UNITED STATES SECURITIES AND EXCHANGE COMMISSION



Washington, D. C. 20549


FORM 10-K

|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2004

|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------

For the Transition Period From ____________ to ____________

Commission File Number: 0-27384

CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its
charter)



|California                                                             |  |  |  | 77-0405791                          
|---------------------------------------------------------------------- |  |  |  | ------------------------------------
|(State or other
jurisdiction of incorporation or organization)         |  |  |  | (I.R.S.
Employer Identification No.)
|550 West Main Street,
Merced, California                               |  |  |  | 95340                               
|(Address of principal
executive offices)                               |  |  |  | (Zip
Code)                          
|(209)
725-2269                                                        
|(Registrants telephone number, including area code)                  
|Securities
registered under Section 12(b) of the Act:                 
|None                                                                  
|Securities
registered under Section 12(g) of the Act (Title of Class):
|Common Stock,
no par value; Preferred Share Purchase Rights           



The Registrant has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes [X]  No [  ]




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




Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act.) Yes [X]  No [  ]




Aggregate market value of the voting stock held by
nonaffiliates of the Registrant was $197,059,019.52 (based on the $39.12 average of bid and ask prices per common share on June 30,
2004).




The number of shares outstanding of the
Registrants common stock, no par value, as of February 1, 2005 was 5,807,382.


Documents incorporated by reference:

Portions of the definitive proxy statement for the 2005 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference in Part III, Items 10
through 14 and portions of the Annual Report to Shareholders for 2004 are incorporated by reference in Part II, Item 5 through 8.






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Capital Corp of the West

Table of Contents

|                      |  |                                                                                               | Page |  | Reference                                                
|--------------------- |  | --------------------------------------------------------------------------------------------- | ---- |  | ---------------------------------------------------------
|PART I               
|ITEM
        1.       |  | BUSINESS                                                                                      | 3   
|ITEM
        2.       |  | PROPERTIES                                                                                    | 23   |  |                                                          
|ITEM
        3.       |  | LEGAL
        PROCEEDINGS                                                                     | 23  
|ITEM
        4.       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                           | 23   |  |                                                          
|PART II              
|ITEM
        5.       |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND ISSUER PURCHASES OF
        EQUITY SECURITIES.  | 24   |  | Page
        48 of 2004 Annual
        Report            
|ITEM
        6.       |  | SELECTED FINANCIAL DATA                                                                       | 24   |  | Page
        35 of 2004 Annual
        Report            
|ITEM
        7.       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS | 24   |  | Pages
        36 through 48 of 2004
        Annual Report
|ITEM
        7A.      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    | 24   |  | Pages
        36 through 48 of 2004
        Annual Report
|ITEM
        8.       |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                   | 24   |  | Pages
        52 through 80 of 2004
        Annual Report
|ITEM
        9.       |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE  | 25  
|ITEM
        9A.      |  | CONTROLS AND PROCEDURES                                                                       | 25   |  | Proxy
        Statement for 2005
        Annual Meeting  
|ITEM
        9B.      |  | OTHER
        INFORMATION                                                                     | 25   |  | N/A                                                      
|PART III             
|ITEM
        10.      |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            | 26   |  | Proxy
        Statement for 2005
        Annual Meeting  
|ITEM
        11.      |  | EXECUTIVE COMPENSATION                                                                        | 26   |  | Proxy
        Statement for 2005
        Annual Meeting  
|ITEM
        12.      |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                | 26   |  | Proxy
        Statement for 2005
        Annual Meeting  
|ITEM
        13.      |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                | 26   |  | Proxy
        Statement for 2005
        Annual Meeting  
|ITEM
        14.      |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                        | 26   |  | Proxy
        Statement for 2005
        Annual Meeting  
|PART IV              
|ITEM
        15.      |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                       | 27  
|SIGNATURES            |  |                                                                                               | 28   |  |                                                          
|EXHIBIT
        INDEX |  |                                                                                               | E-1 

2

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PART I

ITEM 1.    BUSINESS

Forward-Looking Statements



In addition to historical information, this
discussion and analysis includes certain forward-looking statements that are subject to risks and uncertainties and include information about possible
or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This
could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as expects,
anticipates, believes, estimates, intends, plans, assumes,
projects, predicts, forecasts, variations of such words and other similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which
are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such
forward-looking statements.




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




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


General Development of the Company

General



Capital Corp of the West (the Company)
is a bank holding company incorporated under the laws of the State of California on April 26, 1995. On November 1, 1995, the Company became registered
as a bank holding company


3

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and is the holder of all of the capital stock of
County Bank (the Bank). During 1999, Town and Country Finance and Thrift (the Thrift) was merged into County Bank. The
Companys primary asset is the Bank and the Bank is the Companys primary source of income. As of February 1, 2005, the Company had
outstanding 5,807,382 shares of Common Stock, no par value, held by approximately 1,700 shareholders. There were no preferred shares outstanding at
February 1, 2005. The Company has one wholly-owned inactive nonbank subsidiary, Capital West Group (CWG) at December 31, 2004. The Bank has
three wholly-owned subsidiaries, Merced Area Investment & Development, Inc. (MAID), County Asset Advisors (CAA) and County
Investment Trust (REIT). CAA is currently inactive. All references herein to the Company includes direct subsidiaries of the Company as
well as the Bank and the Banks subsidiaries, unless the context otherwise requires.


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



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


Industry & Market Area



The Bank engages in general commercial banking
business primarily in Fresno, Madera, Mariposa, Merced, San Francisco, San Joaquin, Stanislaus, and Tuolomne counties. The Bank has twenty full service
branch offices; two of which are located in Merced with the branch located in downtown Merced currently serving as both a branch and as administrative
headquarters. There are offices in Atwater, Hilmar, Los Banos, Sonora, Stockton, two offices in Modesto and two offices in Turlock. In 1997, the Bank
also opened an office in Madera and purchased three branch offices from Bank of America in Livingston, Dos Palos and Mariposa. During 1999, the Bank
opened its first office in Fresno, and in 2000 expanded its presence in Fresno by adding an additional office. On January 18, 2001 the Bank opened a
loan production office in San Francisco that during 2001 was converted into a full service branch. During 2003 and 2004, the Bank added one full
service branch facility in Fresno each year. The Banks administrative headquarters also provides accommodations for the activities of MAID, the
Banks wholly-owned real estate subsidiary. (See ITEM 2. PROPERTIES)


Competition



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




Smaller independent financial institutions, savings
and loans and credit unions also serve as competition in our service area. In the past, the Banks principal 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 have offered new 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.




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.


4

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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, and other customary banking services to its
customers. During 2004, the Bank received regulatory approval to begin offering trust 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, 2004, these five categories accounted for approximately 47%, 25%, 9%, 11% and 8%, respectively, of the
Banks loan portfolio.




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




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




The principal sources of the Banks revenues
are (i) interest and fees on loans, (ii) interest on investment securities (principally U.S. government agency securities, mortgage-backed securities,
collateralized mortgage obligations, municipal and corporate bonds), and (iii) service charges on deposit accounts and other noninterest income. For
the year ended December 31, 2004, these sources comprised approximately 72%, 20%, and 8% respectively, of the Banks total interest and
noninterest income.




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


Banks Real Estate Subsidiary (MAID)



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




Federal law now precludes banks from engaging in
real estate development. At December 31, 2004, 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 2004, MAID was used to
own, operate, and maintain 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 in the future.


County Investment Trust (REIT)



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


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Employees



As of December 31, 2004, the Company employed a
total of 347 full-time equivalent employees. The Company believes that employee relations are excellent.




Seasonal
Trends in the Companys Business




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




Operations
in Foreign Countries




The Company conducts no operations in any foreign
country.




Other
Financial Information:




Recently
Issued Accounting Standards




In May 2003, FASB issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for the
classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes
required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified
after May 11, 2004 and otherwise will be effective as of January 1, 2004 except for mandatorily redeemable financial instruments. For certain
mandatorily redeemable instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial instruments. The Company does not currently have any financial instruments
that are within the scope of this Statement.




In December 2003, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from
purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt
securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any
valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected
to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance
would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt
securities acquired after December 31, 2004. Although we anticipate that the implementation of SOP 03-3 may require loan system and operational changes
to track credit related losses on loans purchased starting in 2005, we do not expect these changes to have a significant effect on the consolidated
financial statements.




In March 2004, the Emerging Issues Task Force
(EITF) Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments consensus was
published. Issue No. 03-1 contained new guidance effectively codifying the provisions of SEC Staff Accounting Bulletin No. 59 and creates a new model
that calls for new judgments and additional evidence gathering. In September 2004, the FASB delayed the requirement to record impairment losses under
EITF 03-1. The disclosure requirements of EITF 03-1 remain in effect. Management has done an analysis of the impact of this accounting pronouncement,
which is discussed in the section of this report entitled, Financial Condition. The Company does not expect the adoption of the final EITF will have a
material impact of the Companys Consolidated Financial Statements.




In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment. The
statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be
measured based on the fair value of the equity or liability instruments issued. SFAS No. 123 (Revised 2004) covers a wide range of share-based
compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company will adopt SFAS No 123 (Revised 2004) on July 1, 2005 and is currently evaluating the impact the adoption of the standard
will have on the Companys results of operations. The impact on prior years is discussed in Note 1 under the section titled Stock Option
Plan.


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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. Some of the changes may create opportunities for the Company and the Bank to compete in financial
markets with less regulation. However, these changes also may create new competitors in geographic and product markets which have historically been
limited by law to bank institutions, such as the Bank. Changes in the regulation, statutes or policies that impact the Company and the Bank cannot
necessarily be predicted and may have a material effect on their business and earnings.




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




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


BANK HOLDING COMPANY ACT



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




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


COUNTY BANK



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


7

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




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




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


REGULATORY CAPITAL REQUIREMENTS



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




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




Federal regulation has established five tiers of
capital measurement, ranging from well capitalized to critically undercapitalized. Federal bank regulatory authorities are
required to take prompt corrective action with respect to inadequately capitalized banks. If a bank does not meet the minimum capital requirements set
by its regulators, the regulators are compelled to take certain actions, which may include a prohibition on the payment of dividends to a parent
holding company and requiring adoption of an acceptable plan to restore capital to an acceptable level. Failure to comply will result in further
sanctions, which may include orders to raise capital, merge with another institution, restrict transactions with affiliates, limit asset growth or
reduce asset size, divest certain investments and /or elect new directors. It is the Companys intention to maintain risk-based capital ratios for
itself and for the Bank at above the minimum for the well capitalized level (6% Tier 1 risk-based; 10% total risk-based) and to maintain
the leverage capital ratio for County Bank above the 5% minimum for well-capitalized banks. At December 31, 2004, the Companys
leverage, Tier 1 risk-based and total risk-based capital ratios were 8.46%, 10.30% and 11.55%, and the Banks leverage, Tier 1 risk-based and
total risk-based capital ratios were 7.58%, 9.22% and 10.47%. 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.


8

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Prompt Corrective Action



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




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




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




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


9

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basis. Notwithstanding the foregoing, a receiver
must be appointed after 270 days unless the FDIC determines that the institution has positive net worth, is in compliance with a capital plan, is
profitable or has a sustainable upward trend in earnings, and is reducing its ratio of non-performing loans to total loans, and unless the head of the
appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail.




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


Federal Reserve Borrowings



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


Acquisitions of Control



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


Consumer Laws and Regulations



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


Exposure to and Management of Risk



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


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Safety and Soundness Standards



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




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




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




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


Legislation and Proposed Changes



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


LIMITATIONS ON ACTIVITIES



On October 26, 2004 County Bank entered into a
written agreement with the Federal Reserve Bank of San Francisco (FRBSF). Under the Agreement, the Bank will, among other actions to be
taken, (i) develop 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) develop 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) establish enhanced written policies and
procedures designed to strengthen the Banks internal controls and audit program, and (iv) submit quarterly progress reports to the FRBSF
detailing actions taken to secure compliance with the Agreement.




The Bank has already made significant progress in
addressing the deficiencies identified by the Federal Reserve Bank San Francisco. The compliance effort will entail certain additional expenditures. In
addition, while the


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Agreement is in place, its effect may be to
limit the Banks ability to engage in certain expansionary activity. Neither of these effects is expected to have a material adverse impact on the
financial condition nor results of operations of the Bank or the Company. The next review date is scheduled for May 2005.




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




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




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


TIE-IN ARRANGEMENTS AND TRANSACTIONS WITH AFFILIATED PERSONS



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




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


CROSS-INSTITUTION ASSESSMENTS



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


INSURANCE PREMIUMS AND ASSESSMENTS



The FDIC has authority to impose a special
assessment on members of the BIF to ensure that there will be sufficient assessment income for repayment of BIF obligations and for any other purpose
which it deems necessary. The FDIC is authorized to set semi-annual assessment rates for BIF members at levels sufficient to maintain the BIFs
reserve ratio to a designated level of 1.25% of insured deposits. The FDIC has developed a risk-based assessment system, under which the assessment
rate for an insured depository institution varies according to the level of risk incurred in its activities. An institutions risk category is
based upon whether the institution is well capitalized, adequately capitalized, or undercapitalized. Each insured
depository institution is also assigned to supervisory subgroup A, B or C. Subgroup A institutions are financially sound institutions with
no more than


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a few minor weaknesses; Subgroup B institutions
are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are
institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action
is taken to correct the areas of weakness. The FDIC assigns each member institution an annual FDIC assessment rate which, as of the date of this
report, varies between 0.0% per annum with a $2,000 minimum (for well capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized
Subgroup C institutions). Insured institutions are not permitted to disclose their risk assessment classification.


AUDIT REQUIREMENTS



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


COMMUNITY REINVESTMENT ACT



The Community Reinvestment Act (CRA)
requires banks to identify the communities served by the banks offices and to identify the types of credit the bank is prepared to extend within
such communities. It also requires the banks regulators to assess the banks performance in meeting the credit needs of its community and to
take that assessment into consideration in reviewing applications for mergers, acquisitions and other transactions. During January, 2003, a CRA
examination was completed. The Bank was assigned a CRA rating of outstanding as of this examination.


BANK SECRECY ACT



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


SECURITIES AND EXCHANGE COMMISSION FILINGS



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


POTENTIAL ENFORCEMENT ACTIONS



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


INTERSTATE BANKING



Bank holding companies (including bank holding
companies that also are financial holding companies) are required to obtain the prior approval of the Federal Reserve Board before acquiring more than
five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the Interstate Banking and Branching Act), a bank holding company may acquire banks located in states other than its home state
without regard to the permissibility of such acquisitions under state law,


13

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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 grater amount set by state law of such deposits in that state.




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


FINANCIAL SERVICES MODERNIZATION LEGISLATION



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




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




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




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


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



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




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




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




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


SARBANES-OXLEY ACT OF 2002



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




The SOX generally applies to all companies, both
U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Exchange Act.




The SOX includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules, and mandates further studies of certain issues by the SEC and the Comptroller General. The SOX represents
significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to
state corporate law, such as the relationship between a board of directors and management and a board of directors and its committees.




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


15

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or waiver of such code; real time
filing of issuers periodic reports; the formation of a public accounting oversight board; auditor independence; and various increased criminal
penalties for violation of securities laws. The SEC has adopted a number of rules designed to effectuate the provisions of the SOX.


REGULATION W



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




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




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


CONCLUSIONS



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


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Selected Statistical Information



The following tables on pages 17 through 23 present
certain statistical information concerning the business of the Company. This information should be read in conjunction with MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS incorporated in ITEM 7 of this report by reference to pages 36 through 48
of the Companys 2004 Annual Report to Shareholders and with the Companys Consolidated Financial Statements and the Notes thereto
incorporated in Item 8 of this report by reference to pages 35 through 80 of the Companys 2004 Annual Report to Shareholders. The statistical
information that follows is based on average daily amounts.


