**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 Ended September 30,
                2007




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 November 6, 2007 was 10,789,944.  No shares of preferred stock, no
      par value, were outstanding at November 6, 2007.





**Capital
      Corp of the West**


Table
      of
      Contents











**PART
      I.   FINANCIAL INFORMATION**





Item
                1.   Financial StatementsConsolidated
                Balance Sheets (unaudited)
            3Consolidated
                Statements of Income
                (unaudited)
            4Consolidated
                Statements of Changes in Shareholders’ Equity
                (unaudited)
            5Consolidated
                Statements of Comprehensive Income
                (unaudited)
            6Consolidated
                Statements of Cash Flows
                (unaudited)
            7Notes
                to the Consolidated Financial Statements
                (unaudited)
            8Item
                2.    Management’s Discussion and
                Analysis of Financial Condition and Results
                of Operations
            13Item
                3.    Quantitative and Qualitative
                Disclosures about Market Risk
            33Item
                4.    Controls and
                Procedures
            33











**PART
      II.   OTHER INFORMATION**





Item
                1.     Legal
                Proceedings
            34Item
                1A.  Risk Factors
            34Item
                2.     Unregistered Sales of
                Equity Securities and Use of Proceeds
            37Item
                3.    Defaults Upon Senior
                Securities
            37Item
                4.    Submission of Matters to a
                Vote of Security Holders
            37Item
                5.    Other
                Information
            37Item
                6.    Exhibits
            37SIGNATURES
            38Exhibit
                Index
            39





-2-


**Capital
      Corp of the West**


**Consolidated
      Balance Sheets**


(Unaudited)




**As
                of September 30,**
            
            
            **As
                of December 31,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006****ASSETS:**Cash
                and non-interest-bearing deposits in other banks
            
            $
            45,389
            
            
            $
            44,853Federal
                funds sold
            
            
            12,880
            
            
            
            150,680Time
                deposits at other financial institutions
            
            
            100
            
            
            
            350Investment
                securities available for sale, at fair value
            
            
            231,686
            
            
            
            256,538Investment
                securities held to maturity, at cost; fair value of $154,862
                and $166,266 at September 30, 2007 and December 31,
                2006
            
            
            157,507
            
            
            
            168,058Loans,
                net of allowance for loan losses of $15,285 and $14,031 at September
                30, 2007 and December 31, 2006
            
            
            1,348,953
            
            
            
            1,210,730Interest
                receivable
            
            
            9,941
            
            
            
            9,819Premises
                and equipment, net
            
            
            46,119
            
            
            
            42,320Goodwill
            
            
            1,405
            
            
            
            1,405Cash
                value of life insurance
            
            
            43,574
            
            
            
            43,051Investment
                in housing tax credit limited partnerships
            
            
            9,439
            
            
            
            10,082Other
                real estate owned
            
            
            9,450
            
            
            
            60Other
                assets
            
            
            31,072
            
            
            
            23,593**Total
                assets:**
            
            **$**
            **1,947,515**
            
            
            **$**
            **1,961,539****LIABILITIES:****Deposits:**Non-interest-bearing
                demand
            
            $
            240,720
            
            
            $
            287,723Negotiable
                orders of withdrawal
            
            
            226,040
            
            
            
            225,481Savings
            
            
            464,005
            
            
            
            436,494Time,
                under $100,000
            
            
            352,336
            
            
            
            299,409Time,
                $100,000 and over
            
            
            248,148
            
            
            
            366,234**Total
                deposits:**
            
            ****
            **1,531,249**
            
            
            ****
            **1,615,341**Other
                borrowings
            
            
            213,292
            
            
            
            151,697Junior
                subordinated debentures
            
            
            31,960
            
            
            
            31,960Accrued
                interest, taxes and other liabilities
            
            
            14,910
            
            
            
            14,961**Total
                liabilities:**
            
            ****
            **1,791,411**
            
            
            ****
            **1,813,959****SHAREHOLDERS’
                EQUITY:**Preferred
                stock, no par value; 10,000,000 shares authorized; none
                outstanding
            
            
            -
            
            
            
            -Common
                stock, no par value; 20,000,000 shares authorized;
                10,789,944   and 10,760,762 issued and outstanding at
                September 30, 2007 and December 31, 2006
            
            
            66,090
            
            
            
            64,586Retained
                earnings
            
            
            91,987
            
            
            
            84,614Accumulated
                other comprehensive loss, net
            
            
            (1,973
            )
            
            
            (1,620
            )**Total
                shareholders’ equity:**
            
            ****
            **156,104**
            
            
            ****
            **147,580****Total
                liabilities and shareholders’ equity:**
            
            **$**
            **1,947,515**
            
            
            **$**
            **1,961,539**




*See
      accompanying notes to consolidated financial statements.*


-3-


**Capital
      Corp of the West**


**Consolidated
      Statements of Income**


(Unaudited)





**For
                the Three Months Ended September 30,**
            
            
            **For
                the Nine Months Ended September 30,***(Amounts
                in thousands, except per share data)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Interest
                income:**Interest
                and fees on loans
            
            $
            28,422
            
            
            $
            26,009
            
            
            $
            80,068
            
            
            $
            73,440Interest
                on deposits with other financial institutions
            
            
            1
            
            
            
            5
            
            
            
            9
            
            
            
            14Interest
                on investments held to maturity:Taxable
            
            
            855
            
            
            
            882
            
            
            
            1,708
            
            
            
            2,723Non-taxable
            
            
            842
            
            
            
            950
            
            
            
            2,655
            
            
            
            2,844Interest
                on investments available for sale:Taxable
            
            
            2,825
            
            
            
            3,063
            
            
            
            9,463
            
            
            
            9,826Non-taxable
            
            
            11
            
            
            
            11
            
            
            
            33
            
            
            
            33Interest
                on federal funds sold
            
            
            223
            
            
            
            100
            
            
            
            1,756
            
            
            
            193**Total
                interest income:**
            
            ****
            **33,179**
            
            
            ****
            **31,020**
            
            
            ****
            **95,692**
            
            
            ****
            **89,073****Interest
                expense:**Interest
                on negotiable orders of withdrawal
            
            
            792
            
            
            
            373
            
            
            
            2,214
            
            
            
            1,038Interest
                on savings deposits
            
            
            3,778
            
            
            
            2,259
            
            
            
            10,798
            
            
            
            6,041Interest
                on time deposits, under $100,000
            
            
            4,191
            
            
            
            2,666
            
            
            
            12,019
            
            
            
            7,443Interest
                on time deposits, $100,000 and over
            
            
            2,995
            
            
            
            4,840
            
            
            
            10,430
            
            
            
            10,305Interest
                on federal funds purchased
            
            
            11
            
            
            
            40
            
            
            
            16
            
            
            
            914Interest
                on other borrowings
            
            
            2,831
            
            
            
