one contract to build
      a
      branch in Clovis, California.




**Market
      and Interest Rate Risk Management**




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 by the Company and are utilized to manage the Company's exposure
      to
      market risk. Quarterly testing of the Company’s assets and liabilities under
      both increasing and decreasing interest rate environments are performed to
      insure the Company does not assume a magnitude of risk that is outside approved
      policy limits.




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




-49-
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During
      the third quarter of 2005, the Company purchased an interest rate floor from
      Wachovia Bank. The interest rate floor provides the Company with partial
      protection against an interest rate downturn on loans that are indexed off
      the
      Prime rate through September 1, 2010. For more information on the interest
      rate
      floor see the Note 1 in the derivative instruments and hedging activities
      section.




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




The
      Company’s interest rate risk management is the responsibility of the
      Asset/Liability Management Committee (ALCO), which reports to the Board of
      Directors. ALCO establishes policies that 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. Balance sheet management personnel monitor the asset and liability
      changes on an ongoing basis and provide report information and recommendations
      to the ALCO committee in regards to those changes.




**Earnings
      Sensitivity**




The
      Company’s net income is dependent on its net interest income. Net interest
      income is susceptible to interest rate risk to the degree that interest-bearing
      liabilities mature or reprice on a different basis than interest-earning assets.
      When interest-bearing liabilities mature or reprice more quickly than
      interest-earning assets in a given period, a significant increase in market
      rates of interest could adversely affect net interest income. Similarly, when
      interest-earning assets mature or reprice more quickly than interest-bearing
      liabilities, falling interest rates could result in a decrease in net interest
      income.




The
      primary analytical tool used by the Company to gauge interest rate sensitivity
      is a net interest income simulation model that is also used by many other
      financial institutions. The model, which is updated quarterly, incorporates
      all
      of the Company’s assets and liabilities and off-balance sheet funding
      commitments, together with assumptions that reflect the current interest rate
      environment. The Company does utilize off-balance sheet derivative financial
      instruments such as interest rate swaps, or other financial hedging instruments
      in managing interest rate risk. The model projects changes in cash flow of
      the
      various interest-earning assets and interest-bearing liabilities in both rising
      and falling interest rate environments. Based on the current portfolio mix,
      this
      model is used to estimate the effects of changes in market rates on the
      Company’s net interest income under interest rate conditions that simulate a
      gradual and sustained shift in the yield curve of up 2 percent and down 2
      percent over a twelve month period at December 31, 2005 and up 2 percent and
      down 1 percent over a twelve month period at December 31, 2004, as well as
      the
      effect of immediate and sustained flattening or steepening of the yield curve.
      This model’s estimate of interest rate sensitivity takes into account the
      differing time intervals and differing rate change increments of each type
      of
      interest sensitive asset and liability.




-50-
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          of Contents




The
      estimated impact of immediate changes in interest rates at the specified levels
      at December 31, 2005 and 2004 is presented in the following tables:




December
      31, 2005




Change
                in interest rates
              (In
                basis points)
            Change
                in net interest
              Income(1)
            Percentage
                change in net interest
              income+200
            $43,000
            0.06%-200
            $(1,745,000)
            (2.44)%




December
      31, 2004




Change
                in interest rates
              (In
                basis points)(2)
            Change
                in net interest
              Income(1)
            Percentage
                change in net interest
              income+200
            $
                536,000
            0.95
                %-100
            $
                (1,002,000)
            (1.78)
                %


(1)
            The
                amount in this column represents the change in net interest income
                for 12
                months in a stable interest rate environment versus the net interest
                income in the various rate
                scenarios.


(2)
            The
                change in interest rates downward was limited to 100 basis points
                due to
                short term interest rates at levels below 2% at
                12/31/04.




It
      should
      be emphasized that the foregoing estimate are dependent on material assumptions
      such as those discussed above. For instance, asymmetrical interest rate behavior
      can have a material impact on the estimated results.




The
      Company’s primary objective in managing interest rate risk is to minimize the
      adverse impact of changes in interest rates on the Company’s net interest income
      and capital, while structuring the Company’s asset-liability structure to obtain
      the maximum yield-cost spread on that structure. The Company relies primarily
      on
      its asset-liability structure to control interest rate risk. In the opinion
      of
      management , the
      Company is modestly asset sensitive.




**Off-Balance
      Sheet Arrangements**




The
      Bank
      has also extended firm lending commitments in the form of unused credit lines
      to
      loan customers. These commitments may or may not ever be drawn upon, depending
      on the credit needs of the Bank’s loan customers. For more information regarding
      these loan commitments, See Footnote 9, titled “Commitments and Financial
      Instruments with Off-Balance Sheet Credit Risk” in the Company’s 2005 annual
      report.




**Capital
      Resources**




The
      Company is subject to various regulatory capital requirements administered
      by
      the federal banking agencies. Failure to meet minimum capital requirements
      can
      initiate mandatory and possibly additional discretionary actions by the
      regulators that, if undertaken, could have a material effect on the Company's
      financial statements. Management believes, as of December 31, 2005, that the
      Company and the Bank meet all capital requirements to which they are subject.
      The Company's leverage capital ratio at December 31, 2005 was 8.57% as compared
      with 8.46% as of December 31, 2004. The Company's total risk-based capital
      ratio
      at December 31, 2005 was 11.13% as compared to 11.55% as of December 31, 2004.




First,
      a
      bank must meet a minimum Tier I (as defined in the regulations) capital ratio
      ranging from 3%
      to
      5%  based
      upon the bank's CAMEL (“capital adequacy, asset quality, management, earnings
      and liquidity”) rating.




Second,
      a
      bank must meet minimum total risk based capital to risk weighted assets ratio
      of
      8%. Risk based capital and asset guidelines vary from Tier I capital guidelines
      by redefining the components of capital, categorizing assets into different
      risk
      classes, and including certain off-balance sheet items in the calculation of
      the
      capital ratio. The effect of the risk based capital guidelines is that banks
      with high exposure will be required to raise additional capital while
      institutions with low risk exposure could, with the concurrence of regulatory
      authorities, be permitted to operate with lower capital ratios. In addition,
      a
      bank must meet minimum Tier I capital to average assets ratio of 4%.




-51-
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Capital
      ratios are reviewed on a regular basis to ensure that capital exceeds the
      prescribed regulatory minimums and is adequate to meet the Company's future
      needs. All ratios are in excess of the current regulatory definitions of "well
      capitalized". Management believes that, under the current regulations, the
      Company will continue to meet its minimum capital requirements in the
      foreseeable future. Management intends to maintain regulatory capital ratios
      at
      well capitalized levels in 2006 and beyond.




The
      Company has a formal dividend policy, and dividends are issued solely at the
      discretion of the Company’s Board of Directors, subject to compliance with
      regulatory requirements. In order to pay any cash dividend, the Company must
      receive payments of dividends or management fees from the Bank. There are
      certain legal and regulatory limitations on the payment of cash dividends by
      banks. Notwithstanding regulatory restrictions, in order for the Company and
      the
      Bank to maintain a 10% risk weighted capital ratio, the Company had the ability
      to pay cash dividends at December 31, 2005 of $15,653,000 and the Bank had
      the
      ability to pay cash dividends to the Company of $3,360,000.




**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 noninterest expenses, has not
      been significant for the periods covered in this report.




**Market
      for Company’s Common Stock and Related Stock Matters**




The
      Company’s stock is included for quotation on the NASDAQ Global Market System
      with a stock quotation symbol of CCOW.




The
      following table indicates the range of high and low sales prices for the period
      shown, based upon information provided by the NASDAQ Global Market
      System.


2005*
            
            High
            
            Low
            
            Dividends4thquarter
            
            $
            35.52
            
            $
            29.60
            
            $
            0.053rdquarter
            
            $
            34.98
            
            $
            27.09
            
            $
            0.052ndquarter
            
            $
            28.14
            
            $
            24.00
            
            $
            0.051stquarter
            
            $
            26.64
            
            $
            23.62
            
            $
            0.052004*
            
            
            High
            
            
            Low
            
            
            Dividends4thquarter
            
            $
            28.75
            
            $
            23.31
            
            $
            0.053rdquarter
            
            $
            24.30
            
            $
            19.48
            
            $
            0.052ndquarter
            
            $
            22.50
            
            $
            18.32
            
            $
            0.051stquarter
            
            $
            22.26
            
            $
            20.81
            
            $
            0.05


*
        All stock prices are adjusted for the 9 for 5 split announced on March 29,
        2005.


-52-
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          of Contents




Generally,
      the Company has retained most of its earnings to support the growth of the
      Company. The Company did not pay regular cash dividends prior to 2004. The
      Company began paying dividends in the first quarter of 2004. Any future
      dividends will depend on the Company’s performance, the judgment of the Board as
      to the appropriateness of declaring a dividend, and compliance with various
      legal and regulatory provisions which restrict the amount of dividends which
      the
      Company may declare. (See “Capital Resources” above).




**RISK
      FACTORS**




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




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




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




**Market
      and Interest Rate Risk**




***Changes
      in interest rates could reduce income and cash flow***




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




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




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




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




***Capital
      Corp of the West's operations are concentrated geographically in California,
      and
      poor economic conditions may cause us to incur losses***




Substantially
      all of Capital Corp of the West's business is located in California. Capital
      Corp of the West's financial condition and operating results will be subject
      to
      changes in economic conditions in California. In the early to mid-1990s,
      California experienced a significant and prolonged downturn in its economy,
      which adversely affected financial institutions, including Capital Corp of
      the
      West. Economic conditions in California are subject to various uncertainties
      at
      this time, including the decline in the technology sector, the California state
      government's budgetary difficulties and continuing fiscal difficulties. The
      Company will be subject to changes in economic conditions. We can provide no
      assurance that conditions in the California economy will not deteriorate in
      the
      future and that such deterioration will not adversely affect Capital Corp of
      the
      West.




-53-
 Table
          of Contents




***The
      markets in which Capital Corp of the West operates are subject to the risk
      of
      earthquakes and other natural disasters***




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




***Substantial
      competition in the California banking market could adversely affect us***




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




**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 our bank and nonbank subsidiaries pay to us. Various statutory
      provisions restrict the amount of dividends our subsidiaries can pay to us
      without regulatory approval. In addition, if any of our subsidiaries liquidate,
      that subsidiary's creditors will be entitled to receive distributions from
      the
      assets of that subsidiary to satisfy their claims against it before we, as
      a
      holder of an equity interest in the subsidiary, will be entitled to receive
      any
      of the assets of the subsidiary.




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




We
      are
      subject to significant federal and state regulation and supervision, which
      is
      primarily for the benefit and protection of our customers and not for the
      benefit of investors. In the past, our business has been materially affected
      by
      these regulations. This trend is likely to continue in the future. Laws,
      regulations or policies, including accounting standards and interpretations
      currently affecting us and our subsidiaries, may change at any time. Regulatory
      authorities may also change their interpretation of these statutes and
      regulations. Therefore, our business may be adversely affected by any future
      changes in laws, regulations, policies or interpretations or regulatory
      approaches to compliance and enforcement, including legislative and regulatory
      reactions to the terrorist attack on September 11, 2001 and future acts of
      terrorism, and major U.S. corporate bankruptcies and reports of accounting
      irregularities at U.S. public companies.




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




-54-
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          of Contents




**Systems,
      Accounting and Internal Control Risks**




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




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




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




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




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




Management
      regularly reviews and updates the Company’s internal control over financial
      reporting, disclosure controls and procedures, and corporate governance policies
      and procedures. Any system of controls and procedures, however well designed
      and
      operated, is based in part on certain assumptions and can provide only
      reasonable, not absolute, assurances that the objectives of the system are
      met.
      Any failure or circumvention of the Company’s controls and procedures or failure
      to comply with regulations related to controls and procedures could have a
      material adverse effect on the Company’s business, results of operations and
      financial condition.




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 Table
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**CAPITAL
      CORP OF THE WEST AND SUBSIDIARIES**


**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**




Management
      of Capital Corp of the West and subsidiaries (the “Company”) is responsible for
      establishing and maintaining effective internal control over financial
      reporting. Internal control over financial reporting is a process designed
      to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with U.S. generally accepted accounting principles.




Under
      the
      supervision and with the participation of management, including the principal
      executive officer and principal financial officer, the Company conducted an
      evaluation of the effectiveness of internal control over financial reporting
      based on the framework in Internal Control - Integrated Framework issued by
      the
      Committee of Sponsoring Organizations of the Treadway Commission. Based on
      this
      evaluation, management of the Company has concluded the Company maintained
      effective internal control over financial reporting, as such term is defined
      in
      Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31,
      2005.




Internal
      control over financial reporting cannot provide absolute assurance of achieving
      financial reporting objectives because of its inherent limitations. Internal
      control over financial reporting is a process that involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Internal control over financial reporting can also be
      circumvented by collusion or improper management override. Because of such
      limitations, there is a risk that material misstatements may not be prevented
      or
      detected on a timely basis by internal control over financial reporting.
      However, these inherent limitations are known features of the Company’s
      financial reporting process. Therefore, it is possible to design into the
      process safeguards to reduce, though not eliminate, this risk.




Management
      is also responsible for the preparation and fair presentation of the
      consolidated financial statements and other financial information contained
      in
      this report. The accompanying consolidated financial statements were prepared
      in
      conformity with U.S. generally accepted accounting principles and include,
      as
      necessary, best estimates and judgments by management.




KPMG
      LLP,
      an independent registered public accounting firm, has audited the Company’s
      consolidated financial statements as of and for the year ended December 31,
      2005, and the Company’s assessment as to the effectiveness of internal control
      over financial reporting as of December 31, 2005, as stated in their
      reports, which are included herein.






