**FORM
      10-Q**




**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




þ
            Quarterly
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934
                for the Quarterly Period EndedSeptember
                30, 2005


or


 ̈
            Transition
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the Transition Period from _____________ to
                ___________




Commission
      File Number: 0-27384







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










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







550
                West Main, Merced, CA 95340(Address
                of principal executive offices)





Registrant’s
      telephone number, including area code: (209)
      725-2200





Former
      name, former address and former fiscal year, if changed since last report: Not
      applicable





Indicate
      by check mark whether the registrant (1) has filed all reports required
      to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such
      filing
      requirements for the past 90 days. Yes þ No  ̈





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes þ  No  ̈





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





The
      number of shares outstanding of the registrant’s common stock, no par value, as
      of September 30, 2005 was 10,543,205. No shares of preferred stock, no par
      value, were outstanding at September 30, 2005.


-1-


**Capital
      Corp of the West**


Table
      of
      Contents





PART
      I.
      -- FINANCIAL INFORMATION




Item
                1. Financial StatementsConsolidated
                Balance Sheets (unaudited)
            3Consolidated
                Statements of Income and Comprehensive Income
                (unaudited)
            4Consolidated
                Statement of Changes in Shareholders’ Equity
                (unaudited)
            5Consolidated
                Statements of Cash Flows
                (unaudited)
            6Notes
                to the Consolidated Financial Statements
                (unaudited)
            7Item
                2. Management’s Discussion and Analysis of Financial
                Condition and Results of Operations
            12Item
                3. Quantitative and Qualitative Disclosures about
                Market Risk
            28Item
                4. Controls and Procedures
            29





PART
      II.
      -- OTHER INFORMATION




Item
                1.Legal
                Proceedings
            30Item
                2.Unregistered
                Sales of Equity Securities and Use of Proceeds
            30Item
                3.Defaults
                Upon Senior Securities
            30Item
                4.Submission
                of Matters to a vote of Security Holders
            30Item
                5.Other
                Information
            30Item
                6.Exhibits
            30SIGNATURES
            31Exhibit
                Index
            32




-2-




Capital
        Corp ofthe West
 Consolidated
        Balance Sheets
 (Unaudited)
 (Unaudited)
                September
                  30, 2005
              
              December
                  31, 2004(Dollars
                  in thousands)**Assets**Cash
                  and noninterest-bearing deposits in other banks
              
              $
              51,916
              
              $
              40,454Federal
                  funds sold
              
              
              4,760
              
              
              17,365Time
                  deposits at other financial institutions
              
              
              350
              
              
              3,350Investment
                  securities available for sale, at fair value
              
              
              237,792
              
              
              269,189Investment
                  securities held to maturity at cost, fair value of $182,864 and
                  $168,265
                  at September 30, 2005 and December 31, 2004
              
              
              183,779
              
              
              166,987Loans,
                  net of allowance for loan losses of $14,598 and $13,605 at
                September
                  30, 2005 and December 31, 2004
              
              
              1,012,633
              
              
              871,488Interest
                  receivable
              
              
              6,613
              
              
              5,979Premises
                  and equipment, net
              
              
              26,725
              
              
              22,426Goodwill
              
              
              1,405
              
              
              1,405Other
                  intangibles
              
              
              35
              
              
              69Cash
                  value of life insurance
              
              
              31,525
              
              
              28,362Investment
                  in housing tax credit limited partnerships
              
              
              8,217
              
              
              8,623Other
                  assets
              
              
              15,334
              
              
              12,750Total
                  assets
              
              $
              1,581,084
              
              $
              1,448,447**Liabilities
                  and Shareholders’ Equity**Deposits:Noninterest-bearing
                  demand
              
              $
              288,791
              
              $
              262,315Negotiable
                  orders of withdrawal
              
              
              189,776
              
              
              170,870Savings
              
              
              372,761
              
              
              360,319Time,
                  under $100,000
              
              
              210,446
              
              
              193,913Time,
                  $100,000 and over
              
              
              226,734
              
              
              166,740Total
                  deposits
              
              
              1,288,508
              
              
              1,154,157Borrowed
                  funds
              
              
              145,149
              
              
              164,119Junior
                  subordinated debentures
              
              
              16,496
              
              
              16,496Accrued
                  interest, taxes and other liabilities
              
              
              12,952
              
              
              10,194Total
                  liabilities
              
              
              1,463,105
              
              
              1,344,966Preferred
                  stock, no par value; 10,000,000 shares authorized; None
                  outstanding
              
              
              -
              
              
              -Common
                  stock, no par value; 54,000,000 shares authorized; 10,543,205 and
                  10,429,754 issued & outstanding at September 30, 2005 and December 31,
                  2004
              
              
              58,982
              
              
              57,139Retained
                  earnings
              
              
              60,194
              
              
              45,981Accumulated
                  other comprehensive (loss) income
              
              
              (1,197
              )
              
              361Total
                  shareholders’ equity
              
              
              117,979
              
              
              103,481Total
                  liabilities and shareholders’ equity
              
              $
              1,581,084
              
              $
              1,448,447
 See
        accompanying notes to consolidated financial statements.
  -3-
 Table
            of Contents
  Capital
        Corp of the West
 Consolidated
        Statements of Income and Comprehensive Income
 (Unaudited)
  For
                  Three Months
              
              For
                  Nine MonthsEnded
                  September 30,
              
              Ended
                  September 30,(Dollars
                  in thousands, except per share data)
              
              2005
              
              2004
              
              2005
              
              2004**Interest
                  income:**Interest
                  and fees on loans
              
              $
              19,106
              
              $
              13,918
              
              $
              51,572
              
              $
              40,657Interest
                  on deposits with other financial institutions
              
              
              2
              
              
              1
              
              
              17
              
              
              5Interest
                  on investments held to maturity:Taxable
              
              
              1,065
              
              
              563
              
              
              3,243
              
              
              1,728Non-taxable
              
              
              900
              
              
              554
              
              
              2,492
              
              
              1,546Interest
                  on investments available for sale:Taxable
              
              
              2,384
              
              
              2,496
              
              
              7,703
              
              
              7,734Non-taxable
              
              
              11
              
              
              11
              
              
              33
              
              
              32Interest
                  on federal funds sold
              
              
              19
              
              
              44
              
              
              91
              
              
              85Total
                  interest income
              
              
              23,487
              
              
              17,587
              
              
              65,151
              
              
              51,787**Interest
                  expense:**Interest
                  on negotiable orders of withdrawal
              
              
              102
              
              
              18
              
              
              160
              
              
              50Interest
                  on savings deposits
              
              
              1,406
              
              
              772
              
              
              3,515
              
              
              2,290Interest
                  on time deposits, under $100
              
              
              1,578
              
              
              1,129
              
              
              4,248
              
              
              3,264Interest
                  on time deposits, $100 and over
              
              
              1,743
              
              
              869
              
              
              4,196
              
              
              2,678Interest
                  on junior subordinated debentures
              
              
              327
              
              
              272
              
              
              972
              
              
              801Interest
                  on borrowed funds
              
              
              1,364
              
              
              1,196
              
              
              4,152
              
              
              3,428Total
                  interest expense
              
              
              6,520
              
              
              4,256
              
              
              17,243
              
              
              12,511Net
                  interest income
              
              
              16,967
              
              
              13,331
              
              
              47,908
              
              
              39,276Provision
                  for loan losses
              
              
              1,035
              
              
              879
              
              
              1,356
              
              
              2,183Net
                  interest income after provision for loan losses
              
              
              15,932
              
              
              12,452
              
              
              46,552
              
              
              37,093**Noninterest
                  income:**Service
                  charges on deposit accounts
              
              
              1,554
              
              
              1,641
              
              
              4,447
              
              
              4,655Increase
                  in cash surrender value of life insurance policies
              
              
              310
              
              
              271
              
              
              770
              
              
              767Other
              
              
              802
              
              
              707
              
              
              2,458
              
              
              2,228Total
                  noninterest income
              
              
              2,666
              
              
              2,619
              
              
              7,675
              
              
              7,650**Noninterest
                  expenses:**Salaries
                  and related benefits
              
              
              5,538
              
              
              4,976
              
              
              16,748
              
              
              15,470Premises
                  and occupancy
              
              
              1,205
              
              
              990
              
              
              3,256
              
              
              2,533Equipment
              
              
              1,035
              
              
              789
              
              
              2,936
              
              
              2,361Professional
                  fees
              
              
              418
              
              
              335
              
              
              1,620
              
              
              1,103Supplies
              
              
              236
              
              
              222
              
              
              808
              
              
              622Marketing
              
              
              231
              
              
              281
              
              
              855
              
              
              781Intangible
                  amortization
              
              
              11
              
              
              167
              
              
              34
              
              
              500Other
              
              
              1,626
              
              
              1,286
              
              
              5,053
              
              
              4,327Total
                  noninterest expenses
              
              
              10,300
              
              
              9,046
              
              
              31,310
              
              
              27,697Income
                  before provision for income taxes
              
              
              8,298
              
              
              6,025
              
              
              22,917
              
              
              17,046Provision
                  for income taxes
              
              
              2,845
              
              
              2,042
              
              
              7,350
              
              
              5,539Net
                  income
              
              $
              5,453
              
              $
              3,983
              
              $
              15,567
              
              $
              11,507Comprehensive
                  income:Unrealized
                  (loss) gain on securities arising during the period
              
              
              (1,071
              )
              
              2,087
              
              
              (1,558
              )
              
              (697
              )Comprehensive
                  income
              
              $
              4,382
              
              $
              6,070
              
              $
              14,009
              
              $
              10,810Basic
                  earnings per share
              
              $
              0.52
              
              $
              0.38
              
              $
              1.49
              
              $
              1.12Diluted
                  earnings per share
              
              $
              0.50
              
              $
              0.37
              
              $
              1.44
              
              $
              1.08
 See
        accompanying notes to consolidated financial statements. Capital
        Corp of the West
  -4-
 Table
            of Contents
  Consolidated
        Statement of Changes in Shareholders’
        Equity
 (Unaudited)
 Common
                  Stock
              
              
              
              Accumulated
                  Other(Amounts
                  in thousands)
              
              Number
                  of Shares
              
              Amounts
              
              Retained
                  Earnings
              
              Comprehensive
                  Income (Loss), Net
              
              TotalBalance,
                  December 31, 2004
              
              
              10,430
              
              $
              57,139
              
              $
              45,981
              
              $
              361
              
              $
              103,481Exercise
                  of stock options, net of tax benefit of $394
              
              
              101
              
              
              1,543
              
              
              
              
              
              
              
              
              1,543Issuance
                  of shares pursuant to 401K and ESOP plans
              
              
              12
              
              
              300
              
              
              
              
              
              
              
              
              300Net
                  change in fair market value of investment securities, net of tax
                  benefit
                  of $1,128
              
              
              
              
              
              
              
              
              
              
              
              (1,558
              )
              
              (1,558
              )Cash
                  dividends
              
              
              
              
              
              
              
              
              (1,354
              )
              
              
              
              
              (1,354
              )Net
                  income
              
              
              
              
              
              
              
              
              15,567
              
              
              
              
              
              15,567Balance,
                  September 30, 2005
              
              
              10,543
              
              $
              58,982
              
              $
              60,194
              
              $
              (1,197
              )
              $
              117,979
 See
        accompanying notes to consolidated financial statements Capital
        Corp of the West
  -5-
 Table
            of Contents
  Consolidated
        Statements of Cash Flows
 (Unaudited)
 (Dollars
                  in thousands)
              
              Nine
                  months ended
                September
                  30,
                2005
              
              Nine
                  months ended
                September
                  30,
                2004**Operating
                  activities:**Net
                  income
              
              $
              15,567
              
              $
              11,507Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              1,356
              
              
              2,183Depreciation,
                  amortization and accretion, net
              
              
              5,571
              
              
              4,846Noncash
                  earnings from bank owned life insurance
              
              
              (770
              )
              