Interest Rates and Margins:



Managing interest rates and margins is essential to
the Company in order to maintain profitability. The following table presents, for the periods indicated, the distribution of average assets,
liabilities and shareholders equity, as well as the total dollar amount of interest income from average interest-earning assets and resultant
yields and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and rates.


|                                                      |  | For
      the years ended December 31,
|----------------------------------------------------- |  | --------------------------------------
|
|
|Assets                                                |  |                                       
|Federal
        funds sold                            |  | $                                     
|Time
        deposits at other financial institutions |  |                                       
|Nontaxable
        investment securities(1)           |  |                                       
|Taxable
        investment securities(1)              |  |                                       
|Loans,
        gross (2)                              |  |                                       
|Total
        interest-earning assets                 |  |                                       
|Allowance
        for loan losses                     |  |                                       
|Cash
        and due from banks                       |  |                                       
|Premises
        and equipment, net                   |  |                                       
|Interest
        receivable and other assets          |  |                                       
|Total
        assets                                  |  | $                                     
|Liabilities
        and shareholders equity          |  |                                       
|Negotiable
        orders of withdrawal               |  | $                                     
|Savings
        deposits                              |  |                                       
|Time
        deposits                                 |  |                                       
|Subordinated
        Debentures                       |  |                                       
|Other
        borrowings                              |  |                                       
|Total
        interest-bearing liabilities            |  |                                       
|Noninterest-bearing deposits                          |  |                                       
|Accrued
        interest, taxes and other liabilities |  |                                       
|Total
        liabilities                             |  |                                       
|Total
        shareholders equity                    |  |                                       
|Total
        liabilities and shareholders equity    |  | $                                     
|Net
        interest income and margin (3)            |  |                                       

---

|(1) |  | Tax-equivalent adjustments recorded at the statutory rate of 35%
that are included in nontaxable investment securities income totaled $726,000, $442,000, and $408,000 in 2004, 2003, and 2002, 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 $132,000, $133,000, and $145,000 in 2004, 2003, and 2002, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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


17

---



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


|                                                   |  | 2004
      Compared to 2003 |       | 2003
      Compared to 2002
|-------------------------------------------------- |  | --------------------------- | ----- | ---------------------------
|
|Net
        Interest Income Variance Analysis      |  |                             |       |                            
|Increase
        (decrease) in interest income:    |  |                             |       |                            
|Loans                                              |  | $                           | 6,903 |                            
|Taxable
        investment securities              |  |                             | 1,091 |                            
|Nontaxable
        investment securities           |  |                             | 1,187 |                            
|Federal
        funds sold                         |  |                             | (34   | )                          
|Time
        deposits at other institutions        |  |                             | 3     |                            
|Total                                              |  |                             | 9,150 |                            
|Increase
        (decrease) in interest expense:   |  |                             |       |                            
|Interest-bearing demand deposits                   |  |                             | 13    |                            
|Savings
        deposits                           |  |                             | 526   |                            
|Time
        deposits                              |  |                             | 42    |                            
|Subordinated
        Debentures                    |  |                             | 588   |                            
|Other
        borrowings                           |  |                             | 350   |                            
|Total                                              |  |                             | 1,519 |                            
|Increase
        (decrease) in net interest income |  | $                           | 7,631 |                            

Investment Portfolio Maturities



The following table sets forth the maturities of
debt securities at December 31, 2004 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 |        | 
|-------------------------------------------------- |  | --------------------- | ----- | ----------------------- | ---- | ----------------------- |  | -------------------- | ------ | 
|
|Available
        for sale debt securities:        |  |                       |       |                         |      |                         |  |                      |        | 
|U.S.
        Treasury and U.S. Government agencies |  | $                     | 4,979 |                         | 2.50 | %                       |  | $                    | 20,149 | 
|State
        and political subdivisions           |  |                       |      |                         |     |                         |  |                      |       | 
|Mortgage-backed
        securities                 |  |                       |      |                         |     |                         |  |                      | 9,744  | 
|Collateralized
        Mortgage Obligations        |  |                       |      |                         |     |                         |  |                      |       | 
|Corporate
        debt securities                  |  |                       |      |                         |     |                         |  |                      |       | 
|Held
        to maturity debt securities:          |  |                       |       |                         |      |                         |  |                      |        | 
|U.S.
        Treasury and U.S. Government agencies |  |                       |      |                         |     |                         |  |                      |       | 
|State
        and political subdivisions           |  |                       |      |                         |     |                         |  |                      | 3,920  | 
|Mortgage-backed
        securities                 |  |                       |      |                         |     |                         |  |                      |       | 
|Collateralized
        Mortgage Obligations        |  |                       |      |                         |     |                         |  |                      |       | 
|Total
        debt securities                      |  | $                     | 4,979 |                         | 2.50 | %                       |  | $                    | 33,813 | 



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


18

---

Asset/Liability Repricing



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







|                                                           |  | By
      Repricing Interval As of December 31, 2004
|---------------------------------------------------------- |  | ---------------------------------------------------
|
|Assets                                                     |  |                                                    
|Federal
        funds sold                                 |  | $                                                  
|Time
        deposits at other institutions                |  |                                                    
|Investment
        securities                              |  |                                                    
|Loans                                                      |  |                                                    
|Noninterest-earning assets and allowance for loan losses   |  |                                                    
|Total
        assets                                       |  | $                                                  
|Liabilities and shareholders equity                       |  |                                                    
|Demand
        deposits                                    |  | $                                                  
|Savings,
        money market &
        NOW deposits       |  |                                                    
|Time
        deposits                                      |  |                                                    
|Other
        interest-bearing liabilities                 |  |                                                    
|Subordinated
        Debentures                            |  |                                                    
|Other
        liabilities and
        shareholders equity |  |                                                    
|Total
        liabilities and
        shareholders equity |  | $                                                  
|Interest
        rate sensitivity gap                      |  | $                                                  
|Cumulative
        interest rate
        sensitivity gap   |  | $                                                  

19

---

Loan Portfolio



At December 31, 2004, the Company had approximately
$393,039,000 in undisbursed loan commitments. This compares with $348,282,000 at December 31, 2003. Standby and performance letters of credit were
$13,875,000 and $7,380,000, at December 31, 2004 and 2003. For further information about the composition of the Companys loan portfolio see the
information in ITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Credit Risk
Management and Asset Quality, incorporated by reference to pages 43 through 45 of the Companys 2004 Annual Report to Shareholders.




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







|(Dollars
      in thousands)                   |  | December
      31,
|---------------------------------------------- |  | ------------------
|
|
|Commercial,
        financial and agricultural |  | $                 
|Real
        estate construction              |  |                   
|Real
        estate  mortgage                 |  |                   
|Consumer
        installment                   |  |                   
|Total                                          |  | $                 



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, 2004
by fixed and floating rate attributes:


|                                       |  | December
      31, 2004
|-------------------------------------- |  | -----------------------
|
|Commercial
        and agricultural    |  |                        
|Loans
        with floating rates      |  | $                      
|Loans
        with predetermined rates |  |                        
|Subtotal                               |  |                        
|Real
        Estate  Construction     |  |                        
|Loans
        with floating rates      |  |                        
|Loans
        with predetermined rates |  |                        
|Subtotal                               |  |                        
|Real
        Estate  Mortgage         |  |                        
|Loans
        with floating rates      |  |                        
|Loans
        with predetermined rates |  |                        
|Subtotal                               |  |                        
|Consumer
        installment           |  |                        
|Loans
        with floating rates      |  |                        
|Loans
        with predetermined rates |  |                        
|Subtotal                               |  |                        
|Total                                  |  | $                      

All Cash Reserve loans that do not have a maturity date are included in Over
Five Years category.



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


20

---



responsibility of the Companys credit
administration staff. However, certain problem loans may be dealt with by the originating loan officer. The Directors Loan Committee reviews the status
of delinquent and problem loans on a monthly basis. The Companys underwriting and review practices notwithstanding, in the normal course of
business, the Company expects to incur loan losses in the future.


Nonaccrual, Past Due and Restructured Loans



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


|(Dollars
      in thousands)                    |  | December
      31,
|----------------------------------------------- |  | ------------------
|
|Nonaccrual
        loans                        |  | $                 
|Accruing
        loans past due 90 days or more |  |                   
|Total
        nonperforming loans               |  | $                 
|Other
        real estate owned                 |  |                   
|Total
        nonperforming assets              |  | $                 
|Nonperforming
        loans to total loans      |  |                   
|Nonperforming
        assets to total assets    |  |                   



Loans with significant potential problems or
impaired loans are placed on nonaccrual status. Management defines impaired loans as those loans, regardless of past due status, in which management
believes the collection of principal and interest is in doubt. The amount of gross interest income that would have been recorded on nonaccrual loans in
the periods then ended if the loans had been current in accordance with the original terms and had been outstanding throughout the period or since
origination, if held for part of the period, was $4,000, $39,000, $131,000, $170,000 and $224,000 in 2004, 2003, 2002, 2001, and 2000. The amount of
interest income on nonaccrual loans that was included in net income was $216,000, $231,000, $210,000, $105,000, and $79,000 in 2004, 2003, 2002, 2001,
and 2000.


Allocation of the Allowance for Loan Losses



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


|(Dollars
      in thousands)                   |  | December
      31,
|---------------------------------------------- |  | ------------------
|
|
|Commercial,
        financial and agricultural |  | $                 
|Real
        estate construction              |  |                   
|Real
        estate  mortgage                 |  |                   
|Installment                                    |  |                   
|Total                                          |  | $                 

21

---

Other Interest-Bearing Assets



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


|                                               |  | December
      31
|---------------------------------------------- |  | -----------------
|
|Cash
        surrender value of life insurance |  | $28,362          



During 2004, 2003, and 2002 the Bank purchased
$3,175,000, $6,000,000, and $172,000 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.


Deposits



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


Deposits

|                                        |  | For
      the Year Ended December 31,
|--------------------------------------- |  | -------------------------------------
|
|
|Noninterest-bearing demand deposits     |  | $                                    
|Interest-bearing demand deposits        |  |                                      
|Savings
        deposits                |  |                                      
|Time
        deposits under $100,000    |  |                                      
|Time
        deposits $100,000 and over |  |                                      

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, 2004 are summarized as follows:


|(Dollars
      in thousands)     
|---------------------------------
|Three
        months or less     
|Over
        three to six months 
|Over
        six to twelve months
|Over
        twelve months       
|Total                            

22

---

Return on Equity and Assets



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


Return on Average Equity and Assets






|                                         |  | For
      the year ended
      December 31,
|---------------------------------------- |  | -------------------------------------------
|
|Return
        on average assets         |  | 0.94                                       
|Return
        on average equity         |  | 12.69                                      
|Average
        equity to average assets |  | 7.41                                       
|Dividend
        payout ratio            |  | 9.4                                        

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 19 branch operations located
in the central valley and 1 branch operation located in San Francisco. The central valley operations include branches located in: Merced (2), Atwater,
Los Banos, Hilmar, Sonora, Turlock (2), Modesto (2), Dos Palos, Livingston, Mariposa, Madera, Fresno (4) and Stockton. The Bank owns eight of these
branch facilities and the remaining twelve 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 December 31, 2004, 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, 2004.


23

---

PART II

|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- |  | ---------------------------------------------------------------------------------------------------------------



For information concerning the market for the
Companys common stock and related shareholder matters, see page 48 of the Companys 2004 Annual Report to Shareholders incorporated herein
by reference.




For information concerning the Companys
dividend policy, see the Capital Resources discussion on page 47 of the Companys 2004 Annual Report to Shareholders incorporated
herein by reference.


Market for Companys Common Stock and Related Stock Matters



The Companys stock is included for quotation
on the Nasdaq National Market System with a stock quotation symbol of CCOW. The following table indicates the range of high and low bid prices for the
period shown, based upon information provided by the Nasdaq National Market System. There were approximately 1,700 CCOW shareholders as of December 31,
2004.







|2004        |  | High |       | Low
|----------- |  | ---- | ----- | ---
|4th quarter |  | $    | 51.75 |    
|3rd quarter |  |      | 43.75 |    
|2nd quarter |  |      | 40.50 |    
|1st quarter |  |      | 40.07 |    

|2003        |  | High |       | Low
|----------- |  | ---- | ----- | ---
|4th quarter |  | $    | 41.25 |    
|3rd quarter |  |      | 35.30 |    
|2nd quarter |  |      | 26.58 |    
|1st quarter |  |      | 26.31 |    

|ITEM 6. |  | SELECTED FINANCIAL DATA
|------- |  | -----------------------



For selected consolidated financial data concerning
the Company, see page 35 of the Companys 2004 Annual Report to Shareholders incorporated herein by reference.


|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



For managements discussion and analysis of
financial condition and results of operations, see pages 36 through 48 of the Companys 2004 Annual Report to Shareholders incorporated herein by
reference.


|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|-------- |  | ----------------------------------------------------------



For managements discussion and analysis of
market risk and interest rate risk management, see pages 45 through 47 of the Companys 2004 Annual Report to Shareholders incorporated herein by
reference.


|ITEM 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------



Audited Consolidated Balance Sheets as of December
31, 2004 and 2003 and Audited Consolidated Statements of Income and Comprehensive Income, Shareholders Equity and Cash Flows for the fiscal years
ended December 31, 2004, 2003, and 2002 appear on pages 52 through 55 of the Companys 2004 Annual Report to Shareholders incorporated herein by
reference. Notes to the Consolidated Financial Statements appear on pages 56 through 80 of the Companys 2004 Annual Report to Shareholders
incorporated herein by reference. The Independent Auditors Report appears on page 51 of the Companys 2004 Annual Report to Shareholders
incorporated herein by reference.


24

---

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



There were no changes in and there were no
disagreements with accountants on accounting and financial disclosure during 2004.


|ITEM 9A. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES



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




Based on the evaluation, the chief executive officer
and chief financial officer concluded that as of December 31, 2004, the end of the period covered by this report, the disclosure controls and procedures were adequate and
effective, and that the material information required to be included in this report, including information from the Companys consolidated
subsidiaries, was made known to the chief executive officer and chief financial officer by others within the Company in a timely manner, particularly
during the period when this annual report on Form 10-K was being prepared.


Managements Report on Internal Control over Financial
Reporting.



Based on their evaluation as of December 31, 2004,
our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by
us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified within the SECs rules
and instructions for Form 10-K.




Our management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended).
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Our management has concluded that, as of December 31, 2004, our internal control over financial reporting is effective
based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal
control over financial reporting, which is included herein.


|ITEM 9B. |  | OTHER INFORMATION
|-------- |  | -----------------



None


25

---

PART III

|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|-------- |  | --------------------------------------------------



As permitted by the Securities and Exchange
Commissions rules relating to Form 10-K, the information called for by this item is incorporated by reference from the section of the
Companys 2004 Proxy Statement titled Election of Directors, which is to be filed on or about March 11, 2005.


|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 2004 Proxy Statement titled
Information Pertaining to Election of Directors, which is to be filed on or about March 11, 2005.


|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 2004 Proxy Statement, titled Beneficial Ownership of Management and Principal Shareholders which is to be filed
on or about March 11, 2005.


Securities authorized for issuance under equity compensation
plans.

|(a) |  | The information in the following table is provided as of the end
of the fiscal year ended December 2004 with respect to compensation plans (including individual compensation arrangements) under which equity
securities are issuable:
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Equity Compensation Plan Information






|                                                                   |  | (a) |         | (b) |  | (c)
|------------------------------------------------------------------ |  | --- | ------- | --- |  | ---
|
|Equity
        compensation plans approved by security holders     |  |     | 373,364 |     |  | $  
|Equity
        compensation plans not approved by security holders |  |     |        |     |  |    
|Total                                                              |  |     | 373,364 |     |  | $  

|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- |  | ----------------------------------------------



As permitted by the Securities and Exchange
Commissions rules relating to Form 10-K, the information called for by this item is incorporated by reference from the Companys Proxy
Statement, which was filed on or about March 11, 2005.


|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 2004 Proxy Statement titled
Auditor Fees, which is to be filed on or about March 11, 2005.


