**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 EndedMarch
                31, 2006




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). Large accelerated filer  ̈ Accelerated filer þ Non-accelerated filer  ̈





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





The
      number of shares outstanding of the registrant’s common stock, no par value, as
      of March 31, 2006 was 10, 663, 468.
      No
      shares of preferred stock, no par value, were outstanding at March 31,
      2006.


-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
            13Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            28Item
                4. Controls and Procedures
            28





PART
      II.
      -- OTHER INFORMATION





Item
                1. Legal Proceedings
            29Item
                1A. Risk Factors
            29Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            29Item
                3. Defaults Upon Senior Securities
            29Item
                4. Submission of Matters to a vote of Security
                Holders
            29Item
                5. Other Information
            29Item
                6. Exhibits
            29SIGNATURES
            30Exhibit
                Index
            31





-2-
 Table
          of Contents


**Capital
      Corp of the West**


**Consolidated
      Balance Sheets**




(Dollars
                  in thousands)
              
              March
                  31, 2006
              
              December
                  31, 2005**Assets**Cash
                  and noninterest-bearing deposits in other banks
              
              $
              55,032
              
              $
              61,331Federal
                  funds sold
              
              
              -
              
              
              30,250Time
                  deposits at other financial institutions
              
              
              350
              
              
              350Investment
                  securities available for sale, at fair value
              
              
              303,379
              
              
              318,155Investment
                  securities held to maturity, at cost; fair value of $176,130 and
                  $178,233
                  at March 31, 2006 and December 31, 2005
              
              
              179,394
              
              
              181,025Loans,
                  net of allowance for loan losses of $15,141 and $14,776 at March
                  31, 2006
                  and December 31, 2005
              
              
              1,153,739
              
              
              1,054,120Interest
                  receivable
              
              
              8,038
              
              
              8,305Premises
                  and equipment, net
              
              
              31,086
              
              
              28,970Goodwill
              
              
              1,405
              
              
              1,405Other
                  intangibles
              
              
              12
              
              
              23Cash
                  value of life insurance
              
              
              32,102
              
              
              31,796Investment
                  in housing tax credit limited partnerships
              
              
              8,561
              
              
              8,745Other
                  assets
              
              
              16,489
              
              
              32,281Total
                  assets
              
              $
              1,789,587
              
              $
              1,756,756**Liabilities**Deposits:Noninterest-bearing
                  demand
              
              $
              289,607
              
              $
              310,284Negotiable
                  orders of withdrawal
              
              
              214,443
              
              
              216,594Savings
              
              
              377,190
              
              
              426,581Time,
                  under $100
              
              
              222,764
              
              
              216,016Time,
                  $100 and over
              
              
              314,130
              
              
              235,025Total
                  deposits
              
              
              1,418,134
              
              
              1,404,500Federal
                  funds purchased
              
              
              48,950
              
              
              -Other
                  borrowings
              
              
              162,752
              
              
              201,728Junior
                  subordinated debentures
              
              
              16,496
              
              
              16,496Accrued
                  interest, taxes and other liabilities
              
              
              14,808
              
              
              11,787Total
                  liabilities
              
              
              1,661,140
              
              
              1,634,511**Shareholders’
                  Equity**Preferred
                  stock, no par value; 10,000,000 shares authorized; none
                  outstanding
              
              
              -
              
              
              -Common
                  stock, no par value; 54,000,000 shares authorized; 10,665,718 and
                  10,575,361 issued and outstanding at March 31, 2006 and December
                  31,
                  2005
              
              
              61,300
              
              
              59,785Retained
                  earnings
              
              
              70,075
              
              
              65,049Accumulated
                  other comprehensive loss, net
              
              
              (2,928
              )
              
              (2,589
              )Total
                  shareholders’ equity
              
              
              128,447
              
              
              122,245Total
                  Liabilities and Shareholders’ Equity
              
              $
              1,789,587
              
              $
              1,756,756


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
                  the three months ended March 31,(Dollars
                  in thousands, except per share data)
              
              2006
              
              2005**Interest
                  income:**Interest
                  and fees on loans
              
              $
              22,223
              
              $
              15,489Interest
                  on deposits with other financial institutions
              
              
              5
              
              
              12Interest
                  on investments held to maturity:Taxable
              
              
              942
              
              
              1,109Non-taxable
              
              
              941
              
              
              740Interest
                  on investments available for sale:Taxable
              
              
              3,476
              
              
              2,617Non-taxable
              
              
              11
              
              
              11Interest
                  on federal funds sold
              
              
              49
              
              
              35Total
                  interest income
              
              
              27,647
              
              
              20,013**Interest
                  expense:**Interest
                  on negotiable orders of withdrawal
              
              
              360
              
              
              20Interest
                  on savings deposits
              
              
              1,869
              
              
              1,005Interest
                  on time deposits, under $100
              
              
              1,888
              
              
              1,121Interest
                  on time deposits, $100 and over
              
              
              2,384
              
              
              1,273Interest
                  of federal funds purchased
              
              
              442
              
              
              98Interest
                  on other borrowings
              
              
              1,971
              
              
              1,261Interest
                  on junior subordinated debentures
              
              
              375
              
              
              295Total
                  interest expense
              
              
              9,289
              
              
              5,073Net
                  interest income
              
              
              18,358
              
              
              14,940Provision
                  for loan losses
              
              
              -
              
              
              220Net
                  interest income after provision for loan losses
              
              
              18,358
              
              
              14,720**Noninterest
                  income:**Service
                  charges on deposit accounts
              
              
              1,421
              
              
              1,367Increase
                  in cash value of life insurance
              
              
              306
              
              
              261Other
              
              
              905
              
              
              1,041Total
                  noninterest income
              
              
              2,632
              
              
              2,669**Noninterest
                  expenses:**Salaries
                  and related benefits
              
              
              6,859
              
              
              5,553Premises
                  and occupancy
              
              
              1,189
              
              
              985Equipment
              
              
              991
              
              
              858Professional
                  fees
              
              
              920
              
              
              562Supplies
              
              
              236
              
              
              264Marketing
              
              
              387
              
              
              295Community
                  support donations
              
              
              218
              
              
              178Intangible
                  amortization
              
              
              11
              
              
              11Other
              
              
              1,665
              
              
              1,602Total
                  noninterest expenses
              
              
              12,476
              
              
              10,308Income
                  before provision for income taxes
              
              
              8,514
              
              
              7,081Provision
                  for income taxes
              
              
              2,957
              
              
              2,093Net
                  income
              
              $
              5,557
              
              $
              4,988Comprehensive
                  income:Unrealized
                  loss on interest rate floor
              
              $
              (211
              )
              $
              -Unrealized
                  loss on securities
              
              
              (128
              )
              $
              (1,669
              )Comprehensive
                  income
              
              $
              5,218
              
              $
              3,319Basic
                  earnings per share
              
              $
              0.52
              
              $
              0.48Diluted
                  earnings per share
              
              $
              0.51
              
              $
              0.46


See
      accompanying notes to consolidated financial statements


-4-
 Table
          of Contents





Capital
      Corp of the West


Consolidated
      Statement of Changes in Shareholders’ Equity


(Unaudited)





Common
                Stock
            
            
            
            Accumulated
                other(Amounts
                in thousands)
            
            Number
                of shares
            
            Amounts
            
            Retained
                earnings
            
            Comprehensive
                income
            
            TotalBalance,
                December 31, 2005
            
            
            10,575
            
            $
            59,785
            
            $
            65,049
            
            $
            (2,589
            )
            $
            122,245Exercise
                of stock options, including tax benefit of $10
            
            
            88
            
            
            1,515
            
            
            -
            
            
            -
            
            
            1,515Net
                change in fair value of available for sale investment securities,
                net of
                tax effect of $93
            
            
            -
            
            
            -
            
            
            -
            
            
            (128
            )
            
            (128
            )Net
                change in fair value of interest rate floor, net of tax benefit of
                $153
            
            
            -
            
            
            -
            
            
            -
            
            
            (211
            )
            
            (211
            )Cash
                dividends
            
            
            -
            
            
            -
            
            
            (531
            )
            
            -
            
            
            (531
            )Net
                income
            
            
            -
            
            
            -
            
            
            5,557
            
            
            -
            
            
            5,557Balance,
                March 31, 2006
            
            
            10,663
            
            $
            61,300
            
            $
            70,075
            
            $
            (2,928
            )
            $
            128,447


See
      accompanying notes to consolidated financial statements


-5-
 Table
          of Contents


Capital
        Corp of the West
 Consolidated
        Statements of Cash Flows
 (Unaudited)


Three
                  months ended
                March
                  31,(Dollars
                  in thousands)
              
              2006
              
              2005**Operating
                  activities:**Net
                  income
              
              $
              5,557
              
              $
              4,988Adjustments
                  to reconcile net income to net cash provided byoperating
                  activities:Provision
                  for loan losses
              
