**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, 2006





** ̈**  **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:





Title
                of each class:
            Name
                of each exchange on which registered:Common
                Stock, no par value
            NasdaqPreferred
                Share Purchase Rights
            Nasdaq




Securities
            registered under Section 12(g) of the Act (Title of Class):
  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. Yesþ
            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. þ
  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 non-affiliates of the Registrant
            was
            $286,791,936.00 (based on the $3 2.00
            closing price per common share on June 30, 2006).
 
 The
            number of shares outstanding of the Registrant's common stock, no par
            value, as
            of February 1, 2007 was 10,776,744.
 
 Documents
            incorporated by reference:
 Portions
            of the definitive proxy statement for the 2007 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.


**Capital
      Corp of the West**


Table
      of
      Contents


Page
              Reference


**PART
      I**


ITEM
                1.
            BUSINESS
            3ITEM
                1A.
            RISK
                FACTORS
            21ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS
            23ITEM
                2.
            PROPERTIES
            24ITEM
                3.
            LEGAL
                PROCEEDINGS
            24ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            24


**PART
      II**


ITEM
                5.
            MARKET
                FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
                MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
            25ITEM
                6.
            SELECTED
                FINANCIAL DATA
            27


ITEM
                7.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS
            28ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            52ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            52


ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE
            84ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            84ITEM
                9B.
            OTHER
                INFORMATION
            85


**PART
      III**


ITEM****10.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE
                GOVERNANCE
            86
            Proxy
                Statement for 2007 Annual MeetingITEM
                11.
            EXECUTIVE
                COMPENSATION
            86
            Proxy
                Statement for 2007 Annual MeetingITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENTAND RELATED STOCKHOLDER MATTERS
            86
            Proxy
                Statement for 2007 Annual MeetingITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS AND
                DIRECTOR INDEPENDENCE
            86
            Proxy
                Statement for 2007 Annual MeetingITEM
                14.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            87
            Proxy
                Statement for 2007 Annual Meeting


**PART
      IV**


ITEM
                15.
            EXHIBITS,
                FINANCIAL STATEMENT
                SCHEDULES
            87SIGNATURES
            
            88EXHIBIT
                INDEX
            
            E-1





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          of Contents


**PART
      I**





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





**Forward-Looking
      Statements**





This
      Annual Report on Form 10-K includes forward-looking statements and
      information is subject to the “safe harbor” provisions of Section 27A of the
      Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
      In addition to historical information, this Annual Report on Form 10-K
      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 on Form 10-K should not rely solely on forward
      looking statements and should consider all uncertainties and risks throughout
      this report, including but not limited to those discussed under
      ITEM 1A. - RISK FACTORS and ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS-“Critical Accounting Policies and
      Estimates” .
      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 decisions
      to
      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 loan loss provision expense can be affected by local, regional
      and international economic and market conditions; concentrations of borrowers;
      industries; products and geographical conditions; the mix of the loan portfolio;
      and management’s judgments regarding the collectibility of loans. Liquidity
      requirements may change as a result of fluctuations in assets and liabilities
      and off-balance sheet exposures, which will impact the capital and debt
      financing needs of the Company and the mix of funding sources. Decisions to
      purchase, hold, or sell securities are also dependent on liquidity requirements
      and market volatility, as well as on- and off-balance sheet positions. Factors
      that may impact interest rate risk include local, regional and international
      economic conditions, levels, mix, maturities, yields or rates of assets and
      liabilities and the wholesale and retail funding sources of the Company. The
      Company is also exposed to the potential of losses arising from adverse changes
      in market rates and prices which can adversely impact the value of financial
      products, including securities, loans, and deposits. In addition, the banking
      industry in general is subject to various monetary and fiscal policies and
      regulations, which include those determined by the Federal Reserve Board
      (“FRB”), 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
      regulation on internal control; and management’s ability to manage these and
      other risks.


-3-
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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. The Company at December
      31, 2006 has total assets of $1.96 billion and total shareholders’ equity of
      $147.6 million. On November 1, 1995, the Company became registered as a bank
      holding company and is the holder of all of the capital stock of County Bank
      (the “Bank”). The Company's primary asset is the Bank **** and
      the
      Bank is the Company's primary source of income. As of February 1, 2007, the
      Company had outstanding 10,776,744 shares of Common Stock, no par value, held
      by
      approximately 1,700 shareholders. There were no preferred shares outstanding
      at
      February 1, 2007. The Company has one wholly-owned inactive non-bank subsidiary,
      Capital West Group (“CWG”). The Bank has three wholly-owned subsidiaries, Merced
      Area Investment & Development, Inc. (“MAID”) a real estate company, County
      Asset Advisors (“CAA”) and County Investment Trust (“REIT”), which was
      liquidated in 2006. CAA and REIT are currently inactive, and MAID has limited
      operations serving as the owner of certain bank properties. All references
      herein to the Company includes all subsidiaries of the Company, the Bank and
      the
      Bank's subsidiaries, unless the context otherwise requires. The Company is
      also
      the parent of County Statutory Trust I, County Statutory Trust II, and County
      Statutory Trust III, which are all trust subsidiaries established to facilitate
      the issuance of trust preferred securities.





***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 and a member of
      the
      Federal Home Loan Bank.





Industry
      & Market Area





The
      Bank
      engages in general commercial banking business primarily in Fresno, Madera,
      Mariposa, Merced, Sacramento, San Francisco, San Joaquin, Stanislaus, Santa
      Clara, Tuolomne counties, and nearby communities. The Bank has twenty-six 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. The Bank’s administrative headquarters also
      provides accommodations for the activities of MAID, the Bank's wholly-owned
      real
      estate subsidiary. For further information on branch operations see Item 2.
      -
      Properties.





Competition





The
      Company's primary market area consists of Fresno, Madera, Mariposa, Merced,
      Sacramento, San Francisco, San Joaquin, Stanislaus, Santa Clara, 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 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
      competitors for deposits and loans have been other banks (particularly 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 institutions and to foster new entrants into the financial services
      market, and it is anticipated that this trend will continue.


-4-
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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 participation 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.


As
      reported by the FDIC as of June 30, 2006, the Bank had the following market
      share of total deposits held by FDIC insured depository institutions in the
      indicated counties of California:





County
            %
                market shareMerced
            43.5Mariposa
            46.0Fresno
            1.6Stanislaus
            4.8Madera
            4.0Tuolumne
            3.7San
                Joaquin
            0.09Sacramento
            0.08San
                Francisco
            0.06





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, 2006,
      these
      five categories accounted for approximately 44%, 26%, 7%, 15% 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 non-interest income. For the year ended December 31, 2006, these
      sources comprised approximately 75%, 16%, and 9% respectively, of the Bank's
      total interest and non-interest income.


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          of Contents


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.





Federal
      law now precludes banks from engaging in real estate development. At December
      31, 2006, 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
      2006, 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 was a real estate investment trust that invested in
      loan
      participations serviced by the Bank. The REIT provided the Bank with another
      vehicle in which business might 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 owned a minority interest in the REIT in
      the
      aggregate amount of $31,000. During the second quarter of 2006 it was determined
      the REIT was no longer adding value to the Company and it was
      liquidated.




***Employees***





As
      of
      December 31, 2006, the Company employed a total of 421 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 seasonal fluctuations 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.


-6-
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          of Contents


**Other
      Financial Information:**





**Recently
      Issued Accounting Standards**





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140." SFAS
      No. 155 simplifies accounting for certain hybrid instruments currently governed
      by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
      by allowing fair value remeasurement of hybrid instruments that contain an
      embedded derivative that otherwise would require bifurcation. SFAS No. 155
      also
      eliminates the guidance in SFAS No.133 Implementation Issue No. D1, "Application
      of Statement 133 to Beneficial Interests in Securitized Financial Assets,"
      which
      provides such beneficial interests are not subject to SFAS No. 133. SFAS No.
      155
      amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
      and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125,"
      by eliminating the restriction on passive derivative instruments that a
      qualifying special-purpose entity may hold. This statement is effective for
      financial instruments acquired or issued after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006. Management does not
      expect the adoption of this statement to have a material impact on the Company’s
      Consolidated Financial Statements.





In
      March
      2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156,
      "Accounting for Servicing of Financial Assets- an amendment of FASB Statement
      No. 140." SFAS No.156 requires an entity to recognize a servicing asset or
      servicing liability each time it undertakes an obligation to service a financial
      asset by entering into a servicing contract in specific situations.
      Additionally, the servicing asset or servicing liability shall be initially
      measured at fair value; however, an entity may elect the "amortization method"
      or "fair value method" for subsequent balance sheet reporting periods. SFAS
      No.156 is effective as of an entity's first fiscal year beginning after
      September 15, 2006. Early adoption is permitted as of the beginning of an
      entity's fiscal year, provided the entity has not yet issued financial
      statements, including interim financial statements, for any period of that
      fiscal year. Management does not expect the adoption of this statement to have
      a
      material impact on the Company’s Consolidated Financial Statements.





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





In
      September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      157, " *Employers’
      Fair Value Measurements* ”
which
      defines and establishes a framework for measuring fair value used in FASB
      pronouncements that require or permit fair value measurement. This statement
      expands disclosures using fair value to measure assets and liabilities in
      interim and annual periods subsequent to the period of initial recognition.
      SFAS
      No. 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those years. Management
      does
      not expect the adoption of this statement to have a material impact on the
      Company’s Consolidated Financial Statements.


-7-
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In
      September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      158, " *Employers’
      Accounting for Defined Benefit Pension and Other Post Retirement
      Plans* - an
      amendment of FASB Statements No. 87, 88, 106, and 132R” requires the recognition
      of the funded status of a defined benefit plan, and that gains or losses and
      prior service costs or credits that arise during the period that are not
      recognized as net period benefit expenses be recorded in other comprehensive
      income. In addition, benefit plan assets and obligations should generally be
      measured as of the fiscal year-end statement of financial position. Disclosure
      is required in the notes to the financial statements about certain effects
      on
      net periodic benefit cost for the next fiscal year that arise from delayed
      recognition of the gains or losses. SFAS No. 158 is effective, for companies
      with publicly traded securities, for fiscal years ending after December 15,
      2006. The adoption of this statement did not have a material impact on the
      Company’s Consolidated Financial Statements.





In
      September 2006, the U.S. Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108, Considering the Effects of a Prior Year
      Misstatements When Quantifying Misstatements in Current Year Financial
      Statements (SAB 108). SAB 108 addresses how the effects of prior year
      uncorrected errors must be considered in quantifying misstatements in the
      current year financial statements. The effects of prior year uncorrected errors
      include the potential accumulation of improper amounts that may result in a
      material misstatement on the balance sheet or the reversal of prior period
      errors in the current period that result in a material misstatement of the
      current period income statement amounts. Adjustments to current or prior period
      financial statements would be required in the event that after application
      of
      various approaches for assessing materiality of a misstatement in current period
      financial statements and consideration of all relevant quantitative and
      qualitative factors, a misstatement is determined to be material. SAB 108 will
      be applicable to all financial statements issued by the Company after November
      15, 2006. The implementation of this bulletin did not have a significant impact
      on the Company's consolidated financial statements for the year ended December
      31, 2006





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





**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 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.


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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 of the
      West is subject to examination by the FRB. Pursuant to the BHCA, Capital Corp
      of
      the West 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 non-banking 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 the
      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.





DIVIDENDS





The
      Company may make a distribution to its shareholders if it’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 and management fees 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 DFI, 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 DFI 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 DFI 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.


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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,
      mandatorily 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 inter-bank 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, 2006, the
      Company's leverage, Tier 1 risk-based and total risk-based capital ratios were
      9.33%, 11.52% and 12.49%, and the Bank's leverage, Tier 1 risk-based and total
      risk-based capital ratios were 7.98%, 9.86% and 10.83%. 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.




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 or (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.


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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
      non-bank 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 non-depository 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.





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.


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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 DFI 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





The
      Bank
      must also comply with consumer laws and regulations that are designed to protect
      consumers in transactions with banks and the privacy of consumers. While the
      following 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.




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.





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 of 1992 amending the Federal Deposit Insurance 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.


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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 FRB 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.





LIMITATIONS
      ON ACTIVITIES





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 deposit insurance fund (“DIF”) 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 DFI
      to
      address such disparities through a streamlined rulemaking process. The DFI
      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 DFI.





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 DFI.


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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.





INSURANCE
      PREMIUMS AND ASSESSMENTS





The
      Federal Deposit Insurance Reform Act of 2005 and the Federal Deposit Insurance
      Reform Conforming Amendments Act of 2005 amended the insurance of deposits
      by
      the FDIC and collection of assessments from insured depository institutions
      for
      deposit insurance. The new laws provide for the following changes:


·
            Merging
                the Bank Insurance Fund (BIF) and the Savings Association Insurance
                Fund
                (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This change
                was
                made effective March 31, 2006.


·
            Increasing
                the coverage limit for retirement accounts to $250,000 and indexing
                the
                coverage limit for retirement accounts to inflation as with the general
                deposit insurance coverage limit. This change was made effective
                April 1,
                2006.


·
            Establishing
                a range of 1.15 percent to 1.50 percent within which the FDIC Board
                of
                Directors may set the Designated Reserve Ratio (DRR).


·
            Allowing
                the FDIC to manage the pace at which the reserve ratio varies within
                this
                range.


1.
            If
                the reserve ratio falls below 1.15 percent—or is expected to within 6
                months—the FDIC must adopt a restoration plan that provides that the DIF
                will return to 1.15 percent generally within 5 years.


2.
            If
                the reserve ratio exceeds 1.35 percent, the FDIC must generally dividend
                to DIF members half of the amount above the amount necessary to maintain
                the DIF at 1.35 percent, unless the FDIC Board, considering statutory
                factors, suspends the dividends.


3.
            If
                the reserve ratio exceeds 1.5 percent, the FDIC must generally dividend
                to
                DIF members all amounts above the amount necessary to maintain the
                DIF at
                1.5 percent.


·
            Eliminating
                the restrictions on premium rates based on the DRR and granting the
                FDIC
                Board the discretion to price deposit insurance according to risk
                for all
                insured institutions regardless of the level of the reserve ratio.


·
            Granting
                a one-time initial assessment credit (of approximately $4.7 billion)
                to
                recognize institutions' past contributions to the fund.





In
      December 2006 the FDIC issued amended rules intended to make the deposit
      insurance assessment system react more quickly and more accurately to changes
      in
      institutions' risk profiles, create a new system for risk-based assessments,
      and
      set assessment rates for the period beginning January 1, 2007.  Among other
      things the amendments provide that (i) deposit insurance assessment will be
      collected for one quarter at the end of the next quarter, (ii) an existing
      institution with $1 billion or more in assets and any institution that becomes
      insured on or after January 1, 2007 will have its assessment base determined
      using average daily balances, (iii) the float deduction previously used to
      determine the assessment base is eliminated, (iv) the nine assessment rate
      categories that were used previously were consolidated into four new categories,
      and (v) the designated reserve ratio is being maintained at 1.25 percent,
      subject to annual review.  The amended rules also establish that effective
      January 1, 2007 the assessment rates will range from 5 to 7 basis points for
      Risk Category I institutions and will be 10 basis points for Risk Category
      II
      institutions, 28 basis points for Risk Category III institutions, and 43 basis
      points for Risk Category IV institutions.  The Bank is classified as a Risk
      Category I institution.


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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 audits performed by an independent certified
      public accounting firm, 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





Under
      the
      Community Reinvestment Act (“CRA”) regulations, the federal banking agencies
      determine a bank’s CRA rating by evaluating its performance on lending, service
      and investment tests, with the lending test being the most important. The tests
      are applied in an “assessment context” that is developed by the agency for the
      particular institution. The assessment context takes into account demographic
      data about the community, the community’s characteristics and needs, the
      institution’s capacities and constraints, the institution’s product offerings
      and business strategy, the institution’s prior performance, and data on
      similarly situated lenders. Since the assessment context for each bank is
      developed by the bank regulatory agencies, a particular bank does not know
      until
      it is examined whether its CRA programs and efforts have been
      sufficient.





Institutions,
      like the Bank, with $250 million or more in assets are required to compile
      and
      report data on their lending activities to measure the performance of their
      loan
      portfolio. Some of this data is already required under other laws, such as
      the
      Equal Credit Opportunity Act. Institutions have the option of being evaluated
      for CRA purposes in relation to their own pre-approved strategic plan. A
      strategic plan must be submitted to the institution’s regulator three months
      before its effective date and must be published for public comment.





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.


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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 FRB 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 eliminated many of the barriers that separated the
      insurance, securities and banking industries since the Great Depression. The
      Gramm-Leach-Bliley Act is the result of a decade of debate in the Congress
      regarding a fundamental reformation of the nation's financial system. The law
      is
      subdivided into seven titles, by functional area.





The
      major
      provisions of the Gramm-Leach-Bliley Act are:





*Financial
      Holding Companies and Financial Activities.* Title
      I ** 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 system
      to engage in a full range of financial activities through qualification as
      a new
      entity known as a financial holding company.





Activities
      permissible for financial subsidiaries of national banks include, but are not
      limited to, the following: (a) Lending, exchanging, transferring, investing
      for
      others, or safeguarding money or securities; (b) Insuring, guaranteeing, or
      indemnifying against loss, harm, damage, illness, disability, or death, or
      providing and issuing annuities, and acting as principal, agent, or broker
      for
      purposes of the foregoing, in any State; (c) Providing financial, investment,
      or
      economic advisory services, including advising an investment company; (d)
      Issuing or selling instruments representing interests in pools of assets
      permissible for a bank to hold directly; and (e) Underwriting, dealing in,
      or
      making a market in securities.





*Securities
      Activities* .
      Title
      II narrows the exemptions from the securities laws previously enjoyed by banks.





*Insurance
      Activities.* Title
      III restates the proposition that the states are the functional regulators
      for
      all insurance activities, including the insurance activities of
      federally-chartered banks, and bars the states from prohibiting insurance
      activities by depository institutions.





*Privacy.* Under
      Title V, federal banking regulators were required to adopt rules that have
      limited the ability of banks and other financial institutions to disclose
      non-public information about consumers to nonaffiliated third parties. These
      limitations require disclosure of privacy policies to consumers and, in some
      circumstances, allow consumers to prevent disclosure of certain personal
      information to a nonaffiliated third party. Under the rules, financial
      institutions must provide:





·
            initial
                notices to customers about their privacy policies, describing the
                conditions under which they may disclose nonpublic personal information
                to
                nonaffiliated third parties and affiliates;





·
            annual
                notices of their privacy policies to current customers; and





·
            a
                reasonable method for customers to "opt out" of disclosures to
                nonaffiliated third parties.





*Safeguarding
      Confidential Customer information* .
      Under
      Title V, federal banking regulators were required to adopt rules requiring
      financial institutions to implement a program to protect confidential customer
      information, and the federal banking agencies have adopted guidelines requiring
      financial institutions to establish an information security program.


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*Community
      Reinvestment Act Sunshine Requirements* .
      The
      federal banking agencies have adopted regulations implementing Section 711
      of
      Title VII, the CRA Sunshine Requirements. The regulations require
      nongovernmental entities or persons and insured depository institutions and
      affiliates that are parties to written agreements made in connection with the
      fulfillment of the institution's CRA obligations to make available to the public
      and the federal banking agencies a copy of each agreement. The Bank is not
      a
      party to any agreement that would be the subject of reporting pursuant to the
      CRA Sunshine Requirements.





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
      public company auditing 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.


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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 company 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 implement
      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 FRB decides to treat these
      subsidiaries as affiliates.





Concurrent
      with the adoption of Regulation W, the FRB 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.





THE
      MONEY
      LAUNDERING CONTROL ACT





The
      Money
      Laundering Control Act of 1986 provides sanctions for the failure to report
      high
      levels of cash deposits to non-bank financial institutions. Federal banking
      regulators possess the power to revoke the charter or appoint a conservator
      for
      any institution convicted of money laundering. Offending state-chartered banks
      could lose their federal deposit insurance, and bank officers could face
      lifetime bans from working in financial institutions. The Community Development
      Act, which includes a number of provisions that amend the Bank Secrecy Act,
      allows the Secretary of the Treasury to exempt specified currency transactions
      from reporting requirements and permits the federal bank regulatory agencies
      to
      impose civil money penalties on banks for violations of the currency transaction
      reporting requirements.