              (767
              )Death
                  benefit income from bank owned life insurance
              
              
              539
              
              
              -Net
                  (increase) decrease in interest receivable & other
                  assets
              
              
              (2,732
              )
              
              87Net
                  increase (decrease) in accrued interest payable & other
                  liabilities
              
              
              2,758
              
              
              (1,803
              )Net
                  cash provided by operating activities
              
              
              22,289
              
              
              16,053**Investing
                  activities:**Investment
                  securities purchases - available for sale securities
              
              
              (53,282
              )
              
              (57,719
              )Investment
                  securities purchases - held to maturity securities
              
              
              (28,996
              )
              
              (31,807
              )Proceeds
                  from maturities of available for sale investment
                  securities
              
              
              51,434
              
              
              47,951Proceeds
                  from maturities of held to maturity investment securities
              
              
              12,204
              
              
              8,228Maturity
                  of time deposits at other financial institutions
              
              
              3,000
              
              
              -Proceeds
                  from sales of available for sale securities
              
              
              29,537
              
              
              15,975Proceeds
                  from sales of loans
              
              
              1,606
              
              
              2,480Net
                  increase in loans
              
              
              (146,315
              )
              
              (98,626
              )Purchases
                  of premises and equipment
              
              
              (6,097
              )
              
              (4,721
              )Net
                  purchases of bank owned life insurance
              
              
              (2,393
              )
              
              (3,157
              )Net
                  cash used in investing activities
              
              
              (139,302
              )
              
              (121,396
              )**Financing
                  activities:**Net
                  increase in demand, NOW and savings deposits
              
              
              57,824
              
              
              55,217Net
                  increase in certificates of deposit
              
              
              76,527
              
              
              3,626Net
                  (repayments) proceeds from other borrowings
              
              
              (18,970
              )
              
              47,342Payment
                  of cash dividends
              
              
              (1,354
              )
              
              (864
              )Issuance
                  of shares pursuant to 401K and ESOP plans
              
              
              300
              
              
              624Exercise
                  of stock options
              
              
              1,543
              
              
              1,720Net
                  cash provided by financing activities
              
              
              115,870
              
              
              107,665Net
                  (decrease) increase in cash and cash equivalents
              
              
              (1,143
              )
              
              2,322Cash
                  and cash equivalents at beginning of period
              
              
              57,819
              
              
              45,482Cash
                  and cash equivalents at end of period
              
              $
              56,676
              
              $
              47,804**Supplemental
                  disclosure of cash flow activity:**Interest
                  paid
              
              $
              17,050
              
              $
              11,501Income
                  tax payments
              
              
              5,275
              
              
              7,561Income
                  tax benefit from stock options
              
              
              394
              
              
              587**Supplemental
                  disclosure of noncash investing**
                **and
                  financing activities:**Investment
                  securities and swaps unrealized losses, net of tax
              
              $
              (1,558
              )
              $
              (697
              )
 See
        accompanying notes to consolidated financial statements
  -6-
 Table
            of Contents
  Capital
        Corp of the West
 Notes
        to
        Consolidated Financial Statements
 As
          of September 30, 2005 and December 31, 2004 and for the
 Three
          and Nine Months Ended September 30, 2005 and 2004
 (Unaudited)
 
 GENERAL
        -
        COMPANY
 
 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”). 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 54,000,000 shares of authorized common stock, no par value, and 10,000,000
        shares of authorized preferred stock. As of September 30, 2005 there were
        10,543,205 common shares outstanding. There were no preferred shares
        outstanding. The Bank has three wholly owned subsidiaries, Merced Area
        Investment & Development, Inc. ("MAID"), County Asset Advisors ("CAA"), and
        County Investment Trust (“REIT”). CAA is currently inactive. The Company also
        has two unconsolidated trusts, County Statutory Trust and County Statutory
        Trust
        II (the “Trusts”). In the second quarter of 2002, the Company purchased Regency
        Investment Advisors, Inc (“RIA”). RIA was sold in October 2004. The Company has
        one wholly owned subsidiary, Capital West Group, Inc. (“CWG”). CWG is currently
        inactive. All references herein to the "Company" include the Company, the
        Company’s subsidiaries, the Bank and the Bank's subsidiaries, unless the context
        otherwise requires.
 
 GENERAL
        -
        BANK
 
 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 which 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. The Bank is a member of the Federal Reserve
        system.
 
 INDUSTRY
        AND MARKET AREA
 
 The
        Bank
        engages in general commercial banking business primarily in Fresno, Madera,
        Mariposa, Merced, San Francisco, San Joaquin, Stanislaus and Tuolomne counties.
        The Bank has twenty full service branch offices; two of which are located
        in
        Merced with the branch located in downtown Merced currently serving as both
        a
        branch and as administrative headquarters. There are branch offices in Atwater,
        Dos Palos, Hilmar, Livingston, Los Banos, Madera, Mariposa, San Francisco,
        Sonora, Stockton, two offices in Modesto, four in Fresno and two offices
        in
        Turlock. The Bank also has a loan production office in Sacramento, California.
        The Bank’s administrative headquarters provides accommodations for all of its
        not banking activity.
  -7-
 Table
            of Contents
  OTHER
        FINANCIAL NOTES
 
 All
        adjustments which in the opinion of Management are necessary for a fair
        presentation of the Company’s financial position at September 30, 2005 and
        December 31, 2004 and the results of operations for the three and nine month
        periods ended September 30, 2005 and 2004, and the statements of cash flows
        for
        the nine months ended September 30, 2005 and 2004 have been included. The
        interim results for the three and nine months ended September 30, 2005 are
        not
        necessarily indicative of results to be expected for the full year. These
        financial statements, notes and other information should be read in conjunction
        with the financial statements and the notes included in the Company’s Annual
        Report on Form 10-K for the year ended December 31, 2004.
 
 The
        accompanying unaudited financial statements have been prepared in accordance
        with generally accepted accounting principles, instructions to Form 10-Q
        and
        Rule 10-01 of Regulation S-X.
 
 Basic
        earnings per share (EPS) is computed by dividing net income available to
        shareholders by the weighted average number of common shares outstanding
        during
        the period. Diluted earnings per share is computed by dividing net income
        available to common shareholders by the weighted average number of common
        shares
        outstanding during the period plus potential common shares outstanding. Diluted
        earnings per share reflects the potential dilution that could occur if
        securities or other contracts to issue common stock were exercised or converted
        into common stock or resulted in the issuance of common stock that then shared
        in the earnings of the Company. Earnings per share data is adjusted for the
        effect of the nine for five stock split announced on March 29, 2005 with
        a
        distribution date of April 29, 2005.
 
 The
        following table provides a reconciliation of the numerator and denominator
        of
        the basic and diluted earnings per share computation of the three and nine
        month
        periods ended September 30, 2005 and 2004:
 
 For
                  The Three Months Ended September 30,
              
              For
                  The Nine Months Ended September 30,(Dollars
                  in thousands, except per share data)
              
              2005
              
              2004
              
              2005
              
              2004Basic
                  EPS computation:Net
                  income
              
              $
              5,453
              
              $
              3,983
              
              $
              15,567
              
              $
              11,507Average
                  common shares outstanding
              
              
              10,506
              
              
              10,376
              
              
              10,480
              
              
              10,292Basic
                  EPS
              
              $
              0.52
              
              $
              0.38
              
              $
              1.49
              
              $
              1.12Diluted
                  EPS Computations:Net
                  income
              
              $
              5,453
              
              $
              3,983
              
              $
              15,567
              
              $
              11,507Average
                  common shares outstanding
              
              
              10,506
              
              
              10,376
              
              
              10,480
              
              
              10,293Effect
                  of stock options
              
              
              342
              
              
              337
              
              
              329
              
              
              37310,848
              
              
              10,713
              
              
              10,809
              
              
              10,666Diluted
                  EPS
              
              $
              0.50
              
              $
              0.37
              
              $
              1.44
              
              $
              1.08
  -8-
 Table
            of Contents
  INTANGIBLE
        ASSETS
 
 The
        Company has intangible assets consisting of core deposit premiums and goodwill.
        Core deposit premiums are amortized using an accelerated method over a period
        of
        ten years. Intangible assets related to goodwill have not been amortized
        after
        December 31, 2001 but are reviewed periodically for potential impairment.
        During
        the third quarter of 2005, management determined there had been no impairment
        of
        goodwill. As of September 30, 2005 and December 31, 2004, the Company had
        unamortized core deposit premiums of $35,000 and $69,000, respectively.
        Amortization of core deposit premiums and other intangibles was $34,000 and
        $500,000 nine months ended September 30, 2005 and 2004, respectively. Core
        deposit premiums of $460,000 and $4,340,000 were initially recorded as a
        result
        of purchasing deposits from Town and Country Finance and Thrift in July,
        1996
        and the purchase of three branches from Bank of America in December, 1997,
        respectively. The decrease in intangible amortization was related to the
        complete amortization of the premium paid on branch deposits purchased from
        Bank
        of America in December 1997.
 
 BORROWED
        FUNDS
 
 During
        the nine months ended September 30, 2005, the Bank decreased its short term
        borrowings. The borrowings were decreased at the Federal Home Loan Bank,
        Pacific
        Coast Bankers’ Bank, and Fed Funds purchased. The decrease in borrowings totaled
        $18,970,000 between December 31, 2004 and September 30, 2005.
 
 STOCK
        COMPENSATION
 
 The
        Company provides stock-based compensation to certain officers and directors.
        The
        Company uses the intrinsic value method to account for its stock option plans
        (in accordance with the provisions of Accounting Principles Board Opinion
        No.
        25). Under this method, compensation expense is recognized for awards of
        options
        to purchase shares of common stock to employees under compensatory plans
        only if
        the fair market value of the stock at the option grant date (or other
        measurement date, if later) is greater than the amount the employee must
        pay to
        acquire the stock. Statement of Financial Accounting Standards No. 123,
        Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
        using the intrinsic value method or to adopt a fair value based model to
        account
        for stock option plans. The fair value based method results in recognizing
        as
        expense over the vesting period the fair value of all stock-based awards
        on the
        date of grant. The Company has elected to continue to use the intrinsic value
        method.
  -9-
 Table
            of Contents
  Had
        compensation cost for the Company’s option plans been determined in accordance
        with SFAS 123, the Company’s net income and earnings per share would have been
        reduced to the pro forma amounts indicated as follows:
  Three
                    months ended September, 30
                
                Nine
                    months ended September 30,(Dollars
                    in thousands except per share amounts)
                
                2005
                
                2004
                
                2005
                
                2004Net
                    income:As
                    reported
                
                $
                5,453
                
                $
                3,983
                
                $
                15,567
                
                $
                11,507Less
                    stock based compensation expense determined under fair value
                    based method
                    for all awards net of related taxes
                
                
                (231
                )
                
                (191
                )
                
                (854
                )
                
                (698
                )Pro
                    forma
                
                $
                5,222
                
                $
                3,792
                
                $
                14,713
                
                $
                10,809Basic
                    earnings per share:As
                    reported
                
                $
                0.52
                
                $
                0.38
                
                $
                1.49
                
                $
                1.12Pro
                    forma
                
                $
                0.49
                
                $
                0.37
                
                $
                1.40
                
                $
                1.05Diluted
                    earnings per share:As
                    reported
                