/s/
              Thomas T. Hawker
            Director/CEO
                and
            March
                14, 2006THOMAS
                T. HAWKER
            Principal
                Executive Officer








/s/
              R. Dale McKinney
            Chief
                Financial Officer
            March
                14, 2006R.
                DALE MCKINNEY
            Principal
                Financial andAccounting
                Officer





-56-
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**Report
        of Independent Registered Public Accounting Firm**
  To
        the
        Board of Directors and Shareholders of
 Capital
        Corp of the West:
  We
        have
        audited management's assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting, ** that
        Capital Corp of the West and subsidiaries (the Company) maintained effective
        internal control over financial reporting as of December 31, 2005, based on
        criteria established in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission
        (COSO). ** The
        Company’s management is responsible for maintaining effective internal control
        over financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management’s assessment and an opinion on the effectiveness of the Company’s
        internal control over financial reporting based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
 
 A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company;
        (2) provide reasonable assurance that transactions are recorded as
        necessary to permit preparation of financial statements in accordance with
        generally accepted accounting principles, and that receipts and expenditures
        of
        the company are being made only in accordance with authorizations of management
        and directors of the company; and (3) provide reasonable assurance regarding
        prevention or timely detection of unauthorized acquisition, use, or disposition
        of the company’s assets that could have a material effect on the financial
        statements.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
 
 In
        our
        opinion, management's assessment that Capital Corp of the West and subsidiaries
        maintained effective internal control over financial reporting as of
        December 31, 2005, is fairly stated, in all material respects, based on
        criteria established in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission
        (COSO). ** Also,
        in
        our opinion, Capital Corp of the West and subsidiaries maintained, in all
        material respects, effective internal control over financial reporting as
        of
        December 31, 2005, based on criteria
        established in Internal Control — Integrated
        Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO) .
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets of Capital
        Corp
        of the West and subsidiaries as of December 31, 2005 and 2004, and the
        related consolidated statements of income and comprehensive income,
        shareholders’ equity, and cash flows for each of the years in the three-year
        period ended December 31, 2005, and our report dated March 13, 2006
        expressed an unqualified opinion on those consolidated financial
        statements.
  /s/
        KPMG
        LLP
  Sacramento,
        California
 March 13,
        2006


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 Table
          of Contents




**Report
        of Independent Registered Public Accounting Firm**
  To
        the
        Board of Directors and Shareholders of
 Capital
        Corp of the West:
  We
        have
        audited the accompanying consolidated balance sheets of Capital Corp of the
        West
        and subsidiaries (the Company) as of December 31, 2005 and 2004, and the
        related consolidated statements of income and comprehensive income,
        shareholders’ equity, and cash flows for each of the years in the three-year
        period ended December 31, 2005. These consolidated financial statements are
        the responsibility of the Company’s management. Our responsibility is to express
        an opinion on these consolidated financial statements based on our
        audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Capital Corp of the West
        and
        subsidiaries as of December 31, 2005 and 2004, and the results of their
        operations and their cash flows for each of the years in the three-year period
        ended December 31, 2005, in conformity with U.S. generally accepted
        accounting principles.
  We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Capital Corp of the
        West’s
        internal control over financial reporting as of December 31, 2005,
        based on criteria established in Internal Control - Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway
        Commission (COSO), and our report dated March 13, 2006 expressed an
        unqualified opinion on management’s assessment of, and the effective operation
        of, internal control over financial reporting.
 
  /s/
        KPMG
        LLP
  Sacramento,
        California
  March 13,
        2006




-58-
 Table
            of Contents





**Capital
      Corp of the West**


**Consolidated
      Balance Sheets**




As
                of December 31,(Dollars
                in thousands)
            
            2005
            
            2004**Assets**Cash
                and noninterest-bearing deposits in other banks
            
            $
            61,331
            
            $
            40,454Federal
                funds sold
            
            
            30,250
            
            
            17,365Time
                deposits at other financial institutions
            
            
            350
            
            
            3,350Investment
                securities available for sale, at fair value
            
            
            318,155
            
            
            269,189Investment
                securities held to maturity, at cost; fair value of $178,233 and
                $168,265
                in 2005 and 2004
            
            
            181,025
            
            
            166,987Loans,
                net of allowance for loan losses of $14,776 and $13,605 at December
                31,
                2005 and December 31, 2004
            
            
            1,054,120
            
            
            871,488Interest
                receivable
            
            
            8,305
            
            
            5,979Premises
                and equipment, net
            
            
            28,970
            
            
            22,426Goodwill
            
            
            1,405
            
            
            1,405Other
                intangibles
            
            
            23
            
            
            69Cash
                value of life insurance
            
            
            31,796
            
            
            28,362Investment
                in housing tax credit limited partnerships
            
            
            8,745
            
            
            8,623Other
                assets
            
            
            32,281
            
            
            12,750Total
                assets
            
            $
            1,756,756
            
            $
            1,448,447**Liabilities**Deposits:Noninterest-bearing
                demand
            
            $
            310,284
            
            $
            262,315Negotiable
                orders of withdrawal
            
            
            216,594
            
            
            170,870Savings
            
            
            426,581
            
            
            360,319Time,
                under $100,000
            
            
            216,016
            
            
            193,913Time,
                $100,000 and over
            
            
            235,025
            
            
            166,740Total
                deposits
            
            
            1,404,500
            
            
            1,154,157Other
                borrowings
            
            
            201,728
            
            
            164,119Junior
                subordinated debentures
            
            
            16,496
            
            
            16,496Accrued
                interest, taxes and other liabilities
            
            
            11,787
            
            
            10,194Total
                liabilities
            
            
            1,634,511
            
            
            1,344,966**Shareholders’
                Equity**Preferred
                stock, no par value; 10,000,000 shares authorized; none
                outstanding
            
            
            -
            
            
            -Common
                stock, no par value; 54,000,000 shares authorized; 10,575,361 and
                10,429,754 issued and outstanding at December 31, 2005 and 2004
            
            
            59,785
            
            
            57,139Retained
                earnings
            
            
            65,049
            
            
            45,981Accumulated
                other comprehensive (loss) income, net
            
            
            (2,589
            )
            
            361Total
                shareholders’ equity
            
            
            122,245
            
            
            103,481Total
                Liabilities and Shareholders’ Equity
            
            $
            1,756,756
            
            $
            1,448,447


See
      accompanying notes to consolidated financial statements




-59-
 Table
            of Contents





**Capital
      Corp of the West**


**Consolidated
      Statements of Income and Comprehensive Income**




Years
                Ended December 31,(Dollars
                in thousands, except per share data)
            
            2005
            
            2004
            
            2003**Interest
                income:**Interest
                and fees on loans
            
            $
            71,924
            
            $
            55,303
            
            $
            48,948Interest
                on time deposits with other financial institutions
            
            
            20
            
            
            15
            
            
            8Interest
                on investment securities held to maturity:Taxable
            
            
            4,231
            
            
            2,488
            
            
            2,756Non-taxable
            
            
            3,421
            
            
            2,167
            
            
            800Interest
                on investment securities available for sale:Taxable
            
            
            10,123
            
            
            10,288
            
            
            9,076Non-taxable
            
            
            44
            
            
            44
            
            
            551Interest
                on federal funds sold
            
            
            401
            
            
            266
            
            
            274Total
                interest income
            
            
            90,164
            
            
            70,571
            
            
            62,413**Interest
                expense:**Deposits:Negotiable
                orders of withdrawal
            
            
            411
            
            
            70
            
            
            57Savings
            
            
            5,318
            
            
            3,165
            
            
            2,691Time,
                under $100,000
            
            
            6,027
            
            
            4,426
            
            
            4,413Time,
                $100,000 and over
            
            
            6,232
            
            
            3,627
            
            
            4,090Total
                interest on deposits
            
            
            17,988
            
            
            11,288
            
            
            11,251Interest
                on subordinated debentures
            
            
            1,351
            
            
            1,152
            
            
            648Other
                borrowings
            
            
            5,381
            
            
            4,657
            
            
            4,354Total
                interest expense
            
            
            24,720
            
            
            17,097
            
            
            16,253Net
                interest income
            
            
            65,444
            
            
            53,474
            
            
            46,160Provision
                for loan losses
            
            
            2,051
            
            
            2,731
            
            
            2,170Net
                interest income after provision for loan losses
            
            
            63,393
            
            
            50,743
            
            
            43,990**Noninterest
                income:**Service
                charges on deposit accounts
            
            
            5,924
            
            
            6,134
            
            
            5,480Loss
                on sale or impairment of available for sale securities
            
            
            -
            
            
            (3,665
            )
            
            -Gain
                from sale of real estate
            
            
            -
            
            
            -
            
            
            608Increase
                in cash surrender value of life insurance policies
            
            
            1,041
            
            
            1,066
            
            
            1,003Other
            
            
            3,237
            
            
            2,870
            
            
            3,086Total
                noninterest income
            
            
            10,202
            
            
            6,405
            
            
            10,177**Noninterest
                expenses:**Salaries
                and related benefits
            
            
            22,763
            
            
            20,697
            
            
            19,071Premises
                and occupancy
            
            
            4,498
            
            
            3,446
            
            
            2,946Equipment
            
            
            3,961
            
            
            3,186
            
            
            3,335Professional
                fees
            
            
            2,310
            
            
            1,671
            
            
            1,662Supplies
            
            
            1,057
            
            
            873
            
            
            794Marketing
            
            
            1,165
            
            
            1,062
            
            
            963Intangible
                amortization
            
            
            46
            
            
            655
            
            
            676Charitable
                donations
            
            
            859
            
            
            584
            
            
            583Other
            
            
            6,020
            
            
            5,501
            
            
            5,640Total
                noninterest expenses
            
            
            42,679
            
            
            37,675
            
            
            35,670Income
                before provision for income taxes
            
            
            30,916
            
            
            19,473
            
            
            18,497Provision
                for income taxes
            
            
            9,962
            
            
            7,150
            
            
            4,857Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640**Comprehensive
                income:**Unrealized
                (loss) gain on securities arising during the year, net
            
            $
            (2,426
            )
            $
            (80
            )
            $
            (2,468
            )Unrealized
                loss on interest rate floor arising during the year, net
            
            $
            (524
            )
            $
            -
            
            $
            -Comprehensive
                income
            
            $
            18,004
            
            $
            12,243
            
            $
            11,172Basic
                earnings per share
            
            $
            2.00
            
            $
            1.19
            
            $
            1.35Diluted
                earnings per share
            
            $
            1.94
            
            $
            1.15
            
            $
            1.30


See
      accompanying notes to consolidated financial statements





-60-
 Table
            of Contents





**Capital
      Corp of the West**


**Consolidated
      Statements of Shareholders’ Equity**




Common
                Stock
            
            
            
            Acculated
              Other(Dollars
                in thousands )
            
            Number
                of shares
            
            Amounts
            
            Retained
                Earnings
            
            Comprehensive
                Income (Loss), Net
            
            Total**Balance,
                December 31, 2002**
            
            
            **9,586**
            
            **$**
            **46,436**
            
            **$**
            **27,824**
            
            **$**
            **2,909**
            
            **$**
            **77,169**Exercise
                of stock options,
              including
                tax benefit
            
            
            113
            
            
            934
            
            
            -
            
            
            -
            
            
            934Issuance
                of shares pursuant to 401K and ESOP plans
            
            
            13
            
            
            226
            
            
            -
            
            
            -
            
            
            226Net
                change in fair value of investment securities, net of tax effect
                of
                $1,613
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,468
            )
            
            (2,468
            )5%
                stock dividend, including cash payment for fractional
                shares
            
            
            479
            
            
            6,632
            
            
            (6,648
            )
            
            -
            
            
            (16
            )Net
                income
            
            
            -
            
            
            -
            
            
            13,640
            
            
            -
            
            
            13,640**Balance,
                December 31, 2003**
            
            
            **10,191**
            
            **$**
            **54,228**
            
            **$**
            **34,816**
            
            **$**
            **441**
            
            **$**
            **89,485**Exercise
                of stock options,
              including
                tax benefit of $814
            
            
            209
            
            
            2,287
            
            
            -
            
            
            -
            
            
            2,287Issuance
                of shares pursuant to 401K and ESOP plans
            
            
            30
            
            
            624
            
            
            -
            
            
            -
            
            
            624Net
                change in fair value of investment securities, net of tax effect
                of
                $49
            
            
            -
            
            
            -
            
            
            -
            
            
            (80
            )
            
            (80
            )Cash
                dividends
            
            
            -
            
            
            -
            
            
            (1,158
            )
            
            -
            
            
            (1,158
            )Net
                income
            
            
            -
            
            
            -
            
            
            12,323
            
            
            -
            
            
            12,323**Balance,
                December 31, 2004**
            
            
            **10,430**
            
            **$**
            **57,139**
            
            **$**
            **45,981**
            
            **$**
            **361**
            
            **$**
            **103,481**Exercise
                of stock options,
              including
                tax benefit of $555
            
            
            133
            
            
            2,346
            
            
            -
            
            
            -
            
            
            2,346Issuance
                of shares pursuant to 401K and ESOP plans
            
            
            12
            
            
            300
            
            
            -
            
            
            -
            
            
            300Net
                change in fair value of investment securities, net of tax effect
                of
                $1,733
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,426
            )
            
            (2,426
            )Net
                change in fair value of interest rate floor, net of tax benefit of
                $379
            
            
            -
            
            
            -
            
            
            -
            
            
            (524
            )
            
            (524
            )Cash
                dividends
            
            
            -
            
            
            -
            
            
            (1,886
            )
            
            -
            
            
            (1,886
            )Net
                income
            
            
            -
            
            
            -
            
            
            20,954
            
            
            -
            
            
            20,954**Balance,
                December 31, 2005**
            
            
            **10,575**
            
            **$**
            **59,785**
            
            **$**
            **65,049**
            
            **$**
            **(2,589**
            **)**
            **$**
            **122,245**


See
      accompanying notes to consolidated financial statements





-61-
 Table
            of Contents





**Capital
      Corp of the West**


**Consolidated
      Statements of Cash Flows**




Years
                Ended December 31,(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003**Operating
                activities:**Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for loan losses
            
            
            2,051
            
            
            2,731
            
            
            2,170Increase
                in cash surrender value of life insurance policies, net of mortality
                expense
            
            
            (1,041
            )
            
            (1,066
            )
            
            (1,003
            )Depreciation,
                amortization and accretion, net
            
            
            7,484
            
            
            6,520
            
            
            5,457Benefit
                from deferred income taxes
            
            
            (593
            )
            
            (552
            )
            
            (1,582
            )Loss
                on sale or impairment of available for sale investment
                securities
            
            
            -
            
            
            3,665
            
            
            -Gain
                on sale of real estate
            
            
            -
            
            
            -
            
            
            (608
            )Net
                increase in interest receivable & other assets
            
            
            (18,237
            )
            
            (5,038
            )
            
