**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





þ
            Quarterly
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the Quarterly Period EndedJune
                30, 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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer in Rule 12b-2 of the Exchange Act. 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 August 1, 2006 was 10,728,608. No shares of preferred stock, no par value,
      were outstanding at August 1, 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
                Statements 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
            30Item
                4. Controls and Procedures
            30





PART
      II.
      -- OTHER INFORMATION





Item
                1. Legal Proceedings
            31Item
                1A. Risk Factors
            31Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            31Item
                3. Defaults Upon Senior Securities
            31Item
                4. Submission of Matters to a vote of Security
                Holders
            31Item
                5. Other Information
            31Item
                6. Exhibits
            31SIGNATURES
            32Exhibit
                Index
            33





-2-
 Table
          of Contents




**Capital
      Corp of the West**


**Consolidated
      Balance Sheets**


(Dollars
                in thousands)
            
            June
                30, 2006
            
            December
                31, 2005**Assets**Cash
                and noninterest-bearing deposits in other banks
            
            $
            50,390
            
            $
            61,331Federal
                funds sold
            
            
            25,185
            
            
            30,250Time
                deposits at other financial institutions
            
            
            350
            
            
            350Investment
                securities available for sale, at fair value
            
            
            268,348
            
            
            321,155Investment
                securities held to maturity, at cost; fair value of $170,127 and
                $178,233
                at June 30, 2006 and December 31, 2005
            
            
            176,152
            
            
            181,025Loans,
                net of allowance for loan losses of $15,084 and $14,776 at June 30,
                2006
                and December 31, 2005
            
            
            1,182,358
            
            
            1,054,120Interest
                receivable
            
            
            8,228
            
            
            8,305Premises
                and equipment, net
            
            
            36,007
            
            
            28,970Goodwill
            
            
            1,405
            
            
            1,405Other
                intangibles
            
            
            -
            
            
            23Cash
                value of life insurance
            
            
            32,396
            
            
            31,796Investment
                in housing tax credit limited partnerships
            
            
            8,623
            
            
            8,745Other
                assets
            
            
            19,683
            
            
            29,281Total
                assets
            
            $
            1,809,125
            
            $
            1,756,756**Liabilities**Deposits:Noninterest-bearing
                demand
            
            $
            295,016
            
            $
            310,284Negotiable
                orders of withdrawal
            
            
            197,652
            
            
            216,594Savings
            
            
            332,740
            
            
            426,581Time,
                under $100
            
            
            247,883
            
            
            216,016Time,
                $100 and over
            
            
            401,443
            
            
            235,025Total
                deposits
            
            
            1,474,734
            
            
            1,404,500Other
                borrowings
            
            
            155,391
            
            
            201,728Junior
                subordinated debentures
            
            
            31,960
            
            
            16,496Accrued
                interest, taxes and other liabilities
            
            
            14,069
            
            
            11,787Total
                liabilities
            
            
            1,676,154
            
            
            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; 10,720,318 and
                10,575,361 issued and outstanding at June 30, 2006 and December 31,
                2005
            
            
            63,276
            
            
            59,785Retained
                earnings
            
            
            75,473
            
            
            65,049Accumulated
                other comprehensive loss, net
            
            
            (5,778
            )
            
            (2,589
            )Total
                shareholders’ equity
            
            
            132,971
            
            
            122,245Total
                Liabilities and Shareholders’ Equity
            
            $
            1,809,125
            
            $
            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 June 30,
            
            For
                the six months ended June 30,(Dollars
                in thousands, except per share data)
            
            2006
            
            2005
            
            2006
            
            2005**Interest
                income:**Interest
                and fees on loans
            
            $
            25,208
            
            $
            16,977
            
            $
            47,431
            
            $
            32,466Interest
                on deposits with other financial institutions
            
            
            4
            
            
            3
            
            
            9
            
            
            15Interest
                on investments held to maturity:Taxable
            
            
            899
            
            
            1,069
            
            
            1,841
            
            
            2,178Non-taxable
            
            
            942
            
            
            852
            
            
            1,883
            
            
            1,592Interest
                on investments available for sale:Taxable
            
            
            3,287
            
            
            2,702
            
            
            6,763
            
            
            5,319Non-taxable
            
            
            22
            
            
            11
            
            
            33
            
            
            22Interest
                on federal funds sold
            
            
            44
            
            
            37
            
            
            93
            
            
            72Total
                interest income
            
            
            30,406
            
            
            21,651
            
            
            58,053
            
            
            41,664**Interest
                expense:**Interest
                on negotiable orders of withdrawal
            
            
            305
            
            
            38
            
            
            665
            
            
            58Interest
                on savings deposits
            
            
            1,913
            
            
            1,104
            
            
            3,782
            
            
            2,109Interest
                on time deposits, under $100
            
            
            2,889
            
            
            1,396
            
            
            4,777
            
            
            2,670Interest
                on time deposits, $100 and over
            
            
            3,081
            
            
            1,333
            
            
            5,465
            
            
            2,453Interest
                on other borrowings
            
            
            2,344
            
            
            1,445
            
            
            4,757
            
            
            2,788Interest
                on junior subordinated debentures
            
            
            398
            
            
            334
            
            
            773
            
            
            645Total
                interest expense
            
            
            10,930
            
            
            5,650
            
            
            20,219
            
            
            10,723Net
                interest income
            
            
            19,476
            
            
            16,001
            
            
            37,834
            
            
            30,941Provision
                for loan losses
            
            
            200
            
            
            101
            
            
            200
            
            
            321Net
                interest income after provision for loan losses
            
            
            19,276
            
            
            15,900
            
            
            37,634
            
            
            30,620**Noninterest
                income:**Service
                charges on deposit accounts
            
            
            1,504
            
            
            1,526
            
            
            2,925
            
            
            2,893Gain
                on sale of securities
            
            
            622
            
            
            -
            
            
            622
            
            
            -Increase
                in cash value of life insurance
            
            
            294
            
            
            202
            
            
            600
            
            
            460Other
            
            
            1,002
            
            
            612
            
            
            1,907
            
            
            1,656Total
                noninterest income
            
            
            3,422
            
            
            2,340
            
            
            6,054
            
            
            5,009**Noninterest
                expenses:**Salaries
                and related expenses
            
            
            7,335
            
            
            5,657
            
            
            14,194
            
            
            11,210Premises
                and occupancy
            
            
            1,255
            
            
            1,066
            
            
            2,444
            
            
            2,051Equipment
            
            
            1,042
            
            
            1,043
            
            
            2,033
            
            
            1,901Professional
                fees
            
            
            554
            
            
            640
            
            
            1,474
            
            
            1,202Supplies
            
            
            303
            
            
            308
            
            
            539
            
            
            572Marketing
            
            
            466
            
            
            329
            
            
            853
            
            
            624Community
                support donations
            
            
            291
            
            
            218
            
            
            509
            
            
            396Intangible
                amortization
            
            
            12
            
            
            12
            
            
            23
            
            
            23Other
            
            
            1,848
            
            
            1,429
            
            
            3,513
            
            
            3,031Total
                noninterest expenses
            
            
            13,106
            
            
            10,702
            
            
            25,582
            
            
            21,010Income
                before provision for income taxes
            
            
            9,592
            
            
            7,538
            
            
            18,106
            
            
            14,619Provision
                for income taxes
            
            
            3,338
            
            
            2,412
            
            
            6,295
            
            
            4,505Net
                income
            
            $
            6,254
            
            $
            5,126
            
            $
            11,811
            
            $
            10,114Comprehensive
                income:Unrealized
                loss on interest rate floor
            