              
              -
              
              
              220Depreciation,
                  amortization and accretion, net
              
              
              1,772
              
              
              1,625Proceeds
                  from sales of loans
              
              
              599
              
              
              134Increase
                  in cash value of life insurance
              
              
              (306
              )
              
              (261
              )Death
                  benefit income from bank owned life insurance
              
              
              -
              
              
              539Non-cash
                  stock option compensation expense
              
              
              226
              
              
              -Net
                  decrease (increase) in interest receivable & other
                  assets
              
              
              16,080
              
              
              (1,075
              )Net
                  increase in accrued interest payable & other
                  liabilities
              
              
              3,021
              
              
              1,129Net
                  cash provided by operating activities
              
              
              26,949
              
              
              7,299**Investing
                  activities:**Investment
                  securities purchased - available for sale securities
              
              
              (232
              )
              
              (42,402
              )Investment
                  securities purchased - held to maturity securities
              
              
              (2,568
              )
              
              (16,380
              )Proceeds
                  from maturities of available for sale investment
                  securities
              
              
              13,783
              
              
              17,990Proceeds
                  from maturities of held to maturity investment securities
              
              
              3,865
              
              
              3,654Net
                  decrease in time deposits in other financial institutions
              
              
              -
              
              
              3,000Proceeds
                  from sales of available for sale securities
              
              
              1,071
              
              
              -Loans
                  purchased
              
              
              (30,015
              )
              
              -Net
                  increase in loans
              
              
              (71,000
              )
              
              (38,461
              )Purchases
                  of premises and equipment
              
              
              (2,768
              )
              
              (2,084
              )Net
                  cash used in investing activities
              
              
              (87,864
              )
              
              (74,683
              )**Financing
                  activities:**Net
                  (decrease) increase in demand, NOW and savings deposits
              
              
              (72,219
              )
              
              16,251Net
                  increase in certificates of deposit
              
              
              85,853
              
              
              14,913Net
                  proceeds from federal funds purchased
              
              
              48,950
              
              
              33,525Net
                  repayment of other borrowings
              
              
              (38,976
              )
              
              (12,273
              )Payment
                  of cash dividends
              
              
              (531
              )
              
              (292
              )Issuance
                  of shares pursuant to 401K and ESOP plans
              
              
              -
              
              
              -Exercise
                  of stock options
              
              
              1,289
              
              
              363Net
                  cash provided by financing activities
              
              
              24,366
              
              
              52,487Net
                  decrease in cash and cash equivalents
              
              
              (36,549
              )
              
              (14,897
              )Cash
                  and cash equivalents at beginning of period
              
              
              91,581
              
              
              57,819Cash
                  and cash equivalents at end of period
              
              $
              55,032
              
              $
              42,922**Supplemental
                  disclosure of noncash investing and financing
                  activities:**Interest
                  rate floor unrealized loss, net of taxes
              
              $
              (211
              )
              $
              -Interest
                  paid
              
              
              8,427
              
              
              4,867Income
                  tax payments
              
              
              -
              
              
              -Investment
                  securities unrealized losses, net of tax
              
              $
              (128
              )
              $
              (1,669
              )
 See
        accompanying notes to consolidated financial statements




-6-
 Table
          of Contents


Capital
        Corp of the West
 Notes
        to
        Consolidated Financial Statements
 March
        31,
        2006 and December 31, 2005
 (Unaudited)
 
 GENERAL
        COMPANY
 
 Capital
        Corp of the West (the “Company”) is a bank holding company incorporated under
        the laws of the State of California on April 26, 1995. On November 1, 1995,
        the
        Company became registered as a bank holding company and is the holder of
        all of
        the capital stock of County Bank (the “Bank”). The Company's primary asset is
        the Bank **** and
        the
        Bank is the Company's primary source of income. As of May 1, 2006, the Company
        had outstanding 10,683,593 shares of Common Stock, no par value, held by
        approximately 1,700 shareholders. There were no preferred shares outstanding
        at
        May 1, 2006. The Company has one wholly-owned inactive nonbank subsidiary,
        Capital West Group (“CWG”) at March 31, 2006. The Bank has two wholly-owned
        active nonbank subsidiaries, Merced Area Investment & Development, Inc.
        (“MAID”), County Asset Advisors (“CAA”) and County Investment Trust (“REIT”).
        CAA is currently inactive. All references herein to the Company includes
        direct
        subsidiaries of the Company as well as the Bank and the Bank's subsidiaries,
        unless the context otherwise requires.
 
 GENERAL
        BANK
 
 The
        Bank
        was organized on August 1, 1977, as County Bank of Merced, a California
        state banking corporation. The Bank commenced operations in 1977. In November
        1992, the Bank changed its legal name to County Bank. The Bank's deposits
        are
        insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable
        limits. The Bank is a member of the Federal Reserve System.
 
 INDUSTRY
        AND MARKET AREA
 
 The
        Bank
        engages in general commercial banking business primarily in Fresno, Madera,
        Mariposa, Merced, Sacramento, San Francisco, San Joaquin, Santa Clara,
        Stanislaus, and Tuolomne counties. The Bank has twenty-three full service
        branch
        offices; two of which are located in Merced with the branch located in downtown
        Merced currently serving as both a branch and as administrative headquarters.
        There are offices in Atwater, Hilmar, Los Banos, Sonora, Stockton, two offices
        in Modesto and two offices in Turlock. In 1997, the Bank also opened an office
        in Madera and purchased three branch offices from Bank of America in Livingston,
        Dos Palos and Mariposa. During 1999, the Bank opened its first office in
        Fresno,
        and in 2000 expanded its presence in Fresno by adding an additional office.
        On
        January 18, 2001 the Bank opened a loan production office in San Francisco
        that
        during 2001 was converted into a full service branch. During 2003 and 2004,
        the
        Bank added one full service branch facility in Fresno each year. During 2005
        the
        Bank opened a loan production office in Sacramento which was converted into
        a
        full service branch and opened a full service branch in Clovis. During 2006,
        the
        Bank added one full service branch facility in San Jose. The Bank’s
        administrative headquarters also provide accommodations for the activities
        of
        Bank's wholly-owned real estate subsidiaries.
  OTHER
        FINANCIAL NOTES
 
 All
        adjustments which in the opinion of Management are necessary for a fair
        presentation of the Company’s financial position at March 31, 2006 and December
        31, 2005 and the results of operations for the three month periods ended
        March
        31, 2006 and 2005, and the statements of cash flows for the three months
        ended
        March 31, 2006 and 2005 have been included therein. The interim results for
        the
        three months ended March 31, 2006 are not necessarily indicative of results
        for
        the full year. These financial statements should be read in conjunction with
        the
        financial statements and the notes included in the Company’s Annual Report and
        Form 10-K for the year ended December 31, 2005.
  -7-
 Table
            of Contents
  Cash
        and
        cash equivalents on the Consolidated Statement of Cash Flows include cash,
        noninterest bearing deposits in other banks, and federal funds
        sold.
 
 In
        the
        opinion of management, the accompanying unaudited financial statements have
        been
        prepared in accordance with accounting principle generally accepted in the
        United States and with the instructions to Form 10-Q and Rule 10-01 of
        Regulation S-X.
  During
          the first quarter of 2006, the Company purchased approximately $30,015,000
          in
          asset based loans from Heritage Bank of Commerce. The loans were recorded
          at
          fair market value at the time of purchase.
 Basic
        earnings per share (EPS) is computed by dividing net income available to
        common
        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.
 
 The
        following table provides a reconciliation of the numerator and denominator
        of
        the basic and diluted earnings per share computation of the three month periods
        ended March 31, 2006 and 2005:
 
 For
                  The Three MonthsEnded
                  March 31,(Dollars
                  in thousands, except per share data)
              
              2006
              
              2005Basic
                  EPS computation:Net
                  income
              
              $
              5,557
              
              $
              4,988Average
                  common shares outstanding
              
              
              10,599
              
              
              10,454Basic
                  EPS
              
              $
              0.52
              
              $
              0.48Diluted
                  EPS Computations:Net
                  income
              
              $
              5,557
              
              $
              4,988Average
                  common shares outstanding
              
              
              10,599
              
              
              10,454Effect
                  of stock options
              
              
              322
              
              
              33710,921
              
              
              10,791Diluted
                  EPS
              
              $
              0.51
              
              $
              0.46
 
 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 first quarter of 2006, management determined there had been no impairment
        of
        goodwill. As of March 31, 2006 and December 31, 2005, the Company had
        unamortized core deposit premiums of $12,000 and $23,000, respectively.
        Amortization of core deposit premiums and other intangibles was $11,000 during
        the first quarter of 2006 and 2005. 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.
  -8-
 Table
            of Contents
  BORROWED
        FUNDS
 
 During
        the first quarter of 2006, the Bank increased its borrowings with federal
        funds
        purchased. The federal funds purchased and other borrowings were obtained
        from
        the Federal Home Loan Bank and Pacific Coast Bankers’ Bank. The increase in
        federal funds purchased and other borrowings totaled $9,974,000 between March
        31, 2006 and December 31, 2005.
 