            (1,200
            )Net
                increase in accrued interest payable & other
                liabilities
            
            
            1,593
            
            
            2,519
            
            
            763Net
                cash provided by operating activities
            
            $
            12,211
            
            $
            21,102
            
            $
            17,637**Investing
                activities:**Investment
                security purchases - available for sale securities
            
            
            (53,573
            )
            
            (10,076
            )
            
            (47,757
            )Investment
                security purchases - held to maturity securities
            
            
            (32,136
            )
            
            (27,310
            )
            
            (14,400
            )Investment
                security purchases - mortgage-backed securities and collaterized
                mortgage
                obligations-available for sale
            
            
            (105,695
            )
            
            (74,080
            )
            
            (129,084
            )Investment
                security purchases - mortgage-backed securities and collateralized
                mortgage obligations - held to maturity
            
            
            -
            
            
            (53,047
            )
            
            (35,305
            )Proceeds
                from maturities of available for sale investment
                securities
            
            
            13,437
            
            
            22,306
            
            
            45,417Proceeds
                from maturities of held to maturity investment securities
            
            
            1,985
            
            
            15
            
            
            5,515Proceeds
                from maturities of mortgage-backed securities and collateralized
                mortgage
                obligations - available for sale
            
            
            60,584
            
            
            47,828
            
            
            56,942Proceeds
                from maturities of mortgage-backed securities and collateralized
                mortgage
                obligations - held to maturity
            
            
            15,480
            
            
            8,542
            
            
            27,827Proceeds
                from sales of available for sale investment securities
            
            
            30,629
            
            
            15,974
            
            
            -Proceeds
                from sales of mortgage-backed securities and collateralized mortgage
                obligations - available for sale
            
            
            -
            
            
            595
            
            
            -Net
                decrease (increase) in time deposits in other financial
                institutions
            
            
            3,000
            
            
            (3,000
            )
            
            150Proceeds
                from sales of commercial and real estate loans
            
            
            2,638
            
            
            2,959
            
            
            4,026Origination
                of loans
            
            
            (500,638
            )
            
            (650,229
            )
            
            (567,501
            )Proceeds
                from repayment of loans
            
            
            310,285
            
            
            522,595
            
            
            429,655Purchases
                of premises and equipment
            
            
            (8,955
            )
            
            (7,586
            )
            
            (3,960
            )Proceeds
                from sales of real estate
            
            
            -
            
            
            -
            
            
            832Purchase
                of bank owned life insurance, net of death benefit
            
            
            (2,393
            )
            
            (3,175
            )
            
            (6,000
            )Death
                benefit income of life insurance policies
            
            
            (539
            )
            
            -
            
            
            -Sale
                of subsidiary
            
            
            -
            
            
            520
            
            
            -Purchase
                of interest rate floor contract
            
            
            (1,270
            )
            
            -
            
            
            -Net
                cash used in investing activities
            
            $
            (267,161
            )
            $
            (207,169
            )
            $
            (233,643
            )**Financing
                activities:**Net
                increase in demand, NOW and savings deposits
            
            
            159,955
            
            
            119,797
            
            
            165,002Net
                increase in certificates of deposit
            
            
            90,388
            
            
            5,552
            
            
            29,427Proceeds
                from borrowings and repurchase agreement
            
            
            180,000
            
            
            96,900
            
            
            5,000Repayment
                of borrowings
            
            
            (142,391
            )
            
            (25,598
            )
            
            (22,387
            )Issued
                shares for benefit plan purchases
            
            
            300
            
            
            624
            
            
            226Payment
                for fractional shares
            
            
            -
            
            
            -
            
            
            (16
            )Issuance
                of junior subordinated debentures
            
            
            -
            
            
            -
            
            
            10,310Cash
                dividends paid
            
            
            (1,886
            )
            
            (1,158
            )
            
            -Exercise
                of stock options, net
            
            
            2,346
            
            
            2,287
            
            
            743Net
                cash provided by financing activities
            
            $
            288,712
            
            $
            198,404
            
            $
            188,305Net
                increase (decrease) in cash and cash equivalents
            
            
            33,762
            
            
            12,337
            
            
            (27,701
            )Cash
                and cash equivalents at beginning of year
            
            
            57,819
            
            
            45,482
            
            
            73,183Cash
                and cash equivalents at end of year
            
            $
            91,581
            
            $
            57,819
            
            $
            45,482Supplemental
                disclosure of non-cash investing and financing activities:Investment
                securities unrealized losses, net of taxes
            
            $
            (2,426
            )
            $
            (80
            )
            $
            (2,468
            )Interest
                rate floor unrealized loss, net of taxes
            
            
            (524
            )
            
            -
            
            
            -Interest
                paid
            
            
            23,769
            
            
            16,900
            
            
            16,054Income
                tax payments
            
            
            9,129
            
            
            10,271
            
            
            4,355Transfer
                of securities from available for sale to held to maturity
            
            
            -
            
            
            -
            
            
            24,557Loans
                transferred to other real estate owned
            
            $
            -
            
            $
            -
            
            $
            224


See
      accompanying notes to consolidated financial statements




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**NOTE
      1. Summary of Significant Accounting
      Policies**




Capital
      Corp of the West (the "Company") is a registered bank holding company, whose
      bank subsidiary provides a full range of banking services to individual and
      business customers primarily in the Central San Joaquin Valley, through its
      subsidiaries. The following is a description of the significant
      policies.




**Principles
      of Consolidation:** The
      consolidated financial statements of Capital Corp of the West include its
      subsidiaries: County Bank (the "Bank"), Capital West Group (“CWG”), Regency
      Investment Advisors (“RIA”), and the subsidiaries of County Bank which include
      County Asset Advisor, Inc. (“CAA”), Merced Area Investment Development, Inc.
      (“MAID”), and County Investment Trust (“REIT”). CWG, a subsidiary formed in
      1996, became inactive in 1997. Regency Investment Advisors was acquired in
      June
      2002 and divested in October 2004. All significant intercompany balances and
      transactions are eliminated.




The
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America. In preparing
      the
      consolidated financial statements, management is required to make estimates
      and
      assumptions that affect the reported amounts of assets and liabilities and
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reported
      period. Actual results could differ from those estimates applied in the
      preparation of the consolidated financial statements. A material estimate that
      is particularly susceptible to change in the near term relates to the
      determination of the allowance for loan losses.




**Cash
      and Cash Equivalents:** The
      Company maintains deposit balances with various banks which are necessary for
      check collection and account activity charges. Cash in excess of immediate
      requirements is invested in federal funds sold or other short-term investments.
      Generally, federal funds are sold for periods from one to thirty days. Cash,
      noninterest-bearing deposits in other banks and federal funds sold are
      considered to be cash and cash equivalents for the purposes of the consolidated
      statements of cash flows. Banks are required to maintain minimum average reserve
      balances with the Federal Reserve Bank. The amount of those reserve balances
      was
      approximately $25,000 at December 31, 2005 and 2004.




**Investment
      Securities:** Investment securities consist of federal agencies, state and county municipal
      securities, corporate bonds, mortgage-backed securities, collateralized mortgage
      obligations, agency preferred stock, trust preferred stock and equity
      securities. Investment securities are 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. The Company has not purchased
      securities with the intent of actively trading them.




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.




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**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 level yield method.




Interest
      income on loans is accrued based on contract interest rates and principal
      amounts outstanding. Loans which are more than 90 days delinquent, with respect
      to interest or principal, are placed on non-accrual status, unless the
      outstanding principal and interest is adequately secured and, in the opinion
      of
      management, remains collectable. Uncollected accrued interest on nonaccrual
      loans is reversed against interest income, and interest is subsequently
      recognized only as received until the loan is returned to accrual status.
      Interest accruals are resumed when such loans are brought fully current with
      respect to interest and principal and when, in the judgment of management,
      the
      loans are estimated to be fully collectable as to both principal and
      interest.




A
      loan is
      considered impaired, if it is probable that the Company will be unable to
      collect the scheduled payments of principal and interest when due according
      to
      the contractual terms of the loan agreement. Any allowance for loan losses
      on
      impaired loans is measured based upon the present value of future cash flows
      discounted at the loan's effective rate, the loan's observable market price,
      or
      the fair value of collateral if the loan is collateral dependent. Interest
      on
      impaired loans is recognized on a cash basis. In general, these statements
      above
      are not applicable to large groups of small balance homogenous loans that are
      collectively evaluated for impairment, such as residential mortgage and consumer
      installment loans. Income recognition on impaired loans conforms to the method
      the Company uses for income recognition on nonaccrual loans. Interest income
      on
      nonaccrual loans is recorded on a cash basis. Payments may be treated as
      interest income or return of principal depending upon management’s opinion of
      the ultimate risk of loss on the individual loan. Cash payments are treated
      as
      interest income when management believes the remaining principal balance is
      fully collectable.




**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, which include: growth trends
      in
      the portfolio, historical experience, concentrations of credit risk, delinquency
      trends, general economic conditions, underlying collateral and internal and
      external credit reviews. In addition, various regulatory agencies, as an
      integral part of their examination process, periodically review the Company's
      allowance for loan losses. Such agencies may require the Company to recognize
      additions to the allowance for loan losses based on their judgment of
      information available to them at the time of their examination. Additions to
      the
      allowance for loan losses, in the form of provision for loan losses, are
      reflected in current operating results, while charge-offs to the allowance
      for
      loan losses are made when a loss is determined to have occurred.  Recoveries
      on loans previously charged off increases the allowance for loan losses and
      are
      not reflected in the Consolidated Statements of Income and Comprehensive
      Income.Management uses the best information available on which to base
      estimates, however, ultimate losses may vary from current estimates.




**Reserve
      for Unfunded Loan Commitments:** The
      Company reserves for the possibility of an unfunded loan commitment being funded
      and subsequently being charged off. Each quarter, the Bank’s unfunded credit
      obligations are reviewed and assigned a risk factor. The reserve for unfunded
      loan commitments is either increased or decreased to insure that it represents
      the volume of unfunded loan commitments multiplied by the assigned risk factor.




**Gain
      or Loss on Sale of Loans:** Transfers **** of **** real
      estate mortgage loans held for sale in which the Company surrenders control
      over
      those loans are accounted for as a sale to the extent that consideration other
      than beneficial interests in the transferred loans is received in exchange.
      Gains or losses are recognized at the time of sale and are reported in
      noninterest income. All loan sales during 2005, 2004 and 2003 were sales of
      the
      guaranteed portion of loans that received partial guarantees from the Small
      Business Administration (“SBA”). The SBA typically guarantees a major portion of
      small business loans that meet the SBA’s underwriting and collateral
      requirements. In 2005, 2004 and 2003 the Company recognized a gain on the sale
      of loans of $235,000, $251,000 and $296,000.




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**Premises
      and Equipment:** Premises
      and equipment are stated at cost, less accumulated depreciation and
      amortization. Depreciation and amortization are computed on the straight line
      basis over the estimated useful life of each type of asset. Estimated useful
      lives range up to 39 years for buildings, up to the lease term for leasehold
      improvements, and 3 to 15 years for furniture and equipment.




**Other
      Real Estate:** Other
      real estate is comprised of property acquired through foreclosure proceedings
      or
      acceptance of deeds-in-lieu of foreclosure. Losses recognized at the time of
      acquiring property in full or partial satisfaction of debt are charged against
      the allowance for loan losses. Other real estate is recorded at the lower of
      the
      related loan balance or fair value, less estimated disposition costs. Fair
      value
      of other real estate is generally based on an independent appraisal of the
      property. Any subsequent costs or losses are recognized as noninterest expense
      when incurred.




**Goodwill
      and Other Intangible Assets:** Goodwill
      represents the excess of costs over the fair value of net assets of businesses
      acquired. Goodwill was generated with the purchase of the Town and County
      Finance and Thrift (the “Thrift”) in June 1996. The Thrift’s assets, including
      intangible assets, were subsequently merged into County Bank in November 1999,
      and the Thrift’s charter eliminated. Goodwill associated with the purchase of
      the Thrift is no longer being amortized beginning on January 1, 2002 and had
      a
      balance of $1,405,000 as of December 31, 2005 and 2004. The goodwill associated
      with the purchase of Regency Investment Advisors Inc. in June 2002 was $520,000.
      RIA was subsequently sold in the third quarter of 2004. There is no goodwill
      on
      the Balance Sheet related to RIA at December 31, 2005 and 2004. Core deposit
      intangibles, representing the excess of purchase price paid over the fair value
      of net savings deposits acquired, were generated by the purchase of the Thrift
      in June 1996 and the purchase of three branches from the Bank of America in
      December, 1997. Core deposit intangibles resulting from these acquisitions
      are
      being amortized over 10 and 7 years, respectively. Core deposit intangibles
      had
      a balance of $23,000 and $69,000 as of December 31, 2005 and 2004. Amortization
      of core deposit premiums was $46,000, $655,000, and $676,000 for the years
      ended
      December 31, 2005, 2004 and 2003. Core deposit premiums are scheduled to
      amortize by $23,000 in the year 2006 and are scheduled to be fully amortized
      by
      December 2006. Goodwill and intangible assets are reviewed on an annual basis
      for impairment. If impairment is indicated, recoverability of the asset is
      assessed based upon expected undiscounted 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 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. There has been no impairment losses recognized on
      the
      Town and Country Finance and Thrift recorded goodwill as of December 31,
      2005 .




**Impairment
      of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:** Long-lived
      assets, such as property, plant, and equipment and certain purchased intangibles
      subject to amortization are reviewed for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to estimated undiscounted future
      net cash flows expected to be generated by the asset. If the carrying amount
      of
      an asset exceeds its estimated future cash flows, such an asset is considered
      to
      be impaired, and an impairment charge is recognized for the amount by which
      the
      carrying amount of the asset exceeds the fair value of the asset. Assets to
      be
      disposed of would be separately presented in the balance sheet and reported
      at
      the lower of the carrying amount or fair value less costs to sell, and are
      no
      longer depreciated. The assets and liabilities of a disposed group classified
      as
      held for sale would be presented separately in the appropriate asset and
      liability sections of the balance sheet.