            $
            (85
            )
            $
            -
            
            $
            (296
            )
            $
            -Unrealized
                (loss) gain on securities
            
            
            (2,765
            )
            
            1,182
            
            
            (2,893
            )
            
            (487
            )Comprehensive
                income
            
            $
            3,404
            
            $
            6,308
            
            $
            8,622
            
            $
            9,627Basic
                earnings per share
            
            $
            0.59
            
            $
            0.49
            
            $
            1.11
            
            $
            0.97Diluted
                earnings per share
            
            $
            0.57
            
            $
            0.47
            
            $
            1.08
            
            $
            0.94


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
                loss
            
            TotalBalance,
                December 31, 2005
            
            
            10,575
            
            $
            59,785
            
            $
            65,049
            
            $
            (2,589
            )
            $
            122,245Exercise
                of stock options, including tax benefit of $879
            
            
            145
            
            
            3,491
            
            
            -
            
            
            -
            
            
            3,491Net
                change in fair value of available for sale investment securities,
                net of
                tax effect of $2,155
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,893
            )
            
            (2,893
            )Net
                change in fair value of interest rate floor, net of tax benefit of
                $215
            
            
            -
            
            
            -
            
            
            -
            
            
            (296
            )
            
            (296
            )Cash
                dividends
            
            
            -
            
            
            -
            
            
            (1,387
            )
            
            -
            
            
            (1,387
            )Net
                income
            
            
            -
            
            
            -
            
            
            11,811
            
            
            -
            
            
            11,811Balance,
                June 30, 2006
            
            
            10,720
            
            $
            63,276
            
            $
            75,473
            
            $
            (5,778
            )
            $
            132,971


See
      accompanying notes to consolidated financial statements


-5-
 Table
          of Contents




**Capital
      Corp of the West**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**


Six
                months ended
              June
                30,(Dollars
                in thousands)
            
            2006
            
            2005**Operating
                activities:**Net
                income
            
            $
            11,811
            
            $
            10,114Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Provision
                for loan losses
            
            
            200
            
            
            321Depreciation,
                amortization and accretion, net
            
            
            3,545
            
            
            3,634Origination
                of loans held for sale
            
            
            (2,236
            )
            
            (2,126
            )Proceeds
                from sales of loans
            
            
            1,543
            
            
            1,346Increase
                in cash value of life insurance
            
            
            (600
            )
            
            (147
            )Death
                benefit income from bank owned life insurance
            
            
            -
            
            
            539Gain
                on sale of AFS investment securities
            
            
            (622
            )
            
            -Non-cash
                stock option compensation expense
            
            
            435
            
            
            -Net
                decrease (increase) in interest receivable & other
                assets
            
            
            14,457
            
            
            (978
            )Net
                increase in accrued interest, taxes and other liabilities
            
            
            2,282
            
            
            3,215Net
                cash provided by operating activities
            
            
            30,815
            
            
            15,918**Investing
                activities:**Investment
                securities purchased - available for sale securities
            
            
            (2,762
            )
            
            (54,126
            )Investment
                securities purchased - held to maturity securities
            
            
            (3,659
            )
            
            (23,895
            )Proceeds
                from maturities of available for sale investment
                securities
            
            
            28,713
            
            
            25,827Proceeds
                from maturities of held to maturity investment securities
            
            
            8,196
            
            
            6,684Net
                decrease in time deposits in other financial institutions
            
            
            -
            
            
            3,000Proceeds
                from sales of available for sale securities
            
            
            19,368
            
            
            37,000Loans
                purchased
            
            
            (30,015
            )
            
            -Net
                increase in loans
            
            
            (99,360
            )
            
            (99,037
            )Purchases
                of premises and equipment
            
            
            (8,332
            )
            
            (3,489
            )Net
                cash used in investing activities
            
            
            (87,851
            )
            
            (108,036
            )**Financing
                activities:**Net
                (decrease) increase in demand, NOW and savings deposits
            
            
            (128,051
            )
            
            9,847Net
                increase in certificates of deposit
            
            
            198,285
            
            
            62,445Net
                (decrease) increase in other borrowings
            
            
            (46,337
            )
            
            10,645Issuance
                of junior subordinated debentures
            
            
            15,464
            
            
            -Payment
                of cash dividends
            
            
            (1,387
            )
            
            (826
            )Issuance
                of shares pursuant to 401K and ESOP plans
            
            
            -
            
            
            300Exercise
                of stock options
            
            
            2,177
            
            
            749Tax
                effect of stock options
            
            
            879
            
            
            -Net
                cash provided by financing activities
            
            
            41,030
            
            
            83,160Net
                decrease in cash and cash equivalents
            
            
            (16,006
            )
            
            (8,958
            )Cash
                and cash equivalents at beginning of period
            
            
            91,581
            
            
            57,819Cash
                and cash equivalents at end of period
            
            $
            75,575
            
            $
            48,861**Supplemental
                disclosure of noncash investing and financing
                activities:**Interest
                rate floor unrealized loss, net of taxes
            
            $
            (296
            )
            $
            -Interest
                paid
            
            
            19,758
            
            
            10,416Income
                tax payments
            
            
            5,200
            
            
            7,480Investment
                securities unrealized losses, net of tax
            
            
            (2,893
            )
            $
            (487
            )


See
      accompanying notes to consolidated financial statements


-6-
 Table
          of Contents




**Capital
      Corp of the West**


**Notes
      to Consolidated Financial Statements**


**June
      30, 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 August 1, 2006, the
      Company had outstanding 10,728,608 shares of Common Stock, no par value, held
      by
      approximately 2,500 shareholders. There were no preferred shares outstanding
      at
      August 1, 2006. The Company had one wholly-owned inactive nonbank subsidiary,
      Capital West Group (“CWG”) at June 30, 2006. The Bank has one wholly-owned
      active nonbank subsidiary, and one wholly-owned inactive nonbank subsidiary.
      The
      active subsidiary is Merced Area Investment & Development, Inc. (“MAID”),
      the inactive subsidiary is County Asset Advisors (“CAA”). 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-four 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 and Riverbank. 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 June 30, 2006 and December
      31, 2005 and the results of operations for the three and six month periods
      ended
      June 30, 2006 and 2005, and the statements of cash flows for the three and
      six
      months ended June 30, 2006 and 2005 have been included therein. The interim
      results for the three and six months ended June 30, 2006 are not necessarily
      indicative of results for the full year. These consolidated financial statements
      should be read in conjunction with the consolidated 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


In
      the
      opinion of management, the accompanying unaudited financial statements have
      been
      prepared in accordance with accounting principles generally accepted in the
      United States and with the instructions to Form 10-Q and Rule 10-01 of
      Regulation S-X.





Cash
      and
      cash equivalents on the Consolidated Statement of Cash Flows include cash,
      noninterest bearing deposits in other banks, and federal funds
      sold.