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THE
      FAIR
      CREDIT REPORTING ACT





The
      Fair
      Credit Reporting Act (the “FCRA”) was adopted to ensure the confidentiality,
      accuracy, relevancy and proper utilization of consumer credit report
      information. Under the framework of the FCRA, the United States has developed
      a
      highly advanced and efficient credit reporting system. The information contained
      in that broad system is used by financial institutions, retailers and other
      creditors of every size in making a wide variety of decisions regarding
      financial transactions. Employers, and law enforcement agencies have also made
      wide use of the information collected and maintained in databases made possible
      by the FCRA. The FCRA affirmatively preempts state law in a number of areas,
      including the ability of entities affiliated by common ownership to share and
      exchange information freely, the requirements on credit bureaus to reinvestigate
      the contents of reports in response to consumer complaints, among
      others.





RECENT
      LEGISLATION





The
      FDIC
      finalized its interim final rule, with changes, that amended its deposit
      insurance regulations to implement applicable revisions to the Federal Deposit
      Insurance Act made by the Federal Deposit Insurance Reform Act of 2005 and
      the
      Federal Deposit Insurance Reform Conforming Amendments Act of 2005. The final
      rule provides for consideration of inflation adjustments to increase the current
      standard maximum deposit insurance amount of $100,000 on a five-year cycle
      beginning in 2010; increases the deposit insurance limit for certain retirement
      accounts from $100,000 to $250,000, also subject to inflation adjustments;
      and
      provides per-participant insurance coverage to employee benefit plan accounts,
      even if the depository institution at which the deposits are placed is not
      authorized to accept employee benefit plan deposits. The final rule is effective
      on October 12, 2006.





The
      Board
      of Governors of the Federal Reserve System amended Regulation E, which
      implements the Electronic Fund Transfer Act, and the official staff commentary
      to the regulation, which interprets the requirements of Regulation E to become
      effective on July 1, 2006. The final rule provides that Regulation E covers
      payroll card accounts that are established directly or indirectly through an
      employer, and to which transfers of the consumer's salary, wages, or other
      employee compensation are made on a recurring basis. The final rule also
      provides financial institutions with an alternative to providing periodic
      statements for payroll card accounts if they make account information available
      to consumers by specified means.





The
      federal financial regulatory agencies in September 2006 issued final guidance
      to
      address the risks posed by nontraditional residential mortgage products that
      allow borrowers to defer repayment of principal and sometimes interest,
      including "interest-only" mortgages and "payment option" adjustable-rate
      mortgages. These products allow borrowers to exchange lower payments during
      an
      initial period for higher payments later. The lack of principal amortization
      and
      the potential for negative amortization and features that compound risks (such
      as no document loans and simultaneous second mortgages) elevate the concern
      of
      the federal banking agencies for nontraditional mortgage products. The
      guidelines require depository institutions to ensure that loan terms and
      underwriting standards are consistent with prudent lending practices, including
      consideration of a borrower's repayment capacity, to recognize that many
      nontraditional mortgage loans, particularly when they have risk-layering
      features, are untested in a stressed environment. The guidelines also express
      the need for depository institutions to have strong risk management standards,
      capital levels commensurate with the risk, an allowance for loan and lease
      losses that reflects the collectibility of the portfolio, and the need to make
      sure that consumers have sufficient information to clearly understand loan
      terms
      and associated risks prior to making a product or payment choice.


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The
      federal financial regulatory agencies in December 2006 issued a new interagency
      policy statement on the allowance for loan and lease losses (ALLL) along with
      supplemental frequently asked questions. The policy statement revises and
      replaces a 1993 policy statement on the ALLL. The agencies issued the revised
      policy statement in view of today’s uncertain economic environment and the
      presence of concentrations in untested loan products in the loan portfolios
      of
      insured depository institutions. The policy statement has also been revised
      to
      conform with generally accepted accounting principles (GAAP) and post-1993
      supervisory guidance. The 1993 policy statement described the responsibilities
      of the boards of directors, management, and banking examiners regarding the
      ALLL; factors to be considered in the estimation of the ALLL; and the objectives
      and elements of an effective loan review system, including a sound credit
      grading system. The policy statement reiterates that each institution has a
      responsibility for developing, maintaining and documenting a comprehensive,
      systematic, and consistently applied process appropriate to its size and the
      nature, scope, and risk of its lending activities for determining the amounts
      of
      the ALLL and the provision for loan and lease losses and states that each
      institution should ensure controls are in place to consistently determine the
      ALLL in accordance with GAAP, the institution’s stated policies and procedures,
      management’s best judgment and relevant supervisory guidance.





The
      policy statement also restates that insured depository institutions must
      maintain an ALLL at a level that is appropriate to cover estimated credit losses
      on individually evaluated loans determined to be impaired as well as estimated
      credit losses inherent in the remainder of the loan and lease portfolio, and
      that estimates of credit losses should reflect consideration of all significant
      factors that affect the collectibility of the portfolio as of the evaluation
      date. The policy statement states that prudent, conservative, but not excessive,
      loan loss allowances that represent management’s best estimate from within an
      acceptable range of estimated losses are appropriate.





The
      Office of the Comptroller of the Currency, the Board of Governors of the Federal
      Reserve System, and the Federal Deposit Insurance Corporation in December 2006
      issued final guidance on sound risk management practices for concentrations
      in
      commercial real estate lending. The agencies observed that the commercial real
      estate is an area in which some banks are becoming increasingly concentrated,
      especially with small- to medium- sized banks that face strong competition
      in
      their other business lines. The agencies support banks serving a vital role
      in
      their communities by supplying credit for business and real estate development.
      However, the agencies are concerned that rising commercial real estate loan
      concentrations may expose institutions to unanticipated earnings and capital
      volatility in the event of adverse changes in commercial real estate markets.
      The guidance provides supervisory criteria, including numerical indicators
      to
      assist in identifying institutions with potentially significant commercial
      real
      estate loan concentrations that may warrant greater supervisory scrutiny, but
      such criteria are not limits on commercial real estate lending.





In
      California, effective January 1, 2007, a new law Financial Code Section 854.1
      recognizes the ability of mortgage brokers to obtain the benefit of non
      interest-bearing accounts on trust funds deposited in a “commercial bank.” The
      provision applies to real estate brokers who collect payments or provide
      services in connection with a loan secured by a lien on real property and
      permits a mortgage broker to earn interest on an interest-bearing account at
      a
      financial institution. Interest on funds received by a real estate broker who
      collects payments or provides services for an “institutional investor” in
      connection with a loan secured by commercial real property may inure to the
      broker, if agreed to in writing by the broker and the institutional investor.
      For purposes of this law, commercial real property means real estate improved
      with other than a one-to-four family residence.





A
      new
      California law makes it easier for California banks to accept deposits from
      local government agencies. Under the old law, local agency deposits over
      $100,000 had to be secured by collateral. Pursuant to the enactment of Assembly
      Bill 2011, banks would be able to acquire surplus public deposits exceeding
      $100,000 without pledging collateral if they participate in a deposit placement
      service where excess amounts are placed in certificates of deposit at other
      institutions within a network. Such a network (of which currently there is
      only
      one available in the market) permits the entire amount of a customer’s deposit
      to be FDIC-insured, and the bank taking the original deposit retains the benefit
      of the full amount of the deposit for lending or other purposes. AB 2011
      clarifies that a local agency may deposit up to 30% of its surplus funds in
      certificates of deposit at a bank, savings association, savings bank, or credit
      union that participates in such a deposit-sharing network. Since the entire
      amount of the deposits would be FDIC-insured, a bank would not be required
      to
      pledge collateral. The bill permits agencies to make these deposits until
      January 1, 2012.


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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.




**ITEM
      1A. RISK FACTORS**





**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 shareholders could lose all or part of their 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 FRB. Changes in monetary policy, including changes in interest
      rates, will influence the origination of loans, the purchase of investments,
      the
      generation of deposits and the rates received on loans and investment securities
      and paid on deposits and other liabilities.





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





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





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





**Deterioration
      of local economic conditions could hurt our profitability** .




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




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***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 non-financial firms that offer services similar
      to
      those offered by us. Other competitors include large financial institutions
      that
      have substantial capital, technology and marketing resources. Such large
      financial institutions may have greater access to capital at a lower cost than
      us, which may adversely affect our ability to compete effectively.





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





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





**Regulatory
      Risks**





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





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





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





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


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





**Systems,
      Accounting and Internal Control Risks**





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





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





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





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





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





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




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




None




-23-
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**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 25 branch operations located in the Central Valley, 1 branch
      operation in San Francisco, and 1 branch operation in San Jose. The Central
      Valley operations include branches located in: Merced (2), Atwater, Los Banos,
      Hilmar, Sacramento, Sonora, Turlock (2), Modesto (2), Riverbank, Ceres, Newman,
      Dos Palos, Livingston, Mariposa, Madera, Clovis (2), Fresno (4), and Stockton.
      The Bank owns ten of these branch facilities and the remaining seventeen
      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, 2007, 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, 2006.


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**PART
      II**





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





The
      Company’s stock is listed on the Nasdaq Global Select Market with a stock
      quotation symbol of CCOW. The following table indicates the range of high and
      low 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, 2006.





**2006**
            
            **High**
            
            **Low**
            
            **Dividend**s4thQuarter
            
            $
            33.19
            
            $
            29.25
            
            $
            .083rdQuarter
            
            $
            34.73
            
            $
            30.36
            
            $
            .082ndQuarter
            
            $
            36.19
            
            $
            29.85
            
            $
            .081stQuarter
            
            $
            36.75
            
            $
            32.36
            
            $
            .05**2005**
            
            
            **High**
            
            
            **Low**
            
            
            **Dividends**4thQuarter
            
            $
            35.52
            
            $
            29.60
            
            $
            0.053rdQuarter
            
            $
            34.98
            
            $
            27.09
            
            $
            0.052ndQuarter
            
            $
            28.14
            
            $
            24.00
            
            $
            0.051stQuarter
            
            $
            26.64
            
            $
            23.62
            
            $
            0.05





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” located in Item 7
      below).





**Securities
      Authorized for Issuance under Equity Compensation Plans.** The
      following table sets forth securities authorized for issuance under equity
      compensation plans as for December 31, 2006.





**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, Warants 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
            
            
            679,985
            
            $
            20.73
            
            
            223,490Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -**Total**
            
            
            679,985
            
            $
            20.73
            
            
            223,490





For
      additional information related to the above plans see Note 12 of the Company’s
      Consolidated Financial Statements in Item 8 - Financial Statements and
      Supplementary Data of this Annual Report on Form 10K.


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**Stock
      Performance Graph**





The
      following graph compares the change on an annual basis in Capital Corp's
      cumulative total return on its common stock with (a) the change in the
      cumulative total return on stocks of companies included in the NASDAQ Composite
      Index for U.S. Companies, (b) the change in the cumulative total return on
      stocks as included in the SNL Securities "Western Bank Index", a peer industry
      group, and assuming an initial investment of $100 on December 31, 2001. All
      of these cumulative total returns are computed assuming the reinvestment of
      dividends at the frequency with which dividends were paid during the period.
      The
      common stock price performance shown below should not be viewed as being
      indicative of future performance.








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**ITEM
      6 SELECTED FINANCIAL DATA**





The
      following selected consolidated financial data are derived from our consolidated
      financial statements. This data should be read in connection with our
      consolidated financial statements and the related notes located at Item 8 of
      this report.





**Capital
                Corp of the West****Selected
                Financial Data**(Amounts
                in thousands except per share data)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002**SUMMARY
                OF INCOME STATEMENT:**Interest
                income
            
            $
            122,149
            
            $
            90,164
            
            $
            70,571
            
            $
            62,413
            
            $
            58,811Interest
                expense
            
            
            48,101
            
            
            24,720
            
            
            17,097
            
            
            16,253
            
            
            18,854Net
                interest income
            
            
            74,048
            
            
            65,444
            
            
            53,474
            
            
            46,160
            
            
            39,957Provision
                for loan losses
            
            
            400
            
            
            2,051
            
            
            2,731
            
            
            2,170
            
            
            4,063Non-interest
                income
            
            
            12,138
            
            
            10,202
            
            
            6,405
            
            
            10,177
            
            
            8,164Non-interest
                expense
            
            
            52,512
            
            
            42,679
            
            
            37,675
            
            
            35,670
            
            
            31,175Income
                before provision for income taxes
            
            
            33,274
            
            
            30,916
            
            
            19,473
            
            
            18,497
            
            
            12,883Provision
                for income taxes
            
            
            10,598
            
            
            9,962
            
            
            7,150
            
            
            4,857
            
            
            2,455Net
                income
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323
            
            $
            13,640
            
            $
            10,428**SHARE
                DATA:**Average
                common shares outstanding
            
            
            10,692
            
            
            10,500
            
            
            10,323
            
            
            10,102
            
            
            9,968Basic
                earnings per share
            
            $
            2.12
            
            $
            2.00
            
            $
            1.19
            
            $
            1.35
            
            $
            1.04Diluted
                earnings per share
            
            
            2.07
            
            
            1.94
            
            
            1.15
            
            
            1.30
            
            
            1.02Book
                value per share
            
            
            13.71
            
            
            11.56
            
            
            9.92
            
            
            8.78
            
            
            7.67Tangible
                book value per share
            
            $
            13.58
            
            $
            11.42
            
            $
            9.78
            
            $
            8.52
            
            $
            7.34**BALANCE
                SHEET DATA:**Total
                assets
            
            $
            1,961,539
            
            $
            1,756,756
            
            $
            1,448,447
            
            $
            1,235,281
            
            $
            1,034,850Total
                securities
            
            
            424,596
            
            
            499,180
            
            
            436,176
            
            
            372,015
            
            
            287,020Total
                loans
            
            
            1,224,761
            
            
            1,068,896
            
            
            885,093
            
            
            764,252
            
            
            633,773Total
                deposits
            
            
            1,615,341
            
            
            1,404,500
            
            
            1,154,157
            
            
            1,028,808
            
            
            834,379Shareholders'
                equity
            
            $
            147,580
            
            $
            122,245
            
            $
            103,481
            
            $
            89,485
            
            $
            77,169**OPERATING
                RATIOS:**Return
                on average equity
            
            
            16.85
            %
            
            18.54
            %
            
            12.69
            %
            
            16.43
            %
            
            14.94
            %Return
                on average assets
            
            
            1.25
            
            
            1.36
            
            
            0.94
            
            
            1.23
            
            
            1.09Average
                equity to average assets ratio
            
            
            7.44
            
            
            7.34
            
            
            7.41
            
            
            7.46
            
            
            7.29Net
                interest margin
            
            
            4.51
            
            
            4.69
            
            
            4.49
            
            
            4.53
            
            
            4.58**CREDIT
                QUALITY RATIOS:**Non-performing
                loans to total loans (1)
            
            
            0.19
            %
            
            0.18
            %
            
            0.50
            %
            
            0.52
            %
            
            0.38
            %Allowance
                for loan losses to total loans
            
            
            1.15
            
            
            1.38
            
            
            1.54
            
            
            1.64
            
            
            1.84Allowance
                for loan losses to non-performing loans
            
            
            590.78
            
            
            777.68
            
            
            309.63
            
            
            314.12
            
            
            490.14**CAPITAL
                RATIOS:**Risk-based
                tier 1 capital
            
            
            11.52
            %
            
            10.01
            %
            
            10.30
            %
            
            10.31
            %
            
            9.49
            %Total
                risk based capital
            
            
            12.49
            
            
            11.13
            
            
            11.55
            
            
            11.57
            
            
            10.74Leverage
                ratio
            
            
            9.33
            
            
            8.57
            
            
            8.46
            
            
            8.55
            
            
            7.68Dividend
                payout ratio
            
            
            13.7
            %
            
            9.0
            %
            
            9.4
            %
            
            -
            %
            
            -
            %


(1)Non-performing
      loans consist of loans on non-accrual, loans past due 90 days or more, and
      restructured loans.


-27-
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**ITEM
      7.****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 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, the Bank, CWG. It also
      includes the Bank's subsidiaries, MAID, CAA and REIT.





**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.





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
      judgments regarding the collectibility of loans. Liquidity requirements may
      change as a result of fluctuations in assets and liabilities and off-balance
      sheet exposures, which will impact the capital and debt financing needs of
      the
      Company and the mix of funding sources. Decisions to purchase, hold, or sell
      securities are also dependent on liquidity requirements and market volatility,
      as well as on and off-balance sheet positions. Factors that may impact interest
      rate risk include local, regional and international economic conditions, levels,
      mix, maturities, yields or rates of assets and liabilities and the wholesale
      and
      retail funding sources of the Company. The Company is also exposed to the
      potential of losses arising from adverse changes in market rates and prices
      which can adversely impact the value of financial products, including
      securities, loans, and deposits. In addition, the banking industry in general
      is
      subject to various monetary and fiscal policies and regulations, which include
      those determined by the Federal Reserve Board, the Federal Deposit Insurance
      Corporation and state regulators, whose policies and regulations could affect
      the Company’s results.





Other
      factors that may cause actual results to differ from the forward-looking
      statements include the following: competition with other local and regional
      banks, savings and loan associations, credit unions and other 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.


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**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 generally accepted accounting principles.
      The preparation of these financial statements requires the Company to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and disclosures related thereto, including those
      regarding contingent assets and liabilities. On an ongoing basis, the Company
      monitors and revises its estimates where appropriate, including those related
      to
      the adequacy of the allowance for loan losses, investments, 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 under the section titled “Allowance for Loan Losses” as
      well as in Note 3 under the section titled “Loans” of the financial statements
      included in this report under Item 8.





A
      decline
      in the fair value of any securities that are considered other than temporarily
      impaired is recorded in the Company’s consolidated statements of income in the
      period in which the impairment occurs. The cost of the underlying security
      is
      written down to fair value. 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 and debt 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 under the section titled
“Investment Securities” as well as in Note 2 “Investment Securities” of the
      financial statements included in this report under Item 8.





Goodwill
      arises from the Company’s purchase price exceeding the fair value of the net
      assets of an acquired business. 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 under the section titled “Goodwill” and “Other Intangibles”,
      and “Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of” in
      this report of the financial statements included in this report under Item
      8.





The
      Company recognizes all derivatives on the balance sheet at fair value. On the
      date it enters into a derivative contract, it designates the derivative as
      (1) a
      hedge of the fair value of a recognized asset or liability (“fair value” hedge),
      (2) a hedge of a forecasted transaction or of the variability of cash flows
      to
      be received or paid related to a recognized asset or liability (“cash flow”
hedge) or (3) held for trading, customer accommodation or for risk management
      not qualifying for hedge accounting (“free-standing
      derivative”).


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For
      a
      fair value hedge, the Company records changes in the fair value of the
      derivative and, to the extent that it is effective, changes in the fair value
      of
      the hedged asset or liability attributable to the hedged risk, in current period
      earnings in the same financial statement category as the hedged item. For a
      cash
      flow hedge, the Company records changes in the fair value of the derivative
      to
      the extent that it is effective in other comprehensive income. The Company
      subsequently reclassifies these changes in fair value to net income in the
      same
      period(s) that the hedged transaction affects net income in the same financial
      statement category as the hedged item. For free-standing derivatives, we report
      changes in the fair values in current period non-interest income.





The
      Company formally documents at inception the relationship between hedging
      instruments and hedged items, our risk management objective, strategy and our
      evaluation of effectiveness for our hedge transactions. This includes linking
      all derivatives designated as fair value or cash flow hedges to specific assets
      and liabilities on the balance sheet or to specific forecasted transactions.
      Periodically, as required, the Company also formally assesses whether the
      derivative it designated in each hedging relationship is expected to be and
      has
      been highly effective in offsetting changes in fair values or cash flows of
      the
      hedged item using either the dollar offset or the regression analysis method.
      If
      the Company determines that a derivative is not highly effective as a hedge,
      it
      discontinues hedge accounting.





The
      Company discontinues hedge accounting prospectively when (1) a derivative is
      no
      longer highly effective in offsetting changes in the fair value or cash flows
      of
      a hedged item, (2) a derivative expires or is sold, terminated, or exercised,
      (3) a derivative is no longer designated as a hedge, because it is unlikely
      that
      a forecasted transaction will occur, or (4) the Company determines that
      designation of a derivative as a hedge is no longer appropriate. When the
      Company discontinues hedge accounting because a derivative no longer qualifies
      as an effective fair value hedge, it continues to carry the derivative on the
      balance sheet at its fair value with changes in fair value included in earnings,
      and no longer adjust the previously hedged asset or liability for changes in
      fair value. Previous adjustments to the hedged item are accounted for in the
      same manner as other components of the carrying amount of the asset or
      liability. When the Company discontinues hedge accounting because it is probable
      that a forecasted transaction will not occur, it continues to carry the
      derivative on the balance sheet at its fair value with changes in fair value
      included in earnings, and immediately recognize gains and losses that were
      accumulated in other comprehensive income in earnings. When the Company
      discontinues hedge accounting because the hedging instrument is sold,
      terminated, or is no longer designated, the amount reported in other
      comprehensive income up to the date of sale, termination or change in
      designation continues to be reported in other comprehensive income until the
      forecasted transaction affects earnings.