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**Director
      Elective Income Deferral Agreements:** The
      Company has purchased single premium universal life insurance policies in
      conjunction with implementation of salary continuation plans for certain members
      of management, a deferred compensation plan for certain members of the Board
      of
      Directors, and for general funding of various benefit programs of the company.
      This plan was changed in 2004 and is currently being used by five directors.
      The
      expenses related to the deferral agreements are accrued in other expenses.
      The
      Company is the owner and beneficiary of these policies. The Bank has also formed
      a Rabbi trust and has irrevocably assigned some of these universal life
      insurance policies to the Rabbi trust in support of these salary continuation
      and deferred compensation benefits. The cash surrender value of the insurance
      policies totaled $31,796,000 and $28,362,000 as of December 31, 2005 and 2004.
      Income from these policies is recorded in noninterest income and the load,
      mortality and surrender charges have been recorded in other expenses. An accrued
      liability of $3,885,000 and $3,610,000 as of December 31, 2005 and 2004 was
      recorded to reflect the present value of the expected retirement benefits for
      the salary continuation plans and the deferred compensation benefits and was
      included in other liabilities. Salary continuation expense of $339,000 and
      $484,000 and deferred compensation expense of $89,000 and $97,000 was recorded
      for the years ending December 31, 2005 and 2004.




**Advertising
      Costs:** The
      Company expenses all advertising costs as incurred.




**Income
      Taxes:** The
      Company files a consolidated federal income tax return and a combined state
      franchise tax return. 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.




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
      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 a recorded tax benefit is not
      expected to be fully realized. The expense to create the tax valuation is
      recorded as an additional income tax expense in the period the tax valuation
      allowance is created.




**Income
      Tax Credits:** The
      Company has investments in limited partnerships which own low income affordable
      housing projects that generate tax benefits in the form of federal and state
      housing tax credits. As an investor in these partnerships, the Company receives
      tax benefits in the form of tax deductions from partnership operating losses
      and
      income tax credits. These income tax credits are earned over a 10-year period
      as
      a result of the investment meeting certain criteria and are subject to recapture
      over a 15-year period. The expected benefit resulting from the affordable
      housing income tax credits (“HTC”) is recognized in the period in which the tax
      benefit is recognized in the Company's consolidated tax returns. These
      investments are accounted for using the cost method and are evaluated at each
      reporting period for impairment. The Bank had gross investments in these
      partnerships of $11,727,000 and $10,901,000 as of December 31, 2005 and 2004.
      The difference between the Bank’s gross investment in these HTC partnerships and
      the net book value of these partnerships is a valuation reserve that has been
      established to reflect the negative cash flows of these HTC projects and its
      effect on the value of the underlying assets of each partnership.




**Securities
      Purchased and Sold Agreements:** Securities
      under resale agreements and securities sold under repurchase agreements are
      generally accounted for as collateralized financing transactions and are
      recorded at the amount at which the securities were acquired or sold plus
      accrued interest. It is the Company’s policy to take possession of securities
      purchased under resale agreements, which are primarily U.S. Government agency
      securities. The market value of securities purchased and sold is monitored
      and
      collateral is obtained from or returned to the counterparty when
      appropriate.




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**Derivative
      Instruments and Hedging Activities:** The
      Company accounts for derivatives and hedging activities in accordance with
      FASB
      Statement No. 133, *Accounting
      for Derivative Instruments and Certain Hedging Activities* ,
      as
      amended, which requires that all derivative instruments be recorded on the
      balance sheet at their respective fair values.




On
      the
      date a derivative contract is entered into, the Company designates the
      derivative as either a hedge of the fair value of a recognized asset or
      liability or of an unrecognized firm commitment (fair value hedge), a hedge
      of a
      forecasted transaction or the variability of cash flows to be received or paid
      related to a recognized asset or liability (cash flow hedge), a foreign-currency
      fair-value or cash-flow hedge (foreign currency hedge), or a hedge of a net
      investment in a foreign operation. For all hedging relationships the Company
      formally documents the hedging relationship and its risk-management objective
      and strategy for undertaking the hedge, the hedging instrument, the hedged
      item,
      the nature of the risk being hedged, how the hedging instrument’s effectiveness
      in offsetting the hedged risk will be assessed prospectively and
      retrospectively, and a description of the method of measuring ineffectiveness.
      This process includes linking all derivatives that are designated as fair-value,
      cash-flow, or foreign-currency hedges to specific assets and liabilities on
      the
      balance sheet or to specific firm commitments or forecasted transactions. The
      Company also formally assesses, both at the hedge’s inception and on an ongoing
      basis, whether the derivatives that are used in hedging transactions are highly
      effective in offsetting changes in fair values or cash flows of hedged items.
      Changes in the fair value of a derivative that is highly effective and that
      is
      designated and qualifies as a fair-value hedge, along with the loss or gain
      on
      the hedged asset or liability or unrecognized firm commitment of the hedged
      item
      that is attributable to the hedged risk, are recorded in earnings. Changes
      in
      the fair value of a derivative that is highly effective and that is designated
      and qualifies as a cash-flow hedge are recorded in other comprehensive income
      to
      the extent that the derivative is effective as a hedge, until earnings are
      affected by the variability in cash flows of the designated hedged item. Changes
      in the fair value of derivatives that are highly effective as hedges and that
      are designated and qualify as foreign-currency hedges are recorded in either
      earnings or other comprehensive income, depending on whether the hedge
      transaction is a fair-value hedge or a cash-flow hedge. However, if a derivative
      is used as a hedge of a net investment in a foreign operation, its changes
      in
      fair value, to the extent effective as a hedge, are recorded in the cumulative
      translation adjustments account within other comprehensive income. The
      ineffective portion of the change in fair value of a derivative instrument
      that
      qualifies as a cash-flow hedge is reported in earnings. Changes in the fair
      value of derivative trading instruments are reported in current period
      earnings.




The
      Company discontinues hedge accounting prospectively when it is determined that
      the derivative is no longer effective in offsetting changes in the fair value
      or
      cash flows of the hedged item, the derivative expires or is sold, terminated,
      or
      exercised, the derivative is designated as a hedging instrument, because it
      is
      unlikely that a forecasted transaction will occur, a hedged firm commitment
      no
      longer meets the definition of a firm commitment, or management determines
      that
      designation of the derivative as a hedging instrument is no longer
      appropriate.




In
      all
      situations in which hedge accounting is discontinued and the derivative is
      retained, the Company continues to carry the derivative at its fair value on
      the
      balance sheet and recognizes any subsequent changes in its fair value in
      earnings. When hedge accounting is discontinued because it is determined that
      the derivative no longer qualifies as an effective fair-value hedge, the Company
      no longer adjusts the hedged asset or liability for changes in fair value.
      The
      adjustment of the carrying amount of the hedged asset or liability is accounted
      for in the same manner as other components of the carrying amount of that asset
      or liability. When hedge accounting is discontinued because the hedged item
      no
      longer meets the definition of a firm commitment, the Company removes any asset
      or liability that was recorded pursuant to recognition of the firm commitment
      from the balance sheet, and recognizes any gain or loss in earnings. When it
      is
      probable that a forecasted transaction will not occur, the Company discontinues
      hedge accounting if not already done and recognizes immediately in earnings
      gains and losses that were accumulated in other comprehensive
      income.




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**Earnings
      Per Share:** Basic
      earnings per share (EPS) includes no dilution and is 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 an entity.




On
      January 25, 2005, April 26, 2005, July 26, 2005, October 25, 2005 and January
      24, 2006, the Board of Directors authorized a $0.05 cash dividend payable on
      February 25, 2005, May 26, 2005, August 26, 2005, November 25, 2005, and
      February 28, 2006 respectively.




The
      following table provides a reconciliation of the numerator and denominator
      of
      the basic and diluted earnings per share computation for the years ended
      December 31:




For
                The Twelve Months
              Ended
                December 31,(Dollars
                in thousands, except per share data)
            
            2005
            
            2004
            
            2003Basic
                EPS computation:Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640Average
                common shares outstanding
            
            
            10,500
            
            
            10,323
            
            
            10,102Basic
                EPS
            
            $
            2.00
            
            $
            1.19
            
            $
            1.35Diluted
                EPS computations:Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640Average
                common shares outstanding
            
            
            10,500
            
            
            10,323
            
            
            10,102Effect
                of stock options
            
            
            321
            
            
            432
            
            
            403Total
                weighted average shares and common stock equivalents
            
            
            10,821
            
            
            10,755
            
            
            10,505Diluted
                EPS
            
            $
            1.94
            
            $
            1.15
            
            $
            1.30




In
      2005,
      2004, and 2003 there were options covering 17,051, 0, and 7,675 shares that
      were
      not considered in the earnings per share computations because the option
      exercise price was in excess of the stock closing price on December 31, 2005,
      2004 and 2003 making these shares antidilutive.




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**Stock
      Option Plan:** During
      2005, 2004 and 2003, for annual reporting periods beginning after June 15,
      2005,
      equity based compensation will be accounted for by the Company, using the fair
      value method. During 2005, 2004 and 2003, the Company accounted for stock-based
      awards to employees and directors using the intrinsic value method of accounting
      in accordance with Accounting Principles Board Opinion No. 25. Under the
      intrinsic value method, compensation cost is generally the excess, if any,
      of
      the quoted market price of the stock at the grant or other measurement date
      over
      the exercise price. Statement of Financial Accounting Standards No 148,
“Accounting for Stock Based Compensation-Transition and Disclosure” an amendment
      of FASB Statement No. 123 and revised Statement of Financial Accounting
      Standards No. 123 (revised 2004), “Share-Based Payment,” establish financial
      accounting and reporting standards for stock-based compensation plans, including
      employee stock purchase plans, stock options and restricted stock. Statement
      No.
      148 and 123R encourages all entities to adopt a fair value method of accounting
      for stock-based compensation plans, whereby compensation cost is measured at
      the
      grant date upon the fair value of the award and is realized as an expense over
      the service or vesting period. However, Statement No. 148 and 123 also allow
      an
      entity to continue to measure compensation cost for these plans using the
      intrinsic value method of accounting prescribed by Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” as long as proforma
      fair market method disclosures of net income, basic earnings per share, diluted
      earnings per share and stock-based compensation costs, net of related tax
      effects, are prominently disclosed. See Note 12 for additional disclosure
      information relative to options granted and outstanding.




The
      Company applies APB Opinion No. 25 in accounting for its stock options and,
      accordingly, no compensation cost has been recognized for its stock options,
      except as explained in the action by the November board of directors action
      noted below, in the accompanying consolidated financial statements. Had the
      Company determined compensation cost based on the fair value at the grant date
      for its stock options under SFAS No. 123, *Accounting
      for Stock-Based Compensation,* the
      Company’s net income would have been reduced to the proforma amounts indicated
      as follows:




Years
                Ended December 31,(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003**Net
                income**As
                reported net income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640Equity
                compensation, net of income tax effect of $520
            
            
            2,431
            
            
            876
            
            
            582Proforma
                net income
            
            
            18,523
            
            
            11,447
            
            
            13,058**Basic
                earnings per share**As
                reported
            
            
            2.00
            
            
            1.19
            
            
            1.35Proforma
            
            
            1.76
            
            
            1.11
            
            
            1.29**Diluted
                earnings per share**As
                reported
            
            
            1.94
            
            
            1.15
            
            
            1.30Proforma
            
            
            1.71
            
            
            1.06
            
            
            1.24




On
      November 29, 2005, the Company’s board of directors approved the 100% vesting of
      all existing unvested stock options outstanding. All the options affected were
      in-the-money, and were held by certain members of management and the board
      of
      directors. The board took this action so that the Company would not have to
      recognize equity compensation expense in the Consolidated Statements of Income
      and Comprehensive Income on the unvested portion of the stock options
      outstanding as of November 29, 2005. The unvested equity compensation expense
      related to this action was $2,409,000. During 2005, the Company recorded equity
      compensation expense related to this board action of $150,000 to reflect
      management’s estimate of additional equity compensation expense incurred that
      relates to the forfeiture of stock options that occurs when management or
      members of the board of directors leave the Company. Equity compensation expense
      will be recognized in the Consolidated Statements of Income and Comprehensive
      Income beginning in 2006 for any stock options issued after November 29,
      2005.




Total
      compensation expense related to the issuance of options that would have been
      reported was $2,951,000, $972,000, and $601,000 during 2005, 2004 and 2003,
      respectively.




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The
      per
      share weighted average fair value of stock options granted during 2005, 2004,
      and 2003 was $10.11, $7.76, and $6.12 on the date of grant using the Black
      Scholes option pricing model with the following weighted average assumptions:
      2005, 2004, and 2003 expected dividend yield of 0.5%, 0.4% and 0%; 2005, 2004,
      and 2003 expected volatility of 29%, 26%, and 29%; and a risk free interest
      rate
      of 4.07%, 4.00%, and 4.75% for 2005, 2004, and 2003, and an expected life of
      6.32, 7, and 7 years in 2005, 2004, and 2003, respectively.




**Comprehensive
      Income:** Comprehensive
      income consists of net income and unrealized gains (losses) on securities and
      certain derivative instruments and is presented in the consolidated statements
      of income and comprehensive income.




**Reclassifications:** Certain
      amounts in the 2004 and 2003 consolidated financial statements have been
      reclassified to conform with the 2005 presentation. The reclassification that
      pertains to this statement is the reserve for unfunded loan commitments. For
      more information regarding the reserve for unfunded loan commitments, see the
      discussion earlier in Note 1.