            2,010
            
            
            
            6,541
            
            
            
            5,893Interest
                on junior subordinated debentures
            
            
            620
            
            
            
            683
            
            
            
            1,971
            
            
            
            1,456**Total
                interest expense:**
            
            ****
            **15,218**
            
            
            ****
            **12,871**
            
            
            ****
            **43,989**
            
            
            ****
            **33,090**Net
                interest income
            
            
            17,961
            
            
            
            18,149
            
            
            
            51,703
            
            
            
            55,983Provision
                for loan losses
            
            
            732
            
            
            
            200
            
            
            
            4,645
            
            
            
            400**Net
                interest income after provision for loan losses:**
            
            ****
            **17,229**
            
            
            ****
            **17,949**
            
            
            ****
            **47,058**
            
            
            ****
            **55,583****Noninterest
                income:**Service
                charges on deposit accounts
            
            
            2,041
            
            
            
            1,550
            
            
            
            5,834
            
            
            
            4,475Death
                benefit on BOLI policies
            
            
            993
            
            
            
            179
            
            
            
            993
            
            
            
            179Gain
                on the sale of securities
            
            
            835
            
            
            
            0
            
            
            
            835
            
            
            
            622Increase
                      in cash value of life insurance
            
            
            465
            
            
            
            365
            
            
            
            1,304
            
            
            
            966Other
            
            
            782
            
            
            
            1,062
            
            
            
            2,743
            
            
            
            2,968**Total
                noninterest income:**
            
            ****
            **5,116**
            
            
            ****
            **3,156**
            
            
            ****
            **11,709**
            
            
            ****
            **9,210****Noninterest
                expenses:**Salaries
                and related expenses
            
            
            7,606
            
            
            
            7,293
            
            
            
            22,883
            
            
            
            21,487Premises
                and occupancy
            
            
            1,835
            
            
            
            1,422
            
            
            
            5,140
            
            
            
            3,866Equipment
            
            
            1,382
            
            
            
            1,096
            
            
            
            3,861
            
            
            
            3,129Professional
                fees
            
            
            1,225
            
            
            
            478
            
            
            
            2,895
            
            
            
            1,952Supplies
            
            
            222
            
            
            
            237
            
            
            
            719
            
            
            
            776Marketing
            
            
            588
            
            
            
            360
            
            
            
            1,507
            
            
            
            1,213Community
                support donations
            
            
            185
            
            
            
            264
            
            
            
            554
            
            
            
            773Intangible
                amortization
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            23Communications
            
            
            415
            
            
            
            406
            
            
            
            1,179
            
            
            
            1,137Other
            
            
            1,898
            
            
            
            1,436
            
            
            
            6,671
            
            
            
            4,218**Total
                noninterest expenses:**
            
            ****
            **15,356**
            
            
            ****
            **12,992**
            
            
            ****
            **45,409**
            
            
            ****
            **38,574**Income
                before provision for income taxes
            
            
            6,989
            
            
            
            8,113
            
            
            
            13,358
            
            
            
            26,219Provision
                for income taxes
            
            
            993
            
            
            
            2,284
            
            
            
            2,744
            
            
            
            8,579**Net
                income:**
            
            **$**
            **5,996**
            
            
            **$**
            **5,829**
            
            
            **$**
            **10,614**
            
            
            **$**
            **17,640**Basic
                earnings per share
            
            $
            0.56
            
            
            $
            0.54
            
            
            $
            0.98
            
            
            $
            1.65Diluted
                earnings per share
            
            $
            0.55
            
            
            $
            0.53
            
            
            $
            0.97
            
            
            $
            1.61




*See
      accompanying notes to consolidated
      financial statements.*




-4-




**Capital
      Corp of the West**


**Consolidated
      Statement of Changes in Shareholders’ Equity**


(Unaudited)





**Common
                Stock***(Amounts
                in thousands)*
            
            **Number
                of Shares**
            
            
            **Amounts**
            
            
            **Retained
                Earnings**
            
            
            **Total**
            
            
            **Accumulated
                other**
              **Comprehensive
                (Loss) Gain**Balance,
                December 31, 2005
            
            
            10,575
            
            
            $
            59,785
            
            
            $
            65,049
            
            
            $
            (2,589
            )
            
            $
            122,245Exercise
                of stock options, including tax benefit of $911
            
            
            161
            
            
            
            3,553
            
            
            
            -
            
            
            
            -
            
            
            
            3,553Effect
                of share-based payment expense
            
            
            -
            
            
            
            566
            
            
            
            -
            
            
            
            -
            
            
            
            566Net
                change in fair value of available for sale investment securities,
                net of
                tax effect of $347(1)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            479
            
            
            
            479Net
                change in fair value of interest rate floor, net of tax benefit of
                $117(2)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (161
            )
            
            
            (161
            )Cash
                dividends
            
            
            -
            
            
            
            -
            
            
            
            (2,249
            )
            
            
            -
            
            
            
            (2,249
            )Net
                income
            
            
            -
            
            
            
            -
            
            
            
            17,640
            
            
            
            -
            
            
            
            17,640**Balance,
                September 30, 2006**
            
            ****
            **10,736**
            
            
            **$**
            **63,904**
            
            
            **$**
            **80,440**
            
            
            **$**
            **(2,271**
            **)**
            
            **$**
            **142,073**Balance,
                December 31, 2006
            
            
            10,761
            
            
            $
            64,586
            
            
            $
            84,614
            
            
            $
            (1,620
            )
            
            $
            147,580Exercise
                of stock options, including tax benefit of $23
            
            
            29
            
            
            
            438
            
            
            
            -
            
            
            
            -
            
            
            
            438Effect
                of share-based payment expense
            
            
            -
            
            
            
            1,066
            
            
            
            -
            
            
            
            -
            
            
            
            1,066Net
                change in fair value of available for sale investment securities,
                net of
                tax effect of  $490
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (666
            )
            
            
            (666
            )Net
                change in fair value of interest rate floor, net of tax effect of
                $227
                (3)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            313
            
            
            
            313Cash
                dividends
            
            
            -
            
            
            
            -
            
            
            
            (3,241
            )
            
            
            -
            
            
            
            (3,241
            )Net
                income
            
            
            -
            
            
            
            -
            
            
            
            10,614
            
            
            
            -
            
            
            
            10,614**Balance,
                September 30, 2007**
            
            ****
            **10,790**
            
            
            **$**
            **66,090**
            
            
            **$**
            **91,987**
            
            
            **$**
            **(1,973**
            **)**
            
            **$**
            **156,104**




(1)  Includes
      reclassification adjustment for net gains included in net income of $361 (net
      of
      $261 tax expense).


(2)  Includes
      reclassification adjustment for net losses included in net income of $16 (net
      of
      $11 tax benefit).


(3)  Includes
      reclassification adjustment for net losses included in net income of $142 (net
      of $103 tax benefit).