 STOCK
        COMPENSATION
 
 The
        Company maintains a stock option plan for directors, executives, and officers.
        The plan stipulates that (i)
        all
        options have an exercise price equal to the fair market value on the date
        of
        grant; (ii) all options have a ten-year term and become exercisable as follows:
        25% at date of issuance and 25% per year for the subsequent three years;
        and
        (iii) all must be exercised within 90 days following termination of employment
        or they expire. The Company stock option plan is designed to correlate stock
        price performance to officer and Director compensation.  The
        source of shares is new issued, registered shares, that are
        nonrestricted.
  On
        January 1, 2006, the Company began recording stock option compensation expense
        in accordance with Statement of Financial Accounting Standards No. 123-R,
        Share-based Payment, (“SFAS 123R”) as interpreted by SEC Staff Accounting
        Bulletin No. 107. The Company adopted the modified prospective transition
        method
        provided for under SFAS 123R, and consequently has not retroactively adjusted
        results from prior periods. Under this transition method, compensation cost
        associated with stock option awards now includes quarterly amortization of
        the
        remaining unvested portion of stock options outstanding prior to January
        1,
        2006. Stock compensation expense was recorded as additional salaries and
        benefits expense, which had the effect of reducing net income, earnings per
        share, and diluted earnings per share. Stock option expense also had the
        effect
        of lowering income from continuing operations reported in the Consolidated
        Statement Cash Flow for 2006. Under SFAS 123R, stock options are valued at
        fair
        value using an acceptable model. Compensation expense is recorded on a ratable
        basis in the period in which the stock option vests. The Company uses the
        Black-Scholes-Merton closed form model, an acceptable model under SFAS 123R,
        for
        estimating the fair value of stock options.
 
 Prior
        to
        January 1, 2006, the Company accounted for stock option compensation expense
        using the intrinsic method, whereby the difference between the exercise price
        and the fair market value on the date of grant is recognized as compensation
        expense. The Company issued all stock options with an exercise price equal
        to
        the fair market value of the Company’s stock on the date of grant, resulting in
        no compensation expense being recorded; there was no net income affect, and
        it
        did not effect earnings per share of diluted earnings per share. For the
        valuation of stock options the Company used a risk free rate of 4.35%, a
        volatility rate of .2781, an expected dividend rate of 0.50%, and an expected
        term of 5.99 years for the quarter ended March 31, 2006. For the valuation
        of
        stock options the Company used a risk free rate of 3.86%, a volatility rate
        of
        .3046, an expected dividend rate of 0.40%, and an expected term of 6.32 years
        for the year ended December 31, 2005.
  -9-
 Table
            of Contents
  **Information
        as Reported in the Financial Statements**
 
 The
        following table presents the stock option compensation expense included in
        the
        Company’s Consolidated Statement of Income and Comprehensive Income for the
        three months ended March 31, 2006:
 
 Three
                  Months
                Ended
                March
                  31, 2006Stock
                  option compensation expense
              
              $
              226,000Tax
                  benefit recorded related to stock option compensation
                  expense
              
              
              (10,000
              )Decrease
                  in net income
              
              $
              216,000Effect
                  on:Net
                  income per share - basic
              
              $
              (0.02
              )Net
                  income per share - diluted
              
              $
              (0.02
              )
  Options
        activity during the first three months of 2006 is as follows:
  (Shares
                  in thousands)
              
              #
                  of shares
              
              Weighted-Average
                  exercise priceOutstanding
                  at January 1, 2006
              
              
              753
              
              $
              17.46Option
                  granted
              
              
              52
              
              
              34.39Options
                  exercised
              
              
              (88
              )
              
              14.71Outstanding
                  at March 31, 2006
              
              
              717
              
              
              19.01Exercisable
                  at March 31, 2006
              
              
              635
              
              $
              17.12
 
 Options
        grants during the first three months of 2006:
 
 March
                  31,(Shares
                  in thousands)
              
              2006
              
              2005#
                  of shares
              
              Weighted-Average
                  fair value
              
              #
                  of shares
              
              Weighted-Average
                  fair valueOptions
                  granted
              
              
              52
              
              $
              11.77
              
              
              108
              
              $
              9.57
 
 Option
        vesting activity that occurred during the first three months of
        2006:
 
 (Shares
                  in thousands)
              
              #
                  of shares
              
              Weighted-Average
                  fair valueNonvested
                  options at January 1, 2006
              
              
              43
              
              $
              10.60Options
                  granted
              
              
              52
              
              
              12.84Options
                  vested
              
              
              (13
              )
              
              12.84Nonvested
                  options at March 31, 2006
              
              
              82
              
              $
              11.66
  -10-
 Table
            of Contents
  Vested
        option summary information as of March 31, 2006 is as follows:
 (Shares
                    and dollars in thousands)
                
                #
                    of shares
                
                Aggregate
                    intrinsic value
                
                Weighted-Average
                    remaining contractual life
                
                Weighted-Average
                    exercise priceVested
                    options exercisable at March 31, 2006
                
                
                635
                
                $
                11,892
                
                
                6.84
                
                $
                17.69Total
                    options outstanding at March 31, 2006
                
                
                717
                
                $
                12,076
                
                
                7.17
                
                $
                19.01
  The
        vesting schedule for each option holder’s stock option contract is identical to
        the exercise schedule for each option contract. The total intrinsic value
        of
        options exercised was $1,724,000 and $641,000 for the quarters ended March
        31,
        2006 and March 31, 2005. Intrinsic value is defined as positive difference
        between the current price for the underlying stock
        and the strike
        price of an
        option. For a call
        option the
        strike price has to be under the price of the underlying stock to have intrinsic
        value. The total fair value of shares vested was $226,000 and $481,000 for
        the
        quarter ended March 31, 2006 and March 31, 2005. Total future compensation
        expense related to nonvested awards was $895,000 with a weighted average
        period
        to be recognized of 2.73 years as of March 31, 2006.
 
 Information
        Calculated as if Stock Option Valuations were included in prior period Financial
        Statements
 
 (Dollars
                  in thousands except per share amounts)
              
              Three
                  Months
                Ended
                March
                  31, 2005Net
                  income as reported
              
              $
              4,988Stock
                  option compensation expense
              
              
              (490
              )Tax
                  benefit related to stock option compensation expense
              
              
              80Pro
                  forma
              
              $
              4,578Basic
                  earnings per share:As
                  reported
              
              $
              0.48Pro
                  forma
              
              $
              0.44Diluted
                  earnings per share:As
                  reported
              
              $
              0.46Pro
                  forma
              
              $
              0.42Stock-based
                  employee compensation cost, net of related tax effects, included
                  in net
                  income:As
                  reported
              
              $
              -Pro
                  forma
              
              $
              410
 
 Compensation
        expense was recorded at $216,000 for the quarter ended March 31, 2006 for
        stock
        options compared to $490,000 that would have been recorded for the quarter
        ended
        March 31, 2005. The $274,000 decrease is related to the November, 2005 action
        by
        the Board of Directors approving the accelerated vesting of all outstanding
        stock options outstanding at that time. The Board of Directors performed
        this
        action to mitigate the effect of the adoption of Financial Accounting Statement
        123R. If the acceleration did not take place the Company would have recognized
        compensation expense related to stock options of $450,000.
  -11-
 Table
            of Contents
  On
        November 29, 2005, the Company’s Board of Directors approved the 100% vesting of
        all existing unvested stock options outstanding. All the options affected
        were
        in-the-money, and were held by certain members of management and the board
        of
        directors. The board took this action so that the Company would not have
        to
        recognize equity compensation expense in the Consolidated Statements of Income
        and Comprehensive Income on the unvested portion of the stock options
        outstanding as of November 29, 2005. The unvested equity compensation expense
        related to this action was $2,409,000. During the first three months of 2006,
        the additional amount of stock option compensation expense that would have
        been
        recorded if the stock option vesting schedules had not been accelerated was
        $234,000, the tax benefit would have been $35,000 and net income would have
        been
        reduced by $199,000.
 
 RECLASSIFICATIONS
 
 Certain
        amounts previously reported in the 2005 financial statements have been
        reclassified to conform to the 2006 presentation.
 
 **Recent
        Accounting Pronouncements**
 
 In
        December 2004, the Financial Accounting Standards Board ("FASB") issued
        Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), *Share-Based
        Payment* .
        The
        statement requires that compensation cost relating to share-based payment
        transactions be recognized in financial statements and that this cost be
        measured based on the fair value of the equity or liability instruments issued.
        SFAS No. 123 (Revised 2004) covers a wide range of share-based compensation
        arrangements including share options, restricted share plans, performance-based
        awards, share appreciation rights, and employee share purchase plans. The
        Company adopted SFAS No 123 (Revised 2004) on January 1, 2006 which becomes
        effective for accounting periods beginning January 1, 2006. Management believes
        the adoption of the standard will negatively affect reported earnings by
        increasing non-cash stock option compensation expense recorded in the
        Consolidated Statement of Income and Comprehensive Income by approximately
        $700,000 during 2006. The impact on prior years is discussed in the section
        titled “Stock Compensation” above.
 