**NOTE
      2. Investment Securities**




The
      amortized cost and estimated market value of investment securities at December
      31 are summarized below:




(Dollars
                in thousands)
            
            Amortized
                Cost
            
            Gross
                Unrealized Gains
            
            Gross
                Unrealized Losses
            
            Estimated
                Fair Value**2005****Available
                for sale securities:**U.S.
                Government agencies
            
            $
            41,098
            
            $
            1
            
            $
            865
            
            $
            40,234State
                & political subdivisions
            
            
            1,293
            
            
            1
            
            
            8
            
            
            1,286Mortgage-backed
                securities
            
            
            211,181
            
            
            257
            
            
            3,267
            
            
            208,171Collateralized
                mortgage obligations
            
            
            33,008
            
            
            -
            
            
            592
            
            
            32,416Total
                debt securities
            
            
            286,580
            
            
            259
            
            
            4,732
            
            
            282,107Agency
                preferred stock
            
            
            11,001
            
            
            281
            
            
            336
            
            
            10,946Equity
                securities
            
            
            25,562
            
            
            -
            
            
            460
            
            
            25,102Total
                available for sale securities
            
            $
            323,143
            
            $
            540
            
            $
            5,528
            
            $
            318,155**Held
                to maturity securities:**State
                and political subdivisions
            
            $
            100,045
            
            $
            749
            
            $
            1,781
            
            $
            99,013Mortgage-backed
                securities
            
            
            62,484
            
            
            392
            
            
            1,627
            
            
            61,249Collateralized
                mortgage obligations
            
            
            18,496
            
            
            -
            
            
            525
            
            
            17,971Total
                held to maturity securities
            
            $
            181,025
            
            $
            1,141
            
            $
            3,933
            
            $
            178,233**2004****Available
                for sale securities:**U.S.
                Government agencies
            
            $
            25,309
            
            $
            18
            
            $
            199
            
            $
            25,128State
                & political subdivisions
            
            
            1,312
            
            
            13
            
            
            -
            
            
            1,325Mortgage-backed
                securities
            
            
            137,868
            
            
            914
            
            
            701
            
            
            138,081Collateralized
                mortgage obligations
            
            
            62,340
            
            
            39
            
            
            497
            
            
            61,882Total
                debt securities
            
            
            226,829
            
            
            984
            
            
            1,397
            
            
            226,416Agency
                preferred stock
            
            
            18,001
            
            
            -
            
            
            -
            
            
            18,001Equity
                securities
            
            
            25,050
            
            
            -
            
            
            278
            
            
            24,772Total
                available for sale securities
            
            $
            269,880
            
            $
            984
            
            $
            1,675
            
            $
            269,189**Held
                to maturity securities:**State
                and political subdivisions
            
            $
            69,894
            
            $
            1,394
            
            $
            304
            
            $
            70,984Mortgage-backed
                securities
            
            
            72,713
            
            
            732
            
            
            363
            
            
            73,082Collateralized
                mortgage obligations
            
            
            24,380
            
            
            -
            
            
            181
            
            
            24,199Total
                held to maturity securities
            
            $
            166,987
            
            $
            2,126
            
            $
            848
            
            $
            168,265




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At
      December 31, 2005 and 2004, investment securities with carrying values of
      approximately $452,337,000 and $321,688,000, respectively, were pledged as
      collateral for deposits of public funds, government deposits, the Bank's use
      of
      the Federal Reserve Bank's discount window and Federal Home Loan Bank line
      of
      credit. The Bank is a member of the Federal Reserve Bank and the Federal Home
      Loan Bank. The Bank carried balances, stated at cost, of $7,888,000 and
      $7,304,000 of Federal Home Loan Bank stock and $1,187,000 of Federal Reserve
      Bank stock as of December 31, 2005 and 2004. Gross realized losses on sale
      of
      available for sale securities of $0, $6,000, and $0, were recognized in 2005,
      2004, and 2003. Gross realized gains on sale of available for sale securities
      of
      $0, $50,000, and $0 were recognized in 2005, 2004, and 2003. Gross losses on
      sale of available for sale securities were $0, $3,715,000, and $0 in 2005,
      2004,
      and 2003. The gross losses on sale of available for sale securities in 2004
      is
      composed of an unrealized other-than-temporary impairment loss of $3,709,000
      and
      a realized loss of $6,000 on the sale of available for sale
      securities.




In
      June,
      2003, state and municipal debt securities with a carrying value of $24,558,000
      and a market value of $26,204,000 were transferred from the available for sale
      portfolio to the held to maturity portfolio at market value. The Company made
      the decision based on management’s intent to hold these securities to maturity.
      The unrealized holding gain at the date of transfer is reported as accumulated
      other comprehensive income, a separate component of shareholders’ equity, and
      amortized over the remaining life of the securities as an adjustment of yield
      in
      a manner consistent with the amortization of a premium or accretion of a
      discount.




The
      carrying and estimated fair values of debt securities at December 31, 2005
      by
      contractual maturity, are shown on the following table. Actual maturities may
      differ from contractual maturities because issuers generally have the right
      to
      call or prepay obligations with or without call or prepayment
      penalties.




(Dollars
                in thousands)
            
            Amortized
                Cost
            
            Estimated
                Fair Value**Available
                for sale debt securities:**One
                year or less
            
            $
            -
            
            $
            -One
                to five years
            
            
            31,192
            
            
            30,448Five
                to ten years
            
            
            10,162
            
            
            10,038Over
                ten years
            
            
            1,037
            
            
            1,034Mortgage-backed
                securities and CMOs
            
            
            244,189
            
            
            240,587Total
                available for sale debt securities
            
            $
            286,580
            
            $
            282,107**Held
                to maturity debt securities:**One
                year or less
            
            $
            -
            
            $
            -One
                to five years
            
            
            9,265
            
            
            8,582Five
                to ten years
            
            
            23,162
            
            
            23,413Over
                ten years
            
            
            67,618
            
            
            67,018Mortgage-backed
                securities and CMOs
            
            
            80,980
            
            
            79,220Total
                held to maturity debt securities
            
            $
            181,025
            
            $
            178,233




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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 December
      31,
      2005, were as follows:




Less
                than 12 months
            
            12
                months or more
            
            Total(Dollars
                in thousands)
            
            Unrealized
                Losses
            
            Fair
                Value
            
            Unrealized
                Losses
            
            Fair
                Value
            
            Unrealized
                Losses
            
            Fair
                Value**Available
                for sale:**U.S.
                Government agencies
            
            $
            526
            
            $
            30,542
            
            $
            339
            
            $
            9,661
            
            $
            865
            
            $
            40,203State
                and political subdivisions
            
            
            8
            
            
            807
            
            
            -
            
            
            -
            
            
            8
            
            
            807Mortgage-backed
                securities
            
            
            1,490
            
            
            54,410
            
            
            1,777
            
            
            49,538
            
            
            3,267
            
            
            103,948Collateralized
                mortgage Obligations
            
            
            147
            
            
            5,778
            
            
            445
            
            
            26,638
            
            
            592
            
            
            32,416Agency
                preferred stock
            
            
            336
            
            
            4,757
            
            
            -
            
            
            -
            
            
            336
            
            
            4,757Equity
                securities
            
            
            -
            
            
            -
            
            
            460
            
            
            15,482
            
            
            460
            
            
            15,482$
            2,507
            
            $
            96,294
            
            $
            3,021
            
            $
            101,319
            
            $
            5,528
            
            $
            197,613**Held
                to maturity securities:**State
                and political subdivisions
            
            $
            394
            
            $
            31,367
            
            $
            1,387
            
            $
            17,192
            
            $
            1,781
            
            $
            48,559Mortgage-backed
                securities
            
            
            1,000
            
            
            37,883
            
            
            627
            
            
            11,837
            
            
            1,627
            
            
            49,720Collateralized
                mortgage Obligations
            
            
            -
            
            
            -
            
            
            525
            
            
            17,971
            
            
            525
            
            
            17,971$
            1,394
            
            $
            69,250
            
            $
            2,539
            
            $
            47,000
            
            $
            3,933
            
            $
            116,250




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,
        2004, were as follows:


Less
                  than 12 months
              
              12
                  months or more
              
              Total(Dollars
                  in thousands)
              
              Unrealized
                Losses
              
              Fair
                Value
              
              Unrealized
                Losses
              
              Fair
                Value
              
              Unrealized
                Losses
              
              Fair
                Value**Available
                  for sale:**U.S.
                  government agencies
              
              $
              70
              
              $
              9,930
              
              $
              129
              
              $
              9,876
              
              $
              199
              
              $
              19,806State
                  and political subdivisions
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Mortgage-backed
                  securities
              
              
              605
              
              
              76,754
              
              
              96
              
              
              7,283
              
              
              701
              
              
              84,037Collateralized
                  mortgageObligations
              
              
              471
              
              
              47,239
              
              
              26
              
              
              5,058
              
              
              497
              
              
              52,297Equity
                  securities
              
              
              17
              
              
              2,983
              
              
              261
              
              
              12,738
              
              
              278
              
              
              15,721$
              1,163
              
              $
              136,906
              
              $
              512
              
              $
              34,955
              
              $
              1,675
              
              $
              171,861**Held
                  to maturity securities:**State
                  and political subdivisions
              
              $
              304
              
              $
              23,448
              
              $
              -
              
              $
              -
              
              $
              304
              
              $
              23,448Mortgage-backed
                  securities
              
              
              10
              
              
              2,786
              
              
              353
              
              
              12,487
              
              
              363
              
              
              15,273Collateralized
                  mortgageObligations
              
              
              181
              
              
              24,199
              
              
              -
              
              
              -
              
              
              181
              
              
              24,199$
              495
              
              $
              50,433
              
              $
              353
              
              $
              12,487
              
              $
              848
              
              $
              62,920




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The
        Company has determined that unrealized losses on debt securities were driven
        primarily by increases in interest rates over the last year. The Company
        has the
        ability and intent to retain it’s investments until maturity or until
        anticipated recovery in market value occurs. No other-than-temporary impairment
        was recorded in 2005.
  The
        Company invests in mutual funds that hold adjustable rate mortgage loan
        investments which fluctuate in value with prevailing market interest rates.
        The
        unrealized losses on equity securities were primarily caused by generally
        rising
        market rates during 2005. The market price of adjustable rate loans declines
        during periods of rising interest rates. There was one investment in an
        adjustable rate mortgage mutual fund that had a fair value of $12,549,000
        and an
        unrealized loss of $393,000 as of December 31, 2005. In addition, the Company
        holds an investment in a CRA mutual fund that had a fair market value of
        $2,933,000 and an unrealized loss of $67,000 as of December 31, 2005. Both
        mutual funds have been in an unrealized loss position for 12 consecutive
        months
        as of December 31, 2005. Due to the fact the Company has the ability and
        intent
        to hold this investment until a market price recovery, this investment is
        not considered other-than-temporarily impaired.
  **NOTE
                  3. Loans**Loans
                  at December 31 consisted of the following:(Dollars
                  in thousands)
              
              2005
              
              2004Commercial
              
              $
              274,312
              
              $
              217,524Agricultural
              
              
              72,792
              
              
              80,598Real
                  estate - mortgage
              
              
              471,266
              
              
              416,385Real
                  estate - construction
              
              
              167,992
              
              
              97,396Consumer
              
              
              82,534
              
              
              73,190Gross
                  loans
              
              
              1,068,896
              
              
              885,093Less
                  allowance for loan losses
              
              
              (14,776
              )
              
              (13,605
              )Net
                  loans
              
              $
              1,054,120
              
              $
              871,488


Loans
      are
      net of deferred loan fees of $3,183,000 and $2,446,000, as of December 31,
      2005
      and 2004. Consumer loans are net of deferred loan costs of $874,000 and $401,000
      as of December 31, 2005 and 2004.




Nonaccrual
      loans totaled $1,692,000 and $4,394,000 at December 31, 2005 and 2004. Foregone
      interest on nonaccrual loans was approximately $63,000, $4,000, and $39,000
      for
      the years ended December 31, 2005, 2004 and 2003.




Impaired
      loans are loans which, based on current information and events, management
      believes it is probable that the Bank will be unable to collect all amounts
      due
      according to the contractual terms of the loan agreement. At December 31, 2005
      and 2004, the recorded investment in impaired loans was $1,692,000 and
      $4,394,000 which had a related allowance for loan losses of $254,000 and
      $704,000 in 2005 and 2004. As of December 31, 2005 and 2004, there wereno
      impaired loans without a related allowance for loan lossassigned
      to them. The average outstanding balance of impaired loans for the years ended
      December 31, 2005, 2004 and 2003 was $2,236,000, $4,206,000, and $2,328,000
      on
      which $88,000, $216,000, and $231,000 was recognized as interest income on
      a
      cash basis.




At
      December 31, 2005 and 2004, the collateral value method was used to measure
      impairment for all loans classified as impaired. The following table shows
      the
      recorded investment in impaired loans by loan category at December
      31:




(Dollars
                in thousands)
            
            2005
            
            2004Commercial
            
            $
            1,684
            
            $
            3,966Agricultural
            
            
            8
            
            
            382Consumer
                and other
            
            
            -
            
            
            46$
            1,692
            
            $
            4,394




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The
        following is a summary of changes in the allowance for loan losses during
        the
        years ended December 31:
  (Dollars
                  in thousands)
              
              2005
              
              2004
              
              2003Balance
                  at beginning of year
              
              $
              13,605
              
              $
              12,524
              
              $
              11,680Loans
                  charged-off
              
              
              (1,982
              )
              
              (2,296
              )
              
              (1,995
              )Recoveries
                  of loans previously charged-off
              
              
              1,102
              
              
              646
              
              
              669Provision
                  for loan losses
              
              
              2,051
              
              
              2,731
              
              
              2,170Balance
                  at end of year
              
              $
              14,776
              
              $
              13,605
              
              $
              12,524
  The
        following is a summary of changes in the reserve for unfunded loan commitments
        during the years ended December 31:
  (Dollars
                  in thousands)
              
              2005
              
              2004
              
              2003Balance
                  at beginning of year
              
              $
              679
              
              $
              739
              
              $
              454Change
                  in reserve
              
              
              38
              
              
              (60
              )
              
              285Balance
                  at end of year
              
              $
              717
              
              $
              679
              
              $
              739
  In
        the
        ordinary course of business, the Company, through its subsidiaries, has made
        loans to certain directors and officers and their related businesses. In
        management's opinion, these loans are granted on substantially the same terms,
        including interest rates and collateral, as those prevailing on comparable
        transactions with unrelated parties, and do not involve more than the normal
        risk of collectibility.