*See
      accompanying notes to consolidated financial statements.*


-5-


**Capital
      Corp of the West**


**Consolidated
      Statements of Comprehensive Income**


(Unaudited)





**For
                The Nine Months Ended September 30,***(Amounts
                in thousands)*
            
            **2007**
            
            
            **2006**Net
                income
            
            $
            10,614
            
            
            $
            17,640Unrealized
                gain (loss) on securities arising during the year, net
            
            
            (666
            )
            
            
            840Unrealized
                gain (loss) on interest rate floor arising during the year,
                net
            
            
            171
            
            
            
            (177
            )Reclassification
                adjustment for losses realized in net income, net of tax (benefit of
                $83 in 2007 and expense of $258 in 2006 for the time periods
                presented)
            
            
            142
            
            
            
            (345
            )**Comprehensive
                income:**
            
            **$**
            **10,261**
            
            
            **$**
            **17,958**




*See
      accompanying notes to consolidated financial statements.*


-6-


**Capital
      Corp of the West**


**Consolidated
      Statements of Cash Flows**


(Unaudited)




**For
                The Nine Months Ended September 30,***(Amounts
                in thousands)*
            
            **2007**
            
            
            **2006****Operating
                activities:**Net
                income
            
            $
            10,614
            
            
            $
            17,640Adjustments
                to reconcile net income to net cash provided byOperating
                activities:Provision
                for loan losses
            
            
            4,645
            
            
            
            400Depreciation,
                amortization and accretion, net
            
            
            6,555
            
            
            
            5,442Origination
                of loans held for sale
            
            
            (5,203
            )
            
            
            (2,380
            )Proceeds
                from sales of loans
            
            
            5,890
            
            
            
            1,662Gain
                on sale of loans
            
            
            (324
            )
            
            
            (123
            )Gain
                on sale of AFS securities
            
            
            (835
            )
            
            
            (622
            )Increase
                in cash value of bank owned life insurance
            
            
            (1,304
            )
            
            
            (966
            )Gain
                on death benefit from bank owned life insurance
            
            
            (993
            )
            
            
            (179
            )Proceeds
                from death benefit of BOLI
            
            
            1,773
            
            
            
            -Non-cash
                share based payment expense
            
            
            1,066
            
            
            
            566Net
                (increase) decrease in interest receivable & other
                assets
            
            
            (6,706
            )
            
            
            1,431Gain
                on sale of other real estate owned
            
            
            (102
            )
            
            
            (190
            )(Gain)
                loss on interest rate derivative
            
            
            117
            
            
            
            -Net
                (increase) decrease in accrued interest, taxes and other
                liabilities
            
            
            (51
            )
            
            
            1,314**Net
                cash provided by operating activities:**
            
            ****
            **15,142**
            
            
            ****
            **23,995****Investing
                activities:**Investment
                securities purchased – available for sale securities
            
            
            (2,454
            )
            
            
            (2,944
            )Investment
                securities purchased – held to maturity securities
            
            
            -
            
            
            
            (3,659
            )Proceeds
                from maturities of available for sale investment
                securities
            
            
            24,221
            
            
            
            38,591Proceeds
                from maturities of held to maturity investment securities
            
            
            9,986
            
            
            
            11,404Proceeds
                from sales of available for sale securities
            
            
            3,000
            
            
            
            20,483Net
                decrease in time deposits at other institutions
            
            
            250
            
            
            
            -Proceeds
                from the sale of other real estate owned
            
            
            102
            
            
            
            656Loans
                purchased
            
            
            -
            
            
            
            (30,015
            )Net
                increase in loans
            
            
            (155,270
            )
            
            
            (169,379
            )Net
                purchases of bank owned life insurance
            
            
            -
            
            
            
            (10,000
            )Purchases
                of premises and equipment
            
            
            (6,941
            )
            
            
            (11,984
            )**Net
                cash used in investing activities:**
            
            ****
            **(127,106**
            **)**
            
            ****
            **(156,847**
            **)****Financing
                activities:**Net
                (decrease) increase in demand, NOW and savings deposits
            
            
            (18,933
            )
            
            
            (74,966
            )Net
                (decrease) increase in certificates of deposit
            
            
            (65,159
            )
            
            
            244,362Net
                increase (decrease) in other borrowings
            
            
            61,595
            
            
            
            (49,099
            )Issuance
                of subordinated debentures
            
            
            -
            
            
            
            15,464Payment
                of cash dividends
            
            
            (3,241
            )
            
            
            (2,249
            )Exercise
                of stock options
            
            
            415
            
            
            
            2,642Tax
                benefits related to exercise of stock options
            
            
            23
            
            
            
            911**Net
                cash (used in) provided by financing activities:**
            
            ****
            **(25,300**
            **)**
            
            ****
            **137,065**Net
                (decrease) increase in cash and cash equivalents
            
            
            (137,264
            )
            
            
            4,213Cash
                and cash equivalents at beginning of period
            
            
            195,533
            
            
            
            91,581Cash
                and cash equivalents at end of period
            
            
            58,269
            
            
            $
            95,794**Supplemental
                disclosure of noncash investing and financing
                activities:**Interest
                rate floor unrealized gain (loss), net of taxes
            
            $
            313
            
            
            $
            (161
            )Interest
                paid
            
            
            47,627
            
            
            
            31,855Income
                tax payments
            
            
            3,060
            
            
            
            8,150Loans
                transferred to other real estate owned
            
            
            9,390
            
            
            
            -Investment
                securities unrealized gain (loss), net of tax
            
            $
            (666
            )
            
            $
            479




*See
      accompanying notes to consolidated financial statements.*


-7-


**Capital
      Corp of the West**


**Notes
      to Consolidated Financial Statements**


**September
      30, 2007 and December 31, 2006**


(Unaudited)





NOTE
      1.




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. The Company at September
      30, 2007 had total assets of $1.95 billion and total shareholders’ equity of
      $156 million. 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 and source of income is the Bank. As
      of November 6, 2007, the Company had outstanding 10,789,944 shares of
      Common Stock, no par value, held by approximately 1,700 shareholders. There
      were
      no preferred shares outstanding at November 7, 2007. The Company has one
      wholly-owned inactive non-bank subsidiary, Capital West Group (“CWG”).  The
      Bank has two wholly-owned subsidiaries, Merced Area Investment &
Development, Inc. (“MAID”), a real estate company, and County Asset Advisors
      (“CAA”). CAA is currently inactive, and MAID has limited operations serving as
      the owner of certain bank properties.  All references herein to the Company
      includes all subsidiaries of the Company, the Bank and the Bank's subsidiaries,
      unless the context otherwise requires. The Company is also the parent of County
      Statutory Trust I, County Statutory Trust II, and County Statutory Trust III,
      which are all trust subsidiaries established to facilitate the issuance of
      trust
      preferred securities. On June 19, 2007, the Bank formed 1977 Services
      Corporation, a wholly-owned subsidiary formed for the purpose of holding the
      now  foreclosed real estate construction project located in Rocklin,
      California and on October 5, 2007, the Bank acquired Bay View Funding, a
      factoring business headquartered in San Mateo, CA.