26

---

PART IV

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

|(a) |  | Financial Statements and Schedules
|--- |  | ----------------------------------

| |  | An index of all financial statements and schedules filed as part
of this Form 10-K appears below and the material which begins on the pages of the Companys Annual Report to Shareholders for the year ended
December 31, 2004 listed, are incorporated herein by reference in response to Item 8 of this report.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------






|Financial
      Statements:                                                                                                     |  | Page*
|------------------------------------------------------------------------------------------------------------------------------- |  | -----
|Management
        report on internal control over financial reporting                                                          |  | 49   
|Report
        of Independent Registered Public Accounting Firm Regarding Internal Controls                                     |  | 50   
|Report
        of Independent Registered Public Accounting Firm on Financial Statements                                         |  | 51   
|Consolidated
        Balance Sheets at December 31, 2004 and 2003                                                               |  | 52   
|Consolidated
        Statements of Income and Comprehensive Income for the years ended
        December 31, 2004, 2003 and 2002 |  | 53   
|Consolidated
        Statements of Shareholders Equity for the years ended December 31,
        2004, 2003 and 2002            |  | 54   
|Consolidated
        Statements of Cash Flows for the years ended December 31, 2004, 2003
        and 2002                      |  | 55   
|Notes
        to Consolidated Financial Statements                                                                              |  | 56   
|                                                                                                                                | 
|*Incorporated
        by reference from the indicated pages of the 2004 Annual Report.                                          |  |      
|                                                                                                                                | 
|Schedules:                                                                                                                      |  |      
|None                                                                                                                            |  |      

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



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


|(c) |  | Financial Statement Schedules
|--- |  | -----------------------------

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

27

---

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 11th day of March, 2005.


|                             | **CAPITAL
      CORP OF THE WEST**
|---------------------------- | ----------------------------------
|                             |                                   
|Date:
        March 11, 2005 | By:                               
|                             |                                   
|Date:
        March 11, 2005 | By:                               
|                             |                                   

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/
        Dorothy L. Bixxizi
        DOROTHY L. BIZZINI          |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Jerry E. Callister
        JERRY E. CALLISTER          |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        John Fawcett
        JOHN FAWCETT                      |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        G. Michael Graves
        G MICHAEL GRAVES             |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Thomas T. Hawker
        THOMAS T. HAWKER              |  | Director/CEO
        and
        Principal Executive Officer                               |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        R. Dale McKinney
        R. DALE MCKINNEY              |  | Chief
        Financial Officer
        Principal Financial and
        Accounting Officer |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Curtis Riggs
        CURTIS RIGGS                      |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Jerry Tahajian
        JERRY TAHAJIAN                  |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Curtis R. Grant
        CURTIS R. GRANT                |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Roberto Salazar
        ROBERTO SALAZAR                |  | Director                                                                                   |  | March
        11, 2005
|                                                                   |  |                                                                                            |  |                       
|/s/
        Tom A. L. Van Groningen
        TOM A.L. VAN GRONINGEN |  | Chairman
        of the
        Board of Directors                                         |  | March
        11, 2005

28

---

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 |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|-------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|3.1                  |  | Articles of Incorporation as in effect on December 31, 2003 (incorporated
        by reference to Exhibit 3.1 of the registrants Annual Report on
        Form 10-K for the fiscal year ended December 31, 2003).                                                                                                                                                                                                                      | 
|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).                                                                                                                                                                                                                                                    | 

29

---

|Exhibit
      Number |       | Exhibit |                                                                                                                                                                                                                                                                                    
|-------------------- | ----- | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     | 10.7  |         | 2002
        Stock Option Plan (incorporated by reference to Exhibit A to the registrants
        proxy statement dated March 13, 2002)                                                                                                                                           
|                     | 10.8  |         | 401(k) Plan (incorporated by reference to Exhibit 10.7 of the Annual
        Report on Form 10-K of the registrant).                                                                                                                                                               
|                     | 10.9  |         | Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.8
        of the Annual Report on Form 10-K of the registrant for the year ended
        December 31, 1995).                                                                                                
|                     | 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 |         | Deferred Compensation Agreement between members of the board of directors
        and Capital Corp of the West (filed as exhibit 10.7 of the Annual Report
        on Form 10-K of the registrant for the year ended December 31, 1999).                                           
|                     | 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).
|                     | 11    |         | Statement Regarding the Computation of Earnings Per Share (incorporated
        herein by reference from Note 1 of the Companys Consolidated Financial
        Statements, filed as Exhibit 13 to this report).                                                                   
|                     | 13    |         | Annual Report to Security Holders for 2004.                                                                                                                                                                                                                                        
|                     | 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 Subsidiaries                                                                                                                                                                                                                                                       
|                     | 23.1  |         | Independent Registered Public Accounting Firms Consent Regarding
        Financial Statements                                                                                                                                                                                     
|                     | 23.2  |         | Independent Registered Public Accounting Firms Consent Regarding
        Internal Control                                                                                                                                                                                         
|                     | 31.1  |         | Certification of Registrants Chief Executive Officer Pursuant to
        Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                           
|                     | 31.2  |         | Certification of Registrants Chief Financial Officer Pursuant to
        Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            
|                     | 32.1  |         | Certification of Registrants Chief Executive Officer Pursuant to
        18 U.S.C. Section 1350                                                                                                                                                                                   
|                     | 32.2  |         | Certification of Registrants Chief Financial Officer Pursuant to
        18 U.S.C. Section 1350                                                                                                                                                                                   

---

|* |  | Denotes management contract or compensatory plan
arrangement.
|- |  | -------------------------------------------------------------

30

---

Capital Corp of the WestSelected Financial Data

|(Amounts
      in thousands, except per share data)      |  | 2004 |           | 2003 |  | 2002 |           | 2001 |  | 2000
|-------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  | ----
|Summary
        income data:                             |  |      |           |      |  |      |           |      |  |     
|Interest
        income                                  |  | $    | 70,571    |      |  | $    | 62,413    |      |  | $   
|Interest
        expense                                 |  |      | 17,097    |      |  |      | 16,253    |      |  |     
|Net
        interest income                              |  |      | 53,474    |      |  |      | 46,160    |      |  |     
|Provision
        for loan losses                        |  |      | 2,671     |      |  |      | 2,455     |      |  |     
|Noninterest
        income                               |  |      | 6,405     |      |  |      | 10,177    |      |  |     
|Noninterest
        expense                              |  |      | 37,735    |      |  |      | 35,385    |      |  |     
|Income
        before provision for income taxes         |  |      | 19,473    |      |  |      | 18,497    |      |  |     
|Provision
        for income taxes                       |  |      | 7,150     |      |  |      | 4,857     |      |  |     
|Net
        income                                       |  | $    | 12,323    |      |  | $    | 13,640    |      |  | $   
|Share
        Data:                                      |  |      |           |      |  |      |           |      |  |     
|Average
        common shares outstanding                |  |      | 5,735     |      |  |      | 5,612     |      |  |     
|Basic
        earnings per share                         |  | $    | 2.15      |      |  | $    | 2.43      |      |  | $   
|Diluted
        earnings per share                       |  |      | 2.06      |      |  |      | 2.34      |      |  |     
|Book
        value per share                             |  |      | 17.86     |      |  |      | 15.82     |      |  |     
|Tangible
        book value per share                    |  | $    | 17.60     |      |  | $    | 15.36     |      |  | $   
|Balance
        Sheet Data:                              |  |      |           |      |  |      |           |      |  |     
|Total
        assets                                     |  | $    | 1,447,768 |      |  | $    | 1,234,542 |      |  | $   
|Total
        securities                                 |  |      | 436,176   |      |  |      | 372,015   |      |  |     
|Total
        loans                                      |  |      | 885,093   |      |  |      | 764,252   |      |  |     
|Total
        deposits                                   |  |      | 1,154,157 |      |  |      | 1,028,808 |      |  |     
|Shareholders equity                                     |  | $    | 103,481   |      |  | $    | 89,485    |      |  | $   
|Operating
        Ratios:                                |  |      |           |      |  |      |           |      |  |     
|Return
        on average equity                         |  |      | 12.69     | %    |  |      | 16.43     | %    |  |     
|Return
        on average assets                         |  |      | 0.94      |      |  |      | 1.23      |      |  |     
|Average
        equity to average assets ratio           |  |      | 7.41      |      |  |      | 7.46      |      |  |     
|Net
        interest margin                              |  |      | 4.49      |      |  |      | 4.53      |      |  |     
|Credit
        Quality Ratios:                           |  |      |           |      |  |      |           |      |  |     
|Nonperforming
        loans to total loans (1)           |  |      | 0.50      | %    |  |      | 0.52      | %    |  |     
|Allowance
        for loan losses to total
        loans |  |      | 1.61      |      |  |      | 1.74      |      |  |     
|Allowance
        for loan losses to nonperforming loans |  |      | 325.06    |      |  |      | 332.70    |      |  |     
|Capital
        Ratios:                                  |  |      |           |      |  |      |           |      |  |     
|Risk-based
        tier 1 capital                        |  |      | 10.30     | %    |  |      | 10.31     | %    |  |     
|Total
        risk-based capital                         |  |      | 11.55     |      |  |      | 11.57     |      |  |     
|Leverage
        ratio                                   |  |      | 8.46      |      |  |      | 8.55      |      |  |     
|Dividend
        payout ratio                            |  |      | 9         | %    |  |      | %        |      |  |     

---

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

35

---

Managements Discussion and Analysis of Financial Condition and Results
of Operations



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


Forward-Looking Statements



In addition to historical information, this
discussion and analysis includes certain forward-looking statements that are subject to risks and uncertainties and include information about possible
or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This
could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as expects,
anticipates, believes, estimates, intends, plans, assumes,
projects, predicts, forecasts, variations of such words and other similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which
are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such
forward-looking statements.




Readers of the Companys Annual Report and Form
10-K should not rely solely on forward looking statements and should consider all uncertainties and risks discussed throughout this report. These
statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made. Some
possible events or factors that could occur that may cause differences from expected results include the following: the Companys loan growth is
dependent on economic conditions, as well as various discretionary factors, such as decisions to sell, or purchase certain loans or loan portfolios; or
sell or buy participations of loans; the quality and adequacy of management of the borrower; developments in the industry the borrower is involved in,
product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local,
regional and international economic and market conditions, concentrations of borrowers, industries, products and geographical conditions, the mix of
the loan portfolio and managements 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


36

---



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.


Critical Accounting Policies and Estimates



The Companys discussion and analysis of its
financial condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan
losses, investments, and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.




The Allowance for Loan Losses represents
managements estimate of the amount of inherent losses in the loan portfolio that can be reasonably estimated 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 politics related to the adequacy of the allowance for loan losses can be found in Note 1, the section titled Allowance
for Loan Losses as well as in Note 3, titled Loans in this report.




A decline in the fair value of any securities that
is considered other than temporarily impaired is recorded in our consolidated statements of income in the period the impairment occurs. The cost basis
of the underlying security is written down to fair value as a new cost basis. We consider our 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 our control. These factors include
the general condition of the public equity markets, levels of mergers and acquisitions activity, fluctuations in the market prices of the underlying
common stock of these companies, and legal and contractual restrictions on our ability to sell the underlying securities. The policies related to the
valuation of the investment securities can be found in Note 1, the section titled Investment Securities in this report as well as Note 2
Investment Securities.




Goodwill, which arises from the purchase price
exceeding the assigned value of the net assets of an acquired business, represents the value attributable to intangible elements being acquired. The
value of this goodwill is supported ultimately by revenue from the acquired businesses. A decline in earnings could lead to impairment, which would be
recorded as a write-down in our consolidated statements of income. Events that may indicate goodwill impairment include significant or adverse changes
in results of operations of the business, 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. The policies related to the adequacy of the goodwill and other
intangible assets can be found in Note 1, the section titled Goodwill, Other Intangibles, and Impairment of Long-Lived
assets and Long-Lived Assets to be Disposed Of in this report.


Overview



During 2004, earnings decreased $1,317,000 or 10% to
$12,323,000, which compares to earnings of $13,640,000 and $10,428,000 achieved in 2003 and 2002. Basic earnings per share were $2.15 in 2004 compared
to $2.43 and $1.88 in 2003 and 2002. Diluted earnings per share were $2.06 in 2004 compared to $2.34 and $1.83 in 2003 and 2002. The Companys
return on average total assets was 0.94% in 2004 compared with 1.23% and 1.09% in 2003 and 2002. The $1,317,000 earnings decrease in 2004 was primarily
the result of an other-than-temporary impairment charge of $3,709,000, the write-off of tax benefits related to the Companys REIT consent
dividend tax benefit of $1,229,000 which lead to a higher effective tax rate, and increases in general and


37

---



administrative expenses of $2,350,000 which were
partially offset by an increase in net interest income of $7,314,000. The effective tax rate in 2004 was 37% as compared to an effective tax rate of
26% in 2003. The Company achieved strong asset growth in 2004, reaching total assets at December 31, 2004 of $1,447,768,000 up $213,226,000 or 17% from
$1,234,542,000 at December 31, 2003. The growth in assets was primarily funded through increases in the deposit portfolio as well as increased
borrowings. Net loans grew to $870,809,000 at December 31, 2004, an increase of $119,820,000 or 16% from the $750,989,000 outstanding at December 31,
2003. Loan growth was obtained primarily from increased loan production within our existing branch network. Deposits grew to $1,154,157,000 at December
31, 2004, an increase of $125,349,000 or 12% over the $1,028,808,000 outstanding as of December 31, 2003. The increase in deposits was obtained
primarily from increased deposit gathering within our existing branch network. Total shareholders equity grew to $103,481,000 at December 31,
2004, an increase of $13,996,000 or 16% over the December 31, 2003 total of $89,485,000. The Company continues to be well capitalized by regulatory
definitions. The Companys return on average equity was 13%, 16%, and 15% in 2004, 2003, and 2002 respectively.


Results of Operations



Capital Corp of the Wests earnings were
$12,323,000 during 2004, driven primarily by an increase in interest income of $8,158,000 or 13% to $70,571,000 during 2004 which compares with
$62,413,000 achieved during 2003. During 2003, there was an increase of $3,602,000 or 6% to $62,413,000 which compares to $58,811,000 achieved in 2002.
During 2004, interest expense increased by $844,000 or 5%, leaving an interest expense to interest income ratio of 24% in 2004 which compares to 26%
and 32% in 2003 and 2002. The improvement in net interest income in 2004 was partially offset by a higher effective tax provision of $7,150,000 in 2004
when compared to $4,857,000 the year ended December 31, 2003. Net interest income increased by $7,314,000, or 16%, to $53,474,000 during 2004 which
compares to an increase in net interest income of $6,203,000 in 2003 over 2002 levels. The improvement in interest income and net interest income
during 2004 compared to 2003 was driven primarily by an increase in average earning asset balances.




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 liabilities obtained to fund
those assets. The level of interest income is affected by changes in the volume and the rates earned on interest-earning assets. During 2004, the
increase in interest income was due to increases in average earning assets partially offset by lower yields on those assets. Average interest-earning
assets in 2004 were $1,212,314,000 as compared with $1,032,700,000 in 2003, an increase of $179,614,000 or 17%. The average rate earned on
interest-earning assets was 5.89% in 2004, a decrease of 21 basis points from the 6.10% earned in 2003. The primary cause for the decrease in rate on
interest-earning assets was lower prevailing market interest rates that were available for reinvestments in 2004 in comparison to 2003 for new
investments in earning assets.




Interest expense is a function of the volume and
rates paid for interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Average
interest-bearing liabilities in 2004 were $993,486,000 as compared with $858,665,000 in 2003, an increase of $134,821,000 or 16%. The increase in
volume was primarily attributable to increased market penetration within the Banks our existing branch network. Total interest expense increased
$844,000 or 5% to $17,097,000 in 2004 as compared to $16,253,000 for 2003. Total interest expense in 2002 totaled $18,854,000. The weighted average
total cost of interest-bearing funds were 1.72%, 1.89%, and 2.52% in 2004, 2003, and 2002. If the current rate environment remains unchanged during
2005, it is anticipated that the average interest paid on certificates of deposit should stay about the same as maturing accounts reprice at their
maturities to an anticipated current equivalent interest rate level. If interest rates increase in 2005, then it is anticipated that the average
interest paid on certificates of deposit should increase in 2005 as maturing accounts reprice at their maturities to an anticipated higher equivalent
interest rate level.




The Companys net interest margin, the ratio of
net interest income to average interest-earning assets for 2004 was 4.49%. This is a decrease of four basis points compared to the 2003 margin of
4.53%. The decrease in net interest margin during 2004 was primarily the result of falling short term interest rates during most of 2004. If the
current interest rate environment continues throughout 2005, it is anticipated the Companys overall net interest margin should be in the 4.30% to
4.50% range. A modest increase in rates should cause the Companys net interest margin to slightly decrease. The net interest margin decrease of
five basis points during 2003 from the 4.58%


38

---



achieved in 2002 was primarily the result of an
overall decline in prevailing interest rates during the period. In 2004, loans comprised 67% of average interest-earning assets as compared with 67%
and 65% in 2003 and 2002. Securities comprised 32% of average interest-earning in 2004 compared with 31% and 32% in 2003 and 2002.




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 other borrowed funds. The changes due to both rate and volume have been
allocated to rate and volume in proportion to the relationship of the absolute dollar amount of the change in each.




The increase in taxable equivalent interest income
of $8,441,000 in 2004 is comprised of a $9,150,000 volume increase attributable to an increase in interest-earning assets of $179,614,000 between 2004
and 2003 that was partially offset by a $709,000 rate decrease during this same period. The increase in total interest expense of $844,000 in 2004
related to a $1,519,000 volume increase attributable to an increase in average interest-bearing liabilities of $134,821,000 during 2004 when compared
to 2003 that was partially offset by a $675,000 rate decrease during this same period. Interest rates declines were greater for interest earning assets
than interest bearing liabilities during 2004.




The increase in taxable equivalent interest income
of $3,624,000 in 2003 is comprised of a $9,661,000 volume increase primarily attributable to an increase in interest-earning assets of $147,815,000
between 2003 and 2002 that was partially offset by a $6,037,000 rate decrease during this same period. The decrease in total interest expense of
$2,601,000 in 2003 related to a $1,709,000 volume increase attributable to an increase in average interest-bearing liabilities of $109,157,000 during
2003 when compared to 2002 that was partially offset by a $4,310,000 rate decrease during this same period. Interest rate declines were greater for
interest earning assets than interest bearing liabilities during this time period.