Activity
      in loans to, or guaranteed by, directors and executive officers and their
      related businesses at December 31, are summarized as follows:




(Dollars
                in thousands)
            
            2005
            
            2004Balance
                at beginning of year
            
            $
            2,133
            
            $
            2,452Loan
                advances and renewals
            
            
            1,102
            
            
            190Loans
                matured or collected
            
            
            (746
            )
            
            (509
            )Balance
                at end of year
            
            $
            2,489
            
            $
            2,133




**NOTE
      4. Premises and Equipment**




Premises
      and equipment consisted of the following at December 31:




(Dollars
                in thousands)
            
            2005
            
            2004Land
            
            $
            3,506
            
            $
            3,104Buildings
            
            
            17,181
            
            
            16,701Leasehold
                improvements
            
            
            3,016
            
            
            2,827Furniture
                and equipment
            
            
            15,837
            
            
            14,042Construction
                in progress
            
            
            6,198
            
            
            2,268Subtotal
            
            $
            45,738
            
            $
            38,942Less
                accumulated depreciation and amortization
            
            
            16,768
            
            
            16,516Premises
                and equipment, net
            
            $
            28,970
            
            $
            22,426




Depreciation
      expense totaled $2,411,000, $1,717,000, and $1,661,000 in 2005, 2004, and 2003.
      Interest is capitalized during the branch office construction period totaled
      $6,000 and $0 in 2005 and 2004. Capitalized lease payments during the branch
      office construction period totaled $45,000 and $0 in 2005 and 2004.




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**NOTE
      5. Other Borrowings**




The
      following is a summary of selected information for other borrowings. These
      borrowings generally mature in less than one year:




As
                of December 31,(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003Amount
            
            Interest
                Rate(s)
            
            Amount
            
            Interest
                Rate(s)
            
            Amount
            
            Interest
                Rate(s)Treasury
                Tax Loan(1)
            
            $
            5,474
            
            
            4.00
            %
            $
            5,853
            
            
            1.87
            %
            $
            6,467
            
            
            .98
            %FHLB
                advances
            
            
            36,885
            
            
            2.00-5.05
            %
            
            59,900
            
            
            2.18-6.83
            %
            
            18,175
            
            
            1.0-5.09
            %Total
                short term borrowings
            
            $
            42,359
            
            
            
            
            $
            65,753
            
            
            
            
            $
            24,642


(1)
      The
      Treasury tax loan is a variable rate product that reprices weekly based on
      the
      Federal Funds rate. The account is payable on a daily basis.




The
      Company maintains a secured line of credit with the Federal Home Loan Bank
      of
      San Francisco (FHLB). Based on the FHLB stock requirements at December 31,
      2005,
      this line provided for maximum borrowings of $160,583,000 of which $93,384,000
      was outstanding. At December 31, 2005 this borrowing line was collateralized
      by
      securities with a market value of $169,034,000. At December 31, 2004, the line
      of credit was collateralized by securities with a market value of
      $163,956,000 **** of
      which
      $155,326,000 was outstanding. At December 31, 2004 this borrowing line is
      collateralized by securities with a market value of $172,585,000. The Company
      had additional secured, unused lines of credit of $29,301,000 and unsecured
      unused lines of credit of $70,800,000 at December 31, 2005. This compares with
      secured, unused lines of credit of $9,876,000 and unsecured unused lines of
      credit of $44,000,000 as of December 31, 2004.  As
      part
      of this agreement, the Bank has borrowed $100,000,000 that is fully secured
      by
      $100,000,000 in investment securities that serve as collateral for the debt
      obligation.




In
        December 2005, the Bank entered into a repurchase agreement for $100,000,000.
        This agreement has a maturity date of December 15, 2010. The Bank pays the
        3
        month LlBOR rate plus 0.295%, reset quarterly, on this repurchase agreement
        for
        five years, with an embedded floor that drives down funding cost further
        if the
        3 month LlBOR falls below 4%, with the minimum funding cost at 0%. The formula
        for the quarterly reset is as follows: [3 Month LIBOR + 0.295%]- the larger
        of
        0% or 4.00% - 3 Month LIBOR. The repurchase agreement has an embedded derivative
        that does not qualify as a separate derivative as defined by SFAS No. 133
        and
        SFAS No. 149. The
        Financial Accounting Standards Board ("FASB") is considering adding repurchase
        agreement accounting to its agenda of new projects. If this were to occur,
        the
        FASB may provide additional guidance related to the accounting for repurchase
        agreements in the future.


The
      following is a summary of selected information for long-term borrowings. These
      borrowings generally mature in greater than one year.




(Dollars
                in thousands)
            
            
            
            
            
            2005
            
            2004
            
            2003Weighted
                Average Interest Rate(s)
            
            Maturity
                Dates
            
            Amount
            
            Amount
            
            AmountMortgage
                note
            
            
            7.80
            %
            
            2007
            
            $
            2,869
            
            $
            2,940
            
            $
            3,004FHLB
                advances
            
            
            3.73
            %
            
            2007-2011
            
            
            56,500
            
            
            95,426
            
            
            65,171Repurchase
                agreement
            
            
            4.79
            %
            
            2010
            
            
            100,000
            
            
            -
            
            
            -Total
                long term borrowings
            
            
            
            
            
            
            
            $
            159,369
            
            $
            98,366
            
            $
            68,175




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Interest
        expense related to FHLB borrowings totaled $4,447,000, $4,368,000, and
        $4,069,000 in 2005, 2004, and 2003. Interest expense related to the mortgage
        note totaled $230,000, $236,000, and $240,000 in 2005, 2004, and 2003. This
        long
        term note is secured by Company land and buildings. Interest expense on federal
        funds purchased was $438,000, $21,000, and $11,000 in 2005, 2004, and 2003.
        Compensating balance arrangements are not significant to the operations of
        the
        Company.


Principal
      payments required to service the Company's borrowings during the next five
      years
      and thereafter are:




(Dollars
                in thousands)2006
            
            $
            42,3592007
            
            
            29,3692008
            
            
            -2009
            
            
            10,0002010
            
            
            100,000Thereafter
            
            
            20,000Total
                borrowed funds
            
            $
            201,728




**NOTE
      6. Junior Subordinated Debentures**




At
      December 31, 2005 the Company had 2 wholly-owned trusts (“Trusts”) that were
      formed to issue trust preferred securities and related common securities of
      the
      Trusts. As a result of adoption of FASB Interpretation Number 46R, the Company
      deconsolidated the Trusts as of and for the years ended December 31, 2005 and
      2004. There was $16,496,000 of junior subordinated debentures issued and
      outstanding as of December 31, 2005 and 2004. The junior subordinated debentures
      were reflected as long-term debt in the consolidated balance sheets at December
      31, 2005 and 2004.




County
      Statutory Trust I and County Statutory Trust II are Connecticut statutory
      trusts, which were formed for the purpose of issuing County Statutory Trust
      I
      Capital Securities and County Statutory Trust II Capital Securities (“Trust
      Preferred Securities”). The Trust Preferred Securities are described below.
      Interest on the Trust Preferred Securities is payable semi-annually on the
      10.20% issue and quarterly on the Statutory Trust II issue and is deferrable,
      at
      the option of the Company for up to five years for both issues. Following the
      issuance of the Trust Preferred Securities, the Trust used the proceeds from
      the
      Trust Preferred Securities offering to purchase a like amount of Junior
      Subordinated Debt Securities (the Debt Securities) of the Company. The debt
      securities bear the same terms and interest rates as the related Trust Preferred
      Securities. The debt securities are the sole assets of the Trust. The Company
      has fully and unconditionally guaranteed all of the obligations of the
      Trust.




County
      Statutory Trust I issued $6,000,000 in Trust Preferred Securities on February
      22, 2001. These securities pay interest at the rate of 10.20% and have a stated
      maturity date of February 22, 2031. They also have an optional redemption date
      of February 22, 2021. County Statutory Trust II issued $10,000,000 in Trust
      Preferred Securities on December 17, 2003. These securities pay interest at
      a
      variable rate of interest that was 7.32% at December 31, 2005, and have a stated
      maturity date of December 17, 2033. They have an optional redemption date of
      December 17, 2008. The interest rate on this issue is indexed to the average
      quarterly prime rate plus 0.07%, for the first five years, then after the
      optional redemption date of December 17, 2008, the rate will be indexed to
      the
      then-current 3 month LIBOR rate plus 2.85%.




The
      debentures issued, less the common securities of the Trusts, qualify as Tier
      1
      capital under the interim guidance issued by the Board of Governors of the
      Federal Reserve System (Federal Reserve Board).




The
      Trust
      Preferred Securities are mandatorily redeemable, in whole or in part, upon
      repayment of their underlying Debt Securities at their respective stated
      maturities or their earlier redemption. The Debt Securities are redeemable
      prior
      to maturity at the option of the Company on or after their respective optional
      redemption dates.




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**NOTE
      7. Income Taxes**




The
      provision for income taxes for the years ended December 31 is comprised of
      the
      following:




(Dollars
                in thousands)
            
            Federal
            
            State
            
            Total**2005**Current
            
            $
            7,594
            
            $
            2,961
            
            $
            10,555Deferred
            
            
            (548
            )
            
            (45
            )
            
            (593
            )$
            7,046
            
            $
            2,916
            
            $
            9,962**2004**Current
            
            $
            3,528
            
            $
            4,174
            
            $
            7,702Deferred
            
            
            (256
            )
            
            (296
            )
            
            (552
            )$
            3,272
            
            $
            3,878
            
            $
            7,150**2003**Current
            
            $
            4,906
            
            $
            1,533
            
            $
            6,439Deferred
            
            
            (767
            )
            
            (815
            )
            
            (1,582
            )$
            4,139
            
            $
            718
            
            $
            4,857




In
      April
      2004, the Company amended 2001 and 2002 state income tax returns and paid
      $2,411,000 in state income taxes as part of the State of California’s Voluntary
      Compliance Initiative. The payment was related to the tax treatment of consent
      dividends received by the Bank from the Bank’s REIT subsidiaries. The Company
      has maintained the right to file income tax refunds related to these payments,
      but has recorded the payments as a state income tax expense.




The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at December 31 consists of
      the
      following:




(Dollars
                in thousands)
            
            2005
            
            2004**Deferred
                tax assets:**Allowance
                for loan losses
            
            $
            6,514
            
            $
            6,006Investment
                securities unrealized loss
            
            
            1,895
            
            
            0Other
                than temporary impairment of equity securities
            
            
            1,560
            
            
            1,560Deferred
                compensation
            
            
            1,634
            
            
            1,512Intangible
                amortization
            
            
            802
            
            
            904Nonaccrual
                interest
            
            
            43
            
            
            83Academy
                bond tax credits
            
            
            55
            
            
            -Other
            
            
            1,141
            
            
            723Total
                gross deferred tax assets
            
            
            13,644
            
            
            10,788Less
                valuation allowance
            
            
            (424
            )
            
            (424
            )Deferred
                tax assets
            
            
            13,220
            
            
            10,364**Deferred
                tax liabilities:**Investment
                in partnerships
            
            
            706
            
            
            657FHLB
                stock dividends
            
            
            371
            
            
            292Capitalization
                of loan costs and prepaid assets
            
            
            657
            
            
            531Investment
                securities unrealized gain
            
            
            -
            
            
            217Fixed
                assets
            
            
            244
            
            
            140Insurance
                accrual
            
            
            57
            
            
            53Other
            
            
            134
            
            
            128Total
                gross deferred tax liabilities
            
            
            2,169
            
            
            2,018Net
                deferred tax assets
            
            $
            11,051
            
            $
            8,346




In
      assessing the Company’s ability to realize the tax benefits of deferred tax
      assets, management considers whether it is more likely than not that some
      portion or all of the deferred tax assets will be realized. The ultimate
      realization of deferred tax assets is dependent upon the generation of future
      taxable income during the periods in which those temporary differences become
      deductible. Management considers the scheduled reversal of deferred tax
      liabilities, projected future taxable income, and tax planning strategies in
      making this assessment. Based upon the level of historical taxable income and
      projections for future taxable income over the periods which the deferred tax
      assets are deductible, management believes it is more likely than not the
      Company will realize the benefits of these deductible differences, net of the
      existing valuation allowances at December 31, 2005 and 2004.




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During
      2004, the Company increased the tax valuation allowance by $404,000 to a total
      valuation allowance of $424,000 at December 31, 2004. The increase was related
      to management’s assessment of the ultimate collectibility of tax benefits
      related to the book deduction for other than temporary impairment of equity
      securities. In order to realize the tax benefits related to any capital losses
      when recognized for tax purposes, the Company would need to generate offsetting
      capital gains within six years beginning with the year of any recognized loss.
      After an evaluation by management of the potential sources of future capital
      gains from the recorded assets at December 31, 2004, it was management’s
      conclusion that the deferred tax asset related to the other than temporary
      impairment of equity securities may not be entirely realized. Therefore, a
      tax
      valuation allowance was established to the extent that management believed
      it
      was more likely than not that the asset would not be realized. The realizability
      of this deferred tax asset was also reviewed at December 31, 2005, at which
      time
      management concluded no additional allowance was required.




A
      reconciliation of income tax at the federal statutory rate to the provision
      for
      income taxes follows:




(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003Statutory
                federal income tax rate due, computed at an effective tax rate of
                35% in
                2005, 2004, and 2003
            
            $
            10,821
            
            $
            6,815
            
            $
            6,474State
                franchise tax, at statutory rate, net of federal income tax
                benefit
            
            
            1,895
            
            
            2,521
            
            
            467Tax
                exempt interest income, net
            
            
            (1,116
            )
            
            (726
            )
            
            (442
            )Housing
                tax credits
            
            
            (980
            )
            
            (1,028
            )
            
            (975
            )Death
                benefit from bank owned life insurance
            
            
            (188
            )
            
            -
            
            
            -Dividends
                received deduction
            
            
            (124
            )
            
            (112
            )
            
            (134
            )Increase
                in tax valuation allowance
            
            
            -
            
            
            404
            
            
            -Cash
                surrender value life insurance
            
            
            (364
            )
            
            (367
            )
            
            (314
            )Other
            
            
            18
            
            
            (357
            )
            
            (219
            )Provision
                for income taxes
            
            $
            9,962
            
            $
            7,150
            
            $
            4,857




As
      of
      December 31, 2005, the anticipated 2005 tax refund related to federal and state
      income taxes was $870,000.




**NOTE
      8. Regulatory Matters**




The
      Company is subject to various regulatory capital requirements administered
      by
      federal banking agencies. Failure to meet minimum capital requirements can
      initiate mandatory and possibly, additional discretionary actions by regulators
      that, if undertaken, could have a direct material 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.




Management
      believes, as of December 31, 2005 that the Company and the Bank met all capital
      adequacy requirements to which they are subject, including the ratio test for
      a
      well capitalized bank under the regulatory framework for prompt corrective
      action. The most recent notification from the FRB categorized the Company and
      the Bank as well capitalized under the FDICIA regulatory framework for prompt
      corrective action. Subsequent to this notification, there are no conditions
      or
      events that management believes have changed the risk based capital category
      of
      the Company and the Bank.