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 and six month
      periods ended June 30, 2006 and 2005:





For
                The Three Months
            
            For
                The Six MonthsEnded
                June 30,
            
            Ended
                June 30,(Dollars
                in thousands, except per share data)
            
            2006
            
            2005
            
            2006
            
            2005Basic
                EPS computation:Net
                income
            
            $
            6,254
            
            $
            5,126
            
            $
            11,811
            
            $
            10,114Average
                common shares outstanding
            
            
            10,687
            
            
            10,479
            
            
            10,643
            
            
            10,466Basic
                EPS
            
            $
            0.59
            
            $
            0.49
            
            $
            1.11
            
            $
            0.97Diluted
                EPS Computations:Net
                income
            
            $
            6,254
            
            $
            5,126
            
            $
            11,811
            
            $
            10,114Average
                common shares outstanding
            
            
            10,687
            
            
            10,479
            
            
            10,643
            
            
            10,466Effect
                of stock options
            
            
            264
            
            
            323
            
            
            292
            
            
            33010,951
            
            
            10,802
            
            
            10,935
            
            
            10,796Diluted
                EPS
            
            $
            0.57
            
            $
            0.47
            
            $
            1.08
            
            $
            0.94





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 at least annually for potential impairment.
      During the second quarter of 2006, management determined there had been no
      impairment of goodwill. As of June 30, 2006 and December 31, 2005, the Company
      had unamortized core deposit premiums of $0 and $23,000, respectively.
      Amortization of core deposit premiums and other intangibles was $12,000 during
      the second 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-
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BORROWED
      FUNDS





For
      the
      six months ended June 30, 2006, the Company decreased other borrowings which
      were obtained primarily from the Federal Home Loan Bank and Pacific Coast
      Bankers’ Bank. The decrease in other borrowings totaled $46,337,000 for the six
      months ended June 30, 2006. The repayment of other borrowings was primarily
      funded from payments received from the Company’s investment portfolio and the
      increased use of brokered time deposits. The Company increased its subordinated
      debentures outstanding from $16,496,000 to $31,960,000 or an increase of
      $15,464,000 for the six months ended June 30, 2006. The additional subordinated
      debentures were issued primarily to improve liquidity and provide a long term
      financing source that qualifies as regulatory capital under existing
      regulations.





STOCK
      COMPENSATION





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





On
      January 1, 2006, the Company began recording 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 a non-cash increase
      in 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 of 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. For the
      valuation of stock options, the Company used the following assumptions: a risk
      free rate of 4.82%; a volatility rate of 31.86%; an expected dividend rate
      of
      0.85%; and an expected term of 5.88 years for the quarter ended June 30, 2006.
      For the valuation of stock options during the year ended December 31, 2005,
      the
      Company used the following assumptions: a risk free rate of 3.86%; a volatility
      rate of 30.46%; an expected dividend rate of 0.40%; and an expected term of
      6.32
      years.





Prior
      to
      January 1, 2006, the Company accounted for stock option compensation expense
      using the intrinsic method, where the difference between the exercise price
      and
      the fair market value of the option on the date of grant is recognized as
      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 affect earnings per share or diluted earnings
      per
      share.


-9-
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          of Contents


**Information
      as Reported in the Financial Statements**





The
      following table presents the stock option compensation expense included in
      the
      Company’s Consolidated Statements of Income and Comprehensive Income for the
      three and six months ended June 30, 2006:


(Dollars
                in thousands)
            
            Three
                Months Ended June 30, 2006
            
            Six
                Months Ended June 30, 2006Stock
                option compensation expense
            
            $
            209
            
            $
            435Tax
                benefit recorded related to stock option compensation
                expense
            
            
            (18
            )
            
            (28
            )Decrease
                in net income
            
            $
            191
            
            $
            407Effect
                on:Net
                income per share - basic
            
            $
            (0.02
            )
            $
            (0.04
            )Net
                income per share - diluted
            
            $
            (0.02
            )
            $
            (0.04
            )




Options
      activity during the first six months of 2006 is as follows:


(Shares
                in thousands)
            
            #
                of shares
            
            Weighted-Average
                exercise priceOutstanding
                at January 1, 2006
            
            
            753
            
            $
            17.46Options
                granted
            
            
            99
            
            $
            33.57Options
                exercised
            
            
            (146
            )
            $
            14.90Options
                forfeited
            
            
            (4
            )
            $
            32.84Outstanding
                at June 30, 2006
            
            
            702
            
            $
            20.17Exercisable
                at June 30, 2006
            
            
            588
            
            $
            17.63Forfeited
                during the first six months of 2006
            
            
            4
            
            $
            32.84





Options
      grants during the first six months of 2006:


(Shares
                in thousands)
            
            June
                  30,2006
            
            June
                  30,2005#
                of shares
            
            Weighted-Average
                fair value
            
            #
                of shares
            
            Weighted-Average
                fair valueOptions
                granted
            
            
            99
            
            $
            11.83
            
            
            136
            
            $
            9.60





Option
      vesting activity that occurred during the first six months of
      2006:


(Shares
                in thousands)
            
            #
                of shares
            
            Weighted-Average
                fair valueNonvested
                options at January 1, 2006
            
            
            43
            
            $
            10.60Options
                granted
            
            
            99
            
            $
            11.83Options
                vested
            
            
            (25
            )
            $
            11.83Options
                forfeited
            
            
            (4
            )
            $
            10.60Nonvested
                options at June 30, 2006
            
            
            113
            
            $
            11.40


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Vested
      option summary information as of June 30, 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 June 30, 2006
            
            
            588
            
            $
            8,450
            
            
            6.66
            
            $
            17.63Total
                options outstanding at June 30, 2006
            
            
            702
            
            $
            8,305
            
            
            7.14
            
            $
            20.17





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 $1,021,000 and $115,000 for the quarters ended June 30,
      2006 and June 30, 2005. Intrinsic value is defined as positive difference
      between the current market price for the underlying stock
      and the strike
      price of an
      option. The exercise price has to be less than the current market price of
      the
      underlying stock to have intrinsic value. The total fair value of shares vested
      was $435,000 and $719,000 for the six months ended June 30, 2006 and June 30,
      2005. Total future compensation expense related to nonvested awards was
      $1,148,000 with a weighted average period to be recognized of 1.64 years as
      of
      June 30, 2006.  There are 2,570,308 shares authorized for grant under the
      Company's stock option plan.





The
      table
      below presents information calculated as if FAS 123R had been adopted and the
      stock option valuation and expense were included in prior period Financial
      Statements:


(Dollars
                in thousands except per share amounts)
            
            Three
                Months Ended June 30, 2005
            
            Six
                Months Ended June 30, 2005Net
                income as reported
            
            $
            5,126
            
            $
            10,114Stock
                option compensation expense
            
            
            (229
            )
            
            (719
            )Tax
                benefit related to stock option compensation expense
            
            
            16
            
            
            96Net
                income, proforma
            
            $
            4,913
            
            $
            9,491Basic
                earnings per share:As
                reported
            
            $
            0.49
            
            $
            0.97Pro
                forma
            
            $
            0.47
            
            $
            0.91Diluted
                earnings per share:As
                reported
            
            $
            0.47
            
            $
            0.94Pro
                forma
            
            $
            0.45
            
            $
            0.88Stock-based
                employee compensation cost, net of related tax effects, included
                in net
                income:As
                reported
            
            $
            -
            
            $
            -Pro
                forma
            
            $
            213
            
            $
            623





Compensation
      expense was recorded at $435,000 for the six months ended June 30, 2006 for
      stock options compared to $719,000 that would have been recorded for the six
      months ended June 30, 2005. The $284,000 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. The Company received $2,177,000 and $749,000 in
      cash
      related to stock option exercises for the six months ended June 30, 2006 and
      June 30, 2005. The Company recorded a tax benefit related to stock options
      of
      $879,000 and $262,000 for the six months ended June 30, 2006 and June 30,
      2005.


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 and six months
      ended June 30, 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 $188,000 and $422,000, the tax benefit would have been $33,000
      and $68,000, and net income would have been reduced by $155,000 and
      $354,000.