Provision for Loan Losses



The Company maintains an allowance for loan losses
at a level considered by management to be adequate to cover 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, 2004 was $2,671,000 compared
to $2,455,000 in 2003 and $4,151,000 in 2002. The increased level of provision for loan losses in 2004 when compared to 2003 was primarily the result
of increased loan balances and loan volume. The decreased level for 2003 as compared to 2002 was attributable to low charge-off levels helped by a
strong commercial real estate market. 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 a loan grading
and classification system. The Banks management grades its loans through internal reviews and periodically subjects loans to external reviews.
These external reviews are presented to and assessed by the Banks audit committee. Credit reviews are performed quarterly and the quality grading
process occurs on a monthly basis. The level of provision for loan losses in 2004, 2003, and 2002 also supports the general loan growth of the Company,
as gross loans increased 16% in 2004 and 21% in 2003.


Noninterest Income



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


|(Dollars
      in thousands)                            |  | 2004 |        | 2003 |  | 2002
|------------------------------------------------------- |  | ---- | ------ | ---- |  | ----
|Noninterest
        Income:                             |  |      |        |      |  |     
|Deposit
        service charges                         |  | $    | 6,134  |      |  | $   
|Income
        from sale of real estate                 |  |      |       |      |  |     
|Earnings
        on bank owned insurance                |  |      | 1,066  |      |  |     
|Loan
        packaging fees                             |  |      | 398    |      |  |     
|Gain
        on sale of loans                           |  |      | 251    |      |  |     
|Retail
        investment income                        |  |      | 873    |      |  |     
|(Loss)
        gain on sale or impairment of securities |  |      | (3,665 | )    |  |     
|Other                                                   |  |      | 1,348  |      |  |     
|Total
        noninterest income                        |  | $    | 6,405  |      |  | $   

39

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Total noninterest income decreased by $3,772,000 or
37% to $6,405,000 in 2004, which compares with $10,177,000 and $8,164,000 earned in 2003 and 2002. This decrease was caused primarily by an increase in
other than temporary impairment of investment securities that was recorded in the fourth quarter of 2004. The 2004 decrease in noninterest income when
compared to 2003 results was also negatively affected by the fact there were no real estate sales in 2004. Deposit service charges increased by
$654,000 or 12% during 2004. The steadily increasing deposit service charges in 2004, 2003 and 2002 was primarily the result of an increase in demand
deposit and NOW accounts in each of these years. Loan packaging fees fell by $140,000 or 26% primarily due to a slower mortgage market and increased
competition. Retail investment income fell by $41,000 or 4% primarily due to the October 15, 2004 divestiture of Regency Investment Advisors
(RIA). Other income increased by $10,000 or 1% to $1,348,000 in 2004, compared to $1,338,000 and $996,000 in 2003 and 2002. Other income
included letters of credit commitment fees which were $90,000, $108,000 and $65,000 in 2004, 2003, and 2002, respectively. That represents a 17%
decrease from 2003 to 2004 and a 66% increase from 2002 to 2003. Other income also includes operating recoveries which amounted to $166,000, $16,000,
and $24,000 in 2004, 2003, and 2002, respectively. This represents a 904% increase between 2003 and 2004 and a 33% decrease from 2002 to 2003.
Miscellaneous income represented $85,000, $78,000, and $51,000 in 2004, 2003, and 2002, respectively. This represents a 9% increase from 2003 to 2004
and a 53% increase from 2002 to 2003. ATM fee income represented $103,000, $94,000, and $91,000 in 2004, 2003, and 2002, respectively. This represents
a 10% increase from 2003 to 2004 and a 3% increase from 2002 to 2003.


Noninterest Expense



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







|(Dollars in thousands)    |  |  |  | 2004 |        | 2003 |  | 2002
|------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|Noninterest
Expense:      |  |  |  |      |        |      |  |     
|Salaries and
benefits     |  |  |  | $    | 20,697 |      |  | $   
|Premises and
occupancy    |  |  |  |      | 3,446  |      |  |     
|Equipment                 |  |  |  |      | 3,186  |      |  |     
|Professional
fees         |  |  |  |      | 1,671  |      |  |     
|Supplies                  |  |  |  |      | 873    |      |  |     
|Marketing
Expense         |  |  |  |      | 1,062  |      |  |     
|Intangible
Amortization   |  |  |  |      | 655    |      |  |     
|Other                     |  |  |  |      | 6,145  |      |  |     
|Total
noninterest expense |  |  |  | $    | 37,735 |      |  | $   



Total noninterest expense increased $2,350,000 or 7%
to $37,735,000 in 2004 as compared with an increase of $4,298,000 or 14% to $35,385,000 in 2003. Noninterest expense totaled $31,087,000 in
2002.




Salaries and related benefits increased by
$1,626,000 or 9% to $20,697,000 in 2004, compared with an increase of $2,397,000 or 14% to $19,071,000 in 2003. Salaries and related benefits totaled
$16,674,000 in 2002. The salary increases were primarily due to staff additions to support growth and normal salary progression.




Premises and occupancy expenses increased $500,000
or 17% to $3,446,000 in 2004 compared with an increase of $420,000 or 17% to $2,946,000 in 2003. Premises and occupancy expense totaled $2,526,000 in
2002. The increases in 2004 and 2003 were caused primarily by the addition of new branch facilities, an operations center, and improvements in existing
branch facilities.




Equipment expenses decreased $149,000 or 4% to
$3,186,000 in 2004 compared with an increase of $381,000 or 13% to $3,335,000 in 2003. Equipment expenses were $2,954,000 in 2002. The decrease in 2004
was primarily due to the retirement of assets and reduced equipment costs within the branch network. The increase in 2003 and 2002 was primarily due to
equipment purchases relating to branch expansion and general growth of the Company.




The Companys professional fees include legal,
consulting, audit and accounting fees. Total professional fees increased by $9,000 or 1% to $1,671,000 in 2004 as compared with an increase of $485,000
or 41% to $1,662,000 in 2003. Total professional fees were $1,177,000 in 2002. Consulting and auditing fees increased $81,000 in 2004 when compared to
2003 levels and were directly related to increased costs associated with the cost of documenting compliance with the Sarbanes Oxley Act of 2002.
Consulting expenses related to systems improvement and new product development decreased $88,000 in 2004 in comparison to 2003.


40

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Supplies increased by $79,000 or 10% to $873,000 in
2004 as compared with an increase of $14,000 or 2% to $794,000 in 2003. Supplies expense totaled $780,000 in 2002. The supplies expense has increased
for the last three years in relation 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 increased by $99,000 or 10% to
$1,062,000 in 2004 as compared with an increase of $63,000 or 7% to $963,000 in 2003. Marketing expenses totaled $900,000 in 2002. Marketing expenses
have increased slowly 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.




Other expenses increased $207,000 or 3% to
$6,145,000 in 2004. During 2003, other expenses increased $542,000 or 10% to $5,938,000. Other expenses were $5,396,000 in 2002. These expense
increases are generally the result of Company growth. Other expenses include postage which cost $437,000 in 2004. This was an increase of 3% over 2003.
2003 postage cost was $426,000 which was a 6% increase over 2002 which were $402,000. Other expenses also include corresponding bank charges whose cost
was $348,000 in 2004, $321,000 in 2003, and $257,000 in 2002. This represents an increase of 8% from 2003 to 2004 and a 25% increase from 2002 to 2003.
Telephone also contributed expenses of $649,000, $613,000, and $588,000 in 2004, 2003, and 2002, respectively. This represents an increase of 6% from
2003 to 2004 and 4% from 2002 to 2003. Travel added expenses of $461,000, $417,000, and $308,000 in 2004, 2003, and 2002, respectively. This represents
an increase of 11% from 2003 to 2004 and 35% from 2002 to 2003. The housing tax credit writedown also contributed to expenses by $589,000, $386,000,
and $336,000 in 2004, 2003, and 2002, respectively. This represents an increase of 53% from 2003 to 2004 and an increase of 15% from 2002 to
2003.


Provision for Income Taxes



The Companys provision for income taxes was
$7,150,000 in 2004 compared to a provision for income taxes of $4,857,000 and $2,455,000 in 2003 and 2002. The effective income tax rates (computed as
income taxes as a percentage of income before income taxes) were 37%, 26%, and 19% for 2004, 2003, and 2002. During 2002, the effective tax rate was
lowered by the implementation of a certain capital raising strategy that had the effect of reducing state income taxes. This strategy lowered taxable
state income by approximately $16,000,000 in 2002. During 2003 and 2002, the tax rate was lower than the statutory rate due also in part, to tax
credits earned from the investment in low-income housing partnerships that qualify for housing tax credits under internal revenue code section 42. In
2004, the tax rate was in excess of the statutory rate due primarily to the payment of $2,411,000 in state income taxes in conjunction with the State
of Californias Voluntary Compliance Initiative in April of 2004. Total housing tax credits for 2004, 2003, and 2002 were approximately
$1,028,000, $975,000, and $750,000. In addition, during 2004, 2003, and 2002, the Company realized tax benefits of $726,000, $442,000, and $407,000
from nontaxable interest income received from bank qualified municipal securities.




During 2003, California enacted tax legislation that
added new penalties for taxpayers that engaged in strategies and transactions that the Franchise Tax Board defined as abusive tax shelters. The new tax
shelter regulations gave taxpayers until April 30, 2004 to take advantage of an amnesty period that would allow taxpayers to amend prior year tax
filings without being subject to the new tax shelter penalties. The Company utilized a Real Estate Investment Trust (REIT) which had
generated tax savings and has been classified by the California Franchise Tax Board as an abusive tax shelter. Company management believes the strategy
used was lawful and defensible, and intends to defend the tax positions taken. The Company generated a cumulative total of $1,229,000 in recorded tax
benefits from the REIT from January 1, 2001 through December 31, 2002 that were completely expensed in 2004.


Financial Condition



Total assets increased $213,226,000 or 17% to
$1,447,768,000 at December 31, 2004, compared to $1,234,542,000 at December 31, 2003. Net loans increased to $870,809,000 at December 31, 2004, a 16%
increase from the balance of $750,989,000 at December 31, 2003. Deposits grew by $125,349,000 or 12% in 2004 to $1,154,157,000 which compares to
$1,028,808,000 at December 31, 2003. Growth in assets has been achieved


41

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primarily through the growth in deposits
obtained through our retail branch offices which has funded increased investment in loans and investment securities. The Company uses its retail branch
system and outside calling officers to attract new deposit and loan customers.


Securities



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


|(Dollars
      in thousands)                     |  | 2004 |         | 2003 |   | 2002   
|------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|U.S.
        Treasury & U.S. Government agencies |  | $    | 25,128  |      | $ | 55,269 
|State
        and political subdivisions         |  |      | 1,325   |      |   | 1,073  
|Mortgage-backed securities                       |  |      | 138,081 |      |   | 130,182
|Collateralized mortgage obligations              |  |      | 61,882  |      |   | 45,267 
|Corporate
        securities                     |  |      |        |      |   | 3,078  
|Total
        debt securities                    |  |      | 226,416 |      |   | 234,869
|Agency
        preferred stock                   |  |      | 18,001  |      |   | 13,008 
|Trust
        preferred stock                    |  |      |        |      |   | 5,023  
|Equity
        securities                        |  |      | 24,772  |      |   | 22,503 
|Total
        carrying value and fair value      |  | $    | 269,189 |      | $ | 275,403



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


|(Dollars
      in thousands)                       |  | 2004 |         | 2003 |   | 2002  
|-------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|U.S.
        Treasury and U.S. Government agencies |  | $    |        |      | $ |      
|State
        and political subdivisions           |  |      | 69,894  |      |   | 42,482
|Mortgage-backed securities                         |  |      | 72,713  |      |   | 40,185
|Collateralized mortgage obligations                |  |      | 24,380  |      |   | 13,945
|Carrying
        amount (amortized cost)           |  | $    | 166,987 |      | $ | 96.612
|Fair
        value                                 |  | $    | 168,265 |      | $ | 97,295



Available for sale securities decreased $6,214,000
or 2% to $269,189,000 at December 31, 2004 compared with a balance of $275,403,000 at December 31, 2003. Held to maturity securities increased
$70,375,000 or 73% to $166,987,000 at December 31, 2004 compared to $96,612,000 outstanding at December 31, 2003. The increase achieved within the held
to maturity segment of the securities portfolio were made possible by increased deposit liabilities and increased borrowings that were used to fund
increased purchases of investment securities. The decrease in the available for sale segment of the securities portfolio is attributable to maturities,
calls, and selling of U.S. Treasury and governments securities. During 2004, $10,000,000, $10,000,000, and $9,000,000 in U.S. Treasury and governments
were matured, sold, and called respectively. 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 with the investment portfolios. At December 31, 2004 and 2003 the Company did not hold any structured notes. See Note 1 and 2 to
the Companys Consolidated Financial Statements for further information concerning the securities portfolio.


Loans



Total loans increased $120,841,000 or 16% to
$885,093,000 at December 31, 2004, compared to the $764,252,000 outstanding at December 31, 2003 due to increased penetration into existing geographic
markets.




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


42

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As a result of the Companys loan portfolio
mix, the future quality of these assets could be affected by adverse trends in its region or in the broader community. These trends are beyond the
control of the Company.


Credit Risk Management and Asset Quality



The Company closely monitors the markets in which it
conducts its lending operations and adjusts its strategy to control exposure to loans with higher credit risk. Asset reviews are performed using
grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades become classified
assets which include all nonperforming assets and potential problem loans and receive an elevated level of attention to improve the likelihood of
collection. The policy of the Company is to review each loan in the portfolio to identify problem credits. There are three classifications for problem
loans: substandard, doubtful and loss. Substandard loans have one or more defined weaknesses and are characterized
by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of
substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing
facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is considered uncollectible and its
continuance as an asset is not warranted. The level of nonperforming loans and real estate acquired through foreclosure are two indicators of asset
quality. Nonperforming loans are those in which the borrower fails to perform under the original terms of the obligation and are categorized as loans
past due 90 days or more but still accruing, loans on nonaccrual status and restructured loans. Loans are generally placed on nonaccrual status and
accrued but unpaid interest is reversed against current year income when interest or principal payments become 90 days past due unless the outstanding
principal and interest is adequately secured and, in the opinion of management, are deemed to be in the process of collection. Loans that are not 90
days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply with the contractual
loan repayment terms and the collection of principal or interest is in question.




Management defines impaired loans as those loans,
regardless of past due status, in which principal and interest are not expected to be collected under the original contractual loan repayment terms. An
impaired loan is charged off at the time management believes the collection of principal and interest process has been exhausted. Partial charge-offs
are recorded when portions of impaired loans are deemed uncollectable. At December 31, 2004 and 2003, impaired loans were measured based upon the
present value of future cash flows discounted at the loans effective rate, the loans observable market price, or the fair value of
collateral if the loan is collateral dependent.




The Company had impaired loans at December 31, 2004
of $4,394,000 as compared with $3,987,000 at December 31, 2003. The Company recorded $704,000 in specific allowance for loan losses against impaired
loans at December 31, 2004 as compared to $598,000 at December 31, 2003. Other forms of collateral, such as inventory, chattel, and equipment secure
the remaining nonperforming loans as of each date.




At December 31, 2004 and 2003 the Bank had $60,000
of real estate acquired through foreclosure, which consisted of one residential foreclosure property.


Allowance for Loan Losses



In determining the adequacy of the allowance for
loan losses, management takes into consideration the growth trend in the portfolio, examinations by financial institution supervisory authorities,
internal and external credit reviews, prior loan loss experience of the Company, concentrations of credit risk, delinquency trends, general economic
conditions and the interest rate environment. The allowance for loan losses is based on estimates and ultimate future losses may vary from current
estimates. It is always possible that future economic or other factors may adversely affect the Companys borrowers, and thereby cause loan losses
to exceed the current allowance 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 2004 of $2,671,000 as compared to $2,455,000 and $4,151,000 in 2003 and 2002. See Results of Operations  Provision for Loan
Losses.