NOTE
      2.




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.








NOTE
      3.




INDUSTRY
      AND MARKET AREA





County
      Bank is a community bank with operations located mainly in the San Joaquin
      Valley of Central California with business banking operations in the San
      Francisco Bay Area.  The corporate headquarters of the Company and the
      Bank’s main branch facility are located at 550 West Main Street, Merced,
      California.  In addition to this facility, there are three support centers
      in downtown Merced with an additional square footage of 33,000 square feet
      of
      office space.





The
      Bank
      currently has 28 branch operations located in the Central Valley, 1 branch
      operation in San Francisco, and 1 branch operation in San Jose.  The
      Central Valley operations include branches located in: Merced (2), Atwater,
      Los
      Banos, Hilmar, Sacramento, Sonora, Turlock (2), Modesto (2), Riverbank, Ceres,
      Newman, Dos Palos, Livingston, Mariposa, Madera, Clovis (2), Fresno (6), Delhi,
      and Stockton. The Bank owns eleven of these branch facilities and the remaining
      eighteen facilities are leased.  One of the branches in Fresno is
      located in a high school and the school is allowing the bank to use the space
      free of cost.  The Management of the Bank believes that the facilities
      will be adequate to accommodate operations for the foreseeable
      future.  During the fourth quarter of 2007, the bank acquired Bay View
      Funding, a factoring business headquartered in San Mateo, CA and 11 branches
      of
      California Stockmen’s Bank (see Subsequent Events section on page 37 for more
      details).





-8-




NOTE
      4.




OTHER
      FINANCIAL NOTES





All
      adjustments which in the opinion of Management are necessary for a fair
      presentation of the Company’s financial position at September 30, 2007 and
      December 31, 2006 and the results of operations for the three and nine month
      periods ended September 30, 2007 and 2006, and the statements of cash flows
      for
      the nine months ended September 30, 2007 and 2006 have been included
      therein.  The interim results for the three and nine months ended
      September 30, 2007 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,
      2006.





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 and potential common shares
      outstanding.  Diluted earnings per share reflects the potential
      dilution that could occur if options 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 nine
      month
      periods ended September 30, 2007 and 2006:








**For
                The Three Months**
            
            
            **For
                The Nine Months****Ended
                September 30,**
            
            
            **Ended
                September 30,***(In
                thousands, except per share data)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Basic
                EPS computations:**Net
                income
            
            $
            5,996
            
            
            $
            5,829
            
            
            $
            10,614
            
            
            $
            17,640Average
                common shares outstanding
            
            
            10,790
            
            
            
            10,736
            
            
            
            10,783
            
            
            
            10,673Basic
                EPS
            
            $
            0.56
            
            
            $
            0.54
            
            
            $
            0.98
            
            
            $
            1.65**Diluted
                EPS computations:**Net
                income
            
            $
            5,996
            
            
            $
            5,829
            
            
            $
            10,614
            
            
            $
            17,640Average
                common shares outstanding
            
            
            10,790
            
            
            
            10,736
            
            
            
            10,783
            
            
            
            10,673Effect
                of stock options
            
            
            130
            
            
            
            239
            
            
            
            162
            
            
            
            274Diluted common shares outstanding
            
            
            10,920
            
            
            
            10,975
            
            
            
            10,945
            
            
            
            10,947Diluted
                EPS
            
            $
            0.55
            
            
            $
            0.53
            
            
            $
            0.97
            
            
            $
            1.61





NOTE
      5.




BORROWED
      FUNDS





For
      the
      nine months ended September 30, 2007, the Company increased other borrowings
      which were obtained primarily from the Federal Home Loan Bank.  The
      increase in other borrowings of $61,595,000 was used to fund a portion of the
      decrease in the Bank’s brokered deposit balances and a portion of the increase
      in the Bank’s gross loan balances.


-9-


NOTE
      6.




SHARE-BASED
      PAYMENT





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; (iii) all must be exercised within
      90 days following termination of employment (iv) one year after death or
      disability or they expire.  The Company’s stock option plan is
      designed to provide equity compensation to officers and directors that is based
      on Company stock price performance.  The shares issued pursuant to the
      Company’s plan are newly issued, registered and non-restricted.





On
      January 1, 2006, the Company began recording share-based payment 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.  Share-based payment
      expense was recorded as a non-cash expense increase in salaries and benefits,
      which had the effect of reducing net income, earnings per share, and diluted
      earnings per share.  Share-based payment 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 4.18%; a volatility rate of 27.63%; an expected dividend
      rate
      of 2.30%; and an expected term of 6.27 years for the three months ended
      September 30, 2007 and a risk free rate of 4.80%; a volatility rate of 26.89%;
      an expected dividend rate of 0.90%; and an expected term of 5.85 years for
      the
      three months ended September 30, 2006.







**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 nine months ended September 30, 2007 and September 30,
      2006:




**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30, 2007**
            
            
            **September
                30, 2006**
            
            
            **September
                30, 2007**
            
            
            **September
                30, 2006***(Dollars
                in thousands except per share data)*Stock
                option compensation expense
            
            $
            217
            
            
            $
            131
            
            
            $
            1,066
            
            
            $
            566Tax
                benefit recorded related to stock option compensation
                expense
            
            
            (24
            )
            
            
            (9
            )
            
            
            (152
            )
            
            
            (37
            )**Decrease
                in net income**
            
            **$**
            **193**
            
            
            **$**
            **122**
            
            
            **$**
            **914**
            
            
            **$**
            **529**Effect
                on:Net
                income per share – basic
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.08
            )
            
            $
            (0.05
            )Net
                income per share – diluted
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.08
            )
            
            $
            (0.05
            )





Options
      activity during the first nine months of 2007 is as follows:




*(Shares
                in thousands)*
            
            **Number
                of Shares**
            
            
            **Weighted-Average
                Exercise Price per Share**Outstanding
                at January 1, 2007
            
            
            680
            
            
            $
            20.73Options
                granted
            
            
            192
            
            
            
            28.87Options
                exercised
            
            
            (29
            )
            
            
            14.23Options
                forfeited
            
            
            (18
            )
            
            
            30.15Outstanding
                at September 30, 2007
            
            
            825
            
            
            
            22.65Exercisable
                at September 30, 2007
            
            
            606
            
            
            $
            19.84


-10-


Options
      grants during the first nine months of 2007:




**September
                30,****2007**
            
            
            **2006***(Shares
                in thousands)*
            
            **Number
                of Shares**
            
            
            **Weighted-Average
                Fair Value per Share**
            
            
            **Number
                of Shares**
            
            
            **Weighted-Average
                Fair Value per Share**Options
                granted
            
            
            192
            
            
            $
            9.09
            
            
            