                $
                0.50
                
                $
                0.37
                
                $
                1.44
                
                $
                1.08Pro
                    forma
                
                $
                0.48
                
                $
                0.35
                
                $
                1.36
                
                $
                1.01
 
 Compensation
          expense related to the issuance of stock options that would have been reported
          pursuant to Financial Accounting Standards No. 123 (Revised 2004) for the
          three
          and nine months ended September 30, 2005 was $228,000 and $947,000 compared
          to
          $204,000 and $782,000 for the same three and nine months in 2004. During
          the
          three and nine months ended September 30, 2005, the Company would have
          reported
          an additional tax expense of $3,000 and an additional tax benefit of $93,000,
          which compares to a tax benefit of $13,000 and $84,000 for the same periods
          in
          2004 related to compensation expense from the issuance of stock options.
          Beginning January 1, 2006, stock option expense will be presented in the
          Consolidated Statements of Income and Comprehensive Income on a prospective
          basis in conformity with Statement of Financial Accounting Standards No.
          123
          (Revised 2004).
 RECLASSIFICATIONS
 
 Certain
        amounts previously reported in the 2004 financial statements have been
        reclassified to conform to the 2005 presentation. Additionally, in the first
        quarter of 2005, the Company reclassified the reserve for unfunded commitments
        from the allowance for losses to other liabilities, and reclassified the
        provision for unfunded commitments from the provision for loan losses to
        other
        noninterest expense. These reclassifications did not affect previously reported
        net income or total shareholders’ equity. Share and per share data for all
        periods have been adjusted to reflect the nine-for-five stock split which
        was
        effective on April 29, 2005 to shareholders of record on April 8,
        2005.
  -10-
 Table
            of Contents
  **Recent
        Accounting Pronouncements**
 
 In
        May
        2003, Financial Accounting Standards Board ("FASB") issued Statement No.
        150, *Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and
        Equity.* This
        Statement establishes standards for the classification and measurement of
        certain financial instruments with characteristics of both liabilities and
        equity. The Statement also includes required disclosures for financial
        instruments within its scope. For the Company, the Statement was effective
        for
        instruments entered into or modified after May 11, 2004 and otherwise was
        effective as of January 1, 2004 except for mandatorily redeemable financial
        instruments. For certain mandatorily redeemable instruments, the Statement
        was
        effective for the Company on January 1, 2005. The effective date has been
        deferred indefinitely for certain other types of mandatorily redeemable
        financial instruments. The Company does not currently have any financial
        instruments that are within the scope of this Statement.
 
 In
        December 2003, the Accounting Standards Executive Committee of the AICPA
        issued
        Statement of Position No. 03-3 (“SOP 03-3”), *Accounting
        for Certain Loans or Debt Securites Acquired in a Transfer.* SOP
        03-3
        addresses the accounting for differences between the contractual cash flows
        and
        the cash flows expected to be collected from purchased loans or debt securities
        if those differences are attributable, in part, to credit quality. SOP 03-3
        requires purchased loans and debt securities to be recorded initially at
        fair
        value based on the present value of the cash flows expected to be collected
        with
        no carryover of any valuation allowance previously recognized by the seller.
        Interest income should be recognized based on the effective yield determine
        by
        reference to the purchase price and cash flows expected to be collected.
        To the
        extent that the purchased loans or debt securities experience subsequent
        deterioration in credit quality, a valuation allowance must be established
        for
        the present value of any estimated future cash flows that will not be collected.
        However, if more cash flows subsequently are expected to be received than
        originally estimated, the effective yield is to be adjusted on a prospective
        basis. SOP 03-3 was effective for loans and debt securities acquired after
        December 31, 2004. Although the Company anticipates that the implementation
        of SOP 03-3 may require loan system and operational changes to track credit
        related losses on loans purchased starting in 2005, the Company experienced
        no
        significant effect on the consolidated financial statements.
  In
        March
        2004, the Emerging Issues Task Force (“EITF”) Issue No. 03-1 “The Meaning of
        Other-Than-Temporary Impairment and its Application to Certain Investments”
        consensus was published. Issue No. 03-1 contained new guidance effectively
        adopting the provisions of SEC Staff Accounting Bulletin No. 59. In September
        2004, the FASB delayed the requirement to record impairment losses under
        EITF
        03-1. The disclosure requirements of EITF 03-1 remain in effect. Management
        of
        the Company has done an analysis of the impact of this accounting pronouncement,
        which is discussed in the section of this report entitled, Financial Condition.
        The Company does not expect the adoption of the final EITF **** will
        have
        a material impact of the Company’s Consolidated Financial
        Statements.
  In
        December 2004, the FASB issued Statement of Financial Accounting Standards
        ("SFAS") No. 123 (Revised 2004), *Share-Based
        Payment* .
        The
        statement requires that compensation cost relating to share-based payment
        transactions be recognized in financial statements and that this cost be
        measured based on the fair value of the equity or liability instruments issued.
        SFAS No. 123 (Revised 2004) covers a wide range of share-based compensation
        arrangements including share options, restricted share plans, performance-based
        awards, share appreciation rights, and employee share purchase plans. In
        April,
        2005, the SEC deferred the required adoption date for this standard until
        January 1, 2006. The Company will adopt SFAS No 123 (Revised 2004) on January
        1,
        2006 and is currently evaluating the impact the adoption of the standard
        will
        have on the Company's results of operations. The impact on the third quarter
        and
        first nine months of 2004 and 2005 is discussed in the “Other Financial Notes”
        section of this report. SEC Staff Accounting Bulletin No. 107, *Share-Based
        Payment* provides
        guidance that will assist issuers in their initial implementation of FASB
        Statement No. 123 (revised 2004), *Share-Based
        Payment.* The
        SEC
        staff expressed its views regarding the interaction between Statement 123(R)
        and
        certain SEC rules and regulations. SAB 107 also provides the staff’s views on
        the valuation of share-based payment arrangements for public companies.
  In
        May
        2005, the FASB issued SFAS No. 154 *Accounting
        Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
        Statement No. 3.* The
        Statement requires retrospective application to prior periods’ financial
        statements of voluntary changes in accounting principle, unless it is
        impracticable to determine either the period - specific effects of the
        cumulative effect of the change. When it is impracticable to determine the
        period - specific effects of an accounting change on one or more individual
        prior periods presented, the new accounting principle is to be applied to
        the
        balances of assets and liabilities as of the beginning of the earliest period
        for which retrospective application is practicable, with a corresponding
        adjustment made to the opening balance of retained earnings or other components
        of equity for that period. If it is impracticable to determine the cumulative
        effect of applying a change in accounting principle, the new accounting
        principle is to be applied prospectively from the earliest date practicable.
        If
        retrospective application for all periods is impracticable, the method used
        to
        report the change and the reason that retrospective application is impracticable
        are to be disclosed. The Company does not expect the adoption of FASB No.
        154 to
        have a significant effect on the Company’s Consolidated Financial
        Statements.
  -11-
 Table
            of Contents
  **Item
        2. Management'sDiscussion And Analysis Of Financial
        Condition** **And
        Results Of Operations**
 
 The
        following Management's Discussion and Analysis of Financial Condition and
        Results of Operations contains forward-looking statements that are subject
        to
        risks and uncertainties and include information about possible or assumed
        future
        results of operations. Many possible events or factors could affect the future
        financial results and performance of the company. This could cause results
        or
        performance to differ materially from those expressed in our forward-looking
        statements. Words such as
“expects,”“anticipates,”“believes,”“estimates,”“intends,”“plans,”“assumes,”“projects,”“predicts,”“forecasts,”
        and variations of such words and other similar expressions are intended to
        identify such forward-looking statements. These statements are not guarantees
        of
        future performance and involve certain risks, uncertainties and assumptions
        which are difficult to predict. Therefore, actual outcomes and results may
        differ materially from what is expressed or forecasted in, or implied by,
        such
        forward-looking statements.
 
 Readers
        of the Company’s Form 10-Q should not rely solely on forward looking statements
        but must also consider all uncertainties and risks discussed throughout this
        Form 10-Q, as well as those discussed in the Company’s 2004 Annual Report on
        Form 10-K filed on March 15, 2005. These statements are representative only
        on
        the date hereof, and the Company undertakes no obligation to update any
        forward-looking statements made herein. Some possible events or factors that
        could occur that may cause differences from expected results include the
        following: the Company’s loan growth is dependent on economic conditions, as
        well as various discretionary factors, such as decisions to sell, or purchase
        certain loans or loan portfolios; or sell or buy participations of loans;
        the
        quality and adequacy of management of our borrowers; industry, product and
        geographic concentrations and the mix of the loan portfolio. The rate of
        charge-offs and provision expense can be affected by local, regional and
        international economic and market conditions, concentrations of borrowers,
        industries, products and geographical conditions, the mix of the loan portfolio
        and management’s judgements regarding the collectibility of loans. Liquidity
        requirements may change as a result of fluctuations in assets and liabilities
        and off-balance sheet exposures, which will impact the capital and debt
        financing needs of the Company and the mix of funding sources. Decisions
        to
        purchase, hold, or sell securities are also dependent on liquidity requirements
        and market volatility, as well as on and off-balance sheet positions. Factors
        that may impact interest rate risk include local, regional and international
        economic conditions, levels, mix, maturities, yields or rates of assets and
        liabilities and the wholesale and retail funding sources of the Company.
 
 The
        Company is also exposed to the potential of losses arising from adverse changes
        in market rates and prices which can adversely impact the value of financial
        products, including securities, loans, and deposits. In addition, the banking
        industry in general is subject to various monetary and fiscal policies and
        regulations, which include those determined by the Federal Reserve Board,
        the
        Federal Deposit Insurance Corporation and state regulators, whose policies
        and
        regulations could affect the Company’s results.
 
 Other
        factors that may cause actual results to differ from the forward-looking
        statements include the following: competition with other local and regional
        banks, savings and loan associations, credit unions and other nonbank financial
        institutions, such as investment banking firms, investment advisory firms,
        brokerage firms, mutual funds and insurance companies, as well as other entities
        which offer financial services; interest rate, market and monetary fluctuations;
        inflation; market volatility; general economic conditions; introduction and
        acceptance of new banking-related products, services and enhancements; fee
        pricing strategies, mergers and acquisitions and their integration into the
        Company, civil disturbances or terrorist threats or acts, or apprehension
        about
        the possible future occurrences or acts of this type, outbreak or escalation
        of
        hostilities in which the United States is involved, any declaration of war
        by
        the U.S. Congress or any other national or international calamity, crisis
        or
        emergency changes in laws and regulations, recently issued accounting
        pronouncements, government policies, regulations, and their enforcement
        (including Bank Secrecy Act-related matters, taxing statutes and regulations);
        restrictions on dividends that our Bank subsidiaries are allowed to pay the
        Company; the ability to satisfy requirements related to the Sarbanes-Oxley
        Act
        and other regulation on internal control; and management’s ability to manage
        these and other risks. For additional information relating to the risks of
        the
        Company's business see "Risk Factors" in the Company's Annual Report on Form
        10-K.
  -12-
 Table
            of Contents
  **Critical
        accounting policies and estimates**
 
 The
        Company’s discussion and analysis of its financial condition and results of
        operations is based upon the Company’s consolidated financial statements, which
        have been prepared in accordance with accounting principles generally accepted
        in the United States. The preparation of these financial statements requires
        the
        Company to make estimates and judgments that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, and related disclosure of contingent
        assets and liabilities. On an on-going basis, the Company evaluates its
        estimates, including those related to the adequacy of the allowance for loan
        losses, intangible assets, valuation of deferred income taxes and contingencies.
        The Company bases its estimates on historical experience and on various other
        assumptions that are believed to be reasonable under the circumstances, the
        results of which form the basis for making judgments about the carrying values
        of assets and liabilities that are not readily apparent from other sources.
        Actual results may differ from these estimates under different assumptions
        or
        conditions. (See caption “Allowance for Loan Losses” for a more detailed
        discussion). The critical accounting policies and accounting estimates are
        further discussed in Note 1 of the Company’s 2004 Annual Report.
  The
        following discussion and analysis is designed to provide a better understanding
        of the significant changes and trends related to the Company and its
        subsidiaries' financial condition, operating results, asset and liability
        management, liquidity and capital resources and should be read in conjunction
        with the Consolidated Financial Statements of the Company and the Notes thereto.
  -13-
 Table
            of Contents
  Results
        Of Operations
 