43

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


|(Dollars
      in thousands)             |  | 2004 |         | 2003 |  | 2002 |         | 2001 |  | 2000
|---------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ----
|Allowance
        for loan losses:       |  |      |         |      |  |      |         |      |  |     
|Balance
        at beginning of year     |  | $    | 13,263  |      |  | $    | 12,134  |      |  | $   
|Provision
        for loan losses        |  |      | 2,671   |      |  |      | 2,455   |      |  |     
|Charge-offs:                             |  |      |         |      |  |      |         |      |  |     
|Commercial
        and agricultural      |  |      | 1,860   |      |  |      | 1,010   |      |  |     
|Real-estate
         mortgage           |  |      |        |      |  |      | 29      |      |  |     
|Consumer                                 |  |      | 436     |      |  |      | 956     |      |  |     
|Total
        charge-offs                |  |      | 2,296   |      |  |      | 1,995   |      |  |     
|Recoveries:                              |  |      |         |      |  |      |         |      |  |     
|Commercial
        and agricultural      |  |      | 344     |      |  |      | 302     |      |  |     
|Real-estate
         mortgage           |  |      | 12      |      |  |      |        |      |  |     
|Consumer                                 |  |      | 290     |      |  |      | 367     |      |  |     
|Total
        recoveries                 |  |      | 646     |      |  |      | 669     |      |  |     
|Net
        charge-offs                  |  |      | 1,650   |      |  |      | 1,326   |      |  |     
|Balance
        at end of year           |  | $    | 14,284  |      |  | $    | 13,263  |      |  | $   
|Loans
        outstanding at year-end    |  | $    | 885,093 |      |  | $    | 764,252 |      |  | $   
|Average
        loans outstanding        |  |      | 813,050 |      |  |      | 687,419 |      |  |     
|Net
        charge-offs to average loans |  |      | 0.20    | %    |  |      | 0.19    | %    |  |     
|Allowance
        for loan losses        |  |      |         |      |  |      |         |      |  |     
|To
        total loans                   |  |      | 1.61    | %    |  |      | 1.74    | %    |  |     
|To
        nonperforming loans           |  |      | 325.06  | %    |  |      | 332.70  | %    |  |     
|To
        nonperforming assets          |  |      | 320.66  | %    |  |      | 327.74  | %    |  |     



The Companys charge-offs, net of recoveries,
was $1,650,000 in 2004 as compared with $1,326,000 and $1,760,000 in 2003 and 2002. This represents loan loss experience ratios of 0.20%, 0.19%, and
0.31% in those respective years stated as a percentage of average loans outstanding for each year. The increase in net charge-offs in 2004 in
comparison to 2003 is primarily the result of an increase in the size of the loan portfolio. The decrease in net charge-offs in 2003 when compared to
2002 is due to decreased net charge offs within the consumer portfolio as well as the commercial and agricultural portfolios. As of December 31, 2004
the allowance for loan losses was $14,284,000 or 1.61% of total loans outstanding. This compares with an allowance for loan losses of $13,263,000 or
1.74% in 2003 and $12,134,000 or 1.91% in 2002. The decrease in net charge-offs in 2002 compared to 2001 was due to decreased net charge-offs within
the consumer portfolio.


Liquidity



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




Recent accounting rule changes have resulted in the
variable interest entities used for trust preferred offerings no longer being treated as consolidated subsidiaries of trust preferred issuers. The FRB
has indicated that trust preferred securities will continue to constitute Tier 1 capital until further notice. However, there could be a change to the
regulatory capital treatment of preferred securities issued by bank holding companies, such as a conclusion


44

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being reached by the FRB that preferred
securities should no longer be treated as Tier 1 regulatory capital. In addition, the SEC staff has concluded that all banks and bank holding companies
must deconsolidate the trusts used for trust preferred offerings as of December 31, 2003.




The Company reviews its liquidity position on a
regular basis 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 $330,358,000 and $321,235,000 at December 31, 2004 and 2003 and were 23% and 26% of
total assets on December 31, 2004 and 2003. Cash and noninterest-bearing deposits in other banks decreased $3,838,000 or 9% to $40,454,000 at December
31, 2004, compared to $44,292,000 at December 31, 2003. The decrease in the 2004 cash position when compared to 2003 was the result of decreased cash
letters at the end of December 2004 when compared to the same period in 2003. Liquidity is also affected by collateral requirements of the Banks
public agency deposits and certain borrowings. Total pledged securities were $321,688,000 and $295,204,000 at December 31, 2004 and
2003.




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 $217,832,000 of which $155,326,000 was outstanding as of December 31, 2004. This compares with lines
of credit of $174,313,000 of which $83,346,000 was outstanding as of December 31, 2003.




The following table sets forth known contractual
obligations of the Company at December 31, 2004:


Contractual Obligations

|At
      December 31, 2004
      (Dollars in thousands) |  | Within
      One
      Year |        | One
      to
      Three Years |   | Three
      To Five
      Years |  | After
      Five
      Years |        | Total
|------------------------------------------------------- |  | --------------------------- | ------ | ------------------------------ | - | ------------------------------- |  | ---------------------------- | ------ | -----
|Borrowings                                              |  | $                           | 68,025 |                                | $ | 63,826                          |  | $                            | 10,416 |      
|Junior
        subordinated debentures                  |  |                             |       |                                |   |                                |  |                              |       |      
|Operating
        leases                                |  |                             | 1,237  |                                |   | 1,804                           |  |                              | 1,467  |      
|Purchase
        obligations                            |  |                             | 380    |                                |   |                                |  |                              |       |      
|                                                        |  | $                           | 69,642 |                                | $ | 65,630                          |  | $                            | 11,883 |      



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


Market and Interest Rate Risk Management



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




The Companys success is largely dependent upon
its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Companys net interest income to adverse
movements in interest rates. Although the Company manages other risks, such as credit and liquidity risk in the normal course of its business,
management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the
Companys financial condition and results of operations. Correspondingly, the overall strategy of the Company is to manage interest rate risk,
primarily through balance sheet structure, to be interest rate neutral. The Company does use derivative instruments to control interest rate risk.
During the second quarter of 2001, the


45

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Company entered into a $20,000,000 hedge
transaction exchanging a fixed interest rate for a variable rate tied to the prime rate. This hedge transaction was designed to give some interest
income protection in a falling rate environment. This type of hedging activity is permitted subject to the approval of the Board of Directors. The
hedge expired on August 23, 2004.




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


Earnings Sensitivity



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




The primary analytical tool used by the Company to
gauge interest rate sensitivity is a net interest income simulation model 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,
futures contracts, 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 an immediate and sustained shift in the yield curve of up 2 percent and down 1 percent, 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, 2004 and 2003 is presented in the following tables:




December
31, 2004


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



|(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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

December 31, 2003

|Change in interest
      rates
      (In basis points) |  | Change
      in net interest
      Income(1) |            | Percentage
      change in net interest
      income
|------------------------------------------------------ |  | -------------------------------------------- | ---------- | ----------------------------------------------------
|+200                                                   |  | $                                            | 173,000    |                                                     
|100                                                   |  | $                                            | (1,257,000 | )                                                   



|(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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46

---



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




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




Based upon the December 31, 2004 mix of interest
sensitive assets and liabilities, given a parallel shift up in the yield curve of 2%, this model estimated the Companys cumulative net interest
income over the next year would increase by $536,000. This compares with a cumulative one year expected increase in net interest income of $173,000 as
of December 31, 2003. If prevailing market interest rates sustained a parallel decrease of 1.0% at December 31, 2004, this model estimated the
Companys cumulative one year expected decrease in net interest income would be $1,002,000. This compares with an expected cumulative one year
decrease in net interest income of $1,257,000 as of December 31, 2003. The model shows that at December 31, 2004 if interest rates increase or
decrease, the Company has similar interest rate risk exposure as compared to December 31, 2003, with slightly more negative results in a decreasing
rate environment. As the total measure of interest rate risk indicates, the Company is modestly asset sensitive.


Off-Balance Sheet Arrangements



During 2001, the Company entered into an interest
rate exchange agreement with the Federal Home Loan Bank (FHLB) of San Francisco that was recorded as a cash flow hedge transaction. The
notional amount of the swap was $20 million with a term of 3 years which expired on August 23, 2004. For more information regarding this swap
transaction, see Note 1, the section titled Derivative Instruments and Hedging Activities in the Companys 2004 annual
report.




The Bank has also extended firm lending commitments
in the form of unused credit lines to loan customers. These commitments may or may not ever be drawn upon, depending on the credit needs of the
Banks loan customers. For more information regarding these loan commitments, See Footnote 9, titled Commitments and Financial Instruments
With Off-Balance Sheet Credit Risk in the Companys 2004 annual report.


Capital Resources



The Company is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a material effect on the Companys financial statements. Management
believes, as of December 31, 2004, that the Company and the Bank meet all capital requirements to which they are subject. The Companys leverage
capital ratio at December 31, 2004 was 8.46% as compared with 8.55% as of December 31, 2003. The Companys total risk-based capital ratio at
December 31, 2004 was 11.55% as compared to 11.57% as of December 31, 2003.




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
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.




The Company has a formal dividend policy, and
dividends are issued solely at the discretion of the Companys Board of Directors, subject to compliance with regulatory requirements. In order to
pay any cash dividend, the Company must receive payments of dividends or management fees from the Bank. There are certain legal and regulatory
limitations on the payment of cash dividends by banks. Notwithstanding regulatory restrictions, in order for the Bank to maintain a 10% risk weighted
capital ratio, the Company had the ability to pay cash dividends at December 31, 2004 of $17,635,000. The Bank had the ability to pay cash dividends to
the Company at December 31, 2004 of $5,402,000.


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


47

---



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


Market for Companys Common Stock and Related Stock Matters



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




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


|2004        |  | High |       | Low |  | Dividends
|----------- |  | ---- | ----- | --- |  | ---------
|4th quarter |  | $    | 51.75 |     |  | $        
|3rd quarter |  |      | 43.75 |     |  |          
|2nd quarter |  |      | 40.50 |     |  |          
|1st quarter |  |      | 40.07 |     |  |          
|
|4th quarter |  | $    | 41.25 |     |  |          
|3rd quarter |  |      | 35.30 |     |  |          
|2nd quarter |  |      | 26.58 |     |  |          
|1st quarter |  |      | 26.31 |     |  |          



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


48

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CAPITAL CORP OF THE WEST AND SUBSIDIARIESMANAGEMENTS REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING



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




Under the supervision and with the participation of
management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of
internal control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal ControlIntegrated Framework, 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, 2004.




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




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




KPMG LLP, an independent registered public
accounting firm, has audited the Companys consolidated financial statements as of and for the year ended December 31, 2004, and the
Companys assertion as to the effectiveness of internal control over financial reporting as of December 31, 2004, as stated in their reports,
which are included herein.







|/s/
        Thomas T. Hawker
        THOMAS T. HAWKER |  |  |  | Director/CEO and
        Principal Executive Officer                                       |  | March 11, 2005
|----------------------------------------------------- |  |  |  | ------------------------------------------------------------------------------------------ |  | --------------
|                                                      |  |  |  |                                                                                            |  |               
|/s/
        R. Dale McKinney
        R. DALE MCKINNEY |  |  |  | Chief
        Financial Officer
        Principal Financial and
        Accounting Officer |  | March 11, 2005

49

---

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders ofCapital 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, 2004, 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 principals, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.




Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our opinion, managements assessment that
Capital Corp of the West and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, Capital Corp of the West and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, 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, 2004 and 2003, 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, 2004, and our report dated March 11, 2005 expressed an unqualified
opinion on those consolidated financial statements.




/s/ KPMG
LLP




Sacramento,
CaliforniaMarch 11, 2005


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, 2004 and 2003, 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, 2004. 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, 2004 and 2003 and the results
of their operations and their cash flows for each of the years in the three year period ended December 31, 2004, 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 internal control over financial reporting of
Capital Corp of the West as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial reporting.




/s/ KPMG
LLPSacramento, California March 11, 2005


51

---

CAPITAL CORP OF THE WEST CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                       |  | As
      of December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------
|
|Assets                                                                                                                                                 |  |                         
|Cash
        and noninterest-bearing deposits in other banks                                                                                           |  | $                       
|Federal
        funds sold                                                                                                                             |  |                         
|Time
        deposits at other financial institutions                                                                                                  |  |                         
|Investment
        securities available for sale, at fair value                                                                                        |  |                         
|Investment
        securities held to maturity, at cost; market value of $168,265 and $97,295
        in 2004 and 2003                                 |  |                         
|Loans,
        net of allowance for loan losses of $14,284 and $13,263 at December 31,
        2004 and December 31, 2003                              |  |                         
|Interest
        receivable                                                                                                                            |  |                         
|Premises
        and equipment, net                                                                                                                    |  |                         
|Goodwill                                                                                                                                               |  |                         
|Other
        intangibles                                                                                                                              |  |                         
|Cash
        value of life insurance                                                                                                                   |  |                         
|Investment
        in housing tax credit limited partnerships                                                                                          |  |                         
|Other
        assets                                                                                                                                   |  |                         
|Total
        assets                                                                                                                                   |  | $                       
|Liabilities                                                                                                                                            |  |                         
|Deposits:                                                                                                                                              |  |                         
|Noninterest-bearing demand                                                                                                                             |  | $                       
|Negotiable
        orders of withdrawal                                                                                                                |  |                         
|Savings                                                                                                                                                |  |                         
|Time,
        under $100,000                                                                                                                           |  |                         
|Time,
        $100,000 and over                                                                                                                        |  |                         
|Total
        deposits                                                                                                                                 |  |                         
|Other
        borrowings                                                                                                                               |  |                         
|Junior
        subordinated debentures                                                                                                                 |  |                         
|Accrued
        interest, taxes and other liabilities                                                                                                  |  |                         
|Total
        liabilities                                                                                                                              |  |                         
|Shareholders Equity                                                                                                                                   |  |                         
|Preferred
        stock, no par value; 10,000,000 shares authorized; none outstanding none
        outstanding                                         |  |                         
|Common
        stock, no par value; 30,000,000 shares authorized; 5,794,308 and 5,660,739
        issued and outstanding at December 31, 2004 and 2003 |  |                         
|Retained
        earnings                                                                                                                              |  |                         
|Accumulated
        other comprehensive income, net                                                                                                    |  |                         
|Total
        shareholders equity                                                                                                                     |  |                         
|Total
        Liabilities and Shareholders Equity                                                                                                     |  | $                       

See accompanying notes to consolidated financial statements.

52

---

CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME

|                                                                           |  | Years
      Ended December 31,
|-------------------------------------------------------------------------- |  | ------------------------------
|
|Interest
        income:                                                   |  |                               
|Interest
        and fees on loans                                         |  |                               
|Interest
        on deposits with other financial institutions             |  |                               
|Interest
        on investment securities held to maturity:                |  |                               
|Taxable                                                                    |  |                               
|Non-taxable                                                                |  |                               
|Interest
        on investment securities available for sale:              |  |                               
|Taxable                                                                    |  |                               
|Non-taxable                                                                |  |                               
|Interest
        on federal funds sold                                     |  |                               
|Total
        interest income                                              |  |                               
|Interest
        expense:                                                  |  |                               
|Deposits:                                                                  |  |                               
|Negotiable
        orders of withdrawal                                    |  |                               
|Savings                                                                    |  |                               
|Time,
        under $100,000                                               |  |                               
|Time,
        $100,000 and over                                            |  |                               
|Total
        interest on deposits                                         |  |                               
|Interest
        on Subordinated Debentures                                |  |                               
|Other
        borrowings                                                   |  |                               
|Total
        Interest Expense                                             |  |                               
|Net
        interest income                                                |  |                               
|Provision
        for loan losses                                          |  |                               
|Net
        interest income after provision for loan losses                |  |                               
|Noninterest
        income:                                                |  |                               
|Service
        charges on deposit accounts                                |  |                               
|(Loss)
        gain on sale or impairment of available for sale securities |  |                               
|Gain
        from sale of real estate                                      |  |                               
|Increase
        in cash surrender value of life insurance policies        |  |                               
|Other                                                                      |  |                               
|Total
        noninterest income                                           |  |                               
|Noninterest
        expenses:                                              |  |                               
|Salaries
        and related benefits                                      |  |                               
|Premises
        and occupancy                                             |  |                               
|Equipment                                                                  |  |                               
|Professional
        fees                                                  |  |                               
|Supplies                                                                   |  |                               
|Marketing                                                                  |  |                               
|Intangible
        amortization                                            |  |                               
|Other                                                                      |  |                               
|Total
        noninterest expenses                                         |  |                               
|Income
        before provision for income taxes                           |  |                               
|Provision
        for income taxes                                         |  |                               
|Net
        income                                                         |  | $                             
|Comprehensive income:                                                      |  |                               
|Unrealized
        (loss) gain on securities arising during the year, net  |  |                               
|Comprehensive
        income                                               |  | $                             
|Basic
        earnings per share                                           |  | $                             
|Diluted
        earnings per share                                         |  | $                             

See accompanying notes to consolidated financial statements.

53

---

CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                      |  | Common
      Stock |      
|----------------------------------------------------------------------------------------------------- |  | ------------------ | -----
|
|Balance,
        December 31, 2001                                                                    |  |                    | 4,927
|Exercise
        of stock options, including
        tax benefit                                      |  |                    | 116  
|Issuance
        of shares pursuant to 401K and ESOP plans                                            |  |                    | 35   
|Net
        change in fair market value of investment securities, net of tax effect
        of $840   |  |                    |     
|5%
        stock dividend, including cash payment for fractional shares                               |  |                    | 247  
|Net
        income                                                                                    |  |                    |     
|Balance,
        December 31, 2002                                                                    |  |                    | 5,325
|Exercise
        of stock options, including
        tax benefit                                      |  |                    | 63   
|Issuance
        of shares pursuant to 401K and ESOP plans                                            |  |                    | 7    
|Net
        change in fair market value of investment securities, net of tax effect
        of $1,613 |  |                    |     
|5%
        stock dividend, including cash payment for fractional shares                               |  |                    | 266  
|Net
        income                                                                                    |  |                    |     
|Balance,
        December 31, 2003                                                                    |  |                    | 5,661
|Exercise
        of stock options, including
        tax benefit (includes tax effect of $814)        |  |                    | 116  
|Issuance
        of shares pursuant to 401K and ESOP plans                                            |  |                    | 17   
|Net
        change in fair market value of investment securities, net of tax effect
        of $49    |  |                    |     
|Cash
        dividends                                                                                |  |                    |      
|Net
        income                                                                                    |  |                    |      
|Balance,
        December 31, 2004                                                                    |  |                    | 5,794

See accompanying notes to consolidated financial statements.