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RECLASSIFICATIONS





Certain
      amounts previously reported in the 2005 financial statements have been
      reclassified to conform to the 2006 presentation. These reclassifications were
      made to the Consolidated Balance Sheet and the Consolidated Statement of Cash
      Flows. There were no reclassifications made to the Consolidated Statements
      of
      Income and Comprehensive Income or the Consolidated Statement of Changes in
      Shareholders’ Equity.





**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 became
      effective for accounting periods beginning January 1, 2006. Adoption of the
      standard will negatively affect reported earnings by increasing non-cash stock
      option compensation expense recorded in the Consolidated Statements of Income
      and Comprehensive Income. The impact on current and 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.





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


-12-
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          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-
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          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, 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” below in the
      current Form 10-Q and in the Company’s 2005 annual report 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
      and Six Months Ended June 30, 2006 Compared With Three and Six Months Ended
      June
      30, 2005**




OVERVIEW




For
      the
      three and six months ended June 30, 2006 the Company reported net income of
      $6,254,000 and $11,811,000. This compares to $5,126,000 and $10,114,000 for
      the
      same period in 2005 and represents an increase of $1,128,000 and $1,697,000
      or
      22% and 17%. Basic and diluted earnings per share were $0.59 and $0.57 for
      the
      three months ended June 30, 2006 and $1.11 and $1.08 for the six months ended
      June 30, 2006. This compares to basic and diluted earnings per share of $0.49
      and $0.47 for the three months ended June 30, 2005 and $0.97 and $0.94 for
      the
      six months ended June 30, 2005. This was an increase of $0.10 per share for
      basic
      and diluted earnings per share for the three months ended June 30,
      2006 and
      $0.14 for basic and diluted earnings per share for the six months ended June
      30,
      2006. The annualized return on average assets was 1.42% and 1.36% for the three
      and six months ended June 30, 2006 compared to the annualized return on average
      assets was 1.35% and 1.36% for the three and six months ended June 30, 2005.
      The
      Company's annualized return on average equity of 19.10% and 18.53% for the
      three
      and six months ended June 30, 2006 compared to the Company's annualized return
      on average equity was 18.63% and 18.73% for the three and six months ended
      June
      30, 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 three
      and six months ended June 30, 2006 and June 30, 2005.





For
                the three months ended June 30,
            
            For
                the six months ended June 30,(Dollars
                in thousands)
            
            2006
            
            2005
            
            Percent
                change
            
            2006
            
            2005
            
            Percent
                changeTotal
                interest income
            
            $
            30,406
            
            $
            21,651
            
            
            40
            %
            $
            58,053
            
            $
            41,664
            
            
            39
            %Total
                interest expense
            
            
            10,930
            
            
            5,650
            
            
            93
            %
            
            20,219
            
            
            10,723
            
            
            89
            %Net
                interest income
            
            $
            19,476
            
            $
            16,001
            
            
            22
            %
            $
            37,834
            
            $
            30,941
            
            
            22
            %


-14-
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          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 June 30,
            
            For
                the six months ended June 30,(Dollars
                in thousands)
            
            2006
            
            2005
            
            Percent
                change
            
            2006
            
            2005
            
            Percent
                changeAverage
                interest earning assets
            
            $
            1,639,847
            
            $
            1,400,224
            
            
            17
            %
            $
            1,621,885
            
            $
            1,372,465
            
            
            18
            %Average
                interest bearing liabilities
            
            $
            1,340,360
            
            $
            1,122,421
            
            
            19
            %
            $
            1,325,693
            
            $
            1,102,645
            
            
            20
            %Average
                interest rate earned
            
            
            7.51
            %
            
            6.29
            %
            
            19
            %
            
            7.30
            %
            
            6.21
            %
            
            18
            %Average
                interest rate paid
            
            
            3.27
            %
            
            2.02
            %
            
            62
            %
            
            3.08
            %
            
            1.96
            %
            
            57
            %Net
                interest margin
            
            
            4.84
            %
            
            4.67
            %
            
            4
            %
            
            4.78
            %
            
            4.63
            %
            
            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 and six months ended June 30, 2006 was primarily the result
      of an increase in both the volume of interest-earning assets and the average
      interest rates earned. The increase in average interest earning assets during
      2006 was made possible by increased asset generation from our existing branch
      network, the use of brokered time deposits, and the issuance of subordinated
      debt. The increase in interest rates earned during the first three and six
      months ended June 30, 2006 compared to the same period in 2005 was primarily
      the
      result of an increase in prevailing market interest rates. Short term interest
      rates have increased as Federal Reserve Bank’s Open Market Committee continued
      to raise short term rates. Interest expense is a function of the volume and
      rates paid on interest-bearing liabilities. Interest-bearing liabilities consist
      primarily of certain deposits and borrowed funds. The increase in
      interest-bearing liabilities during the first three and six months 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 $128,614,000 as of June 30, 2006 compared to
      $20,871,000 outstanding at December 31, 2005, or an increase of $107,743,000
      during the first six months of 2006. Without this increase in brokered deposits,
      the deposit portfolio would have decreased in size. The increase in interest
      rates paid during the three and six months ended June 30, 2006 when compared
      to
      2005 was primarily the result of an increase in prevailing interest rates and
      a
      change in the mix within the deposit portfolio. Time deposits accounted for
      44%
      of the deposit portfolio as of June 30, 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 certificate of deposit term rates coupled with the
      use
      of brokered time deposits were the primary reasons for the increased time
      deposits recorded.




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 139 and 124
      basis points in the loan portfolio yield achieved during the first three and
      six
      months of 2006 compared to the same time period in 2005. Loans as a percentage
      of average interest-earning assets increased to 68% for the three and six months
      ended June 30, 2006 compared with 67% for the three and six months ended June
      30, 2005. The increase in loans as a percentage on interest-earning assets
      is
      mainly attributable to increased loan production generated through our branch
      network. The loan growth occurred primarily in the secured and unsecured
      commercial loan segments of the portfolio.


-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 average 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 June 30, 2006
            
            Three
                months ended June 30, 2005(Dollars
                in thousands)
            
            AverageBalance
            
            Taxable
                EquivalentInterest
            
            Taxable
                EquivalentYield/rate
            
            AverageBalance
            
            Taxable
                EquivalentInterest
            
            Taxable
                EquivalentYield/rate**Assets**Federal
                funds sold
            
            $
            3,511
            
            $
            44
            
            
            5.03
            %
            $
            5,423
            
            $
            37
            
            
            2.74
            %Time
                deposits at other financial institutions
            
            
            350
            
            
            4
            
            
            4.58
            
            
            350
            
            
            3
            
            
            3.44Taxable
                investment securities (1)
            
            
            360,428
            
            
            4,204
            
            
            4.68
            
            
            363,164
            
            
            3,806
            
            
            4.20Nontaxable
                investment securities (1)
            
            
            103,682
            
            
            1,259
            
            
            4.87
            
            
            90,250
            
            
            1,143
            
            
            5.08Loans,
                gross: (2)
            
            
            1,171,876
            
            
            25,208
            
            
            8.63
            
            
            941,037
            
            
            16,977
            
            
            7.24Total
                interest-earning assets
            
            $
            1,639,847
            
            $
            30,719
            
            
            7.51
            
            $
            1,400,224
            
            $
            21,966
            
            
            6.29Allowance
                for loan losses
            
            
            (15,188
            )
            
            
            
            
            
            
            
            (13,483
            )Cash
                and due from banks
            
            
            45,724
            
            
            
            
            
            
            
            
            43,410Premises
                and equipment, net
            
            
            33,536
            
            
            
            
            
            
            
            
            24,407Interest
                receivable and other assets
            
            
            67,550
            
            
            
            
            
            
            