 **The
        Three and Nine Months Ended September 30, 2005 Compared With The Three
        and
        Nine Months Ended September 30, 2004**
  OVERVIEW
  For
        the
        three and nine months ended September 30, 2005 the Company reported net income
        of $5,453,000 and $15,567,000, respectively. This compares to $3,983,000
        and
        $11,507,000 for the same periods in 2004 and represents an increase of
        $1,470,000 or 37% and $4,060,000 or 35% respectively. Basic and fully diluted
        earnings per share were $0.52 and $0.50 for the three months ended September
        30,
        2005 and $1.49 and $1.44 for the nine months ended September 30, 2005. This
        compares to basic and fully diluted earnings per share of $0.38 and $0.37
        for
        the three months ended September 30, 2004 and $1.12 and $1.08 for the nine
        months ended September 30, 2004. This represents an increase of $0.14 for
        basic
        earnings per share and $0.13 for fully diluted earnings per share for the
        three
        months ended September 30, 2004 and $0.37 and $0.36 for the nine months ended
        September 30, 2004. The basic and fully diluted earnings per share are
        reflective of the nine for five stock split that was announced in March,
        2005,
        with a distribution date of April 29, 2005. The annualized return on average
        assets was 1.39% and 1.37% for the three and nine months ended September
        30,
        2005 compared to 1.21% and 1.20% for the same periods in 2004. The Company's
        annualized return on average equity was 18.84% and 18.77% for the three and
        nine
        months ended September 30, 2005 compared to 16.26% and 16.14% for the same
        time
        periods in 2004.
  NET
        INTEREST INCOME
  The
        Company's primary source of income is net interest income and is determined
        by
        the difference between interest income and fees derived from interest earning
        assets and interest paid on interest-bearing liabilities. Net interest income
        for the three and nine months ended September 30, 2005 totaled $16,967,000
        and
        $47,908,000, respectively. This represents an increase of $3,636,000 and
        $8,632,000 or 27% and 22% when compared to the $13,331,000 and $39,276,000
        earned during the three and nine months ended September 30, 2004.
  Total
        interest and fees on earning assets were $23,487,000 and $65,151,000 for
        the
        three and nine months ended September 30, 2005, rising 34% or $5,900,000
        for the
        three month period ended September 30, 2005 and rising 26% or $13,364,000
        for
        the nine month period ended September 30, 2005 when compared to the $17,587,000
        and $51,787,000 earned during the three and nine months ended September 30,
        2004. Total interest income is affected by changes in the volume of, and
        rates
        earned on, interest earning assets. Interest earning assets consist primarily
        of
        loans, investment securities and federal funds sold. The increase in total
        interest income for the three and nine months ended September 30, 2005 was
        primarily the result of both an increase in volume of interest earning assets
        and the interest rate earned on those assets. Average interest-earning assets
        for the three and nine months ended September 30, 2004 were $1,444,974,000
        and
        $1,397,244,000 compared with $1,211,253,000 and $1,186,843,000 for the three
        and
        nine months ended September 30, 2004, an increase of $233,721,000 or 19%
        and
        $210,401,000 or 18% during both time periods.
  Interest
        expense is a function of the volume of and the rates paid on interest-bearing
        liabilities. Interest-bearing liabilities consist primarily of certain deposits
        and borrowed funds. Total interest expense was $6,520,000 and $17,243,000
        for
        the three and nine months ended September 30, 2005, compared with $4,256,000
        and
        $12,511,000 for the three and nine months ended September 30, 2004, an increase
        of $2,264,000 or 53% and $4,732,000 or 38%, respectively. The increase in
        total
        interest expense for the three and nine months ended September 30, 2005 was
        the
        result of an increase in the volume and rates paid on interest-bearing
        liabilities. Average interest-bearing liabilities were $1,154,247,000 and
        $1,120,036,000 for the three and nine months ended September 30, 2005 compared
        with $989,592,000 and $976,482,000 for the same three and nine months in
        2004,
        an increase of $164,655,000 and $143,554,000 or 17% and 15%. Average interest
        rates paid on interest-bearing liabilities were 2.24% for the three months
        and
        2.06% for nine months ended September 30, 2005 compared with 1.71% for both
        the
        three and nine months ended Spetember 30, 2004, an increase in interest rates
        paid of 53 and 35 basis points. The increases were primarily the result of
        increased prevailing market interest rates and the repricing of maturing,
        lower
        yielding liabilities during the periods.
  The
        increase in volume of both interest earning assets and interest-bearing
        liabilities during the three and nine months ended September 30, 2005, was
        primarily the result of increased market penetration within our target markets
        which was accomplished by increasing the utilization of existing facilities
        and
        the addition of branches in Fresno, California. The Company did not launch
        any
        new, significant product types for 2004 and 2005.
  The
        Company's taxable equivalent net interest margin, the ratio of net interest
        income to average interest earning assets, was 4.75% and 4.67% for the three
        and
        nine months ended September 30, 2005 compared with 4.45% and 4.49% for the
        same
        periods in 2004. Net interest margin provides a measurement of the Company's
        ability to employ funds profitably during the period being measured. The
        Company's increase in net interest margin in 2005 was primarily attributable
        to
        a gain of 86 and 51 basis points in the loan portfolio yield for the three
        and
        nine months ended September 30, 2005. Average gross loans, as a percentage
        of
        average interest earning assets, increased to 70% and 68% for the three and
        nine
        months ended September 30, 2005 as compared to 69% and 67% for the same time
        periods in 2004 an increase of 1% over both the three and nine months ended
        September 30, 2004.
  -14-
 Table
            of Contents
  AVERAGE
        BALANCES AND RATES EARNED AND
        PAID
  The
        following table presents consolidated average balance sheet information for
        the
        Company, together with interest rates earned and paid on the various interest
        eaning assets and interest-bearing liabilities of its funds for each of the
        periods indicated. Nonaccruing loans are included in the calculation of the
        average balances of loans, but the nonaccrued interest on such loans is
        excluded.
 
 AVERAGE
        BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
 Three
                  months ended
              
              Three
                  months endedSeptember
                  30, 2005
              
              September
                  30, 2004Average
                Balance
              
              Taxable
                Equivalent
                Interest
              
              Taxable
                Equivalent
                Yield/rate
              
              Average
                Balance
              
              Taxable
                EquivalentInterest
              
              Taxable
                EquivalentYield/rate(Dollars
                in thousands)**Assets**Federal
                  funds sold
              
              $
              2,101
              
              $
              19
              
              
              3.59
              %
              $
              12,284
              
              $
              44
              
              
              1.42
              %Time
                  deposits at other financial institutions
              
              
              350
              
              
              2
              
              
              2.27
              
              
              350
              
              
              1
              
              
              1.13Taxable
                  investment securities (1)
              
              
              338,311
              
              
              3,474
              
              
              4.07
              
              
              311,199
              
              
              3,083
              
              
              3.93Nontaxable
                  investment securities (1)
              
              
              95,153
              
              
              1,205
              
              
              5.02
              
              
              57,373
              
              
              750
              
              
              5.19Loans,
                  gross: (2)
              
              
              1,009,059
              
              
              19,106
              
              
              7.51
              
              
              830,047
              
              
              13,918
              
              
              6.65Total
                  interest-earning assets
              
              $
              1,444,974
              
              $
              23,806
              
              
              6.54
              
              $
              1,211,253
              
              $
              17,796
              
              
              5.83Allowance
                  for loan losses
              
              
              (13,968
              )
              
              
              
              
              
              
              
              (13,490
              )Cash
                  and due from banks
              
              
              46,720
              
              
              
              
              
              
              
              
              41,569Premises
                  and equipment, net
              
              
              25,860
              
              
              
              
              
              
              
              
              19,367Interest
                  receivable and other assets
              
              
              60,418
              
              
              
              
              
              
              
              
              54,224Total
                  assets
              
              $
              1,564,004
              
              
              
              
              
              
              
              $
              1,312,923**Liabilities
                  And Shareholders' Equity**Negotiable
                  order of withdrawal
              
              $
              180,577
              
              $
              102
              
              
              0.22
              
              $
              149,659
              
              $
              18
              
              
              0.05Savings
                  deposits
              
              
              371,188
              
              
              1,406
              
              
              1.50
              
              
              348,290
              
              
              772
              
              
              0.88Time
                  deposits
              
              
              430,752
              
              
              3,321
              
              
              3.06
              
              
              351,454
              
              
              1,998
              
              
              2.26Other
                  borrowings
              
              
              155,234
              
              
              1,364
              
              
              3.49
              
              
              123,693
              
              
              1,196
              
              
              3.84Subordinated
                  Debentures
              
              
              16,496
              
              
              327
              
              
              7.86
              
              
              16,496
              
              
              272
              
              
              6.54Total
                  interest-bearing liabilities
              
              
              1,154,247
              
              
              6,520
              
              
              2.24
              
              
              989,592
              
              
              4,256
              
              
              1.71Noninterest-bearing
                  deposits
              
              
              281,328
              
              
              
              
              
              
              
              
              219,849Accrued
                  interest, taxes and other liabilities
              
              
              12,660
              
              
              
              
              
              
              
              
              5,502Total
                  liabilities
              
              
              1,448,235
              
              
              
              
              
              
              
              
              1,214,943Total
                  shareholders' equity
              
              
              115,769
              
              
              
              
              
              
              
              
              97,980Total
                  liabilities and shareholders' equity
              
              $
              1,564,004
              
              
              
              
              
              
              
              $
              1,312,923Net
                  interest income and margin (3)
              
              
              
              
              $
              17,286
              
              
              4.75
              %
              
              
              
              $
              13,540
              
              
              4.45
              %
  (1)
              Tax-equivalent
                  adjustments included in the nontaxable investment securities portfolio
                  are
                  $294,000 and $185,000 for the three months ended September 30,
                  2005 and
                  2004. Tax equivalent adjustments included in the taxable investment
                  securities created by the dividends received deduction were $25,000
                  and
                  $24,000 for the three months ended September 30, 2005 and 2004.
                  The tax
                  rate used was 35%.
 (2)
              Amounts
                  of interest earned included net loan fees of $787,000 and $578,000
                  for the
                  three months ended September 30, 2005 and 2004, respectively.
 (3)
              Net
                  interest margin is computed by dividing net interest income by
                  total
                  average interest-earning assets.
  -15-
 Table
            of Contents
  AVERAGE
        BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
 Nine
                  months ended
              
              Nine
                  months endedSeptember
                  30, 2005
              
              September
                  30, 2004Average
                Balance
              
              Taxable
                Equivalent
                Interest
              
              Taxable
                Equivalent
                Yield/rate
              
              Average
                Balance
              
              Taxable
                EquivalentInterest
              
              Taxable
                Equivalent
                Yield/rate(Dollars
                in thousands)**Assets**Federal
                  funds sold
              
              $
              4,411
              
              $
              91
              
              
              2.76
              %
              $
              9,605
              
              $
              85
              
              
              1.18
              %Time
                  deposits at other financial institutions
              
              
              855
              
              
              17
              
              
              2.66
              
              
              350
              
              
              5
              
              
              1.90Taxable
                  investment securities (1)
              
              
              356,963
              
              
              11,043
              
              
              4.14
              
              
              323,864
              
              
              9,543
              
              
              3.93Nontaxable
                  investment securities (1)
              
              
              87,993
              
              
              3,344
              
              
              5.08
              
              
              53,027
              
              
              2,096
              
              
              5.27Loans,
                  gross: (2)
              
              
              947,022
              
              
              51,572
              
              
              7.28
              
              
              799,997
              
              
              40,657
              
              
              6.77Total
                  interest-earning assets
              
              $
              1,397,244
              
              $
              66,067
              
              
              6.32
              
              $
              1,186,843
              
              $
              52,386
              
              
              5.88Allowance
                  for loan losses
              
              
              (13,658
              )
              
