U. S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K
Washington, D. C. 20549

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 [Fee Required]
     For the Fiscal Year Ended December 31, 1996
     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             (I.R.S. Employer Identification No.)
incorporation or organization)

1160 West Olive Avenue, Suite A  Merced, California                   95348-1952
(Address of principal executive offices)                              (Zip Code)

(209) 725-2200
(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 Stock, no par value.

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 (or for
such shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
 X  Yes           No
---          ---

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. [ ]

Aggregate  market  value  of the  voting  stock  held  by  nonaffiliates  of the
Registrant was approximately $32,165,469 (based on the $18.50 average of bid and
ask  prices  per  common  share on  February  28,  1997).  The  number of shares
outstanding of the  Registrant's  common stock, no par value, as of February 28,
1997 was 1,738,674. No shares of preferred stock, no par value, were outstanding
at February 28, 1997.

Documents incorporated by reference:
Portions  of the  definitive  proxy  statement  for the 1997  Annual  Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are  incorporated by reference in Part I, Item 4; Part II, Item 9
and Part  III,  Items  10  through  13 and  portions  of the  Annual  Report  to
Shareholders  for 1996 are  incorporated by reference in Part II, Item 5 through
8.

                                        1

<PAGE>


<TABLE>

                                         Capital Corp of the West
                                             Table of Contents

<CAPTION>

                                                                                 Page              Reference
<S>               <C>                                                            <C>      <C>
                                     PART I
--------------------------------------------------------------------------------------------------------------
ITEM 1.           BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . .  3
--------------------------------------------------------------------------------------------------------------
ITEM 2.           PROPERTIES  . . . . . . . . . . . . . . . . . . . . . . . . . .31
--------------------------------------------------------------------------------------------------------------
ITEM 3.           LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 33
--------------------------------------------------------------------------------------------------------------
ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF                                      Proxy Statement for
                  SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 33       1997 Annual Meeting
--------------------------------------------------------------------------------------------------------------
                                     PART II
--------------------------------------------------------------------------------------------------------------
ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON
                  STOCK AND RELATED SECURITY HOLDER                                       Page 23 of 1996 Annual
                  MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .33       Report.
--------------------------------------------------------------------------------------------------------------
ITEM 6.           SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . .    33       Page 24 of 1996 Annual
                                                                                          Report
--------------------------------------------------------------------------------------------------------------
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF                                      Pages 19-22 of 1996
                  OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 33       Annual Report
--------------------------------------------------------------------------------------------------------------
ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY                                  Pages 9-18 of 1996
                  DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33       Annual Report
--------------------------------------------------------------------------------------------------------------
ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH
                  ACCOUNTANTS ON ACCOUNTING AND                                           Proxy Statement for 1997
                  FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 33       Annual Meeting
--------------------------------------------------------------------------------------------------------------
                                    PART III
--------------------------------------------------------------------------------------------------------------
ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE                                 Proxy Statement for 1997
                  REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . .33       Annual Meeting
--------------------------------------------------------------------------------------------------------------
ITEM 11.          EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . .    34       Proxy Statement for 1997
                                                                                          Annual Meeting
--------------------------------------------------------------------------------------------------------------
ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL                                Proxy Statement for 1997
                  OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . .       34       Annual Meeting
--------------------------------------------------------------------------------------------------------------
ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED                                       Proxy Statement for 1997
                  TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .34       Annual Meeting
--------------------------------------------------------------------------------------------------------------
                                     PART IV
--------------------------------------------------------------------------------------------------------------
ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                  AND REPORTS ON FORM 8-K . . . . . .                            35
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-37
</TABLE>

                                                    2

<PAGE>



                                     PART I

ITEM 1.                  BUSINESS

General Development of the Company

General
Capital  Corp of the West (the  "Company"  or Capital  Corp") is a bank  holding
company  incorporated  under  the laws of the State of  California  on April 26,
1995.  On November 1, 1995,  the Company  became  registered  as a bank  holding
company,  and is the  holder of all of the  capital  stock of  County  Bank (the
"Bank") and all of the capital stock of Town and Country Finance and Thrift (the
"Thrift").  During 1996 the Company  formed Capital West Group, a new subsidiary
that engages in the financial  institution  advisory  business and purchased the
Thrift.  The  Company's  primary asset is the Bank and the Bank is the Company's
primary source of income. The Company's  securities consist of 20,000,000 shares
of Common Stock, no par value,  and 10,000,000  shares of Preferred Stock. As of
February 28, 1997 there were 1,738,674 common shares outstanding, held of record
by approximately 1,175 shareholders.  There were no preferred shares outstanding
at February 28, 1997.  The Bank has two wholly owned  subsidiaries,  Merced Area
Investment & Development,  Inc. ("MAID") and County Asset Advisors ("CAA").  CAA
is currently inactive.  All references herein to the "Company" include the Bank,
the Bank's subsidiaries,  Capital West Group and the Thrift,  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 on December 22, 1977.
In November  1992,  the Bank changed its legal name to County  Bank.  The Bank's
securities  consist  of one  class of Common  Stock,  no par value and is wholly
owned by the Company.  The Bank's deposits are insured under the Federal Deposit
Insurance Act, by the Federal  Deposit  Insurance  Corporation  ("FDIC"),  up to
applicable limits stated therein. Like most state-chartered banks of its size in
California, it is not a member of the Federal Reserve System.

The Company  acquired the Thrift on June 28, 1996 for a combination  of cash and
stock with an aggregate value of  approximately  $5.8 million.  The Thrift is an
industrial loan company with four offices. It specializes in direct loans to the
public and the  purchase of  financing  contracts  principally  from  automobile
dealerships and furniture  stores.  It was originally  incorporated in 1957. Its
deposits (technically known as investment certificate or certificates of deposit
rather than deposits) are insured by the FDIC up to applicable limits.

Industry & Market Area
The Bank engages in general  commercial  banking  business  primarily in Merced,
Tuolomne  and  Stanislaus  Counties.  The Bank has nine branch  offices;  two in
Merced with the branch located in north Merced currently  designated as the head
office,  and offices in Atwater,  Turlock,  Hilmar,  Sonora,  Los Banos, and two
offices  in  Modesto   opened  in  late  1996.   The  Company's   administrative
headquarters  are located in Merced in three separate  suites in the same office
complex.  The  administrative  facilities also provides  accommodations  for the
activities of Merced Area Investment and Development ("MAID"), the Bank's wholly
owned real  estate  development  subsidiary  and Capital  West  Group.  Although
approved  to  be a  full  service  branch  banking  office,  the  administrative
headquarters  facility  is  presently  used  solely as the  Company's  corporate
headquarters.  The Thrift engages in general consumer lending business primarily
in Stanislaus,  Fresno and Tulare Counties from its main office in Turlock;  and
branch  offices  located  in  Modesto,   Visalia,  and  Fresno.  (See  "ITEM  2.
PROPERTIES")

Competition

The Company's  primary  market area consists of Merced,  Tuolomne and Stanislaus
Counties and nearby  communities of adjacent  counties.  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

                                        3

<PAGE>

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.

However,  smaller  independent  financial  institutions,  savings  and loans and
credit unions also  represent a  competitive  force.  To  illustrate  the Bank's
relative  market  share,  based  upon  total  deposits  in the County of Merced,
California  at June 30,  1996 (more  recent data is not  available),  the Bank's
deposits  represented  approximately  15.7%  of  total  deposits  in  all  other
financial  institutions  in the county.  Deposits  in  Stanislaus  and  Tuolomne
counties were not material as of that date.

In the past, an independent 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.  It should be noted,  however,
that savings and loan  institutions have now been restricted in their ability to
make commercial loans under the Financial  Institutions  Reform,  Recovery,  and
Enforcement Act of 1989 ("FIRREA") legislation.

To compete  with major  financial  institutions  in its 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, as opposed to large  multi-branch  banks which compete  primarily by rate
and location of branches.  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.

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,  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.  Although  Management  believes there is demand for trust services in
its service area, the Bank does not operate a trust department nor does it offer
these services through a correspondent banking relationship to its customers.

The four  general  areas in which  the Bank has  directed  virtually  all of its
lendable assets are (i) commercial  loans,  including  agricultural  loans, (ii)
consumer  installment  loans,  (iii) real estate mortgage  loans,  and (iv) real
estate  construction  loans.  As of December  31,  1996,  these four  categories
accounted for approximately  39%, 22%, 31% and 8%,  respectively,  of the Bank's
loan portfolio.

In  1990,  the  Bank  entered  into  a  cooperative  agreement  with  Prudential
Agricultural Group to offer agricultural real estate loans to farmers in Merced,
Stanislaus,  San Joaquin,  Madera, Monterey, Santa Cruz and San Benito Counties.
The program is designed to have a select group of independent  banks  throughout
the United  States  generate  farm real estate loans and process them within the
underwriting  standards of the proposed Farmer Mac program. The qualifying loans
are for the purchase or refinance of production oriented agricultural properties
and are secured by a first deed of trust on the property.  Loan terms range from
5 to 20 years in length and loan amounts  range from  $500,000 to $3.0  million.
The  Bank  originates,  packages  and  subsequently  sells  these  loans  to the
Prudential  Agricultural  Group and retains servicing rights on these loans. The
Bank is the only  representative in Merced and Stanislaus Counties to offer this
program.

                                        4

<PAGE>

In addition in 1992,  the Bank became a certified  Farmers  Home  Administration
lender,  now known as the Farm Service Agency.  The Bank originates  loans under
the  guidelines of such program both to retain for the Bank's loan portfolio and
to sell in the secondary  market.  The Bank may also sell loans, in the $100,000
range, direct to Farmer Mac.

In  1994,  the Bank  organized  a  department  to  originate  loans  within  the
underwriting  standards of Small Business  Administration.  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 securities
and municipal  bonds),  and (iii) service charges on deposit  accounts.  For the
year ended December 31, 1996, these sources comprised  approximately  106%, 20%,
and 8% respectively, of the Bank's total operating income.

Bank's Business Not Dependent upon a Small Number of Individuals
Most  of  the  Bank's  business  originates  from  individuals,  businesses  and
professional  firms  located  in and  around  Merced,  Tuolomne  and  Stanislaus
Counties.  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. As of December 31, 1996, the largest industry within the Bank's loan
portfolio  is it's  real  estate  mortgage  loans at 31% of the loan  portfolio.
Agriculture  loans are 24% including  dairy loans of 15%.  Thus,  the quality of
these Bank assets and Bank earnings could be adversely affected by a downturn in
the local economy, including the dairy industry sector.

Bank's Real Estate Subsidiary (MAID)

General
As authorized  by Section 751.3 of the  California  Financial  Code,  California
state-chartered   banks  are  allowed  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.

In late 1995, the Company wrote down the entire remaining  investment in MAID in
the amount of $2,881,000.  The uncertainty about the effect of the investment in
MAID on the results of future  operations  caused  management  to recognize  the
complete write-down in 1995.

At December 31, 1996, MAID held two real estate projects  including improved and
unimproved land in various stages of development. MAID continues to market these
projects,  and any  amounts  realized  upon sale or other  disposition  of these
assets above their current  carrying  value of zero will result in  non-interest
income  at the time of such  sale or  disposition.  The  following  is a general
discussion of these properties:

(1) This  project  consists  of 9  remaining  improved  lots and 117  additional
unimproved  lots. MAID does not currently intend to develop the subsequent three
phases (117 lots) of this property.

(2) This project is comprised of 230 unimproved lots of which 143 are remaining.
MAID does not currently intend to develop the remaining property.

Bank's subsidiary, County Asset Advisors

General
                                        5

<PAGE>

Pursuant to section 772 of the California  Financial code, the Bank  established
County Asset Advisors, a wholly-owned subsidiary, as a California corporation in
1994. County Asset Advisors is not currently engaged in any activities.

The Thrift

General
The Thrift is a licensed  California  Industrial  Loan Company  specializing  in
direct loans to the public and the purchase of  financing  contract  principally
from car  dealerships  and furniture  stores.  The Thrift offers certain deposit
products  including savings and time deposits which are technically  referred to
as installment investment  certificates and fully paid investment  certificates.
An industrial  loan company is prohibited by the Industrial  Loan Company Law to
offer transaction accounts to its customers.

Capital West Group

General
Capital  West  Group was formed in April 1996 as a wholly  owned  subsidiary  of
Capital Corp.  The subsidiary  specializes  in a variety of consulting  work for
independent  financial  institutions  located  primarily in the western  states.
Consulting services would include strategic planning, capital planning, new bank
formation,  providing  fairness  opinions  and other  special  projects for both
boards and management of client institutions.

Research Activities

The Company has not engaged in any material research  activities relating to the
development  of new services or the  improvement  of existing  banking  services
during the past two fiscal years. During that time, however,  Company directors,
officers  and  employees  have  continually  engaged  in  marketing  activities,
including the evaluation and  development of new services,  in order to maintain
and improve the Company's  competitive position in its primary service area. The
costs of these activities have not been significant during this period.

The Company has no present  plans to introduce a new product or line of business
which would require the invest ment of a material  amount of the Company's total
assets.

Number of Employees

As of  December  31,  1996,  the  Company  employed  a  total  of 141  full-time
equivalent   employees.   The  Company  beleives  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 dairy 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.

Supervision and Regulation

Overview
The Company is subject to extensive regulation by federal and state authorities.
As a California  chartered bank holding  company,  the Company is subject to and
examined by the Board of Governors of the Federal  Reserve System  ("FRB").  The
Bank, as a California  state licensed bank with accounts  insured by the FDIC to
the maximum amount  permitted by law, is subject to regulation,  supervision and
regular examination by the California Superintendent of Banks ("Superintendent")
and the FDIC.  The Bank is also subject to certain  regulations  of the FRB. The
Thrift,  as an industrial loan company with accounts  insured by the FDIC to the
maximum amount

                                        6

<PAGE>

permitted by law is subject to regulation,  supervision and regular  examination
by the  California  Department  of  Corporations  and the FDIC.  The  Company is
subject to the periodic requirements of Section 15(d) of the Securities Exchange
Act of 1934, as amended,  which include, but are not limited to filing,  annual,
quarterly,   and  other  current   reports  with  the  Securities  and  Exchange
Commission.  The primary current function of the Company is to hold the stock of
the Bank and its other subsidiaries.

Most aspects of the Bank's business and operations,  including periodic reports,
investments,  loans,  certain  checkclearing  activities,   branching,  reserves
against deposits,  the permissible scope of the Bank's activities,  and numerous
other  areas,  are  governed  by federal  and state  statutes  and  regulations,
including the  regulations of the FDIC and the FRB. The banking  industry in the
United  States is affected by the extensive  regulation  of  commercial  banking
activities  and,  on an ongoing  basis,  by the  enactment  of federal and state
legislation.  Such  legislation  may have the effect of increasing or decreasing
the cost of doing business, may modify permissible activities, and could enhance
the  competitive  position of  non-bank  financial  institutions.  Any change in
applicable  laws or  regulations  may  have a  material  adverse  effect  on the
business and prospects of the Bank.

In addition to the  challenges  presented by the great breadth of the regulatory
subject  matter which will affect the Company,  it should also be noted that the
regulatory  agencies  which  have  jurisdiction  over  the  Company  have  broad
discretion in exercising their supervisory  powers.  For example,  under federal
law the FDIC has  authority  to  prohibit a state bank from  engaging in banking
practices which it considers unsafe and unsound.

The laws of the  State  of  California  also  affect  the  Bank's  business  and
operations.  Pursuant to the  California  Financial  Code,  if it appears to the
Superintendent  that a bank is violating its articles of  incorporation or state
law,  or  is  engaging  in  unsafe  or   injurious   business   practices,   the
Superintendent  can order the bank to comply with the law or to cease the unsafe
or injurious  practices.  The  Superintendent has the power to suspend or remove
bank  officers,  directors  and  employees who (i) violate any law or regulation
relating to the business of the bank or breach any  fiduciary  duty to the bank,
(ii) engage in any unsafe or unsound  practices  related to the  business of the
bank, or (iii) are charged with or convicted of a felony involving dishonesty or
breach  of  trust.  The  Superintendent  is also  required  to order the Bank to
correct any  impairment of its  contributed  capital and to assess the shares of
the Bank's stock to correct such impairment if necessary.

In addition to the regulation and supervision  outlined  above,  banks must also
deal with  judicial  scrutiny of their  lending and  collection  practices.  For
example,  some banks have been found liable for exercising  remedies which their
loan  documents  authorized  upon the borrower's  default.  This has occurred in
cases  where  the  exercise  of  those  remedies  has  been   determined  to  be
inconsistent  with the  previous  course  of  dealing  between  the bank and the
borrower.  As a result,  banks have had to  exercise  increased  caution,  incur
greater  expense and face  increased  exposure to  liability  when  dealing with
nonperforming loans.

Bank Holding Company Act
Capital  Corp is a bank holding  company  within the meaning of the Bank Holding
Company Act ("BHC") Act and is  registered  as such with the FRB. A bank holding
company is  required to file with the FRB annual  reports and other  information
regarding  its business  operations  and those of its  subsidiaries.  It is also
subject to examination by the FRB and is required to obtain FRB approval  before
acquiring, directly or indirectly,  ownership or control of any voting shares of
any bank, if after such  acquisition,  it would  directly or  indirectly  own or
control more than 5% of the voting stock of that bank,  unless it already owns a
majority of the voting stock of that bank. The BHC Act further provides that the
FRB shall not approve any such  acquisition  that would result in or further the
creation of a monopoly,  or the effect of which may be  substantially  to lessen
competition, unless the anti-competitive effects of the proposed transaction are
clearly  outweighed by the probable  effect in meeting the convenience and needs
of the community to be served.

Under  the  BHC  Act,  a bank  holding  company  is,  with  limited  exceptions,
prohibited  from (i) acquiring  direct or indirect  ownership or control of more
than 5% of the voting shares of any company which is not a bank or (ii) engaging
in any  activity  other  than  managing  or  controlling  banks.  With the prior
approval of the FRB, however, a bank holding company may own shares of a company
engaged in activities  which the FRB has determined to be so closely  related to
banking or managing or controlling banks as to be a proper incident thereto.

                                        7

<PAGE>

The FRB has by  regulation  determined  that certain  activities  are so closely
related to banking as to be a proper incident  thereto within the meaning of the
BHC  Act.  These  activities  include,  but are not  limited  to:  operating  an
industrial loan company, industrial bank, Morris Plan bank, savings association,
mortgage  company,  finance company,  credit card company or factoring  company;
performing  certain  data  processing   operations;   providing  investment  and
financial  advice;  operating  a trust  company  in certain  instances,  selling
traveler's  checks,  United  States  savings  bond  and  certain  money  orders;
providing certain courier services;  providing  management  consulting advice to
nonaffiliated  depository  institutions in some  instances;  acting as insurance
agent for certain types of credit-related insurance;  leasing property or acting
as agent,  broker or advisor for leasing  property  on a "full  pay-out  basis";
acting as a consumer  financial  counselor,  including  tax  planning and return
preparation;  performing futures and options advisory services,  check guarantee
services  and discount  brokage  activities;  operating a  collection  or credit
bureau; or performing personal property appraisals.  Capital Corp has no present
intention to engage in any of such  permitted  activities,  except  operating an
industrial  loan  company  and  providing   management   consulting   advice  to
nonaffiliated depository institutions.

The FRB has also determined  that certain  activities are not so closely related
to banking to be a proper  incident  thereto  within the meaning of the BHC Act.
Such activities include real estate brokerage and syndication; land development;
property  management;  underwriting  of life  insurance  not  related  to credit
transactions; and, with certain exceptions,  securities underwriting, and equity
financing.

Under the BHC Act, a bank holding  company and its  subsidiaries  are prohibited
from acquiring and voting shares of interest in all or substantially  all of the
assets of any bank located outside the state in which the operations of the bank
holding company's  banking  subsidiaries are principally  conducted,  unless the
acquisition is specifically authorized by the law of the state in which the bank
to be acquired is located or unless the transaction  qualifies under federal law
as "emergency  interstate  acquisition" of a closed or failing bank.  California
law expressly permits interstate banking.

Regulations and policies of the FRB 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 should maintain the financial  flexibility
and  capital-raising  capacity to obtain  additional  resources  for assisting a
subsidiary  bank.  Under certain  conditions,  the FRB may conclude that certain
actions of a bank  holding  company,  such as payment of cash  dividends,  would
constitute an unsafe and unsound practice because they violate the FRB's "source
of strength" doctrine.

A bank holding company and its  subsidiaries  are prohibited from certain tie-in
arrangements  in  connections  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,  or on
a promise by its customer not to obtain other  services  from a  competitor.  In
addition,  federal law imposes  certain  restrictions  on  transactions  between
Capital Corp and its subsidiaries.  In addition,  Capital Corp is subject,  with
certain  exceptions,  to provisions of federal law imposing  limitations  on and
requiring collateral for, extensions of credit by Capital Corp's subsidiary bank
to its other affiliates.

Directors,  officers  and  principal  shareholders  of  Capital  Corp,  and  the
companies  with which they are  associated,  have had and will  continue to have
banking  transactions  with the Bank and the  Thrift in the  ordinary  course of
business.  Any loans and commitments to lend included in such  transactions  are
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 risks of  collectibility  or presenting
other unfavorable  features. At December 31, 1996, loans to such persons totaled
$573,000 or 2.7% of Capital Corp's shareholders' equity.

Capital Adequacy Requirements
Federal  regulators have established  minimum  risk-based  capital standards for
commercial banks and bank holding companies.  These guidelines provide a measure
of capital levels and are intended to reflect the degree of risk associated with
both on- and  off-balance  sheet items.  The risk-based  capital rules establish
minimum standards;  they do not evaluate all factors affecting an organization's
financial  condition,  and overall  capital  assessments  by federal  regulators
include  analysis  of such  additional  factors  as (i)  overall  interest  rate
exposure; (ii) liquidity, 

                                       8

<PAGE>

funding and market risk; (iii) quality and level of earnings; (iv) investment or
loan portfolio  concentrations;  (v) quality of loans and investments;  (vi) the
effectiveness of loan and investment  policies;  and (vii) management's  overall
ability to monitor and control other financial and operating risks.

A financial institution's risk-based capital ratio is calculated by dividing its
qualifying   capital  by  its   period-end   risk-weighted   assets.   Financial
institutions,  including the Bank and the Thrift, generally are expected to meet
a minimum ratio of qualifying  total  capital to  risk-weighted  assets of eight
percent, at least one-half of which capital must be in the form of core (Tier 1)
capital,  consisting of common stock,  noncumulative  perpetual preferred stock,
minority  interests in equity capital accounts of consolidated  subsidiaries and
limited  amounts  of  qualifying  mortgage  servicing  rights,  less most  other
intangible  assets.  Supplementary  (Tier 2) capital  consists  of,  among other
things,  the  allowance  for loan  losses up to 1.25  percent  of  risk-weighted
assets,  cumulative,  perpetual and term preferred stock, certain hybrid capital
instruments,  and term  subordinated  debt. The maximum amount of Tier 2 capital
which may be  recognized  for  risk-based  capital  purposes  is  limited to 100
percent of Tier 1 capital (after any deductions for disallowed  intangibles  and
other items).  The aggregate amount of term  subordinated  debt and intermediate
term  preferred  stock  that may be  treated  as Tier 2 capital is limited to 50
percent of Tier 1 capital.  Certain other limitations and restrictions  apply as
well.

The  risk-based  capital  requirements  did not replace or eliminate the minimum
leverage ratios of capital to total assets that are required to be maintained by
financial  institutions.  The federal  regulatory  agencies have adopted a three
percent  minimum  leverage  ratio,  which is intended to  supplement  risk-based
capital requirements and to ensure that all financial  institutions,  even those
that invest  predominantly  in low-risk  assets,  continue to maintain a minimum
level of core capital. These regulations provide that a financial  institution's
minimum  leverage  ratio is  determined  by  dividing  its Tier 1 capital by its
quarterly  average  total  assets,  less  intangibles  not  includable in Tier 1
capital.

Under these rules,  a minimum  leverage  ratio of three  percent is required for
institutions  which  have  been  determined  to be in the  highest  of the  five
categories  used  by  regulators  to  rate  financial  institutions.  All  other
organizations  are required to maintain  leverage  ratios of at least l00 to 200
basis points above the three percent minimum. It is improbable, however, that an
institution  with a three percent  leverage  ratio would be rated in the highest
category,  since a strong  capital  position  is so  closely  tied to the rating
system.  Therefore, the "minimum" leverage ratio is, for all practical purposes,
significantly above three percent.

The leverage  ratio  establishes  a minimum  standard  affecting  the ability of
financial  institutions,  including the Bank and the Thrift,  to increase assets
and liabilities  without  increasing  capital  proportionately.  A state bank or
thrift  which  fails  to  maintain  sufficient  capital  to  meet  both  capital
requirements  is required to submit a plan to the FDIC  describing the means and
schedule by which the  institution  will  achieve its  minimum  capital  ratios.
Failure to submit a plan,  or  failure  to comply  with an  approved  plan,  may
subject a institution to restrictions  on its operations and activities,  and to
other  regulatory  actions,  including  assessments  of civil  money  penalties.
Pursuant  to  federal  law,   continued   failure  to  achieve  minimum  capital
requirements may result in placement of the institution  under a conservatorship
or  receivership  and,  ultimately,  in  liquidation  by the FDIC.  Pursuant  to
California law, the  Superintendent has authority,  under certain  circumstances
(e.g., if the institution's capital is impaired or the institution is conducting
its business in an unsafe or unsound  manner) to take possession of the property
and business of the  institution and tender it to the FDIC for  liquidation.  In
addition,  if the  Superintendent  believes  that  a  institution's  capital  is
impaired, the Superintendent is required to order the institution to correct the
impairment.  In such a case, the institution must levy and collect an assessment
on the shares of the institution's common stock.

Regulatory Ratios
As of December  31, 1996,  the  Company's  total  risk-based  capital  ratio was
approximately  11.2% and its leverage ratio was approximately  8.2%. The Company
does not presently expect that compliance with the risk-based capital guidelines
or minimum leverage  requirements  will have a materially  adverse effect on its
business in the reasonably  foreseeable  future.  For further  information about
regulatory  capital  requirements  see "Note 8--Notes to Consolidated  Financial
Statements"  section entitled  "Regulatory  Matters" at page 16 of the Company's
1996 Annual Report to the Shareholders incorporated herein by reference.