 In
        February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140."
        SFAS
        No. 155 simplifies accounting for certain hybrid instruments currently governed
        by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
        by allowing fair value remeasurement of hybrid instruments that contain an
        embedded derivative that otherwise would require bifurcation. SFAS No. 155
        also
        eliminates the guidance in SFAS No.133 Implementation Issue No. D1, "Application
        of Statement 133 to Beneficial Interests in Securitized Financial Assets,"
        which
        provides such beneficial interests are not subject to SFAS No. 133. SFAS
        No. 155
        amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial
        Assets
        and Extinguishments of Liabilities - a Replacement of FASB Statement No.
        125,"
        by eliminating the restriction on passive derivative instruments that a
        qualifying special-purpose entity may hold. This statement is effective for
        financial instruments acquired or issued after the beginning of an entity’s
        first fiscal year that begins after September 15, 2006. Management does not
        expect the adoption of this statement to have a material impact on the Company’s
        Consolidated Financial Statements.
 
 In
        March
        2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156,
        "Accounting for Servicing of Financial Assets- an amendment of FASB Statement
        No. 140." SFAS No.156 requires an entity to recognize a servicing asset or
        servicing liability each time it undertakes an obligation to service a financial
        asset by entering into a servicing contract in specific situations.
        Additionally, the servicing asset or servicing liability shall be initially
        measured at fair value; however, an entity may elect the "amortization method"
        or "fair value method" for subsequent balance sheet reporting periods. SFAS
        No.156 is effective as of an entity's first fiscal year beginning after
        September 15, 2006. Early adoption is permitted as of the beginning of an
        entity's fiscal year, provided the entity has not yet issued financial
        statements, including interim financial statements, for any period of that
        fiscal year. Management does not expect the adoption of this statement to
        have a
        material impact on the Company’s Consolidated Financial
        Statements.
  -12-
 Table
            of Contents
  **Item
        2. Management's Discussion 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 base their investment decisions solely on
        forward looking statements and should consider all uncertainties and risks
        discussed throughout this report, as well as those discussed in the Company’s
        2005 Annual Report on Form 10-K filed on March 14, 2006. These statements
        are
        representative only on the date hereof, and the Company undertakes no obligation
        to update any forward-looking statements made. Some possible events or factors
        that could occur that may cause differences from expected results include
        the
        following: the Company’s loan growth is dependent on economic conditions, as
        well as various discretionary factors, such as decisions to sell, or purchase
        certain loans or loan portfolios; or sell or buy participations of loans;
        the
        quality and adequacy of management of 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 subsidiaries are allowed to pay to us;
        the
        ability to satisfy requirements related to the Sarbanes-Oxley Act and other
        regulation on internal control; and management’s ability to manage these and
        other risks. 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.
  -13-
 Table
            of Contents
  **Critical
        accounting policies and estimates**
 
 Management’s
        discussion and analysis of its financial condition and results of operations
        are
        based upon the Company’s consolidated financial statements, which have been
        prepared in accordance with accounting principles generally accepted in the
        United States. The preparation of these financial statements requires the
        Company to make estimates and judgments that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, and related disclosure of contingent
        assets and liabilities. On an on-going basis, the Company evaluates its
        estimates, including those related to the adequacy of the allowance for loan
        losses, 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 will differ from these estimates. (See caption “Allowance for
        Loan Losses” for a more detailed discussion).
  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
        included in the Company’s Annual Report and Form 10-K.
  **Results
        Of Operations**
  **Three
        Months Ended March 31, 2006 Compared With Three Months Ended March 31,
        2005**
  OVERVIEW
  For
        the
        three months ended March 31, 2006 the Company reported record net income
        of
        $5,557,000. This compares to $4,988,000 for the same period in 2005 and
        represents an increase of $569,000 or 11%. Basic and fully diluted earnings
        per
        share were $0.52 and $0.51 for the three months ended March 31, 2006. This
        compares to basic and fully diluted earnings per share of $0.48 and $0.46
        for
        the three months ended March 31, 2005 and represents an increase of $0.04
        and
        $0.05 per share for basic and fully diluted earnings per share. The annualized
        return on average assets was 1.28% and 1.37% for the first three months of
        2006
        and 2005. The Company's annualized return on average equity was 17.63% and
        18.85% for the three months ended March 31, 2006 and 2005.
  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 earning assets
        and
        interest paid on interest bearing liabilities. The following table illustrates
        the results and changes in interest income and interest expense for the quarters
        ended March 31, 2006 and March 31, 2005.
 
 For
                  the three months ended March 31,(Dollars
                  in thousands)
              
              2006
              
              2005
              
              Percent
                  changeTotal
                  interest income
              
              $
              27,647
              
              $
              20,013
              
              
              38
              %Total
                  interest expense
              
              
              9,289
              
              
              5,073
              
              
              83
              %Net
                  interest income
              
              $
              18,358
              
              $
              14,940
              
              
              23
              %
  -14-
 Table
            of Contents
  The
        following table illustrates the average balances affecting interest income
        and
        expense, and interest earned or paid on those balances on a tax adjusted
        basis
        for the periods indicated.
  For
                  the three months ended March 31,(Dollars
                  in thousands)
              
              2006
              
              2005
              
              Percent
                  changeAverage
                  interest earning assets
              
              $
              1,603,724
              
              $
              1,345,801
              
              
              19
              %Average
                  interest bearing liabilities
              
              $
              1,310,863
              
              $
              1,082,650
              
              
              21
              %Average
                  interest rate earned
              
              
              7.07
              %
              
              6.12
              %
              
              16
              %Average
                  interest rate paid
              
              
              2.87
              %
              
              1.90
              %
              
              51
              %Net
                  interest margin
              
              
              4.72
              %
              
              4.59
              %
              
              3
              %
  The
        level
        of interest income is affected by changes in 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 months ended March 31, 2006 was primarily the result
        of an
        increase in both volume of interest-earning assets and average interest rates
        earned. The increase in average interest earning assets during 2006 was achieved
        through increased asset generation from existing branches and the addition
        of a
        new branch in San Jose which was acquired with the purchase of approximately
        $30,015,000 in asset based loans during the first quarter of 2006. The increase
        in interest rates earned in the first quarter of 2006 compared to the same
        period in 2005 was primarily the result of an increase in prevailing market
        interest rates. Interest expense is a function of the volume of, and rates
        paid
        on, interest-bearing liabilities. Interest-bearing liabilities consist primarily
        of certain deposits and borrowed funds. The increase in interest-bearing
        liabilities in the first quarter of 2006 when compared to the same period
        in
        2005 was primarily the result of an increase in internally generated and
        brokered Certificates of Deposit of $100,000 and over. Brokered deposits
        totaled
        $84,066,000 as of March 31, 2006 compared to $20,871,000 outstanding at December
        31, 2005, or an increase of $63,105,000 during the first three months of
        2006.
        Without this increase in brokered deposits, the deposit portfolio would have
        decreased in size. The increase in interest rates paid in the first quarter
        of
        2006 when compared to 2005 was primarily the result of an increase in prevailing
        interest rates that was compounded by a change in the mix within the deposit
        portfolio. Time deposits accounted for 38% of the deposit portfolio as of
        March
        31, 2006 compared to 32% as of December 31, 2005. The increase in the time
        deposit portfolio was coupled with declines in the demand, NOW, and savings
        portion of the deposit portfolio. Customers moving funds to lock in higher
        rates
        on time deposits is the primary reason for the increased time deposits as
        a
        percentage of deposits.
  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 2006 was primarily attributable to a gain of 109 basis
        points
        in the loan portfolio yield achieved in the first three months of 2006 compared
        to the same time period in 2005. Loans as a percentage of average
        interest-earning assets increased to 69% for the three months ended March
        31,
        2006 compared with 66% for the three months ended March 31, 2005. The increase
        in loans as a percentage on interest-earning assets is mainly attributable
        to
        the purchase of an
        asset
        based lending portfolio from Heritage Bank of Commerce for approximately
        $30,015,000 during the first quarter of 2006.
  -15-
 Table
            of Contents
  AVERAGE
        BALANCES AND RATES EARNED AND PAID
  The
        following table presents condensed average balance sheet information for
        the
        Company, together with interest rates earned and paid on the various sources
        and
        uses 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 March 31, 2006
                
                Three
                    months ended March 31, 2005(Dollars
                    in thousands)
                
                AverageBalance
                
                Taxable
                    EquivalentInterest
                
                Taxable
                    EquivalentYield/rate
                
                AverageBalance
                
                Taxable
                    EquivalentInterest
                
                Taxable
                    EquivalentYield/rate**Assets**Federal
                    funds sold
                