            
            59,949Total
                assets
            
            $
            1,771,469
            
            
            
            
            
            
            
            $
            1,514,507**Liabilities
                And Shareholders' Equity**Negotiable
                order of withdrawal
            
            $
            203,459
            
            $
            305
            
            
            0.60
            
            $
            177,019
            
            $
            38
            
            
            0.09Savings
                deposits
            
            
            341,294
            
            
            1,913
            
            
            2.25
            
            
            358,658
            
            
            1,104
            
            
            1.23Time
                deposits
            
            
            588,581
            
            
            5,970
            
            
            4.07
            
            
            391,483
            
            
            2,729
            
            
            2.80Other
                borrowings
            
            
            189,171
            
            
            2,344
            
            
            4.97
            
            
            178,765
            
            
            1,445
            
            
            3.24Junior
                subordinated debentures
            
            
            17,855
            
            
            398
            
            
            8.94
            
            
            16,496
            
            
            334
            
            
            8.12Total
                interest-bearing liabilities
            
            $
            1,340,360
            
            $
            10,930
            
            
            3.27
            
            $
            1,122,421
            
            $
            5,650
            
            
            2.02Noninterest-bearing
                deposits
            
            
            284,520
            
            
            
            
            
            
            
            
            270,117Accrued
                interest, taxes and other liabilities
            
            
            15,611
            
            
            
            
            
            
            
            
            11,887Total
                liabilities
            
            $
            1,640,491
            
            
            
            
            
            
            
            $
            1,404,425Total
                shareholders' equity
            
            
            130,978
            
            
            
            
            
            
            
            
            110,082Total
                liabilities and shareholders' equity
            
            $
            1,771,469
            
            
            
            
            
            
            
            $
            1,514,507Net
                interest income and margin (3)
            
            
            
            
            $
            19,789
            
            
            4.84
            %
            
            
            
            $
            16,316
            
            
            4.67
            %




( 1)  Tax-equivalent
      adjustments included in the nontaxable investment securities portfolio are
      $295,000 and $280,000 for the three months ended June 30, 2006 and 2005. Tax
      equivalent adjustments included in the taxable investment securities created
      by
      a dividends received deduction were $18,000 and $35,000 for the three months
      ended June 30, 2006 and 2005.


(2)  Amounts
      of interest earned included loan fees of $947,000 and $922,000 and loan costs
      of
      $114,000 and $75,000 for the three months ended June 30, 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


AVERAGE
      BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS


Six
                months ended June 30, 2006
            
            Six
                months ended June 30, 2005(Dollars
                in thousands)
            
            AverageBalance
            
            Taxable
                EquivalentInterest
            
            Taxable
                EquivalentYield/rate
            
            AverageBalance
            
            Taxable
                EquivalentInterest
            
            Taxable
                EquivalentYield/rate**Assets**Federal
                funds sold
            
            $
            4,049
            
            $
            93
            
            
            4.63
            %
            $
            5,584
            
            $
            72
            
            
            2.60
            %Time
                deposits at other financial institutions
            
            
            350
            
            
            9
            
            
            5.19
            
            
            1,112
            
            
            15
            
            
            2.72Taxable
                investment securities (1)
            
            
            375,431
            
            
            8,650
            
            
            4.65
            
            
            365,925
            
            
            7,569
            
            
            4.17Nontaxable
                investment securities (1)
            
            
            102,058
            
            
            2,507
            
            
            4.95
            
            
            84,354
            
            
            2,139
            
            
            5.11Loans,
                gross: (2)
            
            
            1,139,997
            
            
            47,431
            
            
            8.39
            
            
            915,490
            
            
            32,466
            
            
            7.15Total
                interest-earning assets
            
            $
            1,621,885
            
            $
            58,690
            
            
            7.30
            
            $
            1,372,465
            
            $
            42,261
            
            
            6.21Allowance
                for loan losses
            
            
            (15,178
            )
            
            
            
            
            
            
            
            (13,501
            )Cash
                and due from banks
            
            
            47,605
            
            
            
            
            
            
            
            
            41,856Premises
                and equipment, net
            
            
            31,743
            
            
            
            
            
            
            
            
            23,756Interest
                receivable and other assets
            
            
            67,522
            
            
            
            
            
            
            
            
            58,941Total
                assets
            
            $
            1,753,577
            
            
            
            
            
            
            
            $
            1,483,517**Liabilities
                And Shareholders' Equity**Negotiable
                order of withdrawal
            
            $
            209,104
            
            $
            665
            
            
            0.64
            
            $
            171,764
            
            $
            58
            
            
            0.07Savings
                deposits
            
            
            363,106
            
            
            3,782
            
            
            2.10
            
            
            359,989
            
            
            2,109
            
            
            1.18Time
                deposits
            
            
            532,460
            
            
            10,242
            
            
            3.88
            
            
            382,754
            
            
            5,123
            
            
            2.70Other
                borrowings
            
            
            203,844
            
            
            4,757
            
            
            4.71
            
            
            171,642
            
            
            2,788
            
            
            3.28Junior
                subordinated debentures
            
            
            17,179
            
            
            773
            
            
            9.07
            
            
            16,496
            
            
            645
            
            
            7.88Total
                interest-bearing liabilities
            
            $
            1,325,693
            
            $
            20,219
            
            
            3.08
            
            
            1,102,645
            
            
            10,723
            
            
            1.96Noninterest-bearing
                deposits
            
            
            284,321
            
            
            
            
            
            
            
            
            261,743Accrued
                interest, taxes and other liabilities
            
            
            15,014
            
            
            
            
            
            
            
            
            11,150Total
                liabilities
            
            $
            1,625,028
            
            
            
            
            
            
            
            
            1,375,538Total
                shareholders' equity
            
            
            128,549
            
            
            
            
            
            
            
            
            107,979Total
                liabilities and shareholders' equity
            
            $
            1,753,577
            
            
            
            
            
            
            
            $
            1,483,517Net
                interest income and margin (3)
            
            
            
            
            $
            38,471
            
            
            4.78
            %
            
            
            
            $
            31,538
            
            
            4.63
            %




(1)  Tax-equivalent
      adjustments included in the nontaxable investment securities portfolio are
      $591,000 and $525,000 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 $46,000 and $72,000 for the six months
      ended
      June 30, 2006 and 2005.


(2)  Amounts
      of interest earned included loan fees of $1,855,000 and $1,567,000 and loan
      costs of $225,000 and $145,000 for the six months ended June 30, 2006 and 2005,
      respectively.