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On
      December 15, 2005 the Federal Reserve Bank of San Francisco (“FRBSF”) terminated
      the written agreement (the “Agreement”) which was entered into with the Company
      on October 26, 2004. Under the Agreement, the Bank, among other actions taken,
      (i) developed a written program designed to improve the Bank's system of
      internal controls to ensure compliance with applicable provisions of the Bank
      Secrecy Act; (ii) developed an enhanced written customer due diligence program
      designed to reasonably ensure the identification and reporting of all known
      or
      suspected violations of law and suspicious transactions against or involving
      the
      Bank; (iii) established enhanced written policies and procedures designed to
      strengthen the Bank's internal controls and audit programs, and (iv) submitted
      quarterly progress reports to the FRBSF detailing actions taken to secure
      compliance with the Agreement.




The
      Company has a formal dividend policy, and dividends are issued solely at the
      discretion of the Company’s Board of Directors subject to compliance with
      regulatory requirements. In order to pay any cash dividends, the Company must
      receive payments of dividends or management fees from the Bank. There are
      certain regulatory limitations on the payment of cash dividends by
      banks.




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 capital ratios as of December
      31, 2005 are as follows:




(Dollars
                in thousands)
            
            Actual
            
            For
                Capital Adequacy Purposes
            
            To
                Be Well Capitalized Under Prompt Corrective Action
                Provisions**The
                Company:**
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioTotal
                capital (to risk weighted assets)
            
            $
            154,592
            
            
            11.13
            %
            $
            111,151
            
            
            8
            %
            $
            138,939
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            139,099
            
            
            10.01
            %
            $
            55,576
            
            
            4
            %
            $
            83,364
            
            
            6
            %Leverage
                ratio(1)
            
            $
            139,099
            
            
            8.57
            %
            $
            64,960
            
            
            4
            %
            $
            81,200
            
            
            5
            %**The
                Bank:**Total
                capital (to risk weighted assets)
            
            $
            141,945
            
            
            10.24
            %
            $
            110,868
            
            
            8
            %
            $
            138,585
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            126,452
            
            
            9.12
            %
            $
            55,434
            
            
            4
            %
            $
            83,151
            
            
            6
            %Leverage
                ratio(1)
            
            $
            126,452
            
            
            7.80
            %
            $
            64,830
            
            
            4
            %
            $
            81,038
            
            
            5
            %


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




The
      Company's and Bank's actual capital amounts and ratios as of December 31, 2004
      are as follows:




(Dollars
                in thousands)
            
            Actual
            
            For
                Capital Adequacy Purposes
            
            To
                Be Well Capitalized Under Prompt Corrective Action
                Provisions**The
                Company:**
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioTotal
                capital (to risk weighted assets)
            
            $
            131,743
            
            
            11.55
            %
            $
            91,287
            
            
            8
            %
            $
            114,108
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            117,479
            
            
            10.30
            %
            $
            45,643
            
            
            4
            %
            $
            68,465
            
            
            6
            %Leverage
                ratio(1)
            
            $
            117,479
            
            
            8.46
            %
            $
            55,574
            
            
            4
            %
            $
            69,467
            
            
            5
            %**The
                Bank:**Total
                capital (to risk weighted assets)
            
            $
            119,253
            
            
            10.47
            %
            $
            91,081
            
            
            8
            %
            $
            113,851
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            105,021
            
            
            9.22
            %
            $
            45,541
            
            
            4
            %
            $
            68,311
            
            
            6
            %Leverage
                ratio(1)
            
            $
            105,021
            
            
            7.58
            %
            $
            55,440
            
            
            4
            %
            $
            69,300
            
            
            5
            %


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




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**NOTE
      9. Commitments and Financial Instruments With Off-Balance Sheet Credit
      Risk**




At
      December 31, 2005, the Company has operating lease rental commitments for
      remaining terms of one to **** twenty **** years.
      The Company has options to renew four of its leases for periods of 10 through
      20
      years. The minimum future commitments under non-cancelable lease agreements
      having terms in excess of one year at December 31, 2005 are as
      follows:




(Dollars
                in thousands)2006
            
            $
            1,8252007
            
            
            1,6742008
            
            
            1,5582009
            
            
            1,4462010
            
            
            1,289Thereafter
            
            
            6,765Total
                minimum lease payments
            
            $
            14,557




Rent
      expense was approximately $1,649,000, $1,226,000, and $986,000, for the years
      ended December 31, 2005, 2004, and 2003.




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 December 31,(Dollars
                in thousands)
            
            2005
            
            2004Commitments
                to extend credit
            
            $
            495,313
            
            $
            393,039Standby
                letters of credit
            
            $
            15,160
            
            $
            13,875




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.
      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.




The
      Company, because of the nature of its business, is subject to various threatened
      or filed legal cases. The Company, based on the advice of legal counsel, does
      not expect that the resolution of such cases will have a material, adverse
      effect on its financial position or results of operations.




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**NOTE
      10. Time Deposits**




At
      December 31, 2005 the aggregate maturities for customer time deposits are as
      follows:




(Dollars
                in thousands)2006
            
            $
            296,7892007
            
            
            113,1552008
            
            
            6,9632009
            
            
            28,7052010
            
            
            3,745Thereafter
            
            
            1,684Total
                time deposits
            
            $
            451,041




**NOTE.
      11. Employee and Director Benefit Plans**




The
      Company has a noncontributory employee stock ownership plan ("ESOP") and an
      employee savings plan covering substantially all employees. During 2005, 2004,
      and 2003, the Company contributed approximately $649,000, $580,000, and $541,000
      to the ESOP and $260,000, $226,000, and $193,000 to the employee savings
      plan.




Under
      provisions of the ESOP, the Company can make discretionary contributions to
      be
      allocated based on eligible individual annual compensation, as approved by
      the
      Board of Directors. Contributions to the ESOP are recognized as compensation
      expense. For the years ended December 31, 2005, 2004, and 2003, the ESOP owned
      383,315, 213,607, and 206,980 shares of the Company’s stock. ESOP shares are
      included in the weighted average number of shares outstanding for earnings
      per
      share computations.




The
      employee savings plan allowed participating employees to contribute up to
      $14,000 each in 2005. Eligible employees above the age of 50 have the ability
      to
      contribute an additional $4,000 in catch up contributions in 2005. The Company
      matched 25% of the employees’ elective contribution, as defined, not to exceed
      10% of eligible annual compensation. The expense relating to the 25% match
      was
      $314,000, $225,000 and $193,000 in 2005, 2004 and 2003.




The
      Company maintains a non-qualified salary continuation plan for certain senior
      executive officers of the Company and the Bank. Under the plan, the Company
      has
      agreed to pay these executives retirement benefits for a ten to fifteen year
      period after their retirement so long as they meet certain length of service
      vesting requirements. The plan is informally linked to several single premium
      universal life insurance policies that provide life insurance on certain senior
      executive officers with the Company named as the owner and beneficiary of these
      policies. The Bank has a Rabbi trust and specific life insurance contracts
      have
      been irrevocably assigned to the trust in support of the salary continuation
      plans. Salary continuation expense totaled $339,000, $484,000, and
      $669,000 **,** in 2005,
      2004, and 2003. Total liabilities carried by the Company for salary continuation
      totaled $3,287,000, $3,067,000, and $2,499,000 in 2005, 2004, and 2003
      respectively.




The
      Company also maintains a
      non-qualified Director Elective Income Deferral Agreement plan for members
      of
      the board of directors of the Company and the Bank. Under the present deferred
      compensation plan, members of the board of directors have the ability to defer
      compensation they receive as directors until a future date elected by the
      director. The director then also elects either to be paid in a lump sum or
      annuity starting at the date elected by the director. The plan is informally
      linked to several single premium universal life insurance policies that provide
      life insurance on certain directors with the Company named as the owner and
      beneficiary of these policies. The Bank has a Rabbi trust and life insurance
      contracts have been irrevocably assigned to the trust in support of the deferred
      compensation plans. Deferred compensation expense totaled $88,000, $97,000,
      and
      $64,000 in 2005, 2004, and 2003. Total liabilities carried by the Company for
      Director Elective Income Deferral totaled $598,000, $543,000, and $446,000
      in
      2005, 2004, and 2003 respectively.




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**NOTE
      12. Stock Option Plan**




In
      1992,
      shareholders approved the adoption of an incentive stock option plan for bank
      management and a non-statutory stock option plan for directors. In 2002,
      shareholders approved the adoption of a new incentive stock option plan for
      bank
      management and a new non-statutory stock option plan for directors. The maximum
      number of shares issuable under the plans was 126,000 and was amended by the
      shareholders in 1995 and 2001 to 450,000 and 675,000 options available for
      grant. Options are available for grant under the plans at prices that
      approximate fair market value of the stock at the date of grant. Options granted
      under both plans become exercisable 25% at the time of grant and 25% each year
      thereafter and expire 10 years from the date of grant. At the November meeting,
      the Board of Directors approved the accelerated vesting of all outstanding
      stock
      options. The Board of Directors performed this action to mitigate the effect
      of
      the adoption of Financial Accounting Statement 123R, which goes into effect
      January 1, 2006, which will require the Company to record compensation expense
      as stock options vest in 2006 and beyond. During 2005, the Company recorded
      equity compensation expense related to this board action of $150,000 to reflect
      management’s estimate of additional equity compensation expense incurred that
      relates to the forfeiture of stock options that occurs when management or
      members of the board of directors leave the Company.




A
      summary
      of the status of the Company’s stock options as of and for the years ended
      December 31, 2005, 2004, and 2003 and changes during the years ended on those
      dates, follows:




2005
            
            2004
            
            2003Number
                of shares
            
            Weighted
                average exercise price
            
            Number
                of shares
            
            Weighted
                average exercise price
            
            Number
                of shares
            
            Weighted
                average exercise priceOutstanding
                at beginning of year
            
            
            672,038
            
            
            12.22
            
            
            699,940
            
            
            8.15
            
            
            681,766
            
            
            6.52Granted
            
            
            253,498
            
            
            28.91
            
            
            191,697
            
            
            21.57
            
            
            143,685
            
            
            14.67Exercised
            
            
            (134,191
            )
            
            12.24
            
            
            (208,913
            )
            
            7.05
            
            
            (114,149
            )
            
            6.52Forfeited
            
            
            (37,864
            )
            
            19.73
            
            
            (10,686
            )
            
            14.00
            
            
            (11,362
            )
            
            9.12Outstanding
                at end of year
            
            
            753,481
            
            
            17.46
            
            
            672,038
            
            
            12.22
            
            
            699,940
            
            
            8.15Options
                exercisable at end of year
            
            
            706,981
            
            
            16.49
            
            
            430,656
            
            
            8.99
            
            
            485,782
            
            
            6.63







The
                following table summarizes information about options outstanding
                at
                December 31, 2005:Options
                outstanding
            
            Options
                exercisableRange
                of exercise prices
            
            Number
                of shares outstanding
            
            Weighted
                remaining contractual life
            
            Weighted
                average exercise price
            
            Number
                exercisable
            
            Weighted
                average exercise price$
            3
                - 8
            
            
            225,284
            
            
            4.31
            
            
            Years
            
            $
            5.84
            
            
            225,284
            
            $
            5.848
                - 13
            
            
            101,991
            
            
            6.56
            
            
            
            
            
            10.37
            
            
            101,991
            
            
            10.3713
                - 18
            
            
            19,385
            
            
            7.45
            
            
            
            
            
            14.92
            
            
            19,385
            
            
            14.9218
                - 23
            
            
            157,822
            
            
            8.08
            
            
            
            
            
            20.77
            
            
            157,822
            
            
            20.7723
                - 28
            
            
            131,999
            
            
            9.1
            
            
            
            
            
            26.02
            
            
            128,249
            
            
            26.0428
                - 35
            
            
            117,000
            
            
            9.84
            
            
            
            
            
            32.28
            
            
            74,250
            
            
            31.96$
            3
                - 35
            
            
            753,481
            
            
            7.18
            
            
            Years
            
            $
            17.46
            
            
            706,981
            
            $
            16.49




The
      number of shares and exercise price per share has been adjusted for stock
      dividends and stock splits. See Footnote 1 for additional information related
      to
      total compensation and effects on net income.




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**NOTE
      13. Fair Value of Financial Instruments**




The
      Company in estimating its fair value disclosures for financial instruments
      used
      the following methods and assumptions:




**Financial
      Assets:**




**Cash
      and cash equivalents:** For
      these assets, the carrying amount is a reasonable estimate for fair value.




**Investments:** Fair
      values for available for sale and held to maturity investment securities are
      based on quoted market prices where available. If quoted market prices were
      not
      available, fair values were based upon quoted market prices of comparable
      instruments.




**Net
      loans:** The fair
      value of loans is estimated by utilizing discounted future cash flow
      calculations using the interest rates currently being offered for similar loans
      to borrowers with similar credit risks and for the remaining or estimated
      maturities considering prepayments. The carrying value of loans is net of the
      allowance for loan losses and unearned loan fees.




**Bank
      Owned Life Insurance:** The
      carrying amount of this asset is a reasonable estimate of fair
      value.




**Interest
      Receivable:** The
      carrying amount of this asset is a reasonable estimate of fair
      value.




**Financial
      Liabilities:**




**Deposits:** The fair
      values disclosed for deposits generally paid upon demand (i.e.
      noninterest-bearing and interest-bearing demand) savings and money market
      accounts are considered equal to their respective carrying amounts as reported
      on the consolidated balance sheets. The fair value of fixed rate certificates
      of
      deposit is estimated using the rates currently offered for deposits of similar
      remaining maturities.




**Borrowings:** For
      these instruments, the fair value is estimated using rates currently available
      for similar loans with similar credit risk and for the remaining maturities.




**Commitments
      to extend credit and standby letters of credit:** The fair
      value of commitments to extend credit and standby letters of credit is estimated
      using the fees currently charged to enter into similar agreements, taking into
      account the remaining terms of the agreements and the present credit worthiness
      of the counter parties. For fixed rate loan commitments, fair value also
      considers the difference between current levels of interest rates and the
      committed rate. The fair value of letters of credit is based on fees currently
      charged for similar arrangements or on the estimated cost to terminate them
      or
      otherwise settle the obligation with the counter parties at the recording
      date.