                $
                4,593
                
                $
                49
                
                
                4.33
                %
                $
                5,747
                
                $
                35
                
                
                2.47
                %Time
                    deposits at other financial institutions
                
                
                350
                
                
                5
                
                
                5.79
                
                
                1,883
                
                
                12
                
                
                2.58Taxable
                    investment securities (1)
                
                
                390,601
                
                
                4,446
                
                
                4.62
                
                
                368,717
                
                
                3,763
                
                
                4.14Nontaxable
                    investment securities (1)
                
                
                100,416
                
                
                1,248
                
                
                5.04
                
                
                78,391
                
                
                996
                
                
                5.15Loans,
                    gross: (2)
                
                
                1,107,764
                
                
                22,223
                
                
                8.14
                
                
                891,063
                
                
                15,489
                
                
                7.05Total
                    interest-earning assets
                
                
                1,603,724
                
                
                27,971
                
                
                7.07
                
                
                1,345,801
                
                $
                20,295
                
                
                6.12Allowance
                    for loan losses
                
                
                (15,168
                )
                
                
                
                
                
                
                
                (13,519
                )Cash
                    and due from banks
                
                
                49,507
                
                
                
                
                
                
                
                
                40,285Premises
                    and equipment, net
                
                
                29,931
                
                
                
                
                
                
                
                
                23,097Interest
                    receivable and other assets
                
                
                67,493
                
                
                
                
                
                
                
                
                56,518Total
                    assets
                
                $
                1,735,487
                
                
                
                
                
                
                
                $
                1,452,182**Liabilities
                    And Shareholders' Equity**Negotiable
                    order of withdrawal
                
                $
                214,810
                
                $
                360
                
                
                0.68
                
                $
                166,451
                
                $
                20
                
                
                0.05Savings
                    deposits
                
                
                385,161
                
                
                1,869
                
                
                1.97
                
                
                361,335
                
                
                1,005
                
                
                1.13Time
                    deposits
                
                
                475,716
                
                
                4,272
                
                
                3.64
                
                
                373,929
                
                
                2,394
                
                
                2.60Federal
                    funds purchased
                
                
                38,468
                
                
                442
                
                
                4.66
                
                
                14,549
                
                
                98
                
                
                2.73Other
                    borrowings
                
                
                180,212
                
                
                1,971
                
                
                4.44
                
                
                149,890
                
                
                1,261
                
                
                3.41Subordinated
                    Debentures
                
                
                16,496
                
                
                375
                
                
                9.22
                
                
                16,496
                
                
                295
                
                
                7.25Total
                    interest-bearing liabilities
                
                
                1,310,863
                
                
                9,289
                
                
                2.87
                
                
                1,082,650
                
                
                5,073
                
                
                1.90Noninterest-bearing
                    deposits
                
                
                284,121
                
                
                
                
                
                
                
                
                253,277Accrued
                    interest, taxes and other liabilities
                
                
                14,410
                
                
                
                
                
                
                
                
                10,401Total
                    liabilities
                
                
                1,609,394
                
                
                
                
                
                
                
                
                1,346,328Total
                    shareholders' equity
                
                
                126,093
                
                
                
                
                
                
                
                
                105,854Total
                    liabilities and shareholders' equity
                
                $
                1,735,487
                
                
                
                
                
                
                
                $
                1,452,182Net
                    interest income and margin (3)
                
                
                
                
                $
                18,682
                
                
                4.72
                %
                
                
                
                $
                15,222
                
                
                4.59
                %
  (1)  Tax-equivalent
        adjustments included in the nontaxable investment securities portfolio are
        $2 96,000
        and $245,000 for the three months ended March 31, 2006 and 2005. Tax equivalent
        adjustments included in the taxable investment securities created by a dividends
        received deduction were $28,000 and $37,000 for the three months ended March
        31,
        2006 and 2005.
 (2)  Amounts
        of interest earned included loan fees of $908,000 and $645,000 and loan costs
        of
        $111,000 and $70,000 for the three months ended March 31, 2006 and 2005,
        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 endedMarch
                  31, 2006 compared to March 31, 2005(In
                  thousands)
              
              Volume
              
              Rate
              
              TotalIncrease
                  (decrease) in interest income:Federal
                  funds sold
              
              
              (8
              )
              
              22
              
              
              14Time
                  deposits at other financial institutions
              
              
              (15
              )
              
              8
              
              
              (7
              )Taxable
                  investment securities
              
              
              232
              
              
              451
              
              
              683Tax-exempt
                  investment securities
              
              
              275
              
              
              (23
              )
              
              252Loans
              
              
              4,122
              
              
              2,612
              
              
              6,734Total:
              
              
              4,606
              
              
              3,070
              
              
              7,676Increase
                  in interest expense:Interest
                  bearing demand
              
              
              7
              
              
              333
              
              
              340Savings
                  deposits
              
              
              70
              
              
              794
              
              
              864Time
                  deposits
              
              
              758
              
              
              1,120
              
              
              1,878Federal
                  funds purchased
              
              
              241
              
              
              103
              
              
              344Other
                  borrowings
              
              
              286
              
              
              424
              
              
              710Subordinated
                  Debentures
              
              
              -
              
              
              80
              
              
              80Total:
              
              
              1,362
              
              
              2,854
              
              
              4,216Increase
                  in net interest income
              
              
              3,244
              
              
              216
              
              
              3,460
  PROVISION
        FOR LOAN LOSSES
  The
        provision for loan losses for the three months ended March 31, 2006 was $0
        compared with $220,000 for the three months ended March 31, 2005, a decrease
        of
        $220,000 or 100%. See "Allowance for Loan Losses" contained herein. As
        of
        March 31, 2006 the allowance for loan losses was $15,141,000 or 1.30% of
        total
        loans compared to $14,776,000 or 1.38% of total loans as of December 31,
        2005.
        At March 31, 2006, nonperforming assets totaled $6,523,000 or 0.36% of total
        assets, nonperforming loans totaled $6,463,000 or 0.55% of total loans and
        the
        allowance for loan losses totaled 234% of nonperforming loans. At December
        31,
        2005, nonperforming assets totaled $1,960,000 or 0.11% of total assets,
        nonperforming loans totaled $1,900,000 or 0.18% of total loans and the allowance
        for loan losses totaled 778% of nonperforming loans. No assurance can be
        given
        that nonperforming loans will not increase or that the allowance for loan
        losses
        will be adequate to cover losses inherent in the loan portfolio.
  -17-
 Table
            of Contents
  NONINTEREST
        INCOME
  Noninterest
        income decreased by $37,000 or 1% to $2,632,000 for the three months ended
        March
        31, 2006 compared with $2,669,000 in the same period during 2005. Service
        charges on deposit accounts increased by $54,000 or 4% to $1,421,000 for
        the
        three months ended March 31, 2006 compared with $1,367,000 for the same period
        in 2005. The increase in service charges on deposit accounts was primarily
        the
        result of increased transaction account volumes, partially offset by an increase
        in the earnings rate utilized to offset commercial demand deposit analysis
        charges. The increase of $45,000 in cash surrender value of life insurance
        policies was the result of a higher earnings rate year over year. Other
        noninterest income decreased by $136,000 or 13% for the three month period
        ended
        March 31, 2006 when compared to the same period in 2005. The primary reason
        for
        the decreased other income was the receipt in the first quarter of 2005,
        a
        $539,000 death benefit proceed received from a bank owned life insurance
        policy
        on a retired executive manager.
 