            169
            
            
            $
            9.83





Option
      vesting activity that occurred during the first nine months of
      2007:




*(Shares
                in thousands)*
            
            **Number
                of Shares**
            
            
            **Weighted-Average
                Fair Value per Share**Nonvested
                options at January 1, 2007
            
            
            115
            
            
            $
            11.17Options
                granted
            
            
            192
            
            
            
            9.09Options
                vested
            
            
            (70
            )
            
            
            9.80Options
                forfeited
            
            
            (18
            )
            
            
            10.14**Nonvested
                options at September 30, 2007**
            
            ****
            **219**
            
            
            **$**
            **9.87**






Vested
                option summary information as of September 30, 2007 is as
                follows:




*(Shares
                and dollars in thousands, except per share data)*
            
            **Number
                of Shares**
            
            
            **Aggregate
                Intrinsic Value**
            
            
            **Weighted-Average
                Remaining Contractual Life in Years**
            
            
            **Weighted-Average
                Exercise Price per Share**Vested
                options exercisable at September 30, 2007
            
            
            606
            
            
            $
            2,669
            
            
            
            6.01
            
            
            $
            19.84Total
                options outstanding at September 30, 2007
            
            
            825
            
            
            $
            2,671
            
            
            
            6.82
            
            
            $
            22.65




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 $402,000 and $919,000 for the nine months ended
      September 30, 2007 and September 30, 2006.  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 must be less
      than the current market price of the underlying stock to have intrinsic
      value.  The total fair value of shares vested was $686,000 and
      $566,000 for the nine months ended September 30, 2007 and 2006.  Total
      future compensation expense related to non-vested awards was $1,646,000 with
      a
      weighted average period to be recognized of 2.00 years as of September 30,
      2007.  There are 650,000 authorized shares remaining available for
      future grant under the Company’s stock option plan.




-11-


NOTE
      7.




RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48 (FIN 48), *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 (c)
      both.  This interpretation was effective for fiscal years beginning
      after December 15, 2006.  The adoption of this statement did not have
      a material impact on the Company’s Consolidated Financial
      Statements.





In
      September 2006, FASB issued SFAS No. 157, "*Employers’ Fair Value
      Measurements*” which defines and establishes a framework for measuring fair
      value used in FASB pronouncements that require or permit fair value
      measurement.   This statement expands disclosures using fair
      value to measure assets and liabilities in interim and annual periods subsequent
      to the period of initial recognition.  SFAS No. 157 is effective for
      financial statements issued for fiscal years after November 15, 2007, and
      interim periods within those years.  Management is currently
      evaluating the impact the adoption of SFAS No. 157 will have on its financial
      position and results of operations.





In
      September 2006, the Emerging Issues Task Force issued EITF Issue No. 06-04,
      *Accounting for Deferred Compensation and Postretirement Benefit Aspects
      of
      Endorsement Split-Dollar Life Insurance Arrangements*(“EITF
      06-04”).  EITF 06-04 establishes that for certain split-dollar life
      insurance arrangements, an employer should recognize a liability for future
      benefits in accordance with currently existing accounting pronouncements based
      on the substantive agreement with the employee.  EITF 06-04 will be
      effective for fiscal years beginning after December 15,
      2007.  Management is currently evaluating the impact of the adoption
      of EITF 06-04 and has not yet determined the impact EITF 06-04 will have on
      the
      Company’s consolidated financial statements upon adoption.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
      159), which creates an alternative measurement method for certain financial
      assets and liabilities. SFAS 159 permits fair value to be used for both the
      initial and subsequent measurements on a contract-by-contract election, with
      changes in fair value to be recognized in earnings as those changes occur.
      This
      election is referred to as the “fair value option”. SFAS 159 also requires
      additional disclosures to compensate for the lack of comparability that will
      arise from the use of the fair value option. SFAS 159 is effective for fiscal
      years beginning after November 15, 2007, with early adoption permitted as
      of the beginning of a company’s fiscal year, provided the company has not yet
      issued financial statements for that fiscal year.  Management is
      currently evaluating the impact the adoption of SFAS 159 will have on its
      financial position and results of operations and has decided not to early adopt
      SFAS 159.


-12-


**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 contain 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
      2006 Annual Report on Form 10-K filed on March 16, 2007.  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; or 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
      judgments regarding the collectibility of loans.  Liquidity
      requirements may change as a result of fluctuations in assets and liabilities
      and off-balance sheet exposures, which will impact the capital and debt
      financing needs of the Company and the mix of funding
      sources.  Decisions to purchase, hold, or sell securities are also
      dependent on liquidity requirements and market volatility, as well as on and
      off-balance sheet positions.  Factors that may impact interest rate
      risk include local, regional and international economic conditions, levels,
      mix,
      maturities, yields or rates of assets and liabilities and the wholesale and
      retail funding sources of the Company.





The
      Company is also exposed to the potential of losses arising from adverse changes
      in market rates and prices which can adversely impact the value of financial
      products, including securities, loans, and deposits.  In addition, the
      banking industry in general is subject to various monetary and fiscal policies
      and regulations, which include those determined by the Federal Reserve Board,
      the Federal Deposit Insurance Corporation and state regulators, whose policies
      and regulations could affect the Company’s results.





Other
      factors that may cause actual results to differ from the forward-looking
      statements include the following: competition with other local and regional
      banks, savings and loan associations, credit unions and other 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 for
      2006
      and in Part II Item 1A of this report.


-13-


**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 and reserve for unfunded loan commitments, 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 2006 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 2006 Annual Report and Form 10-K.







**Results
      of Operations**




**Three
      and Nine Months Ended September 30, 2007 Compared With Three and Nine Months
      Ended September 30, 2006**







OVERVIEW




For
      the
      three and nine months ended September 30, 2007, the Company reported net income
      of $5,996,000 and $10,614,000.  This compares to $5,829,000 and
      $17,640,000 for the comparative periods in 2006 and represents an increase
      of
      $167,000 (or 3%) and a decrease of $7,026,000 (or 40%)
      respectively.  Basic earnings per share were $0.56 and $0.98 and
      diluted earnings per share were $0.55 and $0.97 for the three and nine
      months ended September 30, 2007.  This compares to basic earnings per
      share of $0.54 and $1.65 and diluted earnings per share were $0.53 and
      $1.61 for the three and nine months ended September 30,
      2006.  This was an increase of $0.02 and a decrease of $0.67 per share
      for basic and an increase of $0.02 and a decrease of $0.64 for diluted
      earnings per share for the three and nine months ended September 30,
      2007.