In
      all
      other situations in which we discontinue hedge accounting, the derivative will
      be carried at its fair value on the balance sheet, with changes in its fair
      value recognized in current period earnings.





If
      the
      Company purchases or originates financial instruments that contain an embedded
      derivative; at inception of the financial instrument, it assesses (1) if the
      economic characteristics of the embedded derivative are clearly and closely
      related to the economic characteristics of the financial instrument (host
      contract), (2) if the financial instrument that embodies both the embedded
      derivative and the host contract is measured at fair value with changes in
      fair
      value reported in earnings, or (3) if a separate instrument with the same terms
      as the embedded instrument would meet the definition of a derivative. If the
      embedded derivative does not meet any of these conditions, the Company separates
      it from the host contract and carries it at fair value with changes recorded
      in
      current period earnings.  Management
      considers the Company’s derivative accounting policies to be critical, as
      the valuation of these instruments fluctuate depending upon
      factors beyond the Company’s control.  Management monitors the
      effectiveness of hedges quarterly to ensure effectiveness is
      maintained.





The
      Company is subject to income tax laws of the United States, its states, and
      municipalities in which it operates. The Company considers our accounting policy
      relating to income taxes to be critical as the determination of current and
      deferred income taxes is based on complex analyses of many factors including
      interpretation of federal and state tax laws, the difference between tax and
      financial reporting bases of assets and liabilities (temporary differences),
      estimates of amounts due or owed, the timing of reversals of temporary
      differences and current financial accounting standards. Actual results could
      differ significantly from the estimates due to tax law interpretations used
      in
      determining the current and deferred income tax liabilities. Additionally,
      there
      can be no assurances that estimates and interpretations used in determining
      income tax liabilities may not be challenged by federal and state taxing
      authorities.


-30-
 Table
          of Contents


In
      establishing a provision for income tax expense, the Company must make judgments
      and interpretations about the application of these inherently complex tax laws.
      The Company must also make estimates about when in the future certain items
      will
      affect taxable income in different tax jurisdictions. The Company evaluates
      our
      income tax contingencies in accordance with SFAS No. 5. Management believes
      that our reserve for income tax liabilities is adequate.





The
      Company is also subject to routine corporate tax audits by the various tax
      jurisdictions. Although Management believes that the Company’s tax return
      positions are supportable, we believe that certain positions could be challenged
      and may not be fully sustained on review by tax authorities. Management reviews
      its tax postitions and related reserves quarterly, and may adjust these reserves
      in light of changing facts and circumstances, such as the closing of a tax
      audit
      or the refinement of an estimate, and to the extent that the final tax outcome
      of these matters is different than the amounts recorded, such differences will
      impact income tax expense in the period in which such determination is
      made.




**Overview**





The
      increase in net income from $20,954,000 in 2005 to $22,676,000 in 2006 was
      primarily the result of increased net interest income and increased interest
      earning assets. The earnings increase in 2005 when compared to 2004 levels,
      was
      primarily the result of increased interest income and the absence of an
      other-than-temporary impairment charge of $3,709,000 taken in 2004. The growth
      in assets in 2006 was primarily funded through increases in the deposit
      portfolio and the growth in 2005 was primarily funded through increases in
      the
      deposit portfolio as well as increased borrowings. Loan growth in 2006 was
      obtained primarily from increased loan production within our branch network
      and
      loan production offices. The increase in deposits in 2006 was obtained primarily
      from increased deposit gathering within our branch network and increased use
      of
      brokered deposits. In the opinion of management, the Company is “well
      capitalized” for purposes of the federal banking regulatory capital
      requirements.





The
      table
      below highlights some of the important Consolidated Balance Sheets amounts
      and
      their change from 2005 to 2006:





Years
                Ended December 31,(Dollars
                in thousands except per share data)
            
            2006
            
            2005
            
            Change
                During 2006
            
            %
                Change During 2006Total
                assets
            
            $
            1,961,539
            
            $
            1,756,756
            
            $
            204,783
            
            
            12
            %Net
                loans
            
            
            1,210,730
            
            
            1,054,120
            
            
            156,610
            
            
            15
            %Deposits
            
            
            1,615,341
            
            
            1,404,500
            
            
            210,841
            
            
            15
            %Shareholders
                equity
            
            $
            147,580
            
            $
            122,245
            
            $
            25,335
            
            
            21
            %







The
      table
      below highlights some of the important Consolidated Statements of Income and
      Comprehensive Income information and their change from 2004 to
      2006:





Years
                Ended December 31,(Dollars
                in thousands except per share data)
            
            2006
            
            2005
            
            Change
                in 2006
            
            %
                Change in 2006
            
            2004
            
            Change
                in 2005
            
            %
                Change in 2005Net
                income
            
            $
            22,676
            
            $
            20,954
            
            $
            1,722
            
            
            8
            %
            $
            12,323
            
            $
            8,631
            
            
            70
            %Basic
                earnings per share
            
            $
            2.12
            
            $
            2.00
            
            $
            0.12
            
            
            6
            %
            $
            1.19
            
            $
            0.81
            
            
            68
            %Diluted
                earnings per share
            
            $
            2.07
            
            $
            1.94
            
            $
            0.13
            
            
            7
            %
            $
            1.15
            
            $
            0.79
            
            
            69
            %


-31-
 Table
            of Contents




**Results
      of Operations**





The
      Company’s earnings during 2006 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 2006, the increase in interest income was
      primarily due to an increase in average earning assets with increased yields
      on
      those assets compared to 2005. The primary cause for the increase in rates
      on
      interest-earning assets was higher prevailing market rates that were available
      for reinvestments in 2006 when compared to 2005. During 2005, increases in
      interest income over 2004 levels were caused primarily by volume and rate
      increases in average interest earning assets.





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 interest expense in 2006 was primarily
      due
      to increased rates paid on interest bearing liabilities and secondarily due
      to
      increased volume of interest-bearing liabilities. The average interest rate
      paid
      on total average interest bearing liabilities in 2006 was of 3.47% compared
      to
      an average interest rate of 2.17% paid on total average interest-bearing
      liabilities in 2005. The increase in volume of interest-bearing liabilities
      in
      2006 as compared to 2005 was primarily attributable to increased market
      penetration within the Bank’s branch network and increased use of brokered
      deposits. Brokered deposits increased from $20,871,000 on December 31, 2005,
      to
      $92,943,000 on December 31, 2006. If the current interest rate environment
      remains unchanged during 2007, it is anticipated that the average interest
      paid
      on certificates of deposit should modestly increase as maturing accounts
“re-price” to an anticipated current equivalent interest rate level. If the
      prevailing market interest rates increase or decrease in 2007, 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
      “re-price” 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 decrease in net interest margin during
      2006
      was primarily the result of increased rates and volumes paid on interest bearing
      liabilities in 2006. A
      modest
      increase or decrease in rates should cause the Company’s net interest margin to
      slightly decrease in the short term. In 2006,
      loans comprised 71% of average interest-earning assets as compared with 68%
      in
      2005 and 67% in 2004. Securities comprised 27% of average interest-earning
      in
      2006 compared with 31% and 32% in 2005 and 2004. Loans earn at a higher interest
      rate than securities therefore, a higher loan concentration will increase net
      interest margin if all other factors remain the same.





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
      Company uses a taxable equivalent method to evaluate performance in its
      investment portfolio. The taxable equivalent method converts tax benefits into
      an equivalent pretax interest or dividend income on tax advantaged investment
      securities. This adjustment is made in order to make yield comparisons using
      a
      total economic benefit approach. Taxable equivalent interest income is equal
      to
      recorded interest income plus the interest income pretax equivalent of the
      tax
      benefit afforded certain investment securities, such as bank qualified state
      and
      municipal debt securities and corporate dividends received from certain equity
      securities. The tax rate used in calculating the taxable equivalent interest
      income was 35% in 2006, 2005, and 2004.





The
      increase in taxable equivalent interest income of $32,075,000 in 2006 is
      comprised of a $19,170,000 volume increase primarily attributable to an increase
      in interest-earning assets between 2005 and 2006 that was combined with a
      $12,905,000 increase attributable to rate improvement during this same period.
      The increase in total interest expense of $23,381,000 in 2006 related to a
      $8,751,000 volume increase attributable to an increase in average
      interest-bearing liabilities during 2006 which was combined with a $14,630,000
      increase attributable to rate increases during 2006.


-32-
 Table
          of Contents


The
      increase in taxable equivalent interest income of $19,975,000 in 2005 is
      comprised of a $13,949,000 volume increase primarily attributable to an increase
      in interest-earning assets between 2004 and 2005 that was combined with a
      $6,026,000 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 and a $5,182,000 increase attributable
      to rate increases when compared to 2004.





**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,****2006**
            
            **2005**
            
            **2004****Average**
            
            
            
            
            
            **Average**
            
            
            
            
            
            **Average**(Dollars
                in thousands)
            
            **Balance**
            
            **Interest**
            
            **Rate**
            
            **Balance**
            
            **Interest**
            
            **Rate**
            
            **Balance**
            
            **Interest**
            
            **Rate**AssetsFederal
                funds sold
            
            $
            28,919
            
            $
            1,500
            
            
            5.19
            %
            $
            10,981
            
            $
            401
            
            
            3.65
            %
            $
            16,604
            
            $
            266
            
            
            1.60
            %Time
                deposits at other financial institutions
            
            
            350
            
            
            19
            
            
            5.43
            
            
            728
            
            
            20
            
            
            2.75
            
            
            670
            
            
            15
            
            
            2.24Nontaxable
                investment securities(1)
            
            
            102,415
            
            
            5,158
            
            
            5.04
            
            
            90,531
            
            
            4,581
            
            
            5.06
            
            
            56,057
            
            
            2,937
            
            
            5.24Taxable
                investment securities(1)
            
            
            353,911
            
            
            16,367
            
            
            4.62
            
            
            351,948
            
            
            14,478
            
            
            4.11
            
            
            325,933
            
            
            12,908
            
            
            3.96Loans,
                gross (2)
            
            
            1,187,156
            
            
            100,435
            
            
            8.46
            
            
            968,492
            
            
            71,924
            
            
            7.43
            
            
            813,050
            
            
            55,303
            
            
            6.80Total
                interest-earning assets
            
            $
            1,672,751
            
            $
            123,479
            
            
            7.38
            
            $
            1,422,680
            
            $
            91,404
            
            
            6.42
            
            $
            1,212,314
            
            $
            71,429
            
            
            5.89Allowance
                for loan losses
            
            
            (14,966
            )
            
            
            
            
            
            
            
            (13,937
            )
            
            
            
            
            
            
            
            (14,001
            )Cash
                and due from banks
            
            
            44,943
            
            
            
            
            
            
            
            
            45,142
            
            
            
            
            
            
            
            
            40,475Premises
                and equipment, net
            
            
            35,433
            
            
            
            
            
            
            
            
            25,264
            
            
            
            
            
            
            
            
            18,881Interest
                receivable and other assets
            
            
            71,957
            
            
            
            
            
            
            
            
            60,495
            
            
            
            
            
            
            
            
            51,854Total
                assets
            
            $
            1,810,118
            
            
            
            
            
            
            
            $
            1,539,644
            
            
            
            
            
            
            
            $
            1,309,523Liabilities
                and shareholders' equityNegotiable
                orders of withdrawal
            
            $
            204,637
            
            $
            1,466
            
            
            0.72
            %
            $
            183,017
            
            $
            411
            
            
            0.22
            %
            $
            148,951
            
            $
            70
            
            
            0.05
            %Savings
                deposits
            
            
            369,758
            
            
            9,679
            
            
            2.62
            
            
            372,292
            
            
            5,318
            
            
            1.43
            
            
            350,270
            
            
            3,165
            
            
            0.90Time
                deposits
            
            
            607,753
            
            
            26,002
            
            
            4.28
            
            
            410,974
            
            
            12,259
            
            
            2.98
            
            
            356,184
            
            
            8,053
            
            
            2.26Subordinated
                debentures
            
            
            24,630
            
            
            2,131
            
            
            8.65
            
            
            16,496
            
            
            1,351
            
            
            8.19
            
            
            16,496
            
            
            1,152
            
            
            6.98Other
                borrowings
            
            
            178,376
            
            
            8,823
            
            
            4.95
            
            
            156,807
            
            
            5,381
            
            
            3.43
            
            
            121,585
            
            
            4,657
            
            
            3.83Total
                interest-bearing liabilities
            
            $
            1,385,154
            
            $
            48,101
            
            
            3.47
            
            $
            1,139,586
            
            $
            24,720
            
            
            2.17
            
            $
            993,486
            
            $
            17,097
            
            
            1.72Non-interest
                bearing deposits
            
            
            274,895
            
            
            
            
            
            
            
            
            274,750
            
            
            
            
            
            
            
            
            213,864Accrued
                interest, taxes and other liabilities
            
            
            15,476
            
            
            
            
            
            
            
            
            12,289
            
            
            
            
            
            
            
            
            5,081Total
                liabilities
            
            
            1,675,525
            
            
            
            
            
            
            
            
            1,426,625
            
            
            
            
            
            
            
            
            1,212,431Average
                shareholders' equity
            
            
            134,593
            
            
            
            
            
            
            
            
            113,019
            
            
            
            
            
            
            
            
            97,092Average
                liabilities and shareholders’ equity
            
            $
            1,810,118
            
            
            
            
            
            
            
            $
            1,539,644
            
            
            
            
            
            
            
            $
            1,309,523Net
                interest income and margin (3)
            
            
            
            
            $
            75,378
            
            
            4.51
            %
            
            
            
            $
            66,684
            
            
            4.69
            %
            
            
            
            $
            54,332
            
            
            4.49
            %





(1)
            Tax
                equivalent adjustments recorded at the statutory rate of 35% that
                are
                included in nontaxable investment securities income totaled $1,162,000,
                $1,116,000, and $726,000 in 2006, 2005, and 2004, 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 $75,000, $124,000, and
                $132,000 in 2006, 2005, and 2004, respectively. Tax equivalent income
                adjustments recorded at the statutory federal rate of 35% that are
                included in taxable investment securities income were created by
                a
                qualified zone academy bond of $93,000 in 2006.(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.


-33-
 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 is recognized in 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)
              
              **2006
                  Compared to 2005**
              
              **2005
                  Compared to 2004****Net
                  Interest Income Variance Analysis**
              
              **Volume**
              
              **Rate**
              
              **Total**
              
              **Volume**
              
              **Rate**
              
              **Total****Increase
                  (decrease) in interest income:**Loans
              
              $
              17,637
              
              $
              10,874
              
              $
              28,511
              
              $
              11,229
              
              $
              5,392
              
              $
              16,621Taxable
                  investment securities
              
              
              81
              
              
              1,808
              
              
              1,889
              
              
              1,057
              
              
              513
              
              
              1,570Nontaxable
                  investment securities
              
              
              582
              
              
              (5
              )
              
              577
              
              
              1,669
              
              
              (25
              )
              
              1,644Federal
                  funds sold
              
              
              874
              
              
              225
              
              
              1,099
              
              
              (7
              )
              
              142
              
              
              135Time
                  deposits at other institutions
              
              
              (4
              )
              
              3
              
              
              (1
              )
              
              1
              
              
              4
              
              
              5**Total:**
              
              
              19,170
              
              
              12,905
              
              
              32,075
              
              
              13,949
              
              
              6,026
              
              
              19,975**Increase
                  (decrease) in interest expense**:Interest-bearing
                  demand deposits
              
              
              54
              
              
              1,001
              
              
              1,055
              
              
              19
              
              
              322
              
              
              341Savings
                  deposits
              
              
              (9
              )
              
              4,370
              
              
              4,361
              
              
              210
              
              
              1,943
              
              
              2,153Time
                  deposits
              
              
              7,206
              
              
              6,537
              
              
              13,743
              
              
              1,367
              
              
              2,839
              
              
              4,206Subordinated
                  debentures
              
              
              700
              
              
              80
              
              
              780
              
              
              -
              
              
              199
              
              
              199Other
                  borrowings
              
              
              818
              
              
              2,624
              
              
              3,442
              
              
              845
              
              
              (121
              )
              
              724**Total:**
              
              
              8,769
              
              
              14,612
              
              
              23,381
              
              
              2,441
              
              
              5,182
              
              
              7,623**Increase
                  (decrease) in net interest income**
              
              $
              10,401
              
              $
              (1,707
              )
              $
              8,694
              
              $
              11,508
              
              $
              844
              
              $
              12,352


-34-
 Table
          of Contents


**Asset
      / Liability “Re-Pricing”**





The
      interest rate gaps reported in the table below arise when assets are funded
      with
      liabilities having different


“re-pricing”
      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 “re-pricing”
intervals. For purposes of the analysis below, “re-pricing” of fixed-rate
      instruments is based upon the contractual maturity of the applicable
      instruments. Actual payment patterns may differ from contractual payment
      patterns.





**By
                “Re-Pricing” Interval As of December 31, 2006**(Dollars
                  in thousands)
            
            **Within
                Three Months**
            
            **After
                Three Months, Within One Year**
            
            **After
                One Year, Within**
              **Five
                Years**
            
            **After
                Five Years**
            
            **Non-Interest
                Bearing Funds**
            
            **Total****Assets**Federal
                funds sold
            
            $
            150,680
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            150,680Time
                deposits at other institutions
            
            
            100
            
            
            250
            
            
            -
            
            
            -
            
            
            -
            
            
            350Investment
                securities
            
            
            -
            
            
            5,138
            
            
            55,328
            
            
            346,650
            
            
            17,480
            
            
            424,596Loans
            
            
            550,876
            
            
            82,986
            
            
            394,910
            
            
            195,989
            
            
            -
            
            
            1,224,761Non-interest
                earning assets and allowance for loan losses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            161,152
            
            
            161,152Total
                assets
            
            $
            701,656
            
            $
            88,374
            
            $
            450,238
            
            $
            542,639
            
            $
            178,632
            
            $
            1,961,539**Liabilities
                  and shareholders’ equity**Demand
                deposits
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            287,723
            
            $
            287,723Savings,
                money market & NOW deposits
            
            
            661,975
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            661,975Time
                deposits
            
            
            261,708
            
            
            353,083
            
            
            49,219
            
            
            1,633
            
            
            -
            
            
            665,643Other
                interest-bearing liabilities
            
            
            26,404
            
            
            5,293
            
            
            120,000
            
            
            -
            
            
            -
            
            
            151,697Subordinated
                debentures
            
            
            -
            
            
            -
            
            
            -
            
            
            31,960
            
            
            -
            
            
            31,960Other
                liabilities and shareholders’ equity
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162,541
            
            
            162,541Total
                liabilities and shareholders’ equity
            
            $
            950,087
            
            $
            358,376
            
            $
            169,219
            
            $
            33,593
            
            $
            450,264
            
            $
            1,961,539Interest
                rate sensitivity gap
            
            $
            (248,431
            )
            $
            (270,002
            )
            $
            281,019
            
            $
            509,046
            
            $
            (271,632
            )Cumulative
                interest rate sensitivity gap
            
            $
            (248,431
            )
            $
            (518,433
            )
            $
            (237,414
            )
            $
            271,632
            
            $
            -





**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 current and former 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 Company has purchased insurance on the lives of
        participants and intends to hold these policies until death as a cost recovery
        of plans the with universal life insurance policies containing cash
        surrender values as listed in the following table:




**December
                31,**(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**Cash
                surrender value of life insurance
            
            $
            43,051
            
            $
            31,796
            
            $
            28,362





During
      2006, 2005 and 2004 the Bank purchased $10,000,000, $3,000,000, and $3,175,000
      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 2006,
      2005
      and 2004, the Company received $179,000, $607,000 and $0 in proceeds related
      to
      death benefits on bank owned life insurance.