54

---

CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF CASH
FLOWS






|                                                                                                                                      |  | Years
      Ended December 31,
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------
|
|Operating
        activities:                                                                                                         |  |                               
|Net
        income                                                                                                                    |  | $                             
|Adjustments
        to reconcile net income to net cash provided by operating activities:                                             |  |                               
|Provision
        for loan losses                                                                                                     |  |                               
|Increase
        in cash surrender value of life insurance policies, net of mortality expense                                         |  |                               
|Depreciation,
        amortization and accretion, net                                                                                 |  |                               
|Benefit
        from deferred income taxes                                                                                            |  |                               
|Loss
        (gain) on sale or impairment of available for sale investment securities                                                 |  |                               
|Gain
        on sale of real estate                                                                                                   |  |                               
|Net
        increase in interest receivable & other assets                                                                            |  |                               
|Net
        increase (decrease) in accrued interest payable & other liabilities                                                       |  |                               
|Net
        cash provided by operating activities                                                                                     |  | $                             
|Investing
        activities:                                                                                                         |  |                               
|Investment
        security purchases  available for sale securities                                                                 |  |                               
|Investment
        security purchases  held to maturity securities                                                                   |  |                               
|Investment
        security purchases  mortgage-backed securities and collateralized
        mortgage obligations-available for sale |  |                               
|Investment
        security purchases  mortgage-backed securities and collateralized
        mortgage obligations  held to maturity |  |                               
|Proceeds
        from maturities of available for sale investment securities                                                          |  |                               
|Proceeds
        from maturities of held to maturity investment securities                                                            |  |                               
|Proceeds
        from maturities of mortgage-backed securities and collateralized mortgage
        obligations  available for sale   |  |                               
|Proceeds
        from maturities of mortgage-backed securities and collateralized mortgage
        obligations  held to maturity     |  |                               
|Proceeds
        from sales of available for sale investment securities                                                               |  |                               
|Proceeds
        from sales of mortgage-backed securities and collateralized mortgage obligations
         available for sale        |  |                               
|Net
        (increase) decrease in time deposits in other financial institutions                                                      |  |                               
|Proceeds
        from sales of commercial and real estate loans                                                                       |  |                               
|Origination
        of loans                                                                                                          |  |                               
|Proceeds
        from repayment of loans                                                                                              |  |                               
|Purchases
        of premises and equipment                                                                                           |  |                               
|Proceeds
        from sales of real estate                                                                                            |  |                               
|Purchase
        of bank owned life insurance                                                                                         |  |                               
|Sale
        (purchase) of subsidiary                                                                                                 |  |                               
|Net
        cash used in investing activities                                                                                         |  | $                             
|Financing
        activities:                                                                                                         |  |                               
|Net
        increase in demand, NOW and savings deposits                                                                              |  |                               
|Net
        increase in certificates of deposit                                                                                       |  |                               
|Proceeds
        from borrowings                                                                                                      |  |                               
|Repayment
        of borrowings                                                                                                       |  |                               
|Issued
        shares for benefit plan purchases                                                                                      |  |                               
|Payment
        for fractional shares                                                                                                 |  |                               
|Issuance
        of Junior Subordinated Debentures                                                                                    |  |                               
|Cash
        dividends paid                                                                                                           |  |                               
|Exercise
        of stock options, net                                                                                                |  |                               
|Net
        cash provided by financing activities                                                                                     |  | $                             
|Net
        increase (decrease) in cash and cash equivalents                                                                          |  |                               
|Cash
        and cash equivalents at beginning of year                                                                                |  |                               
|Cash
        and cash equivalents at end of year                                                                                      |  | $                             
|Supplemental
        disclosure of non-cash investing and financing activities:                                                       |  |                               
|Investment
        securities unrealized (losses) gains, net of taxes                                                                 |  | $                             
|Interest
        paid                                                                                                                 |  |                               
|Income
        tax payments                                                                                                           |  |                               
|Transfer
        of securities from available for sale to held to maturity                                                            |  |                               
|Loans
        transferred to other real estate owned                                                                                  |  | $                             

See accompanying notes to consolidated financial statements.

55

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

NOTE 1.    Summary of Significant Accounting
Policies



Capital Corp of the West (the Company)
is a registered bank holding company, which 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 more significant policies.




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




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




Cash and Cash Equivalents:  The
Company maintains deposit balances with various banks which are necessary for check collection and account activity charges. Cash in excess of
immediate requirements is invested in federal funds sold or other short-term investments. Generally, federal funds are sold for periods from one to
thirty days. Cash, noninterest-bearing deposits in other banks and federal funds sold are considered to be cash and cash equivalents for the purposes
of the consolidated statements of cash flows. Banks are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount
of those reserve balances was approximately $25,000 at December 31, 2004 and $25,000 in 2003.




Investment Securities:  Investment
securities consist of U.S. treasury, federal agencies, state and county municipal securities, corporate bonds, mortgage-backed securities,
collateralized mortgage obligations, agency preferred stock, trust preferred stock and equity securities. Investment securities are classified into one
of three categories. These categories include trading, available for sale, and held to maturity. The category of each security is determined based on
the Companys investment objectives, operational needs and intent. The Company has not purchased securities with the intent of actively trading
them.




Securities available for sale may be sold prior to
maturity and are available for future liquidity requirements. These securities are carried at fair value. Unrealized gains and losses on securities
available for sale are excluded from earnings and reported net of tax as a separate component of shareholders equity until
realized.




Securities held to maturity are classified as such
where the Company has the ability and positive intent to hold them to maturity. These securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts.




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




Loans:  Loans are carried at the
principal amount outstanding, net of unearned income, including deferred loan origination fees and costs. Nonrefundable loan origination and commitment
fees and the direct costs associated


56

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



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 is reversed against interest income, and interest is subsequently recognized only as received until the loan
is returned to accrual status. Interest accruals are resumed when such loans are brought fully current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be fully collectable as to both principal and interest.




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




Allowance for Loan Losses:  The
allowance for loan losses is maintained at the level considered to be adequate for probable loan losses inherent 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, 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.




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. There were no loans held
for sale as of December 31, 2004 and 2003. Gains or losses are recognized at the time of sale and are calculated based on the amounts received and the
book value of the loans sold.




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




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




Goodwill and Other Intangible
Assets:  Goodwill represents the excess of costs over the fair value of net assets of businesses acquired. Goodwill was generated with
the purchase of the Town and County Finance and Thrift


57

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



(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, 2004 and 2003. The goodwill associated with the purchase of Regency Investment Advisors Inc. in June 2002 was $520,000.
RIA was subsequently sold and goodwill was included in the sale. 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 $69,000 and $724,000 as of December 31, 2004 and 2003. Amortization of core deposit premiums was $655,000,
$676,000, and $680,000 for the years ended December 31, 2004, 2003 and 2002. Core deposit premiums are scheduled to amortize by $46,000 in the year
2005 and are scheduled to be fully amortized by June 2006. Goodwill and intangible assets are reviewed on an annual basis for impairment. If such
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 recorded amortization and no impairment losses recognized on the Town and
Country Finance and Thrift recorded goodwill as of December 31, 2004.




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:  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 $28,362,000 and $24,138,000 as of December 31, 2004 and
2003. Income from these policies is recorded in other income and the load, mortality and surrender charges have been recorded in other expenses. An
accrued liability of $3,610,000 and $3,125,000 as of December 31, 2004 and 2003 was recorded to reflect the present value of the expected retirement
benefits for the salary continuation plans and the deferred compensation benefits and was included in other liabilities. Salary continuation expense of
$484,000 and $669,000 and deferred compensation expense of $97,000 and $64,000 was recorded for the years ending December 31, 2004 and
2003.


58

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



Income Taxes:  The Company files a
consolidated federal income tax return and a combined state franchise tax return. The provision for income taxes includes federal income and state
franchise taxes. Income tax expense is allocated to each entity of the Company based upon the analysis of the tax consequences of each company on a
stand alone basis.




The Company accounts for income taxes under the
asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.




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 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 effective yield
method and are evaluated at each reporting period for impairment. The Bank had gross investments in these partnerships of $10,901,000 and $10,407,000
as of December 31, 2004 and 2003.




Derivative Instruments and Hedging
Activities:  All derivative instruments are recognized in the consolidated balance sheet at fair value. The accounting treatment for
gains or losses from changes in the derivative instruments fair value is contingent on whether the derivative instrument qualifies as a hedge
under the accounting standard. On the date the Company enters into a derivative contract, the Company designates the derivative instruments as (1) a
hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (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) hedge for
trading, customer accommodation or not qualifying for hedge accounting (free-standing derivative instruments). For a fair value hedge, changes in the
far value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment
attributable to the hedged risk are recorded in current period net income. For a cash flow hedge, changes in the fair value of the derivative
instrument to the extent that it is effective are recorded in other comprehensive income, net of tax, within shareholders equity and subsequently
reclassified to net income in the same period(s) that the hedged transaction impacts net income. For free-standing derivative instruments, changes in
the fair values are reported in current period net income. The Company formally documents the relationship between hedging instruments and hedged
items, as well as the risk management objective and strategy for undertaking any hedge transaction. This process includes linking all derivative
instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted
transactions. The Company also formally assesses both at the inception of the hedge and on an ongoing basis, whether the derivative instruments used
are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that the derivative instrument is not
highly effective as a hedge, hedge accounting is discontinued.




During the third quarter of 2001, the Company
entered into an interest rate exchange agreement with the Federal Home Loan Bank of San Francisco that was recorded as a cash flow hedge transaction.
The notional amount of the swap was $20 million with a term of 3 years that expired on August 23, 2004. The Company has no hedging relationships as of
December 31, 2004.




Earnings Per Share:  Basic earnings
per share (EPS) includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an
entity.


59

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



On January 27, 2004, April 27, 2004, July 27, 2004,
October 26, 2004 and January 25, 2005, the Board of Directors authorized a $0.05 cash dividend payable on February 26, 2004, May 26, 2004, August 25,
2004, November 29, 2004, and February 25, 2005 respectively.




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







|                                                                           |  | For
      The Twelve Months
      Ended December 31,
|-------------------------------------------------------------------------- |  | ----------------------------------------------------
|
|Basic
        EPS computation:                                             |  |                                                     
|Net
        income                                                         |  | $                                                   
|Average
        common shares outstanding                                  |  |                                                     
|Basic
        EPS                                                          |  | $                                                   
|Diluted
        EPS computations:                                          |  |                                                     
|Net
        income                                                         |  | $                                                   
|Average
        common shares outstanding                                  |  |                                                     
|Effect
        of stock options                                            |  |                                                     
|Total
        weighted average shares and common
        stock equivalents |  |                                                     
|Diluted
        EPS                                                        |  | $                                                   



In 2004, 2003, and 2002 there were options covering
0, 7,675, 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, 2004, 2003 and 2002 making these shares antidilutive.




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


60

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



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







|                                                            |  | Years
      Ended December 31,
|----------------------------------------------------------- |  | ------------------------------
|
|Net
        income                                          |  |                               
|As
        reported net income                              |  | $                             
|Stock
        option compensation, net of income tax effect |  |                               
|Proforma
        net income                                 |  |                               
|Basic
        earnings per share                            |  |                               
|As
        reported                                         |  |                               
|Proforma                                                    |  |                               
|Diluted
        earnings per share                          |  |                               
|As
        reported                                         |  |                               
|Proforma                                                    |  |                               



Total compensation expense related to the issuance
of options that would have been reported was $972,000, $601,000, and $449,000 during 2004, 2003 and 2002, respectively.




The per share weighted average fair value of stock
options granted during 2004, 2003, and 2002 was $13.96, $11.02, and $7.57 on the date of grant using the Black Scholes option pricing model with the
following weighted average assumptions: 2004, 2003, and 2002 expected dividend yield of 0.4%, 0% and 0%; 2004, 2003, and 2002 expected volatility of
26%, 29%, and 29%; and a risk free interest rate of 4.00%, 4.75%, and 4.75% for 2004, 2003, and 2002, and an expected life of 7 years in 2004, 2003,
and 2002, respectively.




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




Reclassifications:  Certain amounts
in the 2003 and 2002 consolidated financial statements have been reclassified to conform with the 2004 presentation.


61

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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
|-------------------------------------------------- |  | -------------------- | ------- | ---------------------------------- |  | ----------------------------------- | ----- | --------------------------------
|2004                                               |  |                      |         |                                    |  |                                     |       |                                 
|Available
        for sale securities:             |  |                      |         |                                    |  |                                     |       |                                 
|U.S.
        Treasury and U.S. Government agencies |  | $                    | 25,309  |                                    |  | $                                   | 18    |                                 
|State
        & political subdivisions             |  |                      | 1,312   |                                    |  |                                     | 13    |                                 
|Mortgage-backed securities                         |  |                      | 137,868 |                                    |  |                                     | 914   |                                 
|Collateralized mortgage obligations                |  |                      | 62,340  |                                    |  |                                     | 39    |                                 
|Total
        debt securities                      |  |                      | 226,829 |                                    |  |                                     | 984   |                                 
|Agency
        preferred stock                     |  |                      | 18,001  |                                    |  |                                     |      |                                 
|Equity
        securities                          |  |                      | 25,050  |                                    |  |                                     |      |                                 
|Total
        available for sale securities        |  | $                    | 269,880 |                                    |  | $                                   | 984   |                                 
|Held
        to maturity securities:               |  |                      |         |                                    |  |                                     |       |                                 
|State
        and political subdivisions           |  | $                    | 69,894  |                                    |  | $                                   | 1,394 |                                 
|Mortgage-backed securities                         |  |                      | 72,713  |                                    |  |                                     | 732   |                                 
|Collateralized mortgage obligations                |  |                      | 24,380  |                                    |  |                                     |      |                                 
|Total
        held to maturity securities          |  | $                    | 166,987 |                                    |  | $                                   | 2,126 |                                 
|2003                                               |  |                      |         |                                    |  |                                     |       |                                 
|Available
        for sale securities:             |  |                      |         |                                    |  |                                     |       |                                 
|U.S.
        Treasury and U.S. Government agencies |  | $                    | 55,029  |                                    |  | $                                   | 478   |                                 
|State
        & political subdivisions             |  |                      | 1,068   |                                    |  |                                     | 6     |                                 
|Mortgage-backed securities                         |  |                      | 129,196 |                                    |  |                                     | 1,329 |                                 
|Collateralized mortgage obligations                |  |                      | 45,356  |                                    |  |                                     | 242   |                                 
|Corporate
        debt securities                  |  |                      | 3,018   |                                    |  |                                     | 60    |                                 
|Total
        debt securities                      |  |                      | 233,667 |                                    |  |                                     | 2,115 |                                 
|Agency
        preferred stock                     |  |                      | 14,832  |                                    |  |                                     |      |                                 
|Trust
        preferred stock                      |  |                      | 5,533   |                                    |  |                                     |      |                                 
|Equity
        securities                          |  |                      | 22,600  |                                    |  |                                     |      |                                 
|Total
        available for sale securities        |  | $                    | 276,632 |                                    |  | $                                   | 2,115 |                                 
|Held
        to maturity securities:               |  |                      |         |                                    |  |                                     |       |                                 
|State
        and political subdivisions           |  | $                    | 42,482  |                                    |  | $                                   | 420   |                                 
|Mortgage-backed securities                         |  |                      | 40,185  |                                    |  |                                     | 1,028 |                                 
|Total
        held to maturity securities          |  |                      | 13,945  |                                    |  |                                     | 16    |                                 
|                                                   |  | $                    | 96,612  |                                    |  | $                                   | 1,464 |                                 



At December 31, 2004 and 2003, investment securities
with carrying values of approximately $321,688,000 and $295,204,000, respectively, were pledged as collateral for deposits of public funds, government
deposits, the Banks use of the Federal Reserve Banks discount window and Federal Home Loan Bank line of credit. The Bank is a member of the
Federal Reserve Bank and the Federal Home Loan Bank. The Bank carried balances, stated at cost, of $7,304,000 and $4,914,000 of Federal Home Loan Bank
stock and $1,187,000 and $1,127,000 of Federal Reserve Bank stock as of December 31, 2004 and 2003. Gross realized losses on sale of available for sale
securities of $6,000, $0, and $99,000, were recognized in 2004, 2003, and 2002. Gross realized gains on sale of available


62

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



for sale securities of $50,000, $0, and $279,000
were recognized in 2004, 2003, and 2002. Gross losses on sale of available for sale securities were $3,715,000, $0, and $0 in 2004, 2003, and 2002. The
gross losses on sale of available for sale securities in 2004 is composed of an unrealized other-than-temporary impairment loss of $3,709,000 and a
realized loss of $6,000 on the sale of available for sale securities.