 NONINTEREST
        EXPENSE **** ****
 
 Noninterest
        expenses increased by $2,168,000 or 21% to $12,476,000 for the three months
        ended March 31, 2006 compared with $10,308,000 for the same period in 2005.
        The
        primary components of noninterest expenses were salaries and employee benefits,
        premises and occupancy expenses, equipment expenses, professional fees, supplies
        expenses, marketing expenses, intangible amortization and other operating
        expenses.
  For
        the
        three months ended March 31, 2006, salaries and related benefits increased
        by
        $1,306,000 or 24% to $6,859,000 from the $5,553,000 recorded for the same
        period
        in 2005. The increase was primarily the result of normal salary progression,
        increased support staff used in operations, the staffing of the new San Jose
        branch office, regulatory compliance support functions, and the recognition
        of
        stock option expense as part of salaries and related benefits expense in
        2006.
        Premises and occupancy expense increased by $204,000 or 21% to $1,189,000
        for
        the three months ending March 31, 2006 from $985,000 during the same period
        in
        2005. The primary reason for the increase in 2006 was related to the addition
        of
        new branch facilities opened or remodeled. Equipment expenses increased by
        $133,000 or 16% to $991,000 during the three months ended March 31, 2006
        from
        the $858,000 experienced during the same period in 2005. The additional
        equipment expenses were primarily the result of branch and department equipment
        upgrades and purchases related to the opening of new branch offices. When
        comparing the results of the three months ended March 31, 2006 to the three
        months ended March 31, 2005, professional fees increased by $358,000 or 64%,
        marketing expenses increased by $92,000 or 31%, supplies expenses decreased
        by
        $28,000 or 11%, intangible amortization expenses remained the same, and other
        expenses increased $63,000 or 4% from 2005 levels. Increased professional
        fees
        in 2006 were primarily attributable to the legal costs associated with corporate
        litigation, and executive recruitment expenses. The increase in marketing
        expense was primarily the result of increased advertising expenses. The decrease
        in supplies expenses was related to decreased administrative supplies used
        at
        the customer support center. The increased other expenses were primarily
        the
        result of increased correspondent bank charges caused by increased activity,
        charitable donations, and increased communications costs which were attributable
        to opening of new facilities.
  PROVISION
        FOR INCOME TAXES
  The
        Company recorded an increase of $864,000 or 41% in the income tax provision
        to
        $2,957,000 for the three months ended March 31, 2006 compared to the $2,093,000
        recorded for the same period in 2005. During the first quarter of 2006 and
        2005,
        the Company achieved an effective tax rate of 35% and 30%, respectively.
        The
        effective tax rate for the first quarter of 2005 was lower than the rate
        recorded during the same period in 2006 primarily due to the receipt of $539,000
        in nontaxable bank owned life insurance death benefits during the first quarter
        of 2005. Excluding the bank owned life insurance death benefits, the income
        tax
        rate for the first quarter of 2005 would have been 32%, compared to 35% for
        the
        same time period in 2006. This increase in the year over year income tax
        rate is
        due to the increased level of fully taxable income generated in 2006 compared
        to
        2005 levels.
  -18-
 Table
            of Contents
  **Financial
        Condition**
  Total
        assets at March 31, 2006 were $1,789,587,000, an increase of $32,831,000
        or 2%
        compared with total assets of $1,756,756,000 at December 31, 2005. Net loans
        were $1,153,739,000 at March 31, 2006, an increase of $99,619,000 or 9% compared
        with net loans of $1,054,120,000 at December 31, 2005. Deposits were
        $1,418,134,000 at March 31, 2006, an increase of $13,634,000 or 1% compared
        with
        deposits of $1,404,500,000 at December 31, 2005. The increase in total assets
        of
        the Company between December 31, 2005 and March 31, 2006 was primarily funded
        by
        an increase in Federal funds purchased and deposit growth. Cash inflows
        generated from the increased deposits and borrowings were primarily used
        to fund
        growth in the loan and investment portfolios and to fund infrastructure
        expenditures related to branch expansion.
  Total
        shareholders' equity was $128,447,000 at March 31, 2006, an increase of
        $6,202,000 or 5% from the $122,245,000 at December 31, 2005. The growth in
        shareholders’ equity between December 31, 2005 and March 31, 2006 was primarily
        achieved through the retention of accumulated earnings.
  OFF-BALANCE
        SHEET COMMITMENTS
  The
        following table shows the distribution of the Company's undisbursed loan
        commitments at the dates indicated.
  March
                    31,
                
                December
                    31,(In
                    thousands)
                
                2006
                
                2005Letters
                    of credit
                
                $
                15,542
                
                $
                15,160Commitments
                    to extend credit
                
                
                528,159
                
                
                495,313Total
                
                $
                543,701
                
                $
                510,473
 
 As
        a
        financial services provider; we routinely commit to extend credit, including
        loan commitments, standby letters of credit and financial guarantees. A
        significant portion of commitments to extend credit may expire without being
        drawn upon. These commitments are subject to the same credit policies and
        approval process used for our loans.
 
  CASH
        VALUE OF LIFE INSURANCE
  The
        Bank
        maintains certain cash surrender value life insurance policies to help offset
        some of 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. These plans are informally
        linked with universal life insurance policies maintained by the Bank. Income
        from these policies is reflected in noninterest income. At March 31 2006,
        the
        Bank held $32,102,000 in cash surrender value life insurance, an increase
        of
        $306,000 from the $31,796,000 maintained at December 31, 2005.
  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 as
        well as
        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 a total of $11,727,000 in these investments as of March
        31,
        2006 and December 31, 2005.
 
  -19-
 Table
            of Contents
  INVESTMENT
        SECURITIES
 
 At
        March
        31, 2006 equity securities included $11,001,000 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 AA- credit ratings from the securities
        rating agencies and are callable by the issuer at par. At March 31, 2006,
        the
        unrealized gain on these securities totaled $988,000 compared to a $54,000
        unrealized loss at December 31, 2005.
 
 Mutual
        fund investments that are invested in adjustable rate mortgages had an amortized
        cost basis of $12,905,000 and $12,928,000 and a corresponding unrealized
        loss
        compared to market value of $383,000 and $451,000 as of March 31, 2006 and
        December 31, 2005. Management has reviewed these investments impairment.
        As of
        March 31, 2006, management believes that the unrealized loss related to this
        investment does not represent an other than temporary impairment, but rather
        is
        temporary in nature.
 
 INTEREST
        RATE FLOOR
 
 The
        fair
        value and notional amounts for the cash flow hedge at March 31, 2006 and
        December 31, 2005 are presented below.
  March
                  31, 2006
              
              December
                  31, 2005(In
                  thousands)
              
              Fair
                  Value
              
              Notional
                  Amount
              
              Fair
                  Value
              
              Notional
                  AmountPurchased
                  option, interest rate floor
              
              $
              375
              
              $
              100,000
              
              $
              743
              
              $
              100,000
 
 The
        decrease of $368,000 or 49% in the fair value of the interest rate floor
        between
        December 31, 2005 and March 31, 2006 is primarily the result of an increasing
        interest rate environment which caused a corresponding reduction in the
        probability that the Company will receive any future cash inflows related
        to
        this contract.
 
 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 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 reestablished. The Company had no restructured
        loans as of the dates indicated in the table below.
  -20-
 Table
            of Contents
  The
        following table summarizes nonperforming assets of the Company at March 31,
        2006
        and December 31, 2005:
  March
                    31,2006
                
                December
                    31,2005(Dollars
                    in thousands)Nonaccrual
                    loans
                
                $
                3,066
                
                $
                1,692Accruing
                    loans past due 90 days or more
                
                
                3,397
                
                
                208Total
                    nonperforming loans
                
                
                6,463
                
                
                1,900Other
                    real estate owned
                
                
                60
                
                
                60Total
                    nonperforming assets
                
                $
                6,523
                
                $
                1,960Nonperforming
                    loans to total loans
                
                
                0.55
                %
                
                0.18
                %Nonperforming
                    assets to total assets
                
                
                0.36
                %
                
                0.11
                %
  The
        increase in nonaccrual loans of $1,374,000 between March 31, 2006 and December
        31, 2005 was primarily the result of an increase of $1,439,000 related to
        one
        customer relationship that was included as part of the approximately $30,015,000
        asset based loans purchase that occurred in the first quarter of 2006. This
        borrower’s repayment ability and collateral assignments have been reviewed by
        management and, in the opinion of management, are believed to be adequate
        to
        support the credit that has been extended. The carrying value of this asset
        based loan credit is less than management’s estimate of its fair market value.
        The increase in accruing loans past due 90 days or more was primarily related
        to
        a single agricultural loan of $3,372,000 that is 100% guaranteed by an agency
        of
        the federal government. This loan, and all accrued interest, is expected
        to be
        paid in full by the end of the second quarter 2006 by the guarantor.
  Contractual
        accrued interest income on loans on nonaccrual status as of March 31, 2006
        and
        2005, which would have been recognized if the loans had been current in
        accordance with their original terms, was approximately $79,000 and $44,000,
        respectively.
  At
        March
        31, 2006, nonperforming assets represented 0.36% of total assets, an increase
        of
        25 basis points when compared to the 0.11% at December 31, 2005. Nonperforming
        loans represented 0.55% of total loans at March 31, 2006, an increase of
        37
        basis points compared to the 0.18% at December 31, 2005. Nonperforming loans
        that were secured by first deeds of trust on real property were $4,754,000
        and
        $1,684,000 at March 31, 2006 and December 31, 2005. The increase in
        nonperforming loans and nonperforming assets was primarily the result of
        the
        purchase of the asset based lending group where $1,439,000 of nonperforming
        loans were included in the purchase and a specific loan of $3,372,000 that
        is
        100% government guaranteed, with all principal and accrued interest to be
        paid
        by the government agency. 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
        March
        31, 2006 and December 31, 2005, the Company had $60,000 invested in one real
        estate 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
        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 with the current occupant of
        the
        residence. During the first quarter of 2006, no new foreclosure properties
        were
        acquired or sold. No assurance can be given that the Company will sell the
        remaining property during 2006 or at any time or the amount for which the
        property might be sold.
  -21-
 Table
            of Contents
  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 March 31,
        2006
        and December 31, 2005, 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 March 31, 2006 were $3,066,000 for
        which
        the Company made provisions to the allowance for loan losses of approximately
        $460,000.
  Except
        for loans that are disclosed above, there were no assets as of March 31,
        2006,
        where known information about possible credit problems of the borrower causes
        management to have serious doubts as to the ability of the borrower to comply
        with the present loan repayment terms and which may become nonperforming
        assets.
        Given the magnitude of the Company's loan portfolio, however, it is always
        possible that current credit problems may exist that may not have yet been
        identified by the Bank’s credit officers.
  **Allowance
        for Loan Losses**
 