                                        9

<PAGE>

Prompt Corrective Action
The Federal  Deposit  Insurance  Corporation  Improvement Act of 1991 ("FDICIA")
requires federal  regulators to take "prompt  corrective action" with respect to
institutions that do not meet minimum capital requirements.  In response to this
requirement,  federal  regulators adopted rules based upon FDICIA's five capital
tiers. These rules, which will apply to the Bank and the Thrift, provide that an
institution is "well capitalized" if its risk-based capital ratio is ten percent
or greater,  its Tier 1 risk-based capital ratio is six percent or greater,  its
leverage ratio is five percent or greater, and the institution is not subject to
a  capital  directive  or other  enforceable  order by  federal  regulators.  An
institution is "adequately capitalized" if its risk-based capital ratio is eight
percent or  greater,  its Tier 1  risk-based  capital  ratio is four  percent or
greater;  and its leverage  ratio is four percent or greater  (three  percent or
greater for the most highly-rated institutions, as rated by federal regulators).
An institution is considered  "undercapitalized" if its risk-based capital ratio
is less than eight  percent;  its Tier 1 risk-based  capital  ratio is less than
four  percent;  or its  leverage  ratio is four percent or less (less than three
percent   for  the  most   highly-rated   institutions).   An   institution   is
"significantly  undercapitalized"  if (i) its  risk-based  capital ratio is less
than six percent;  (ii) its Tier 1 risk-based  capital  ratio is less than three
percent;  or (iii) its leverage ratio is less than three percent. An institution
is deemed to be "critically  undercapitalized"  if its ratio of tangible  equity
(Tier 1  capital)  to total  assets  is equal to or less  than two  percent.  An
institution may be deemed to be in a capitalization  category that is lower than
is  indicated by its actual  capital  position if the FDIC  determines  that the
institution is in an unsafe and unsound  condition or if the FDIC deems the bank
to be engaged in an unsafe or unsound banking practice.

No sanctions apply to  institutions  which are "well  capitalized."  "Adequately
capitalized"  institutions  are  prohibited  from  accepting  brokered  deposits
without  the  consent of their  primary  federal  regulator.  "Undercapitalized"
institutions are (i) required to submit a capital restoration plan for improving
capital,  and  are  prohibited  from  making  capital  distributions  or  paying
management  fees to  controlling  persons  if such  distributions  or fees would
result in the institution being undercapitalized;  (ii) may be subject to growth
limitations;  and (iii)  acquisitions,  branching and entering into new lines of
business  would  be  subject  to  prior  regulatory   approval.   Finally,   the
institution's  regulatory  agency  has  discretion  to  impose  certain  of  the
restrictions   generally   applicable   to   "significantly    undercapitalized"
institutions.

In the event an institution is deemed to be "significantly undercapitalized," it
may be required  to (i) sell  additional  shares of its stock;  (ii) merge or be
acquired;  (iii) restrict  transactions with affiliates;  (iv) restrict interest
rates paid;  (v) restrict  asset growth or reduce  total  assets;  (vi) divest a
subsidiary;  or (vii)  dismiss  specified  directors or officers.  A "critically
undercapitalized"  institution is generally  prohibited  from making payments on
subordinated  debt and among other things may not, without the prior approval of
the FDIC,  (i) enter into a  material  transaction  other  than in the  ordinary
course of business;  (ii) engage in certain  transactions  with  affiliates;  or
(iii) pay  excessive  compensation  or  bonuses.  "Critically  undercapitalized"
institutions  are subject to  appointment  of a receiver or  conservator  by the
institution's federal regulator. As of the most recent data available,  the Bank
and Thrift were both well capitalized institutions.

Enforcement Powers
FIRREA  provided civil and criminal  penalties that are available for use by the
federal  regulatory   agencies  against  depository   institutions  and  certain
"institution-affiliated  parties" (primarily including management, employees and
agents of a financial institution, independent contractors such as attorneys and
accountants,  and  others  who  participate  in the  conduct  of  the  financial
institution's   affairs).   These  practices  can  include  the  failure  of  an
institution to timely file required reports or the filing of false or misleading
information or the submission of inaccurate  reports.  Civil penalties may be as
high as $1 million a day for  violations  and criminal  penalties  for financial
institution  crimes range up to 20 years.  In addition,  federal  regulators are
provided  with  great  flexibility  to  commence   enforcement  actions  against
institutions and  institution-affiliated  parties.  Possible enforcement actions
include the termination of deposit insurance.  Furthermore,  FIRREA expanded the
appropriate  banking  agencies' power to issue cease and desist orders that may,
among other things,  require  affirmative  action to correct any harm  resulting
from  a   violation   or   practice,   including   restitution,   reimbursement,
indemnifications or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets,

                                       10

<PAGE>

rescind  agreements  or  contracts,  or take other  actions as determined by the
ordering federal agency to be appropriate.

In addition, California law provides the Superintendent with certain enforcement
powers.  For  example,  if it  appears  to the  Superintendent  that  a bank  is
violating its articles of  incorporation  or state law, or is engaging in unsafe
or unsound business  practices,  the Superintendent can order the bank to comply
with the law or to cease the unsafe or injurious  practices.  The Superintendent
also has the power to suspend or remove bank  officers,  directors and employees
who (i) violate any law,  regulation or fiduciary duty to the bank;  (ii) engage
in any unsafe or unsound practices related to the business of the bank, or (iii)
are charged  with or  convicted  of a crime  involving  dishonesty  or breach of
trust.

Limitations on Dividends by the Company
Under the California General  Corporation Law (The "California Law") the holders
of common  stock are entitled to receive  dividends  when and as declared by the
Board of Directors,  out of funds  legally  available  therefor,  subject to the
restrictions set forth in the California Law. The California Law provides that a
corporation  may make a distribution to its  shareholders  if the  corporation's
retained earnings will equal at least the amount of the proposed distribution.

The  California  Law  further  provides  that in the event  sufficient  retained
earnings are not  available  for the proposed  distribution  a  corporation  may
nevertheless  make a distribution to its shareholders if, after giving effect to
the  distribution,  it meets  two  conditions,  which  generally  stated  ate as
follows:  (i)  the  corporation's  assets  must  equal  at  least  125%  of  its
liabilities;  and (ii) the corporation's  current assets must equal at least its
current  liabilities  or, if the average of the  corporation's  earnings  before
taxes on income and before interest  expense for the two preceding  fiscal years
was less than the  average of the  corporation's  current  assets  must equal at
least 125% of its current liabilities. Most bank holding companies are unable to
meet this test.

The  payment of cash  dividends  by the  Company  depends  on  various  factors,
including the earnings and capital  requirements of itself and its subsidiaries,
and other  financial  conditions.  The  primary  source of funds for  payment of
dividends by the Company to its  shareholders  is the receipt of  dividends  and
management fees from the Bank and, to a lesser extent, the Thrift.

Payment of Dividends
Under  California  law,  the  directors  of  California   state-licensed  banks,
including the Bank, may declare  distributions  to  shareholders  (which include
cash  dividends),  subject to the restriction  that the amount available for the
payment of cash dividends  shall be the lesser of retained  earnings of the bank
or the bank's net income for its last three fiscal years (less the amount of any
distributions to shareholders made during such period). If the above test is not
met,  distributions  to shareholders  may be made with the prior approval of the
Superintendent  in an  amount  not  exceeding  the  greatest  of (i) the  bank's
retained earnings, (ii) the bank's net income for its last fiscal year, or (iii)
the bank's net income for its current fiscal year. If the  Superintendent  finds
that the shareholders' equity of a bank is not adequate, or that the making by a
bank of a distribution to shareholders  would be unsafe or unsound for the bank,
the  Superintendent  can  order  the  bank  not  to  make  any  distribution  to
shareholders.

The ability of the Bank to pay  dividends is further  restricted  under  FDICIA,
which prohibits a bank from paying dividends if, after making such payment,  the
bank would fail to meet any of its minimum capital requirements.  As a result of
these  provisions,  the Bank  may  find it  difficult  to pay  dividends  out of
retained  earnings from historical  periods prior to the most recent fiscal year
or to take advantage of earnings  generated by  extraordinary  items.  Under the
Financial Institutions  Supervisory Act and FIRREA, federal regulators also have
authority to prohibit financial institutions from engaging in business practices
which are considered to be unsafe or unsound. It is possible, depending upon the
financial  condition of the Bank and other factors,  that the  regulators  could
assert that the payment of  dividends  in some  circumstances  might  constitute
unsafe or unsound practices,  and that the regulators might prohibit the payment
of  dividends  even  though  under  the  circumstances  such  payments  would be
technically permissible.

Accordingly,  the future  payment of cash dividends of the Company will not only
depend upon the Bank's  earnings  during any fiscal  period but will also depend
upon an assessment by the Bank's Board of Directors of

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<PAGE>

the capital  requirements of the Bank and other factors,  including the dividend
guidelines  and the  maintenance  of an  adequate  allowance  for loan and lease
losses.  As noted above the Bank pays dividends to the Company which in turn can
pay  dividends  to its  shareholders  subject  to the  laws  limiting  corporate
dividends.

The Thrift may not pay dividends  unless its remaining  capital exceeds $750,000
plus $50,000 for each branch office.

Governmental Monetary Policies
The principal  sources of funds essential to the business of banks are deposits,
shareholders'  equity,  and borrowed funds. The availability of these sources of
funds and other potential sources,  such as preferred stock or commercial paper,
and the extent to which they are  utilized,  depends on many  factors,  the most
important of which are the FRB's  monetary  policies  and the relative  costs of
different  types of funds.  An important  function of the FRB is to regulate the
national  supply  of  bank  credit  in  order  to  combat   recession  and  curb
inflationary pressures. Among the instruments of monetary policy used by the FRB
to implement  these  objectives are (i) open market  operations in United States
Government securities, (ii) changes in the discount rate on bank borrowings, and
(iii) changes in reserve requirements against bank deposits.

The monetary policies of the FRB have had a significant  effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.  Since banking is a business which depends  largely on interest rate
differentials,  the influence of economic  conditions  and monetary  policies on
interest rates may directly affect the Company's earnings. In view of the recent
changes in regulations affecting commercial banks and other actions and proposed
actions by the  federal  government  and its  monetary  and fiscal  authorities,
including  proposed changes in the structure of banking in the United States, no
prediction  can  be  made  as  to  future  changes  in  interest  rates,  credit
availability, deposit levels or the overall performance of banks generally or of
the Company in particular.

Community Reinvestment Act
Pursuant to the  Community  Reinvestment  Act of 1977,  the  federal  regulatory
agencies which oversee the banking  industry are required to use their authority
to encourage  financial  institutions to help meet the credit needs of the local
communities in which such  institutions are chartered,  consistent with safe and
sound  banking  practices.   When  conducting  an  examination  of  a  financial
institution  such  as  the  Bank  and  the  Thrift,   the  agencies  assess  the
institution's  record of  meeting  the  credit  needs of its  entire  community,
including  low- and  moderate-income  neighborhoods.  This  record is taken into
account in an agency's  evaluation of an application  for creation or relocation
of domestic branches or for merger with another institution.  Failure to address
the credit needs of a institution's  community may also result in the imposition
of certain other regulatory  sanctions,  including a requirement that corrective
action  be  taken.  As of the  last  exam in  August  of  1995  and  April  1995
respectively, the Bank and the Thrift were each given "satisfactory" ratings for
community reinvestment.

New Community Reinvestment Act Regulations
Under the revised CRA  regulations,  the  agencies  determine  an  institution's
rating  under the CRA by  evaluating  its  performance  on lending,  service and
investment tests, with the lending test as the most important.  The tests are to
be applied in an  "assessment  context"  that is developed by the agency for the
particular  institution.  The assessment context takes into account  demographic
data  about the  community,  the  community's  characteristics  and  needs,  the
institution's  capacities and constraints,  the institution's  product offerings
and  business  strategy,  the  institution's  prior  performance,  and  data  on
similarly  situated  lenders.  Since the assessment  context is developed by the
regulatory  agencies,  a  particular  bank  will not know  until it is  examined
whether its CRA programs and efforts have been sufficient.

Larger  institutions  are required under the revised  regulations to compile and
report certain data on their lending activities in order to measure performance.
Some of this data is already  required under other laws, such as the ECOA. Small
institutions (with less than $250 million in assets) are now being examined on a
"streamlined   assessment   method."  The  streamlined  method  focuses  on  the
institution's loan to deposit ratio, degree of local lending,  record of lending
to  borrowers  and  neighborhoods  of  differing  income  levels,  and record of
responding to complaints.  The Federal  regulators who are  implementing the new
regulations  have  reported  that  the  time  spent  

                                       12

<PAGE>

at the banks during CRA  examination is reduced under the new  regulations,  and
the institutions spend less time on paperwork evidencing compliance.

Large and small institutions have the option of being evaluated for CRA purposes
in relation to their own pre-approved strategic plan. Such a strategic plan must
be submitted to the  institution's  regulator  three months before its effective
date and be published for public comment.

Limitation on Activities
FDICIA prohibits state  chartered-banks and their subsidiaries from engaging, as
principal,   in  activities   not   permissible  to  national  banks  and  their
subsidiaries,  unless the FDIC determines the activity poses no significant risk
to the Bank  Insurance Fund and the state bank is and continues to be adequately
capitalized. Similarly, state bank subsidiaries may not engage, as principal, in
activities  impermissible  to subsidiaries of national banks.  This  prohibition
extends to acquiring or retaining  any  investment,  including  those that would
otherwise be permissible under California law.

Bank Sales of Insurance Products
If the Bank elects to make insurance products available to its customers,  those
sales will be subject to various legal and regulatory  restrictions.  California
state-chartered  banks now have  statutory  authority to engage in the insurance
business as an agent or broker. FDICIA prohibits state-chartered banks and their
subsidiaries  from  engaging,  as principal,  in activities  not  permissible to
national banks and their  subsidiaries,  unless the FDIC determines the activity
poses no  significant  risk to the bank insurance fund and the state bank is and
continues to be adequately capitalized.  Similarly,  state bank subsidiaries may
not engage,  as  principal,  in  activities  impermissible  to  subsidiaries  of
national banks. This prohibition extends to insurance underwriting activities by
California  state chartered  banks.  It does not,  however,  prevent  California
chartered banks from engaging in insurance agency activities.

Change in Senior Executives or Board Members
Certain banks and bank holding  companies  must file a notice with their primary
regulator  prior to (i) adding or replacing a member of the board of  directors,
or (ii)  the  employment  of or a  change  in the  responsibilities  of a senior
executive officer.  Notice is required if the bank or holding company is failing
to meet its minimum capital standards or is otherwise in a "troubled condition,"
as defined in FDIC  regulations,  has  undergone a change in control  within the
past two years, or has received its bank charter within the past two years.

Environmental Liability
Compliance with federal,  state and local regulations regarding the discharge of
materials into the  environment  could have a substantial  effect on the capital
expenditures,  earnings and competitive  position of the Company.  Under federal
law,  liability for environmental  damage and the cost of cleanup may be imposed
upon any person or entity who is an owner or operator of contaminated  property.
State law  provisions,  which were modeled after federal law, are  substantially
similar. Especially relevant for the Company are judicial interpretations of the
law which have held that banks that take real estate as  security  for loans may
be deemed to be owners or operators of the  property if their  involvement  with
the  borrower's  management  is broad  enough to support an  inference  that the
institution,  if it  chose  to do so,  could  affect  hazardous  waste  disposal
decisions made by the borrower.

Environmental Regulation
Both  Federal and state laws were  amended in 1996 to provide  generally  that a
lender who is not actively  involved in causing  contamination  to property will
not be  liable  to clean up the  property,  even if the  lender  has a  security
interest  in  the  property  or  becomes  an  owner  of  the  property   through
foreclosure,  so long as it merely maintains the property and moves to divest it
at the earliest possible time after foreclosure.  Under California law, a lender
generally will not be liable to the State for the cost  associated with cleaning
up  contaminated  property  unless the lender  realized  some  benefit  from the
property,  failed to divest the property promptly after  foreclosure,  caused or
contributed to the release of the hazardous materials or made the loan primarily
for purpose of investing in the  property.  This  amendment  to  California  law
became  effective with respect to judicial  proceedings  filed and orders issued
after January 1, 1997.

                                       13

<PAGE>

It is the Bank's policy to perform environmental due diligence procedures in the
following cases: prior to foreclosure upon any commercial or industrial property
or any suspect  residential  property;  prior to commitment on any commercial or
industrial  or/and real estate  development  loan greater  than  $100,000 or any
single  family  or  multifamily  loan  greater  than  $200,000.   Due  diligence
procedures  include an  environmental  questionnaire  completed by the borrower,
onsite  inspection  of the  property by the  originating  loan  officer  and, in
certain cases, a formal environmental audit report. A formal environmental audit
report may be required on  properties  that are in a high risk  category,  where
Management believes potential risk exists on a property or where the loan amount
exceeds  $500,000.  The  Bank  establishes  a  list  of  approved  environmental
consultants which it contracts with for these services.

The extent of the  protection  provided  by both the  federal  and state  lender
protection  statutes will depend on their  interpretation by the  administrative
agencies  and  courts,  and  the  Company  cannot  predict  whether  it  will be
adequately protected for the types of loans made by the Bank.

In the  event  the Bank  was held  liable  as an  owner or  operator  of a toxic
property,  it could be  responsible  for the  entire  cost of the  environmental
damage and cleanup. Depending on the amount of liability assessed and the amount
of  cleanup  required,  such an  outcome  could  have a  serious  effect  on the
Company's consolidated financial condition.

In  addition,  the  Company  and the Bank are still  subject to the risks that a
borrower's   financial   position  will  be  impaired  by  liability  under  the
environmental  laws and that  property  securing  a loan made by the Bank may be
environmentally  impaired  and not  provide  adequate  security  for  the  Bank.
California law provides some protection against the second risk, by establishing
certain additional, alternative remedies for a lender in the situation where the
property  securing  a  loan  is  later  found  to be  environmentally  impaired.
Primarily,  the law permits the lender in such a case to pursue remedies against
the borrower other than foreclosure under the deed of trust.

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

Recent Accounting Rules
The  Company  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards  ("SFAS") No. 121,  Accounting for the Impairment of Long-Lived Assets
and for Long-Lived  Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be 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 future net cash flows  expected to be generated by the asset.  If such assets
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount which the carrying value exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.

On January 1, 1996, the Company adopted SFAS No.123,  Accounting for Stock-Based
Compensation,  which  permits  entities to recognize as expense over the vesting
period  the  fair  value  of all  stock-based  awards  on  the  date  of  grant.
Alternatively,  SFAS No.  123 also  allows  entities  to  continue  to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method

                                       14

<PAGE>

defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma  disclosure
provisions of SFAS No. 123.

Interstate  Banking  and  The  Riegle-Neal   Interstate  Banking  and  Branching
Efficiency Act Certain restrictions in the BHC Act, have historically  prevented
interstate  banking.  Provisions  of  FIRREA  allow  out-of-state  bank  holding
companies to acquire  depository  institutions  located in California which have
failed or are in danger of failing provided certain  requirements are satisfied,
including an assessment  of the  estimated  cost to the FDIC of not allowing the
acquisition.

Since 1991,  California  law has allowed banks and bank holding  companies to be
acquired by bank holding companies from other states on a reciprocal basis; that
is, such  transactions  are  permissible  if the state in which the bank holding
company is located would permit a California  bank holding  company to acquire a
bank located in that state on substantially the same terms and conditions as are
applicable to bank holding companies located in that state.

The  Riegle-Neal  Interstate  Banking  and  Branching  Efficiency  Act  of  1994
("IBBEA")  was enacted to enable banks and bank holding  companies to merge with
and  acquire  other  banks  and  bank  holding  companies   without   geographic
limitations.  Beginning in September 1995, bank holding companies were permitted
to acquire  banks  located in any state  regardless  of state laws that prohibit
such  acquisition.  Bank  holding  companies  are only  permitted  to make  such
acquisitions if they are adequately  capitalized and managed.  Beginning June 1,
1997,  banks will be  permitted  to merge with  banks  located in other  states,
provided that neither  state acts to opt out of the IBBEA before that date.  The
IBBEA also permits a bank to establish an agency relationship with an affiliated
insured  depository  institution  located  in another  state for the  purpose of
receiving deposits,  renewing time deposits,  closing loans, servicing loans and
receiving  payments.  Additionally,  the IBBEA allows  states to enact  statutes
permitting interstate bank mergers before June 1, 1997.

The IBBEA prohibits an interstate  acquisition  where the resulting bank or bank
holding company would control more than ten percent of the insured deposits held
by  depository  institutions  nationwide  or more than 30 percent of the insured
deposits in any state  affected by the merger.  States are permitted to waive or
increase the 30 percent limit. Further, the IBBEA permits states to prohibit the
acquisition of banks that have been established fewer than five years.

In October 1995,  the California  Interstate  Banking and Branching Act of 1995,
became  effective.  Assembly  Bill  1482 was  designed  to  implement  important
features  of the  IBBEA in  California.  Assembly  Bill  1482  opts-in  early to
interstate  branching by permitting a bank domiciled in another state to acquire
an entire  California  bank by merger or purchase and thereby  establish  one or
more California branch offices. To be eligible to be acquired, a California bank
must have been in  existence  for at least five years.  In  addition,  while the
IBBEA  authorizes  agency   relationships  only  between  affiliated   financial
institutions,  Assembly Bill 1482 is more expansive in that it allows California
state  banks  to  establish  agency   relationships  with  both  affiliated  and
unaffiliated  insured  depository  institutions.  It also  expands  the  list of
authorized agency activities to include, in addition to the activities listed in
the IBBEA,  the evaluation of loan  applications  and the  disbursement  of loan
funds.

The full impact of interstate  banking  legislation  cannot be estimated at this
time.  However,  the IBBEA and Assembly Bill 1482 are generally expected to have
the effect of  increasing  competition  and  consolidation  within the financial
services industry.

The Riegle Community Development and Regulatory Improvement Act of 1994
The  Riegle  Community  Development  and  Regulatory  Improvement  Act  of  1994
("Community  Development  Act") is broad in scope,  and many  aspects of banking
regulation  are affected.  Among other things,  the Act  encourages and provides
funding for community  development  institutions.  Also included are  provisions
meant to increase  small  business  access to  capital.  The Act also amends the
Truth in  Lending  Act by  creating  additional  restrictions  on and  requiring
disclosures for some loans secured by a consumer's  principal  dwelling,  and by
creating penalties for violations of Truth in Lending.

                                       15

<PAGE>

The Community  Development Act offers banks  regulatory  relief by requiring the
federal  banking  agencies  to  coordinate  examinations,  to  streamline  their
regulations,   to  consider  the  burden  of   compliance   when   enacting  new
requirements,  and to create a formal appeals  process for material  examination
determinations.  Additionally,  the  Community  Development  Act  created a new,
alternative procedure for the formation of a bank holding company, with the time
period  within  which a merger  or  acquisition  governed  by the BHC Act can be
affected  following FRB approval  reduced from 30 days to 15 days. The Community
Development  Act also  modified and  clarified  the FDIC's powers as receiver or
conservator,  provided an exemption  under the Truth in Savings Act for business
purpose accounts,  and simplified certain  disclosure  requirements for mortgage
lenders.  A number of the Act's  provisions  were directed at suppressing  money
laundering.

The full impact of the Community  Development  Act cannot be estimated until the
federal banking agencies  complete  implementation of regulations under the Act.
It is anticipated that the Act may reduce the overall  regulatory  burden on the
Bank.

Safety and Soundness Standards
FDICIA,  along with the  Community  Development  Act,  mandated  the creation of
safety and soundness  standards  that will allow federal  regulators to identify
and address problems at financial  institutions before capital becomes impaired.
Accordingly, the federal regulators have adopted a Safety and Soundness Rule and
Interagency   Guidelines   Prescribing   Standards   for  Safety  and  Soundness
("Guidelines").  Rather than  requiring  rules,  the Community  Development  Act
allows the regulators to enact  guidelines that do not dictate how  institutions
must be managed and operated.  The Guidelines  create standards for a wide range
of  operational  and  managerial   matters  including  (i)  internal   controls,
information systems, and internal audit systems; (ii) loan documentation;  (iii)
credit  underwriting;  (iv) interest rate exposure;  (v) asset growth;  and (vi)
compensation  and benefits.  In addition,  the agencies will soon issue proposed
standards for asset quality and earnings for public comment.

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.

The 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 or unsound practice or an unsafe and unsound  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 such severity that it could 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 (the FDIC in the case
of the Bank and the Thrift).  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.

Insurance Premiums
FDICIA  also  required  the FDIC to adopt a  risk-based  assessment  system  for
insurance  premiums.  For an  individual  institution,  the FDIC  must take into
consideration  the probability that the Bank Insurance Fund ("BIF") will incur a
loss with respect to the institution.  In making that assessment,  the FDIC must
consider the different  categories and  concentrations of assets and liabilities
of the institution, the likely amount of any loss, the revenue 

                                       16

<PAGE>

needs of BIF, and any other  factors the FDIC  considers  relevant.  The FDIC is
permitted  to establish  separate  risk-based  assessment  systems for large and
small members of BIF. Regardless of the potential risk to BIF, FDICIA prohibited
assessment  rates from falling  below 23 cents per $100 of eligible  deposits if
the FDIC has outstanding  borrowings from the U.S. Treasury Department or if the
reserve ratio is below 1.25 percent.

The 1.25 percent  reserve ratio was met during 1995.  The FDIC will continue the
risk-based  assessment system for insurance  premiums,  causing premiums to vary
between  institutions.  The assessment  for the  highest-rated  institutions  is
currently set at the statutory  annual minimum of $2,000.  Assessment  rates for
institutions  that are not well  capitalized  can  range as high as 27 cents per
$100. The FDIC has maintained the current  assessment  rate schedule of 23 to 31
cents per $100 of deposits for the  institutions  whose  deposits are subject to
assessment by the Savings Association Insurance Fund ("SAIF").

The  disparity  between  the cost of deposit  insurance  for  healthy  banks and
similarly  situated  thrifts  over the last  several  years  caused many healthy
thrifts  to seek ways to  either  convert  to BIF  insurance  or to  obtain  BIF
insurance for some portions of their  deposits,  in order to remain  competitive
with banks.  The  migration of deposits  increased the pressure on the remaining
thrifts to build up reserves at the SAIF and pay the cost of servicing Financing
Company  ("FICO") bonds that were issued to cover some of the losses incurred by
failed savings associations in the late 1980s.