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




The carrying and estimated fair values of debt
securities at December 31, 2004 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   |                           
|One
        to five years                        |  |                      | 20,273  |                           
|Five
        to ten years                        |  |                      | 295     |                           
|Over
        ten years                           |  |                      | 1,053   |                           
|Mortgage-backed securities and CMOs              |  |                      | 200,208 |                           
|Total
        available for sale debt securities |  | $                    | 226,829 |                           
|Held
        to maturity debt securities:        |  |                      |         |                           
|One
        year or less                         |  | $                    |        |                           
|One
        to five years                        |  |                      | 3,707   |                           
|Five
        to ten years                        |  |                      | 22,434  |                           
|Over
        ten years                           |  |                      | 43,753  |                           
|Mortgage-backed securities and CMOs              |  |                      | 97,093  |                           
|Total
        held to maturity debt securities   |  | $                    | 166,987 |                           

63

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



Gross unrealized losses on investment securities and
the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2004, were as follows:







|                                         |  | Less
      than 12 months |       | 12
      months or more |  | Total
|---------------------------------------- |  | ------------------------- | ----- | ----------------------- |  | -----
|
|Available
        for sale:              |  |                           |       |                         |  |      
|U.S.
        government agencies         |  | $                         | 70    |                         |  | $    
|State
        and political subdivisions |  |                           |      |                         |  |      
|Mortgage-backed securities               |  |                           | 605   |                         |  |      
|Collateralized mortgage Obligations      |  |                           | 471   |                         |  |      
|Equity
        securities                |  |                           | 17    |                         |  |      
|                                         |  | $                         | 1,163 |                         |  | $    
|Held
        to maturity securities:     |  |                           |       |                         |  |      
|State
        and political subdivisions |  | $                         | 304   |                         |  | $    
|Mortgage-backed securities               |  |                           | 10    |                         |  |      
|Collateralized mortgage Obligations      |  |                           | 181   |                         |  |      
|                                         |  | $                         | 495   |                         |  | $    



U.S. government agencies:  The unrealized
losses on investments in U.S. government agency securities were caused by market interest rate increases that occurred after these securities were
purchased. There were two securities that had a fair market value of $9,876,000 and a total unrealized loss of $129,000 that had been in an unrealized
loss position for more than twelve months as of December 31, 2004. The first of these securities had a fair market value of $4,898,000 and an
unrealized loss of $102,000 as of December 31, 2004. This government agency security has been in an unrealized loss position for 19 consecutive months
as of December 31, 2004. The second had a fair market value of $4,978,000 and an unrealized loss of $27,000 as of December 31, 2004. This government
agency security has been in an unrealized loss position for 18 consecutive months as of December 31, 2004. Due to the fact the Company has the ability
and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily
impaired.




State and political subdivisions:  The
unrealized losses on state and political subdivision investments were caused by market interest rate increases that occurred after these securities
were purchased. There were no state and political subdivision securities that had been in an unrealized loss position for twelve months or more.
Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.




Mortgage-backed securities:  The
unrealized losses on available for sale and held to maturity investments in mortgage-backed securities were caused by market interest rate increases
that occurred after these securities were purchased and higher actual prepayment rates than were originally estimated on mortgage-backed securities
that were purchased at a premium. When the marketplace believes that prepayment rates will remain high, higher coupon mortgage-backed securities are
priced to reflect lower premiums and higher expected principal prepayments. There were four available for sale and three held to maturity
mortgage-backed securities that had a fair market value of $19,770,000 and an unrealized loss of $449,000 that had been in an unrealized loss position
for more than twelve months as of December 31, 2004. The four available for sale mortgage-backed securities had a fair market value of $7,283,000 and
an unrealized loss of $96,000 as of December 31, 2004. These four securities had been in an unrealized loss position for 20, 19, 17, and 16 consecutive
months as of December 31, 2004. The three held to maturity securities had a fair market value of $12,487,000 and an unrealized loss of $353,000 as of
December 31,


64

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



2004. These three held to maturity
mortgage-backed securities had been in an unrealized loss position for 18, 18, and 17 consecutive months as of December 31, 2004. Due to the fact the
Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.




Collateralized mortgage obligations:  The
unrealized losses on collateralized mortgage obligation securities were caused by market rate increases that occurred after these securities were
purchased. There was one collateralized mortgage obligation that had a fair value of $5,058,000 and an unrealized loss of $26,000 as of December 31,
2004. This collateralized mortgage obligation has been in an unrealized loss position for 19 consecutive months as of December 31, 2004. Due to the
fact the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.




Equity securities:  The Company invests in
mutual funds that hold adjustable rate mortgage loan investments that fluctuate in value with prevailing market interest rates. The unrealized losses
on equity securities were caused by generally low prevailing market rates. The market price of adjustable rate loans declines during periods of falling
or flat interest rates. There was one investment in an adjustable rate mortgage mutual fund that had a fair market value of $12,738,000 and an
unrealized loss of $261,000 as of December 31, 2004. This mutual fund has been in an unrealized loss position for 12 consecutive months as of December
31, 2004. Due to the fact the Company has the ability and intent to hold these investments until a market price recovery, and the Company believes that
the market price of these securities will improve as interest rates move higher, these investments are not considered other-than-temporarily
impaired.


NOTE 3.    Loans



Loans at December 31 consisted of the
following:







|(Dollars
      in thousands)           |  | 2004 |         | 2003
|-------------------------------------- |  | ---- | ------- | ----
|Commercial                             |  | $    | 217,524 |     
|Agricultural                           |  |      | 80,598  |     
|Real
        estatemortgage           |  |      | 416,385 |     
|Real
        estate  construction     |  |      | 97,396  |     
|Consumer                               |  |      | 73,190  |     
|Gross
        loans                    |  |      | 885,093 |     
|Less
        allowance for loan losses |  |      | (14,284 | )   
|Net
        loans                      |  | $    | 870,809 |     



Loans are net of deferred loan fees of $2,446,000
and $2,683,000, excluding consumer loans, as of December 31, 2004 and 2003. Consumer loans are net of deferred loan costs of $401,000 and $417,000 as
of December 31, 2004 and 2003.




Nonaccrual loans totaled $4,394,000 and $3,987,000
at December 31, 2004 and 2003. Foregone interest on nonaccrual loans was approximately $4,000, $39,000, and $131,000 for the years ended December 31,
2004, 2003 and 2002.




Impaired loans are loans for which it is probable
that the Company will not be able to collect all amounts due. At December 31, 2004 and 2003, the recorded investment in impaired loans was $4,394,000,
and $3,987,000 which had a related allowance for loan losses of $704,000, and $598,000 in 2004 and 2003. As of December 31, 2004 and 2003, there were
no impaired loans without a related allowance for loan loss assigned to them. The average outstanding balance of impaired loans for the years ended
December 31, 2004, 2003 and 2002 was $4,206,000, $2,328,000, and $5,134,000 on which $216,000, $231,000, and $210,000 was recognized as interest income
on a cash basis.


65

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



At December 31, 2004 and 2003, 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) |  | 2004 |       | 2003
|---------------------------- |  | ---- | ----- | ----
|Commercial                   |  | $    | 3,966 |     
|Agricultural                 |  |      | 382   |     
|Consumer
        and other   |  |      | 46    |     
|                             |  | $    | 4,394 |     



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







|(Dollars
      in thousands)                       |  | 2004 |        | 2003 |  | 2002
|-------------------------------------------------- |  | ---- | ------ | ---- |  | ----
|Balance
        at beginning of year               |  | $    | 13,263 |      |  | $   
|Loans
        charged-off                          |  |      | (2,296 | )    |  |     
|Recoveries
        of loans previously charged-off |  |      | 646    |      |  |     
|Provision
        for loan losses                  |  |      | 2,671  |      |  |     
|Balance
        at end of year                     |  | $    | 14,284 |      |  | $   



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)         |  | 2004 |       | 2003
|------------------------------------ |  | ---- | ----- | ----
|Balance
        at beginning of year |  | $    | 2,452 |     
|Loan
        advances and renewals   |  |      | 190   |     
|Loans
        matured or collected   |  |      | (509  | )   
|Balance
        at end of year       |  | $    | 2,133 |     



The Banks business activity is with customers
located primarily in the counties of Fresno, Madera, Mariposa, Merced, San Francisco, San Joaquin, Stanislaus, and Tuolumne in the state of California.
Consumer lending and small working capital total loan portfolio consists of consumer lending, loans to small businesses, credit cards and the purchase
of financing contracts principally from automobile dealers. Individual loans and lines 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 including loans to businesses, construction and permanent real estate financing, short and long term agricultural loans for production
and real estate purposes and SBA financing. Where appropriate, collateral is taken to secure and reduce the Banks credit risk. Each loan is
submitted to an individual risk grading process but the borrowers ability to repay is dependent, in part, upon factors affecting the local and
national economies.


66

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 4.    Premises and Equipment



Premises and equipment consisted of the following at
December 31:







|(Dollars
      in thousands)                           |  | 2004 |        | 2003
|------------------------------------------------------ |  | ---- | ------ | ----
|Land                                                   |  | $    | 3,104  |     
|Buildings                                              |  |      | 16,701 |     
|Leasehold
        improvements                         |  |      | 2,827  |     
|Furniture
        and equipment                        |  |      | 16,310 |     
|Subtotal                                               |  | $    | 38,942 |     
|Less
        accumulated depreciation and amortization |  |      | 16,516 |     
|Premises
        and equipment, net                    |  | $    | 22,426 |     



Included in the totals above are
construction in progress of $2,268,000 and $541,000 at December 31, 2004 and 2003 respectively. Depreciation expense totaled $1,717,000, $1,661,000 and
$1,903,000 in 2004, 2003 and 2002.


NOTE 5.    Other Borrowings



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


As of December 31,






|(Dollars
      in Millions)         |  | 2004 |        |  |  | 2003 |            |   |  | 2002 |       
|----------------------------------- |  | ---- | ------ |  |  | ---- | ---------- | - |  | ---- | ------
|
|Treasury
        Tax Loan (1)       |  | $    | 5,853  |  |  |      | 1.87       | % |  | $    | 6,467 
|FHLB
        advances               |  |      | 59,900 |  |  |      | 2.186.83% |   |  |      | 18,175
|Total
        short term borrowings |  | $    | 65,753 |  |  |      |            |   |  | $    | 24,642






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



The Company maintains a secured line of credit with
the Federal Home Loan Bank of San Francisco (FHLB). Based on the FHLB stock requirements at December 31, 2004, this line provided for maximum
borrowings of $163,956,000 of which $155,326,000 was outstanding. At December 31, 2004 this borrowing line is collateralized by securities with a
market value of $172,585,000. At December 31, 2003, the line of credit collateralized by securities totaled $119,372,000 of which $83,346,000 was
outstanding. At December 31, 2003 this borrowing line is collateralized by securities with a market value of $125,655,000. The Company had additional
secured, unused lines of credit of $9,876,000 and unsecured unused lines of credit of $44,000,000 at December 31, 2004. This compares with secured,
unused lines of credit of $14,941,000 and unsecured unused lines of credit of $40,000,000 as of December 31, 2003.




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







|(Dollars
      in millions)        |  |       |  |           |  | 2004 |        | 2003 |  | 2002
|---------------------------------- |  | ----- |  | --------- |  | ---- | ------ | ---- |  | ----
|
|Mortgage
        note              |  | 7.80% |  | 2007      |  | $    | 2,940  |      |  | $   
|FHLB
        advances              |  | 5.09% |  | 20062011 |  |      | 95,426 |      |  |     
|Total
        long term borrowings |  |       |  |           |  | $    | 98,366 |      |  | $   

67

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



Interest expense related to FHLB borrowings totaled
$4,368,000, $4,069,000, and $4,265,000 in 2004, 2003, and 2002. Interest expense related to the mortgage note totaled $236,000, $240,000, and $245,000
in 2004, 2003, and 2002. This long term note is secured by Company land and buildings. Interest expense on federal funds purchased was $21,000, $11,000
and $22,000 in 2004, 2003, and 2002. Compensating balance arrangements are not significant to the operations of the Company.




Principal payments required to service the
Companys borrowings during the next five years are:







|                             | 
|---------------------------- | 
|
|2005                         | 
|2006                         | 
|2007                         | 
|2008                         | 
|2009                         | 
|Thereafter                   | 
|Total
        borrowed funds | 

NOTE 6.    Junior Subordinated Debentures



At December 31, 2004 the Company had 2 wholly-owned
trusts (Trusts) that were formed to issue trust preferred securities and related common securities of the Trusts. As a result of adoption
of FIN 46R, the Company deconsolidated the Trusts as of and for the years ended December 31, 2004 and 2003. There was $16,496,000 of junior
subordinated debentures issued and outstanding as of December 31, 2004 and 2003. The junior subordinated debentures were reflected as long-term debt in
the consolidated balance sheets at December 31, 2004 and 2003.




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




County Statutory Trust I issued $6,000,000 in Trust
Preferred Securities on February 22, 2001. These securities pay interest at the rate of 10.20% and have a stated maturity date of February 22, 2031.
They also have an optional redemption date of February 22, 2021. County Statutory Trust II issued $10,000,000 in Trust Preferred Securities on December
17, 2003. These securities pay interest at a variable rate of interest that was 4.07% at December 31, 2004, 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 fixed for five years, then after the optional
redemption date of December 17, 2008, the rate will be indexed to the then-current 3 month LIBOR rate plus 2.85%.




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




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


68

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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
|---------------------------- |  | ------- | ------ | ----- |  | -----
|2004                         |  |         |        |       |  |      
|Current                      |  | $       | 3,528  |       |  | $    
|Deferred                     |  |         | (256   | )     |  |      
|                             |  | $       | 3,272  |       |  | $    
|2003                         |  |         |        |       |  |      
|Current                      |  | $       | 4,906  |       |  | $    
|Deferred                     |  |         | (767   | )     |  |      
|                             |  | $       | 4,139  |       |  | $    
|2002                         |  |         |        |       |  |      
|Current                      |  | $       | 4,416  |       |  | $    
|Deferred                     |  |         | (1,124 | )     |  |      
|                             |  | $       | 3,292  |       |  | $    



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




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







|(Dollars
      in thousands)                                 |  | 2004 |        | 2003
|------------------------------------------------------------ |  | ---- | ------ | ----
|Deferred
        tax assets:                                 |  |      |        |     
|Allowance
        for loan losses                            |  | $    | 6,006  |     
|Other
        than temporary impairment of equity securities |  |      | 1,560  |     
|Deferred
        compensation                                |  |      | 1,512  |     
|Intangible
        amortization                              |  |      | 904    |     
|Nonaccrual
        interest                                  |  |      | 83     |     
|Fixed
        assets                                         |  |      |       |     
|Other                                                        |  |      | 723    |     
|Total
        gross deferred tax assets                      |  |      | 10,788 |     
|Less
        valuation allowance                             |  |      | (424   | )   
|Deferred
        tax assets                                  |  |      | 10,364 |     
|Deferred
        tax liabilities:                            |  |      |        |     
|Investment
        in partnerships                           |  |      | 657    |     
|FHLB
        stock dividends                                 |  |      | 292    |     
|Capitalization of loan costs and prepaid assets              |  |      | 531    |     
|Investment
        securities unrealized gain                |  |      | 217    |     
|Fixed
        assets                                         |  |      | 140    |     
|Insurance
        accrual                                    |  |      | 53     |     
|Other                                                        |  |      | 128    |     
|Total
        gross deferred tax liabilities                 |  |      | 2,018  |     
|Net
        deferred tax assets                              |  | $    | 8,346  |     

69

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



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, 2004 and 2003.




During 2004, the Company increased the tax valuation
allowance by $404,000 to a total valuation allowance of $424,000 at December 31, 2004. The increase was related to managements assessment of the
ultimate collectibility of tax benefits related to the book deduction for other than temporary impairment of equity securities. In order to realize the
tax benefits related to any realized capital losses, the Company would need to be able to generate offsetting capital gains within six years beginning
with the year of any realized loss. After an evaluation by management of the potential sources of future capital gains from the recorded assets at
December 31, 2004, it was managements conclusion that the deferred tax asset related to the other than temporary impairment of equity securities
was impaired, and a partial tax valuation allowance was established to the extent that management believed it was more likely than not that the asset
would not be realized.