Fair
      values for financial instruments are management’s estimates of the values at
      which the instruments could be exchanged in a transaction between a hypothetical
      willing and able buyer and a hypothetical willing and able seller, acting at
      arms length in an open and unrestricted market, when neither is under compulsion
      to buy or sell and when both have reasonable knowledge of the relevant facts.
      In
      addition, other significant assets are not considered financial assets
      including, any deferred tax assets and premises and equipment. Further, the
      tax
      ramifications related to the realization of the unrealized gains and losses
      can
      have a significant effect on the fair value estimates and have not been
      considered in any of these estimates.




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(Dollars
                in thousands)**2005**
            
            Carrying
                Amount
            
            Fair
                Value**Financial
                assets:**Cash
                and cash equivalents
            
            $
            61,331
            
            $
            61,331Federal
                funds sold
            
            
            30,250
            
            
            30,250Time
                deposits at other financial institutions
            
            
            350
            
            
            350Available
                for sale investment securities
            
            
            318,155
            
            
            318,155Held
                to maturity investment securities
            
            
            181,025
            
            
            178,233Interest
                receivable
            
            
            8,305
            
            
            8,305Bank
                owned life insurance
            
            
            31,796
            
            
            31,796Net
                loans
            
            
            1,054,120
            
            
            1,054,120Interest
                rate floor
            
            
            743
            
            
            743**Financial
                liabilities**Noninterest-bearing
                demand
            
            
            310,284
            
            
            310,284Negotiable
                orders of withdrawal
            
            
            216,594
            
            
            216,594Savings
            
            
            426,581
            
            
            426,581Time
                deposits
            
            
            451,041
            
            
            451,041Borrowings
            
            
            201,728
            
            
            201,369Subordinated
                debentures
            
            
            16,496
            
            
            20,138**Off-balance
                sheet:**Loan
                commitments
            
            $
            495,313
            
            $
            37,148Standby
                letters of credit
            
            
            15,160
            
            
            1,516





(Dollars
                in thousands)**2004**
            
            Carrying
                Amount
            
            Fair
                Value**Financial
                assets:**Cash
                and cash equivalents
            
            $
            40,454
            
            $
            40,454Federal
                funds sold
            
            
            17,365
            
            
            17,365Time
                deposits at other financial institutions
            
            
            3,350
            
            
            3,350Available
                for sale investment securities
            
            
            269,189
            
            
            269,189Held
                to maturity investment securities
            
            
            166,987
            
            
            168,265Interest
                receivable
            
            
            5,979
            
            
            5,979Bank
                owned life insurance
            
            
            28,362
            
            
            28,362Net
                loans
            
            
            871,488
            
            
            870,124**Financial
                liabilities**Noninterest-bearing
                demand
            
            
            262,315
            
            
            262,315Negotiable
                orders of withdrawal
            
            
            170,870
            
            
            170,870Savings
            
            
            360,319
            
            
            360,319Time
                deposits
            
            
            360,653
            
            
            360,653Borrowings
            
            
            164,119
            
            
            164,995Subordinated
                debentures
            
            
            16,496
            
            
            19,690**Off-balance
                sheet:**Loan
                commitments
            
            $
            393,039
            
            $
            2,948Standby
                letters of credit
            
            
            13,875
            
            
            1,388




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**NOTE
      14. Parent Company Only Financial Information**




This
      information should be read in conjunction with the other notes to the
      consolidated financial statements. The following are the condensed balance
      sheets of the Company as of December 31, 2005 and 2004 and the condensed
      statements of income and cash flows for the years ended December 31, 2005,
      2004,
      and 2003:




**Condensed
                balance sheets**
            
            December
                31,(Dollars
                in thousands)
            
            2005
            
            2004**Assets**Cash
                and short-term investments
            
            $
            9,555
            
            $
            10,397Investment
                in County Bank
            
            
            125,598
            
            
            107,023Net
                premises and equipment
            
            
            774
            
            
            765Other
                assets
            
            
            5,008
            
            
            3,695Total
                assets
            
            $
            140,935
            
            $
            121,880**Liabilities
                and shareholders’ equity****Liabilities**Subordinated
                debentures
            
            $
            16,496
            
            $
            16,496Capitalized
                lease
            
            
            640
            
            
            724Other
                liabilities
            
            
            1,554
            
            
            1,179Total
                liabilities
            
            
            18,690
            
            
            18,399**Total
                shareholders’ equity**
            
            
            122,245
            
            
            103,481Total
                liabilities and shareholders’ equity
            
            $
            140,935
            
            $
            121,880





**Condensed
                statements of income**
            
            Years
                Ended December 31,(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003**Income**Interest
            
            $
            245
            
            $
            107
            
            $
            10Management
                fees from subsidiaries
            
            
            15,091
            
            
            12,337
            
            
            8,717Other
                noninterest income
            
            
            82
            
            
            109
            
            
            45Total
                income
            
            
            15,418
            
            
            12,553
            
            
            8,772**Expenses**Interest
                on borrowings
            
            
            1,287
            
            
            1,088
            
            
            648Capitalized
                lease interest
            
            
            50
            
            
            72
            
            
            83Salaries
                and related benefits
            
            
            6,637
            
            
            5,506
            
            
            4,701Other
                noninterest expense
            
            
            8,373
            
            
            6,704
            
            
            4,091Total
                other expenses
            
            
            16,347
            
            
            13,370
            
            
            9,523Loss
                before income taxes and equity in undistributed earnings of
                subsidiaries
            
            
            (929
            )
            
            (817
            )
            
            (751
            )Income
                tax benefit
            
            
            356
            
            
            290
            
            
            290Equity
                in undistributed income of subsidiaries
            
            
            21,527
            
            
            12,850
            
            
            14,101Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640





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**Condensed
                statements of cashflows**
            
            Years
                Ended December 31,(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003**Operating
                activities:**Net
                income
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640**Adjustments
                to reconcile net income to net cash used in operating
                activities:**Depreciation
                of fixed assets
            
            
            423
            
            
            344
            
            
            337Equity
                in undistributed earnings of subsidiaries
            
            
            (21,527
            )
            
            (12,850
            )
            
            (14,101
            )Increase
                in other assets
            
            
            (1,313
            )
            
            (793
            )
            
            (704
            )Increase
                (decrease) in other liabilities
            
            
            375
            
            
            850
            
            
            (419
            )Net
                cash used in operating activities
            
            
            (1,088
            )
            
            (126
            )
            
            (1,247
            )**Investing
                activities:**Capital
                contribution to subsidiary bank
            
            
            -
            
            
            -
            
            
            (2,184
            )Sale
                of subsidiary plus additional capital contributions
            
            
            -
            
            
            609
            
            
            -Purchase
                of premises and equipment
            
            
            (430
            )
            
            (313
            )
            
            (263
            )Net
                cash (used in) provided by investing activities
            
            
            (430
            )
            
            296
            
            
            (2,447
            )**Financing
                activities:**Issuance
                of Junior Subordinated Debentures
            
            
            -
            
            
            -
            
            
            10,310Net
                (decrease) increase in other borrowings and capitalized
                lease
            
            
            (84
            )
            
            (362
            )
            
            765Issuance
                of common stock related to exercise of stock options and employee
                benefit
                plans
            
            
            2,646
            
            
            2,911
            
            
            969Cash
                dividends and fractional shares
            
            
            (1,886
            )
            
            (1,158
            )
            
            (16
            )Net
                cash provided by financing activities
            
            
            676
            
            
            1,391
            
            
            12,028(Decrease)
                increase in cash and cash equivalents
            
            
            (842
            )
            
            1,561
            
            
            8,334Cash
                and cash equivalents at beginning of year
            
            
            10,397
            
            
            8,836
            
            
            502Cash
                and cash equivalents at end of year
            
            $
            9,555
            
            $
            10,397
            
            $
            8,836





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**NOTE
      15. Quarterly Results of Operations (Unaudited)**




2005
                Quarter Ended(Dollars
                in thousands)
            
            Dec
                31
            
            Sept
                30
            
            June
                30
            
            Mar
                31Interest
                income
            
            $
            25,013
            
            $
            23,487
            
            $
            21,651
            
            $
            20,013Interest
                expense
            
            
            7,477
            
            
            6,520
            
            
            5,650
            
            
            5,073Net
                interest income
            
            
            17,536
            
            
            16,967
            
            
            16,001
            
            
            14,940Provision
                for loan losses
            
            
            695
            
            
            1,035
            
            
            101
            
            
            220Noninterest
                income
            
            
            2,527
            
            
            2,666
            
            
            2,340
            
            
            2,669Noninterest
                expenses
            
            
            11,369
            
            
            10,300
            
            
            10,702
            
            
            10,308Income
                before income taxes
            
            
            7,999
            
            
            8,298
            
            
            7,538
            
            
            7,081Income
                taxes
            
            
            2,612
            
            
            2,845
            
            
            2,412
            
            
            2,093Net
                income
            
            
            5,387
            
            
            5,453
            
            
            5,126
            
            
            4,988Basic
                earnings per share (1)
            
            $
            0.51
            
            $
            0.52
            
            $
            0.49
            
            $
            0.48Diluted
                earnings per share (1)
            
            $
            0.49
            
            $
            0.50
            
            $
            0.47
            
            $
            0.462004
                Quarter Ended(Dollars
                in thousands)
            
            
            Dec
                31
            
            
            Sept
                30
            
            
            June
                30
            
            
            Mar
                31Interest
                income
            
            $
            18,784
            
            $
            17,587
            
            $
            17,294
            
            $
            16,906Interest
                expense
            
            
            4,586
            
            
            4,256
            
            
            4,136
            
            
            4,119Net
                interest income
            
            
            14,198
            
            
            13,331
            
            
            13,158
            
            
            12,787Provision
                for loan losses
            
            
            548
            
            
            879
            
            
            689
            
            
            615Noninterest
                income
            
            
            (1,239
            )
            
            2,619
            
            
            2,591
            
            
            2,440Noninterest
                expenses
            
            
            9,984
            
            
            9,046
            
            
            9,320
            
            
            9,331Income
                before income taxes
            
            
            2,427
            
            
            6,025
            
            
            5,740
            
            
            5,281Income
                taxes
            
            
            1,611
            
            
            2,042
            
            
            1,860
            
            
            1,637Net
                income
            
            
            816
            
            
            3,983
            
            
            3,880
            
            
            3,644Basic
                earnings per share (1)
            
            $
            0.08
            
            $
            0.38
            
            $
            0.38
            
            $
            0.36Diluted
                earnings per share (1)
            
            $
            0.08
            
            $
            0.37
            
            $
            0.36
            
            $
            0.34


*(1)
      Basic and diluted earnings per share calculations are based upon the weighted
      average number of shares outstanding during each period. Full year weighted
      average shares differ from quarterly weighted average shares and, therefore,
      annual earnings per share may not equal the sum of the
      quarters.*




During
      the fourth quarter of 2004, the Company recorded two separate adjustments to
      earnings. The first was an other-than-temporary impairment charge $3,709,000
      related to unrealized losses on three agency preferred stocks. The second was
      a
      charge to income tax expense of $1,229,000 related to the write-off of tax
      benefits derived from the utilization of consent dividends declared by the
      Bank’s REIT. See Note 2 and Note 8 for additional disclosure information related
      to these two charges.






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**NOTE
      16. Derivatives**


During
        the third quarter of 2005, the Company purchased an interest rate floor contract
        from Wachovia Bank to be effective from October 1, 2005 until September 1,
        2010,
        at a price of $1,270,000 which will be amortized over the life of the contract.
        The notional amount of the floor is $100,000,000 with a strike rate of 6.5%
        vs.
        the Prime rate as published in the H15 bulletin from the Federal Reserve
        Bank
        for the first of each month. The interest rate floor provides the Company
        with
        partial protection against an interest rate downturn on loans that are indexed
        off the Prime rate through September 1, 2010. The floor is designated as
        a cash
        flow hedge. The Company assesses the effectiveness of the interest rate floor
        contract based on changes in the option’s intrinsic value. The change in the
        time value of the contract is excluded from the assessment of the hedge
        effectiveness and such planned ineffectiveness is recorded as a reduction
        in
        interest income. For the year ended December 31, 2005, the Company recognized
        a
        net reduction in interest income of $4,000.




The
      Company uses derivatives to manage exposure to interest rate risk. Derivative
      transactions are measured in terms of the notional amount, but this amount
      is
      not recorded on the balance sheet and is not, when viewed in isolation, a
      meaningful measure of the risk profile of the instruments. The notional amount
      is not exchanged, but is used only as the basis on which interest and other
      payments are determined.




For
      derivatives, the Company’s exposure to credit risk is measured by the current
      fair value of all derivatives in a gain position plus a prudent estimate of
      potential change in value over the life of the contract and generally takes
      into
      account legally enforceable risk mitigating agreements for each obligor such
      as
      netting and collateral.





The
      fair
      value and notional amounts for trading derivatives at December 31, 2005 are
      presented below.




December
                31, 2005(Dollars
                in thousands)
            
            Fair
                Value
            
            Notional
                AmountPurchased
                option, interest rate floor
            
            $
            743
            
            $
            100,000




Risk
      management derivative financial instruments represent financial instruments
      the
      Company has designated and accounted for as accounting hedges. Information
      related to these derivative financial instruments used for the Company’s
      interest rate risk management purposes at December 31, 2005,
      follows.




December
                  31, 2005Gross
                  Unrealized(Dollars
                  in thousands)
              
              Notional
                  Amount
              
              Gains
              
              Losses
              
              Fair
                  Value
              
              Maturity
                  in yearsAsset
                  Cash Flow HedgeInterest
                  rate option
              
              $
              100,000
              
              $
              -
              
              $
              524
              
              $
              743
              
              
              4.67


**NOTE
        17. Subsequent Events**
  In
        the
        first quarter of 2006 the Company purchased an asset based lending portfolio
        from Heritage Bank of Commerce for approximately $30,015,000. The loans were
        purchased from Heritage Bank at the note amount. There was no discount or
        premium paid related to these loans. As part of the transaction several
        employees from Heritage Bank of Commerce have joined County Bank. These
        employees are responsible for the management and expansion of the segment.
  -88-