-35-
 Table
          of Contents


**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)
              
              **2006**
              
              **2005**
              
              **2004****Amount**
              
              **Yield**
              
              **Amount**
              
              **Yield**
              
              **Amount**
              
              **Yield**Non-interest
                  bearing demand deposits
              
              $
              274,895
              
              
              -
              %
              $
              274,750
              
              
              -
              %
              $
              213,864
              
              
              -
              %Interest-bearing
                  demand deposits
              
              
              204,637
              
              
              0.72
              
              
              183,017
              
              
              0.22
              
              
              148,951
              
              
              0.05Savings
                  deposits
              
              
              369,758
              
              
              2.62
              
              
              372,292
              
              
              1.43
              
              
              350,270
              
              
              0.90Time
                  deposits (under $100,000)
              
              
              252,255
              
              
              4.00
              
              
              198,374
              
              
              2.91
              
              
              182,016
              
              
              2.35Time
                  deposits ($100,000 and over)
              
              
              355,498
              
              
              4.47
              
              
              212,600
              
              
              3.05
              
              
              174,168
              
              
              2.17





**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,
      2006 are summarized as follows:





(Dollars
                in thousands)Three
                months or less
            
            $
            190,565Over
                three to six months
            
            
            103,261Over
                six to twelve months
            
            
            50,555Over
                twelve months
            
            
            21,853**Total**
            
            $
            366,234





**Non-Interest
      Income**





The
      following table summarizes non-interest income for the years ended December
      31,





(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **Change
                in 2006**
            
            **%
                Change in 2006**
            
            **2004**
            
            **Change
                in 2005**
            
            **%
                Change in 2005****Non-Interest
                Income:**Deposit
                service charges
            
            $
            6,122
            
            $
            5,924
            
            $
            198
            
            
            3
            %
            $
            6,134
            
            $
            (210
            )
            
            (3
            )%Gain
                on the sale of real estate
            
            
            190
            
            
            -
            
            
            190
            
            
            100
            
            
            -
            
            
            -
            
            
            -Increase
                in cash surrender value of bank owned insurance
            
            
            1,434
            
            
            1,041
            
            
            393
            
            
            38
            
            
            1,066
            
            
            (25
            )
            
            (2
            )Loan
                packaging fees
            
            
            664
            
            
            589
            
            
            75
            
            
            13
            
            
            398
            
            
            191
            
            
            48Gain
                on sale of loans
            
            
            202
            
            
            235
            
            
            (33
            )
            
            (14
            )
            
            251
            
            
            (16
            )
            
            (6
            )Retail
                investment income
            
            
            414
            
            
            405
            
            
            9
            
            
            2
            
            
            873
            
            
            (468
            )
            
            (54
            )Gain
                (loss) on sale or impairment of securities
            
            
            622
            
            
            -
            
            
            622
            
            
            100
            
            
            (3,665
            )
            
            3,665
            
            
            100Bank
                owned life insurance death benefit
            
            
            179
            
            
            539
            
            
            (360
            )
            
            (67
            )
            
            -
            
            
            541
            
            
            100Asset
                based lending fees
            
            
            503
            
            
            -
            
            
            503
            
            
            100
            
            
            -
            
            
            -
            
            
            -Other
            
            
            1,808
            
            
            1,469
            
            
            339
            
            
            23
            
            
            1,348
            
            
            119
            
            
            9**Total
                Non-Interest Income:**
            
            $
            12,138
            
            $
            10,202
            
            $
            1,936
            
            
            19
            %
            $
            6,405
            
            $
            3,797
            
            
            59
            %


-36-
 Table
            of Contents




The
      increase in non-interest income in 2006 was primarily the result of a gain
      on
      available-for-sale securities of $622,000, the addition of asset based lending
      fees of $503,000, and an increase in the cash surrender value of bank owned
      life
      insurance of $393,000. The increase in 2005 was primarily the result of the
      receipt of bank owned life insurance benefit of $541,000, increased other
      non-interest income, and the absence of an other than temporary impairment
      on
      securities of $3,665,000 in 2005 compared to 2004 where an other than temporary
      impairment occurred in the fourth quarter. The increase in deposit service
      charges in 2006 was primarily the result of increased rejected item charges
      of
      $209,000. 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. Loan packaging fees increased due to continued low market rates for
      mortgages in 2006 and increased in 2005 primarily due to a strong mortgage
      market and more affordable terms in that market. Retail investment income
      remained flat in 2006, and declined in 2005 primarily due to the October 15,
      2004 divesture of RIA. Other components of non-interest income include letters
      of credit commitment fees, operating recoveries, miscellaneous income and ATM
      fee income.





**Non-Interest
      Expense**





The
      following table summarizes non-interest expense and changes for the years ended
      December 31,





(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **Change
                in 2006**
            
            **%
                Change in 2006**
            
            **2004**
            
            **Change
                in 2005**
            
            **%
                Change in 2005****Non-Interest
                Expense:**Salaries
                and benefits
            
            $
            29,165
            
            $
            22,763
            
            $
            6,402
            
            
            28
            %
            $
            20,697
            
            $
            2,066
            
            
            10
            %Premises
                and occupancy
            
            
            5,581
            
            
            4,498
            
            
            1,083
            
            
            24
            
            
            3,446
            
            
            1,052
            
            
            31Equipment
            
            
            4,305
            
            
            3,961
            
            
            344
            
            
            9
            
            
            3,186
            
            
            775
            
            
            24Professional
                fees
            
            
            2,699
            
            
            2,310
            
            
            389
            
            
            17
            
            
            1,671
            
            
            639
            
            
            38Supplies
            
            
            1,070
            
            
            1,057
            
            
            13
            
            
            1
            
            
            873
            
            
            184
            
            
            21Marketing
                expense
            
            
            1,576
            
            
            1,165
            
            
            411
            
            
            35
            
            
            1,062
            
            
            103
            
            
            10Intangible
                amortization
            
            
            23
            
            
            46
            
            
            (23
            )
            
            (50
            )
            
            655
            
            
            (609
            )
            
            (93
            )Charitable
                donations
            
            
            1,037
            
            
            859
            
            
            178
            
            
            21
            
            
            584
            
            
            275
            
            
            47Communications
            
            
            1,493
            
            
            1,251
            
            
            242
            
            
            19
            
            
            970
            
            
            281
            
            
            29Other
            
            
            5,563
            
            
            4,769
            
            
            794
            
            
            17
            
            
            4,531
            
            
            238
            
            
            5Total
                non-interest expense:
            
            $
            52,512
            
            $
            42,679
            
            $
            9,833
            
            
            23
            %
            $
            37,675
            
            $
            5,004
            
            
            13
            %





In
      2006,
      non-interest expenses increased by $9,833,000 due primarily to increases in
      salaries and benefits of $6,402,000 that were the result of management and
      support staff increases necessary to accommodate branch expansion, normal salary
      progression, the addition of an asset based lending group in 2006 and equity
      compensation expense. For 2006, equity compensation expense of $717,000 was
      recorded. The $1,083,000 increase in premises and occupancy expense was due
      primarily to branch expansion and remodeling costs. The increase **** in
      equipment expenses in 2006 was primarily due to new equipment costs within
      the
      branch network, depreciation of prior year’s equipment, and general growth of
      the Company. Equipment expenses include depreciation of equipment purchased
      in
      prior years, expense of equipment with a life of less than one year, rented
      equipment, and repairs and maintenance on existing equipment. The Company’s
      professional fees include legal, consulting, audit and accounting fees. The
      Company’s professional fees increased due to increased usage of professional
      consultants. The increase in 2005 over 2004 was primarily the result of the
      retention of an internal auditing consultant whose fees where greater than
      the
      prior consultant and increased external auditor fees. Intangible amortization
      declined in 2006 primarily because of the full amortization of all intangible
      item assets.


-37-
 Table
          of Contents


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 2005 and 2006. Charitable donations
      have increased in 2006 due to increased giving to the communities we served.
      The
      Company has a policy of donating 5% of net income to the communities we served.
      Growth in other non-interest expense in 2006 and 2005 was due to increased
      costs
      related to the growth of the Company, which include increased costs related
      to
      postage, travel, and telephone expenses.





**Provision
      for Income Taxes**





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 formed the
      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.
      The
      Company’s investment 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 and filed state amended
      tax returns in April 2004 for the tax years 2001 and 2002. Management decided
      to
      discontinue pursuit of the strategy in 2006 and subsequently liquidated and
      inactivated the REIT.





The
      Company's provision for income taxes was $10,598,000 **** in
      2006
      compared to a provision for income taxes of $9,962,000 and $7,150,000 in 2005
      and 2004. The effective income tax rates (computed as taxes as a percentage
      of
      income before taxes) were 32%, 32%, and 37% for 2006, 2005, and 2004. During
      2006 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 and
      non-taxable interest income received from bank qualified municipal
      securities. **** In 2004,
      the tax rate was in excess of the statutory rate due primarily to the payment
      of
      $2,411,000 in additional state income taxes in conjunction with the State of
      California’s Voluntary Compliance Initiative in April of 2004. Total housing tax
      credits for 2006, 2005, and 2004 were approximately $968,000 , **** $980 ,000 ,
      and
      $1,028,000. During 2006 additional housing tax credits were claimed related
      to
      prior year tax returns in the amount of $260,000. In addition, during 2006,
      2005, and 2004, the Company realized tax benefits of approximately
      $1,113,000 **,** $1,116,000,
      and $726,000 from nontaxable interest income received from bank qualified
      municipal securities.





**Securities**





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





(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**U.S.
                government agencies
            
            $
            40,199
            
            $
            40,234
            
            $
            25,128State
                and political subdivisions
            
            
            1,266
            
            
            1,286
            
            
            1,325Mortgage-backed
                securities
            
            
            181,143
            
            
            208,171
            
            
            138,081Collateralized
                mortgage obligations
            
            
            13,784
            
            
            32,416
            
            
            61,882Corporate
                securities
            
            
            -
            
            
            -
            
            
            -Total
                debt securities
            
            
            236,392
            
            
            282,107
            
            
            226,416Agency
                preferred stock
            
            
            5,666
            
            
            10,946
            
            
            18,001Trust
                preferred stock
            
            
            -
            
            
            -
            
            
            -Equity
                securities
            
            
            14,480
            
            
            25,102
            
            
            24,772Total
                carrying value and fair value:
            
            $
            256,538
            
            $
            318,155
            
            $
            269,189


-38-
 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)
            
            **2006**
            
            **2005**
            
            **2004**State
                and political subdivisions
            
            $
            99,747
            
            $
            100,045
            
            $
            69,894Mortgage-backed
                securities
            
            
            55,599
            
            
            62,484
            
            
            72,713Collateralized
                mortgage obligations
            
            
            12,712
            
            
            18,496
            
            
            24,380Carrying
                amount (amortized cost)
            
            $
            168,058
            
            $
            181,025
            
            $
            166,987Fair
                value
            
            $
            166,266
            
            $
            178,233
            
            $
            168,265





Available
      for sale securities decreased **** $61,617,000 **** or
      19% **** to
      $256,538,000 at December 31, 2006 compared with a balance of $318,155,000 at
      December 31, 2005. Held to maturity securities decreased $12,967,000 **** or
      7% to
      $168,058,000 **** at
      December 31, 2006 compared to $181,025,000 outstanding at December 31, 2005.
      The
      decrease within the available for sale and held to maturity segment of the
      securities portfolio was the result of the Company using maturing securities
      to
      retire debt in conjunction with the sale of certain equity securities whose
      values, management believed, reached a level where a sale was advantageous
      to
      the Company. 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 portfolio. At
      December 31, 2006 and 2005 the Company did not hold any structured notes. See
      Note 1 and 2 to the Company’s Consolidated Financial Statements included in Item
      8 of this report for further information concerning the securities portfolio.





The
      following table sets forth the maturities of debt securities at December 31,
      2006 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
            
            $
            4,893
            
            
            2.80
            %
            $
            30,400
            
            
            4.99
            %
            $
            4,906
            
            
            4.53
            %
            $
            -
            
            
            -
            %
            $
            40,199State
                and political subdivisions
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            250
            
            
            4.78
            
            
            1,016
            
            
            4.99
            
            
            1,266Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            13,052
            
            
            4.40
            
            
            33,891
            
            
            4.73
            
            
            134,200
            
            
            4.81
            
            
            181,143Collateralized
                mortgage obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,724
            
            
            4.47
            
            
            12,060
            
            
            4.39
            
            
            13,784Corporate
                debt securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Held
                to Maturity Debt Securities:**U.S.
                government agencies
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -State
                and political subdivisions
            
            
            473
            
            
            4.38
            
            
            12,340
            
            
            4.24
            
            
            24,580
            
            
            4.32
            
            
            62,354
            
            
            4.47
            
            
            99,747Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            450
            
            
            7.06
            
            
            55,149
            
            
            4.87
            
            
            55,599Collateralized
                mortgage obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            12,712
            
            
            5.08
            
            
            12,712**Total
                Debt Securities:**
            
            $
            5,366
            
            
            2.94
            %
            $
            55,792
            
            
            4.68
            %
            $
            65,801
            
            
            4.57
            %
            $
            277,491
            
            
            4.74
            %
            $
            404,450





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


-39-
 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, 2006 was $400,000 compared to $2,051,000 in 2005 and $2,731,000
      in
      2004. The decreased level of provision for loan losses in 2006 when compared
      to
      2005 was primarily the result of decreased classified credits which were
      partially offset by the reserves that were assigned to higher loan volumes
      at
      expected loss experience rates. 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 loans which were partially offset by the
      reserves that were assigned to higher loan volumes at expected loss experience
      rates. 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 Review 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 periodic
      basis. For more information related to the provision for loan loss see the
      “Allowance for Loan Losses” section.





**Loans**





Total
      loans increased due to, among other things, increased penetration within
      existing geographic markets. The 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
      $30,015,000. Interest rates charged for loans made by the Company vary with
      the
      degree of risk, the size and term of the loan, borrowers’ depository
      relationships with the Company and prevailing market rates.





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





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





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


-40-
 Table
          of Contents


At
      December 31, 2006, the Company had approximately $445,189,000 in undisbursed
      loan commitments. This compares with $495,313,000 at December 31, 2005. Standby
      and performance letters of credit were $6,739,000 and $15,160,000, at December
      31, 2006 and 2005. For more information regarding these loan commitments, See
      Footnote 9, under the section titled “Commitments and Financial Instruments with
      Off-Balance Sheet Credit Risk” in the consolidated financial statements included
      in Item 8 of this report.





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





For
                the Year Ended December 31,2006
            
            2005
            
            2004
            
            2003
            
            2002(Dollars
              in thousands)
            
            Amount
            
            Amount
            
            Amount
            
            Amount
            
            AmountCommercial
                and agricultural
            
            $
            401,689
            
            $
            347,104
            
            $
            298,122
            
            $
            288,138
            
            $
            242,157Real
                estate -construction
            
            
            177,233
            
            
            167,992
            
            
            97,396
            
            
            89,652
            
            
            78,064Real
                estate - mortgage
            
            
            542,080
            
            
            471,266
            
            
            416,385
            
            
            318,624
            
            
            244,468Consumer
                installment
            
            
            103,759
            
            
            82,534
            
            
            73,190
            
            
            67,838
            
            
            69,084**Total**
            
            $
            1,224,761
            
            $
            1,068,896
            
            $
            885,093
            
            $
            764,252
            
            $
            633,773





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, 2006 by fixed and floating rate attributes:




December
                    31, 2006**Within**
                
                **One
                    to**
                
                **Over**(Dollars
                    in thousands)
                
                **One
                    Year**
                
                **Five
                    Years**
                
                **Five
                    Years**
                
                **Total*****Commercial
                    and Agricultural***Loans
                    with floating rates
                
                $
                152,307
                
                $
                52,921
                
                $
                26,705
                
                $
                231,933Loans
                    with predetermined rates
                
                
                52,138
                
                
                101,181
                
                
                16,437
                
                
                169,756Subtotal
                
                
                204,445
                
                
                154,102
                
                
                43,142
                
                
                401,689***Real
                    Estate—Construction***Loans
                    with floating rates
                
                
                152,604
                
                
                21,077
                
                
                304
                
                
                173,985Loans
                    with predetermined rates
                
                
                3,248
                
                
                -
                
                
                -
                
                
                3,248Subtotal
                
                
                155,852
                
                
                21,077
                
                
                304
                
                
                177,233***Real
                    Estate—Mortgage***Loans
                    with floating rates
                
                
                50,843
                
                
                85,122
                
                
                290,509
                
                
                426,474Loans
                    with predetermined rates
                
                
                5,008
                
                
                41,942
                
                
                68,656
                
                
                115,606Subtotal
                
                
                55,851
                
                
                127,064
                
                
                359,165
                
                
                542,080***Consumer
                    Installment***Loans
                    with floating rates
                
                
                230
                
                
                4,433
                
                
                64,838
                
                
                69,501Loans
                    with predetermined rates
                
                
                1,419
                
                
                1,213
                
                
                31,626
                
                
                34,258Subtotal
                
                
                1,649
                
                
                5,646
                
                
                96,464
                
                
                103,759**Total**
                
                $
                417,797
                
                $
                307,889
                
                $
                499,075
                
                $
                1,224,761


All
      loans
      that do not have a maturity date are included in “Over Five Years”
category.


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 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 Review Committee
      reviews the status of delinquent and problem loans on a periodic 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.





**Non-Accrual,
      Past Due and Restructured Loans**





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





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Amount
            
            Amount
            
            Amount
            
            Amount
            
            Amount(Dollars
              in thousands)Non-accrual
                loans
            
            $
            2,375
            
            $
            1,692
            
            $
            4,394
            
            $
            3,987
            
            $
            2,381Accruing
                loans past due 90 days or more
            
            
            -
            
            
            208
            
            
            -
            
            
            -
            
            
            2Total
                non-performing loans
            
            
            2,375
            
            
            1,900
            
            
            4,394
            
            
            3,987
            
            
            2,383Other
                real estate owned
            
            
            60
            
            
            60
            
            
            60
            
            
            60
            
            
            60Total
                non-performing assets
            
            $
            2,435
            
            $
            1,960
            
            $
            4,454
            
            $
            4,047
            
            $
            2,443Non-performing
                loans to total loans
            
            
            0.19
            %
            
            0.18
            %
            
            0.50
            %
            
            0.52
            %
            
            0.38
            %Non-performing
                assets to total assets
            
            
            0.12
            %
            
            0.11
            %
            
            0.30
            %
            
            0.33
            %
            
            0.24
            %





Loans
      with significant potential problems or impaired loans are placed on non-accrual
      status. A loan is generally considered impaired when, based upon current
      information and events, it is probable that a creditor will be unable to collect
      all amounts (i.e., including both contractual interest and principal payments)
      due according to the contractual terms of the loan agreement.





The
      amount of gross interest income that would have been recorded on non-accrual
      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 $137,000, $63,000, $4,000,
      $39,000, and $131,000 in 2006, 2005, 2004, 2003, and 2002. The amount of
      interest income on non-accrual loans that was included in net income was
      $168,000, $88,000, $216,000, $231,000, and $210,000 in 2006, 2005, 2004, 2003,
      and 2002.


-42-
 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:





**For
                  the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(Dollars
                in thousands)
            
            Amount
            
            Loans
                % to totalloans
            
            Amount
            
            Loans
                % to totalloans
            
            Amount
            
            Loans
                % to Totalloans
            
            Amount
            
            Loans
                % to totalloans
            
            Amount
            
            Loans
                % to totalloansCommercial
                and agricultural
            
            $
            4,983
            
            
            33
            %
            $
            6,024
            
            
            32
            %
            $
            4,626
            
            
            34
            %
            $
            4,759
            
            
            38
            %
            $
            4,438
            
            
            38
            %Real
                estate -construction
            
            
            1,658
            
            
            15
            
            
            2,474
            
            
            16
            
            
            1,497
            
            
            11
            
            
            1,503
            
            
            12
            
            
            1,402
            
            
            12Real
                estate - mortgage
            
            
            3,882
            
            
            44
            
            
            5,598
            
            
            44
            
            
            6,394
            
            
            47
            
            
            5,135
            
            
            41
            
            
            4,555
            
            
            39Installment
            
            
            3,508
            
            
            8
            
            
            680
            
            
            8
            
            
            1,088
            
            
            8
            
            
            1,127
            
            
            9
            
            
            1,285
            
            
            11**Total**
            
            $
            14,031
            
            
            100
            %
            $
            14,776
            
            
            100
            %
            $
            13,605
            
            
            100
            %
            $
            12,524
            
            
            100
            %
            $
            11,680
            
            
            100
            %





**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 non-accrual
      status and restructured loans. Loans are generally placed on non-accrual 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 non-accrual status if management reasonably believes
      the borrower will not be able to comply with the contractual loan repayment
      terms and the collection of principal or interest is in question.





A
      loan is
      generally considered impaired when, based upon current information and events,
      it is probable that a creditor will be unable to collect all amounts (i.e.,
      including both contractual interest and principal payments) due according to
      the
      contractual terms of the loan agreement. An impaired loan is charged off at
      the
      time management believes the collection of principal and interest process has
      been exhausted. Partial charge-offs are recorded when portions of impaired
      loans
      are deemed un-collectable. At December 31, 2006 and 2005, impaired loans were
      measured based upon the present value of expected 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.