The
      increase in net income for the three months ended September 30, 2007 compared
      to
      same time period in 2006 is mainly attributable to a $835,000 ($484,000 after
      tax) gain on the sale of certain equity securities and a gain of $993,000 on
      bank owned life insurance.  These gains were offset by an increase in
      the provision for loan losses of $532,000 ($309,000 after
      tax).  Additionally, third quarter acquisition and integration costs
      aggregated $382,000 ($222,000 after tax) and $626,000 ($363,000 after tax)
      for
      the nine months ended September 30, 2007.




The
      decrease in net income for the nine months ended September 30, 2007 is primarily
      attributable to an increase in the provision for loan losses recorded of
      $4,245,000, compared to the same time periods in 2006.  The increase
      in the provision was primarily attributable to a specific reserve recorded
      in
      the second quarter for a housing development loan in Rocklin,
      California.  In the third quarter, the Bank foreclosed on the property
      and charged off $2,823,000 ($1,637,000 after tax) of the specified reserve
      recorded in the second quarter to record the property at its net realizable
      value.  For more information related to the provision for loan losses,
      see the section titled “NON-PERFORMING ASSETS” on page 25 of this
      report.  The increase in the provision for loan loss was combined with
      a contraction in the net interest margin and an increase in noninterest expense
      which resulted in decreased net income for the nine months ended September
      30,
      2007 compared to the same time periods in 2006.  The decrease in net
      interest margin was primarily attributable to higher prevailing interest rates
      paid on deposits and a change in the deposit portfolio’s mix of
      deposits.  The increase in noninterest expense has primarily been
      driven by a specific reserve of $1,646,000 related to the unfunded commitments
      recorded in 2007 on the aforementioned housing development loan in Rocklin,
      California, related to mechanic's liens, increased costs associated with
      branch expansion, normal salary progression and acquisition
      expenses.  For more information related to the specific reserve
      recorded in noninterest expense, see the section titled “RESERVE FOR UNFUNDED
      COMMITMENTS” on page 28 of this report.




The
      Bank
      has opened nine new branch facilities in two years.  These new
      branches have increased salary and benefit costs attributable to the staffing
      for these branches, and the additional depreciation expense of capitalized
      equipment and new facilities.  The annualized return on average assets
      was 1.25% and .76% for the three and nine months ended September 30, 2007
      compared to 1.29% and 1.33% for the three and nine months ended September 30,
      2006.  The Company's annualized return on average equity was 15.66%
      and 9.39% for the three and nine months ended September 30, 2007 compared to
      17.05% and 17.91% for the three and nine months ended September 30,
      2006.




-14-




NET
      INTEREST INCOME




The
      Company's primary source of income is net interest income and represents 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 dates indicated.




**For
                the Three Months Ended September 30,**
            
            
            **For
                the Nine Months Ended September 30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **Percent
                Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **Percent
                Change**Total
                interest income
            
            $
            33,179
            
            
            $
            31,020
            
            
            
            6.9
            %
            
            $
            95,692
            
            
            $
            89,073
            
            
            
            7.4
            %Total
                interest expense
            
            
            15,218
            
            
            
            12,871
            
            
            
            18.2
            %
            
            
            43,989
            
            
            
            33,090
            
            
            
            32.9
            %**Net
                interest income:**
            
            **$**
            **17,961**
            
            
            **$**
            **18,149**
            
            
            ****
            **(1.0**
            **)%**
            
            **$**
            **51,703**
            
            
            **$**
            **55,983**
            
            
            ****
            **(7.6**
            **)%**







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 September 30,**
            
            
            **For
                the Nine Months Ended September 30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **Percent
                Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **Percent
                Change**Average
                interest-earning assets
            
            $
            1,744,977
            
            
            $
            1,674,083
            
            
            
            4.2
            %
            
            $
            1,721,541
            
            
            $
            1,639,476
            
            
            
            5.0
            %Average
                interest-bearing liabilities
            
            $
            1,496,922
            
            
            $
            1,384,793
            
            
            
            8.1
            %
            
            $
            1,467,260
            
            
            $
            1,345,609
            
            
            
            9.0
            %Average
                interest rate earned
            
            
            7.61
            %
            
            
            7.42
            %
            
            
            2.6
            %
            
            
            7.50
            %
            
            
            7.34
            %
            
            
            2.2
            %Average
                interest rate paid
            
            
            4.03
            %
            
            
            3.69
            %
            
            
            9.4
            %
            
            
            4.01
            %
            
            
            3.29
            %
            
            
            21.9
            %**Net
                interest margin:**
            
            ****
            **4.15**
            **%**
            
            ****
            **4.37**
            **%**
            
            ****
            **(5.0**
            **)%**
            
            ****
            **4.09**
            **%**
            
            ****
            **4.64**
            **%**
            
            ****
            **(12.0**
            **)%**




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 nine months ended September 30, 2007
      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 2007 was made possible by increased asset
      generation from our existing branch network with funding being provided from
      the
      reduction in federal funds sold and the issuance of other
      borrowings.  The increase in interest rates earned during 2007
      compared to the same period in 2006 was primarily the result of an increase
      in
      prevailing market interest rates.  Management believes that while
      deposit competition will likely continue, the dramatic increase in interest
      rates paid on deposits appears to have ended.  Short term interest
      rates for the three and nine months ended September 30, 2007 as compared to
      the
      same period in 2006 have increased as a result of the Federal Reserve Board’s
      Open Market Committee (FRBOMC) actions that increased short term rates through
      June 2006.  The FRBOMC reduced the fed funds rate by 50 basis points
      on September 18, 2007 and another 25 basis points on October 31,
      2007.  These reductions took place late in the third quarter and in
      the fourth quarter of 2007 and did not materially impact our third quarter
      financial results.




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 rates
      paid during the three and nine months ended September 30, 2007 when compared
      to
      2006 was primarily the result of an increase in prevailing interest rates and
      a
      change in the mix within the deposit portfolio.  The increase in
      interest-bearing liabilities during 2007 when compared to the same period in
      2006 was primarily the result of an increase in time and savings
      deposits.  The increase in savings deposits was primarily the result
      of a decision the Bank made in September of 2006 to retain deposits that the
      Bank swept out at the end of the day to other depository
      institutions.  This action allowed the Bank to retain $49,840,000 in
      savings deposits in September 2006, which grew to $91,152,000 at December 31,
      2006 and again grew to $104,115,000 as of September 30, 2007.  Average
      savings deposits accounted for 29% and 28% of the average deposit portfolio
      for
      the three and nine months ended September 30, 2007 compared to 23% and 25%
      for
      the same time periods in 2006.  The increase in time deposits in 2007
      was partially the result of customers reallocating funds from non-interest
      bearing demand deposit accounts to interest bearing time
      accounts.  The Bank has also increased market penetration into
      existing markets and expanded into new markets, which has increased deposits
      in
      the savings and time segments of the deposit portfolio.  One of the
      major causes for the increase was an increase in promotional rate programs
      established by the new branches in an effort to attract more
      business.  Management decided to reduce the amount of federal funds
      sold allowing the Bank to reduce high cost brokered time deposits to $2,606,000
      as of September 30, 2007 compared to $92,943,000 at December 31,
      2006.  Average time deposits accounted for 40% and 41% of the average
      deposit portfolio for the three and nine months ended September 30, 2007
      compared to 45% and 41% for the same time periods in 2006.  The
      decrease in the time deposit segment of the deposit portfolio was coupled with
      declines in the demand deposit segment of the deposit portfolio causing the
      average interest rate paid on interest bearing liabilities to increase to 4.03%
      and 4.01% for the three and nine months ended September 30, 2007 compared to
      3.69% and 3.29% for the same periods in 2006.