The  Economic  Growth  and  Regulatory  Paperwork  Reduction  Act of  1996  (the
"Economic  Growth Act")  required all remaining  SAIF  institutions  (subject to
certain  exceptions) to pay a one-time  deposit  assessment of $.657 per $100 of
insured  deposits in 1996 in order to  recapitalize  the SAIF fund.  The banking
agencies  are now  required by law to take  actions to prevent the  migration of
deposits  from the SAIF to the BIF funds until the year 2000.  In addition,  the
cost of  carrying  the FICO  bonds will now be  allocated  between  BIF  insured
institutions and SAIF insured institutions, with BIF insured institutions paying
1/5 the amount paid by SAIF insured  institutions.  The FDIC recently  estimated
that BIF institutions  will pay an assessment of  approximately  $.0128 annually
per $100 insured deposits;  and SAIF institutions will pay approximately  $.0644
annually per $100 of insured  deposits.  Starting in the year 2000, BIF and SAIF
institutions  will  share  the  FICO  bond  costs  equally,  with  an  estimated
assessment of $.0243 annually per $100 of insured deposits.

The legislation will increase the Bank's premiums, as it will now be required to
share in the cost of carrying the FICO bonds.  The increase will be slight until
the year 2000, at which time it will increase.

The  Economic  Growth  Act also  included  other  regulatory  relief  provisions
applicable to the Company and the Bank.  Application  procedures for the Company
to engage in certain non-banking activities will be streamlined,  so long as the
Company maintains an adequate financial position and is considered well-managed.
The lending  restrictions  on directors and officers have been relaxed to permit
loans having  favorable  terms under  employee  benefit  plans.  The FRB and the
Department of Housing and Urban Development ("HUD") are required to simplify and
improve  their  regulations  with  respect to  disclosures  relating  to certain
mortgage loans,  and certain  exemptions from the disclosure  requirements  were
added.

The Economic  Growth Act also provides  protection for lenders who self-test for
compliance  with the Equal  Credit  Opportunity  Act (the  "ECOA")  and the Fair
Housing Act ("FHA"). The ECOA now provides that the results or reports generated
or obtained by a institution  from a self-test may not be obtained by an agency,
department  or  applicant  to be used with  respect to any  proceeding  or civil
action  alleging a violation  of the ECOA.  This change in the law  protects the
Company against liability based on the results of internal tests done to enhance
compliance  with the law and  encourages  the  Company  to use  self-testing  to
evaluate its compliance with the ECOA and the FHA.

Additional Requirements of FDICIA
FDICIA  restricted  the  acceptance of brokered  deposits by insured  depository
institutions  and included a number of consumer  banking  provisions,  including
disclosure  requirements and substantive contractual limitations with respect to
deposit  accounts.  FDICIA contained  numerous other  provisions,  including new
reporting,  examination, and auditing requirements,  termination of the "too big
to fail" doctrine except in special cases, and revised 

                                       17

<PAGE>

regulatory  standards for, among other things, real estate lending.  FDICIA also
expanded the grounds upon which a conservator  or receiver of a institution  can
be  appointed.  For example,  a  conservator  or receiver can be appointed for a
institution which fails to maintain minimum capital levels and has no reasonable
prospect of becoming adequately capitalized.

Under  FDICIA,  the  federal  regulatory  agencies  are  required  to  establish
loan-to-value guidelines for real estate loans, and to revise risk-based capital
guidelines to reflect interest-rate risk, concentration of credit risk, the risk
of nontraditional  activities and the actual performance of nontraditional  real
estate  loans.  The  federal  bank  regulatory  agencies  are in the  process of
developing  interagency risk exposure guidelines which will establish risk-based
capital standards for interest rate and other risk exposures.

FDICIA also requires, with some exceptions, that each institution have an annual
examination  performed by its primary federal  regulatory  agency, and that each
bank with $500  million  or more in assets  have an annual  outside  independent
audit. The outside audit must consider bank regulatory compliance in addition to
financial statement reporting.  Although the independent audit requirements only
apply to  institutions  with assets of $500 million or more, the FDIC encourages
all institutions,  regardless of size or charter,  to have an annual independent
audit of their financial statements. The Company intends to have an annual audit
conducted by the Company's independent public accountants.

Implementation  of the various  provisions of FDICIA are subject to the adoption
of regulations by the various  federal banking  agencies or to certain  phase-in
periods.  The effect of the FDICIA  provisions  cannot be determined  until such
regulations are promulgated.

State Bank Sales of Non-deposit Investment Products
Securities  activities of state  nonmember  banks,  as well as the activities of
their  subsidiaries  and affiliates,  are governed by guidelines and regulations
issued by the securities and financial  institution  regulatory agencies.  These
agencies  have  taken the  position  that bank sales of  alternative  investment
products, such as mutual funds and annuities,  raise substantial bank safety and
soundness  concerns involving consumer confusion over the nature of the products
offered,  as well as the potential for  mismanagement  of sales  programs  which
could  expose a bank to liability  under the  anti-fraud  provisions  of federal
securities laws.

Accordingly,  the agencies have issued  guidelines  which  require,  among other
things,  the  establishment  of a  compliance  and audit  program to monitor (i)
bank's mutual funds sales activities and its compliance with applicable  federal
securities  laws; (ii) the provision of full  disclosures to customers about the
risks of such  investments  (including the possibility of loss of the customer's
principal  investment);  and (iii) the conduct of securities  activities of bank
subsidiaries or affiliates in separate and distinct locations.  In addition, the
guidelines  prohibit bank employees  involved in deposit-taking  activities from
selling investment products or giving investment advice. Banks are also required
to  establish  qualitative  standards  for the  selection  and  marketing of the
investments  offered  by the bank,  and to  maintain  appropriate  documentation
regarding the suitability of investments recommended to bank customers.

Increased Permitted Activities
During 1996,  the Federal  banking  agencies,  especially  OCC and the FRB, took
steps to  increase  the types of  activities  in which  national  banks and bank
holding  companies  can  engage,  and to  make  it  easier  to  engage  in  such
activities.  The FRB adopted  interim  regulations on November 1, 1996 to permit
certain  well-capitalized  bank  holding  companies  to  engage  (de  novo or by
acquisition) in activities  previously approved by regulation without submitting
a prior  application.  In order  to  qualify,  a bank  holding  company  must be
well-capitalized  and have received a  sufficiently  high  composite  rating and
management rating at its last examination.

To be well-capitalized  for this purpose, a bank holding company must (i) have a
total  risk-based  capital  ratio of 10% or more,  (ii) have a Tier 1 risk-based
capital ratio of 6% or more,  (iii) have either (a) a Tier leverage  ratio of 4%
or more (b) a  composite  rating of 1 or uses a market  risk  adjustment  of its
risk-based  capital  ratio,  and has a tier 1 leverage  ratio of 3% or more, and
(iv) not be subject to any written agreement,  order or capital directive issued
by the Federal Reserve.  The Company is considered  well-capitalized  under this
rule.

                                       18

<PAGE>

On November 20, 1996, the OCC issued final regulations permitting national banks
to  engage  in a wider  range  of  activities  through  subsidiaries.  "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.  Parity legislation in
California may permit  state-licensed banks to engage in similar new activities,
subject to the  discretion  of the  Superintendent.  See "State Bank Parity Act"
below.

State Bank Parity Act
Recent California legislation has ended some of the disparities between national
banks and California  state-chartered  banks.  Commencing January 1, 1996, state
banks  are able to  repurchase  their  shares  with the  prior  approval  of the
California State Banking Department.  Moreover, like national banks, they are no
longer  required to publish  their  statement of condition in a local  newspaper
(replaced  by a  lobby  notice  requiring  prompt  availability  of a copy  upon
request).  In addition,  much of the confusing interplay between the federal and
state insider lending rules  (Pursuant to the Federal Reserve  Regulation 0) has
been  ironed out.  Lastly,  the  legislation  included,  a "wild  card"  statute
empowering the Superintendent to remove future disparities by regulation.

ATM Fee Legislation
In April of 1996, two of the larger  Automatic  Teller Machines ("ATM") networks
lifted  their  prior   restriction   prohibiting  ATM  operators  from  directly
surcharging  the  users of the ATMs,  which  triggered  a series of  legislative
proposals and hearings with respect to whether the fees charged by the operators
of ATM machines  should be regulated.  The lifting of the prior  restriction  on
surcharges was  controversial  in part because  customers may be required to pay
two charges for a single  transaction,  one to the bank issuing the ATM card and
another to the operator of the ATM being used.

Currently,  Federal law  requires a bank at which a depositor  has an account to
disclose to its own customers the amount of fees it charges,  and California law
requires  an ATM  operator to disclose to users of the ATM machine who are using
an ATM card  issued by someone  other than the ATM  operator  that a fee will be
charged.  California law was amended in 1996, effective July 1, 1997, to require
the  operators of ATMs in  California  to disclose to customers any surcharge or
fee  that the  operator  of the  machine  will  charge,  including  charges  for
mini-statements and other services.

This  legislation  will  not  have a  significant  effect  on the  Bank as it is
currently  stated.  Other proposed changes could affect the Bank by limiting ATM
charges to  customers,  but the impact  would not be material  to the  financial
condition of the Company.

Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress,  in conjunction
with similar  California  legislation,  is having an impact on institutions  and
increasing their cost of doing business. The legislation requires employers with
15 or more employees and all  businesses  operating  "commercial  facilities" or
"public accommodations" to accommodate disabled employees and customers. The ADA
has two major  objectives:  (1) to prevent  discrimination  against disabled job
applicants,  job candidates and employees,  and (2) to provide  disabled persons
with ready access to commercial facilities and public accommodations. Commercial
facilities,  such as the Bank and the Thrift, must ensure all new facilities are
accessible to disabled  persons,  and in some instances may be required to adapt
existing facilities to make them accessible, such as ATMs and bank premises.

Recent and Proposed Legislation and Regulation
From time to time, legislation is proposed or enacted which has the potential to
increase the cost of doing business, limit or change permissible activities,  or
affect the competitive  balance between banks and other financial  institutions.
In recent  years,  legislation  has resulted in major  changes to  interest-rate
structures and the permissible powers of banks,  increasing the relative cost of
funds and generally  exposing  banks to interest rate

                                       19

<PAGE>

risks in their liability portfolios.  At the same time, legislation  authorizing
changes  in the  powers  of other  types  of  financial  institutions  has had a
substantial  impact on  certain  fundamental  aspects  of the  Bank's  business.
Proposals  to change  the laws and  regulations  governing  the  operations  and
taxation of bank holding companies,  banks and other financial  institutions are
frequently  made in Congress,  in the California  legislature and before various
bank holding company and bank regulatory  agencies.  The likelihood of any major
changes and the impact such changes might have been impossible to predict.

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,  or to predict whether
or when any of the proposed  legislation and regulations will be adopted.  It is
anticipated  that the banking  industry will  continue to be a highly  regulated
industry.  Additionally,  if experience is any indication, 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 the enactment of the IBBEA and Assembly Bill 1482. 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.

Selected Statistical Information

The  following  tables  in pages  21  through  30  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"  at ITEM 7, at page 19 of the Bank's 1996
Annual Report to  Shareholders  incorporated  herein by reference,  and with the
Bank's Consolidated  Financial Statements and the Notes thereto included in Item
14, at pages 9 through 18 of the Company's  1996 Annual  Report to  Shareholders
incorporated  herein by reference.  Statistical  information  below is generally
based on average daily amounts.

                                       20

<PAGE>

<TABLE>

Item I. Distribution of Average Assets,  Liabilities and  Shareholders'  Equity;
Interest Rates and Differentials

The following table presents for the periods indicated condensed average balance
sheet information for the Company,  together with interest rates earned and paid
on the various sources and uses of its funds. The table is arranged to group the
elements of  interest-earning  assets and  interest-bearing  liabilities,  these
items  being the major  sources of income  and  expense.  Nonaccruing  loans are
included in the table for computational  purposes,  but the nonaccrued  interest
thereon is excluded.

Average Balance Sheet & Analysis of Net Interest Earnings
<CAPTION>

                                      Year Ended December 31, 1996             Year Ended December 31, 1995    
                                -------------------------------------    ------------------------------------- 
                                              Interest        Average                      Interest   Average  
                                 Average      Income/        Interest     Average          Income/    Interest 
                                 Balance      Expense          Rate       Balance         Expense       Rate   
                                ---------    ---------         -----     ---------       ---------      ----   
                                                             (Dollar amounts in thousands)                     
<S>                             <C>          <C>                <C>      <C>             <C>            <C>    
ASSETS                                                                                                         
Federal funds sold              $   3,920    $     207          5.28%    $   6,253       $     358      5.73%  
                                ---------    ---------         -----     ---------       ---------      ----   
Taxable investment                                                                                             
  securities                       38,331        2,596          6.77%       34,095           2,219       6.5?% 
Nontaxable investment                                                                                          
  securities(1)                     4,531          246          5.43%        5,858             327      5.58%  
Loans gross(2)                    157,098       16,302         10.38%      120,620          12,969     10.75%  
                                ---------    ---------         -----     ---------       ---------      ----   
  Total interest                                                                                               
     earning assets               203,880       19,351          9.49%      166,826          15,873      9.51%  
                                                                                                               
                                                                                                               
Allowance for loan losses          (1,913)                                  (1,616)                            
Cash and noninterest-                                                                                          
  bearing deposits at                                                                                          
  other banks                      10,436                                    8,832                             
Premises and equipment,                                                                                        
  net                               4,775                                    3,783                             
Interest, receivable                                                                                           
  and other assets                 10,946                                    8,056                             
                                ---------                                ---------                             
  Total Assets                  $ 228,124                                $ 185,881                             
                                =========                                =========                             
                                                                                                               
LIABILITIES AND SHAREHOLDER                                                                                    
EQUITY                                                                                                         
Interest-bearing demand         $  29,376          268           .91%    $  26,192             239       .9%   
Savings deposits                  104,938        4,350          4.15%       91,509           4,213      4.65%  
Time deposits                      40,994        2,167          5.29%       25,431           1,254      4.93%  
Other borrowings                    1,020           80          7.84%          141              11      7.80%  
                                ---------        -----          -----    ---------           -----      -----  
  Total interest-bearing                                                                                       
     liabilitiies                 176,328        6,865          3.89%      143,273           5,717      3.99%  
                                                                                                               
Noninterest-bearing                                                                                            
  demand deposits                  30,549                                   26,478                             
Accrued interest,                                                                                              
  taxes and other liabilities       3,067                                      641                             
                                  -------                                  -------                             
  Total Liabilities               209,944                                  170,392                             
                                  =======                                  =======                             
                                                                                                               
  Total shareholders'                                                                                          
    equity                         18,810                                   15,489                             
                                ---------                                ---------                            
  Total Liabilities and                                                                                        
    shareholder's equity        $ 228,124                                $ 185,881                            
                                =========                                =========                            
                                                                                                               
Net interest income                                                                                            
  and margin(3)                                $ 12,486         6.12%                     $  10,156     6.09%  
                                                                                                               

</TABLE>

                                       Year Ended December 31, 1994
                                       -----------------------------
                                                 Interest  Average
                                       Average   Income/  Interest
                                        Balance   Expense     Rate
                                        ------    -------     ---- 
                                       
ASSETS                                 
Federal funds sold                      $6,330    $   261     4.12%
                                        ------    -------     ---- 
Taxable investment                                
  securities                            26,966      1,479     5.48%
Nontaxable investment                             
  securities(1)                          4,579        272     5.94%
Loans gross(2)                         110,690     10,795     9.75%
                                        ------    -------     ---- 
  Total interest                                  
     earning assets                    148,565     12,807     8.62%
                                                  
                                                  
Allowance for loan losses               (1,690)   
Cash and noninterest-                             
  bearing deposits at                             
  other banks                            8,750    
Premises and equipment,                           
  net                                    2,578    
Interest, receivable                              
  and other assets                       7,528    
                                       --------   
  Total Assets                         $165,831   
                                       ========   
                                                  
LIABILITIES AND SHAREHOLDER                       
EQUITY                                            
Interest bearing demand                $25,126        237      .94%
Savings deposits                        65,516      2,298     3.45%
Time deposits                           34,420      1,312     3.81%
Other borrowings                            48          3     5.25%
                                       -------      -----     ---- 
  Total interest-bearing                          
     liabilitiies                      126,110      3,850     3.05%
                                                  
Noninterest-bearing                               
  demand deposits                       25,326    
Accrued interest,                                 
  taxes and other liabilities              842    
                                       -------    
  Total Liabilities                    152,278    
                                       =======    
                                                  
  Total shareholders'                             
    equity                              13,553    
                                ---------------   
  Total Liabilities and                           
    shareholder's equity        $       165,831   
                                ===============   
                                                  
Net interest income                               
  and margin(3)                                     $8,957    6.03%
                                                  
                                                  

----------
(1)  Interest on municipal securities is not computed on tax-equivalent basis.
(2)  Amounts of interest earned  includes loan fees of $1,106,000,  $901,000 and
     $812,000 for 1996, 1995, and 1994, respectively.
(3)  Net interest  margin is computed by dividing  net interest  income by total
     average interest-earning assets.


                                       21

<PAGE>



The  following  tables set forth,  for the periods  indicated,  a summary of the
changes in average asset and liability balances and interest earned and interest
paid resulting from changes in average asset and liability balances (volume) and
changes in average  interest rates.  The change in interest due to both rate and
volume has been  allocated  to volume  and rate  changes  in  proportion  to the
relationship  of the absolute  dollar amount of the change in each.  Nonaccruing
loans are included in the table for computational  purposes,  but the nonaccrued
interest thereon is excluded.

<TABLE>

Net Interest Income Changes Due to Volume and Rate

                                                                          1996 vs. 1995                  1995 vs. 1994
                                                                          -------------                  -------------
                                                                  Due to    Due to      Total    Due to      Due to     Total
                                                                  Volume     Rate      Change     Volume      Rate      Change
                                                                -------    -------    -------    -------    -------    -------
                                                                                    (Dollar amounts in thousands)
<S>                                                             <C>        <C>        <C>        <C>        <C>        <C>    
Interest Income:
   Investment securities                                        $   276    $   101    $   377    $   434    $   306    $   740
   Tax-exempt investment securities                                 (74)        (7)       (81)        70        (15)        55
   Federal funds sold                                              (125)       (26)      (151)        (3)       100         97
   Loans, gross (2)                                               3,767       (434)     3,333      1,015      1,159      2,174
                                                                -------    -------    -------    -------    -------    -------
     Total                                                        3,844       (366)     3,478      1,516      1,550      3,066

Interest Expense:
   Interest-bearing demand deposits                             $    29    $  --      $    29    $     9    $    (7)   $     2
   Savings deposits                                                 427       (290)       137      1,016        899      1,915
   Time deposits                                                    817         96        913        (90)        32        (58)
   Other borrowings                                                  69       --           69          7          1          8
                                                                -------    -------    -------    -------    -------    -------
     Total                                                        1,342       (194)     1,148        942        925      1,867

Net Interest Income                                             $ 2,502    $  (172)   $ 2,330    $   574    $   625    $ 1,199
                                                                =======    =======    =======    =======    =======    =======
                                                                                                                             
                                                                                                                   
<FN>
(1)  Interest on municipal securities is not computed on a tax-equivalent basis.
(2)  Amounts of interest  earned  includes loan fees of $1,106,000  for 1996 and
     $901,000 for 1995.
</FN>
</TABLE>

                                       22

<PAGE>

Interest Rate Sensitivity

The interest  rate gaps  reported in the table 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 be reflective of 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.

<TABLE>

Interest Rate Sensitivity
<CAPTION>
                                                                        By Repricing Interval
                                                     ----------------------------------------------------------------------
                                                              After three                After one
                                                                months,                    year,
                                                       Within three within one    within five   After five    Noninterest-
                                                        months         year           years        years      bearing funds  Total
                                                        ------         ----           -----        -----      -------------  -----
                                                                                (Dollar amounts in thousands)
<S>                                                   <C>           <C>           <C>           <C>          <C>           <C>      
Assets
Federal funds sold                                    $   3,735     $    --       $    --       $    --      $    --       $   3,735
Time deposits at other institutions                       1,800           308           993          --           --           3,101
Investment securities                                       315         3,976         8,279        30,808         --          43,378
Loans                                                   115,848        20,857        36,856         9,686         --         183,247
Other interest-bearing assets                               880         3,134          --            --           --           4,014
Noninterest-earning assets
   and allowances for loan losses                          --            --            --            --         28,514        28,514
                                                      ---------       --------    ---------     ---------     --------     ---------
Total Assets                                            122,578        28,275        46,128        40,494       28,514       265,989
                                                                                                                           =========

Liabilities and shareholders' equity
Savings, money market & NOW deposits                    145,588          --            --            --         39,157       184,745
Time deposits                                            12,180        29,877        11,543          --           --          53,600
Other interest-bearing liabilities                         --             791          --             105        3,000         3,896
Other liabilities and
   Shareholders' equity                                    --            --            --            --         23,748        23,748
                                                      ---------       --------    ---------     ---------     --------     ---------
Total liabilities and shareholders' equ                 157,768        30,668        11,543           105       65,905     $ 265,989
                                                                                                                           =========
Interest rate sensitivity
   Gap                                                  (35,190)       (2,393)       34,585        40,389    $ (37,391)
                                                      ---------       --------    ---------     ---------    =========
Cumulative interest rate
   Sensitivity Gap                                    $ (35,190)      $(37,583)   $  (2,998)    $  37,391
                                                      =========       ========    =========     =========

</TABLE>

                                                               23

<PAGE>

Item II: Investment Portfolio

All Company  securities  are  classified  available-for-sale  as of December 31,
1996. The following table sets forth the fair value of investment  securities at
the dates indicated:

<TABLE>
Fair Value of Investment Securities
<CAPTION>
                                                                     Fair Value
                                                                     December 31
                                                       ------------------------------------
                                                          1996          1995         1994
                                                          ----          ----         ----
                                                               (Amount in thousands)
<S>                                                      <C>           <C>         <C>    
U.S. Treasury, U.S. Government agencies and corporatio   $17,711       $22,521     $20,593
Obligations of states and political subdivisions           4,271         4,297       6,571
Mortgage-backed securities                                20,751        17,932       8,175
Other securities                                             645           552         487
                                                         -------       -------     -------
Total                                                    $43,378       $45,302     $35,826
                                                         =======       =======     =======
                                                                                
</TABLE>

The  following  table sets forth the  maturities  of  investment  securities  at
December 31, 1996 and the weighted average yields of such securities  calculated
on the basis of the cost and effective yields based on the scheduled maturity of
each security.  Maturities of mortgage-backed securities 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.


<TABLE>

Securities Available-for-Sale-Fair Value and Maturity Distribution

<CAPTION>

                                                                           Stated Maturity
                                   -------------------------------------------------------------------------------------------------
                                     Within One Year         One to Five Years     Five to Ten Years    Over Ten Years
                                   ------------------      --------------------   -----------------    -----------------
                                      Amount     Yield      Amount      Yield      Amount     Yield    Amount     Yield      Total
                                      ------     -----      ------      -----      ------     -----    ------     -----      -----
                                                                   (Dollar amounts in thousands)
<S>                                  <C>          <C>       <C>          <C>      <C>         <C>      <C>          <C>     <C>     
U.S. Treasury and other 
   U.S. government
   agencies and corporations (1)     $   362     7.03%      $ 6,455      6.05%    $  8,276    7.19%    $ 23,369     7.35%   $ 38,462
                                                                                                                  
State and political subdivisions         619     9.05%        2,439      5.60%          83    4.20%          37     6.92%      4,271
                                     -------               --------               --------             --------             --------
   Total debt securities                 981                  8,894                  9,111               23,747              42,733
Equity securities                        -                      -                    -                      -                   645
                                                                                                                            -------
   Total                             $   981               $  8,894               $  9,111             $ 23,747             $ 43,378
                                     =======               ========               ========             ========             ========
                                                                                                              
<FN>

(1) Mortgage-backed securities are shown in this table at the contractual maturity dates.
</FN>
</TABLE>

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




                                       24

<PAGE>



Item III:      Loan Portfolio

The following  table shows the  composition  of the loan  portfolio at the dates
indicated:

<TABLE>

Loans Outstanding
<CAPTION>

                                                                                          December 31,
                                                          --------------------------------------------------------------------------
                                                             1996            1995           1994            1993            1992
                                                          ---------       ---------       ---------       ---------       ---------
<S>                                                       <C>              <C>            <C>             <C>             <C>      
Commercial, financial and agricultural                    $  71,786        $ 65,563       $  55,827       $  54,925       $  57,091
Real estate--construction                                    13,923          12,006          11,726           9,143           7,131
Real estate--mortgage                                        57,098          42,128          34,743          32,984          21,338
Installment                                                  40,440          14,039          11,304          10,072          11,775
                                                          ---------       ---------       ---------       ---------       ---------
  Total                                                     183,247         133,736         113,600         107,124          97,335

Less: Allowance for possible loan losses                     (2,792)         (1,701)         (1,621)         (1,747)         (1,616)
                                                          ---------       ---------       ---------       ---------       ---------
  Total loans, net                                        $ 180,455       $ 132,035       $ 111,979       $ 105,377       $  95,719
                                                          =========       =========       =========       =========       =========
</TABLE>


At December 31, 1996, the Company had  approximately  $46,159,000 in undisbursed
loan  commitments  of which  approximately  $6,305,000  related  to real  estate
construction loans. This compares with $28,321,000 at December 31, 1995 of which
$4,232,000 related to real estate construction loans.  Standby letters of credit
were $3,213,000 and $2,465,000,  respectively, at December 31, 1996 and December
31, 1995. For further  information  about the  composition of the Company's loan
portfolio  see  "ITEM  7--MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" section entitled "Asset Quality" at page 21
of the  Company's  1996 Annual  Report to  Shareholders  incorporated  herein by
reference.

The  Company  seeks to mitigate  the risks  inherent  in its loan  portfolio  by
adhering to certain  underwriting  practices.  They include careful  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  property  and  chattel  taken as  collateral  and audits of
accounts receivable or inventory pledged as security.

The Company also has an internal loan review system as well as periodic external
reviews.  The results of these  external  reviews are assessed by the  Company's
audit committee.  Collection of delinquent loans is generally the responsibility
of the Company's credit administration staff. However, certain problem loans may
be dealt with by the originating loan officer. The Board of Directors review 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.