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 Table
          of Contents


The
      Company had impaired loans at December 31, 2006 of $2,375,000 as compared with
      $1,692,000 at December 31, 2005. The Company had no loans with specific
      allowance for loan losses against impaired loans at December 31, 2006 as
      compared to $254,000 at December 31, 2005. Other forms of collateral, such
      as
      inventory, chattel, and equipment secure the remaining nonperforming loans
      as of
      each date. Management believes the increase in impaired loans between 2005
      and
      2006 can be attributed to individual customers with specific circumstances
      and
      not a degradation of overall credit quality of the loan portfolio.





In
      May
      2006, the Bank obtained two properties through foreclosure. During September
      2006, one of these properties was sold. At December 31, 2006 the Company had
      $60,000 invested in two real estate properties that were acquired through
      foreclosure. At December 31, 2005, the Company had $60,000 invested in one
      real
      estate property that was acquired through foreclosure. These properties were
      carried at the lower of their estimated market value, as evidenced by an
      independent appraisal, or the recorded investment in the related loan, less
      estimated selling expenses.





**Allowance
      for Loan Losses**





In
      determining the adequacy of the allowance for loan losses, management takes
      into
      consideration the growth trend in the portfolio, results of examinations by
      financial institution supervisory authorities, internal and external credit
      reviews, prior 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 will vary from current estimates. It is always
      possible that future economic or other factors may adversely affect the
      Company’s borrowers, and thereby cause actual loan losses to exceed the current
      allowance for loan losses.





The
      balance in the allowance for loan losses was affected by the amounts provided
      from operations, amounts charged-off and recoveries of loans previously charged
      off. The Company had provisions to the allowance in 2006 of $400,000 as compared
      to $2,051,000 and $2,731,000 in 2005 and 2004. 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)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002**Allowance
                for Loan Losses:**Balance
                at beginning of year
            
            $
            14,776
            
            $
            13,605
            
            $
            12,524
            
            $
            11,680
            
            $
            9,377Provision
                for loan losses
            
            
            400
            
            
            2,051
            
            
            2,731
            
            
            2,170
            
            
            4,063Charge-offs:Commercial
                and agricultural
            
            
            2,134
            
            
            1,664
            
            
            1,860
            
            
            1,010
            
            
            1,504Real-estate
                - mortgage
            
            
            -
            
            
            -
            
            
            -
            
            
            29
            
            
            -Consumer
            
            
            495
            
            
            318
            
            
            436
            
            
            956
            
            
            1,085Total
                charge-offs
            
            
            2,629
            
            
            1,982
            
            
            2,296
            
            
            1,995
            
            
            2,589**Recoveries**:Commercial
                and agricultural
            
            
            1,337
            
            
            903
            
            
            344
            
            
            302
            
            
            233Real-estate
                - mortgage
            
            
            -
            
            
            -
            
            
            12
            
            
            -
            
            
            -Consumer
            
            
            147
            
            
            199
            
            
            290
            
            
            367
            
            
            596Total
                recoveries
            
            
            1,484
            
            
            1,102
            
            
            646
            
            
            669
            
            
            829Net
                charge-offs
            
            
            1,145
            
            
            880
            
            
            1,650
            
            
            1,326
            
            
            1,760**Balance
                at End of Year:**
            
            $
            14,031
            
            $
            14,776
            
            $
            13,605
            
            $
            12,524
            
            $
            11,680Loans
                outstanding at year end
            
            $
            1,224,761
            
            $
            1,068,896
            
            $
            885,093
            
            $
            764,252
            
            $
            633,773Average
                loans outstanding
            
            
            1,187,156
            
            
            968,492
            
            
            813,050
            
            
            687,419
            
            
            576,156Net
                charge-offs to average loans
            
            
            0.10
            %
            
            0.09
            %
            
            0.20
            %
            
            0.19
            %
            
            0.31
            %**Allowance
                for Loan Losses:**To
                total loans
            
            
            1.15
            %
            
            1.38
            %
            
            1.54
            %
            
            1.64
            %
            
            1.84
            %To
                non-performing loans
            
            
            590.78
            %
            
            777.68
            %
            
            309.63
            %
            
            314.12
            %
            
            490.14
            %To
                non-performing assets
            
            
            576.22
            %
            
            753.88
            %
            
            305.46
            %
            
            309.46
            %
            
            478.10
            %


-44-
 Table
          of Contents




**Net
      Charge-Offs**





In
      2006
      the increase in charge-offs was primarily due to an increase in charge-offs
      of
      $470,000 in the commercial segments of the loan portfolio. This increase was
      partially offset by an increase in recoveries of $434,000 in the commercial
      segments of the Bank’s loan portfolio. A strong real estate market, increased
      collateral values, and strong profit margin in real estate have continued to
      contributed to the overall low net charge-offs experience.





**Liquidity**





The
      maintenance of 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 and management
      fees from the Bank. Dividends from the Bank are subject to certain regulatory
      limitations.





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
      $452,421,000 and $410,086,000 at December 31, 2006 and 2005 and were 23% of
      total assets on December 31, 2006 and 2005. Cash and non-interest-bearing
      deposits in other banks decreased $16,478,000 or 27% to $44,853,000 at December
      31, 2006, compared to $61,331,000 at December 31, 2005. The decrease in the
      2006
      cash position when compared to 2005 was the result of decreased cash letters
      in
      process of collection at the end of December 2006 when compared to the same
      period in 2005. Liquidity is also affected by collateral requirements of the
      Bank’s public agency deposits and certain borrowings. Total pledged securities
      were $280,182,000 and $452,337,000 at December 31, 2006 and 2005. The decrease
      of $172,155,000 in pledged securities is the result of the Bank pledging loans
      as collateral for borrowings in place of using securities for collateral.





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
      $239,289,000 of which $46,500,000 was outstanding as of December 31, 2006.
      This
      compares with lines of credit of $260,684,000 of which $93,384,000 was
      outstanding as of December 31, 2005.





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**
            
            **Total**Borrowings
            
            $
            31,697
            
            $
            -
            
            $
            120,000
            
            $
            -
            
            $
            151,697Junior
                subordinated debentures
            
            
            -
            
            
            -
            
            
            -
            
            
            31,960
            
            
            31,960Operating
                leases
            
            
            2,303
            
            
            4,251
            
            
            3,606
            
            
            6,268
            
            
            16,428Purchase
                obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            34,000
            
            $
            4,251
            
            $
            123,606
            
            $
            38,228
            
            $
            200,085





Borrowings,
      junior subordinated debentures, operating lease obligations and purchase
      obligations are discussed in the consolidated financial statements at Notes
      5,
      6, and 9, in the consolidated financial statements included in this report
      as
      Item 8. The table excludes the contractual commitments and arrangements
      described previously under the Loans caption, which depending on the nature
      of
      the obligation, may or may not require use of the Company’s
      resources.


-45-
 Table
          of Contents


**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 “re-pricing” characteristics of assets,
      liabilities, and off-balance sheet instruments at a specified point in time.
      Mismatches in interest rate “re-pricing” 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 by the Company of it’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.





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 under the derivative instruments and hedging activities
      section in the consolidated financial statements included in the report as
      Item
      8.





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 under the section entitled “Other Borrowings” in
      the consolidated financial statements included in this report as Item
      8.





The
      Company’s interest rate risk management is the responsibility of it’s
      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. Management monitors 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 “re-price” on a different basis than interest-earning
      assets. When interest-bearing liabilities mature or “re-price” 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 “re-price” more quickly than interest-bearing
      liabilities, falling interest rates could result in a decrease in net interest
      income.


-46-
 Table
          of Contents


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, 2006 and up 2 percent and
      down 2 percent over a twelve month period at December 31, 2005, 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.





The
      estimated impact of immediate changes in interest rates at the specified levels
      at December 31, 2006 and 2005 is presented in the following tables:





**December
      31, 2006**





**Change
                in Interest Rates**
              **(In
                basis points)**
            **Change
                in Net Interest**
              **Income(1)**
            **Percentage
                Change in Net Interest**
              **Income**+200
            $(214,000)
            (0.30)%-200
            $(692,000)
            (0.99)%





**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)%





(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.





It
      should
      be emphasized that the foregoing estimates are dependent on material assumptions
      such as those discussed above. For instance, a different assumption such as
      an
      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 policies to obtain
      the maximum yield-cost spread. The Company relies primarily on its
      asset-liability structure to manage 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 consolidated financial
      statements included in this report as Item 8 in this Report.


-47-
 Table
          of Contents


**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, 2006, that the
      Company and the Bank meet all capital requirements to which they are subject.
      The Company's leverage capital ratio at December 31, 2006 was 9.33% as compared
      with 8.57% as of December 31, 2005. The Company's total risk-based capital
      ratio
      at December 31, 2006 was 12.49% as compared to 11.13% as of December 31, 2005.





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%.





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 2007 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 and policy 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, 2006 of $38,573,000 and
      the Bank had the ability to pay cash dividends to the Company of
      $12,834,000.





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





**Return
      on Equity and Assets**





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





**For
                the Year Ended December
                31,****2006**
            
            **2005**
            
            **2004**Return
                on average assets
            
            
            1.25
            %
            
            1.36
            %
            
            0.94
            %Return
                on average equity
            
            
            16.85
            
            
            18.54
            
            
            12.69Average
                equity to average assets
            
            
            7.44
            
            
            7.34
            
            
            7.41Dividend
                payout ratio
            
            
            13.7
            %
            
            9.0
            %
            
            9.4
            %




-49-


**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, 2006, 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 the Company maintained effective internal
        control over financial reporting as of December 31, 2006, 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, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2006, 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, 2006 and 2005, 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, 2006, and our report dated March 14, 2007
        expressed an unqualified opinion on those consolidated financial
        statements.
  /s/
        KPMG
        LLP
  Sacramento,
        California
  March 14,
        2007


-50-


**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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their
        operations and their cash flows for each of the years in the three-year period
        ended December 31, 2006, 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 the Company’s internal
        control over financial reporting as of December 31, 2006, 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 14, 2007 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 14,
        2007


-51-
 Table
          of Contents




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





For
      management's discussion and analysis of market risk and interest rate risk
      management, see Item 7 above.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**


-52-
 Table
          of Contents


**Capital
      Corp of the West**


**Consolidated
      Balance Sheets**




As
                of December 31,(Dollars
                in thousands)
            
            2006
            
            2005**ASSETS:**Cash
                and non-interest-bearing deposits in other banks
            
            $
            44,853
            
            $
            61,331Federal
                funds sold
            
            
            150,680
            
            
            30,250Time
                deposits at other financial institutions
            
            
            350
            
            
            350Investment
                securities available for sale, at fair value
            
            
            256,538
            
            
            318,155Investment
                securities held to maturity, at cost; fair value of $166,266 and
                $178,233
                in 2006 and 2005
            
            
            168,058
            
            
            181,025Loans,
                net of allowance for loan losses of $14,031 and $14,776 at December
                31,
                2006 and December 31, 2005
            
            
            1,210,730
            
            
            1,054,120Interest
                receivable
            
            
            9,819
            
            
            8,305Premises
                and equipment, net
            
            
            42,320
            
            
            28,970Goodwill
            
            
            1,405
            
            
            1,405Other
                intangibles
            
            
            -
            
            
            23Cash
                value of life insurance
            
            
            43,051
            
            
            31,796Investment
                in housing tax credit limited partnerships
            
            
            10,082
            
            
            8,745Other
                assets
            
            
            23,653
            
            
            32,281Total
                assets:
            
            $
            1,961,539
            
            $
            1,756,756**LIABILITIES:**Deposits:Non-interest-bearing
                demand
            
            $
            287,723
            
            $
            310,284Negotiable
                orders of withdrawal
            
            
            225,481
            
            
            216,594Savings
            
            
            436,494
            
            
            426,581Time,
                under $100,000
            
            
            299,409
            
            
            216,016Time,
                $100,000 and over
            
            
            366,234
            
            
            235,025Total
                deposits
            
            
            1,615,341
            
            
            1,404,500Other
                borrowings
            
            
            151,697
            
            
            201,728Junior
                subordinated debentures
            
            
            31,960
            
            
            16,496Accrued
                interest, taxes and other liabilities
            
            
            14,961
            
            
            11,787Total
                liabilities:
            
            
            1,813,959
            
            
            1,634,511**SHAREHOLDERS’
                EQUITY:**Preferred
                stock, no par value; 10,000,000 shares authorized; none
                outstanding
            
            
            -
            
            
            -Common
                stock, no par value; 54,000,000 shares authorized; 10,760,762 and
                10,575,361 issued and outstanding at December 31, 2006 and 2005
            
            
            64,586
            
            
            59,785Retained
                earnings
            
            
            84,614
            
            
            65,049Accumulated
                other comprehensive (loss) income, net
            
            
            (1,620
            )
            
            (2,589
            )Total
                shareholders’ equity
            
            
            147,580
            
            
            122,245Total
                liabilities and shareholders’ equity
            
            $
            1,961,539
            
            $
            1,756,756


(See
      accompanying notes to consolidated financial statements.)




-53-
 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)
            
            2006
            
            2005
            
            2004**INTEREST
                INCOME:**Interest
                and fees on loans
            
            $
            100,435
            
            $
            71,924
            
            $
            55,303Interest
                on time deposits with other financial institutions
            
            
            19
            
            
            20
            
            
            15Interest
                on investment securities held to maturity:Taxable
            
            
            3,603
            
            
            4,231
            
            
            2,488Non-taxable
            
            
            3,784
            
            
            3,421
            
            
            2,167Interest
                on investment securities available for sale:Taxable
            
            
            12,764
            
            
            10,123
            
            
            10,288Non-taxable
            
            
            44
            
            
            44
            
            
            44Interest
                on federal funds sold
            
            
            1,500
            
            
            401
            
            
            266Total
                interest income
            
            
            122,149
            
            
            90,164
            
            
            70,571**INTEREST
                EXPENSE:**Deposits:Negotiable
                orders of withdrawal
            
            
            1,466
            
            
            411
            
            
            70Savings
            
            
            9,679
            
            
            5,318
            
            
            3,165Time,
                under $100,000
            
            
            10,097
            
            
            6,027
            
            
            4,426Time,
                $100,000 and over
            
            
            15,905
            
            
            6,232
            
            
            3,627Total
                Iiterest on deposits
            
            
            37,147
            
            
            17,988
            
            
            11,288Interest
                on subordinated debentures
            
            
            2,131
            
            
            1,351
            
            
            1,152Other
                borrowings
            
            
            8,823
            
            
            5,381
            
            
            4,657Total
                interest expense
            
            
            48,101
            
            
            24,720
            
            
            17,097Net
                interest income
            
            
            74,048
            
            
            65,444
            
            
            53,474Provision
                for loan losses
            
            
            400
            
            
            2,051
            
            
            2,731Net
                interest income after provision for loan losses
            
            
            73,648
            
            
            63,393
            
            
            50,743**NON-INTEREST
                INCOME:**Service
                charges on deposit accounts
            
            
            6,122
            
            
            5,924
            
            
            6,134Gain
                (loss) on sale or impairment of available for sale
                securities
            
            
            622
            
            
            -
            
            
            (3,665
            )Increase
                in cash surrender value of life insurance policies
            
            
            1,434
            
            
            1,041
            
            
            1,066Other
            
            
            3,960
            
            
            3,237
            
            
            2,870Total
                non-interest income
            
            
            12,138
            
            
            10,202
            
            
            6,405**NON-INTEREST
                EXPENSES:**Salaries
                and related benefits
            
            
            29,165
            
            
            22,763
            
            
            20,697Premises
                and occupancy
            
            
            5,581
            
            
            4,498
            
            
            3,446Equipment
            
            
            4,305
            
            
            3,961
            
            
            3,186Professional
                fees
            
            
            2,699
            
            
            2,310
            
            
            1,671Supplies
            
            
            1,070
            
            
            1,057
            
            
            873Marketing
            
            
            1,576
            
            
            1,165
            
            
            1,062Intangible
                amortization
            
            
            23
            
            
            46
            
            
            655Charitable
                donations
            
            
            1,037
            
            
            859
            
            
            584Communications
            
            
            1,493
            
            
            1,251
            
            
            970Other
            
            
            5,563
            
            
            4,769
            
            
            4,531Total
                non-interest expenses
            
            
            52,512
            
            
            42,679
            
            
            37,675Income
                before provision for income taxes
            
            
            33,274
            
            
            30,916
            
            
            19,473Provision
                for income taxes
            
            
            10,598
            
            
            9,962
            
            
            7,150Net
                income
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323**COMPREHENSIVE
                INCOME:**Unrealized
                (loss) gain on securities arising during the year, net
            
            $
            1,214
            
            $
            (2,426
            )
            $
            (80
            )Unrealized
                loss on interest rate floor arising during the year, net
            
            $
            (215
            )
            $
            (524
            )
            $
            -Change
                in minimum pension liability during the year, net
            
            $
            (30
            )
            
            -
            
            
            -Comprehensive
                income
            
            $
            23,645
            
            $
            18,004
            
            $
            12,243Basic
                earnings per share
            
            $
            2.12
            
            $
            2.00
            
            $
            1.19Diluted
                earnings per share
            
            $
            2.07
            
            $
            1.94
            
            $
            1.15


(See
      accompanying notes to consolidated financial statements.)


-54-
 Table
          of Contents


**Capital
      Corp of the West**


**Consolidated
      Statements of Shareholders’ Equity**




(In
                thousands )
            
            Number
                of shares
            
            Amounts
            
            Retained
                Earnings
            
            Comprehensive
                Income (Loss), Net
            
            Total**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**Exercise
                of stock options,
              including
                tax benefit of $1,248
            
            
            186
            
            
            4,084
            
            
            -
            
            
            -
            
            
            4,084Effect
                of share based compensation expense
            
            
            -
            
            
            717
            
            
            
            
            
            
            
            
            717Net
                change in fair value of investment securities, net of tax effect
                of
                $891
            
            
            -
            
            
            -
            
            
            -
            
            
            1,214
            
            
            1,214Net
                change in fair value of interest rate floor, net of tax benefit of
                $156
            
            
            -
            
            
            -
            
            
            -
            
            
            (215
            )
            
            (215
            )Adjustment
                to initially apply FASB Statement No. 158, net of tax benefit of
                $23
            
            
            
            
            
            
            
            
            
            
            
            (30
            )
            
            (30
            )Cash
                dividends
            
            
            -
            
            
            -
            
            
            (3,111
            )
            
            -
            
            
            (3,111
            )Net
                income
            
            
            -
            
            
            -
            
            
            22,676
            
            
            -
            
            
            22,676**Balance,
                December 31, 2006**
            
            
            **10,761**
            
            **$**
            **64,586**
            
            **$**
            **84,614**
            
            **$**
            **(1,620**
            **)**
            **$**
            **147,580**


(See
      accompanying notes to consolidated financial statements.)