 The
        following table summarizes the loan loss experience of the Company for the
        three
        months ended March 31, 2006 and 2005, and for the year ended December 31,
        2005.
  March
                    31
                
                December
                    31(Dollars
                    in thousands)
                
                2006
                
                2005
                
                2005Allowance
                    for Loan Losses:Balance
                    at beginning of period
                
                $
                14,776
                
                $
                13,605
                
                $
                13,605Provision
                    for loan losses
                
                
                -
                
                
                220
                
                
                2,051Charge-offs:Commercial
                    and agricultural
                
                
                238
                
                
                565
                
                
                1,664Real
                    estate - mortgage
                
                
                -
                
                
                -
                
                
                -Consumer
                
                
                15
                
                
                111
                
                
                318Total
                    charge-offs
                
                
                253
                
                
                676
                
                
                1,982RecoveriesCommercial
                    and agricultural
                
                
                562
                
                
                149
                
                
                903Real-Estate
                    - mortgage
                
                
                -
                
                
                -
                
                
                -Consumer
                
                
                56
                
                
                60
                
                
                199Total
                    recoveries
                
                
                618
                
                
                209
                
                
                1,102Net
                    charge-offs
                
                
                (365
                )
                
                467
                
                
                880Balance
                    at end of period
                
                $
                15,141
                
                $
                13,358
                
                $
                14,776Loans
                    outstanding at period-end
                
                $
                1,168,880
                
                $
                922,377
                
                $
                1,068,896Average
                    loans outstanding
                
                $
                1,107,764
                
                $
                891,063
                
                $
                968,492Annualized
                    net charge-offs to average loans
                
                
                (0.13
                )%
                
                0.21
                %
                
                0.09
                %Allowance
                    for loan lossesTo
                    total loans
                
                
                1.30
                %
                
                1.45
                %
                
                1.38
                %To
                    nonperforming loans
                
                
                234.27
                %
                
                433.00
                %
                
                777.68
                %To
                    nonperforming assets
                
                
                232.12
                %
                
                424.74
                %
                
                753.88
                %
  -22-
 Table
            of Contents
  The
        Company maintains an allowance for loan losses at a level considered by
        management to be sufficient to cover the inherent risks of loss associated
        with
        its loan portfolio under prevailing and anticipated economic conditions.
        In
        determining the adequacy of the allowance for loan losses, management takes
        into
        consideration , among other things, growth trends in the portfolio, examination
        by financial institution supervisory authorities, prior loan loss experience
        for
        the Company, concentrations of credit risk, delinquency trends, specific
        credit
        risks, general economic conditions, the interest rate environment and internal
        and external credit reviews. In addition, the risks management considers
        vary
        depending on the nature of the loan. The normal risks considered by management
        with respect to agricultural loans include, among other things, 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,
        among other things, 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 borrowers' ability to obtain
        permanent financing. The normal risks considered by management with respect
        to
        real estate mortgage loans include, among other things, 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.
  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 first three months of 2006 of
        $0
        compared with $220,000 in the same period of 2005. The decrease was related
        to
        the overall improvement in specific credit risks in the first quarter of
        2006
        when compared to the same period in 2005 and the level of net recoveries
        experienced in the first quarter of 2006. The Company had net recoveries
        of
        $365,000 for the three months ended March 31, 2006 compared with net charge-offs
        of $467,000 for the same three months in 2005. The increased recoveries occurred
        primarily within the commercial and agricultural segment of the loan portfolio.
        The increase in nonperforming loans did not negatively affect the first quarter
        loan loss provision due to the fact that $3,372,000 of the total loans past
        due
        and still accruing is related to a single credit that is 100% guaranteed
        by an
        agency of the United States government. Management expects to be paid in
        full on
        this credit during the second quarter of 2006.
  As
        of
        March 31, 2006, the allowance for loan losses was $15,141,000 or 1.30% of
        total
        loans outstanding, compared with $14,776,000 or 1.38% of total loans outstanding
        as of December 31, 2005 and $13,358,000 or 1.45% of total loans outstanding
        as
        of March 31, 2005. The allowance for loan loss associated with the purchase
        of
        the asset based loan portfolio totals $447,000 on a portfolio that is
        $30,651,000 in size.
  The
        Company uses a proprietary method developed by credit officers for estimating
        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
        and
        periodically subjects loans to external reviews which then 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.
  -23-
 Table
            of Contents
  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 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 may 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 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 credit officers
        of the relative risk characteristics of loans in those categories. No assurance
        can be given that 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.
 
 OTHER
        ASSETS
 
 At
        the
        year ended December 31, 2005, the Company recorded a balance in other assets
        of
        $32,281,000. This was primarily due to a receivable of $16,296,000 related
        to a
        loan participation funding receivable. During the first week of January,
        2006,
        this funding receivable was collected from the participating banks. This
        action
        caused a significant decrease in the Company’s other assets during the first
        quarter of 2006.
 
 RESERVE
        FOR UNFUNDED LENDING COMMITMENTS
 
 The
        reserve for unfunded lending commitments at March 31, 2006 and 2005, and
        December 31, 2005, is presented below.
 
 March
                  31
              
              December
                  31(Dollars
                  in thousands)
              
              2006
              
              2005
              
              2005Balance
                  at the beginning of period
              
              $
              717
              
              $
              679
              
              $
              679Provision
                  for credit losses
              
              
              (11
              )
              
              -
              
              
              38Balance
                  at the end of period
              
              $
              706
              
              $
              679
              
              $
              717
  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 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 water for irrigation purposes.
        The
        area obtains nearly all of its water from the run-off of melting snow in
        the
        mountains of the Sierra Nevada to the east. Although such sources have usually
        been available in the past, water supply can be adversely affected by light
        snowfall over one or more winters 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 during 2006. No assurance
        can be
        given that future flooding will not have an adverse impact on the Company
        and
        its borrowers and depositors.
  -24-
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            of Contents
  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 and liabilities. The Company considers cash and
        deposits held in other banks, federal funds sold, other short term investments,
        maturing loans and investments, payments of principal and interest on loans
        and
        investments and potential loan sales as sources of asset liquidity. Deposit
        growth and access to credit lines established with correspondent banks and
        market sources of funds are considered by the Company as sources of liability
        liquidity. The holding 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. These assets include
        cash
        and deposits in other banks, time deposits at other financial institutions,
        available-for-sale securities and federal funds sold. The Company's liquid
        assets totaled $358,761,000 and $410,086,000 on March
        31, 2006 and December 31, 2005, respectively, and constituted 20% 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 $430,911,000 at March 31, 2006 compared with $452,337,000
        at
        December 31, 2005.
  Although
        the Company's primary sources of liquidity include liquid assets and our
        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 Banker’s Bank,
        Union Bank of California, Wells Fargo Bank and First Tennessee Bank aggregating
        $247,282,000 of which $107,579,000 was outstanding as of March 31, 2006 and $260,684,000
        of which $93,384,000 was
        outstanding as of December 31, 2005. The increase in borrowings outstanding
        during the first quarter of 2004 produced an inflow of funds that were used
        to
        purchase additional investment securities. 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
        anticipated levels. Deposit withdrawals can increase if a company experiences
        financial difficulties or receives adverse publicity for other reasons, or
        if
        its pricing, products or services are not competitive with those offered
        by
        other institutions.
  CAPITAL
        RESOURCES
  Capital
        serves as a source of funds and helps protect depositors against potential
        losses. The primary source of capital for the Company has been internally
        generated capital through retained earnings. The Company's shareholders'
        equity
        increased by $6,202,000 or 5% from December 31, 2005 to March 31, 2006. This
        increase was achieved through the retention of accumulated earnings and the
        exercise of stock options.
  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 statements. Management believes, as of March 31, 2006, that
        the Company and the Bank met all applicable capital requirements. The Company’s
        leverage capital ratio at March 31, 2006 was 8.37% as compared with 8.57%
        as of
        December 31, 2005. The Company’s total risk based capital ratio at March 31,
        2006 was 11.08% as compared to 11.13% as of December 31, 2005.
  -25-
 Table
            of Contents
  The
        Company’s and Bank’s actual capital amounts and ratios met all regulatory
        requirements as of March 31, 2006 and were summarized as follows:
 (Dollars
                  in thousands)
              
              Actual
              
              For
                  Capital Adequacy Purposes
              
              To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions:**The
                  Company:**
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioTotal
                  capital (to risk weighted assets)
              
              $
              161,158
              
              
              11.08
              %
              $
              116,364
              
              
              8.0
              %
              $
              145,455
              
              
              10.0
              %Tier
                  1 capital (to risk weighted assets)
              
              
              145,094
              
              
              9.98
              
              
              58,182
              
              
              4.0
              
              
              87,273
              
              
              6.0Leverage
                  ratio(1)
              
              
              145,094
              
              
              8.37
              
              
              69,363
              
              
              4.0
              
              
              86,704
              
              
              5.0**The
                  Bank:**Total
                  capital (to risk weighted assets)
              
              $
              149,615
              
              
              10.31
              %
              $
              116,054
              
              
              8.0
              %
              $
              145,067
              
              
              10.0
              %Tier
                  1 capital (to risk weighted assets)
              
              
              133,551
              
              
              9.21
              
              
              58,027
              
              
              4.0
              
              
              87,040
              
              
              6.0Leverage
                  ratio(1)
              
              
              133,551
              
              
              7.72
              
              
              69,211
              
              
              4.0
              
              
              86,514
              
              
              5.0
 (1)
        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.
 