                                       25

<PAGE>


<TABLE>

The table that  follows  shows the  maturity  distribution  of the  portfolio of
commercial, financial, and agricultural loans and real estate construction loans
on December 31, 1996, as well as sensitivity to changes in interest rates:


Loan Maturity Distribution and Sensitivity to Changes in Interest Rates
<CAPTION>

                                                                                               December 31, 1996
                                                                 -------------------------------------------------------------------
                                                                   Within              One to               Over
                                                                   One Year          Five Years          Five Years          Total
                                                                   --------           --------           --------           --------
<S>                                                                <C>                <C>                <C>                <C>     
Commerical, financial and agricultural
Loans with floating rates                                          $ 39,515           $ 20,150           $  4,337           $ 64,002
Loans with predetermined rates                                          630              6,116              1,038              7,784
                                                                   --------           --------           --------           --------
  Subtotal                                                           40,145             26,266              5,375             71,786
Real Estate--Construction
Loans with floating rates                                             5,419              4,528              2,542             12,489
Loans with predetermined rates                                          674                 32                728              1,434
                                                                   --------           --------           --------           --------
  Subtotal                                                            6,093              4,560              3,270             13,923
Real Estate--Mortgage                                                 4,384             39,845             12,869             57,098
Installment                                                           3,909             33,192              3,339             40,440
                                                                   --------           --------           --------           --------
  Total                                                            $ 54,431           $103,863           $ 24,853           $183,247
                                                                   ========           ========           ========           ========

</TABLE>


Item IV:  Nonperforming Assets

The following table  summarizes the Company's  nonaccrual,  90 days or more past
due and restructured loans and other real estate owned:


                                                    December 31
                                      -----------------------------------------
                                       1996     1995     1994     1993     1992
                                      ------   ------   ------   ------   ------
Nonaccrual loans                      $4,968   $4,626   $  653   $1,019   $1,064
Accruing loans past due
  90 days or more                        600      224       46       64      145
Restructed performing loans            1,456     --       --       --       --
Other real estate owned                1,466       47     --       --        676
                                      ------   ------   ------   ------   ------
                                      $8,490   $4,897   $  699   $1,083   $1,885
                                      ======   ======   ======   ======   ======

                                       26

<PAGE>


The Company  generally places loans on nonaccrual  status and accrued but unpaid
interest  is  reversed  against  the  current  year's  income  when  interest or
principal  payments  become  90 days or more  past due  unless  the  outstanding
principal and interest is adequately  secured and, in the opinion of Management,
is deemed in the process of collection.  Interest income on nonaccrual  loans is
recorded on a cash basis.  Payments may be treated as interest  income or return
of principal depending upon Management's opinion of the ultimate risk of loss on
the  individual  loan.  Cash  payments  are  treated as  interest  income  where
Management  believes  the  remaining  principal  balance  is fully  collectible.
Additional loans not 90 days past due may also be placed on nonaccrual status if
Management  reasonably believes the borrower will not be able to comply with the
contractual  loan repayment  terms and collection of principal or interest is in
question.

Interest income of loans on nonaccrual status during the year ended December 31,
1996,  that would have been  recognized  during  that same year if the loans had
been current in accordance with their original terms was approximately $497,000.
In the prior years of 1995, 1994, 1993 and 1992 the amounts were not material.

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, loans on nonaccrual status and restructured loans.  Nonperforming loans
on December 31, 1996 amounted to $8,220,000. As of December 31, 1995, such loans
were  $4,850,000.  Included in these totals are loans  secured by first deeds of
trust on real property  totaling  $3,626,000 in 1996 and $3,286,000 in 1995. The
reason for the  increase is the  purchased  portfolio  of the lease  receivables
discussed  below,  a newly  restructured  commercial  real  estate  loan and two
agricultural real estate properties acquired through foreclosure.

In late 1995, a $3.4 million  commercial real estate development loan was placed
on  non-accrual  status  due to  restructuring  of the loan and is  included  in
nonperforming loans for both years.

The Bank  purchased a portfolio of lease  receivables in 1994. The company which
packages  and sells these leases to  financial  institutions  filed a Chapter 11
reorganization in April 1996 and its chief financial officer has been charged by
the Securities and Exchange  Commission with  participating in securities fraud.
More than 360 banks nationwide had acquired similar lease receivable  contracts.
The Bank has $1,281,000 of these leases on nonaccrual  status as of December 31,
1996. The Bank has retained  counsel jointly with other  California banks and is
monitoring  its position to ascertain the extent of loss the Bank may incur.  As
of December 31, 1996,  specific  reserves of $385,000 have been  established for
this portfolio.  As of February 12, 1997, the Bank signed a settlement agreement
in regards to this portfolio of leases that  established the projected  recovery
rate at 78.5% or approximately $1,006,000.

The Bank closely  monitors its loans  classified by the regulatory  agencies and
such loans totaled $10,239,000 at December 31, 1996.

Except for loans which are disclosed  above,  there are no assets as of December
31, 1996,  where known  information  about possible  credit problems of borrower
causes  Management  to have serious  doubts as to the ability of the borrower to
comply with the present loan repayment terms and which may become  nonperforming
assets.  Given the magnitude of the Company's  loan  portfolio,  however,  it is
always  possible that current  credit  problems may exist that may not have been
discovered by management.

At December 31, 1996, the Company had $1,466,000 in real estate acquired through
foreclosure.  At  December  31,  1995,  the  Company  had $47,000 in real estate
acquired  through  foreclosure.  The increase was due to the  foreclosure on two
agricultural  properties in late 1996.  Current  projections  are that these two
properties will be sold in 1997.


                                      27

<PAGE>



<TABLE>
Reconciliation of allowance for possible loan losses
<CAPTION>

                                                                                        December 31,
                                                           -------------------------------------------------------------------------
                                                                                (Dollar amount in thousands)
                                                             1996            1995            1994            1993             1992
                                                           --------        --------        --------        --------        --------
<S>                                                        <C>             <C>             <C>             <C>             <C>     
Balance at beginning of period                             $  1,701        $  1,621        $  1,747        $  1,616        $  1,699
Due to Acquisition of Thrift                                    148            --              --              --              --
Provision for Possible Loan Losses                            1,513             228            --               254             162
Charge-Offs
  Commercial, Financial, and Agricultural                       518             160             260             217             250
  Real Estate--Construction and
     Land Development                                          --              --              --              --              --
  Real Estate--Mortgage                                        --              --              --              --              --
  Installment Loans to Individuals                              140              63              42              83             109
                                                           --------        --------        --------        --------        --------
     Total Loans Charged Off                                    658             223             248             300             359
Recoveries
  Commercial, Financial, and Agricultural                        27              66              99             145              87
  Real Estate--Construction and
     Land Development                                          --              --                 8            --              --
  Real Estate--Mortgage                                        --              --              --              --              --
  Installment Loans to Individuals                               61               9              15              32              27
                                                           --------        --------        --------        --------        --------
     Total Recoveries                                            88              75             122             177             114
  Net Loans Charged Off                                         570             148           1,621             123             245
                                                           --------        --------        --------        --------        --------
Balance at End of Period                                   $  2,792        $  1,701        $  1,621        $  1,747        $  1,616
                                                           ========        ========        ========        ========        ========

Loans:
Average Loans Outstanding During Period,
  Gross                                                    $157,098        $120,620        $110,690        $102,236        $ 91,458
Total Loans at End of Period, Gross                        $183,247        $133,736        $113,600        $107,124        $ 97,335

Ratio of net charge-offs to average
  loans outstanding                                            0.36%           0.12%           0.12%           0.12%           0.27%

</TABLE>

                                       28

<PAGE>





                                       29

<PAGE>



The  provision  for loan losses  represents  Management's  determination  of the
amount  necessary to be added to the  allowance for loan losses to bring it to a
level which is considered adequate in relation to the risk of foreseeable losses
inherent in the loan portfolio.  Immediately  upon  determination  of a specific
loss in the portfolio, an adjustment to the loan loss reserve is made.

In making this  determination,  Management takes into  consideration the overall
growth  trend  in  the  loan  portfolio,   examinations   of  bank   supervisory
authorities,  internal and external credit  reviews,  prior loan loss experience
for the Company,  concentrations of credit risk, delinquency trends, general and
local economic  conditions and the interest rate  environment.  The normal risks
considered by Management with respect to real estate  construction loans include
fluctuations in real estate values,  the demand for housing and the availability
of permanent  financing in the Company's market area and the home buyers ability
to obtain  permanent  financing.  The normal risks considered by Management with
respect to real estate mortgage loans include  fluctuations in the value of real
estate.  The normal risks  considered by Management with respect to agricultural
loans  include  the  fluctuating  value of the  collateral,  changes  in weather
conditions and the  availability  of adequate  water  resources in the Company's
local market area.  Additionally,  the Company relies upon data obtained through
independent appraisals for significant properties in specific  identification of
loss exposure in nonperforming loans.

The allowance  for loan losses does not represent a specific  judgment that loan
charge-offs of that magnitude will necessarily occur. 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.

<TABLE>
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:

Allocation of the Allowance for Loan Losses
<CAPTION>
                                                                                    December 31
                                        --------------------------------------------------------------------------------------------
                                               1996              1995               1994               1993                1992
                                               ----              ----               ----               ----                ----
                                                                       (Dollar amounts in thousands)
                                         Amount     %      Amount      %      Amount      %      Amount        %      Amount    %
                                         ------     -      ------      -      ------      -      ------        -      ------    -
<S>                                     <C>         <C>    <C>         <C>    <C>         <C>    <C>         <C>    <C>         <C> 
Commercial, financial
  and agricultural                      $  840       39%   $  944       49%   $  898       49%   $  974       51%   $  835       59%
Real estate - constructio                1,421        8%      708        9%      218       10%      317        9%      305        7%
Real estate - mortgage                     219       31%     --         31%      376       31%      296       31%      275       22%
Installment                                312       22%       49       11%      129       10%      160        9%      201       12%
                                        ------   ------    ------   ------    ------   ------    ------   ------    ------   ------
   Total                                $2,792      100%   $1,701      100%   $1,621      100%   $1 747      100%   $1,616      100%
                                        ======   ======    ======   ======    ======   ======    ======   ======    ======   ======
</TABLE>


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  deferred  retirement  benefits  for
participating  board members.  The plan is informally linked with universal life
insurance policies totaling $3,839,000 for the salary continuation plan.

Other Interest-Bearing Assets
                                                     December 31
                                        ----------------------------------------
                                         1996      1995     1994    1993   1992
                                         ----      ----     ----    ----   ----
                                             (Dollar amounts in thousands)
Cash surrender value of life insurance  $3,134   $1,290   $  288   $  -    $  -
                                        ------   ------   ------   ------  -----


                                       30

<PAGE>


<TABLE>

Item V     Deposits

The following table sets forth the average balance and the average rate paid for
the major categories of deposits for the dates indicated:
<CAPTION>
                                                                              December 31
                                      ----------------------------------------------------------------------------------------------
                                                                    (Amounts in thousands except yield)
                                      Amount     Yield     Amount  Yield   Amount      Yield     Amount    Yield     Amount    Yield
                                      --------   -----   --------  ------   -------    ------  --------   ------   --------    -----
<S>                                   <C>        <C>     <C>       <C>     <C>       <C>       <C>         <C>     <C>         <C>
Noninterest-bearing demand deposits   $ 30,549     --    $ 26,478     --   $ 25,326     --     $ 22,913      --    $ 19,662      --
Interest-bearing demand deposits        29,376   0.91%     26,196  0.91%     25,126    0.94%     21,782    12.7%     19,341    2.03%
Savings deposits                       104,938   4.15%     91,509  4.60%     66,517    3.45%     52,385    2.81%     46,440    3.53%
Time deposits under $100,000            34,408   5.26%     19,073  4.84%     27,259    3.82%     24,048    3.86%     26,981    4.98%
Time deposits $100,000 or more           6,586   5.43%      6,358  5.17%      7,160    3.78%     10,148    3.77%     12,080    4.77%
                                      --------           --------          --------             --------             --------  
  Total deposits                      $205,857           $169,610          $151,388            $131,276             $124,504  
                                      ========           ========          ========            ========             ========  
</TABLE>



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, 1996 are summarized as follows:

                                   December 31, 1996
                                   -----------------
                                    (In thousands)
Remaining Maturity:
Three months or less                $    2,230
Over three through six months            2,150
Over six through twelve months             175
 Over twelve months                      2,055
                                    -----------
   Total                            $    6,610
                                    ==========


Item VI    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
                                          --------------------------
                                            1996    1995       1994
                                            ----    ----       ----
Return on average assets                    0.88%    0.18%     1.05%
Return on average equity                   11.05%    2.16%    12.81%
Dividend payout ratio                        .05%       -         -
Average equity to average assets            7.96%    8.33%     8.17%



Item VII  Short Term Borrowings

The Company has a loan with an unaffiliated  lender with an outstanding  balance
of $791,000 as of December 31, 1996.  The loan matures in July of 1998. The loan
was related to the cash portion of the purchase of the Thrift.

                                       31

<PAGE>



ITEM 2.                 PROPERTIES

The Bank

(1)     Main Office
The  Bank's  main  office is located  at 490 West  Olive  Avenue in Merced,  and
consists of a  single-story  building  with  approximately  5,600 square feet of
interior  floor  space.  This  building  was  constructed  in  1978 at a cost of
approximately  $400,000 and is situated on a lot of approximately  47,000 square
feet,  which the Bank  purchased in 1977 for  approximately  $186,000.  The site
contains 43 parking spaces and six drive-up lanes, and Management  believes that
this facility will be adequate to accommodate  the operations of this branch for
the foreseeable future.

(2)     Downtown Merced Branch
The Bank's  downtown Merced Branch is located at 606 West 19th Street in Merced.
In August 1991,  the Bank  entered into an 8-1/2 year lease with two  additional
five-year renewal options with a nonaffiliated  third party for the lease of the
facility.  The  facility  is  approximately  7,680  square  feet in size  and is
intended  to  accommodate  the  current  needs of the  existing  branch  and the
agriculture and  agriculture  real estate  departments.  The annual rental under
this lease is $69,120  for the first three  years and  increases  to $78,336 per
year for the remaining 5-1/2 years.  Leasehold improvements including remodeling
and redecorating were approximately  $235,000.  In conjunction with the plans to
move the administrative  facilities of the Company and Bank, as discussed below,
this branch will be relocated. Leasehold improvements will have been written off
and the Bank is  currently  seeking  possible  tenants for the  remainder of the
lease term.

(3)     Atwater Branch
On  October 5,  1981,  the Bank  opened a branch  office at 735  Bellevue  Road,
Atwater. The branch is located on a lot of approximately 40,000 square feet, for
which the Bank entered into a 35-year  ground lease with a  nonaffiliated  third
party,  commencing on October 5, 1981. The building contains approximately 6,000
square  feet  of  interior  floor  space,  and  was  built  at a  total  cost of
approximately  $500,000.  In  1994,  the  Bank  purchased  the  lot at a cost of
$316,000. Management of the Bank believes that this facility will be adequate to
accommodate  the  operations  of this branch for the  foreseeable  future.  This
office has been subsequently  remodeled and also accommodates the Company's data
processing  and  central  services  support  personnel   including  the  related
equipment. The data processing and central service support personnel and related
equipment will be relocated to the new facility in downtown Merced, as discussed
below.

(4)     Administrative Headquarters
On  August  22,  1986,  the  Bank  entered  into  an  eight-year  lease  with  a
nonaffiliated  third  party  for the  relocation  of the  Bank's  administrative
headquarters,  located at 1160 West Olive Avenue,  Suite A, in Merced. The lease
commenced on January 1, 1987 with one  eight-year  option to renew.  The monthly
rental  under the lease is $3,054 per month for the first three  years,  with an
annual  increase  of 3% for years  four,  five and six,  and an  increase  of 5%
annually for years seven and eight. The building  contains  approximately  3,000
square feet of interior floor space.  In 1995, the Bank extended its lease until
April 1, 1997. The facility also  accommodates  the staff of Capital West Group.
The  Company  plans  to move  the  personnel  at this  facility  to the new site
discussed below.

In  addition,  the Bank leased an  additional  1,375 square feet located at 1170
West Olive Avenue, Suite B in September 1990 for administrative  personnel.  The
Bank entered into a two-year  lease in April of 1992 for this facility at a cost
of $1,645 per month for the first year with a 5% increase  for the second  year.
In 1995,  the Bank  extended its lease until April 1, 1997.  This  facility also
accommodates  the staff of Capital  West Group.  The  Company  plans to move the
personnel at this facility to the new site discussed below.

The Company's  administrative  headquarters  are currently  located at 1160 West
Olive  Avenue,  Suite A, in  Merced,  California.  Effective  July 15,  1995 the
Company entered into an agreement to relocate its existing administrative office
and an existing branch in downtown Merced to a new facility in downtown  Merced.
Construction  began in the summer of 1996 and is expected to be complete in late
summer of 1997.  The estimated  construction  cost of the new 29,000 square foot
facility  including a parking  structure  is  estimated  at  approximately  $4.7
million.  In  conjunction  with the  construction  of the  facility,  the Merced
Redevelopment  Agency has provided the Company with an interest-free loan in the
amount of $3.0 million.  The loan matures on August 31, 1997. It is  anticipated
that upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender.

(5)     Real Estate Office
In September of 1992,  the Bank  relocated  its real estate  office to 1170 West
Olive  Avenue,  Suite I, in  Merced.  The Bank  entered  into a  two-year  lease
commencing  in October of 1992 with a  nonaffiliated  third  party at a cost per
month of $3,377.  In 1995,  the 

                                       32

<PAGE>



Bank extended its lease until April 1, 1997. The facility contains approximately
3,200  square feet of interior  floor  space.  It is the location for the Bank's
real estate department as well as centralized credit administration, credit card
services and the headquarters for MAID, the Bank's wholly owned subsidiary.  The
Company plans to move the  personnel at this facility to the new  administrative
site discussed above.

(6)     Los Banos Branch
On August 15, 1989,  the Bank opened a fourth branch office at 1341 East Pacheco
Boulevard,  Los Banos,  located in the new Canal Farm Shopping Center.  The Bank
entered into a five-year lease with a nonaffiliated  third party,  commencing on
August 1, 1989. In October of 1994, the Los Banos branch was relocated to 953 W.
Pacheco  Boulevard,  Los Banos.  The Bank entered  into a ten-year  lease with a
non-affiliated  third party on the  facility.  The new facility  contains  4,928
square feet of  interior  floor  space,  parking  facilities,  a walk-up ATM and
drive-up  facilities.  Remodeling and redecorating  expenses were  approximately
$355,000. Management believes that this facility will be adequate to accommodate
the operation of the branch for the foreseeable future.

(7)     Hilmar Branch
On November  15, 1993,  the Bank opened a fifth branch  office at 8019 N. Lander
Avenue, Hilmar. The building was purchased at a cost of $328,000 and consists of
a single story  building of  approximately  4,456 square feet of interior  floor
space. The site contains 22 parking spaces and a drive-up  facility.  Remodeling
and redecorating expenses were approximately  $53,000.  Management believes that
this facility will be adequate to  accommodate  the operation of this branch for
the foreseeable future.

(8)     Sonora Branch
On January 12, 1996, the Bank received  approval to open a full service  banking
facility at the Crossroads  Shopping  Center and entered into a five-year  lease
with a  non-affiliated  third party on January 12, 1996 for a 2,500  square foot
facility. The branch opened April 1, 1996. Management is currently reviewing its
options for relocating this branch to a larger facility.

(9)     Turlock Branch
On September 1, 1995,  the Bank opened a branch in Turlock,  California.  In May
1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road, Turlock.  The Bank
completed the construction of a permanent facility in February 1997 at a cost of
approximately  $694,000 and the branch was  subsequently  relocated there from a
temporary facility at the same location.

(10)    Modesto Branches
On January 24, 1996, the Bank received  approval to open a full service  banking
facility  in Modesto  and entered  into a ten-year  lease with a  non-affiliated
third party on December 2, 1996 for an approximately  5,413 square foot building
at 3508 McHenry Avenue,  Modesto. The branch opened for business on December 10,
1996. Management believes that this facility will be adequate to accommodate the
branch for the foreseeable future.

On September  26, 1996,  the Bank  received  approval to open a second branch in
Modesto and entered into a four-year lease with a non-affiliated  third party on
December 1, 1996 for an  approximately  8,208 square foot  building at 1003 12th
Street, Modesto. The branch opened for business on December 31, 1996. Management
believes  that  this  facility  will be  adequate  to  accommodate  the  banking
operation for the foreseeable future.

The Thrift
The Thrift currently  operates with four branch offices.  The main office is the
office in Turlock and the other branch  offices are located in Modesto,  Visalia
and Fresno.  All branch  offices are leased  facilities  with minimal  leasehold
improvements  which are  anticipated  to be  adequate  to serve the needs of the
Thrift in the foreseeable future.



                                       33

<PAGE>



ITEM 3.                  LEGAL PROCEEDINGS

As of December  31, 1996,  the  Company,  is not a party to, nor is any of their
property the subject of, any material  pending  legal  proceedings,  nor are any
such proceedings known to be contemplated by government authorities.

The Company is, however, also 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

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
1997 Proxy Statement titled "Security Ownership of Certain Beneficial Owners and
Management," which is incorporated herein by reference and was filed on or about
March 20, 1997.
                                     PART II

ITEM 5.                 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                        SHAREHOLDER MATTERS

For information concerning the market for the Company's common stock and related
shareholder  matters,  see  page  23 of the  Company's  1996  Annual  Report  to
Shareholders incorporated herein by reference.

ITEM 6.                 SELECTED FINANCIAL DATA

For selected consolidated  financial data concerning the Company, see page 24 of
the  Company's  1996  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 19  through 22 of the  Company's  1996  Annual  Report to
Shareholders incorporated herein by reference.

ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Audited Consolidated Balance Sheets as of December 31, 1996 and 1995 and Audited
Consolidated  Statements of Income,  Shareholders' Equity and Cash Flows for the
fiscal years ending December 31, 1996,  1995, and 1994 appear on pages 9 through
11 of the Company's 1996 Annual Report to  Shareholders  incorporated  herein by
reference.  Notes to the Consolidated  Financial  Statements  appear on pages 12
through 18 of the  Company's  1996 Annual  Report to  Shareholders  incorporated
herein by reference.  The Independent Auditors' Report appears on page 23 of the
Company's 1996 Annual Report to Shareholders incorporated herein by reference.

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.

                                    PART III

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As  permitted  by  Securities  and  Exchange  Commission   Regulation  14a,  the
information  called  for by this  item is  incorporated  by  reference  from the
section of the Company's 1997 Proxy  Statement  titled  "Election of Directors,"
which was filed on or about March 20, 1997.

                                       34

<PAGE>
ITEM 11.                EXECUTIVE COMPENSATION

As  permitted  by  Securities  and  Exchange  Commission   Regulation  14A,  the
information  called  for by this  item is  incorporated  by  reference  from the
section of the Company's 1997 Proxy Statement titled "Information  Pertaining to
Election of Directors," which was filed on or about March 20, 1997.

ITEM 12.                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                        MANAGEMENT

As  permitted  by  Securities  and  Exchange  Commission   Regulation  14A,  the
information  called  for by this  item is  incorporated  by  reference  from the
Company's 1997 Proxy Statement, which was filed on or about March 20, 1997.

ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As  permitted  by  Securities  and  Exchange  Commission   Regulation  14A,  the
information  called  for by this  item is  incorporated  by  reference  from the
Company's 1997 Proxy Statement, which was filed on or about March 20, 1997.

                                     PART IV

ITEM 14.                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 pages of the  Company's  Annual  Report to
    Shareholders  for the year ended December 31, 1996 listed,  are incorporated
    herein by reference in response to Item 8 of this report.


    Financial Statement Schedules:                                      Page
    -----------------------------                                       ----
    Independent Auditor's Report                                         23
    Consolidated Balance Sheets as of December 31, 1996 and              10
    1995
    Consolidated Statements of Income for the Years Ended                 9
    1996, 1995, and 1994
    Consolidated Statements of Shareholders' Equity for the              10
    Years Ended 1996, 1995, and 1994
    Consolidated Statements of Cash Flows for the Years Ended            11
    1996, 1995, and 1994
    Notes to Consolidated Financials                                     12


(b) Reports on Form 8-K
    There were no reports filed in the quarter ending  December 31, 1996 on Form
8-K.

                                       35

<PAGE>

<TABLE>
(c)  Exhibits
     The following is a list of all exhibits  required by Item 601 of Regulation
      S-K to be filed as part of this Form 10-K:

<CAPTION>

                                                                                            Sequentially
   Exhibit                                                                                    Numbered
    Number     Exhibit                                                                            Page
    ------     -------                                                                      ----------
<S>            <C>                                                                              <C>
     3.1       Articles of Incorporation (filed as Exhibit 3.1 of the Company's                 *
               September  30,  1996  Form  10Q  filed  with  the SEC on or about
               November 14, 1996).
     3.2       Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form            *
               10Q filed with the SEC on or about November 14, 1996).
      10       Employment Agreement between Thomas T. Hawker and Capital Corp.
     10.1      Administration Construction Agreement (filed as Exhibit 10.4 of the              *
               Company's 1995 Form 10K filed with the SEC on or about March 31,
               1996).
     10.2      Stock Option Plan (filed as Exhibit 10.6 of the Company's 1995 Form              *
               10K filed with the SEC on or about March 31, 1996).
     10.3      401(k) Plan (filed as Exhibit 10.7 of the Company's 1995 Form 10K                *
               filed with the SEC on or about March 31, 1996).
     10.4      Employee Stock Ownership Plan (filed as Exhibit 10.8 of the                      *
               Company's 1995 Form 10K filed with the SEC on or about March 31,
               1996).
      11       Statement  Regarding  the  Computation  of Earnings  Per Share is
               incorporated  herein by  reference  from Note 1 of the  Company's
               Consolidated Financial Statements.
      13       Annual Report to Security Holders.
      *        Denotes documents which have been incorporated by reference.
</TABLE>


(d) 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.