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


-17-
 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 endedJune
                30, 2006 compared to June 30, 2005(Dollars
                  in thousands)
            
            Volume
            
            Rate
            
            TotalIncrease
                (decrease) in interest income:Federal
                funds sold
            
            $
            (16
            )
            $
            23
            
            $
            7Time
                deposits at other financial institutions
            
            
            -
            
            
            1
            
            
            1Taxable
                investment securities
            
            
            (29
            )
            
            427
            
            
            398Tax-exempt
                investment securities
            
            
            165
            
            
            (49
            )
            
            116Loans
            
            
            4,613
            
            
            3,618
            
            
            8,231Total:
            
            $
            4,733
            
            $
            4,020
            
            $
            8,753Increase
                in interest expense:Interest
                bearing demand
            
            $
            7
            
            $
            260
            
            $
            267Savings
                deposits
            
            
            (56
            )
            
            865
            
            
            809Time
                deposits
            
            
            1,702
            
            
            1,539
            
            
            3,241Other
                borrowings
            
            
            89
            
            
            810
            
            
            899Junior
                subordinated debentures
            
            
            29
            
            
            35
            
            
            64Total:
            
            $
            1,771
            
            $
            3,509
            
            $
            5,280Increase
                in net interest income
            
            $
            2,962
            
            $
            511
            
            $
            3,473




Net
        interest income variance analysis:


Six
                months endedJune
                30, 2006 compared to June 30, 2005(Dollars
                  in thousands)
            
            Volume
            
            Rate
            
            TotalIncrease
                (decrease) in interest income:Federal
                funds sold
            
            $
            (9
            )
            $
            30
            
            $
            21Time
                deposits at other financial institutions
            
            
            (8
            )
            
            2
            
            
            (6
            )Taxable
                investment securities
            
            
            200
            
            
            881
            
            
            1,081Tax-exempt
                investment securities
            
            
            379
            
            
            (11
            )
            
            368Loans
            
            
            8,770
            
            
            6,195
            
            
            14,965Total:
            
            $
            9,332
            
            $
            7,097
            
            $
            16,429Increase
                in interest expense:Interest
                bearing demand
            
            $
            15
            
            $
            592
            
            $
            607Savings
                deposits
            
            
            18
            
            
            1,655
            
            
            1,673Time
                deposits
            
            
            2,417
            
            
            2,702
            
            
            5,119Other
                borrowings
            
            
            592
            
            
            1,377
            
            
            1,969Junior
                subordinated debentures
            
            
            28
            
            
            100
            
            
            128Total:
            
            $
            3,070
            
            $
            6,426
            
            $
            9,496Increase
                in net interest income
            
            $
            6,262
            
            $
            671
            
            $
            6,933




-18-
 Table
          of Contents




PROVISION
      FOR LOAN LOSSES




The
      provision for loan losses was $200,000 for both the three and six months ended
      June 30, 2006 compared with $101,000 and $321,000 for the three and six months
      ended June 30, 2005, an increase of $99,000 or 98% and a decrease of $121,000
      or
      38%. See "Allowance for Loan Losses" elsewhere herein. As
      of
      June 30, 2006 the allowance for loan losses was $15,084,000 or 1.26% of total
      loans compared to $14,776,000 or 1.38% of total loans as of December 31, 2005.
      At June 30, 2006, nonperforming assets totaled $2,119,000 or 0.12% of total
      assets, nonperforming loans totaled $1,593,000 or 0.13% of total loans and
      the
      allowance for loan losses totaled 947% 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.




NONINTEREST
      INCOME





Noninterest
      income increased by $1,082,000 or 46% to $3,422,000 and $1,045,000 or 21% to
      $6,054,000 for the three and six months ended June 30, 2006 compared with
      $2,340,000 and $5,009,000 in the same period during 2005. Service charges on
      deposit accounts decreased by $22,000 or 1% to $1,504,000 and increased by
      $32,000 or 1% to $2,925,000 for the three and six months ended June 30, 2006
      compared with $1,526,000 and $2,893,000 for the same period in 2005. The
      increase in service charges on deposit accounts for the six month period 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 $92,000 and $140,000 for the three months
      and
      six months ended June 30, 2006 in cash surrender value of life insurance
      policies was the result of a higher earnings rate year over year. In the second
      quarter of 2006 the Company recognized a gain on the sale of securities of
      $622,000. The securities that were sold included approximately $6,917,000 in
      FHLMC preferred stock and $12,882,000 in an adjustable rate mutual fund. The
      FHLMC preferred stock was sold due to a recent increase in market value that
      was
      made possible by relatively high short term interest rates during the quarter.
      The investment in the adjustable rate mutual fund was sold so that the sales
      proceeds could be reinvested in higher yielding investments. High prepayments
      within the mortgage notes purchased at a premium by the fund have had a
      detrimental effect on the Bank’s total return on this investment. There was no
      gain on the sale of securities recognized for the same time period in 2005.
      Other noninterest income increased by $390,000 or 64% and $251,000 or 15% for
      the three and six month period ended June 30, 2006 when compared to the same
      period in 2005. The primary reason for the increase in other noninterest income
      is attributable to fees of $159,000 and $236,000, for the three and six months
      ended June 30, 2006, in service fees associated with the addition of the asset
      based lending portfolio.





NONINTEREST
      EXPENSE **** ****





Noninterest
      expenses increased by $2,404,000 or 22% to $13,106,000 and $4,572,000 or 22%
      to
      $25,582,000 for the three and six months ended June 30, 2006 compared with
      $10,702,000 and $21,010,000 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 and six months ended June 30, 2006, salaries and related benefits
      increased by $1,678,000 or 30% and $2,984,000 or 27% to $7,335,000 and
      $14,194,000. This compares to the $5,657,000 and $11,210,000 for the three
      and
      six months ended June 30, 2005. The increase was primarily the result of normal
      salary progression, increased support staff used to support branch 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
      $189,000 or 18% and $393,000 or 19% to $1,255,000 and $2,444,000 for the three
      and six months ended June 30, 2006. This compares to the $1,066,000 and
      $2,051,000 recorded for the same period in 2005. The primary reason for the
      increase in 2006 was related to the addition of new branch facilities opened
      and
      remodeled. Equipment expenses decreased by $1,000 or 1% and increased by
      $132,000 or 7% to $1,042,000 and $2,033,000 for the three and six months ended
      June 30, 2006. This compares with the $1,043,000 and $1,901,000 recorded for
      the
      three and six months ended June 30, 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 for the three and six months ended June 30, 2006 to the
      same periods in June 30, 2005, professional fees decreased by $86,000 or 13%
      for
      the three months and increased by $272,000 or 23% for the six months, marketing
      expenses increased by $137,000 or 42% and $229,000 or 37%, supplies expenses
      decreased by $5,000 or 2% and $33,000 or 6%, community support donations
      increased by $73,000 or 33% and $113,000 or 29%, intangible amortization
      expenses remained the same, and other noninterest expenses increased $419,000
      or
      29% and $482,000 or 16% from 2005 levels. The increase in marketing expense
      was
      primarily the result of increased advertising expenses related to branch support
      and loan and deposit gathering efforts. The decrease in supplies expenses was
      primarily related to decreased administrative supplies used at the customer
      support center. The increased other noninterest expenses were primarily the
      result of increased correspondent bank charges caused by increased activity,
      and
      increased communications costs which were attributable to the opening of new
      facilities.




-19-
 Table
          of Contents




PROVISION
      FOR INCOME TAXES




The
      Company recorded an increase in the provision for income taxes of $926,000
      or
      38% and $1,790,000 or 40% to $3,338,000 and $6,295,000 for the three and six
      months ended June 30, 2006 compared to the $2,412,000 and $4,505,000 recorded
      for the same time period. During the first three and six months of 2006 the
      Company’s effective tax rate of 35%. For the same time period in 2005, the
      Company recorded an effective tax rate of 32% and 31%. The receipt of $539,000
      in nontaxable bank owned life insurance death benefits during the first quarter
      of 2005 lowered the effective tax rate experienced in 2005. Excluding the bank
      owned life insurance death benefits, the income tax rate for the first six
      months 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 primarily due
      to
      the increased level of fully taxable income generated in 2006 compared to 2005
      levels, and the nondeductibility of incentive stock option compensation expense
      recorded in conformity with FAS 123R during 2006.