-55-
 Table
          of Contents


**Capital
      Corp of the West**


**Consolidated
      Statements of Cash Flows**


Years
                Ended December 31,(Dollars
                in thousands)
            
            2006
            
            2005
            
            2004**OPERATING
                ACTIVITIES:**Net
                Income
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for loan losses
            
            
            400
            
            
            2,051
            
            
            2,731Increase
                in cash surrender value of life insurance policies, net of mortality
                expense
            
            
            (1,434
            )
            
            (1,041
            )
            
            (1,066
            )Origination
                of loans held for sale
            
            
            (4,198
            )
            
            (5,013
            )
            
            (3,733
            )Proceeds
                from sales of loans
            
            
            2,208
            
            
            2,638
            
            
            2,959Depreciation,
                amortization and accretion, net
            
            
            7,655
            
            
            7,484
            
            
            6,520Benefit
                from deferred income taxes
            
            
            780
            
            
            (593
            )
            
            (552
            )(Gain)
                loss on sale or impairment of available for sale investment
                securities
            
            
            (622
            )
            
            -
            
            
            3,665Gain
                on the sale of loans
            
            
            (202
            )
            
            (235
            )
            
            (251
            )Death
                benefit income of life insurance policies
            
            
            (179
            )
            
            (539
            )
            
            -Gain
                on sale of other real estate owned
            
            
            (190
            )
            
            -
            
            
            -Non-cash
                share based compensation expense
            
            
            717
            
            
            -
            
            
            -Net
                increase in interest receivable & other assets
            
            
            3,109
            
            
            (18,002
            )
            
            (4,787
            )Net
                increase in accrued interest payable & other
                liabilities
            
            
            3,174
            
            
            1,593
            
            
            2,519Net
                cash provided by operating activities
            
            $
            33,894
            
            $
            9,297
            
            $
            20,328**INVESTING
                ACTIVITIES:**Investment
                security purchases - available for sale securities
            
            
            (3,105
            )
            
            (53,573
            )
            
            (10,076
            )Investment
                security purchases - held to maturity securities
            
            
            (3,659
            )
            
            (32,136
            )
            
            (27,310
            )Investment
                security purchases - mortgage-backed securities and collateralized
                mortgage obligations-available for sale
            
            
            -
            
            
            (105,695
            )
            
            (74,080
            )Investment
                security purchases - mortgage-backed securities and collateralized
                mortgage obligations - held to maturity
            
            
            -
            
            
            -
            
            
            (53,047
            )Proceeds
                from maturities of available for sale investment
                securities
            
            
            336
            
            
            13,437
            
            
            22,306Proceeds
                from maturities of held to maturity investment securities
            
            
            3,019
            
            
            1,985
            
            
            15Proceeds
                from maturities of mortgage-backed securities and collateralized
                mortgage
                obligations - available for sale
            
            
            46,875
            
            
            60,584
            
            
            47,828Proceeds
                from maturities of mortgage-backed securities and collateralized
                mortgage
                obligations - held to maturity
            
            
            12,506
            
            
            15,480
            
            
            8,542Proceeds
                from sales of available for sale investment securities
            
            
            20,483
            
            
            30,629
            
            
            15,974Proceeds
                from sales of mortgage-backed securities and collateralized mortgage
                obligations - available for sale
            
            
            -
            
            
            -
            
            
            595Net
                decrease (increase) in time deposits in other financial
                institutions
            
            
            -
            
            
            3,000
            
            
            (3,000
            )Origination
                of loans
            
            
            (678,187
            )
            
            (495,625
            )
            
            (646,496
            )Proceeds
                from repayment of loans
            
            
            520,226
            
            
            310,285
            
            
            522,595Purchases
                of premises and equipment
            
            
            (16,519
            )
            
            (8,955
            )
            
            (7,586
            )Proceeds
                from sales of real estate
            
            
            657
            
            
            -
            
            
            -Purchase
                of bank owned life insurance, net of death benefit
            
            
            (9,821
            )
            
            (2,393
            )
            
            (3,175
            )Sale
                of subsidiary
            
            
            -
            
            
            -
            
            
            520Purchase
                of interest rate floor contract
            
            
            -
            
            
            (1,270
            )
            
            -Net
                cash used in investing activities
            
            $
            (107,189
            )
            $
            (264,247
            )
            $
            (206,395
            )**FINANCING
                ACTIVITIES:**Net
                (decrease) increase in demand, NOW and savings deposits
            
            
            (3,761
            )
            
            159,955
            
            
            119,797Net
                increase in certificates of deposit
            
            
            214,602
            
            
            90,388
            
            
            5,552Proceeds
                from borrowings and repurchase agreement
            
            
            -
            
            
            180,000
            
            
            96,900Repayment
                of borrowings
            
            
            (50,031
            )
            
            (142,391
            )
            
            (25,598
            )Issued
                shares for benefit plan purchases
            
            
            -
            
            
            300
            
            
            624Issuance
                of junior subordinated debentures
            
            
            15,464
            
            
            -
            
            
            -Cash
                dividends paid
            
            
            (3,111
            )
            
            (1,886
            )
            
            (1,158
            )Exercise
                of stock options
            
            
            2,836
            
            
            1,791
            
            
            1,473Tax
                benefits related to exercise of stock options
            
            
            1,248
            
            
            555
            
            
            814Net
                cash provided by financing activities
            
            $
            177,247
            
            $
            288,712
            
            $
            198,404Net
                increase in cash and cash equivalents
            
            
            103,952
            
            
            33,762
            
            
            12,337Cash
                and cash equivalents at beginning of year
            
            
            91,581
            
            
            57,819
            
            
            45,482Cash
                and cash equivalents at end of year
            
            $
            195,533
            
            $
            91,581
            
            $
            57,819**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION**:Investment
                securities unrealized gains (losses), net of taxes
            
            $
            1,214
            
            $
            (2,426
            )
            $
            (80
            )Interest
                rate floor unrealized loss, net of taxes
            
            
            (215
            )
            
            (524
            )
            
            -Change
                in minimum pension liabilities
            
            
            (30
            )
            
            -
            
            
            -Interest
                paid
            
            
            47,289
            
            
            23,769
            
            
            16,900Income
                tax payments
            
            
            10,600
            
            
            9,129
            
            
            10,271Loans
                transferred to other real estate owned
            
            $
            467
            
            $
            -
            
            $
            -


(See
      accompanying notes to consolidated financial statements. )




-56-
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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. REIT , a subsidiary formed in 2001, became
      inactive in 2006. Regency Investment Advisors was acquired in June 2002 and
      divested in October 2004. The divesture of RIA was not significant and therefore
      the Company did not apply discontinued operations accounting. All significant
      inter-company 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 will differ from those estimates applied in the
      preparation of the consolidated financial statements.





**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,
      non-interest-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, 2006 and 2005.





**Investment
      Securities:** Investment securities consist of federal agency securities, 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.





**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 non-accrual
      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.




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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 expected 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 income 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
      non-accrual loans. Interest income on non-accrual loans is recorded on a cash
      basis. Payments may be treated as interest income or return of principal
      depending upon management’s opinion of the ultimate risk of loss on the
      individual loan. Cash payments are treated as interest income 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. 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 ensure 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
      non-interest income. All loan sales during 2006, 2005 and 2004 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 2006, 2005 and 2004 the Company recognized a gain on the sale
      of loans of $202,000, $235,000 and $251,000.





**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, the shorter of the lease term or
      useful life for leasehold improvements, and 3 to 7 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 non-interest expense
      when incurred.


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**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, 2006 and 2005. The goodwill associated
      with the purchase of Regency Investment Advisors Inc. (“RIA”) 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, 2006 and 2005.
      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 $0 and $23,000 as of December 31, 2006 and 2005.
      Amortization of core deposit premiums was $23,000, $46,000 and $655,000 for
      the
      years ended December 31, 2006, 2005 and 2004. Core deposit premiums were 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, 2006.





**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.





**Director
      Elective Income Deferral Agreements and Salary Continuation
      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 $43,051,000 and $31,796,000 as of December 31, 2006 and 2005.
      Income from these policies is recorded in non-interest income and the load,
      mortality and surrender charges have been recorded as a reduction to
      non-interest income. An accrued liability of $4,286,000 and $3,885,000 as of
      December 31, 2006 and 2005 was recorded to reflect the present value of the
      expected future benefits for the salary continuation plans and the deferred
      compensation benefits and was included in other liabilities. Salary continuation
      expense of $424,000 and $339,000 and deferred compensation expense of $106,000
      and $89,000 was recorded for the years ending December 31, 2006 and 2005. For
      further information on the director elective income deferral agreements and
      salary continuation agreements, see “NOTE 11. Employee and Director Benefit
      Plans”.





**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.


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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 it is more likely than not
      that 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 $13,800,000 and $11,727,000 as of December 31, 2006 and 2005.
      The difference between the Bank’s gross investment in these HTC partnerships and
      the net book value of these partnerships are other than temporary impairments
      that have been recorded 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.





**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.


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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.




**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 the Company.





On
      January 24, 2006, the Board of Directors authorized a $0.05 cash dividend
      payable on February 28, 2006. On May 2, 2006, August 25, 2006, November 2,
      2006
      and January 30, 2007, the Board of Directors authorized a $0.08 cash dividend
      payable on June 2, 2006, September 14, 2006, December 4, 2006, and February
      28,
      2007 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 Year Ended December 31,(Dollars
                in thousands, except per share data)
            
            **2006**
            
            **2005**
            
            **2004****Basic
                EPS Computation:**Net
                income
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323Average
                common shares outstanding
            
            
            10,692
            
            
            10,500
            
            
            10,323Basic
                EPS
            
            $
            2.12
            
            $
            2.00
            
            $
            1.19**Diluted
                EPS Computations**:Net
                income
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323Average
                common shares outstanding
            
            
            10,692
            
            
            10,500
            
            
            10,323Effect
                of stock options
            
            
            259
            
            
            321
            
            
            432Total
                weighted average shares and common stock equivalents
            
            
            10,951
            
            
            10,821
            
            
            10,755Diluted
                EPS
            
            $
            2.07
            
            $
            1.94
            
            $
            1.15





In
      2006,
      2005, and 2004 there were options covering 141,261, 17,051, and 0 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, 2006,
      2005 and 2004 making these shares anti-dilutive.


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





On
      January 1, 2006, the Company began recording share-based payment expense in
      accordance with Statement of Financial Accounting Standards No. 123-R,
      Share-based Payment, (“SFAS 123R”) as interpreted by SEC Staff Accounting
      Bulletin No. 107. The Company adopted the modified prospective transition method
      provided for under SFAS 123R, and consequently has not retroactively adjusted
      results from prior periods. Under this transition method, compensation cost
      associated with stock option awards now includes quarterly amortization of
      the
      remaining unvested portion of stock options outstanding prior to January 1,
      2006. Share-based payment expense was recorded as a non-cash expense increase
      in
      salaries and benefits expense, which had the effect of reducing net income,
      earnings per share, and diluted earnings per share. Share-based payment expense
      also had the effect of lowering income from continuing operations reported
      in
      the Consolidated Statement of Cash Flow for 2006. Under SFAS 123R, stock options
      are valued at fair value using an acceptable model. Share-based payment expense
      is recorded on a ratable basis in the period in which the stock option vests.
      The Company uses the Black-Scholes-Merton closed form model, an acceptable
      model
      under SFAS 123R, for estimating the fair value of stock options. See Note 12
      for
      additional disclosure information relative to options granted and outstanding.





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**NET
                INCOME:As
                reported net income
            
            $
            20,954
            
            $
            12,323Equity
                compensation, net of income tax effect of $555 in 2005 and $814 in
                2004
            
            
            2,431
            
            
            876Pro-forma
                net income
            
            $
            18,523
            
            $
            11,447BASIC
                EARNINGS PER SHARE:As
                reported
            
            $
            2.00
            
            $
            1.19Pro-forma
            
            $
            1.76
            
            $
            1.11DILUTED
                EARNINGSPER SHARE:As
                reported
            
            $
            1.94
            
            $
            1.15Pro-forma
            
            $
            1.71
            
            $
            1.06





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





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


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





**Reclassifications:** Certain
      amounts in the 2005 and 2004 consolidated financial statements have been
      reclassified to conform with the 2006 presentation.





**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****2006****Available
                for Sale Securities:**U.S.
                government agencies
            
            $
            40,828
            
            $
            -
            
            $
            629
            
            $
            40,199State
                & political subdivisions
            
            
            1,273
            
            
            -
            
            
            7
            
            
            1,266Mortgage-backed
                securities
            
            
            183,201
            
            
            549
            
            
            2,607
            
            
            181,143Collateralized
                mortgage obligations
            
            
            14,113
            
            
            0
            
            
            329
            
            
            13,784Total
                debt securities
            
            
            239,415
            
            
            549
            
            
            3,572
            
            
            236,392Agency
                preferred stock
            
            
            5,093
            
            
            573
            
            
            -
            
            
            5,666Equity
                securities
            
            
            14,667
            
            
            -
            
            
            187
            
            
            14,480Total
                available for sale securities
            
            $
            259,175
            
            $
            1,122
            
            $
            3,759
            
            $
            256,538**Held
                to Maturity Securities:**State
                and political subdivisions
            
            $
            99,747
            
            $
            787
            
            $
            1,225
            
            $
            99,309Mortgage-backed
                securities
            
            
            55,599
            
            
            260
            
            
            1,260
            
            
            54,599Collateralized
                mortgage obligations
            
            
            12,712
            
            
            -
            
            
            354
            
            
            12,358Total
                held to maturity securities
            
            $
            168,058
            
            $
            1,047
            
            $
            2,839
            
            $
            166,266**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
                  & 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





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At
      December 31, 2006 and 2005, investment securities with carrying values of
      approximately $280,182,000 and $452,337,000, respectively, were pledged as
      collateral for deposits of public funds, government deposits, and the Bank's
      use
      of the Federal Reserve Bank's discount window. The Bank is a member of the
      Federal Reserve Bank and the Federal Home Loan Bank. The Bank carried balances,
      stated at cost, of $7,331,000 and $7,888,000 of Federal Home Loan Bank stock
      and
      $1,247,000 and $1,187,000 of Federal Reserve Bank stock as of December 31,
      2006
      and 2005. Gross realized gains on sale of available for sale securities of
      $1,009,000, $0, and $50,000 were recognized in 2006, 2005, and 2004. Gross
      losses on sale of available for sale securities were $387,000, $0, and
      $3,715,000 in 2006, 2005, and 2004. 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.





The
      carrying and estimated fair values of debt securities at December 31, 2006
      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
            
            $
            5,000
            
            $
            4,893One
                to five years
            
            
            36,080
            
            
            35,556Five
                to ten years
            
            
            235
            
            
            232Over
                ten years
            
            
            786
            
            
            784Mortgage-backed
                securities and CMOs
            
            
            197,314
            
            
            194,927Total
                available for sale debt securities
            
            $
            239,415
            
            $
            236,392**Held
                to Maturity Debt Securities:**One
                  year or less
            
            $
            473
            
            $
            237One
                to five years
            
            
            17,209
            
            
            16,784Five
                to ten years
            
            
            30,378
            
            
            30,532Over
                ten years
            
            
            51,687
            
            
            51,756Mortgage-backed
                securities and CMOs
            
            
            68,311
            
            
            66,957Total
                held to maturity debt securities
            
            $
            168,058
            
            $
            166,266





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,
      2006, 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
            
            $
            -
            
            $
            -
            
            $
            629
            
            $
            40,176
            
            $
            629
            
            $
            40,176State
                and political subdivisions
            
            
            -
            
            
            -
            
            
            7
            
            
            794
            
            
            7
            
            
            794Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            2,607
            
            
            84,794
            
            
            2,607
            
            
            84,794Collateralized
                mortgage obligations
            
            
            -
            
            
            -
            
            
            329
            
            
            13,784
            
            
            329
            
            
            13,784Equity
                securities
            
            
            95
            
            
            2,531
            
            
            92
            
            
            2,908
            
            
            187
            
            
            5,439$
            95
            
            $
            2,531
            
            $
            3,664
            
            $
            142,456
            
            $
            3,759
            
            $
            144,987**Held
                to Maturity Securities:**State
                and political subdivisions
            
            $
            32
            
            $
            6,106
            
            $
            1,193
            
            $
            34,065
            
            $
            1,225
            
            $
            40,171Mortgage-backed
                securities
            
            
            1
            
            
            565
            
            
            1,259
            
            
            44,828
            
            
            1,260
            
            
            45,393Collateralized
                mortgage obligations
            
            
            -
            
            
            -
            
            
            354
            
            
            12,358
            
            
            354
            
            
            12,358$
            33
            
            $
            6,671
            
            $
            2,806
            
            $
            91,251
            
            $
            2,839
            
            $
            97,922


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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





The
      Company has determined that unrealized losses on debt securities were primarily
      the result of 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 2006 or 2005.





The
      Company holds an investment in a CRA mutual fund that had a fair market value
      of
      $2,908,000 and an unrealized loss of $92,000 as of December 31, 2006. This
      mutual fund has been in an unrealized loss position for more than 12 consecutive
      months as of December 31, 2006. 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)
            
            **2006**
            
            **2005**Commercial
            
            $
            320,121
            
            $
            274,312Agricultural
            
            
            81,568
            
            
            72,792Real
                estate - mortgage
            
            
            542,080
            
            
            471,266Real
                estate - construction
            
            
            177,233
            
            
            167,992Consumer
            
            
            103,759
            
            
            82,534Gross
                loans
            
            
            1,224,761
            
            
            1,068,896Less
                allowance for loan losses
            
            
            (14,031
            )
            
            (14,776
            )Net
                loans
            
            $
            1,210,730
            
            $
            1,054,120





Non-consumer
      loans are net of deferred loan fees of $3,625,000 and $3,183,000, as of December
      31, 2006 and 2005. Since the Bank for competitive reasons is unable to charge
      loan fees greater than the costs associated with originating and servicing
      consumer loans, consumer loans are reported net of deferred loan costs of
      $2,122,000 and $874,000 as of December 31, 2006 and 2005. During 2006 the Bank
      pledged loans for collateral with the value of $443,450,000 for a borrowing
      line
      with the Federal Home Loan Bank.





Non-accrual
      loans totaled $2,375,000 and $1,692,000 at December 31, 2006 and 2005. Foregone
      interest on non-accrual loans was approximately $137,000, $63,000, and $4,000
      for the years ended December 31, 2006, 2005 and 2004.


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At
      December 31, 2006 and 2005, the recorded investment in impaired loans was
      $2,375,000 and $1,692,000. The Company had no loans with specific allowance
      for
      loan losses against impaired loans at December 31, 2006 as compared to $254,000
      at December 31, 2005. The average outstanding balance of impaired loans for
      the
      years ended December 31, 2006, 2005 and 2004 was $2,591,000, $2,236,000, and
      $4,206,000 on which $168,000, $88,000, and $216,000 was recognized as interest
      income on a cash basis.





At
      December 31, 2006 and 2005, 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)
            
            **2006**
            
            **2005**Commercial
            
            $
            982
            
            $
            1,684Agricultural
            
            
            1,208
            
            
            8Consumer
                and other
            
            
            185
            
            
            -Balance
              at end of year
            
            $
            2,375
            
            $
            1,692





The
      following is a summary of changes in the allowance for loan losses during the
      years ended December 31:





(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**Balance
                at beginning of year
            
            $
            14,776
            
            $
            13,605
            
            $
            12,524Loans
                charged-off
            
            
            (2,629
            )
            
            (1,982
            )
            
            (2,296
            )Recoveries
                of loans previously charged-off
            
            
            1,484
            
            
            1,102
            
            
            646Provision
                for loan losses
            
            
            400
            
            
            2,051
            
            
            2,731Balance
                at end of year
            
            $
            14,031
            
            $
            14,776
            
            $
            13,605





The
      following is a summary of changes in the reserve for unfunded loan commitments
      during the years ended December 31:





(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**Balance
                  at beginning of year
            
            $
            717
            
            $
            679
            
            $
            739Change
                in reserve
            
            
            (7
            )
            
            38
            
            
            (60
            )Balance
                  at end of year
            
            $
            710
            
            $
            717
            
            $
            679





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)
            
            **2006**
            
            **2005**Balance
                  at beginning of year
            
            $
            2,489
            
            $
            2,133Loan
                advances and renewals
            
            
            597
            
            
            1,102Loans
                matured or collected
            
            
            (1,362
            )
            
            (746
            )Balance
                  at end of year
            
            $
            1,724
            
            $
            2,489




-66-
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**NOTE
      4. Premises and Equipment**




Premises
      and equipment consisted of the following at December 31:





(Dollars
                in thousands)
            
            **2006**
            
            **2005**Land
            
            $
            3,506
            
            $
            3,506Buildings
            
            
            27,641
            
            
            17,181Leasehold
                improvements
            
            
            6,241
            
            
            3,016Furniture
                and equipment
            
            
            20,866
            
            
            15,837Construction
                in progress
            
            
            4,002
            
            
            6,198Subtotal
            
            $
            62,257
            
            $
            45,738Less
                accumulated depreciation and amortization
            
            
            19,936
            
            
            16,768Premises
                and equipment, net
            
            $
            42,320
            
            $
            28,970





Depreciation
      expense totaled $3,168,000, $2,411,000, and $1,717,000, in 2006, 2005, and
      2004.
      Interest capitalized during the branch office construction period totaled $9,000
      and $6,000 in 2006 and 2005.