                                       36

<PAGE>



                                   SIGNATURES


Pursuant to the  requirements  of Section 13 of the  Securities  Exchange Act of
1934,  as  amended,  the Company has duly caused this report to be signed on its
behalf by the undersigned,  thereunto duly authorized, on the 25th day of March,
1997
                        CAPITAL CORP OF THE WEST

                        By:   /s/ THOMAS T. HAWKER
                           ----------------------------------------------
                             THOMAS T. HAWKER
                            (President and Chief Executive Officer
                             of Capital Corp of the West)


                        By:   /s/ JANEY E. BOYCE
                           ----------------------------------------------
                            JANEY E. BOYCE
                           (Senior Vice President and Chief Financial Officer
                            of Capital Corp of the West)


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

<CAPTION>
Signature                                            Capacity                        Date
---------                                            --------                        ----
<S>                                                  <C>                             <C>
/s/ JERRY E. CALLISTER                               Chairman of the                 March 25, 1997
-----------------------------------                  Board of Directors
JERRY E. CALLISTER     


/s/ HENRY DUPERTUIS                                  Director                        March 25, 1997
----------------------------------
HENRY DUPERTUIS


/s/ ROBERT E. HOLL                                   Director                        March 25, 1997
----------------------------------
ROBERT E. HOLL


/s/ BERTYL W. JOHNSON                                Director                        March 25, 1997
----------------------------------
BERTYL W. JOHNSON


/s/ DOROTHY L. BIZZINI                               Director                        March 25, 1997
----------------------------------
DOROTHY L. BIZZINI


/s/ LLOYD H. ALHEM                                   Director                        March 25, 1997
----------------------------------
LLOYD H. ALHEM


/s/ JAMES W. TOLLADAY                                Director                        March 25, 1997
----------------------------------
JAMES W. TOLLADAY


/s/ JACK F. CAUWELS                                  Director                        March 25, 1997
----------------------------------
JACK F. CAUWELS

                                       37

<PAGE>



/s/ THOMAS T. HAWKER                                 Director/CEO                    March 25, 1997
----------------------------------
THOMAS T. HAWKER


/s/ JOHN FAWCETT                                     Director                        March 25, 1997
----------------------------------
JOHN FAWCETT


/s/ TAPAN MONROE                                     Director                        March 25, 1997
----------------------------------
TAPAN MONROE


/s/ JANEY E. BOYCE                                   Chief Financial &               March 25, 1997
----------------------------------                   Accounting Officer
JANEY E. BOYCE                    

CAPITAL CORP OF THE WEST

</TABLE>

                                       38

<PAGE>





                              EMPLOYMENT AGREEMENT


DATE:             March 11, 1997

PARTIES:          CAPITAL CORP. OF THE WEST, a California Bank Holding
                  Company, hereinafter referred to as "Employer"; and

                  THOMAS T. HAWKER, herein after referred to as
                  "Employee".


RECITALS:

         1.       Employee is currently  employed as the Chief Executive Officer
                  of Employer  (previously known as County Bank) under a written
                  Employment  Agreement  which  will  expire  at  the  close  of
                  business on February 28, 1997.

         2.       The Parties desire to enter into a new Employment
                  Agreement ("Agreement") for the purpose of extending the
                  employment of Employee.



AGREEMENT:

         Employer   hereby  employs   Employee,   and  Employee  hereby  accepts
employment with Employer, upon the terms and conditions hereinafter set forth.

         1.  Duties.

         Employee  is hereby  employed  as the  President  and  Chief  Executive
Officer of Employer.  Employee  shall  perform the  customary  duties of a Chief
Executive  Officer of a  California  bank  holding  company,  including  but not
limited  to,  the   supervision  of  Employer's   business  and  all  subsidiary
corporations and businesses owned or related to Employer and such kindred duties
as may from time to time be  reasonably  requested  of  Employee by the Board of
Directors of  Employer.  As used herein the term  "business  of Employer"  shall
include the business of any of Employer's subsidiaries and related entities.


-1-
<PAGE>


         2.       Appointment to Board of Directors.

         Employer hereby agrees that Employee shall remain a member of the Board
of Directors of Employer for so long as Employee is elected to a position on the
board  by the  shareholders  of  Employer,  or  until  this  Agreement  has been
terminated.  During the period of Employee's election to the Board of Directors,
Employee  shall  serve  as a  member  of any or all  committees  to  which he is
appointed,  except the audit  committee.  Employee  also hereby agrees to accept
appointment  to other boards of  directors  and  committees  of  subsidiary  and
related  organizations  of Employer.  Employee  shall  fulfill all of Employee's
duties as a board and committee member without additional compensation. Upon the
termination of this Agreement by either Employee or Employer, Employee agrees to
immediately resign from the Board of Directors, from all committees and from all
corporate  offices  of  Employer  and from all of  Employer's  subsidiaries  and
related companies;  further,  all fringe benefits,  such as insurance,  shall be
terminated on the last day of service of Employee,  unless otherwise mandated by
the terms of this Agreement,  Employer's  personnel policy, or any other benefit
policies in effect at the time of such termination.

         3.  Term.

         This  Agreement  shall be  effective  for a period  of  forty-six  (46)
months.  It shall  commence  on March 1, 1997 and unless  sooner  terminated  as
provided herein shall end on December 31, 2000 ("Term").

         4.       Extent of Services.

         Employee  shall  donate his full time,  attention  and  energies to the
business of Employer, and shall not during the Term of this Agreement be engaged
in any other business activities, except personal investments, without the prior
written consent of Employer.


                                      - 2 -

<PAGE>



         5.       Regular Compensation.

         In  consideration  for the services  which  Employee is to render under
this  Agreement,  Employer  shall pay to Employee an initial base salary  ("Base
Salary") of One  Hundred  Fifty-one  Thousand  Two  Hundred  Fifty-nine  Dollars
($151,259.00)  per  year.  On July 1,  1997,  the Board of  Directors  agrees to
reevaluate  the Base  Salary,  and if the  earnings  are in line with  projected
budget figures and if the present concerns  regarding several large loans in the
troubled loan portfolio of County Bank are rectified to the  satisfaction of the
Board of Directors, the Base Salary shall be increased thereafter to One Hundred
Sixty-seven  Thousand  Dollars  ($167,000.00)  per year  (prorated  for  partial
years),  or it shall be  changed  to said  figure as soon after said date as the
Board of  Directors  is  satisfied  that the  troubled  loan  portfolio is at an
acceptable  level and the earnings of the corporation are in line with projected
budget  figures.  The  Base  Salary  shall  be  payable  to  Employee  in  equal
semi-monthly  installments  on the  fifteenth  and the last  working day of each
month  during the period of  employment,  prorated  for any  partial  employment
period. The Base Salary shall be subject to an annual economic adjustment on the
first day of each calendar year to reflect  changes in the cost of living in the
San Joaquin  Valley in an amount to be  determined  by the Board of Directors of
Employer.  Employer by its Board of Directors  and at its sole  discretion,  may
also  give  due  consideration  to the  question  of  salary  increases  on each
anniversary of the effective date of this Agreement.

         6.       Discretionary Incentive Compensation.

         Employee  shall be entitled to  participate  in any incentive  programs
which may be adopted from time to time by Employer for Employee. Amounts awarded
to Employee  under any said  incentive  program  shall be determined at the sole
discretion of Employer, including the vesting of any incentive awards.


                                      - 3 -

<PAGE>



         7.       Business Expenses.

         Employee shall be reimbursed for all ordinary and necessary, documented
expenses  reasonably  incurred  by Employee in  connection  with his  employment
associated  with managing the business of Employer and other  expenses which may
be authorized from time to time by the Board of Directors of Employer, including
expenses for club membership,  entertainment,  travel and similar items.  Travel
and other expenses for attendance at conventions and banking education  programs
that are approved by the Board of Directors  shall also be reimbursed.  Employer
will pay for or will reimburse  Employee for such expenses upon  presentation by
Employee from time to time of receipts evidencing such expenditures.

         8.       Automobile.

         Employer shall provide an automobile for the use of Employee.  Employer
shall pay all fuel,  operating,  maintenance and insurance costs associated with
such automobile. Employee shall be entitled to limited use of the automobile for
personal use, but shall primarily use it for business  purposes  associated with
his employment.

         9.       Vacation.

         During  each full year of  employment  Employee  shall be  entitled  to
annual  vacation  leave at full  salary at the  discretion  of  Employee as time
allows,   so  long  as  it  is   reasonable   and   does  not   jeopardize   his
responsibilities,  of sixteen  (16) days each year plus an  additional  four (4)
bonus  days if he  receives  a  "satisfactory"  or higher  rating on his  Annual
Employee Performance Evaluation; provided that Employee each calendar year shall
take as a portion of his vacation leave at least ten (10)  consecutive  business
days.

         Recognizing  that Employee  would like to receive  additional  vacation
time in the year 2,000, Employer and Employee agree to

                                      - 4 -

<PAGE>



enter into a separate incentive program whereby certain goals and objectives are
set for Employee.  If Employee  meets the  objectives  and goals of said plan by
December 31, 1999,  Employee shall be entitled to an additional 2 weeks vacation
in the year 2,000, which additional vacation time must be taken in said year.

    10.           Disability.

         If Employee  becomes  permanently  disabled  during the Term because of
sickness,  physical  or mental  disability,  so that he is unable to perform his
full duties  hereunder,  Employer  agrees to continue the salary (i) ninety (90)
days from commencement of the disability,  (ii) until Employee is able to return
to work,  (iii) until payments  commence under any disability  insurance  policy
obtained by Employee,  or (iv) when any payments  commence to Employee under the
separate Salary Continuation  Agreement executed between the parties,  whichever
is less.

    11.           Insurance.

         Employer shall provide to Employee,  his wife and qualifying  children,
during  the Term at  Employer's  expense  the  same  medical  insurance,  dental
insurance,  and disability  insurance coverage,  if any, which may be offered to
Employer's other full-time employees under any benefit plans as may be in effect
from time to time.

         It is acknowledged that Employee  currently has a $400,000.00 term life
insurance  policy  with Sun Life  Insurance  Company,  Employer  has  under  its
previous employment agreement with Employee given Employee extra compensation to
cover the premiums on said policy.  Under this agreement  Employee's Base Salary
has been increased so that Employee may determine  whether to maintain said life
insurance  policy  and use the  increase  in Base  Salary to cover the  premiums
thereon,  or to discontinue or alter said policy and to use the additional  Base
Salary for other  purposes.  Employer shall have no duty under this agreement to
give Employee any extra

                                      - 5 -

<PAGE>



compensation to cover life insurance  premiums or to maintain any life insurance
on Employee's life.

    12.           Stock Options and Bonuses.

         As additional consideration for entering into this Employment Agreement
Employer  hereby  grants to Employee a stock option to purchase  8,000 shares of
Employer's  stock at a price equal to the fair market value of such stock on the
date of execution of this agreement.  The stock purchase rights under said stock
option shall vest in Employee as follows:

                  (1) Twenty percent (20%) upon commencement of
                      the Employment Term under this Agreement;

                  (2) Additional twenty percent (20%) on January 1, 1998;

                  (3) Additional twenty percent (20%) on January 1, 1999;

                  (4) Additional twenty percent (20%) on January 1, 2000;

                  (5) Additional twenty percent (20%) on January 1, 2001.

         Said vesting shall occur only if Employee is still employed by Employer
under the terms of this Agreement on the date said vesting is to occur.

         Employer may consider  granting  additional  stock  options and bonuses
from time to time during the term, but shall not be obligated to do so.

    13.           Retirement Plan.

          Employer  shall be entitled to  participate  in any  retirement  plans
offered to other  employees  of Employer  such as  Employee's  participation  in
Employer's 401K plan and  participation  in Employer's Stock Option Plan (ESOP).
In addition it is  acknowledged  that  Employer and Employee have entered into a
separate "Amended and Restated Salary Continuation  Agreement" dated October 30,
1996, which provides for gradual vesting of retirement

                                      - 6 -

<PAGE>



benefits  to Employee  based on his  continued  employment  with  Employer.  The
Parties to this agreement  understand that the participation by Employee in said
salary continuation plan does not assure in any way, or guarantee, the continued
employment of Employee under this Employment Agreement.

    14.           Printed Material.

         All written,  printed,  visual or audio  materials  used by Employee in
performing  duties  for  Employer,  other  than  Employee's  personal  notes and
diaries,  are and shall  remain the property of Employer.  Upon  termination  of
employment on any basis, Employee shall return all such materials to Employer.

    15.           Disclosure of Information.

         In the course of employment,  Employee may have access to  confidential
information  and  trade  secrets  relating  to  Employer's  business.  Except as
required in the course of employment by Employer,  Employee  shall not,  without
Employer's prior written consent,  directly or indirectly disclose to anyone any
confidential  information  relating to Employer  or any  financial  information,
trade  secrets  or  "know-how"  which is  germane  to  Employer's  business  and
operations.  Employee recognizes and acknowledges that any financial information
concerning  any of  Employer's  customers,  as it may  exist  from to  time,  is
strictly confidential and is a valuable,  special and unique asset of Employer's
business.  Employee  shall  not,  either  before  or after  termination  of this
Agreement,  disclose to anyone said financial information,  or any part thereof,
for any reason or purposes whatsoever.

    16.           Prohibited Activities and Investments.

         During the Term of this  Agreement,  Employee  shall not,  directly  or
indirectly,  either as an  employee,  employer,  consultant,  agent,  principal,
partner, principal stockholder (i.e., ten percent or more) or corporate officer,
directly, or in any

                                      - 7 -

<PAGE>



other  individual  or  representative  capacity,  engage or  participate  in any
banking business competitive with that of Employer.

    17.           Surety Bond.

         Employee  agrees to furnish  all  information  and take any other steps
necessary to enable Employer to obtain and maintain a fidelity bond  conditional
on the  rendering of a true account by Employee of all moneys,  goods,  or other
property  which may come into the custody,  charge,  or  possession  of Employee
during the Term of Employee's  employment.  The surety company issuing such bond
and the amount of the bond must be acceptable  to Employer.  All premiums on the
bond are to be paid by Employer.  If Employee  cannot  personally  qualify for a
surety bond at any time during the Term of this  Agreement,  Employer shall have
the option to terminate this Agreement immediately and said termination shall be
deemed to be a termination for cause.

    18.           Moral Conduct.

         Employee  agrees to  conduct  himself  at all times  with due regard to
public  conventions  and  morals  and to abide by and  reflect  in his  personal
actions all of the "core values" adopted by Employer and its  subsidiaries  from
time to time.  Employee  further  agrees  not to do or commit  any act that will
reasonably  tend to degrade him or to bring him into public hatred,  contempt or
ridicule, or that will reasonably tend to shock or offend any community in which
Employer engages in business,  or to prejudice  Employer or the banking industry
in general.

    19.           Termination of Agreement.

         (a)      Termination for Cause.

         Employer  reserves the right to terminate  this  Agreement "for cause."
Termination  for cause  shall  include  termination  because of  Employee's  (i)
personal dishonesty, (ii) incompetence, (iii) will-

                                      - 8 -

<PAGE>



ful misconduct,  (iv) breach of fiduciary duty involving  personal  profit,  (v)
material breach of any of the terms of this Agreement,  (vi) intentional failure
to  perform  assigned  duties,  (vii)  willful  violation  of any  law,  rule or
regulation  (other  than  traffic  violations  or  similar  offenses)  or  final
cease-and-desist order, or (viii) the willful or permanent breach by Employee of
any  obligations  owed to Employer  pursuant  to this  Agreement.  In  addition,
Employer reserves the right to terminate this Agreement "for cause" in the event
that actions are effected by any regulatory agency having jurisdiction to remove
or suspend  Employee from office,  or upon the directive of any such  regulatory
agency that  Employer  must  remove  Employee  as its Chief  Executive  Officer,
regardless of whether such directive is given orally or in writing.


         (b)      Statutory Grounds for Termination.

         Employee's  employment under this Agreement shall terminate immediately
upon the occurrence of any of the following  events,  which events are described
in sections 2920 and 2921 of the California Labor Code:

                  (1) The occurrence of circumstances that make it impossible or
impractical for the business of Employer to be continued.

                  (2)  The death of Employee.

                  (3) The loss of  Employee  of legal  capacity.  This  does not
affect Employee's rights under Section 10 of this Agreement.

                  (4)  The loss by Employer of legal capacity to contract.

                  (5)  Subject to Section 10 of this  Agreement,  the  continued
incapacity  on the part of  Employee  under  this  Agreement,  unless  waived by
Employer.


                                      - 9 -

<PAGE>



         (c)      Termination for Bankruptcy.

         This  Agreement  may be terminated  immediately  be either party at the
option of either party and without prejudice to any other remedy to which either
party may be entitled at law, in equity or under this Agreement if either party:

                  (1)      Files a petition in bankruptcy court or is adjudi-
cated a bankrupt;

                  (2)      Institutes or suffers to be instituted against it or
him any procedure in bankruptcy court for reorganization or re-
arrangement of his financial affairs;

                  (3)      Has a receiver of his assets or property appointed
because of insolvency; or

                  (4)      Makes a general assignment for the benefit of credi-
tors.

         (d)      Automatic Termination in the Event of Acquisition of
                  Employer.

         This Agreement shall  automatically  terminate upon the consummation of
any event by which  substantially all of the stock and/or assets of Employer are
acquired by a person,  a group of  persons,  a  financial  institution  or other
entity.

         At  the  closing  of  such  acquisition,   Employee  shall  receive  an
acquisition  payment  ("Acquisition  Payment")  in the  amount  equal to six (6)
month's Base Salary at the then current rate of compensation.

         In the event of any such  acquisition  of Employer  and the  consequent
automatic  termination  of  this  Agreement,  no  provision  contained  in  this
Agreement should be construed to prevent Employee

                                     - 10 -

<PAGE>



from negotiating a new employment agreement with either Employer or the acquiror
of Employer, should the parties desire to do so.

         It  is  mutually  agreed  by  the  parties  that  the  above-referenced
Acquisition  Payment shall be received by Employee in lieu of any and all claims
and/or  damages  which may be sustained by Employee  due to the  acquisition  of
Employer and the  termination  of Employee's  employment and will be accepted by
Employee in full satisfaction of all such claims and damages.

    20.           Severance Pay.

         Upon early  termination of this Agreement (i) pursuant to Section 19(d)
of this  Agreement,  (ii) by  Employee  for any reason,  (iii) by Employer  "for
cause"  (pursuant to Section  19(a) of this  Agreement),  or (iv) because of the
death,  incapacity  or disability  of Employee,  Employee  shall not receive any
Severance  Payment  of any  sort or any  bonus  for the  calendar  year in which
termination is effected.

         The parties  acknowledge  that it would be difficult  to determine  the
damages which  Employee would suffer if his employment is terminated by Employer
without  cause or on  statutory  grounds.  Therefore  it is agreed  that if this
agreement is  terminated  early by Employer on any basis other than those listed
in the first  paragraph of this Section 20, then  Employee  shall be entitled to
receive a cash payment  ("Severance  Payment") in the amount equal to one year's
Base Salary at the then current rate of  compensation.  It is mutually agreed by
the parties that the payment of the cash Severance Payment set forth above shall
be received by Employee in lieu of any and all claims  and/or  damages which may
be sustained by Employee by reason of his early termination and will be accepted
by Employee in full  satisfaction  of all such claims and damages and as payment
in full  for  all  benefits  received  from  Employee's  services.  The  parties
understand  and agree  under no  circumstances  would  Employee  be  entitled to
receive both the Acquisition Payment and the Severance Payment.

                                     - 11 -

<PAGE>




    21.           Notices.

         Any notice to Employer required or permitted under this Agreement shall
be given in writing to  Employer,  either by  personal  service or by  certified
mail,  postage  prepaid,  addressed to the chairman of the Board of Directors of
Employer at its then  principal  place of business.  Any such notice to Employee
shall be given in like manner and, if mailed,  shall be addressed to Employee at
Employee's  home  address  then shown on  Employer's  files.  For the purpose of
determining  compliance with any time limit in this Agreement, a notice shall be
deemed to have been duly given (a) on the date of service,  if personally served
on the party to whom notice is to be given,  or (b) the fifth business day after
mailing,  if  mailed to the  party to whom  notice is to be given in the  manner
provided in this Section.

    22.           Nonassignability.

         Neither this  Agreement  nor any right or interest  hereunder  shall be
assignable  by Employee,  his  beneficiaries  or legal  representatives  without
Employer's  prior  written  consent;  provided,  however,  that  nothing in this
Section 22 shall preclude (i) Employee from designating a beneficiary to receive
any  benefit   payable   hereunder  upon  his  death,  or  (ii)  the  executors,
administrators,  or other legal  representatives  of Employee or his estate from
assigning any rights hereunder to the person or persons entitled thereto.

    23.           No Attachment.

         Except as  required  by law,  no right to receive  payments  under this
Agreement  shall be  subject to  anticipation,  commutation,  alienation,  sale,
assignment,  encumbrance,  charge,  pledge  or  hypothecation  or to  execution,
attachment,  levy or similar  process or assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.

                                     - 12 -

<PAGE>




    24.           Binding Effect.

         This  Agreement  shall be binding  upon,  and inure to the  benefit of,
Employee and Employer and their respective permitted successors and assigns.

    25.           Modification and Waiver.

         (a)      Amendment of Agreement

         This  Agreement may not be modified or amended  except by an instrument
in writing signed by the parties hereto.

         (b)      Waiver.

         No term or  condition  of this  Agreement  shall be deemed to have been
waived nor shall there be any estoppel  against the enforcement of any provision
of this Agreement,  except by written  instrument of the party charged with such
waiver or estoppel.  No such written waiver shall be deemed a continuing  waiver
unless specifically  stated therein,  and each such waiver shall operate only as
to the  specific  term or  condition  for the future or as to any act other than
that  specifically  waived. No delay in exercising any rights shall be construed
as a  waiver,  nor shall a waiver on one  occasion  operate  as a waiver of such
right on any future occasion.

    26.           Entire Agreement.

         This Agreement supersedes any and all other agreements,  either oral or
in writing,  between  the  parties  hereto  with  respect to the  employment  of
Employee  by  Employer.  This  Agreement  contains  all  of  the  covenants  and
agreements  between the parties  with respect to such  employment  in any manner
whatsoever.  Each party to this Agreement  acknowledges that no representations,
inducements,  promises or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not

                                     - 13 -

<PAGE>



embodied herein, and that no other agreement, statement or promise not contained
in this Agreement shall be valid and binding.

    27.           Partial Invalidity.

         If any  provision  in this  Agreement  is held by a court of  competent
jurisdiction  to be invalid,  void or  unenforceable,  the remaining  provisions
shall nevertheless  continue in full force without being impaired or invalidated
in any way.

    28.           Governing Law.

         This Agreement shall be governed by, and construed in accordance  with,
the laws of the State of California.

    29.           Injunctive Relief.

         Employer  and  Employee  acknowledge  and agree that the services to be
performed under this Agreement are of a special, unique, unusual,  extraordinary
and  intellectual  character which give them a peculiar value, the loss of which
cannot be reasonably or adequately  compensated  in damages in an action at law.
Employer and Employee therefore  expressly agree that Employer and Employee,  in
addition  to any other  rights or  remedies  which  Employer  and  Employee  may
possess, shall be entitled to injunctive and other equitable relief to prevent a
breach of this Agreement by Employee and Employer.

         30.      Bank Regulatory Agencies.

         The  obligations  and rights of the  parties  hereunder  are  expressly
conditioned  upon the approval or  non-disapproval  of (i) this Agreement and/or
(ii)  Employee,  in the event such  approvals  are  required,  by those  banking
regulatory  agencies  which  have  jurisdiction  over  Employer  or  any  of its
subsidiaries.


                                     - 14 -

<PAGE>


         31.    Duplicate Originals.

         This  Agreement  may  be  executed   simultaneously   in  one  or  more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together constitute one and the same instrument.

         IN  WITNESS  WHEREOF,  the  parties  hereto  have  duly  executed  this
Agreement on the day and year first above written.