              
              
              
              
              
              
              (13,120
              )Cash
                  and due from banks
              
              
              43,495
              
              
              
              
              
              
              
              
              40,135Premises
                  and equipment, net
              
              
              24,465
              
              
              
              
              
              
              
              
              18,100Interest
                  receivable and other assets
              
              
              59,095
              
              
              
              
              
              
              
              
              50,959Total
                  assets
              
              $
              1,510,641
              
              
              
              
              
              
              
              $
              1,282,917**Liabilities
                  And Shareholders' Equity**Negotiable
                  order of withdrawal
              
              $
              174,734
              
              $
              160
              
              
              0.12
              
              $
              142,725
              
              $
              50
              
              
              0.05Savings
                  deposits
              
              
              363,763
              
              
              3,515
              
              
              1.29
              
              
              347,091
              
              
              2,290
              
              
              0.88Time
                  deposits
              
              
              398,930
              
              
              8,444
              
              
              2.83
              
              
              354,831
              
              
              5,942
              
              
              2.23Other
                  borrowings
              
              
              166,113
              
              
              4,152
              
              
              3.34
              
              
              115,339
              
              
              3,428
              
              
              3.96Subordinated
                  Debentures
              
              
              16,496
              
              
              972
              
              
              7.88
              
              
              16,496
              
              
              801
              
              
              6.47Total
                  interest-bearing liabilities
              
              
              1,120,036
              
              
              17,243
              
              
              2.06
              
              
              976,482
              
              
              12,511
              
              
              1.71Noninterest-bearing
                  deposits
              
              
              268,343
              
              
              
              
              
              
              
              
              205,897Accrued
                  interest, taxes and other liabilities
              
              
              11,657
              
              
              
              
              
              
              
              
              5,497Total
                  liabilities
              
              
              1,400,036
              
              
              
              
              
              
              
              
              1,187,876Total
                  shareholders' equity
              
              
              110,605
              
              
              
              
              
              
              
              
              95,041Total
                  liabilities and shareholders' equity
              
              $
              1,510,641
              
              
              
              
              
              
              
              $
              1,282,917Net
                  interest income and margin (3)
              
              
              
              
              $
              48,824
              
              
              4.67
              %
              
              
              
              $
              39,875
              
              
              4.49
              %
  (1)
              Tax-equivalent
                  adjustments included in the nontaxable investment securities portfolio
                  are
                  $819,000 and $333,000 for the nine months ended September 30, 2005
                  and
                  2004. Tax equivalent adjustments included in the taxable investment
                  securities created by a dividends received deduction were $97,000
                  and
                  $81,000 for the nine months ended September 30, 2005 and 2004.
                  The tax
                  rate used was 35%.
 (2)
              Amounts
                  of interest earned included net loan fees of $2,209,000 and $1,515,000
                  for
                  the nine months ended September 30, 2005 and 2004, respectively.
 (3)
              Net
                  interest margin is computed by dividing net interest income by
                  total
                  average interest-earning assets.
  -16-
 Table
            of Contents
  NET
        INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
  The
        following table sets 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 and the total net change in interest income
        and expenses. The changes in interest due to both rate and volume have been
        allocated to volume and rate changes in proportion to the relationship of
        the
        absolute dollar amount of the change in each.
 
 Net
        Interest Income Variance Analysis:
 
 Three
                  months endedSeptember
                  30, 2005 compared to September 30, 2004(Dollars
                  in thousands)
              
              Volume
              
              Rate
              
              TotalIncrease
                  (decrease) in interest income:Federal
                  funds sold
              
              $
              (56
              )
              $
              31
              
              $
              (25
              )Time
                  deposits at other financial institutions
              
              
              -
              
              
              1
              
              
              1Taxable
                  investment securities
              
              
              276
              
              
              115
              
              
              391Tax-exempt
                  investment securities
              
              
              479
              
              
              (24
              )
              
              455Loans
              
              
              3,244
              
              
              1,944
              
              
              5,188Total:
              
              $
              3,943
              
              $
              2,067
              
              $
              6,010Increase
                  (decrease) in interest expense:Interest
                  bearing demand
              
              $
              4
              
              $
              80
              
              $
              84Savings
                  deposits
              
              
              54
              
              
              580
              
              
              634Time
                  deposits
              
              
              513
              
              
              810
              
              
              1,323Other
                  borrowings
              
              
              283
              
              
              (115
              )
              
              168Subordinated
                  Debentures
              
              
              -
              
              
              55
              
              
              55Total:
              
              $
              854
              
              $
              1,410
              
              $
              2,264Increase
                  in net interest income
              
              $
              3,089
              
              $
              657
              
              $
              3,746
  
 Nine
                  months endedSeptember
                  30, 2005 compared to September 30, 2004(Dollars
                  in thousands)
              
              Volume
              
              Rate
              
              TotalIncrease
                  (decrease) in interest income:Federal
                  funds sold
              
              $
              (20
              )
              $
              26
              
              $
              6Time
                  deposits at other financial institutions
              
              
              9
              
              
              3
              
              
              12Taxable
                  investment securities
              
              
              983
              
              
              517
              
              
              1,500Tax-exempt
                  investment securities
              
              
              1,272
              
              
              (24
              )
              
              1,248Loans
              
              
              7,738
              
              
              3,177
              
              
              10,915Total:
              
              $
              9,982
              
              $
              3,699
              
              $
              13,681Increase
                  (decrease) in interest expense:Interest
                  bearing demand
              
              $
              13
              
              $
              97
              
              $
              110Savings
                  deposits
              
              
              114
              
              
              1,111
              
              
              1,225Time
                  deposits
              
              
              791
              
              
              1,711
              
              
              2,502Other
                  borrowings
              
              
              798
              
              
              (74
              )
              
              724Subordinated
                  Debentures
              
              
              -
              
              
              171
              
              
              171Total:
              
              $
              1,716
              
              $
              3,016
              
              $
              4,732Increase
                  in net interest income
              
              $
              8,266
              
              $
              683
              
              $
              8,949
  -17-
 Table
            of Contents
  PROVISION
        FOR LOAN LOSSES
  The
        provision for loan losses for the three and nine months ended September 30,
        2005
        was $1,035,000 and $1,356,000 compared with $879,000 and $2,183,000 for the
        three and nine months ended September 30, 2004, an increase of $156,000 and
        a
        decrease of $827,000 or 18% and 38%. See "Allowance for Loan Losses" contained
        herein. As
        of
        September 30, 2005 the allowance for loan losses was $14,598,000 or 1.42%
        of
        total loans which compares to the allowance for loan losses of $13,605,000
        or
        1.54% of total loans as of December 31, 2004. At September 30, 2005,
        nonperforming assets totaled $2,111,000 or 0.13% of total assets, nonperforming
        loans totaled $2,051,000 or 0.20% of total loans and the allowance for loan
        losses totaled 712% of nonperforming loans. At December 31, 2004, nonperforming
        assets totaled $4,454,000 or 0.31% of total assets, nonperforming loans totaled
        $4,394,000 or 0.50% of total loans and the allowance for loan losses totaled
        310% of nonperforming loans. The primary reason the provision for loan loss
        decreased in 2005 compared to 2004 is a lower volume of charged-off and
        nonperforming loans. The Company had a net recovery of $159,000 and a net
        charge-off of $156,000 for the three months ended September 30, 2005 and
        September 30, 2004, respectively. The increased recoveries in 2005 were realized
        in the commercial and agricultural portfolios. The Company's charge-offs,
        net of
        recoveries, were $363,000 and $903,000 for the nine months ended September
        30,
        2005 and September 30, 2004, respectively. No assurance can be given that
        nonperforming loans will not increase or that the allowance for loan losses
        will
        be adequate to cover future losses inherent in the loan portfolio.
  NONINTEREST
        INCOME
  Noninterest
        income increased by $47,000 and $25,000 or 2% and less than 1% to $2,666,000
        and
        $7,675,000 for the three and nine months ended September 30, 2005 compared
        with
        $2,619,000 and $7,650,000 for the same periods during 2004. Service charges
        on
        deposit accounts decreased by $87,000 and $208,000 or 5% and 4% to $1,554,000
        and $4,447,000 for the three and nine months ended September 30, 2005 compared
        with $1,641,000 and $4,655,000 earned during for the same period in 2004. The
        decrease was primarily the result of demand deposit account growth obtained
        from
        existing customers in 2005 that resulted in larger balances per customer
        and a
        relatively smaller number of fee paying deposit customers. Also, the larger
        account balances reduced fees paid by deposit customers, especially commercial
        accounts that utilize account analysis to determine customer fees
        charged. Other
        noninterest income increased by $95,000 and $230,000 or 13% and 10% for the
        three and nine month periods ended September 30, 2005 when compared to the
        same
        periods in 2004. The
        primary reason for the increased other noninterest income in the current
        year
        was the receipt of $539,000 in death benefits received from a bank owned
        life
        insurance policy on a retired executive manager during the first quarter
        of
        2005.
 
 NONINTEREST
        EXPENSE
 
 Noninterest
        expenses increased by $1,254,000 and $3,613,000 or 14% and 13% to $10,300,000
        and $31,310,000 for the three and nine months ended September 30, 2005 compared
        with the $9,046,000 and $27,697,000 recorded during for the same periods
        in
        2004. The primary components of noninterest expenses were salaries and related
        benefits, equipment expense, premises and occupancy expense, professional
        fees,
        marketing expense, supplies expense and other noninterest expenses.
  For
        the
        three and nine months ended September 30, 2005, salaries and related benefits
        increased by $562,000 and $1,278,000 or 11% and 8% to $5,538,000 and $16,748,000
        from the $4,976,000 and $15,470,000 recorded for the same periods in 2004.
        The
        increase was primarily the result of normal salary progression and increased
        support staff used in operations and regulatory compliance support functions.
        Premises and occupancy expenses increased by $215,000 or 22% and $723,000
        or 29%
        to $1,205,000 and $3,256,000 for the three and nine months ended September
        30,
        2005 from $990,000 and $2,533,000 during the same periods in 2004. The primary
        reason for the increase in 2005 was the addition of a new customer support
        center in late 2004. Equipment expense increased by $246,000 and $575,000
        or 31%
        and 24% to $1,035,000 and $2,936,000 for the three and nine months ended
        September 30, 2005 from the $789,000 and $2,361,000 recorded during the same
        periods in 2004. The additional equipment expenses were primarily the result
        of
        branch and department equipment upgrades. When comparing the results of the
        three and nine months ended September 30, 2005 to the three and nine months
        ended September 30, 2004, professional fees increased by $83,000 or 25% for
        the
        three month period and increased $517,000 or 47% for the nine month period,
        supplies expense increased by $14,000 and $186,000 or 6% and 30%, marketing
        expenses decreased by $50,000 for the three months ended September 30, 2005
        and
        increased $74,000 for the nine months ended September 30, 2005 or 18% and
        9%,
        goodwill and intangible amortization expense decreased by $156,000 and $466,000
        or 93% for both periods, and other noninterest expenses increased $340,000
        and
        $726,000 or 26% and 17% from 2004 levels. Increased professional fees in
        2005
        were attributable to the costs associated with the Sarbanes-Oxley Act and
        Bank
        Secrecy Act (“BSA”) compliance efforts and increased internal and external audit
        expenses. The overall increase in marketing expenses was primarily the result
        of
        increased advertising expenses. The decreased marketing expenses for the
        three
        months ended September 30, 2005 when compared to the same period in 2004
        were
        the result of decreased media marketing expenditures. The increase in supplies
        expenses was related to increased administrative supplies for the Company’s new
        customer support center. The decrease in intangible amortization expense
        was
        related to the complete amortization of the premium paid on branch deposits
        purchased from Bank of America in December 1997. The increase in other
        noninterest expenses was primarily the result of increased spending for
        telecommunications expenses related to the Company’s customer support center.
  PROVISION
        FOR INCOME TAXES
  The
        Company recorded an increase of $803,000 and $1,811,000 or 39% and 33% in
        the
        income tax provision to $2,845,000 and $7,350,000 for the three and nine
        months
        ended September 30, 2005 compared to the $2,042,000 and $5,539,000 recorded
        for
        the same periods in 2004. In 2005, the Company recorded an effective tax
        rate of
        34% and 32% for the three and nine months ended September 30, 2005. This
        compares to an effective tax rate of 34%and 32% for the three and nine months
        ended September 30, 2004. The effective tax rate for the nine months ended
        September 30, 2005 was equivalent to the rate recorded during the same period
        in
        2004 primarily due to the receipt of $539,000 in nontaxable bank owned life
        insurance death benefits during the first quarter of 2005, and increased
        nontaxable municipal interest income in 2005 that was offset by increased
        fully
        taxable income in 2005 over 2004 levels. The increased effective tax rate
        for
        the third quarter of 2005 was primarily the result of increased fully taxable
        income coupled with lower than anticipated Enterprise Zone related tax credits
        in the Company’s 2004 state tax return that was filed in September, 2005.
  **Financial
        Condition**
  Total
        assets at September 30, 2005 were $1,581,084,000, an increase of $132,637,000
        or
        9% compared with total assets of $1,448,447,000 at December 31, 2004. Net
        loans
        were $1,012,633,000 at September 30, 2005, an increase of $141,145,000 or
        16%
        compared with net loans of $871,488,000 at December 31, 2004. Deposits were
        $1,288,508,000 at September 30, 2005, an increase of $134,351,000 or 12%
        compared with deposits of $1,154,157,000 at December 31, 2004. The increase
        in
        total assets of the Company between December 31, 2004 and September 30, 2005
        was
        primarily funded by an increase in customer deposits. Cash inflows generated
        from the increased deposits were primarily used to fund growth in the loan
        portfolio, and to fund increased expenditures on branch and support operations
        facilities and equipment.
  Total
        shareholders' equity was $117,979,000 at September 30, 2005, an increase
        of
        $14,498,000 or 14% from $103,481,000 at December 31, 2004. The growth was
        primarily due to retained earnings.
  OFF-BALANCE
        SHEET COMMITMENTS
  The
        following table shows the distribution of the Company's undisbursed loan
        commitments at the dates indicated.
 