The
      net
      interest margin provides a measurement of the Company's ability to utilize
      funds
      profitably during the period of measurement.  The Company's decrease
      in the net interest margin for the three and nine months ended September 30,
      2007 when compared to the same periods in 2006 was primarily attributable to
      a
      larger percentage increase in yields paid for deposits than yields earned on
      loans.  Loans as a percentage of average interest-earning assets
      increased to 77% and 74% for the three and nine months ended September 30,
      2007
      as compared with 73% and 71% for the same time periods in 2006.  The
      increase in loans as a percentage of interest-earning assets is mainly
      attributable to increased loan production generated through our branch
      network.  For the three and nine months ended September 30, 2007
      average loans grew to $1,334,981,000 and $1,270,114,000 from $1,225,723,000
      and
      $1,168,887,000.  The increase in average loan growth equated to 8.9%
      and 8.7% respectively.  The loan growth occurred primarily in the
      non-residential real estate mortgage loan segment of the
      portfolio.  Net interest income and the net interest margin are
      presented in the table on pages 16 and 17 on a taxable-equivalent
      basis to consistently reflect income from taxable loans and securities and
      tax-exempt securities based on a 35% marginal federal tax rate.




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.  Non-accruing loans are included in the calculation of the
      average balances of loans, but the non-accrued interest on such loans is
      excluded


-15-





**AVERAGE
      BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS**




**Three
                Months Ended September 30, 2007**
            
            
            **Three
                Months Ended September 30, 2006***(Dollars
                in thousands)*
            
            **Average
                Balance**
            
            
            **Taxable
                Equivalent Interest**
            
            
            **Taxable
                Equivalent Yield/Rate**
            
            
            **Average
                Balance**
            
            
            **Taxable
                Equivalent Interest**
            
            
            **Taxable
                Equivalent Yield/Rate****Assets:**Federal
                funds sold
            
            $
            17,862
            
            
            $
            223
            
            
            
            4.95
            %
            
            $
            7,613
            
            
            $
            100
            
            
            
            5.21
            %Time
                deposits at other financial institutions
            
            
            100
            
            
            
            1
            
            
            
            3.97
            
            
            
            350
            
            
            
            5
            
            
            
            5.67Taxable
                investment securities  (1)
            
            
            294,858
            
            
            
            3,712
            
            
            
            4.99
            
            
            
            337,085
            
            
            
            3,959
            
            
            
            4.66Nontaxable
                investment securities (1)
            
            
            97,176
            
            
            
            1,124
            
            
            
            4.59
            
            
            
            103,312
            
            
            
            1,249
            
            
            
            4.80Loans,
                gross: (2)
            
            
            1,334,981
            
            
            
            28,422
            
            
            
            8.45
            
            
            
            1,225,723
            
            
            
            26,009
            
            
            
            8.42**Total
                interest-earning assets:**
            
            ****
            **1,744,977**
            
            
            ****
            **33,482**
            
            
            ****
            **7.61**
            
            
            ****
            **1,674,083**
            
            
            ****
            **31,322**
            
            
            ****
            **7.42**Allowance
                for loan losses
            
            
            (15,547
            )
            
            
            
            
            
            
            
            
            
            
            (14,868
            )Cash
                and due from banks
            
            
            44,731
            
            
            
            
            
            
            
            
            
            
            
            43,274Premises
                and equipment, net
            
            
            46,371
            
            
            
            
            
            
            
            
            
            
            
            37,647Interest
                receivable and other assets
            
            
            86,596
            
            
            
            
            
            
            
            
            
            
            
            73,820**Total
                assets:**
            
            **$**
            **1,907,128**
            
            
            
            
            
            
            
            
            
            
            **$**
            **1,813,956****Liabilities
                And Shareholders' Equity:**Negotiable
                order of withdrawal
            
            $
            232,859
            
            
            $
            792
            
            
            
            1.35
            
            
            $
            197,546
            
            
            $
            372
            
            
            
            0.75Savings
                deposits
            
            
            430,562
            
            
            
            3,778
            
            
            
            3.48
            
            
            
            333,695
            
            
            
            2,259
            
            
            
            2.69Time
                deposits
            
            
            597,518
            
            
            
            7,186
            
            
            
            4.77
            
            
            
            666,501
            
            
            
            7,507
            
            
            
            4.47**Total
                interest-bearing deposits:**
            
            ****
            **1,260,939**
            
            
            ****
            **11,756**
            
            
            ****
            **3.70**
            
            
            ****
            **1,197,742**
            
            
            ****
            **10,138**
            
            
            ****
            **3.36**Federal
                funds purchased
            
            
            816
            
            
            
            11
            
            
            
            5.35
            
            
            
            2,945
            
            
            
            40
            
            
            
            5.39Other
                borrowings
            
            
            203,207
            
            
            
            2,831
            
            
            
            5.53
            
            
            
            152,146
            
            
            
            2,026
            
            
            
            5.28Junior
                subordinated debentures
            
            
            31,960
            
            
            
            620
            
            
            
            7.70
            
            
            
            31,960
            
            
            
            667
            
            
            
            8.28**Total
                interest-bearing liabilities:**
            
            **$**
            **1,496,922**
            
            
            **$**
            **15,218**
            
            
            ****
            **4.03**
            
            
            **$**
            **1,384,793**
            
            
            **$**
            **12,871**
            
            
            ****
            **3.69**Noninterest-bearing
                deposits
            
            
            243,145
            
            
            
            
            
            
            
            
            
            
            
            276,923Accrued
                interest, taxes and other liabilities
            
            
            15,176
            
            
            
            
            
            
            
            
            
            
            
            15,471**Total
                liabilities:**
            
            **$**
            **1,755,243**
            
            
            
            
            
            
            
            
            
            
            **$**
            **1,677,187****Total
                shareholders' equity:**
            
            ****
            **151,885**
            
            
            
            
            
            
            
            
            
            
            ****
            **136,769****Total
                liabilities and shareholders' equity:**
            
            **$**
            **1,907,128**
            
            
            
            
            
            
            
            
            
            
            **$**
            **1,813,956****Net
                interest income and margin (3)**
            
            
            
            
            
            **$**
            **18,264**
            
            
            ****
            **4.15**
            **%**
            
            
            
            
            
            **$**
            **18,451**
            
            
            ****
            **4.37**
            **%**





(1)
            Tax-equivalent
                adjustments included in the nontaxable investment securities portfolio
                are
                $271,000 and $288,000 for the three months ended September 30, 2007
                and
                2006.  Tax equivalent adjustments included in the taxable
                investment securities created by a dividends received deduction were
                $32,000 and $14,000 for the three months ended September 30, 2007
                and
                2006.