                           EMPLOYER:            CAPITAL CORP OF THE WEST

                                                By: __________________________
                                                       Jerry E. Callister
                                                    Chairperson of the Board





                           EMPLOYEE:               ___________________________
                                                        Thomas T. Hawker




                                     - 15 -

<PAGE>


<TABLE>
CAPITAL CORP of the WEST
CONSOLIDATED STATEMENTS OF INCOME

<CAPTION>
                                                                                                            Years Ended December 31,
                                                                                  --------------------------------------------------
                                                                                          1996              1995               1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>               <C>                <C>         
Interest  income:
Interest  and fees on loans                                                       $ 16,302,000      $ 12,969,000       $ 10,795,000
Interest on deposits with other financial  institutions                                127,000              --                 --
Interest on investment  securities held to maturity:
  Taxable                                                                               60,000            34,000            413,000
  Non-taxable                                                                             --                --              272,000
Interest on  investment  securities  available for sale:
  Taxable                                                                            2,409,000         2,185,000          1,066,000
  Non-taxable                                                                          246,000           327,000               --   
  Interest on federal funds sold                                                       207,000           358,000            261,000
------------------------------------------------------------------------------------------------------------------------------------
Total interest income                                                               19,351,000        15,873,000         12,807,000
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Negotiable  orders of withdrawal                                                       268,000           239,000            237,000
 Savings                                                                             4,350,000         4,213,000          2,298,000
Time, under $100,000                                                                 1,808,000           950,000          1,040,000
Time,  $100,000 and over                                                               359.000           304,000            272,000
------------------------------------------------------------------------------------------------------------------------------------
Total  interest  on deposits                                                         6,785,000         5,706,000          3,847,000
------------------------------------------------------------------------------------------------------------------------------------
Other                                                                                   80,000            11,000              3,000
------------------------------------------------------------------------------------------------------------------------------------
  Total interest expense                                                             6,865,000         5,717,000          3,850,000
------------------------------------------------------------------------------------------------------------------------------------
 Net interest income                                                                12,486,000        10,156,000          8,957,000
------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses                                                            1,513,000           228,000               --   
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses                                                                     10,973,000         9,928,000          8,957,000
------------------------------------------------------------------------------------------------------------------------------------
Other income (loss):
 Service charges on
deposit  accounts                                                                    1,274,000           920,000            900,000
  Income  from real estate held for sale or
development                                                                            508,000            88,000             14,000
 Provision for loss on real estate held for sale or
development                                                                               --          (2,881,000)          (798,000)
Gain on sale of premises and equipment                                                    --                --              277,000
Other                                                                                1,153,000           649,000            412,000
------------------------------------------------------------------------------------------------------------------------------------
Total  other  income  (loss)                                                         2,935,000        (1,224,000)           805,000
------------------------------------------------------------------------------------------------------------------------------------
Other expenses:
 Salaries  and  related  benefits                                                    5,283,000         4,161,000          3,540,000
 Premises  and occupancy                                                               835,000           612,000            587,000
 Equipment                                                                           1,022,000           789,000            534,000
Bank assessments                                                                        48,000           183,000            394,000
  Professional  fees                                                                   755,000           404,000            299,000
Supplies                                                                               292,000           234,000            124,000
  Marketing                                                                            370,000           212,000            250,000
 Other                                                                               2,131,000         1,551,000          1,195,000
------------------------------------------------------------------------------------------------------------------------------------
 Total other  expenses                                                              10,736,000         8,146,000          6,923,000
------------------------------------------------------------------------------------------------------------------------------------
 Income before  income taxes                                                         3,172,000           558,000          2,839,000
  Provision for income taxes                                                         1,163,000           223,000          1,103,000
------------------------------------------------------------------------------------------------------------------------------------
 Net income                                                                       $  2,009,000      $    335,000       $  1,736,000
------------------------------------------------------------------------------------------------------------------------------------
Net income per share                                                              $       1.27      $        .24       $       1.24
====================================================================================================================================
<FN>
See accompanying notes to Consolidated Financial Statements. 
</FN>
</TABLE>

                                                                 9
<PAGE>


<TABLE>

CAPITAL CORP of the WEST
CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                                           December 31,
                                                                                                    1996                     1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                      <C>          
Assets
Cash and noninterest-bearing deposits in other  banks                                         $  12,982,000            $  18,967,000
Federal funds sold                                                                                3,735,000                     --  
Time deposits at other financial institutions                                                     3,101,000                     --  
Investment securities available for sale at fair value                                           43,378,000               45,302,000
Mortgage loans held for sale                                                                        880,000                  501,000
Loans, net                                                                                      180,455,000              132,035,000
Interest receivable                                                                               1,879,000                1,860,000
Premises and equipment, net                                                                       6,266,000                4,138,000
Other assets                                                                                     13,313,000                6,230,000
------------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                  $ 265,989,000            $ 209,033,000
====================================================================================================================================
Liabilities
Deposits:
Noninterest-bearing demand                                                                    $  39,157,000            $  39,726,000
Negotiable orders of withdrawal                                                                  34,303,000               29,019,000
Savings                                                                                         111,285,000               95,537,000
Time, under $100,000                                                                             46,990,000               21,917,000
Time, $100,000  and  over                                                                         6,610,000                6,402,000
------------------------------------------------------------------------------------------------------------------------------------
     Total  deposits                                                                            238,345,000              192,601,000
------------------------------------------------------------------------------------------------------------------------------------
Accrued interest, taxes and other liabilities                                                     6,670,000                1,339,000
------------------------------------------------------------------------------------------------------------------------------------
Total  liabilities                                                                              245,015,000              193,940,000
------------------------------------------------------------------------------------------------------------------------------------
Shareholders'  equity
Preferred stock, no par value; 10,000,000 shares authorized;
  none outstanding                                                                                     --                       --
Common stock, no par value; 20,000,000 shares authorized;
1,734,474 and 1,334,956 shares issued and outstanding                                            15,321,000                9,870,000
Retained earnings                                                                                 5,722,000                4,911,000
Investment securities  unrealized  (losses)  gains,  net                                            (69,000)                 312,000
------------------------------------------------------------------------------------------------------------------------------------
Total  shareholders' equity                                                                      20,974,000               15,093,000
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                                    $ 265,989,000            $ 209,033,000
====================================================================================================================================
<FN>
See accompanying notes to Consolidated Financial Statements 
</FN>
</TABLE>

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF  
SHAREHOLDERS'  EQUITY                                     Common  Stock 
                                                       -----------------------------------------------------------------------------
                                                            Number                             Unrealized  
                                                            of                            Retained  Securities Gains 
                                                            Shares         Amount         Earnings       (Losses), net      Total 
------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1993                                1,002,360   $  5,477,000   $  7,156,000    $       --      $ 12,633,000
====================================================================================================================================
<S>                                                           <C>          <C>            <C>                                <C>    
15% stock dividend, including payment
  for fractional shares                                       149,966      1,875,000      1,880,000)           --            (5,000)
Exercise of stock  options                                      7,560         73,000           --              --            73,000
Investment securities  unrealized  losses,
  net of tax  effect of $227,000                                 --             --             --          (355,000)       (355,000)
Net  income                                                      --             --        1,736,000            --         1,736,000
------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1994                                1,159,886      7,425,000      7,012,000        (355,000)     14,082,000
====================================================================================================================================
15% stock dividend, including payment
  for fractional shares                                       173,570      2,430,000     (2,436,000)           --            (6,000)
Exercise of stock options                                       1,500         15,000           --              --            15,000
Net change in fair value of investment
 securities, net of tax effect of $427,000                       --             --             --           667,000         667,000
Net income                                                       --             --          335,000            --           335,000
------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1995                                1,334,956      9,870,000      4,911,000         312,000      15,093,000
====================================================================================================================================
5% stock dividend and $.05 per share cash dividend,
 including  payment  for  fractional  shares                   82,384      1,112,000     (1,198,000)           --           (86,000)
Exercise of stock options                                      20,739        208,000           --              --           208,000
Issuance of shares pursuant to 401K & ESOP plans               11,817        162,000           --              --           162,000
Acquisition of Town & Country Finance & Thrift                284,578      3,969,000           --              --         3,969,000
Change in fair value of investment
 securities, net of tax effect of ($247,000)                     --             --             --          (381,000)       (381,000)
Net Income                                                       --             --        2,009,000            --         2,009,000
------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1996                                1,734,474   $ 15,321,000   $  5,722,000    $    (69,000)   $ 20,974,000
====================================================================================================================================
<FN>
See accompanying notes to Consolidated Financial Statements. 
</FN>
</TABLE>

                                                            10

<PAGE>

<TABLE>
CAPITAL CORP of the WEST
CONSOLIDATED STATEMENTS
OF CASH FLOWS
<CAPTION>
                                                                                                 Years Ended December 31,
                                                                               -----------------------------------------------------
                                                                                     1996                1995                1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>                 <C>         
Operating  activities:
Net income                                                                     $  2,009,000        $    335,000        $  1,736,000
Adjustments to reconcile  net income to net cash (used)
      provided by  operating  activities:
Provision for loan losses                                                         1,513,000             228,000                --
Depreciation,  amortization  and accretion, net                                   1,023,000             860,000             707,000
Provision for deferred income taxes                                                (327,000)         (1,191,000)           (235,000)
Gain on sale of premises and equipment                                                 --                  --              (277,000)
Gain on sale of real estate held for sale                                          (348,000)               --                  --
Net increase in interest receivable
      and other assets                                                           (5,044,000)         (3,164,000)         (1,015,000)
Net decrease (increase) in mortgage loans held for sale                            (376,000)          2,241,000          (1,583,000)
Net increase in deferred loan fees                                                   54,000              31,000              63,000
Net increase (decrease) in accrued interest payable and
      other liabilities                                                           1,330,000             499,000             (82,000)
Provision for loss on real estate held for
  sale or development                                                                  --             2,881,000             798,000
Net cash  (used)  provided  by  operating  activities                              (166,000)          2,720,000             112,000
Investing  activities:
Investment  security  purchases                                                 (26,993,000)        (26,622,000)        (23,494,000)
Proceeds  from  maturities  of  investment  securities                           17,599,000          15,022,000           9,578,000
Proceeds from sales of investment  securities                                    14,590,000           3,012,000                --
Proceeds from sales of commercial and real estate loans                           3,230,000           1,037,000           1,691,000
Net increase in loans                                                           (35,017,000)        (21,379,000)         (8,345,000)
Purchases of premises and equipment                                              (2,768,000)         (1,719,000)         (1,501,000)
Proceeds  from sales of premises and  equipment                                       9,000              71,000             739,000
Construction of real estate held for sale
  or development                                                                   (417,000)           (622,000)           (916,000)
Proceeds from sale of real estate held for sale
 or development                                                                     765,000           1,547,000           1,346,000
Purchase  of  subsidiary                                                           (183,000)               --                  --
------------------------------------------------------------------------------------------------------------------------------------
Net  cash  used  by  investing activities                                       (29,185,000)        (29,653,000)        (20,902,000)
------------------------------------------------------------------------------------------------------------------------------------
Financing  activities:
Net increase in demand, NOW and savings deposits                                 13,812,000          26,004,000          30,351,000
Net increase (decrease) in certificates of deposit                                9,109,000           3,397,000          (8,882,000)
Net increase in other borrowings                                                  3,896,000                --               107,000
Issued shares for benefit plan purchases                                            162,000                --                  --
Exercise of stock options                                                           208,000              15,000              73,000
Fractional  shares from stock  dividends                                            (86,000)             (6,000)             (5,000)
------------------------------------------------------------------------------------------------------------------------------------
Net cash  provided by financing  activities                                      27,101,000          29,410,000          21,644,000
------------------------------------------------------------------------------------------------------------------------------------
Net(decrease) increase in cash and cash equivalents                              (2,250,000)          2,477,000             854,000
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                                   18,967,000          16,490,000          15,636,000
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                       $ 16,717,000        $ 18,967,000          16,490,000
====================================================================================================================================
<FN>
See accompanying  notes to Consolidated Financial Statements
</FN>
</TABLE>

                                                                 11

<PAGE>

CAPITAL CORP of the WEST


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 
1996, 1995, 1994

NOTE 1. Summary of Significant  Accounting Policies Principles of Consolidation:
The  consolidated  financial  statements  of  Capital  Corp  of  the  West  (the
"Company")  include its subsidiaries,  County Bank (the "Bank"),  Town & Country
Finance and Thrift (the  "Thrift")  and Capital West Group.  Effective  June 28,
1996,  the Company  consummated  the  purchase of the  Thrift.  The  transaction
resulted in 284,578 shares of stock being issued and $1,493,000  being disbursed
to the shareholders of the Thrift. The total purchase price was $5,823,000.  The
Thrift is licensed by the California Department of Corporations as an industrial
loan  company,  also  known  as a thrift  and loan  company.  The  purchase  was
accounted  for under the  purchase  method of  accounting.  All of the  Thrift's
operations  since  June 28,  1996  have  been  included  in  these  consolidated
financial statements.

A summary of the net assets acquired is set forth in the following table:

Assets  Acquired:
Cash & cash  equivalents                                             $ 1,310,000
Time deposits at other financial  institutions                         6,554,000
Loans,  net                                                           18,203,000
Interest  receivable                                                      60,000
Premises and equipment                                                   212,000
Other assets                                                             114,000
Total assets acquired                                                $26,453,000
--------------------------------------------------------------------------------
Liabilities Assumed:
Deposits                                                             $22,823,000
Other liabilities                                                        105,000
Total liabilities  assumed                                            22,928,000
 Net Assets Acquired                                                 $ 3,525,000
--------------------------------------------------------------------------------


   The total  purchase  price was  allocated to the  tangible  and  identifiable
intangible  assets and liabilities of the Thrift based on their  respective fair
values and the remainder was  allocated to goodwill.  The following  adjustments
were made to allocate  the purchase  price of the Thrift:  equity of the Thrift
$3,525,000;  fair value adjustments to loans ($185,000); core deposit intangible
$460,000;  and goodwill  $2,023,000.  The fair value  adjustments  are amortized
against  (accreted to) net income as follows:  fair value adjustment to loans: 3
years; core deposit intangible:  10 years;  goodwill: 18 years. The amortization
of goodwill  will be evaluated  periodically  in  accordance  with  Statement of
Financial  Accounting  Standards  No.121,   Accounting  for  the  Impairment  of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

   In  April of 1996,  the  Company  formed a new  subsidiary  that  engages  in
financial  institution  advisory services,  Capital West Group. The Bank has two
wholly owned subsidiaries, Merced Area Investment and Development, Inc. ("MAID")
and another inactive  subsidiary.  All references  herein to the Company include
the Bank, the Thrift,  Capital West Group and the Bank's subsidiaries unless the
context  otherwise   requires.   All  significant   intercompany   accounts  and
transactions  have been  eliminated in preparing  these  consolidated  financial
statements.

   The  consolidated  financial  statements  are  prepared  in  accordance  with
generally accepted accounting principles and prevailing practices in the banking
industry.  In preparing the  consolidated  financial  statements,  management is
required to make estimates and assumptions  that affect the reported  amounts of
assets and  liabilities  as of the date of the  balance  sheet and  revenue  and
expense for the period. Actual results could differ from those estimates applied
in the  preparation  of the  consolidated  financial  statements. 


Cash and Cash  Equivalents:  The Company maintains deposit balances with various
banks which are necessary for check  collection  and account  activity  charges.
Cash in excess of immediate  requirements  is invested in federal  funds sold or
other short term investments. Generally, federal funds are sold for periods from
one to  thirty  days.  Cash,  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. At December 31, 1996, the
Company's  average cash reserve balances as required by the Federal Reserve Bank
were approximately  $2,190,000.  The Company maintained  sufficient  balances of
vault  cash  to  satisfy  its  reserve  requirements. 

Investment  Securities:  Investment  securities  at  December 3 1, 1996 and 1995
consist of U.S.  Treasury  and U.S.  Government  agency  obligations,  municipal
securities  and  mortgage-backed  securities.  At  the  time  of  purchase  of a
security,  the  Company  designates  the  security  as  held-to-maturity  or  as
available-for-sale,  based on its investment  objectives,  operational needs and
intent.  The Company  does not purchase  securities  with the intent of actively
trading  them.  Held-to-maturity  securities  are  recorded at  amortized  cost,
adjusted   for   amortization   or   accretion   of   premiums   or   discounts.
Available-for-sale securities are recorded at fair value with unrealized holding
gains and losses,  net of the related tax effect, and are reported as a separate
component of stockholders' equity until realized.

   A decline in the market value of any  available-for-sale  or held-to-maturity
security below cost that is deemed other than temporary,  results in a charge to
earnings  and  the  corresponding  establishment  of a new  cost  basis  for the
security.  No such declines have occurred.

   Premiums and discounts are amortized or accreted over the life of the related
security  as an  adjustment  to yield  using a  method  which  approximates  the
effective  interest  method.  Dividend and interest  income are recognized  when
earned.    Realized   gains   and   losses   for   securities    classified   as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for deter-mining the cost of securities
sold.

Mortgage  Loans  Held for Sale:  Real  estate  mortgage  loans held for sale are
carried at the lower of cost or market at the balance  sheet date or the date on
which investors have committed to purchase such loans. 

Loans:  Loans are carried at the principal amount  outstanding,  net of deferred
origination  fees,  less an allowance for loan losses.  During 1995, the Company
adopted the provisions of Statement of Financial  Accounting  Standards No. 114,
Accounting by Creditors for the Impairment of a Loan as amended by Statement No.
118,  Accounting by Creditors for  Impairment of a Loan-Income  Recognition  and
Disclosures  (SFAS 114). Under SFAS 114, an impaired loan 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. SFAS 114 does not apply to large groups of small balance homogenous loans
that are  collec-tively  evaluated for  impairment. 

   The recognition of interest income on a loan is discontinued,  and previously
accrued interest is reversed, 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, remains collectible. Interest is subsequently
recognized  only as  received  until the loan is  returned  to  accrual  status.
Nonrefundable  fees and related direct costs  associated with the origination or
purchase of loans are deferred and are amortized  into interest  income over the
loan term using a method which approximates the interest method.

Allowance for Loan Losses: The allowance for loan losses represents management's
recognition  of the risks assumed when  extending  credit and its evaluation of
the quality of the loan  portfolio.  The  allowance is  maintained  at the level
considered to be adequate for potential loan 

                                       12


<PAGE>


                            CAPITAL CORP of the WEST

losses based on management's  assessment of various  factors  affecting the loan
portfolio,  which include a review of problem loans,  business conditions and an
overall  evaluation of the quality of the portfolio.  The allowance is increased
by provisions for loan losses charged to operations and reduced by loans charged
to the  allowance,  net of  recoveries.  The  allowance  for  loan  losses  is a
subjective  estimation  and may be adjusted in the future  depending on economic
conditions.  Also  regulatory  examiners  may require  the Company to  recognize
additions  to  the  allowance  based  upon  their  judgments  about  information
available to them at the time of an examination.

Loan Servicing Income:  The Company services both the sold and retained portions
of United States Small  Business  Administration  (SBA) loans and a portfolio of
mortgage loans. Servicing income is realized through the retention of an ongoing
rate  differential  between the rate paid by the borrower to the Company and the
rate paid by the Company to the investor in the loan. 

Premises  and  Equipment:   Premises  and  equipment  are  stated  at  cost  and
depreciated on the  straight-line  method over the estimated useful lives of the
assets as follows:

            Buildings - 35 years   Leasehold  improvements - term of lease      
                    Furniture and equipment - 3 to 15 years

Real  Estate  Held  for  Sale or  Development:  Real  estate  held  for  sale or
development  is recorded at the lower of cost or net realizable  value. 

   Revenue  recognition on the  disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property sold
and the terms of the sale. Under certain circumstances,  revenue recognition may
be deferred until these criteria are met. 

Other Real  Estate:  In  accordance  with the  provisions  of the  Statement  of
Financial Account Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to be Disposed Of, other real estate  acquired
through foreclosure is carried at the lower of cost or fair value less estimated
costs to sell at the date of  foreclosure.  Fair value of other  real  estate is
determined based on an appraisal of the property. Credit losses arising from the
acquisition of such  properties  are charged  against the allowance for possible
loan losses.  Any  subsequent  costs or losses are charged  against  income when
incurred.

Investment Tax Credits:  The Company has investments in limited  partnerships in
low income  affordable  housing which provides the investor  affordable  housing
income 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 cost method.  These  investments  are evaluated at each
reporting period for impairment.  The Bank had investments in these partnerships
of $2,700,000 and $1,701,000 as of December 31, 1996 and 1995 respectively.

Deferred  compensation:  The Company has purchased single premium universal life
insurance  policies in conjunction with  implementation  of salary  continuation
plans for certain members of management and the Board of Directors.  The Company
is the owner and  beneficiary of these plans.  The cash  surrender  value of the
insurance  policies is recorded in other  assets in  accordance  with  Financial
Accounting Standards Board Technical Bulletin No. 85-4, Accounting For Purchases
of Life  Insurance.  Income from the policy is recorded in other  income and the
load, mortality and surrender charges have been recorded in other expenses.  The
accrued  liability  is recorded to reflect  the  present  value of the  expected
retirement benefits. The balance of these life insurance policies was $3,134,000
and $1,290,000 as of December 31, 1996 and 1995 respectively.

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 analyses 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.

Stock Option Plan: Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance  with the  provisions of Accounting  Principles  Board
("APB")  Opinion No. 25,  Accounting for Stock Issued to Employees,  and related
interpretations.  As such, compensation expense would be recorded on the date of
grant only if the current  market  price of the  underlying  stock  exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for  Stock-Based  Compensation,  which permits  entities to recognize as expense
over the vesting period the fair value of all stock-based  awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions  of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based  method defined in SFAS No. 123 had been
applied.  The Company has  elected to  continue to apply the  provisions  of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

Per Share  Information:  Per share  information is based on the weighted average
number of shares of common stock outstanding  during the periods presented after
giving retroactive effect to stock dividends. 

<TABLE>
NOTE 2:  Investment  Securities  

The carrying  value and  estimated  fair value for each  category of  investment
securities at December 31 are as follows:

<CAPTION>
                                                                                  Gross                   Gross            Estimated
           1996                                           Amortized cost      unrealized  gains      unrealized  losses   fair value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>                 <C>                 <C>        
Available-for-Sale:
 U.S. Treasury & U.S. government
 agencies  & corporations                                    $38,653,000         $   190,000         $   381,000         $38,462,000
------------------------------------------------------------------------------------------------------------------------------------
State &  political subdivisions                                4,196,000             100,000              25,000           4,271,000
  Total debt securities                                       42,849,000             290,000             406,000          42,733,000
Equity  securities                                               645,000                --                  --               645,000
------------------------------------------------------------------------------------------------------------------------------------
Total Investment  Securities                                 $43,494,000         $   290,000         $   406,000         $43,378,000
====================================================================================================================================
          1995
------------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
 U.S.  Treasury & U.S. government
 agencies &  corporations                                    $40,055,000         $   437,000         $    39,000         $40,453,000
------------------------------------------------------------------------------------------------------------------------------------
States &  political  subdivisions                              4,183,000             133,000              19,000           4,297,000
  Total debt securities                                       44,238,000             570,000              58,000          44,750,000
Equity  securities                                               552,000                --                  --               552,000
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities                                  $44,790,000         $   570,000         $    58,000         $45,302,000
====================================================================================================================================
</TABLE>
                                                                 13


<PAGE>

                            CAPITAL CORP of the WEST

   The  change  in the  net  unrealized  holding  gain  on  available  for  sale
securities during 1996 was $628,000.  At December 31, 1996 and 1995,  investment
securities with carrying values of  approximately  $16,678,000 and  $18,157,000,
respectively,  were  pledged as  collateral  for  deposits  of public  funds and
government  deposits  and for  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 Home Loan Bank and has purchased $645,000 and $552,000 of Federal
Home Loan Bank stock as of December 31, 1996 and 1995 respectively.

   For the years ended December 31, 1996 and 1995, the proceeds from the sale of
securities  were  $14,590,000  and  $3,012,000,   respectively.  There  were  no
securities  sold in 1994. The Bank recognized net gains or losses on the sale of
investment  securities of  approximately  $11,000 in gains in 1996 and $3,000 in
losses in 1995, respectively.

   The carrying and  estimated  fair values of debt  securities  at December 31,
1996  by  contractual  maturity,  are  shown  on  the  following  table.  Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment notice.

                                                                      Estimated
               1996                                 Amortized Cost    Fair Value
--------------------------------------------------------------------------------
Available-for-Sale  Debt Securities:
Due in one year or less                              $   981,000     $   996,000
Due  after one year through five years                 8,894,000       8,922,000
Due after five years through ten years                 7,849,000       7,774,000
Due after ten years                                    4,400,000       4,290,000
Mortgage-backed securities                            20,725,000      20,751,000
--------------------------------------------------------------------------------
Total Debt securities                                $42,849,000     $42,733,000
================================================================================

NOTE 3: Loans 

Loans  outstanding  at  December  31 consist of the  following: 

                                                         1996           1995
--------------------------------------------------------------------------------
Commercial,  financial and  agricultural           $ 71,786,000     $ 65,563,000
Real Estate:
Mortgage                                             57,098,000       42,128,000
Construction                                         13,923,000       12,006,000
Consumer Loans                                       40,440,000       14,039,000
--------------------------------------------------------------------------------
                                                    183,247,000      133,736,000
Less allowance for loan losses                        2,792,000        1,701,000
--------------------------------------------------------------------------------
                                                   $180,455,000     $132,035,000
================================================================================

   These loans are net of deferred loan fees of $765,000 in 1996 and $708,000 in
1995.  The  amount  of  nonaccrual  loans at  December  31,  1996 is  $4,968,000
($4,626,000  at December  31,  1995).  Impaired  loans are loans for which it is
probable  that the Company  will not be able to collect  all amounts  due. As of
December  31,  1996,  the Company had  outstanding  balances  of  $7,020,000  in
impaired  loans which had specific  allowances  for possible loss of $1,827,000.
The average  outstanding  balance of impaired  loans for the year ended December
31, 1996 was approximately  $6,248,000.  Of these impaired loans, $5,090,000 are
loans that have been  restructured.  This compares  with  $4,326,000 in impaired
loans which had specific allowances for possible loss of $605,000 and an average
outstanding  balance  for the  year  ending  December  31,  1995 of  $2,165,000.
Foregone interest on nonaccrual loans was approximately $497,000 and $25,000 for
the years ending December 31, 1996 and 1995 respectively.

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

                                         1996            1995           1994  
--------------------------------------------------------------------------------
Balance -  beginning  of year         $ 1,701,000    $ 1,621,000    $ 1,747,000
Due to  acquisition  of Thrift            148,000           --             --   
Losses  charged to the allowance         (658,000)      (223,000)      (248,000)
Recoveries of amounts charged off          88,000         75,000        122,000
Provision charged to operations         1,513,000        228,000           --
--------------------------------------------------------------------------------
Balance - end of year                 $ 2,792,000    $ 1,701,000    $ 1,621,000
================================================================================

   In the  ordinary  course of  business,  the Company has made loans to certain
directors and officers and their related  businesses.  In management's  opinion,
these loans were 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. These loans are summarized below:


                                                      1996               1995  
--------------------------------------------------------------------------------
Balance - beginning of year                        $ 675,000          $ 497,000
Loan advances and renewals                           511,000            633,000
Loans matured or collected                          (613,000)          (455,000)
--------------------------------------------------------------------------------
Balance - end of year                              $ 573,000          $ 675,000
================================================================================


NOTE 4. Premises and Equipment  Premises and equipment consists of the following
at December 31: 


                                                       1996           1995
--------------------------------------------------------------------------------
Land                                                $ 1,139,000      $   955,000
Buildings                                             2,979,000        1,744,000
Leasehold improvements                                  887,000          725,000
Furniture and equipment                               6,363,000        4,505,000
--------------------------------------------------------------------------------
                                                     11,368,000        7,929,000
Less  accumulated  depreciation  and
amortization                                          5,102,000        3,791,000
--------------------------------------------------------------------------------
                                                    $ 6,266,000      $ 4,138,000
================================================================================

                                       14

<PAGE>

                            CAPITAL CORP of the WEST

   Included  in the  totals  on the  previous  page  for  December  31,  1996 is
construction  in progress for the new branch and  administrative  facilities  in
downtown  Merced  and  the  branch  under   construction  in  Turlock   totaling
$1,428,000.

NOTE 5: Real Estate  Operations  

   As of  December  31,  1996,  MAID held two real  estate  projects,  including
improved  and  unimproved  land.  Based on the  general  state of the local real
estate climate, the Bank reduced its carrying value of its remaining projects to
zero as of December 31, 1995.  Total real estate write downs were  $2,881,000 in
1995 and $798,000 in 1994.