**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)
            
            **2006**
            
            **2005**
            
            **2004****Amount**
            
            **Interest
                Rate(s)**
            
            **Amount**
            
            **Interest
                Rate(s)**
            
            **Amount**
            
            **Interest
                Rate(s)**Treasury
                tax loan (1)
            
            $
            2,404
            
            
            5.04
            %
            $
            5,474
            
            
            4.00
            %
            $
            5,853
            
            
            1.87
            %FHLB
                advances
            
            
            26,500
            
            
            4.16-5.07
            %
            
            36,885
            
            
            2.00-5.05
            %
            
            59,900
            
            
            2.18-6.83
            %Mortgage
                note
            
            
            2,793
            
            
            7.80
            %
            
            2,869
            
            
            7.80
            %
            
            2,940
            
            
            7.80
            %Total
                short term borrowings
            
            $
            31,697
            
            
            
            
            $
            45,228
            
            
            
            
            $
            68,693


(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,
      2006,
      this line provided for maximum borrowings of $134,562,000 of which $46,500,000
      was outstanding. At December 31, 2006 this borrowing line was collateralized
      by
      qualifying loans of $443,450,000. At December 31, 2005, the line of credit
      was
      collateralized by securities with a market value of $169,034,000 **.** At
      December 31, 2004 the borrowing line was collateralized by securities with
      a
      market value of $172,585,000. The Company had additional secured, unused lines
      of credit of $27,927,000 and unsecured unused lines of credit of $76,800,000
      at
      December 31, 2006. This compares with secured, unused lines of credit of
      $29,301,000 and unsecured unused lines of credit of $70,800,000 as of December
      31, 2005.





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.


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





(Dollars
                in thousands)
            
            
            
            
            
            **2006**
            
            **2005**
            
            **2004****Weighted
                Average Interest Rate(s)**
            
            **Maturity
                Dates**
            
            **Amount**
            
            **Amount**
            
            **Amount**FHLB
                advances
            
            
            3.80
            %
            
            2011
            
            $
            20,000
            
            $
            56,500
            
            $
            95,426Repurchase
                 agreement
            
            
            5.69
            %
            
            2010
            
            
            100,000
            
            
            100,000
            
            
            -Total
                long term borrowings
            
            
            
            
            
            
            
            $
            120,000
            
            $
            156,500
            
            $
            95,426





Interest
      expense related to FHLB borrowings totaled $2,177,000, $4,447,000, and
      $4,368,000 in 2006, 2005, and 2004. Interest expense related to the mortgage
      note totaled $228,000, $247,000, and $253,000 in 2006, 2005, and 2004. This
      long
      term note is secured by Company land and buildings. Interest expense on the
      repurchase agreement was $5,455,000, $213,000, and $0 in 2006, 2005, and 2004.
      Interest expense on federal funds purchased was $914,000, $438,000, and $21,000
      in 2006, 2005, and 2004. Other interest expense totaled $49,000, $36,000, and
      $15,000 in 2006, 2005, and 2004. The Company has no significant compensating
      balance arrangements.





Principal
      payments required to service the Company's borrowings during the next five
      years
      and thereafter for years ended December 31, are:





(Dollars
                in thousands)**2007**
            
            $
            31,697**2008**
            
            
            -**2009**
            
            
            -**2010**
            
            
            100,000**2011**
            
            
            20,000**Thereafter**
            
            
            -**Total
                borrowed funds**
            
            $
            151,697





**NOTE
      6. Junior Subordinated Debentures**




At
      December 31, 2006 the Company had 3 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, 2006 and
      2005. There was $31,960,000 and $16,496,000 of junior subordinated debentures
      issued and outstanding as of December 31, 2006 and 2005. The junior subordinated
      debentures were reflected as long-term debt in the consolidated balance sheets
      at December 31, 2006 and 2005.





County
      Statutory Trust I, County Statutory Trust II and County Statutory Trust III
      are
      Connecticut statutory trusts, which were formed for the purpose of issuing
      County Statutory Trust I Capital Securities, County Statutory Trust II Capital
      Securities and County Statutory Trust III Capital Securities (“Trust Preferred
      Securities”). The Trust Preferred Securities are described below. 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 I interest on the Trust Preferred
      Securities is payable semi-annually and is deferrable, at the option of the
      Company for up to five years.


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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
      8.32% at December 31, 2006, 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%. County Statutory Trust II interest on the Trust Preferred Securities
      is
      payable quarterly and is deferrable, at the option of the Company for up to
      five
      years.





County
      Statutory Trust III issued $15,000,000 in Trust Preferred Securities on June
      23,
      2006. These securities pay interest at a variable rate of interest that was
      6.95% at December 31, 2006, and have a stated maturity date of September 15,
      2036. The Company has an optional redemption date on any March 15, June 15,
      September 15 or December 15 on or after September 15, 2011. The interest rate
      on
      this issue is indexed to 3 month LIBOR plus 1.59%, interest payments begun
      September 15, 2006 and will be paid every March 15, June 15, September 15,
      and
      December 15 of each year during the term of the indenture.





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
      FRB.





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.





**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****2006**Current
            
            $
            7,488
            
            $
            2,308
            
            $
            9,818Deferred
            
            
            560
            
            
            242
            
            
            780$
            8,048
            
            $
            2,550
            
            $
            10,598**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




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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)
            
            **2006**
            
            **2005****Deferred
                Tax Assets:**Allowance
                for loan losses
            
            $
            6,198
            
            $
            6,514Investment
                securities unrealized loss
            
            
            784
            
            
            1,675Interest
                rate derivative unrealized loss
            
            
            376
            
            
            220Other
                than temporary impairment of equity securities
            
            
            680
            
            
            1,560Deferred
                compensation
            
            
            1,717
            
            
            1,634Accrued
                pension liability
            
            
            23
            
            
            -Intangible
                amortization
            
            
            852
            
            
            802Non-accrual
                interest
            
            
            58
            
            
            43Academy
                bond tax credits
            
            
            82
            
            
            55Capital
                loss carry forward
            
            
            568
            
            
            -Other
            
            
            1.192
            
            
            1,141Total
                gross deferred tax assets
            
            
            12,530
            
            
            13,644Less
                valuation allowance
            
            
            (667
            )
            
            (424
            )Deferred
                tax assets
            
            
            11,863
            
            
            13,220**Deferred
                Tax Liabilities:**Investment
                in partnerships
            
            
            746
            
            
            706FHLB
                stock dividends
            
            
            573
            
            
            371Capitalization
                of loan costs and pre-paid assets
            
            
            923
            
            
            657Fixed
                assets
            
            
            85
            
            
            244Insurance
                accrual
            
            
            -
            
            
            57Other
            
            
            -
            
            
            134Total
                gross deferred tax liabilities
            
            
            2,327
            
            
            2,169Net
                deferred tax assets
            
            $
            9,536
            
            $
            11,051





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, 2006 and 2005.





Management
      has recorded a valuation allowance of $667,000 and $424,000 against realized
      and
      unrealized capital losses on the preferred stock in the Company’s investment
      portfolio at December 31, 2006 and December 31, 2005. The company invested
      in
      preferred stock, which has been subject to a write down for permanent impairment
      of its value. Corporations can only deduct capital losses to the extent of
      capital gains. Unused capital losses in a year may be carried back three years,
      and forward for five years.





An
      initial valuation allowance was placed against capital losses in 2003 with
      an
      increase to the valuation allowance recorded in 2004, with the valuation
      allowance at December 31, 2004 being $424,000. The realizibility of this
      deferred tax asset was also reviewed at December 31, 2005, at which time
      management concluded no additional allowance was required.





In
      2006
      the Company sold a portion of the securities, and realized the capital loss.
      The
      Company also sold equity securities realizing a book gain in 2006. The activity
      for 2006 resulted in a net capital loss of $1,352,000 in 2006. The ** capital
      loss generated will be realized by carrying back the capital losses to 2003,
      2004 and 2005 capital gains with the remainder carried forward. The capital
      losses expire in 2011. Management has evaluated the potential sources of future
      capital gains as of December 31, 2006, and concluded that the valuation
      allowance should be increased from $424,000 to $667,000.


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





(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**Statutory
                federal income tax rate due, computed at an effective tax rate of
                35% in
                2006, 2005, and 2004
            
            $
            11,646
            
            $
            10,821
            
            $
            6,815State
                franchise tax, at statutory rate, net of federal income tax
                benefit
            
            
            1,657
            
            
            1,895
            
            
            2,521Tax
                exempt interest income, net
            
            
            (1,113
            )
            
            (1,116
            )
            
            (726
            )Housing
                tax credits
            
            
            (968
            )
            
            (980
            )
            
            (1,028
            )Death
                benefit from bank owned life insurance
            
            
            (62
            )
            
            (188
            )
            
            -Dividends
                received deduction
            
            
            (75
            )
            
            (124
            )
            
            (112
            )Increase
                in tax valuation allowance
            
            
            243
            
            
            -
            
            
            404Cash
                surrender value life insurance
            
            
            (502
            )
            
            (364
            )
            
            (367
            )Other
            
            
            (228
            )
            
            18
            
            
            (357
            )Provision
                for income taxes
            
            $
            10,598
            
            $
            9,962
            
            $
            7,150





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.





As
      of
      December 31, 2006, the anticipated 2006 tax refund related to federal and state
      income taxes was $2,756,000.





**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
      result in 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, 2006 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.





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).


-71-
 Table
          of Contents


The
      Company's and Bank's actual capital amounts and capital ratios as of December
      31, 2006 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**
            
            **Ratio**Total
                capital (to risk weighted assets)
            
            $
            193,721
            
            
            12.49
            %
            $
            124,119
            
            
            8
            %
            $
            155,148
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            178,764
            
            
            11.52
            %
            $
            62,059
            
            
            4
            %
            $
            93,089
            
            
            6
            %Leverage
                ratio(1)
            
            $
            178,764
            
            
            9.33
            %
            $
            76,644
            
            
            4
            %
            $
            95,806
            
            
            5
            %**The
                Bank:**Total
                capital (to risk weighted assets)
            
            $
            167,238
            
            
            10.83
            %
            $
            123,523
            
            
            8
            %
            $
            154,404
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            152,281
            
            
            9.86
            %
            $
            61,762
            
            
            4
            %
            $
            92,643
            
            
            6
            %Leverage
                ratio(1)
            
            $
            152,281
            
            
            7.98
            %
            $
            76,313
            
            
            4
            %
            $
            95,392
            
            
            5
            %


(1)
      The
      leverage ratio consists of Tier 1 capital divided by quarterly average assets.
      The minimum leverage ratio 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 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**
            
            **Ratio**Total
                  capital (to risk weighted assets)
            
            $
            154,592
            
            
            11.13
            %
            $
            111,151
            
            
            8
            %
            $
            138,939
            
            
            10
            %Total
                  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
            %Total
                  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.





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




At
      December 31, 2006, the Company has operating lease rental commitments for
      remaining terms of one to **** twenty **** years.
      The Company has options to renew 21 of its leases for periods of 5 through
      20
      years. The minimum future commitments under non-cancelable lease agreements
      having terms in excess of one year at December 31, 2006 are as
      follows:





Years
                ended December 31,(Dollars
                in thousands)**2007**
            
            $
            2,303**2008**
            
            
            2,184**2009**
            
            
            2,067**2010**
            
            
            1,905**2011**
            
            
            1,701**Thereafter**
            
            
            6,268**Total
                minimum lease payments**
            
            $
            16,428





Rent
      expense was approximately $2,196,000, $1,649,000, and $1,226,000 for the years
      ended December 31, 2006, 2005, and 2004.


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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:


**December
                31,**(Dollars
                in thousands)
            
            **2006**
            
            **2005**Commitments
                to extend credit
            
            $
            445,189
            
            $
            495,313Standby
                letters of credit
            
            $
            6,739
            
            $
            15,160





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.





**N** **OTE
      10. Time Deposits**




At
      December 31, 2006 the aggregate maturities for customer time deposits are as
      follows:





(Dollars
                in thousands)**2007**
            
            $
            614,791**2008**
            
            
            17,258**2009**
            
            
            27,391**2010**
            
            
            3,843**2011**
            
            
            727**Thereafter**
            
            
            1,633**Total
                time deposits**
            
            $
            665,643




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**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 2006, 2005,
      and 2004 the Company contributed approximately $812,000, $649,000, and $578,000
      to the ESOP. 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, 2006, 2005, and 2004,
      the ESOP owned 628,656, 383,315, and 213,607 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 $15,000 each in 2006. Eligible employees above
      the
      age of 50 have the ability to contribute an additional $5,000 in catch up
      contributions in 2006. 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 $277,000, $260,000 and $225,000 in 2006,
      2005 and 2004.





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 Company has purchased insurance on the lives of the participants and intends
      to hold these policies until death as a cost recovery of the Company's Director
      Elective Income Deferral Agreement plan. The Bank has a Rabbi trust that
      contains specific life insurance contracts in support of the deferred
      compensation plans. Deferred compensation expense totaled $106,000, $88,000,
      and
      $97,000 in 2006, 2005, and 2004. Total liabilities carried by the Company for
      Director Elective Income Deferral totaled $672,000, $598,000, and $543,000
      in
      2006, 2005, and 2004 respectively.





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 Company has purchased insurance on the lives of the
      participants and intends to hold these policies until death as a cost recovery
      of the Company's salary continuation plan. The Bank has a Rabbi trust that
      contain specific life insurance contracts in support of the salary continuation
      plans. Salary continuation expense totaled $424,000, $376,000, and
      $484,000 **,** in 2006,
      2005, and 2004. Total liabilities carried by the Company for salary continuation
      totaled $3,614,000, $3,287,000, and $3,067,000 in 2006, 2005, and 2004
      respectively.


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Information
      pertaining to the activity in the salary continuation plan using the measurement
      date of December 31, is as follows:





(Dollars
                in thousands)
            
            **Pension
                Benefits 2006**
            
            **Pension
                Benefits 2005**Change
                in Benefit ObligationBenefit
                obligation, January 1
            
            $
            3,287
            
            $
            3,067Service
                cost
            
            
            231
            
            
            167Interest
                cost
            
            
            193
            
            
            209Benefits
                paid
            
            
            (150
            )
            
            (156
            )Actuarial
                gain
            
            
            53
            
            
            -Benefit
                obligation, December 31
            
            $
            3,614
            
            $
            3,287Change
                in plan assetsPlan
                assets at fair value, January 1
            
            $
            -
            
            $
            -Actual
                return on plan assets
            
            
            -
            
            
            -Company
                contributions
            
            
            150
            
            
            156Benefits
                paid
            
            
            (150
            )
            
            (156
            )Plan
                assets at fair value, December 31
            
            $
            -
            
            $
            -Funded
                status
            
            $
            (3,614
            )
            $
            (3,287
            )Unrecognized
                net loss (gain)
            
            
            53
            
            
            -Net
                amount recognized
            
            $
            (3,561
            )
            $
            (3,287
            )Amounts
                recognized in the statement of financial position, December
                31Prepaid
                benefit cost
            
            $
            -
            
            $
            -Accrued
                benefit liability
            
            
            (3,614
            )
            
            (3,287
            )Accumulated
                other comprehensive expense (income)
            
            
            53
            
            
            -Net
                amount recognized
            
            $
            (3,561
            )
            $
            (3,287
            )





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





(Dollars
                in thousands)
            
            **Pension
                Benefit**
              **Fiscal
                Year Ending 2006**
            
            **Pension
                Benefit**
              **Fiscal
                Year Ending 2005**Components
                of net periodic benefit costService
                cost
            
            $
            231
            
            $
            167Interest
                cost
            
            
            193
            
            
            209Net
                periodic benefit cost
            
            $
            424
            
            $
            376





The
      following table sets forth assumptions used in accounting for the
      plans:





The
                net periodic benefit cost was determined using the following
                assumptionsDiscount
                rate
            
            
            6
            %
            
            7
            %Salary
                scale
            
            
            N/A
            
            
            N/AExpected
                return on plan assets
            
            
            N/A
            
            
            N/A





As
      permitted, the amortization of any prior service cost is determined using a
      straight-line amortization of the cost over the average remaining service period
      of employees expected to receive benefits under the Plan.


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The
      following table sets forth the expected benefit payments to participants to
      be
      made by the Company under the salary continuation plan for the years
      indicated:





(Dollars
                in thousands)2007
            
            $
            1482008
            
            
            2982009
            
            
            2982010
            
            
            2982011
            
            
            3582012
                - 2016
            
            $
            2,200





The
      discount rate used to determine the minimum pension liability in 2006 was
      derived by using the Citicorp pension yield curve at December 31, 2006 and
      adjusting the rate for movements in 25 basis point increments.





**NOTE
      12. Share-Based Payment**




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 equals
      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.





Prior
      to
      January 1, 2006, the Company accounted for share-based payment expense using
      the
      intrinsic method, where the difference between the exercise price and the fair
      market value of the option on the date of grant is recognized as share-based
      payment expense.





**Information
      as Reported in the Financial Statements**




For
        the
        valuation of stock options, the Company used the following assumptions: a
        risk
        free rate of 4.6%; a volatility rate of 29.15%; an expected dividend rate
        of
        0.73%; and an expected term of 5.87 years for the year ended December 31,
        2006.
        For the valuation of stock options during the year ended December 31, 2005,
        the
        Company used the following assumptions: a risk free rate of 4.07%; a volatility
        rate of 29.00%; an expected dividend rate of 0.50%; and an expected term
        of 6.32
        years.





The
      following table presents the stock option compensation expense included in
      the
      Company’s Consolidated Statements of Income and Comprehensive Income for the
      twelve months ended December 31, 2006:





Year
                Ended December 31, 2006(Dollars
              in thousands)Stock
                option compensation expense
            
            $
            717Tax
                benefit recorded related to stock option compensation
                expense
            
            
            (46
            )Decrease
                in net income
            
            $
            671Effect
                on:Net
                income per share - basic
            
            $
            (0.01
            )Net
                income per share - diluted
            
            $
            (0.01
            )




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Option
      activity during 2006 is as follows:





(Shares
                in thousands)
            
            **#
                of Shares**
            
            **Weighted-Average
                Exercise Price**Outstanding
                at January 1, 2006
            
            
            753
            
            $
            17.53Options
                granted
            
            
            126
            
            $
            33.15Options
                exercised
            
            
            (185
            )
            $
            15.30Options
                forfeited
            
            
            (14
            )
            $
            32.28Outstanding
                at December 31, 2006
            
            
            680
            
            $
            20.73Exercisable
                at December 31, 2006
            
            
            565
            
            $
            18.21Forfeited
                during 2006
            
            
            14
            
            $
            32.28





Option
      grants during 2006
      and
      2005 are as follows:





December
                31,(Shares
                in thousands)
            
            **2006**
            
            **2005**#
                of Shares
            
            Weighted-Average
                fair value
            
            #
                of Shares
            
            Weighted-Average
                fair valueOptions
                granted
            
            
            126
            
            $
            11.42
            
            
            253
            
            $
            10.13





Option
      vesting activity that occurred during 2006:





(Shares
                in thousands)
            
            **#
                of Shares**
            
            **Weighted-Average
                Fair Value**Non-vested
                options at January 1, 2006
            
            
            43
            
            $
            10.60Options
                granted
            
            
            126
            
            $
            11.42Options
                vested
            
            
            (45
            )
            $
            11.17Options
                forfeited
            
            
            (9
            )
            $
            10.94Non-vested
                options at December 31, 2006
            
            
            115
            
            $
            11.17





Vested
      option summary information as of December 31, 2006 is as follows:





(Shares
                and Dollars in thousands)
            
            #
                of Shares
            
            Aggregate
                Intrinsic Value
            
            Weighted-Average
                Remaining Contractual Life
            
            Weighted-Average
                Exercise PriceVested
                options exercisable atDecember
                31,
                2006
            
            
            565
            
            $
            7,939
            
            
            6.23
            
            $
            18.21Total
                options outstanding at December 31, 2006
            
            
            680
            
            $
            7,954
            
            
            6.74
            
            $
            20.73





The
      vesting schedule for each option holder’s stock option contract is identical to
      the exercise schedule for each option contract. The total intrinsic value of
      options exercised was $3,303,000 and $2,233,000 for the years ended December
      31,
      2006 and December 31, 2005. Intrinsic value is defined as positive difference
      between the current market price for the underlying stock
      and the strike
      price of an
      option. The exercise price must be less than the current market price of the
      underlying stock to have intrinsic value. The total fair value of shares vested
      was $503,000 for the year ended December 31, 2006. Total future compensation
      expense related to nonvested awards was $1,285,000 with a weighted average
      period to be recognized of 2.33 years as of December 31, 2006. There are
      2,570,308 shares authorized for grant under the Company’s stock option plan.





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 had
      a
      positive intrinsic value, and were held by certain members of management and
      the
      Board of Directors. The Board took this action so that the Company would not
      be
      required 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 share-based payment expense
      related to this action was $2,409,000. During the year ended December 31, 2006,
      the additional amount of share-based payment expense that would have been
      recorded if the stock option vesting schedules had not been accelerated was
      $930,000, the tax benefit would have been $150,000, and net income would have
      been reduced by $780,000.