 **September
                  30,**
              
              **December
                  31,**(Dollars
                  in thousands)
              
              **2005**
              
              **2004**Letters
                  of credit
              
              $
              16,610
              
              $
              13,875Commitments
                  to extend credit
              
              
              462,402
              
              
              393,039Total
              
              $
              479,012
              
              $
              406,914
 
 In
        2005,
        the Company reclassified the reserve for unfunded lending commitments from
        the
        allowance for loan losses to other liabilities. The reclassifications had
        no
        effect on the income before provision for income taxes as reported. The
        reclassified allowance for loan losses for the three and nine months ended
        September 30, 2005 and 2004, and for the year ended December 31, 2004, is
        presented on page 21 and 22 and the reserve for unfunded commitments
        is
        presented on page 24.
  -18-
 Table
            of Contents
  CASH
        VALUE OF LIFE INSURANCE
  The
        Bank
        maintains certain cash surrender value life insurance policies to help offset
        the cost of employee benefit programs. They are also associated with a salary
        continuation plan for the Company's executive management and deferred retirement
        benefits for participating board members. Income from these policies is
        reflected in noninterest income. At September 30, 2005, the Bank held
        $31,525,000 in cash surrender value life insurance, an increase of $3,163,000
        from the $28,362,000 maintained at December 31, 2004.
  INVESTMENT
        IN HOUSING TAX CREDIT LIMITED PARTNERSHIPS
  The
        Bank
        invests in housing tax credit limited partnerships to help meet the Bank’s
        Community Reinvestment Act low income housing investment requirements and
        to
        obtain federal and state income tax credits. These partnerships provide the
        funding for low-income housing projects that might not otherwise be created.
        The
        Bank had invested $11,024,000 in these partnerships as of September 30, 2005
        and
        $10,901,000 as of the year ended December 31, 2004, which represents an increase
        of $123,000 or 1%. The Company does not anticipate making additional significant
        investments in these partnerships during the remainder of 2005.
 
 INVESTMENT
        SECURITIES
 
 At
        September 30, 2005 equity securities included $14.7 million of preferred
        stock
        issued by the Federal National Mortgage Association and the Federal Home
        Loan
        Mortgage Corporation. These issues of preferred stock are tied to various
        short
        term indexes ranging from the one year LIBOR interest rate to the five year
        U.S.
        Treasury rate. These securities have investment grade credit ratings from
        the
        securities rating agencies and are callable by the issuer at par. At September
        30, 2005, the unrealized loss on these securities totaled $219,000 compared
        to a
        $209,000 unrealized gain at December 31, 2004, after recording a $3,709,000
        other than temporary impairment charge during the fourth quarter of 2004.
 
 NONPERFORMING
        ASSETS
 
 Nonperforming
        assets include nonaccrual loans, loans 90 days or more past due, restructured
        loans and other real estate owned.
  Nonperforming
        loans are those which the borrower fails to perform in accordance with the
        original terms of the obligation and include loans on nonaccrual status,
        loans
        past due 90 days or more and restructured loans. 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 Company 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.
  A
        "restructured loan" is a loan on which interest accrues at a below market
        rate
        or upon which certain principal has been forgiven so as to aid the borrower
        in
        the final repayment of the loan, with any interest previously accrued, but
        not
        yet collected, being reversed against current income. Interest is reported
        on a
        cash basis until the borrower's ability to service the restructured loan
        in
        accordance with its terms is established. The Company had no restructured
        loans
        as of the dates indicated in the table below.
  -19-
 Table
            of Contents
  The
        following table summarizes nonperforming assets of the Company at September
        30,
        2005 and December 31, 2004:
 
 September
                  30,
              
              December
                  31,2005
              
              2004(Dollars
                  in thousands)Nonaccrual
                  loans
              
              $
              2,042
              
              $
              4,394Accruing
                  loans past due 90 days or more
              
              
              9
              
              
              -Total
                  nonperforming loans
              
              
              2,051
              
              
              4,394Other
                  real estate owned
              
              
              60
              
              
              60Total
                  nonperforming assets
              
              $
              2,111
              
              $
              4,454Nonperforming
                  loans to total loans
              
              
              0.20
              %
              
              0.50
              %Nonperforming
                  assets to total assets
              
              
              0.13
              %
              
              0.31
              %
  Contractual
        accrued interest income on loans on nonaccrual status as of September 30,
        2005
        and 2004, that would have been recognized if the loans had been current in
        accordance with their original terms was approximately $152,000 and $93,000,
        respectively.
  At
        September 30, 2005, nonperforming assets represented 0.13% of total assets,
        a
        decrease of 18 basis points when compared to the 0.31% at December 31, 2004.
        Nonperforming loans represented 0.20% of total loans at September 30, 2005,
        a
        decrease of 30 basis points compared to the 0.50% at December 31, 2004.
        Nonperforming loans that were secured by first deeds of trust on real property
        were $1,958,000 and $4,390,000 at September 30, 2005 and December 31, 2004.
        The
        decrease in nonperforming loans and nonperforming assets was primarily the
        result of the continuation of a strong real estate market that has allowed
        for
        successful workouts on a few struggling commercial real estate and agricultural
        properties. Other forms of collateral such as inventory and equipment secured
        a
        portion of the nonperforming loans as of each date. No assurance can be given
        that the collateral securing nonperforming loans will be sufficient to prevent
        losses on such loans.
  At
        September 30, 2005 and December 31, 2004, the Company had $60,000 invested
        in
        one property that had been acquired through foreclosure. The property was
        carried at the lower of its estimated market value, as evidenced by an
        independent appraisal, or the recorded investment in the related loan, less
        estimated selling expenses. At foreclosure, if the fair value of the real
        estate, net of estimated selling costs, is less than the Company's recorded
        investment in the related loan, a charge is made to the allowance for loan
        losses. The Company does not expect to sell its one remaining property within
        the next twelve month period due to the fact that the property is subject
        to a
        lifetime tenancy for the current occupant of the residence. During the third
        quarter of 2005, no new foreclosure properties were acquired or sold. No
        assurance can be given that the Company will sell the remaining property
        during
        2005, or at any time, or for the assigned value.
  Management
        defines impaired loans, regardless of past due status on loans, as those
        on
        which principal and interest are not expected to be collected under the original
        contractual loan repayment terms. An impaired loan is charged off at the
        time
        management believes the collection process has been exhausted. At September
        30,
        2005 and December 31, 2004, impaired loans were measured based on 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. Impaired loans at September 30, 2005 were $2,051,000
        for
        which the Company has made provisions to the allowance for loan losses of
        approximately $305,000.
  Except
        for loans that are disclosed above, there were no assets as of September
        30,
        2005, where known information about possible credit problems of the borrower
        caused the Bank’s 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 volume and complexity of the Bank's loan
        portfolio, however, it is always possible that current credit problems may
        exist
        that may not have been discovered by management.
  -20-
 Table
            of Contents
  **Allowance
        for Loan Losses**
  The
        following table summarizes the loan loss experience of the Company for the
        three
        months ended September 30, 2005 and 2004.
 
 **September
                  30**(Dollars
                  in thousands)
              
              **2005**
              
              **2004****Allowance
                  for Loan Losses:**Balance
                  at beginning of period
              
              $
              13,404
              
              $
              13,081Provision
                  for loan losses
              
              
              1,035
              
              
              879Charge-offs:Commercial
                  and agricultural
              
              
              108
              
              
              226Real
                  estate - mortgage
              
              
              -
              
              
              -Consumer
              
              
              89
              
              
              164Total
                  charge-offs
              
              
              197
              
              
              390RecoveriesCommercial
                  and agricultural
              
              
              313
              
              
              162Real-Estate
                  - mortgage
              
              
              -
              
              
              -Consumer
              
              
              43
              
              
              72Total
                  recoveries
              
              
              356
              
              
              234Net
                  charge-offs
              
              
              (159
              )
              
              156Balance
                  at end of period
              
              $
              14,598
              
              $
              13,804Loans
                  outstanding at period-end
              
              $
              1,027,231
              
              $
              857,980Average
                  loans outstanding
              
              $
              1,009,059
              
              $
              830,047
  -21-
 Table
            of Contents
  The
        following table summarizes the loan loss experience of the Company for the
        nine
        months ended September 30, 2005 and 2004, and for the year ended December
        31,
        2004.
 