  Summarized below is condensed financial information of MAID: 

Condensed                                                      December 31, 
Balance Sheets                                            1996           1995
--------------------------------------------------------------------------------
Assets:
Cash on deposit with the Bank                         $  481,000      $1,359,000
Notes  receivable and other                              103,000            --  
--------------------------------------------------------------------------------
                                                      $  584,000      $1,359,000
Liabilities and Shareholder's equity:
Accounts payable and other                            $  298,000      $  296,000
  Shareholder's  equity                                  286,000       1,063,000
--------------------------------------------------------------------------------
                                                      $  584,000      $1,359,000
================================================================================

Condensed  Statement                                        December  31,
of Operations                                      1996                 1995
--------------------------------------------------------------------------------
Revenues                                       $   812,000          $ 1,643,000
Expenses                                           287,000            4,437,000
--------------------------------------------------------------------------------
                                                   505,000           (2,794,000)
Other,  net                                        (81,000)              94,000)
Income  (loss)  before
income  taxes                                  $   424,000          $(2,888,000)
================================================================================

NOTE 6. Income Taxes 

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

1996                            Federal             State               Total
--------------------------------------------------------------------------------
Current                       $ 1,049,000        $   441,000        $ 1,490,000
Deferred                         (283,000)           (44,000)          (327,000)
--------------------------------------------------------------------------------
                              $   766,000        $   397,000        $ 1,163,000

1995
--------------------------------------------------------------------------------
Current                       $ 1,020,000        $   394,000        $ 1,414,000
Deferred                         (860,000)          (331,000)        (1,191,000)
--------------------------------------------------------------------------------
                              $   160,000        $    63,000        $   223,000

1994
--------------------------------------------------------------------------------
Current                       $   972,000        $   366,000        $ 1,338,000
Deferred                         (204,000)           (31,000)          (235,000)
--------------------------------------------------------------------------------
                              $   768,000        $   335,000        $ 1,103,000
================================================================================

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 consists of the following:

                                                       1996             1995  
--------------------------------------------------------------------------------
Deferred tax assets:  
State  franchise tax                               $   162,000      $   115,000
Real estate subsidiary                               1,822,000        2,176,000
Allowance  for  loan  losses                           804,000          535,000
Investment securities unrealized losses                 47,000             --   
Nonaccrual interest                                    335,000             --   
Other                                                  134,000          183,000
--------------------------------------------------------------------------------
Total gross deferred tax assets                      3,301,000        3,009,000
Less valuation  allowance                             (170,000)        (170,000)
--------------------------------------------------------------------------------
Deferred tax assets                                $ 3,134,000      $ 2,839,000
================================================================================
Deferred  tax  liabilities:
Fixed  assets                                      $   127,000      $    58,000
State franchise  taxes                                  61,000          187,000
Deferred  loan  fees                                      --             65,000
Investment securities unrealized gain                     --            200,000
Other                                                   79,000           36,000
--------------------------------------------------------------------------------
Total gross deferred tax liabilities                   267,000          546,000
--------------------------------------------------------------------------------
Net deferred tax assets                            $ 2,867,000      $ 2,293,000
================================================================================

 A valuation  allowance  is  provided  when it is more likely than not that some
portion of the  deferred tax assets will not be  realized.  Management  believes
that the  valuation  allowance is sufficient to cover that portion that will not
be fully  realized.  

<TABLE>

  A  reconciliation  of the provision for income taxes to the statutory  federal
income  tax rate  follows:
<CAPTION>
                                                            1996     1995     1994  
--------------------------------------------------------------------------------------
<S>                                                         <C>      <C>      <C>  
Statutory federal  income tax rate                          34.0%    34.0%    34.0%
State franchise  tax, net of federal income tax benefit      8.3      7.5      7.7
Tax-exempt  interest  income, net                           (2.7)   (17.7)    (3.0)
Housing tax credits                                          (.7)     --       --   
Other                                                       (2.2)     3.5       .1
Increase in valuation allowance for deferred tax assets      --      12.6      --   
--------------------------------------------------------------------------------------
Effective  income tax rate                                  36.7%    39.9%    38.8%
======================================================================================
</TABLE>
                                       15

<PAGE>

                            CAPITAL CORP of the WEST

NOTE 7: Lines of Credit

At  December  31,  1996,  the  Company  has  available   lines  of  credit  with
correspondent  banks and the  Federal  Reserve  Bank  aggregating  approximately
$7,623,000 of which $105,000 were outstanding.

NOTE 8.  Regulatory  Matters  

   The  Company  and  the  Bank  are  subject  to  various   regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can initiate  mandatory and possibly  additional
discretionary  actions by 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  judgements by the regulators
about components, risk weightings and other factors.

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

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

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

   Management  believes,  as of December 31, 1996, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. As of December
31,  1996,  the  most  recent   notification,   the  Federal  Deposit  Insurance
Corporation  (FDIC)  categorized  the Bank as meeting  the ratio test for a well
capitalized bank under the regulatory framework for prompt corrective action. To
be categorized as adequately capitalized,  the Bank must meet the minimum ratios
as set forth below.  There are no conditions  or events since that  notification
that management believes have changed the institution's classification.

<TABLE>
   The Company's and Bank's actual capital amounts and ratios as of December 31,
1996 are as follows:
<CAPTION>

                                                                                                         To Be Well Capitalized 
                                                                                For Capital              Under Prompt Corrective 
                                                            Actual           Adequacy Purposes:             Action Provisions:  
------------------------------------------------------------------------------------------------------------------------------------
Consolidated:                                        Amount      Ratio      Amount         Ratio         Amount         Ratio
                                                                         (less than      (less than     (less than     (less than
                                                                         or equal to)    (or equal to)(or equal to)   (or equal to)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>     <C>               <C>       <C>                <C>  
As of December  31, 1996                                                                                              
Total  capital (to risk  weighted  assets)         $23,670,000    11.2%   $16,914,000       8.0%      $21,142,000        10.0%
Tier I capital (to risk weighted assets)            21,043,000     9.6    $ 8,407,000       4.0       $12,686,000         6.0
Tier  I  capital  (to average assets)               21,043,000     8.2    $10,293,000       4.0       $12,868,000         5.0
------------------------------------------------------------------------------------------------------------------------------------
The Bank:                                                                                                             
As of December 31, 1996                                                                                               
Total  capital (to risk weighted assets)            19,007,000    10.2    $14,965,000       8.0       $18,707,000        10.0
Tier I capital  (to  risk  weighted assets)         16,667,000     8.9    $ 7,483,000       4.0       $11,224,000         6.0
Tier I capital (to  average  assets)               $16,667,000     7.3%   $ 9,150,000       4.0%      $11,438,000         5.0%
====================================================================================================================================
                                                                                                                         
</TABLE>

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

   At December 31, 1996, the Company has operating lease rental  commitments for
remaining terms of one to ten years. The Company has options to renew one of its
leases  for  a  period  of  15  years.  The  minimum  future  commitments  under
noncancellable  lease agreements  having terms in excess of one year at December
31, 1996 aggregates approximately $2,469,000 as follows:

1997: $451,000 1998: $427,000 1999: $385,000 2000: $323,000 2001: $171,000 
Thereafter: $712,000 = $2,469,000

   Rent expense was approximately $391,000, $272,000, and $248,000 for the years
ended December 31, 1996,  1995 and 1994,  respectively.  Effective July 15, 1995
the Company  entered into an  agreement to relocate its existing  administrative
office and an existing  branch in downtown  Merced to a new facility in downtown
Merced.  Construction began in the summer of 1996 and is expected to be complete
in late summer of 1997. The estimated construction cost of the new 29,000 square
foot facility  including a parking structure is estimated at approximately  $4.7
million.  In  conjunction  with the  construction  of the  facility,  the Merced
Redevelopment  Agency has  provided the Bank with an  interest-free  loan in the
amount of $3.0 million.  The loan matures on August 31, 1997. It is  anticipated
that upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender.

   In  addition,  the  Company  has a loan with an  unaffiliated  lender with an
outstanding  balance of $791,000 as of December  31,  1996.  The loan matures in
July of 1998.  The loan was related to the cash  portion of the  purchase of the
Thrift.

   At December 31, 1996 the aggregate  maturities for time deposits in excess of
one year are as follows:

1997: $10,263,000 1998: $863,000 1999: $417,000 2000: --- 2001: ---- 
= $11,543,000

   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  sheet.  These
transactions may involve, to varying degrees, credit and interest risk in excess
of the amount, if any, recognized in the balance sheet.

   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 (see
note 10).

                December  31,                           1996           1995
--------------------------------------------------------------------------------
Financial instruments  whose  contractual  
  amount  represents risk:  
Commitments to extend credit                         $46,159,000     $28,321,000
Standby letters of credit                              3,231,000      2,465,000
================================================================================

   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 drawdown, 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.

                                       16


<PAGE>



                            CAPITAL CORP of the WEST

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.  

NOTE 10. Concentrations of Credit Risk

   The Bank's  business  activity is with  customers  located  primarily  within
Merced and  Stanislaus  and  Tuolomne  counties.  The Bank  specializes  in real
estate,  real estate  construction,  commercial and dairy lending.  Although the
Bank has a diversified loan portfolio,  a significant  portion of its customers'
ability to repay loans is dependent upon economic factors affecting  residential
real estate,  construction,  dairy,  agribusiness  and consumer goods retailing.
Generally,  loans are secured by various  forms of  collateral.  The Bank's loan
policy requires sufficient collateral be secured as necessary to meet the Bank's
relative  risk  criteria  for each  borrower.  The  Bank's  collateral  consists
primarily  of  real  estate,  dairy  cattle,  accounts  receivable,   inventory,
equipment and marketable securities. A small portion of the Bank's loans are not
supported by specific collateral but rather by the general financial strength of
the borrower.

   The Thrift's  business  activity is with customers  located  primarily within
Stanislaus,  Fresno  and  Tulare  counties.  The  Thrift  specializes  in direct
consumer  loans  and  the  purchase  of  financing  contracts  principally  from
automobile  dealerships and furniture  stores.  Generally,  loans are secured by
various  forms of  collateral.  The Thrift's  collateral  consists  primarily of
automobiles  and flooring  inventory.  A small portion of the Thrift's loans are
not  supported  by  specific  collateral  but  rather by the  general  financial
strength of the  borrower.  In addition the  contracts  are  purchased  from the
dealers with recourse to the dealer and dealer reserves are established for each
borrower. 

   Although  the  slowdown  in the real  estate  market has been a factor in the
local  economy  for the last  several  years and has  played a role in  reducing
economic growth in California,  it is  management's  opinion that the underlying
strength and diversity of the Central  Valley's economy should mitigate a severe
deterioration  in the  borrowers'  ability  to repay  their  obligations  to the
Company.

NOTE 11.  Employee  Benefit  Plans 

   The Company has a noncontributory  employee stock ownership plan ("ESOP") and
an employee  savings plan covering  substantially  all  employees.  During 1996,
1995, and 1994, the Company contributed  approximately  $114,000,  $100,000, and
$101,000,   respectively,  to  the  ESOP  and  $38,000,  $27,000,  and  $30,000,
respectively,  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 December 31, 1996,  1995, and 1994, the
ESOP owned 106,247,  95,263,  and 86,899 shares,  respectively.  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
$9,500  in  1996.  The  Company  will  match  25%  of  the  employees'  elective
contribution, as defined, not to exceed 6% of eligible annual compensation.
<TABLE>

NOTE 12.  Stock  Option Plan 

During  1992,  shareholders  approved the adoption of an
incentive stock option plan for bank management and a nonstatutory  stock option
plan for directors.  The maximum  number of shares  issuable under the plans was
126,000.  Options  are  available  for grant  under  the  plans at  prices  that
approximate  fair market value 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.  In 1995,  shareholders  approved an
amendment to the stock  option plans  increasing  the number of  authorized  but
unissued shares available for future grant of the Company's common stock. 
<CAPTION>

                       Shares Available For Grant      Options Outstanding      Exercise Price per Share 
----------------------------------------------------------------------------------------------------------
<S>                                     <C>                   <C>                     <C>    
Balance, December 31, 1994               21,122               130,708                 $ 8.10-$14.13
Additional  shares added to plan        148,170                                      
Options  granted                        (29,000)               29,000                 $12.25-$13.50
Options  exercised                         --                  (1,500)                       $ 9.90
Stock dividend  declared                 24,494                20,506                        --
----------------------------------------------------------------------------------------------------------
Balance,  December 31, 1995             163,886               179,614                 $ 8.10-$13.86
Options granted                         (29,500)               29,500                 $12.63-$14.00
Options exercised                          --                 (20,739)                $ 9.90-$12.25
Stock dividend declared                   6,844                 9,294                       --   
----------------------------------------------------------------------------------------------------------
Balance,  December 31, 1996             141,230               197,669                 $ 8.10-$14.00
==========================================================================================================
</TABLE>

   At December 31, 1996,  options for 156,310 shares were  exercisable at prices
varying from $8.10 to $14.00 per share.  The  exercise  price per share has been
adjusted for stock dividends in periods in which the exercise price exceeded the
then current fair market value.

   The per share  weighted-average  fair value of stock options  granted  during
1996 and 1995 was $8.59 and $5.24 on the date of grant  using the Black  Scholes
option-pricing model with the following weighted-average assumptions:  1995-1996
- an expected dividend yield of 0%; a risk-free interest rate of 5.48% and 6.31%
respectively;  and an expected life of 7 years. 

<TABLE>

   The  Company  applies  APB  Opinion  No. 25 in  accounting  for its plan 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, the Company's net income would have been reduced to
the pro forma amounts indicated below:
<CAPTION>

                                           1996           1995                           1996           1995 
----------------------------------------------------------------       ------------------------------------------
<S>                  <C>                 <C>            <C>            <C>            <C>            <C>      
Net income           As reported         $2,009,000     $335,000       Pro forma      $1,857,000     $250,000 
Net income per share As reported              $1.27         $.24       Pro forma           $1.17        $ .19
================================================================       ==========================================
</TABLE>

   Pro  forma  net  income  reflects  only  options  granted  in 1996 and  1995.
Therefore,  the full impact of calculating  compensation  cost for stock options
under  SFAS  No.  123 is not  reflected  in the pro  forma  net  income  amounts
presented above because compensation cost is reflected over the options' vesting
period of ten years and  compensation  cost for options granted prior to January
1, 1995 is not considered.  

NOTE 13: Supplementary Cash Flow Information 

For the years ended December 31, 1996,  1995 and 1994, the Company paid interest
of  $6,244,000,  $5,678,000,  and  $3,906,000  and income  taxes of  $1,126,000,
$1,471,000,  and  $1,242,000,  respectively.  

NOTE 14: Fair Value of Financial Instruments

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

Financial  Assets:  

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

                                       17


<PAGE>



                            CAPITAL CORP of the WEST

Investments:  Fair values for investment securities  available-for-sale  are the
amounts  reported on the consolidated  balance sheets and investment  securities
held-to-maturity  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  pre-payments.  The carrying value of loans are
net of the allowance for possible loan losses and unearned loan fees.

Loans held for sale: The fair value of loans held for sale is the carrying value
as the loans are under commitments to be sold at carrying 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 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  rates.  The fair value of letters of credit is
based on fees currently charged for similar  agreements or on the estimated cost
to terminate them or otherwise settle the obligation with the counter parties at
the reporting 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 significantly from amounts
that would be realized in actual  transactions.  In addition,  other significant
assets are not  considered  financial  assets  including,  any mortgage  banking
operations,  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.

1996                                             Carrying Amount     Fair Value
--------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents                        $ 16,717,000       $ 16,717,000
Investment securities:
Available-for-sale                                 43,378,000         43,378,000
Net  loans                                        180,455,000        180,259,000
Mortgage loans held for sale                          880,000            880,000
--------------------------------------------------------------------------------
Financial  Liabilities:
Deposits:
Noninterest-bearing demand                         39,157,000         39,157,000
Interest-bearing demand                            34,303,000         34,303,000
Savings and money market                          111,285,000        111,285,000
Time deposits                                      53,600,000         53,753,000
Borrowings                                       $  3,896,000       $  3,575,000
--------------------------------------------------------------------------------
                                                         Contract  Amount
                                                  ------------------------------
Off-balance  sheet:
Commitments                                      $ 46,159,000       $  4,615,900
Standby letters of credit                           3,231,000             32,300
================================================================================

1995                                              Carrying Amount  Fair Value
--------------------------------------------------------------------------------
Financial assets:
Cash  and  cash  equivalents                     $ 18,967,000       $ 18,967,000
Investment securities:
Available-for-sale                                 45,302,000         45,302,000
Net  loans                                        132,035,000        131,708,000
Mortgage loans held for sale                          501,000            501,000
--------------------------------------------------------------------------------
Financial  Liabilities:
Deposits:
Noninterest-bearing  demand                        39,726,000         39,726,000
Interest-bearing demand                            29,019,000         29,019,000
Savings and money market                           95,537,000         95,537,000
Time deposits                                      28,319,000         28,559,000
Borrowings                                       $    106,000       $    106,000
--------------------------------------------------------------------------------
                                                         Contract  Amount
                                                  ------------------------------
Off-balance  sheet:
Commitments                                      $ 28,321,000       $  2,832,100
Standby  letters of credit                          2,465,000             24,600
================================================================================

NOTE 15: Derivative Financial Instruments 

As of December 31, 1996 and 1995 the Company had no off-balance sheet derivative
financial  instruments.   The  Company  held  one  step-up  bond,  considered  a
structured  note,  with a fair market  value of $497,000 as of December 31, 1995
which  matured  during 1996.  The Company held no derivative  instruments  as of
December 31, 1996. 

NOTE 16:  Parent  Company Only  Financial  Information  

This  information  should be read in  conjunction  with the  other  notes to the
consolidated  financial  statements.  The parent company was formed  November 1,
1995.  During  the year  ended  December  31,  1996,  the Bank paid the  Company
$100,000 in cash  dividends  and the Thrift  paid the  Company  $825,000 in cash
dividends.  The  following is the  condensed  balance sheet of the Company as of
December 31, 1996 and the  condensed  statement of income and cash flows for the
year ended December 31, 1996:

--------------------------------------------------------------------------------
Condensed Balance Sheets (In thousands)                     1996        1995
Cash  deposited in subsidiary  bank                       $    159     $     51
Investment  in  subsidiary, County Bank                     16,574       14,968
Investment in  subsidiary,  Town & Country                   5,061         --
Investment  in  subsidiary,  Capital West Group                 81         --   
Other assets                                                    98          107
--------------------------------------------------------------------------------
Total Assets                                              $ 21,973     $ 15,126
================================================================================
Accrued  expenses  and  other  liabilities                $    999     $     33
Stockholders'  equity                                       20,974       15,093
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity                $ 21,973     $ 15,126
================================================================================

--------------------------------------------------------------------------------
Condensed  Statements of Income (In  thousands)             1996         1995
Equity in  undistributed  income of subsidiary            $  2,094     $    335
Expenses                                                        85         --   
Net income                                                $  2,009     $    335
================================================================================
Condensed Statements of Cash Flows (In thousands)           1996         1995
Net cash used by operating activities                     $   (712)    $    (74)
Net cash (used)/provided by investing  activities             (233)         125
Net cash provided by financing  activities                   1,053         --
Net increase in cash                                           108           51
Cash at the beginning of the year                               51         --
Cash at the end of the year                               $    159     $     51
================================================================================

NOTE 17: Prospective Accounting Pronouncements 

In June 1996,  the  Financial  Accounting  Standards  Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial  Assets and  Extinguishments
of  Liabilities.  SFAS No. 125 is  effective  for  transfers  and  servicing  of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively.  This Statement provides accounting and
reporting  standards  for  transfers  and  servicing  of  financial  assets  and
extinguishments  of liabilities  based on consistent  application of a financial
components  approach  that  focuses on control.  It  distinguishes  transfers of
financial  assets that are sales from  transfers  that are  secured  borrowings.
Management  of the Company  does not expect  that  adoption of SFAS No. 125 will
have  a  material  impact  on  the  Company's  financial  position,  results  of
operations, or liquidity.

                                       18


<PAGE>



                            CAPITAL CORP of the WEST

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

The  following   discussion  and  analysis  is  designed  to  provide  a  better
understanding  of the significant  changes and trends related to the Company and
its subsidiaries' financial condition,  operating results, liquidity and capital
resources.  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 Capital Corp of the West (the  "Company")
include its subsidiaries,  County Bank (the "Bank"),  Town & Country Finance and
Thrift (the  "Thrift")  and  Capital  West Group.  It also  includes  the Bank's
subsidiary,  Merced Area Investment Development,  Inc. ("MAID").  

Overview Total net income for 1996 was  $2,009,000  compared to $335,000 in 1995
and  $1,736,000 in 1994.  Earnings per share were $1.27 in 1996 compared to $.24
in 1995 and $1.24 in 1994.  The  return on  average  assets  was .90% in 1996 as
compared with .18% in 1995 and 1.05% in 1994. The Company's  return on beginning
equity for the same periods was 13.3%, 2.4% and 13.7%, respectively. Included in
1995  earnings is a complete  write-off of the Bank's  investment in real estate
held by its real estate  subsidiary.  This real estate write-off in 1995 totaled
$2,881,000  and resulted in a $1,757,000  reduction in 1995 after tax  earnings.

   Total assets at December 31, 1996 reached $266 million, up $57 million or 27%
from  December 31, 1995.  Net loans grew to $180 million at year end 1996, a 37%
increase and deposits grew to $238 million, a 16% increase. Total equity capital
grew to $21 million, a 39% increase over year end 1995. Growth is in part due to
the  acquisition of the Thrift as of June 28, 1996. As of December 31, 1996, the
Thrift  had $28  million  in assets,  $20  million  in loans and $23  million in
deposits.

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. A company may achieve desired liquidity
from both assets and liabilities.  The Company  considers cash and deposits held
in other banks, federal funds sold, other short term investments, maturing loans
and investments, payments of principal and interest on loans and investments and
potential loan sales as sources of asset liquidity. Deposit growth and access to
credit lines  established with  correspondent  banks and market sources of funds
are considered by the Company as sources of liability liquidity.

   The 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 and  deposits  in  other  banks,
available-for-sale  securities  and federal  funds sold.  The  Company's  liquid
assets  totaled  $63,196,000  and  $64,269,000  at  December  31, 1996 and 1995,
respectively,  and are 23.8% and 30.7%,  respectively,  of total assets on those
dates.  The decrease in liquid assets in 1996 is primarily due to loan growth in
excess of deposit  growth during the 1996 year.  In analyzing  liquidity for the
Company,  consideration  is also  taken  for the  pledging  requirements  of the
Company's investment  securities.  Total pledged securities were  $16,678,000 at
December 31, 1996 and  $18,157,00 at December 31, 1995,  respectively. 

   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 and the Federal Reserve Bank aggregating $7,623,000 of which
$105,000 was  outstanding  as of December 31, 1996.  This compares with lines of
credit of $5,270,000 of which $106,000 was  outstanding as of December 31, 1995.

Capital  Resources  Capital  serves  as a source  of  funds  and  helps  protect
depositors  against  potential  losses.  The  primary  source of capital for the
Company has been internally  generated  capital through retained  earnings.  The
Company's  shareholders'  equity  had a net  increase  of  $5,881,000  in  1996,
$1,011,000 in 1995,  and $1,449,000 in 1994. The increase in 1996 was the result
of net income for the year of  $2,009,000,  $208,000 in stock options  exercised
and  $162,000 due to the  issuance of shares  pursuant to the  employee  benefit
plans.  This is partially  offset by a total of $86,000 in cash  dividends  paid
lieu of  fractional  shares on stock  dividends  and the 5 cents per share  cash
dividend   and  a  net   reduction   in  the  net   unrealized   value   in  the
available-for-sale  investment  portfolio of $381,000.  Finally, the purchase of
the Thrift added  $3,969,000  to capital for the Company.  The 1995 increase was
the result of net income of $335,000,  $15,000 on the exercise of stock  options
and  $667,000  increase  in  the  unrealized  gain  in  the   available-for-sale
investment portfolio. This is in part offset by $6,000 in cash dividends paid in
lieu of fractional shares on stock dividends.

   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,
1996, that the Company, the Bank and the Thrift meet all capital requirements to
which they are subject.  The  Company's  leverage  capital ratio at December 31,
1996 was 8.2% as  compared  with 7.4% as of December  31,  1995.  The  Company's
risk-based capital ratio at December 31, 1996 was 11.2% of which 9.6% was common
shareholders' equity as compared to 10.3% (9.2% was common shareholders' equity)
as  of  December  31,  1995.   Management   believes  that,  under  the  current
regulations,  the Company will continue to meet its minimum capital requirements
in the foreseeable future.

Results of Operations Net income in 1996 was $2,009,000  compared to $335,000 in
the prior year and  $1,736,000  in 1994.  This  represents  a 500%  increase  in
earnings  compared to 1995,  following a 81%  decrease in 1995  compared to 1994
results.  Earnings  per share in 1996 were  $1.27  compared  to $.24 in 1995 and
$1.24  in  1994.  Included  in 1995  earnings  is a  complete  write-off  of the
Company's  investment  in real estate held by its real estate  subsidiary.  This
real estate  write-off in 1995 totaled  $2,881,000 and result-ed in a $1,757,000
reduction in 1995 earnings. 

   The increase in earnings in 1996 as compared to 1995 is primarily  due to the
complete  write-off of the real estate subsidiary in 1995.  Excluding that item,
earnings were down  approximately  $83,000.  The areas where the Company  showed
earnings  improvement  include a net interest  income  increase of $2,330,000 or
23%, and  increases  in  noninterest  income,  exclusive of the 1995 real estate
writeoff,  of  $1,278,000  or 77%.  This is more  than  offset by  increases  in
provisions for loan losses of $1,285,000 or 564% and in noninterest  expenses of
$2,591,000 or 32%.

   The  decrease  in  earnings  in 1995  resulted  primarily  from the  complete
write-off of the Bank's remaining investment in its real estate held by its real
estate subsidiary totaling $2,881,000. This compares with provisions for loss on
real estate held for sale or  development  of  $798,000  in 1994.  Net  interest
income increased  $1,199,000 or 13%.  Noninterest income,  exclusive of the real
estate provisions increased by $324,000. These increases are partially offset by
increased loan loss provisions of $228,000 and increased noninterest expenses of
$1,223,000 or 18%.