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Share-based
      payment expense related to stock option activity was recorded at $717,000 for
      the year ended December 31, 2006 compared to $2,951,000 that would have been
      recorded for the year ended December 31, 2005. The $2,234,000 decrease is
      related to the November, 2005 action by the Board of Directors approving the
      accelerated vesting of all outstanding stock options at that time. The Board
      of
      Directors performed this action to mitigate the effect of the adoption of
      Financial Accounting Statement 123R. The Company received $2,836,000 and
      $1,642,000 in cash related to stock option exercises for the year ended December
      31, 2006 and December 31, 2005. The Company recorded a tax benefit related
      to
      stock options of $1,248,000 and $520,000 for the year ended December 31, 2006
      and December 31, 2005.





The
      following table summarizes information about options outstanding at December
      31,
      2006:





**Options
                outstanding**
            
            **Options
                exercisable**Range
                of exercise prices
            Number
                of shares outstanding
            Weighted
                remaining contractual life
            Weighted
                average exercise price
            Number
                exercisable
            Weighted
                average exercise price$3.81-6.06
            
            120,637
            
            3.09
            Years
            $5.53
            
            120,637
            
            $5.536.63-9.80
            
            70,020
            
            4.32
            
            7.96
            
            70,020
            
            7.9610.11-19.83
            
            68,567
            
            6.19
            
            13.94
            
            68,567
            
            13.9419.88-20.25
            
            9,900
            
            7.05
            
            20.05
            
            9,900
            
            20.0521.06-21.06
            
            83,362
            
            7.04
            
            21.06
            
            83,362
            
            21.0621.37-26.34
            
            96,199
            
            7.53
            
            24.92
            
            96,199
            
            24.9227.19-32.32
            
            75,300
            
            9.09
            
            30.99
            
            46,800
            
            30.5932.61-32.84
            
            76,000
            
            9.16
            
            32.77
            
            30,750
            
            32.8032.94-34.88
            
            68,000
            
            9.05
            
            33.97
            
            35,375
            
            33.9835.77
                - 35.77
            
            12,000
            
            9.13
            
            35.77
            
            3,000
            
            35.77$3.81
                - 35.77
            
            679,985
            
            6.74
            Years
            $20.73
            
            564,610
            
            $18.21


The
      number of shares and exercise price per share has been adjusted for stock
      dividends and stock splits.





**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.


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 Table
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**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 borrowings with similar credit risk and for the remaining
      maturities.




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


**Commitments
      to extend credit and standby letters of credit:** The fair
      value of 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.





(Dollars
                in thousands)**2006**
            
            **Carrying
                Amount**
            
            **Fair
                Value****FINANCIAL
                ASSETS:**Cash
                and cash equivalents
            
            $
            44,853
            
            $
            44,853Federal
                funds sold
            
            
            150,680
            
            
            150,680Time
                deposits at other financial institutions
            
            
            350
            
            
            350Available
                for sale investment securities
            
            
            256,538
            
            
            256,538Held
                to maturity investment securities
            
            
            168,058
            
            
            166,266Interest
                receivable
            
            
            9,819
            
            
            9,819Bank
                owned life insurance
            
            
            43,051
            
            
            43,051Net
                loans
            
            
            1,210,730
            
            
            1,205,505Interest
                rate floor
            
            
            314
            
            
            314**FINANCIAL
                LIABILITIES:**Non-interest-bearing
                demand
            
            
            287,723
            
            
            287,723Negotiable
                orders of withdrawal
            
            
            225,481
            
            
            225,481Savings
            
            
            436,494
            
            
            436,494Time
                deposits
            
            
            665,643
            
            
            665,643Borrowings
            
            
            151,697
            
            
            152,034Subordinated
                debentures
            
            
            31,960
            
            
            32,256Interest
                payable
            
            
            2,779
            
            
            2,779**Contract
                Amount****OFF-BALANCE
                SHEET:**Loan
                commitments
            
            $
            445,189
            
            $
            3,339Standby
                letters of credit
            
            
            6,739
            
            
            67


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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:**Non-interest-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
            
            
            20,138Interest
                payable
            
            
            1,524
            
            
            1,524**Contract
                Amount****OFF-BALANCE
                SHEET**Loan
                commitments
            
            $
            495,313
            
            $
            3,715Standby
                letters of credit
            
            
            15,160
            
            
            152





**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, 2006 and 2005 and the condensed
      statements of income and cash flows for the years ended December 31, 2006,
      2005,
      and 2004:





**CONDENSED
                BALANCE SHEETS**
            
            December
                31,(Dollars
                in thousands)
            
            **2006**
            
            **2005****ASSETS**Cash
                and short-term investments
            
            $
            19,197
            
            $
            9,555Investment
                in County Bank
            
            
            152,151
            
            
            125,598Net
                premises and equipment
            
            
            1,217
            
            
            774Other
                assets
            
            
            8,831
            
            
            5,008Total
                assets:
            
            $
            181,396
            
            $
            140,935**LIABILITIES
                AND SHAREHOLDERS EQUITY:****LIABILITIES**Subordinated
                debentures
            
            $
            31,960
            
            $
            16,496Capitalized
                lease
            
            
            945
            
            
            640Other
                liabilities
            
            
            911
            
            
            1,554Total
                liabilities:
            
            
            33,816
            
            
            18,690**Total
                shareholders’ equity**
            
            
            147,580
            
            
            122,245**Total
                liabilities and shareholders’ equity**
            
            $
            181,396
            
            $
            140,935




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**CONDENSED
                STATEMENT OF INCOME**
            
            Years
                Ended December 31,(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004****INCOME:**Interest
            
            $
            663
            
            $
            245
            
            $
            107Management
                fees from subsidiaries
            
            
            19,491
            
            
            15,091
            
            
            12,337Other
                non-interest income
            
            
            89
            
            
            82
            
            
            109Total
                income
            
            
            20,243
            
            
            15,418
            
            
            12,553**EXPENSES:**Interest
                on borrowings
            
            
            2,067
            
            
            1,287
            
            
            1,088Capitalized
                lease interest expense
            
            
            53
            
            
            50
            
            
            72Salaries
                and related benefits
            
            
            8,350
            
            
            6,637
            
            
            5,506Other
                non-interest expense
            
            
            10,647
            
            
            8,373
            
            
            6,704Total
                other expenses
            
            
            21,117
            
            
            16,347
            
            
            13,370Loss
                before income taxes and equity in undistributed earnings of
                subsidiaries
            
            
            (874
            )
            
            (929
            )
            
            (817
            )Income
                tax benefit
            
            
            20
            
            
            356
            
            
            290Equity
                in undistributed income of subsidiaries
            
            
            23,530
            
            
            21,527
            
            
            12,850**Net
                income**
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323







**CONDENSED
                STATEMENT OF CASH FLOWS**
            
            Years
                Ended December 31,(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004****OPERATING
                ACTIVITIES:**Net
                income
            
            $
            22,676
            
            $
            20,954
            
            $
            12,323**Adjustments
                to reconcile net income to net cash used in operating
                activities:**Depreciation
                of fixed assets
            
            
            425
            
            
            423
            
            
            344Equity
                in undistributed earnings of subsidiaries
            
            
            (23,530
            )
            
            (21,527
            )
            
            (12,850
            )Increase
                in other assets
            
            
            (977
            )
            
            (1,313
            )
            
            (793
            )Increase
                (decrease) in other liabilities
            
            
            (643
            )
            
            375
            
            
            850Net
                cash used in operating activities
            
            
            (2,049
            )
            
            (1,088
            )
            
            (126
            )**Investing
                activities:**Purchase
                of AFS equity securities
            
            
            (2,531
            )
            
            -
            
            
            -Investment
                portfolio market valuation
            
            
            95Capital
                contribution to subsidiary bank
            
            
            (2,000
            )
            
            -
            
            
            -Sale
                of subsidiary plus additional capital contributions
            
            
            
            
            
            -
            
            
            609Purchase
                of premises and equipment
            
            
            (868
            )
            
            (430
            )
            
            (313
            )Net
                cash (used in) provided by investing activities
            
            
            (5,304
            )
            
            (430
            )
            
            296**Financing
                activities:**Issuance
                of junior subordinated debentures
            
            
            15,000
            
            
            -
            
            
            -Net
                (decrease) increase in other borrowings and capitalized
                lease
            
            
            305
            
            
            (84
            )
            
            (362
            )Issuance
                of common stock related to exercise of stock options and employee
                benefit
                plans
            
            
            4,801
            
            
            2,646
            
            
            2,911Cash
                dividends and fractional shares
            
            
            (3,112
            )
            
            (1,886
            )
            
            (1,158
            )Net
                cash provided by financing activities
            
            
            16,994
            
            
            676
            
            
            1,391Increase
                decrease in cash and cash equivalents
            
            
            9,641
            
            
            (842
            )
            
            1,561Cash
                and cash equivalents at beginning of year
            
            
            9,556
            
            
            10,397
            
            
            8,836Cash
                and cash equivalents at end of year
            
            $
            19,197
            
            $
            9,555
            
            $
            10,397


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**NOTE
      15. Quarterly Results of Operations (Un-Audited)**




2006
                Quarter Ended(Dollars
                in thousands except per share amounts)
            
            Dec
                31
            
            Sept
                30
            
            June
                30
            
            Mar
                31Interest
                income
            
            $
            33,076
            
            $
            31,020
            
            $
            30,406
            
            $
            27,647Interest
                expense
            
            
            15,011
            
            
            12,871
            
            
            10,930
            
            
            9,289Net
                interest income
            
            
            18,065
            
            
            18,149
            
            
            19,476
            
            
            18,358Provision
                for loan losses
            
            
            -
            
            
            200
            
            
            200
            
            
            -Non-interest
                income
            
            
            2,928
            
            
            3,156
            
            
            3,422
            
            
            2,632Non-interest
                expenses
            
            
            13,938
            
            
            12,992
            
            
            13,106
            
            
            12,476Income
                before income taxes
            
            
            7,055
            
            
            8,113
            
            
            9,592
            
            
            8,514Income
                taxes
            
            
            2,019
            
            
            2,284
            
            
            3,338
            
            
            2,957Net
                income
            
            
            5,036
            
            
            5,829
            
            
            6,254
            
            
            5,557Basic
                earnings per share (1)
            
            $
            0.47
            
            $
            0.54
            
            $
            0.59
            
            $
            0.52Diluted
                earnings per share (1)
            
            $
            0.46
            
            $
            0.53
            
            $
            0.57
            
            $
            0.512005
                Quarter Ended(Dollars
                in thousands except per share amounts)
            
            
            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
            
            
            220Non-interest
                income
            
            
            2,527
            
            
            2,666
            
            
            2,340
            
            
            2,669Non-interest
                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)
            
            $
            0.50
            
            $
            0.50
            
            $
            0.47
            
            $
            0.47


*(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.*




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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, 2006, the Company recognized
      a
      net reduction in interest income of $58,000 and December 31, 2005, the Company
      recognized a net reduction in interest income of $4,000. Management does not
      expect the instrument to have a material impact on the financial statements
      in
      future years.





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, 2006 and
      December 31, 2005 are presented below.





December
                31, 2006(Dollars
                in thousands)
            
            Fair
                Value
            
            Notional
                AmountPurchased
                option, Interest rate floor
            
            $
            314
            
            $
            100,000




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





**NOTE
      17. Subsequent Events**




Subsequent
      to year end 2006, the Company placed loans aggregating $13,343,000 to one
      borrower for the construction of a Planned Unit Development on non-accrual.
      The
      Bank recorded a reduction in interest income of $421,000 in relation to this
      loan in 2007. The Bank has stopped funding the construction upon determining
      that there appeared to be significant cost overruns, disputes with the
      municipality and other project related issues. At this time, Management is
      reviewing the situation to determine the financial impact if any to the Company.
      Because the loans would become 90 days past due prior to the completion of
      our
      review, the loans were put on non-accrual.




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





There
      were no changes in the Company’s accountants nor any disagreements with those
      accountants on accounting and financial disclosure during 2006.




**ITEM
      9A. CONTROLS AND PROCEDURES**




EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES




Disclosure
        controls and procedures are the controls and other procedures that are designed
        to ensure that information required to be disclosed in the reports that the
        Company files or submits under the Securities Exchange Act of 1934, as amended
        (the "Exchange Act") is recorded, processed, summarized, and reported within
        the
        time periods specified in the SEC rules and forms. Disclosure controls and
        procedures include, among other processes, controls and procedures designed
        to
        ensure that information required to be disclosed in the reports that the
        Company
        files or submits under the Exchange Act is accumulated and communicated to
        management, including the Chief Executive Officer and Chief Financial Officer,
        as appropriate, to allow timely decisions regarding required
        disclosure.
 
 The
        Company carried out an evaluation, under the supervision and with the
        participation of management, including the Chief Executive Officer and the
        Chief
        Financial Officer, of the effectiveness of the design and operation of our
        disclosure controls and procedures as of December 31, 2006 pursuant to Exchange
        Act Rule 13a-15b. Based on this evaluation, the Chief Executive Officer and
        Chief Financial Officer have concluded that the Company's disclosure controls
        and procedures were effective as of December 31, 2006.


-84-




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




Management
      of the Company is responsible for establishing and maintaining adequate internal
      control over financial reporting. 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. Internal control over
      financial reporting is defined in Rule 13a-15(f) promulgated under the
      Securities Exchange Act of 1934 as a process designed by, or under the
      supervision of, the company’s principal executive and principal financial
      officers and effected by the company’s board of directors, management and other
      personnel, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with GAAP and 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 assets of the
                company;  2
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with GAAP, 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.  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,
        2006.
  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.
        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. 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, these risks.
 KPMG
          LLP,
          the independent registered public accounting firm that audited and reported
          on
          the consolidated financial statements of the Company, has issued a report
          on
          management's assessment of the Company's internal control over financial
          reporting as of December 31, 2006. The report expresses unqualified opinions
          on
          management's assessment and on the effectiveness of the Company's internal
          control over financial reporting as of December 31, 2006.


There
      was
      no change in the Company’s internal control over financial reporting that
      occurred during the most recent fiscal quarter that materially affected, or
      is
      reasonably likely to materially affect, internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**





None


-85-
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**PART
      III**





**ITEM
      10.****DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
      GOVERNANCE**





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 2007 Proxy Statement titled "Election of
      Directors".





**ITEM
      11****.
      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
      2007
      Proxy Statement titled "Information Pertaining to Election of
      Directors".





**ITEM
      12****.
      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 200 7
      Proxy
      Statement, titled “Beneficial Ownership of Management” and “Principal
      Shareholders.”





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





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,
      2007.


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**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 2007
      Proxy Statement titled “Auditor Fees”.





**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 Item 8 of this
      Report listed below.





Financial
                Statements:
            
            PageReport
                  of Registered Independent Public Accounting Firm Regarding Internal
                  Controls
            
            50Report
                of Registered Independent Public Accounting Firm on Financial Statements
            
            51Consolidated
                Balance Sheets at December 31, 2006 and 2005
            
            53Consolidated
                Statements of Income and Comprehensive Income for the years ended
                December
                31, 2006, 2005 and 2004
            
            54Consolidated
                Statements of Shareholders’ Equity for the years ended December 31,
                2006, 2005 and 2004
            
            55Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004
            
            56Notes
                to Consolidated Financial Statements
            
            57Schedules:None





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





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





(c) **Financial
      Statement Schedules**





All
      other
      supporting schedules are omitted because they are either 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.


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**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,
      2007.





**CAPITAL
      CORP OF THE WEST**





Date:
                March 14, 2007
            By:
                /s/ Thomas T. HawkerTHOMAS
                T. HAWKERPresident
                and Chief Executive Officer(Principal
                Executive Officer)








Date:
                March 14, 2007
            By:
                /s/ David A. HeaberlinDAVID
                A. HEABERLINExecutive
                Vice President andChief
                Financial Officer and Principal Accounting Officer(Principal
                Financial and Accounting Officer)





-88-
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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.





Signature
            
            Capacity
            
            Date/s/
                Jerry E. Callister
            
            Chairman
                of the
            
            March
                14, 2007JERRY
                E. CALLISTER
            
            Board
                of Directors/s/
                Thomas T. Hawker
            
            Director/CEO
                and
            
            March
                14, 2007THOMAS
                T. HAWKER
            
            Principal
                Executive Officer/s/
                David A. Heaberlin
            
            Chief
                Financial Officer
            
            March
                14, 2007DAVID
                A. HEABERLIN
            
            Principal
                Financial andAccounting
                Officer/s/
                Dorothy L. Bizzini
            
            Director
            
            March
                14, 2007DOROTHY
                L. BIZZINI/s/
                David X. Bonnar
            
            Director
            
            March
                14, 2007DAVID
                X. BONNAR/s/
                John Fawcett
            
            Director
            
            March
                14, 2007JOHN
                FAWCETT/s/
                Curtis R. Grant
            
            Director
            
            March
                14, 2007CURTIS
                R. GRANT/s/
                G. Michael Graves
            
            Director
            
            March
                14, 2007G
                MICHAEL GRAVES/s/
                Curtis Riggs
            
            Director
            
            March
                14, 2007CURTIS
                RIGGS/s/
                Jerry Tahajian
            
            Director
            
            March
                14, 2007JERRY
                TAHAJIAN/s/
                Tom A. L. Van Groningen
            
            Director
            
            March
                14, 2007TOM
                A. L. VAN GRONINGEN


-89-
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**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


Exhibit
                    Number
                Exhibit3.1
                Articles
                    of Incorporation as in effect on April 8, 2005 (incorporated
                    by reference
                    to Exhibit 3.2 of Admendment 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)
                *10.8
                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 14, 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 14, 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).
                *10.14
                Salary
                    Continuation Agreement****dated April 1, 2006, between
                    Capital Corp of the West and Katherine Wohlford, Executive Vice
                    President
                    and Chief Administrative Officer of the Bank (filed as Exhibit
                    99.1 to
                    Current Report on Form 8-K of the registrant dated April 7, 2006,
                    as
                    amended by Amendment No. 1)
                *10.15
                Severance
                    Agreement dated March 29, 2006 between Capital Corp of the West
                    and
                    Katherine Wohlford (Filed as Exhibit 99.2 to Current Report on
                    Form 8-K of
                    the registrant dated April 7, 2006, as amended by Amendment No.
                    1).
                *10.16
                Salary
                    Continuation Agreement****dated June 26, 2006, between
                    Capital Corp of the West and Richard de la Pena, Executive Vice
                    President
                    and General Counsel of the Bank (filed as Exhibit 99.1 to Current
                    Report
                    on Form 8-K of the registrant dated July 7, 2006)
                *10.17
                Severance
                    Agreement dated June 26, 2006 between Capital Corp of the West
                    and Richard
                    de la Pena (Filed as Exhibit 99.2 to Current Report on Form 8-K
                    of the
                    registrant dated July 7, 2006).
                *10.18
                Salary
                    Continuation Agreement****dated June 19, 2006, between
                    Capital Corp of the West and David A. Haeberlin, Executive Vice
                    President
                    and Chief Financial Officer of the Bank (filed as Exhibit 99.1
                    to Current
                    Report on Form 8-K of the registrant dated July 7, 2006)
                *10.19
                Severance
                    Agreement dated June 19, 2006 between Capital Corp of the West
                    and David
                    A. Haeberlin (Filed as Exhibit 99.2 to Current Report on Form
                    8-K of the
                    registrant dated July 7, 2006).
                *10.20
                Form
                    of Director Elective Income Deferral Agreement (Filed as Exhibit
                    99.1 to
                    Current Report on Form 8-K of the registrant dated December 15,
                    2006)
                *10.21
                Director
                    Elective Income Deferral Agreement between Dorothy Bizzini and
                    the
                    registrant dated December 15, 2006 (Filed as Exhibit 99.1 to
                    Current
                    Report on Form 8-K of the registrant dated December 15,
                    2006)
                *10.22
                Director
                    Elective Income Deferral Agreement between David Bonnar and the
                    registrant
                    dated December 15, 2006 (Filed as Exhibit 99.1 to Current Report
                    on Form
                    8-K of the registrant dated December 15, 2006)
                *10.23
                Director
                    Elective Income Deferral Agreement between John Fawcett and the
                    registrant
                    dated December 15, 2006 (Filed as Exhibit 99.1 to Current Report
                    on Form
                    8-K of the registrant dated December 15, 2006)
                *10.24
                Director
                    Elective Income Deferral Agreement between Jerry E. Callister
                    and the
                    registrant dated December 15, 2006 (Filed as Exhibit 99.1 to
                    Current
                    Report on Form 8-K of the registrant dated December 15,
                    2006)
                *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).14
                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
                    Statements31.1
                Certification
                    of Registrant’s Chief Executive Officer Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.31.2
                Certification
                    of Registrant’s Chief Financial Officer Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 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.




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