**Financial
      Condition**




Total
      assets at June 30, 2006 were $1,809,125,000, an increase of $52,369,000 or
      3%
      compared with total assets of $1,756,756,000 at December 31, 2005. Net loans
      were $1,182,358,000 at June 30, 2006, an increase of $128,238,000 or 12%
      compared with net loans of $1,054,120,000 at December 31, 2005. Deposits were
      $1,474,734,000 at June 30, 2006, an increase of $70,234,000 or 5% 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 June 30, 2006 was primarily funded
      by
      an increase in time deposit growth. Cash inflows generated from the increased
      deposits were primarily used to fund growth in the loan portfolio and to fund
      infrastructure expenditures related to branch expansion.




Total
      shareholders' equity was $132,971,000 at June 30, 2006, an increase of
      $10,726,000 or 9% from the $122,245,000 at December 31, 2005. The growth in
      shareholders’ equity between December 31, 2005 and June 30, 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.





June
                30,
            
            December
                31,(Dollars
                  in thousands)
            
            2006
            
            2005Letters
                of credit
            
            $
            7,985
            
            $
            15,160Commitments
                to extend credit
            
            
            416,157
            
            
            495,313Total
            
            $
            424,142
            
            $
            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.





-20-
 Table
          of Contents




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 June 30 2006, the
      Bank held $32,396,000 in cash surrender value life insurance, an increase of
      $600,000 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 $11,973,000 in these investments as of June 30,
      2006 and $11,727,000 as of December 31, 2005.





INVESTMENT
      SECURITIES





At
      June
      30, 2006 equity securities included $5,093,000 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. During the second quarter
      of 2006 the Company sold $5,908,000 of these securities at a pretax gain of
      $1,009,000.





Mutual
      fund investments that are invested in adjustable rate mortgages had an amortized
      cost basis of $12,882,000 were sold during the second quarter of 2006 at a
      realized loss of $387,000. The investments were sold in order to provide
      liquidity to the Bank and to redistribute funds to higher yielding investments.





In
      the
      second quarter of 2006, the Company purchased $2,531,000 of the common stock
      of
      Farmers and Merchants bank, a California based community bank. This investment
      decision was made based on management’s desire to invest in community banks that
      management believes have significant long-term appreciation potential. This
      purchase represents less than 1% of the outstanding shares of Farmers and
      Merchants bank at the time of purchase, and will be accounted for using the
      cost
      method.





-21-
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          of Contents




INTEREST
      RATE FLOOR





The
      fair
      value and notional amounts for the cash flow hedge at June 30, 2006 and December
      31, 2005 are presented below:


June
                30, 2006
            
            December
                31, 2005(Dollars
                  in thousands)
            
            Fair
                Value
            
            Notional
                Amount
            
            Fair
                Value
            
            Notional
                AmountPurchased
                option, interest rate floor
            
            $
            224
            
            $
            100,000
            
            $
            743
            
            $
            100,000





The
      decrease of $519,000 or 70% in the fair value of the interest rate floor between
      December 31, 2005 and June 30, 2006 was 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.




-22-
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The
      following table summarizes nonperforming assets of the Company at June 30,
      2006
      and December 31, 2005:


(Dollars
                in thousands)
            
            June
                30, 2006
            
            December
                31, 2005Nonaccrual
                loans
            
            $
            1,593
            
            $
            1,692Accruing
                loans past due 90 days or more
            
            
            -
            
            
            208Total
                nonperforming loans
            
            
            1,593
            
            
            1,900Other
                real estate owned
            
            
            527
            
            
            60Total
                nonperforming assets
            
            $
            2,119
            
            $
            1,960Nonperforming
                loans to total loans
            
            
            0.13
            %
            
            0.18
            %Nonperforming
                assets to total assets
            
            
            0.12
            %
            
            0.11
            %





During
      the first six months of 2006, two customers with loans that totaled $804,000
      were placed on nonaccrual status, while three customers with loans that totaled
      approximately $238,000 were removed from nonaccrual status.




The
      decrease in nonaccrual loans of $99,000 between June 30, 2006 and December
      31,
      2005 was primarily the result of a foreclosure of a loan customer who accounted
      for $467,000 of nonaccrual loans on December 31, 2005.




Contractual
      accrued interest income on loans on nonaccrual status as of June 30, 2006 and
      2005, which would have been recognized if the loans had been current in
      accordance with their original terms, was approximately $55,000 and $101,000,
      respectively.




At
      June
      30, 2006, nonperforming assets represented 0.12% of total assets, an increase
      of
      1 basis point when compared to the 0.11% at December 31, 2005. Nonperforming
      loans represented 0.13% of total loans at June 30, 2006, a decrease of 5 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 $789,000 and $1,684,000
      at
      June 30, 2006 and December 31, 2005. The increase in nonperforming assets was
      primarily the result of the foreclosure of property secured by the loan
      discussed above. 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
      June
      30, 2006 the Company had $527,000 invested in three real estate properties
      that
      were acquired through foreclosure. At December 31, 2005, the Company had $60,000
      invested in one real estate property that was acquired through foreclosure.
      These properties were carried at the lower of their estimated market value,
      as
      evidenced by an independent appraisal, or the recorded investment in the related
      loan, less estimated selling expenses. 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 expects to sell
      two of three properties within the next twelve month period. No assurance can
      be
      given that the Company will sell the properties during 2006 or at any time
      or
      for an amount that will be sufficient to recover the Company’s investment in
      these properties.




-23-
 Table
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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 June 30,
      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 June 30, 2006 were $1,593,000 for which
      the Company made provisions to the allowance for loan losses of approximately
      $239,000.




Except
      for loans that are disclosed above, there were no assets as of June 30, 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 scope and extent 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
      six
      months ended June 30, 2006 and 2005, and for the year ended December 31,
      2005.





June
                30
            
            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
            
            
            200
            
            
            321
            
            
            2,051Charge-offs:Commercial
                and agricultural
            
            
            377
            
            
            970
            
            
            1,664Real
                estate - mortgage
            
            
            -
            
            
            -
            
            
            -Consumer
            
            
            265
            
            
            151
            
            
            318Total
                charge-offs
            
            
            642
            
            
            1,121
            
            
            1,982RecoveriesCommercial
                and agricultural
            
            
            649
            
            
            470
            
            
            903Real-Estate
                - mortgage
            
            
            -
            
            
            -
            
            
            -Consumer
            
            
            101
            
            
            129
            
            
            199Total
                recoveries
            
            
            750
            
            
            599
            
            
            1,102Net
                charge-offs
            
            
            (108
            )
            
            522
            
            
            880Balance
                at end of period
            
            $
            15,084
            
            $
            13,404
            
            $
            14,776Loans
                outstanding at period-end
            
            $
            1,197,442
            
            $
            982,965
            
            $
            1,068,896Average
                loans outstanding
            
            $
            1,139,997
            
            $
            915,490
            
            $
            968,492Annualized
                net charge-offs to average loans
            
            
            (0.02
            )%
            
            0.11
            %
            
            0.09
            %Allowance
                for loan lossesTo
                total loans
            
            
            1.26
            %
            
            1.36
            %
            
            1.38
            %To
                nonperforming loans
            
            
            946.89
            %
            
            591.78
            %
            
            777.68
            %To
                nonperforming assets
            
            
            711.85
            %
            
            576.51
            %
            
            753.88
            %


-24-
 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 six months of 2006 of $200,000
      compared with $321,000 in the same period of 2005. The decrease was related
      to
      the overall improvement in specific credit risks in the first half of 2006
      when
      compared to the same period in 2005 and the level of net recoveries experienced
      in the first half of 2006. The Company had net recoveries of $108,000 for the
      six months ended June 30, 2006 compared with net charge-offs of $522,000 for
      the
      same six months in 2005. The increased recoveries occurred primarily within
      the
      commercial and agricultural segment of the loan portfolio.