                                       19


<PAGE>
                            CAPITAL CORP of the WEST

   When  evaluating  the  earnings  performance  of banking  organizations,  two
measures of profitability  commonly used are return on average assets and return
on  beginning  equity.  Return on average  assets  measures a bank's  ability to
profitably employ its resources. Return on average assets in 1996 was .90%. This
compares  with .18% in 1995 and 1.05% in 1994.  Return on beginning  equity is a
measure of a bank's  ability to generate  income on the capital  invested in the
company by its  shareholders.  Return on  beginning  equity was 13.3% in 1996 as
compared  to 2.4% in 1995 and 13.7% in 1994.  The  decrease in return on average
assets and beginning equity in 1996, exclusive of the real estate write-off, was
generally  attributed  to a moderate  increase  in the net  interest  income and
increases  in  noninterest  income  which was more than offset by  increases  in
noninterest expenses and loan loss provisions.

Net Interest  Income The Company's  primary  source of income is the  difference
between  interest  income and fees derived from earning assets and interest paid
on liabilities  obtained to fund those assets. The difference between the two is
referred to as net interest income.

   Total interest and fee income on earning assets increased from $15,873,000 to
$19,351,000,  a  $3,478,000  or 22%  increase  in 1996.  This  compares  with an
increase from $12,807,000 to $15,873,000,  a $3,066,000 or 24% increase in 1995.
The level of interest  income is affected by changes in the volume  (growth) and
the rates earned on interest  earning  assets.  Interest-earning  assets consist
pri-marily  of loans,  investment  securities  and federal  funds sold.  Average
interest-earning  assets in 1996 were $203,046,000 as compared with $166,826,000
in 1995, a $36,220,000 or 22% increase.  Of the 1996 increase in interest income
of  $3,478,000,  $3,451,000 was the result of growth in these assets and $27,000
was a result of increases  in yields on these  assets.  Of the 1995  increase in
interest  income of  $3,066,000,  $1,663,000  was the  result of growth in these
assets and $1,403,000 was as a result of increases in yields on these assets.

   Interest  expense is a function of the volume  (growth) of and rates paid for
interest-bearing liabilities.  Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total average interest-bearing  liabilities
in 1996 were  $176,333,000 as compared with  $143,131,000 in 1995, a $33,202,000
or 23%  increase.  Total  interest  expense  increased  $1,148,000  or  20%  and
increased $1,867,000 or 48% in 1995. Of the 1996 increase in interest expense of
$1,148,000,  $1,289,000  was the result of growth in these  liabilities  and was
partially   offset  by  $141,000  as  a  result  of  decreased  costs  of  these
liabilities.  Of the 1995  increase of  $1,867,000,  $568,000  was the result of
growth in these  liabilities and $1,299,000 was the result of increases in costs
of these liabilities.

   The Bank's net interest margin, the ratio of net interest income expressed as
a percent of  average  interest-earning  assets  for 1996 was 6.16%.  This is an
increase of .07%  compared to the 1995 margin of 6.09% and .06%  compared to the
1994  margin of 6.03%.  This  provides a  measurement  of the Bank's  ability to
purchase  and employ funds  profitably  during the period  being  measured.  The
mod-est improvement in net interest margin is due to increases in loan volume as
a percentage of earning assets,  which was partially  off-set by the increase in
nonearning loans.

Asset and Liability  Management  Asset and  liability  management is an integral
part of managing a banking  institution's primary source of income, net interest
income.  The  Company  manages  the balance  between  rate-sensitive  assets and
rate-sensitive liabilities being repriced in any given period with the objective
of stabilizing net interest income during periods of fluctuating interest rates.
The Company considers its rate-sensitive assets to be those which either contain
a provision to adjust the interest rate  periodically or mature within one year.
These assets include  certain loans and investment  securities and federal funds
sold.  Rate-sensitive  liabilities  are those which allow for periodic  interest
rate  changes  and  include  maturing  time  certificates,  certain  savings and
interest-bearing demand deposits. The difference between the aggregate amount of
assets and  liabilities  that are repricing at various time frames is called the
"gap."  Generally,  if repricing assets exceed  repricing  liabilities in a time
period  the  Company  would be  deemed  to be  "asset-sensitive."  If  repricing
liabilities exceed repricing assets in a time period the Company would be deemed
to be "  liability-sensitive."  Generally,  the  Company  seeks  to  maintain  a
balanced   position  whereby  there  is  no  significant   "asset  or  liability
sensitivity"  to ensure  net  interest  margin  stability  in times of  volatile
interest rates. This is accomplished  through maintaining a significant level of
loans,  investment  securities and deposits  available for repricing  within one
year.

   As of December 31, 1996 the Company was moderately "liability-sensitive" with
a cumulative  negative one-year gap of $42,922,000 or 16% of total assets.  This
compares  with  the  Company  being  moderately   "liability-sensitive"  with  a
cumulative  negative  one-year  gap of  $14,718,000  or 7% of  total  assets  at
December 31, 1995. In general,  based upon the Company's mix of deposits,  loans
and  investments,  declines  in interest  rates would be expected to  moderately
increase the Company's net interest margin. Increases in interest rates would be
expected to have the opposite  effect.  The increase in the cumulative  negative
one  year  gap  is  due  primarily  to  the  purchase  of  the  Thrift  and  its
"liability-sensitive"  profile  as of  December  31,  1996.

   The change in net interest income may not, however, always follow the general
expectations  of an  "asset-sensitive"  or  "liability-sensitive"  balance sheet
during periods of changing interest rates. This results from interest rates paid
changing by differing  increments  and at different time intervals for each type
of  interest-sensitive  asset and liability.

   An additional  measure of interest rate sensitivity that the Company monitors
is its expected  change in earnings.  This  model's  esti-mate 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.  It
then measures the projected  impact of changes in market  interest  rates on the
Company's   return  on  equity.   Based  upon  the  December  31,  1996  mix  of
interest-sensitive  assets and  liabilities,  given an immediate  and  sustained
increase in the federal  funds rate of 1%, this model  estimates  the  Company's
cumulative  return on equity over the next year would  decrease by less than 1%.
This compares with a cumulative  one year expected  decrease in return on equity
of less than 1% as of December 31, 1995.  As both of these  measures of interest
rate risk indicate,  the Company is not subject to significant risk of change in
its net interest margin as a result of changes in interest rates. 

Allowance and  Provision for Loan Losses The Company  maintains an allowance for
loan  losses at a level  considered  by  Management  to be adequate to cover the
inherent risks of loss associated  with its loan portfolio under  prevailing and
anticipated  economic  conditions.  In determining the adequacy of the allowance
for loan losses,  Management  takes into  consideration  the growth trend in the
portfolio,   examinations  of  financial  institution  supervisory  authorities,
internal  and  external  credit  reviews,  prior  loan loss  experience  for the
Company,  concentrations of credit risk,  delinquency  trends,  general economic
conditions  and the  interest  rate  environment.  The  allowance  is  based  on
estimates  and ultimate  future  losses may vary from current  estimates.  It is
always possible that future  economic or other factors may adversely  affect the
Company's  borrowers,  and  thereby  cause  loan  losses to exceed  the  current
allowance. 

                                       20


<PAGE>



                            CAPITAL CORP of the WEST

   The  balance in the  allowance  is  affected  by the  amounts  provided  from
operations,  amounts charged off and recoveries of loans previously charged off.
The Company had provisions to the allowance in 1996 of $1,513,000 as compared to
228,000 in 1995 and none in 1994. 

   The  Company's  charge-offs,  net of  recoveries,  were  $570,000  in 1996 as
compared with $148,000 in 1995 and $126,000 in 1994.  This  represents loan loss
experience  ratios of .32%, .12% and .12% in those  respective years stated as a
percentage  of average net loans  outstanding  for each year. As of December 31,
1996 the  allowance  for  loan  losses  was  $2,792,000  or 1.5% of total  loans
outstanding.  This  compares  with an allowance for loan losses of $1,701,000 or
1.3% in 1995 and $1,621,000 or 1.5% in 1994. The increase in loan loss provision
in  1996  was  primarily  due to  increased  reserves  established  for a  large
commercial real estate loan that was deemed  impaired,  reserves  required for a
portfolio of lease receivables purchased in 1994 and to support the general loan
growth of the Company.  The increase in net chargeoffs in 1996 was primarily due
to the loss recognized on the foreclosure of a real estate secured  agricultural
loan  currently  held as other  real  estate  owned. 

Asset Quality  Management  recognizes  the  importance of asset quality as a key
ingredient to the successful financial  performance of a financial  institution.
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
cat-egorized as loans past due 90 days or more,  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,  is deemed to
be in the process of collection. Additional loans which 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 is 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.  At December 31, 1996 and 1995, 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  nonperforming  loans at December 31, 1996 of  $5,568,000  as
compared  with  $4,626,000  at year  end  1995 and  $699,000  at year end  1994.
Included  in the 1996  totals,  $3,626,000  are loans  secured by first deeds of
trust on real property as compared with $3,286,000 in 1995 and $422,000 in 1994.
Impaired  loans as of  December  31,  1996 were  $7,020,000  which had  specific
allowances  for possible loss of  $1,827,000  as compared with  $4,326,000 as of
December 31, 1995 which had specific  allowances  for possible loss of $605,000.
Other forms of collateral, such as inventory,  chattel and equipment, secure the
remaining nonperforming loans as of each date. Included in the nonperforming and
impaired loans in 1996 and 1995 was a $3.4 million  commercial  real estate loan
that has been restructured but is still shown as a nonperforming  loan. The loan
is expected to remain on nonaccrual status until substantial  performance on the
loan occurs. The restructured loan matures in 1998.

   In addition, the Bank purchased a portfolio of lease receivables in 1994. The
company which packages and sells these leases to financial  institutions filed a
Chapter 11 reorganization in April 1996 and its chief financial officer has been
charged by the Securities  Exchange  Commission with participating in securities
fraud.  More than 360 banks  nationwide  had acquired  similar lease  receivable
contracts.  The Bank has  $1,281,000 of these leases on nonaccrual  status as of
December 31, 1996. The Bank has retained  counsel jointly with other  California
banks and is  monitoring  its position to ascertain  the extent of loss the Bank
may incur.  As of December  31,  1996  specific  reserves of $385,000  have been
established  for this  portfolio.  As of February  12,  1997,  the Bank signed a
settlement agreement in regards to this portfolio of leases that established the
projected  recovery rate at 78.5% or approximately  $1,006,000. 

   At December 31, 1996 the Bank had  $1,466,000  in two real estate  properties
acquired through  foreclosure  compared with $47,000 as of December 31, 1995 and
at year end 1994 the Company had no real estate  acquired  through  foreclosure.

   Total  nonperforming  assets represented 30% of the allowance for loan losses
and   shareholders'   equity  as  of  December  31,  1996.  This  compares  with
nonperforming  assets of 29% and 5% of the  allowance  for loan losses and total
equity as of December 31, 1995 and December  31, 1994,  respectively. 

   Net loans grew to  $180,455,000  at December 31, 1996, a  $48,420,000  or 37%
increase from the end of the prior year. The Company's  loan portfolio  consists
primarily  of  commercial,  agricultural,  real  estate  mortgage,  real  estate
construction  and consumer  installment  loans.  Loan growth was  principally in
agricultural, real estate mortgage, real estate construction and consumer loans.
In addition,  the Company purchased the Thrift and its approximately $20 million
consumer  finance  operation as of June 1996. As of December 31, 1996,  the loan
portfolio  mix was  comprised as follows:  commercial  loans (15%),  agriculture
loans (24%),  real estate  construction  loans (8%),  real estate mortgage loans
(31%) and  consumer  loans (22%).  The largest  segment  within the  agriculture
portfolio  is the  Company's  dairy  loans.  Dairy  loans  comprised  15% of the
Company's  loan  portfolio as of December 31, 1996.  

   The above  referenced loan portfolio mix has not materially  changed from the
prior year. There have been moderate increases in consumer loans as a percentage
of the portfolio due primarily to the purchase of the Thrift.

   As a result of the Company's  loan portfolio mix, the future quality of these
assets could be affected by adverse  trends in these local or regional  economic
sectors.  There have been  significant  floods  throughout  parts of  California
occurring in January 1997. The Company has done an analysis of its collateral as
a result of the recent  floods.  Current  estimates  indicate that there were no
mate-rial  adverse  effects to the collateral  position of the Company as of the
date of this report.

   Additionally,  the  Company has  investments  in  residential  real estate in
Merced County through its wholly owned  subsidiary,  Merced Area  Investment and
Development,  Inc.  (MAID).  MAID held two separate  properties held for sale or
development at December 31, 1996. These investments were completely  written-off
in 1995,  although  the Bank  still  retains  title  to these  properties.  This
compares  with a carrying  value of  $3,853,000  at  December  31,  1994.  These
properties  consist of residential lots in varying stages of development. 

Other Income or Loss Total noninterest income in 1996 increased by $4,159,000 or
340%.  Total  noninterest  income in 1995  includes a complete  write-off of its
remaining  real estate held by the Bank's real estate  subsidiary of $2,881,000.
In 1996,  service charges  increased  $354,000 or 38%, other income increased by
$504,000  or 78% and gains on the sale of real estate  increased  by $420,000 or
474%.  Increases in service charge income are due to Company's growth as well as
increased service charges implemented in 1996. 

                                       21


<PAGE>



                            CAPITAL CORP of the WEST

Other  income  has  increased  primarily  due to  increased  revenues  on retail
investment products,  loan servicing income, gains on the sale of Small Business
Administration  loans  and  gains on the sale of  securities. 

   In 1995, service charge income showed increases of $20,000 or 2%, income from
the sale of real estate held for sale or  development  show increases of $74,000
and other income shows an increase of $237,000 or 57%. Other income increases in
1995 are due to the addition of  commission  fees earned on  investment  product
sales and  increases  in loan  servicing  fee  income.

   The Company recognized  $508,000 in gains on the sale of real estate held for
sale in 1996.  This was the  result  of the  sale of 40  improved  lots and four
single family homes in two real estate  projects.  This compares with $88,000 in
gains on the sale of real estate held for sale or development  in 1995.  This is
the result of sales of 8 single  family homes and 56 improved lots in three real
estate  projects.  This  compares with gains of $14,000 in 1994 on the sale of 9
single  family  homes and 2 improved  lots in three real  estate  projects.

   The  Company  records  its  investment  in  real  estate  held  for  sale  or
development at the lower of cost or net realizable value,  based on management's
best estimate of the local real estate market,  along with appraised  values and
prospects for sales in the future.  In 1995, the Bank decided to take a complete
write-off  of its  remaining  investment  of its real estate held by MAID.  This
resulted  in  provisions  for  loss of  $2,881,000  in 1995.  The Bank  provided
$798,000 for future  losses on the sales of certain of its real estate  projects
in 1994.

Other Expense Total noninterest  expense increased  $2,590,000 or 32% in 1996 as
compared with an increase of $1,223,000 or 18% in 1995 as compared to 1994.

   Salaries  and related  benefits  increased  by  $1,122,000  or 27% in 1996 as
compared  with an increase of  $621,000 or 17% in 1995.  The salary  increase in
1996 was primarily due to two factors. First, the purchase of Town & Country and
the  establishment  of Capital West Group added $473,000 to total  salaries.  In
addition,  the Bank  underwent a  reengineering  project in 1996,  whereby  Bank
operations were  streamlined and voluntary  separation  packages were offered to
all  employees.  A  total  of 23  employees  accepted  the  package,  and  total
separation  expenses were  $286,000.  Current  projections  are that the project
resulted  in salary  savings in  existing  branch  operations  of  approximately
$114,000  per quarter with  benefits  being  realized  starting in the third and
fourth quarters of 1996.  Other  increases  relate to overall Bank growth in new
branches in late 1995 through 1996. The salary and related benefits  increase in
1995 was primarily due to an increase in full time equivalents. This was in part
due to the opening of a new branch and two new loan production  offices in 1995.
Full time  equivalents  were 115 on average in 1995,  compared to 103 in 1994, a
11.7%  increase.  Normal  merit  increases  and related  benefit  expenses  also
contributed to the overall increase.

   Premises and occupancy expenses increased $223,000 or 36% in 1996 and $25,000
or 4% in 1995 as compared  with an  increase of $50,000 or 9% in 1994.  The 1996
and 1995  increases are primarily due to the purchase of the Thrift and its four
branch  offices  as of June  1996 and the  opening  of  branches  of the Bank in
November 1995, April 1996 and two in December 1996.

   Bank assessments by both the FDIC and the California State Banking Department
totaled $48,000,  $183,000 and $394,000 respectively in the years ended December
31, 1996,  1995 and 1994. The decreases in 1995 and 1996 are due to reduced FDIC
premiums  beginning in May of 1995. FDIC assessment  levels for the Company were
$2,000 in 1996 as compared with $.04 cents per $100 in deposits in 1995 and $.26
cents per $100 in deposits in 1994.

   The Bank's professional fees increased by $351,000 or 87% in 1996 as compared
with an  increase  of  $105,000  or 35% in 1995  over the same  period  in 1994.
Professional  fees include legal,  consulting,  audit and  accounting  fees. The
primary reason for the 1996 increase was consulting fees incurred in conjunction
with the reengineering  project undertaken by the Bank in 1996. The increases in
1995 were  primarily  due to legal fees  increases  which  related to  corporate
matters  such as the bank  holding  company  formation  and the  expanded  proxy
statement.

   Other noninterest  expenses changed as follows:  equipment expenses increased
by  $233,000 or 30% in 1996 as compared  with  $48,000 or 10% in 1995;  supplies
increased  by $58,000 or 25% in 1996 as compared  with  increases of $110,000 or
89% in 1995; marketing expenses increased by $158,000 or 75% in 1996 as compared
with increases of $38,000 or 16% in 1995; and other operating expenses increased
by $280,000 or 32% in 1996 as compared with $356,000 in 1995.  Increases  relate
primarily to overall  growth of the Company  through the purchase of the Thrift,
branch  expansion in late 1995 and 1996, and the  establishment  of Capital West
Group.

Provision  for  Income  Taxes  The  Company's  provision  for  income  taxes was
$1,163,000  in 1996,  $223,000 in 1995 and  $1,103,000  in 1994.  The  effective
income  tax rate was 36.7% in 1996 as  compared  with 39.9% in 1995 and 38.8% in
1994. In part the effective tax rate of the Company has been reduced in 1996 due
to the tax  credits  earned by the  purchase of housing tax credits in late 1995
and 1996.  Total housing tax credits for 1996 were  approximately  $67,000.  The
change in the  effective  tax rate for the three years was also  impacted by the
effective  tax benefit  derived  from  interest  income on loans and  securities
exempt from federal  taxation.  The tax benefit from such income as a percentage
of income before taxes was 2.7% in 1996, 17.7% in 1995 and 3.0% in 1994.

Impact of Inflation The primary impact of inflation on the Company is its effect
on interest rates. The Company's primary source of income is net interest income
which is affected by changes in interest  rates.  The Company  attempts to limit
inflation's   impact  on  its  net  interest   margin   through   management  of
rate-sensitive  assets  and  liabilities  and  the  analysis  of  interest  rate
sensitivity.  The effect of  inflation  on  premises  and  equipment  as well as
noninterest  expenses has not been  significant  for the periods covered in this
report. 

                                       22


<PAGE>
                            CAPITAL CORP of the WEST

MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS

Effective January 18, 1996, the Company's stock was listed on NASDAQ, a national
market symbol with a stock quotation symbol of CCOW.  During 1995, the Company's
common stock was not listed on any stock  exchange nor quoted on NASDAQ,  it was
traded through the electronic  bulletin board.

   The  following  table  indicates  the  range  of high and low  sales  prices,
excluding  brokers'  commissions,  for the periods shown, based upon information
provided  by the NASDAQ for 1996 and the  Company's  market  makers and known to
management for 1995.

1996                                                 High             Low
--------------------------------------------------------------------------------
4th  quarter                                    $   16.25          $   13.75
3rd  quarter                                        14.75              12.63
2nd quarter                                         15.00              13.00
1st quarter                                     $   15.00          $   12.50
================================================================================

1995                                                High               Low
--------------------------------------------------------------------------------
4th quarter                                     $   12.25          $   12.00
3rd quarter                                         13.25              12.00
2nd quarter                                         14.00              12.50
1st quarter                                     $   13.50          $   12.00
================================================================================

   As of December 31, 1996, the number of  stockholders of the Company on record
was  approximately  1,175. A California  corporation  may pay a cash dividend or
other shareholder distribution only if (i) the distribution would not exceed its
retained  earnings or (ii)  either (a) the sum of its assets  (net of  goodwill,
capitalized  research and  development  expenses and deferred  charges) would be
less than 125% of its  liabilities  (net of  deferred  taxes,  income  and other
credits),  or (b)  current  assets  would not be less than  current  liabilities
(except  that if its average  earnings  before  taxes for the last two years had
been less than average interest  expenses,  current assets must be not less than
125% of current  liabilities). 

   Under the California  Financial  Code, a state licensed bank may declare cash
dividends in an amount not to exceed the lesser of the bank's retained  earnings
or net  income  for its last  three  fiscal  years  (less any  distributions  to
shareholders  made during the such  period)  or, with the prior  approval of the
California  Superintendent  of Banks, in an amount not to exceed the greatest of
(i) retained  earnings of the bank; (ii) the net income of the bank for its last
fiscal year; or (iii) the net income of the bank for its current fiscal year. If
the Superintendent finds that the shareholders' equity in a bank is not adequate
or that the payment of a dividend would be unsafe or unsound, the Superintendent
may order  the bank not to pay a  dividend  to  shareholders. 

   Federal  law  also   restricts   the  payment  of  dividends   under  certain
circumstances.  The FDIC  Improvement Act prohibits a bank from paying dividends
if after  making  such  payment,  the bank would fail to meet any of its capital
requirements.  Also, under the Financial  Institution  Supervisory Act, the FDIC
has the authority to prohibit a bank from engaging in business  practices  which
the  FDIC  considers  unsafe  or  unsound.  It is  possible,  depending  on the
financial  condition of the bank and other  factors,  that the FDIC could assert
that the payment of dividends or other payments in some  circumstances  might be
such an  unsafe  or  unsound  practice  and  therefore  prohibit  such  payment.

   Generally,  the  Company has  retained  earnings to support the growth of the
Company and has not paid regular cash dividends. The Company declared a 5% stock
dividend and a $.05 per share cash  dividend in August of 1996 for  shareholders
of  record as of  September  15,  1996.  This  resulted  in the  issuance  of an
additional  82,384 shares in 1996 and cash dividends to shareholders of $86,000.
In addition in 1996, the Bank paid $100,000 and the Thrift paid $825,000 in cash
dividends  to the  holding  company.  The  Thrift  dividend  was due to the cash
portion  of the  purchase  price of the Thrift  and was in  accordance  with its
dividend  authority as defined by the  Department of  Corporations. 

INDEPENDENT AUDITORS'  REPORT 

   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, 1996 and 1995 and the
related consolidated  statements of income, cash flows, and shareholders' equity
for each of the years in the three year period ended  December  31, 1996.  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  generally  accepted  auditing
standards. 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, 1996 and 1995 and the results of
their  operations  and their  cash flows for each of the years in the three year
period ended December 31, 1996 in conformity with generally accepted  accounting
principles. 

   As discussed in Note 1 to the consolidated financial statements,  the Company
changed  its  method  of  accounting  for  impaired  loans in 1995 to adopt  the
provisions of the Financial  Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by Statement No. 118, Accounting by Creditors for Impairment of
a Loan  -  Income  Recognition  and  Disclosures.  

/s/ KPMG Peat Marwick LLP

Sacramento, California 
January 31, 1997 

                                       23

<PAGE>


<TABLE>
CAPITAL CORP of the WEST
SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>

                                                                                                            Years Ended December 31,
                                          ------------------------------------------------------------------------------------------
                                                      1994              1993              1992            1996               1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>               <C>              <C>               <C>          
Summary of  operations
Total  interest  income                          $  19,351,000    $  15,873,000     $  12,807,000    $  11,483,000     $  11,370,000
Total interest expense                               6,865,000        5,717,000         3,850,000        3,061,000         3,948,000
Net interest income                                 12,486,000       10,156,000         8,957,000        8,422,000         7,422,000
Provision for loan losses                            1,513,000          228,000              --            254,000           162,000
Net interest income after provision
for loan losses                                     10,973,000        9,928,000         8,957,000        8,168,000         7,260,000
Total other income                                   2,935,000       (1,224,000)          805,000          679,000           884,000
Total other expense                                 10,736,000        8,146,000         6,923,000        6,459,000         6,302,000
Income before income taxes                           3,172,000          558,000         2,839,000        2,388,000         1,842,000
Provision for income taxes                           1,163,000          223,000         1,103,000          905,000           676,000
Cumulative effect of change
in accounting  for income taxes                           --               --                --           (300,000)             --
------------------------------------------------------------------------------------------------------------------------------------
Net income                                       $   2,009,000    $     335,000     $   1,736,000    $   1,783,000     $   1,166,000
------------------------------------------------------------------------------------------------------------------------------------
Per share
Weighted average number of
shares outstanding                                   1,578,198        1,333,923         1,333,456        1,332,414         1,332,414
Net income                                       $        1.27    $         .24     $        1.24    $        1.27     $         .84
Cash  dividends                                  $         .05             --                --               --                --
Shareholders'  equity (book value)               $       12.09    $       10.74     $       10.03    $        9.01     $        7.74
------------------------------------------------------------------------------------------------------------------------------------
Balance  sheet
Cash and  noninterest-bearing
deposit  in other  banks                         $  12,982,000    $  18,967,000     $  14,190,000    $  10,936,000     $   5,539,000
Time  deposits and federal                           6,836,000             --           2,300,000        4,700,000         5,300,000
funds sold
Investment securities                               43,378,000       45,302,000        35,826,000       22,823,000        21,980,000
Loans, net                                         180,455,000      132,035,000       111,979,000      105,377,000        95,719,000
Other  assets                                       22,338,000       12,729,000        13,826,000       11,342,000        13,450,000
------------------------------------------------------------------------------------------------------------------------------------
Total  assets                                      265,989,000      209,033,000       178,121,000      155,178,000       141,988,000
------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing  deposits                       39,157,000       39,726,000        31,924,000       29,392,000        24,041,000
Interest-bearing  deposits                         199,188,000      152,875,000       131,275,000      112,338,000       106,467,000
Other  liabilities                                   6,670,000        1,339,000           840,000          815,000           627,000
Shareholders' equity                                20,974,000       15,093,000        14,082,000       12,633,000        10,853,000
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity                             $ 265,989,000    $ 209,033,000     $ 178,121,000    $ 155,178,000     $ 141,988,000
====================================================================================================================================
<FN>
See  accompanying  notes to  Consolidated  Financial Statements. 
</FN>
</TABLE>

                                       24