 **September
                  30**
              
              **December
                  31**(Dollars
                  in thousands)
              
              **2005**
              
              **2004**
              
              **2004****Allowance
                  for Loan Losses:**Balance
                  at beginning of period
              
              $
              13,605
              
              $
              12,524
              
              $
              12,524Provision
                  for loan losses
              
              
              1,356
              
              
              2,183
              
              
              2,731Charge-offs:Commercial
                  and agricultural
              
              
              1,078
              
              
              1,104
              
              
              1,860Real
                  estate - mortgage
              
              
              -
              
              
              -
              
              
              -Consumer
              
              
              240
              
              
              316
              
              
              436Total
                  charge-offs
              
              
              1,318
              
              
              1,420
              
              
              2,296RecoveriesCommercial
                  and agricultural
              
              
              783
              
              
              305
              
              
              344Real-Estate
                  - mortgage
              
              
              -
              
              
              -
              
              
              12Consumer
              
              
              172
              
              
              212
              
              
              290Total
                  recoveries
              
              
              955
              
              
              517
              
              
              646Net
                  charge-offs
              
              
              363
              
              
              903
              
              
              1,650Balance
                  at end of period
              
              $
              14,598
              
              $
              13,804
              
              $
              13,605Loans
                  outstanding at period-end
              
              $
              1,027,231
              
              $
              857,980
              
              $
              885,093Average
                  loans outstanding
              
              $
              947,022
              
              $
              799,997
              
              $
              813,050Annualized
                  net charge-offs to average loans
              
              
              0.05
              %
              
              0.15
              %
              
              0.20
              %Allowance
                  for loan lossesTo
                  total loans
              
              
              1.42
              %
              
              1.61
              %
              
              1.54
              %To
                  nonperforming loans
              
              
              711.75
              %
              
              325.11
              %
              
              309.63
              %To
                  nonperforming assets
              
              
              691.52
              %
              
              320.58
              %
              
              305.46
              %
  The
        Company maintains an allowance for loan losses at a level considered by the
        Company’s 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 overall adequacy of the allowance for loan
        losses, management takes into consideration growth trends in the portfolio,
        examinations by financial institution supervisory authorities, prior loan
        loss
        experience, concentrations of credit risk, delinquency trends, general and
        local
        economic conditions, loan security, the interest rate environment and internal
        and external credit reviews. In addition, the risks management considers
        vary
        depending on the nature of specific loans. 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. The normal risks considered
        by management with respect to real estate construction loans include fluctuation
        in real estate values, the demand for improved commercial and industrial
        properties and housing, the availability of permanent financing in the Company's
        market area and the borrowers' 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. Additionally, the Company
        relies on data obtained through independent appraisals for significant
        properties to determine loss exposure on nonperforming loans.
  -22-
 Table
            of Contents
  The
        Company uses a method developed by management for determining the appropriate
        level of its allowance for loan losses. This method applies relevant risk
        factors to the entire loan portfolio, including nonperforming loans. The
        methodology is based, in part, on the Company's loan grading and classification
        system. The Company grades its loans through internal reviews. In addition,
        the
        Company periodically subjects loans to external reviews whose reports are
        assessed by the Company's audit committee and management. Credit reviews
        are
        performed on a monthly basis and the quality grading process occurs on a
        quarterly basis. Risk factors applied to the performing loan portfolio are
        based
        on the Company's past loss history considering the current portfolio's
        characteristics, current economic conditions and other relevant factors.
        General
        reserves are applied to various categories of loans at percentages ranging
        up to
        1.8% based on the Company's assessment of credit risks for each category.
        Risk
        factors are applied to the carrying value of each classified loan:
        (i) loans internally graded "Watch" or "Special Mention" carry a risk
        factor from 1.0% to 2.0%; (ii) "Substandard" loans carry a risk factor
        from
        15% to 40% depending on collateral securing the loan, if any; (iii) "Doubtful"
        loans carry a 50% risk factor; and (iv) "Loss" loans are charged off 100%.
        In
        addition, a portion of the allowance is specially allocated to identified
        problem credits. The analysis also includes reference to factors such as
        the
        delinquency status of the loan portfolio, inherent risk by type of loans,
        industry statistical data, recommendations made by the Company's regulatory
        authorities and outside loan reviewers, and current economic environment.
        Important components of the overall credit rating process are the asset quality
        rating process and the internal loan review process.
  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
        recorded a provision for loan losses in the three and nine months ended
        September 30, 2005 of $1,035,000 and $1,356,000 compared with $879,000 and
        $2,183,000 in the same periods of 2004. The increase in loan loss provision
        for
        the three months ended September 30, 2005 compared to the same period in
        2004
        was caused by an increase in graded loans. In the opinion of management the
        increase in graded loans relates to individual borrower difficulties, and
        are
        not indicative of any industry or market deterioration in our marketplace.
        The
        decrease for the first nine months of 2005 compared to the same periods in
        2004
        was related to an overall improvement in nonperforming loans. The Company
        had a
        net recovery of $159,000 for the three months ended September 30, 2005 compared
        to a net charge-off of $156,000 for the same period in 2004. The increased
        recoveries in 2005 were realized in the commercial and agricultural portfolios.
        The Company's charge-offs, net of recoveries, were $363,000 for the nine
        months
        ended September 30, 2005 compared with $903,000 for the same nine months
        in
        2004. The decrease primarily occurred due to increased recoveries obtained
        from
        the commercial and agricultural segment of the loan portfolio that occurred
        in
        the third quarter of 2005. The increased recoveries in this segment were
        primarily attributable to recoveries specific to individual borrowers rather
        than market or industry conditions that apply to a broader customer
        base.
  As
        of
        September 30, 2005, the allowance for loan losses was $14,598,000 or 1.42%
        of
        total loans outstanding, compared with $13,605,000 or 1.54% of total loans
        outstanding as of December 31, 2004 and $13,804,000 or 1.61% of total loans
        outstanding as of September 30, 2004.
  The
        allowance is based on estimates and ultimate future losses may vary from
        current
        estimates. It is possible that future economic or other factors may adversely
        affect the Company's borrowers, and thereby cause future loan losses to exceed
        the current allowance. In addition, there can be no assurance that future
        economic or other factors will not adversely affect the Company's borrowers,
        or
        that the Company's asset quality will not deteriorate through rapid growth,
        failure to enforce underwriting standards, failure to maintain appropriate
        underwriting standards, failure to maintain an adequate number of qualified
        loan
        personnel, failure to identify and monitor potential problem loans, increased
        market competition, adverse economic conditions, or for other reasons, and
        thereby cause loan losses to exceed the current allowance.
  The
        allocation of the allowance to loan categories is an estimate by management
        of
        the relative risk characteristics of loans in those categories. No assurance
        can
        be given that future losses in one or more loan categories will not exceed
        the
        portion of the allowance allocated to that category or even exceed the entire
        allowance.
  -23-
 Table
            of Contents
  RESERVE
        FOR UNFUNDED LENDING COMMITMENTS
  The
        reserve for unfunded lending commitments at September 30, 2005 and 2004,
        and
        December 31, 2004, is presented below.
 
 **September
                  30**
              
              **December
                  31****2005**
              
              **2004**
              
              **2004**(Dollars
                in thousands)**Balance
                  at the beginning of period**
              
              $
              679
              
              $
              739
              
              $
              739Increase
                  (reduction) in accruals for credit commitment losses
              
              
              24
              
              
              (182
              )
              
              (60
              )Balance
                  at the end of period
              
              $
              703
              
              $
              557
              
              $
              679
  In
        2005,
        the Company reclassified the reserve for unfunded lending commitments from
        the
        allowance for loan losses to other liabilities. The reclassifications had
        no
        effect on the income before provision for income taxes as reported. Prior
        periods have been adjusted for the reclassification.
  EXTERNAL
        FACTORS AFFECTING ASSET QUALITY
  As
        a
        result of the Company's loan portfolio mix, the future quality of its assets
        could be affected by adverse economic trends in its region or in the
        agricultural community. These trends are beyond the control of the Company.
  California
        is an earthquake-prone region. Accordingly, a major earthquake could result
        in
        material loss to the Company. At times the Company's service area has
        experienced other natural disasters such as floods and droughts. The Company's
        properties and substantially all of the real and personal property securing
        loans in the Company's portfolio are located in California. The Company faces
        the risk that many of its borrowers face uninsured property damage, interruption
        of their businesses or loss of their jobs from earthquakes, floods or droughts.
        As a result these events, borrowers may be unable to repay their loans in
        accordance with their terms and the collateral for such loans may decline
        significantly in value. The Company's service area is a largely agricultural
        region and therefore is highly dependent on a reliable supply of quality
        water
        for irrigation purposes. Water supply can be adversely affected by light
        snowfall over one or more winters, draught or by any diversion of water from
        its
        present natural courses. Any such natural disaster could impair the ability
        of
        many of the Company's borrowers to meet their obligations to the Company.
  Parts
        of
        California have experienced significant floods in the late 1990s. No assurance
        can be given that future flooding will not have an adverse impact on the
        Company
        and its borrowers and depositors.
  LIQUIDITY
  In
        order
        to maintain adequate liquidity, the Company must have sufficient resources
        available at all times to meet its cash flow requirements. The need for
        liquidity in a banking institution arises principally to provide for deposit
        withdrawals, the credit needs of its customers and to take advantage of
        investment opportunities as they arise. The Company may achieve desired
        liquidity from both assets, liabilities and retained earnings. 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 sales of loans, investments
        and
        real estate 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’s
        primary source of liquidity is from dividends received from the Bank. Dividends
        from the Bank are subject to certain regulatory restrictions.
  The
        Company reviews its liquidity position on a regular basis based upon its
        current
        position and expected trends of loans and deposits. The Company's liquid
        assets,
        as defined above totaled $294,818,000 and $330,358,000 on September 30, 2005
        and
        December 31, 2004, respectively, and constituted 19% and 23% of total assets
        on
        both those dates. Liquidity is also affected by the collateral requirements
        of
        its public deposits and certain borrowings. Total pledged securities were
        $364,612,000 at September 30, 2005 compared with $321,688,000 at December
        31,
        2004.
  Although
        the Company's primary sources of liquidity include liquid assets and a stable
        deposit base, the Company maintains lines of credit with the Federal Reserve
        Bank of San Francisco, Federal Home Loan Bank of San Francisco, Pacific Coast
        Bankers' Bank, Union Bank of California, Wells Fargo Bank and First Tennessee
        Bank aggregating $283,407,000 of which $140,650,000 was outstanding as of
        September 30, 2005, and lines of credit aggregating $217,832,000 as of December
        31, 2004 of which $155,326,000 was outstanding as of December 31, 2004. The
        decrease in borrowings outstanding during the first nine months of 2005 was
        mainly the result of a decrease in the investment portfolio. Management believes
        that the Company maintains adequate amounts of liquid assets to meet its
        liquidity needs. The Company's liquidity might be insufficient if deposit
        withdrawals were to exceed foreseeable levels. Deposit withdrawals can increase
        if the Bank experiences financial difficulties, receives adverse publicity
        for
        other reasons, or if its pricing, products or services are not competitive
        with
        those offered by other institutions.
  CAPITAL
        RESOURCES
  The
        Company’s 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 increased by $14,498,000 or 14% from December 31, 2004
        to
        September 30, 2005. This increase was caused by the retention of accumulated
        earnings.
  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 adverse effect on the
        Company’s financial condition and liquidity. Management believes, as of
        September 30, 2005, that the Company and the Bank met all applicable capital
        requirements. The Company’s leverage capital ratio at September 30, 2005 was
        8.53% as compared with 8.46% as of December 31, 2004. The Company’s total risk
        based capital ratio at September 30, 2005 was 11.50% as compared to 11.55%
        as of
        December 31, 2004.
  -24-
 Table
            of Contents
  In
        the
        opinion of management, the Company’s and Bank’s actual capital amounts and
        ratios met all regulatory requirements as of September 30, 2005 and were
        summarized as follows:
  Dollars
                  in thousands
              
              Actual
              
              For
                  Capital
                Adequacy
                  Purposes
              
              To
                  Be Well Capitalized
                Under
                  Prompt Corrective
                Action
                  Provisions:Consolidated
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioAs
                  ofSeptember
                  30, 2005Total
                  capital (to risk weighted assets)
              
              $
              148,629
              
              
              11.50
              %
              $
              103,416
              
              
              8.0
              %
              $
              129,270
              
              
              10.0
              %Tier
                  1 capital (to risk weighted assets)
              
              
              133,328
              
              
              10.31
              
              
              51,708
              
              
              4.0
              
              
              77,562
              
              
              6.0Leverage
                  ratio*
              
              
              133,328
              
              
              8.53
              
              
              62,503
              
              
              4.0
              
              
              78,128
              
              
              5.0The
                  Bank:As
                  of September 30, 2005Total
                  capital (to risk weighted assets)
              
              $
              136,149
              
              
              10.56
              %
              $
              103,154
              
              
              8.0
              %
              $
              128,942
              
              
              10.0
              %Tier
                  1 capital (to risk weighted assets)
              
              
              120,848
              
              
              9.37
              
              
              51,577
              
              
              4.0
              
              
              77,365
              
              
              6.0Leverage
                  ratio*
              
              
              120,848
              
              
              7.75
              
              
              62,403
              
              
              4.0
              
              
              78,004
              
              
              5.0
  *
        The
        leverage ratio consists of Tier 1 capital divided by adjusted quarterly average
        assets. The minimum leverage ratio is 3 percent for banking organizations
        that
        do not anticipate significant growth and that have well-diversified risk,
        excellent asset quality and in general, are considered top-rated
        banks.
  -25-
 Table
            of Contents
  The
        Company issues dividends solely at the discretion of the Company’s Board of
        Directors, subject to compliance with regulatory requirements. In order to
        pay
        any cash dividends, the Company must receive payments of dividends or management
        fees from the Bank. There are certain regulatory limitations on the payment
        of
        cash dividends by banks.
 