As
      of
      June 30, 2006, the allowance for loan losses was $15,084,000 or 1.26% of total
      loans outstanding, compared with $14,776,000 or 1.38% of total loans outstanding
      as of December 31, 2005 and $13,404,000 or 1.36% of total loans outstanding
      as
      of June 30, 2005.




The
      Company uses a proprietary method developed by its 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 three times
      a year. 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.


-25-
 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. The majority of the balance in other assets was primarily due
      to a
      $16,296,000 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 half of 2006.





RESERVE
      FOR UNFUNDED LENDING COMMITMENTS





The
      reserve for unfunded lending commitments at June 30, 2006 and 2005, and December
      31, 2005, is presented below.





June
                30
            
            December
                31(Dollars
                in thousands)
            
            2006
            
            2005
            
            2005Balance
                at the beginning of period
            
            $
            717
            
            $
            679
            
            $
            679Provision
                for credit losses
            
            
            12
            
            
            (12
            )
            
            38Balance
                at the end of period
            
            $
            729
            
            $
            667
            
            $
            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.


-26-
 Table
          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 $344,273,000 and $410,086,000 on June
      30, 2006 and December 31, 2005, respectively, and constituted 19% and 23% of
      total assets on both those dates. Liquidity is also affected by the collateral
      requirements of its public deposits and certain borrowings. Total pledged
      securities were $271,382,000 at June 30, 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
      $200,575,000 of which $48,940,000 was outstanding as of June 30, 2006 and $260,684,000
      of which $93,384,000 was
      outstanding as of December 31, 2005. 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 $10,726,000 or 9% from December 31, 2005 to June 30, 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 June 30, 2006, that
      the Company and the Bank met all applicable capital requirements. The Company’s
      leverage capital ratio at June 30, 2006 was 9.57% as compared with 8.57% as
      of
      December 31, 2005. The Company’s total risk based capital ratio at June 30, 2006
      was 12.28% as compared to 11.13% as of December 31, 2005.


-27-
 Table
          of Contents




In
      the
      opinion of management, the Company’s and Bank’s actual capital amounts and
      ratios met all regulatory requirements as of June 30, 2006 and are 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)
            
            $
            184,270
            
            
            12.65
            %
            $
            120,642
            
            
            8.0
            %
            $
            150,802
            
            
            10.0
            %Tier
                1 capital (to risk weighted assets)
            
            
            168,344
            
            
            11.56
            
            
            60,321
            
            
            4.0
            
            
            90,481
            
            
            6.0Leverage
                ratio(1)
            
            
            168,344
            
            
            9.51
            
            
            70,799
            
            
            4.0
            
            
            88,499
            
            
            5.0**The
                Bank:**Total
                capital (to risk weighted assets)
            
            $
            156,753
            
            
            10.45
            %
            $
            120,052
            
            
            8.0
            %
            $
            150,065
            
            
            10.0
            %Tier
                1 capital (to risk weighted assets)
            
            
            140,859
            
            
            9.39
            
            
            60,026
            
            
            4.0
            
            
            90,039
            
            
            6.0Leverage
                ratio(1)
            
            
            140,859
            
            
            7.98
            
            
            70,640
            
            
            4.0
            
            
            88,300
            
            
            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.







In
      the
      opinion of management, the Company’s and Bank’s actual capital amounts and
      ratios met all regulatory requirements as of December 31, 2005 and are
      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)
            
            $
            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 June 30, 2006, the Company had
      a
      deposit mix of 23% in savings deposits, 44% in time deposits, 13% 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.


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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 June 30, 2006, the Company had brokered
      deposits of $128,614,000. At December 31, 2005, the Company’s brokered deposits
      totaled $20,861,000. The increase in brokered deposits during the first six
      months of 2006 was related to loan funding requirements. The Bank has a policy
      target for brokered deposits of no more than 7% of the Bank’s asset base.
      Brokered deposits exceeded the policy limit as of June 30, 2006, and this policy
      violation was acknowledged by the Bank’s executive committee. The Bank intends
      to increase its policy limit to 15 percent of assets by the end of the third
      quarter. This pending policy change reflects management’s belief that the risks
      related to this higher level of brokered deposits are manageable, and the
      liquidity provided by them is a valuable source of cash inflows that is
      available for making investments or paying down borrowings.





Maturities
      of time certificates of deposits of $100,000 or more outstanding at June 30,
      2006 and December 31, 2005 are summarized as follows:


(Dollars
                in thousands)
            
            June
                30, 2006
            
            December
                31, 2005Three
                months or less
            
            $
            155,452
            
            $
            106,874Over
                three to six months
            
            
            81,127
            
            
            24,365Over
                six to twelve months
            
            
            138,809
            
            
            39,005Over
                twelve months
            
            
            26,055
            
            
            64,781Total
            
            $
            401,443
            
            $
            235,025





**Federal
      Funds Purchased and Other Borrowed Funds**




The
      total
      of federal funds purchased and other borrowed funds decreased by $46,337,000
      or
      23% to $155,391,000 at June 30, 2006 compared to the $201,728,000 outstanding
      at
      December 31, 2005. Other borrowed funds have decreased primarily by the
      repayment of obligations obtained from maturities that occurred within the
      Company’s investment portfolio and the issuance of a $15,464,000 subordinated
      debenture, decreasing the need for other borrowings.





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 June 30, 2006 and the
      year
      ended December 31, 2005.




**Return
      on Equity and Assets**





Six
                Months Ended June 30,
            
            Year
                ended December 31,2006
            
            2005
            
            2005Annualized
                return on average assets
            
            
            1.36
            %
            
            1.36
            %
            
            1.36
            %Annualized
                return on average equity
            
            
            18.53
            %
            
            18.73
            %
            
            18.54
            %Average
                equity to average assets
            
            
            7.33
            %
            
            7.28
            %
            
            7.34
            %Dividend
                payout ratio
            
            
            11.71
            %
            
            10.31
            %
            
            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.




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**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 provides monthly 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 half 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 half 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 interim 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 interim 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
      interim 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.


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CHANGES
      IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
      was
      no change in the Company’s internal control over financial reporting that
      occurred during the most recent fiscal quarter that materially affected, or
      is
      reasonably likely to materially affect, the internal control 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 the legal costs incurred by the Bank have
      totaled over $250,000, the amount of the Company’s insurance deductible.




SUBSEQUENT
      EVENT




During
      the month of July, 2006, a settlement agreement was executed related to this
      lawsuit. The settlement was funded by the Bank’s insurance carrier and was
      settled to the mutual satisfaction of the parties.





**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.**




(a.)
            Our
                Annual Meeting of Shareholders for 2006 was held May 2, 2006. the
                number
                of shares represented in person or by proxy and constituting a quorum
                was
                6,856,569, which equaled 65% of the shares
                outstanding.




(b.)
            The
                following are the results of the election of directors of the
                Board:




Election
      of directors    Votes
      For   Votes
      Withheld


Dorothy
      L. Bizzini    6,640,089   216,480


Jerry
      E.
      Callister  6,757,740   99,099


Gerald
      L.
      Tahajian    6,754,047   102,522




**Item
      5. Other Information.**




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




**Item
      6. Exhibits**




See
      Exhibit Index


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**SIGNATURES**




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




CAPITAL
      CORP OF THE WEST




(Registrant)







Date:
                August 9, 2006
            By/s/
                Thomas T. HawkerThomas
                T. HawkerPresident
                andChief
                Executive Officer








Date:
                August 9, 2006
            By/s/
                David A. CurtisDavid
                A. CurtisInterim
                Chief Financial Officer


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**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





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