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







|(Dollars
      in thousands)                                                                                                     |  | 2004 |        | 2003 |  | 2002
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ----
|Statutory
        federal income tax rate due, computed at an effective tax rate of 35%
        in 2004 and 2003 and 34% in 2002 |  | $    | 6,815  |      |  | $   
|State
        franchise tax, at statutory rate, net of federal income tax benefit                                                |  |      | 2,521  |      |  |     
|Tax
        exempt interest income, net                                                                                          |  |      | (726   | )    |  |     
|Housing
        tax credits                                                                                                      |  |      | (1,028 | )    |  |     
|Dividends
        received deduction                                                                                             |  |      | (112   | )    |  |     
|Increase
        in tax valuation allowance                                                                                      |  |      | 404    |      |  |     
|Cash
        surrender value life insurance                                                                                      |  |      | (367   | )    |  |     
|Other                                                                                                                            |  |      | (357   | )    |  |     
|Provision
        for income taxes                                                                                               |  | $    | 7,150  |      |  | $   



As of December 31, 2004, the anticipated 2004 tax
refund related to federal and state income taxes was $1,683,000.


NOTE 8.    Regulatory Matters



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




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.


70

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



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%.




Management believes, as of December 31, 2004 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. To be categorized as well capitalized, the Bank must meet
minimum ratios.




On October 26, 2004 County Bank entered into a
written agreement (the Agreement) with the Federal Reserve Bank of San Francisco (FRBSF). Under the Agreement, the Bank will,
among other actions to be taken, (i) develop 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) develop 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) establish
enhanced written policies and procedures designed to strengthen the Banks internal controls and audit program, and (iv) submit quarterly progress
reports to the FRBSF detailing actions taken to secure compliance with the Agreement.




The Bank has already made significant progress in
addressing the deficiencies identified by the FRBSF. The compliance effort will entail certain additional expenditures. In addition, while the
Agreement is in place, its effect may be to limit the Banks ability to engage in certain expansionary activity. Neither of these effects is
expected to have a material adverse impact on the financial condition nor results of operations of the Bank or the Company. The next review date is
scheduled for May 2005.




The Company has no formal dividend policy, and
dividends are issued solely at the discretion of the Companys Board of Directors subject to compliance with regulatory requirements. In order to
pay any cash dividends, the Company must receive payments of dividends 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

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)



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







|(Dollars
      in thousands)                     |  | Actual |         | For
      Capital
      Adequacy
      Purposes |  | To
      Be Well
      Capitalized
      Under Prompt
      Corrective
      Action Provisions
|------------------------------------------------ |  | ------ | ------- | ----------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|
|The
        Company:                             |  |        |         |                                                 |  |                                                                                               
|Total
        capital (to risk weighted assets)  |  |        | 131,743 |                                                 |  |                                                                                               
|Tier
        I capital (to risk weighted assets) |  |        | 117,479 |                                                 |  |                                                                                               
|Leverage
        ratio(1)                        |  |        | 117,479 |                                                 |  |                                                                                               
|The
        Bank:                                |  |        |         |                                                 |  |                                                                                               
|Total
        capital (to risk weighted assets)  |  |        | 119,253 |                                                 |  |                                                                                               
|Tier
        I capital (to risk weighted assets) |  |        | 105,021 |                                                 |  |                                                                                               
|Leverage
        ratio(1)                        |  |        | 105,021 |                                                 |  |                                                                                               



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



The Companys and Banks actual capital
amounts and ratios as of December 31, 2003 are as follows:







|(Dollars
      in thousands)                     |  | Actual |         | For
      Capital
      Adequacy
      Purposes |  | To
      Be Well
      Capitalized
      Under Prompt
      Corrective
      Action Provisions
|------------------------------------------------ |  | ------ | ------- | ----------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|
|The
        Company:                             |  |        |         |                                                 |  |                                                                                               
|Total
        capital (to risk weighted assets)  |  |        | 113,543 |                                                 |  |                                                                                               
|Tier
        I capital (to risk weighted assets) |  |        | 101,259 |                                                 |  |                                                                                               
|Leverage
        ratio(1)                        |  |        | 101,259 |                                                 |  |                                                                                               
|The
        Bank:                                |  |        |         |                                                 |  |                                                                                               
|Total
        capital (to risk weighted assets)  |  |        | 102,842 |                                                 |  |                                                                                               
|Tier
        I capital (to risk weighted assets) |  |        | 90,591  |                                                 |  |                                                                                               
|Leverage
        ratio(1)                        |  |        | 90,591  |                                                 |  |                                                                                               

---

|(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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

72

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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



At December 31, 2004, the Company has operating
lease rental commitments for remaining terms of one to twenty years. The Company has options to renew four of its leases for periods of 10 through 20
years. The minimum future commitments under non-cancelable lease agreements having terms in excess of one year at December 31, 2004 are as
follows:







|Years
      ended December 31,
      (Dollars in thousands) | 
|----------------------------------------------------------- | 
|2005                                                        | 
|2006                                                        | 
|2007                                                        | 
|2008                                                        | 
|2009                                                        | 
|Thereafter                                                  | 
|Total
        minimum lease payments                        | 



Rent expense was approximately $1,226,000, $986,000,
and $873,000, for the years ended December 31, 2004, 2003, and 2002.




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




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




Financial instruments whose contractual amount
represents risk:







|                                     |  | As
      of December 31,
|------------------------------------ |  | ------------------------
|
|Commitments
        to extend credit |  | $                       
|Standby
        letters of credit    |  |                         



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 such cases will have a
material, adverse effect on its financial position or results of operations.


73

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CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Note 10.    Time Deposits



At December 31, 2004 the aggregate maturities for
time deposits are as follows:







|Years
      ended December 31,
      (Dollars in thousands) | 
|----------------------------------------------------------- | 
|2005                                                        | 
|2006                                                        | 
|2007                                                        | 
|2008                                                        | 
|2009                                                        | 
|Thereafter                                                  | 
|Total
        time deposits                                 | 

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 2004, 2003, and 2002, the Company
contributed approximately $580,000, $541,000, and $468,000, to the ESOP and $226,000, $193,000, and $173,000 to the employee savings
plan.




Under provisions of the ESOP, the Company can make
discretionary contributions to be allocated based on eligible individual annual compensation, as approved by the Board of Directors. Contributions to
the ESOP are recognized as compensation expense. For the years ended December 31, 2004, 2003, and 2002, the ESOP owned 213,607, 206,980, and 206,100
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 $13,000 each in 2004. The Company matched 25% of the employees elective contribution, as defined, not to exceed 10%
of eligible annual compensation.




The Company maintains a non-qualified salary
continuation plan for certain senior executive officers of the Company and the Bank. Under the plan, the Company has agreed to pay these executives
retirement benefits for a ten to fifteen year period after their retirement so long as they meet certain length of service vesting requirements. The
plan is informally linked to several single premium universal life insurance policies that provide life insurance on certain senior executive officers
with the Company named as the owner and beneficiary of these policies. The Bank has a Rabbi trust and specific life insurance contracts have been
irrevocably assigned to the trust in support of the salary continuation plans. Salary continuation expense totaled $484,000, $669,000, and $656,000, in
2004, 2003, and 2002. Total liabilities carried by the Company for salary continuation totaled $3,067,000, $2,499,000, and $1,925,000 in 2004, 2003,
and 2002, respectively.




The Company also maintains a non-qualified Director
Elective Income Deferral Agreement plan for members of the board of directors of the Company and the Bank. This plan was recently changed and is now
call the Director Elective Income Deferral Agreements. Under the deferred compensation plan, members of the board of directors have the
ability to defer compensation they receive as directors until a future date elected by the director. The director then also elects either to be paid in
a lump sum or annuity starting at the date elected by the director. The plan is informally linked to several single premium universal life insurance
policies that provide life insurance on certain directors with the Company named as the owner and beneficiary of these policies. The Bank has a Rabbi
trust and life insurance contracts have been irrevocably assigned to the trust in support of the deferred compensation plans. Deferred compensation
expense totaled $97,000, $64,000, and $59,000 in 2004, 2003, and 2002. Total liabilities carried by the Company for Director Elective Income Deferral
totaled $543,000, $446,000, and $387,000 in 2004, 2003, and 2002, respectively.


74

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 12.    Stock Option Plan



In 1992, shareholders approved the adoption of an
incentive stock option plan for bank management and a non-statutory stock option plan for directors. In 2002, shareholders approved the adoption of a
new incentive stock option plan for bank management and a new non-statutory stock option plan for directors. The maximum number of shares issuable
under the plans was 126,000 and was amended by the shareholders in 1995 and 2001 to 450,000 and 675,000 options available for grant. Options are
available for grant under the plans at prices that approximate fair market value of the stock at the date of grant. Options granted under both plans
become exercisable 25% at the time of grant and 25% each year thereafter and expire 10 years from the date of grant.




A summary of the status of the Companys stock
options as of and for the years ended December 31, 2004, 2003, and 2002 and changes during the years ended on those dates, follows:







|                                           |  |  |          | 2004 |  |   |       | 2003 |  |  |         | 2002
|------------------------------------------ |  |  | -------- | ---- |  | - | ----- | ---- |  |  | ------- | ----
|
|Outstanding
        at beginning of year   |  |  | 388,877  |      |  | $ | 14.67 |      |  |  | 378,785 |     
|Granted                                    |  |  | 106,500  |      |  |   | 38.82 |      |  |  | 79,825  |     
|Exercised                                  |  |  | (116,075 | )    |  |   | 12.69 |      |  |  | (63,421 | )   
|Forfeited                                  |  |  | (5,938   | )    |  |   | 25.20 |      |  |  | (6,312  | )   
|Outstanding
        at end of year         |  |  | 373,364  |      |  | $ | 22.00 |      |  |  | 388,877 |     
|Options
        exercisable at end of year |  |  | 239,269  |      |  | $ | 16.17 |      |  |  | 269,886 |     



The following table summarizes information about
options outstanding at December 31, 2004:







|Options
      Outstanding |  | Options
      exercisable
|------------------------- |  | -------------------------
|
|$ 615                    |  |                          
|1524                     |  |                          
|2433                     |  |                          
|3342                     |  |                          
|4249                     |  |                          
|$ 649                    |  |                          



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


75

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 13.    Fair Value of Financial
Instruments



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


Financial Assets:



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




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




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




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




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


Financial Liabilities:



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




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




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




Fair values for financial instruments are
managements estimates of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are
subjective and may vary considerably from amounts that would be realized in actual transactions. 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.


76

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)






|(Dollars in thousands)                        |  |  | 
|--------------------------------------------- |  |  | 
|
|Financial
assets:                             |  |  | 
|Cash and cash
equivalents                     |  |  | 
|Federal funds
sold                            |  |  | 
|Time deposits
at other financial institutions |  |  | 
|Available for
sale investment securities      |  |  | 
|Held to
maturity investment securities        |  |  | 
|Interest
receivable                           |  |  | 
|Bank owned
life insurance                     |  |  | 
|Net
loans                                     |  |  | 
|Financial
liabilities                         |  |  | 
|Noninterest-bearing demand                    |  |  | 
|Negotiable
orders of withdrawal               |  |  | 
|Savings                                       |  |  | 
|Time
deposits                                 |  |  | 
|Borrowings                                    |  |  | 
|Subordinated
debentures                       |  |  | 
|                                              |  |  | 
|Off-balance sheet:                            |  |  | 
|Loan
commitments                              |  |  | 
|Standby
letters of credit                     |  |  | 






|(Dollars in thousands)                        |  |  | 
|--------------------------------------------- |  |  | 
|
|Financial
assets:                             |  |  | 
|Cash and cash
equivalents                     |  |  | 
|Federal funds
sold                            |  |  | 
|Time deposits
at other financial institutions |  |  | 
|Available for
sale investment securities      |  |  | 
|Held to
maturity investment securities        |  |  | 
|Interest
receivable                           |  |  | 
|Bank owned
life insurance                     |  |  | 
|Net
loans                                     |  |  | 
|Fair value of
interest rate swap              |  |  | 
|Financial
liabilities                         |  |  | 
|Noninterest-bearing demand                    |  |  | 
|Negotiable
orders of withdrawal               |  |  | 
|Savings                                       |  |  | 
|Time
deposits                                 |  |  | 
|Borrowings                                    |  |  | 
|Subordinated
debentures                       |  |  | 
|                                              |  |  | 
|Off-balance sheet:                            |  |  | 
|Loan
commitments                              |  |  | 
|Standby
letters of credit                     |  |  | 
|Borrowed
funds commitment                     |  |  | 

77

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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, 2004 and
2003 and the condensed statements of income and cash flows for the years ended December 31, 2004, 2003, and 2002:


Condensed balance sheets






|                                                   |  | December
      31,
|-------------------------------------------------- |  | ------------------
|
|Assets                                             |  |                   
|Cash
        and short-term investments            |  | $                 
|Investment
        in County Bank                  |  |                   
|Investment
        in Regency Investment Advisors  |  |                   
|Net
        premises and equipment                 |  |                   
|Other
        assets                               |  |                   
|Total
        assets                               |  | $                 
|Liabilities and shareholders equity               |  |                   
|Liabilities                                        |  |                   
|Subordinated
        debentures                    |  | $                 
|Capitalized
        lease                          |  |                   
|Other
        liabilities                          |  |                   
|Total
        liabilities                          |  |                   
|Total
        shareholders equity                 |  |                   
|Total
        liabilities and shareholders equity |  | $                 

Condensed statements of income

|                                                                                      |  | Years
      Ended December 31,
|------------------------------------------------------------------------------------- |  | ------------------------------
|
|Income                                                                                |  |                               
|Interest                                                                              |  | $                             
|Lease
        income                                                                  |  |                               
|Management
        fees from subsidiaries                                             |  |                               
|Other
        noninterest income                                                      |  |                               
|Total
        income                                                                  |  |                               
|Expenses                                                                              |  |                               
|Interest
        on borrowings                                                        |  |                               
|Capitalized
        lease interest                                                    |  |                               
|Salaries
        and related benefits                                                 |  |                               
|Other
        noninterest expense                                                     |  |                               
|Total
        other expenses                                                          |  |                               
|Loss
        before income taxes and equity in undistributed earnings of subsidiaries |  |                               
|Income
        tax benefit                                                            |  |                               
|Equity
        in undistributed income of subsidiaries                                |  |                               
|Net
        income                                                                    |  | $                             

78

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Condensed statements of cashflows






|                                                                                                         |  | Years
      Ended December 31,
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------
|
|Operating
        activities:                                                                            |  |                               
|Net
        income                                                                                       |  | $                             
|Adjustments to reconcile net income to net
        cash used in operating activities:                    |  |                               
|Depreciation
        of fixed assets                                                                     |  |                               
|Equity
        in undistributed earnings of subsidiaries                                                 |  |                               
|Increase
        in other assets                                                                         |  |                               
|Increase
        (decrease) in other liabilities                                                         |  |                               
|Net
        cash used in operating activities                                                            |  |                               
|Investing
        activities:                                                                            |  |                               
|Capital
        contribution to subsidiary bank                                                          |  |                               
|Sale
        (purchase) of subsidiary plus additional capital contributions                              |  |                               
|Purchase
        of premises and equipment                                                               |  |                               
|Net
        cash provided by (used in) investing activities                                              |  |                               
|Financing
        activities:                                                                            |  |                               
|Issuance
        of Junior Subordinated Debentures                                                       |  |                               
|Net
        (decrease) increase in other borrowings and capitalized lease                                |  |                               
|Issuance
        of common stock related to exercise of stock options and employee benefit
        plans |  |                               
|Cash
        dividends and fractional shares                                                             |  |                               
|Net
        cash provided by financing activities                                                        |  |                               
|Increase
        (decrease) in cash and cash equivalents                                                 |  |                               
|Cash
        and cash equivalents at beginning of year                                                   |  |                               
|Cash
        and cash equivalents at end of year                                                         |  | $                             

79

---

CAPITAL CORP OF THE WESTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 15.    Quarterly Results of Operations
(Unaudited)






|                                       |  | 2004
      Quarter Ended
|-------------------------------------- |  | ------------------------
|
|Interest
        income                |  | $                       
|Interest
        expense               |  |                         
|Net
        interest income            |  |                         
|Provision
        for loan losses      |  |                         
|Other
        income                   |  |                         
|Other
        expenses                 |  |                         
|Income
        before income taxes     |  |                         
|Income
        taxes                   |  |                         
|Net
        income                     |  |                         
|Basic
        earnings per share (1)   |  | $                       
|Diluted
        earnings per share (1) |  | $                       






|                                       |  | 2003
      Quarter Ended
|-------------------------------------- |  | ------------------------
|
|Interest
        income                |  | $                       
|Interest
        expense               |  |                         
|Net
        interest income            |  |                         
|Provision
        for loan losses      |  |                         
|Other
        income                   |  |                         
|Other
        expenses                 |  |                         
|Income
        before income taxes     |  |                         
|Income
        taxes                   |  |                         
|Net
        income                     |  | $                       
|Basic
        earnings per share (1)   |  | $                       
|Diluted
        earnings per share (1) |  | $                       

---

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



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


80

---