 On
        October 26, 2004, the Bank entered into a written agreement (the “Agreement”)
        with the Federal Reserve Bank of San Francisco (“FRBSF”) relating to certain
        deficiencies identified by the FRBSF with respect to the Bank’s compliance with
        Bank Secrecy Act (“BSA”) and other applicable laws and regulations relating to
        anti-money laundering (“AML”). CCOW has filed a Form 8-K on October 28,
        2004.
 
 The
        banking industry, including the Bank, is subject to significantly increased
        regulatory scrutiny and enforcement regarding BSA matters. Under the Agreement,
        the Bank will, among other actions to be taken, (i) develop a written program
        designed to improve the Bank’s system of internal controls to ensure compliance
        with applicable provisions of the BSA; (ii) develop an enhanced written customer
        due diligence program designed to reasonably ensure the identification and
        reporting of all known or suspected violations of law and suspicious
        transactions against or involving the Bank; (iii) establish enhanced written
        policies and procedures designed to strengthen the Bank’s internal controls and
        internal audit program, and (iv) submit quarterly progress reports to the
        FRBSF
        detailing actions taken to secure compliance with the Agreement.
 
 The
        Bank
        has made significant progress in addressing the deficiencies identified by
        the
        FRBSF. The compliance effort has entailed certain additional expenditures.
        In
        addition, while the Agreement is in place, its effect may be to limit the
        Bank’s
        ability to engage in certain expansionary activity. Neither of these effects
        are
        expected to have a material adverse impact on the financial condition nor
        results of operations of the Bank or the Company.
  DEPOSITS
  Deposits
        are the Company's primary source of operating and investment funds. At September
        30, 2005, the Company had a deposit mix of 29% in savings deposits, 34% in
        time
        deposits, 15% in interest-bearing checking accounts and 22% in
        noninterest-bearing demand accounts. Noninterest-bearing demand deposits
        enhance
        the Company's net interest income by lowering its costs of funds.
  The
        Company obtains deposits primarily from within the communities it serves.
        No
        material portion of its deposits has been obtained from, or is dependent,
        on any
        one person or industry. The Company's business is not seasonal in nature.
        The
        Company accepts deposits in excess of $100,000 from customers. These deposits
        are priced competitively. At September 30, 2005, the Company had brokered
        deposits of $20,966,000 and $99,000 at December 31, 2004.
  Maturities
        of time certificates of deposits of $100,000 or more outstanding at September
        30, 2005 and December 31, 2004 are summarized as follows:
  **September
                  30, 2005**
              
              **December
                  31, 2004****(Dollars
                  in thousands)**Three
                  months or less
              
              $
              64,450
              
              $
              77,105Over
                  three to six months
              
              
              71,046
              
              
              20,366Over
                  six to twelve months
              
              
              45,907
              
              
              38,086Over
                  twelve months
              
              
              45,331
              
              
              31,183Total
              
              $
              226,734
              
              $
              166,740
 -26-
 Table
            of Contents
  **Borrowed
        Funds**
  Borrowed
        funds decreased by $18,970,000 or 12% to $145,149,000 at September 30, 2005
        compared to the $164,119,000 outstanding at December 31, 2004. The decrease
        in
        borrowed funds during the first nine months of 2005 was primarily due to
        the
        decrease in investments including held to maturity, available for sale, and
        fed
        funds sold.
  **Return
        on Equity and Assets**
  Three
                  months ended
              
              Three
                  months ended
              
              Year
                  endedSeptember
                  30
              
              September
                  30
              
              December
                  312005
              
              2004
              
              2004Annualized
                  return on average assets
              
              
              1.39
              %
              
              1.21
              %
              
              0.94
              %Annualized
                  return on average equity
              
              
              18.84
              %
              
              16.26
              %
              
              12.69
              %Dividend
                  payout ratio
              
              
              9.62
              %
              
              13.16
              %
              
              16.81
              %Average
                  equity to average assets
              
              
              7.40
              %
              
              7.46
              %
              
              7.41
              %
  Nine
                  months ended
              
              Nine
                  months ended
              
              Year
                  endedSeptember
                  30
              
              September
                  30
              
              December
                  312005
              
              2004
              
              2004Annualized
                  return on average assets
              
              
              1.37
              %
              
              1.20
              %
              
              0.94
              %Annualized
                  return on average equity
              
              
              18.77
              %
              
              16.14
              %
              
              12.69
              %Dividend
                  payout ratio
              
              
              10.05
              %
              
              13.42
              %
              
              16.81
              %Average
                  equity to average assets
              
              
              7.32
              %
              
              7.41
              %
              
              7.41
              %
  **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 ongoing analysis of interest rate sensitivity. The effect
        of
        inflation on premises and equipment, as well as on interest expenses, was
        not
        significant for the periods covered in this report.
  -27-
 Table
            of Contents
  **Item
        3.** **Quantitative
        and Qualitative Disclosures about Market Risk**
 
 In
        the
        normal course of business, the Company is exposed to market risk which includes
        both price and liquidity risk. Price risk is created from fluctuations in
        interest rates and the mismatch in repricing characteristics of assets,
        liabilities, and off balance sheet instruments at a specified point in time.
        Mismatches in interest rate repricing among assets and liabilities arise
        primarily through the interaction of the various types of loans versus the
        types
        of deposits that are maintained as well as from management's discretionary
        investment and funds gathering activities. Liquidity risk arises from the
        possibility that the Company may not be able to satisfy current and future
        financial commitments or that the Company may not be able to liquidate financial
        instruments at market prices. Risk management policies and procedures have
        been
        established and are utilized to manage the Company's exposure to market risk.
        Quarterly analysis of the Company’s assets and liabilities under both increasing
        and decreasing interest rate environments are performed to insure the Company
        does not assume a magnitude of risk that is outside approved policy
        limits.
 
 The
        Company’s success is largely dependent upon its ability to manage interest rate
        risk. Interest rate risk can be defined as the exposure of the Company’s net
        interest income to adverse movements in interest rates. Although the Company
        manages other risks, such as credit and liquidity risk in the normal course
        of
        its business, management considers interest rate risk to be its most significant
        market risk and could potentially have the largest material impact on the
        Company’s financial condition and results of operations. Correspondingly, the
        overall strategy of the Company is to manage interest rate risk, through
        its
        balance sheet structure, to be interest rate neutral.
 
 The
        Company’s interest rate risk management is the responsibility of the
        Asset/Liability Management Committee (“ALCO”). ALCO establishes policies that
        monitor and coordinate the Company’s sources, uses and pricing of funds. ALCO is
        also involved in formulating the economic projections for the Company’s annual
        budget and strategic plan. ALCO sets specific rate sensitivity limits for
        the
        Company. ALCO monitors and adjusts the Company’s exposure to changes in interest
        rates to achieve predetermined risk targets that it believes are consistent
        with
        current and expected market conditions. Balance sheet management personnel
        monitor the asset and liability changes on an ongoing basis and provide report
        information and recommendations to ALCO in regards to those changes.
 
 The
        marketplace has experienced a significant increase in short term interest
        rates
        over the last fifteen months. In June, 2004, the federal funds rate was 1%
        and
        the prime rate was 4%. By September 20, 2005, after consecutive 25 basis
        point
        increases in the fed funds rate by the Federal Reserve Board of Governors,
        the
        federal funds rate was 3.75% and the prime rate was 6.75%. In order to reduce
        some of the interest rate sensitivity in the Company’s balance sheet, on August
        26, 2005, the Company purchased an option contract at a premium of $1,270,000
        from Wachovia Bank that specifies the Company shall receive the difference
        between 6.5% and the prime rate for the month if the prime rate falls below
        6.5%
        on the measurement date each month, during the five year term ending August
        25,
        2010, on $100,000,000 of the Company’s prime indexed loans. Management believes
        this option contract will lower the interest rate sensitivity, of the Company’s
        balance sheet, to declining interest rates, at a reasonable cost. If interest
        rates were to suddenly and materially decline from levels experienced during
        2005, the Company could become susceptible to an increased level of market
        risk.
  It
          is the
          opinion of management, with the purchase of the option contract described
          in the
          preceding paragraph, there has been no material change in the Company’s market
          risk position exposure during the first nine months of 2005 when compared
          to the
          level of market risk at December 31, 2004. If interest rates were to suddenly
          and materially fall from levels experienced during the first nine months
          of
          2005, the Company could become susceptible to an increased level of market
          risk.
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  **Item
        4.** **Controls
        and Procedures**
 
 Evaluation
        Of Disclosure Controls And Procedures
 
 Under
        the
        supervision and with the participation of the Company’s management, including
        its chief executive officer and chief financial officer, the Company conducted
        an evaluation of the effectiveness of the design and operation of its disclosure
        controls and procedures as defined by Rule 13a-15(e) under the Securities
        Exchange Act of 1934.
 
 Based
        on
        the evaluation, the chief executive officer and chief financial officer
        concluded that as of the end of the period covered by this report the disclosure
        controls and procedures were adequate and effective, and that the material
        information required to be included in this report, including information
        from
        the Company’s consolidated subsidiaries, was properly recorded, processed,
        summarized and reported, and was made known to the chief executive officer
        and
        chief financial officer by others within the Company in a timely manner,
        particularly during the period when this quarterly report on Form 10-Q was
        being
        prepared.
 
 Changes
        In Internal Control over Financial Reporting
 
 There
        was
        no significant change in our internal control over financial reporting that
        occurred during our most recent fiscal quarter that has materially affected,
        or
        is reasonably likely to materially affect, our internal control over financial
        reporting.
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**PART
      II - Other Information**




**Item
      1.****Legal
      Proceedings**




The
      Company is a party to routine litigation in the ordinary course of its business.
      In the opinion of management, pending and threatened litigation is not likely
      to
      have a material adverse effect on the financial condition or results of
      operations of the Company.




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




None.




**Item
      3.** **Defaults
      Upon Senior Securities.**




None.




**Item
      4.****Submission
      of Matters to a Vote of Securities Holders.**




None.




**Item
      5.****Other
      Information.**




In
      the
      opinion of management, there is no additional information relating to these
      periods being reported which warrants inclusion in the report.




**Item
      6. Exhibits**




See
      Exhibit Index


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**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




CAPITAL
      CORP OF THE WEST




(Registrant)







Date:
                November 3, 2005
            By/s/
                Thomas T. HawkerThomas
                T. HawkerPresident
                andChief
                Executive Officer








Date:
                November 3, 2005
            By/s/
                R. Dale McKinneyR.
                Dale McKinneyExecutive
                Vice Presidentand
              Chief
                Financial Officer


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Exhibit
      Index




Exhibit  Description


31.1
            Certification
                of Registrant's Chief Executive Officer Pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 200231.2
            Certification
                of Registrant's Chief Financial Officer Pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 200232.1
            Certification
                of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section
                135032.2
            Certification
                of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section
                1350







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