  The
        Company's and Bank's actual capital amounts and capital ratios as of December
        31, 2005 are as follows:
  (Dollars
                  in thousands)
              
              Actual
              
              For
                  Capital Adequacy Purposes
              
              To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions**The
                  Company:**
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioTotal
                  capital (to risk weighted assets)
              
              $
              154,592
              
              
              11.13
              %
              $
              111,151
              
              
              8
              %
              $
              138,939
              
              
              10
              %Tier
                  I capital (to risk weighted assets)
              
              
              139,099
              
              
              10.01
              
              
              55,576
              
              
              4
              
              
              83,364
              
              
              6Leverage
                  ratio(1)
              
              
              139,099
              
              
              8.57
              
              
              64,960
              
              
              4
              
              
              81,200
              
              
              5**The
                  Bank:**Total
                  capital (to risk weighted assets)
              
              $
              141,945
              
              
              10.24
              %
              $
              110,868
              
              
              8
              %
              $
              138,585
              
              
              10
              %Tier
                  I capital (to risk weighted assets)
              
              
              126,452
              
              
              9.12
              
              
              55,434
              
              
              4
              
              
              83,151
              
              
              6Leverage
                  ratio(1)
              
              
              126,452
              
              
              7.80
              
              
              64,830
              
              
              4
              
              
              81,038
              
              
              5
 (1)
        The
        leverage ratio consists of Tier 1 capital divided by quarterly average assets.
        The minimum leverage ratio is 3 percent for banking organizations that do
        not
        anticipate significant growth and that have well diversified risk, excellent
        asset quality and in general, are considered top-rated banks.
  The
        Company declares 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.
  DEPOSITS
  Deposits
        are the Company's primary source of funds. At March 31, 2006, the Company
        had a
        deposit mix of 27% in savings deposits, 38% in time deposits, 15% in
        interest-bearing checking accounts and 20% in noninterest-bearing demand
        accounts. Noninterest-bearing demand deposits enhance the Company's net interest
        income by lowering its cost of funds.
  -26-
 Table
            of Contents
  The
        Company obtains deposits primarily from 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 time deposits in excess of $100,000 from customers. These deposits
        are
        priced to remain competitive. At March 31, 2006, the Company had brokered
        deposits of $83,966,000. At December 31, 2005, the Company’s brokered deposits
        totaled $20,861,000. The increase in brokered deposits during the first three
        months of 2006 was related to loan funding requirements. The Bank has a policy
        of limiting brokered deposits to no more than 7% of the Bank’s asset base.
        Approval is needed by the Bank’s board of directors if the management wishes to
        exceed this limit. As of March 31, 2006, the policy limit for brokered deposits
        at the Bank, before approval is required by the board of directors, was
        $124,999,997.
 
 Maturities
        of time certificates of deposits of $100,000 or more outstanding at March
        31,
        2006 and December 31, 2005 are summarized as follows:
 
 (Dollars
                  in thousands)
              
              March
                  31, 2006
              
              December
                  31, 2005Three
                  months or less
              
              $
              110,819
              
              $
              106,874Over
                  three to six months
              
              
              83,158
              
              
              24,365Over
                  six to twelve months
              
              
              68,808
              
              
              39,005Over
                  twelve months
              
              
              51,345
              
              
              64,781Total
              
              $
              314,130
              
              $
              235,025
 
 **Federal
        Funds Purchased and Other Borrowed Funds**
  The
        total
        of federal funds purchased and other borrowed funds increased by $9,974,000
        or
        5% to $211,702,000 at March 31, 2006 compared to the $201,728,000 outstanding
        at
        December 31, 2005. Federal funds increased by $48,950,000 and other borrowings
        decreased by $38,976,000 between December 31, 2005 and March 31, 2006.
        Management utilized federal funds purchased, while reducing other borrowed
        funds
        during the first quarter of 2006 to provide short term liquidity during the
        first quarter of 2006 that management believes will be paid down during the
        second quarter of 2006. Federal funds purchased can be repaid daily, making
        them
        more flexible than term advances in terms of matching repayments with
        anticipated additional cash inflows during the remainder of 2006.
 
 In
        December 2005, the Bank entered into a repurchase agreement for $100,000,000.
        This agreement has a maturity date of December 15, 2010. The repurchase
        agreement totaled $100,000,000 for the quarter ending March 31, 2006 and
        the
        year ended December 31, 2005.
  **Return
        on Equity and Assets**
  Three
                    months ended March 31,
                
                Year
                    ended December 31,2006
                
                2005
                
                2005Annualized
                    return on average assets
                
                
                1.28
                %
                
                1.39
                %
                
                1.36
                %Annualized
                    return on average equity
                
                
                17.63
                %
                
                19.11
                %
                
                18.54
                %Average
                    equity to average assets
                
                
                7.27
                %
                
                7.29
                %
                
                7.34
                %Dividend
                    payout ratio
                
                
                9.62
                %
                
                5.86
                %
                
                9.00
                %
  **Impact
        of Inflation**
  The
        primary impact of inflation on the Company is its effect on interest rates.
        The
        Company’s primary source of income is net interest income which is affected by
        changes in interest rates. The Company attempts to limit inflation’s impact on
        its net interest margin through management of rate sensitive assets and
        liabilities and the analysis of interest rate sensitivity. The effect of
        inflation on premises and equipment, as well as on interest expenses, has
        not
        been 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 testing of the Company’s assets and liabilities under both increasing
        and decreasing interest rate environments are performed to insure the Company
        does not assume a magnitude of risk that is outside approved policy
        limits.
 
 The
        Company’s success is largely dependent upon its ability to manage interest rate
        risk. Interest rate risk can be defined as the exposure of the Company’s net
        interest income to adverse movements in interest rates. Although the Company
        manages other risks, such as credit and liquidity risk in the normal course
        of
        its business, management considers interest rate risk to be its most significant
        market risk and could potentially have the largest material effect on the
        Company’s financial condition and results of operations. Correspondingly, the
        overall strategy of the Company is to manage interest rate risk, through
        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), which reports to the Board of
        Directors. ALCO establishes policies that monitor and coordinate the Company’s
        sources, uses and pricing of funds. ALCO is also involved in formulating
        the
        economic projections for the Company’s budget and strategic plan. ALCO sets
        specific rate sensitivity limits for the Company. ALCO monitors and adjusts
        the
        Company’s exposure to changes in interest rates to achieve predetermined risk
        targets that it believes are consistent with current and expected market
        conditions. Balance sheet management personnel monitor the asset and liability
        changes on an ongoing basis and provide report information and recommendations
        to the ALCO committee in regards to those changes.
 
 It
        is the
        opinion of management there has been no material change in the Company’s market
        risk during the first quarter of 2006 when compared to the level of market
        risk
        at December 31, 2005. If interest rates were to suddenly and materially fall
        from levels experienced during the first quarter of 2006, the Company could
        become susceptible to an increased level of market risk.
 
 **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.
  -28-
 Table
            of Contents
  CHANGES
        IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 There
        was
        no change in the Company’s internal controls over financial reporting that
        occurred during the most recent fiscal quarter that materially affected,
        or is
        reasonably likely to materially affect, the internal controls over financial
        reporting.
  **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.
  The
        Bank
        is subject to one lawsuit where legal costs have totaled over $250,000, the
        amount of the Company’s insurance deductible. Future legal costs related to this
        lawsuit will be paid for by the Company’s insurance carrier. Management believes
        that the Company will prevail in this legal dispute.
 
 **Item
        1A. Risk Factors**
  See
        “External Factors Affecting Asset Quality” in Part I.
  **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 Security
        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
  -29-
 Table
            of Contents




**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:
                May 5, 2006
            By/s/
                Thomas T. HawkerThomas
                T. HawkerPresident
                andChief
                Executive Officer








Date:
                May 5, 2006
            By/s/
                R. Dale McKinneyR.
                Dale McKinneyChief
                Financial Officer


-30-
 Table
          of Contents


Exhibit
      Index





Exhibit
            Description31.1
            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





-31-