(2)
            Amounts
                of interest earned included loan fees of $1,011,000 and $950,000
                and loan
                costs of $105,000 and $152,000 for the three months ended September
                30,
                2007 and 2006, respectively.


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




-16-


**AVERAGE
      BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS**




**Nine
                Months Ended September 30, 2007**
            
            
            **Nine
                Months Ended September 30, 2006***(Dollars
                in thousands)*
            
            **Average
                Balance**
            
            
            **Taxable
                Equivalent Interest**
            
            
            **Taxable
                Equivalent Yield/Rate**
            
            
            **Average
                Balance**
            
            
            **Taxable
                Equivalent Interest**
            
            
            **Taxable
                Equivalent Yield/Rate****Assets:**Federal
                funds sold
            
            $
            44,939
            
            
            $
            1,756
            
            
            
            5.22
            %
            
            $
            5,250
            
            
            $
            193
            
            
            
            4.92
            %Time
                deposits at other financial institutions
            
            
            223
            
            
            
            9
            
            
            
            5.40
            
            
            
            350
            
            
            
            14
            
            
            
            5.35Taxable
                investment securities  (1)
            
            
            307,240
            
            
            
            11,235
            
            
            
            4.89
            
            
            
            362,508
            
            
            
            12,609
            
            
            
            4.65Nontaxable
                investment securities (1)
            
            
            99,025
            
            
            
            3,548
            
            
            
            4.79
            
            
            
            102,481
            
            
            
            3,756
            
            
            
            4.90Loans,
                gross: (2)
            
            
            1,270,114
            
            
            
            80,068
            
            
            
            8.43
            
            
            
            1,168,887
            
            
            
            73,440
            
            
            
            8.40**Total
                interest-earning assets:**
            
            ****
            **1,721,541**
            
            
            ****
            **96,616**
            
            
            ****
            **7.50**
            
            
            ****
            **1,639,476**
            
            
            ****
            **90,012**
            
            
            ****
            **7.34**Allowance
                for loan losses
            
            
            (14,622
            )
            
            
            
            
            
            
            
            
            
            
            (15,074
            )Cash
                and due from banks
            
            
            43,692
            
            
            
            
            
            
            
            
            
            
            
            46,146Premises
                and equipment, net
            
            
            45,581
            
            
            
            
            
            
            
            
            
            
            
            33,733Interest
                receivable and other assets
            
            
            80,144
            
            
            
            
            
            
            
            
            
            
            
            69,644**Total
                assets:**
            
            **$**
            **1,876,336**
            
            
            
            
            
            
            
            
            
            
            **$**
            **1,773,925****Liabilities
                And Shareholders' Equity:**Negotiable
                order of withdrawal
            
            $
            230,732
            
            
            $
            2,214
            
            
            
            1.28
            
            
            $
            205,209
            
            
            $
            1,038
            
            
            
            0.68Savings
                deposits
            
            
            419,405
            
            
            
            10,798
            
            
            
            3.44
            
            
            
            353,195
            
            
            
            6,041
            
            
            
            2.29Time
                deposits
            
            
            626,809
            
            
            
            22,450
            
            
            
            4.79
            
            
            
            577,631
            
            
            
            17,749
            
            
            
            4.11**Total
                interest-bearing deposits:**
            
            ****
            **1,276,946**
            
            
            ****
            **35,462**
            
            
            ****
            **3.71**
            
            
            ****
            **1,136,035**
            
            
            ****
            **24,828**
            
            
            ****
            **2.92**Federal
                funds purchased
            
            
            387
            
            
            
            16
            
            
            
            5.53
            
            
            
            25,275
            
            
            
            914
            
            
            
            4.83Other
                borrowings
            
            
            157,967
            
            
            
            6,540
            
            
            
            5.54
            
            
            
            162,139
            
            
            
            5,942
            
            
            
            4.90Junior
                subordinated debentures
            
            
            31,960
            
            
            
            1,971
            
            
            
            8.25
            
            
            
            22,160
            
            
            
            1,407
            
            
            
            8.49**Total
                interest-bearing liabilities:**
            
            **$**
            **1,467,260**
            
            
            **$**
            **43,989**
            
            
            ****
            **4.01**
            
            
            **$**
            **1,345,609**
            
            
            **$**
            **33,091**
            
            
            ****
            **3.29**Noninterest-bearing
                deposits
            
            
            242,919
            
            
            
            
            
            
            
            
            
            
            
            281,828Accrued
                interest, taxes and other liabilities
            
            
            15,020
            
            
            
            
            
            
            
            
            
            
            
            15,169**Total
                liabilities:**
            
            **$**
            **1,725,199**
            
            
            
            
            
            
            
            
            
            
            **$**
            **1,642,606**Total
                shareholders' equity
            
            
            151,137
            
            
            
            
            
            
            
            
            
            
            
            131,319**Total
                liabilities and shareholders' equity:**
            
            **$**
            **1,876,336**
            
            
            
            
            
            
            
            
            
            
            **$**
            **1,773,925****Net
                interest income and margin (3)**
            
            
            
            
            
            **$**
            **52,627**
            
            
            ****
            **4.09**
            **%**
            
            
            
            
            
            **$**
            **56,921**
            
            
            ****
            **4.64**
            **%**





(1)
            Tax-equivalent
                adjustments included in the nontaxable investment securities portfolio
                are
                $860,000 and $879,000 for the nine months ended September 30, 2007
                and
                2006.  Tax equivalent adjustments included in the taxable
                investment securities created by a dividends received deduction were
                $52,000 and $64,000 for the nine months ended September 30, 2007
                and
                2006.


(2)
            Amounts
                of interest earned included loan fees of $3,013,000 and $2,805,000
                and
                loan costs of $364,000 and $377,000 for the nine months ended September
                30, 2007 and 2006, respectively.


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




-17-




NET
      INTEREST INCOME CHANGES DUE TO VOLUME AND RATE




The
      following table sets forth, for the periods indicated, a summary of the changes
      in interest earned and interest paid resulting from changes in average interest
      rates (Rate) and changes in average asset and liability balances (Volume) and
      the total net change in interest income and expenses on a tax equivalent
      basis.  The changes in interest due to both rate and volume have been
      allocated to rate and volume changes in proportion to the relationship of the
      absolute dollar amount of the change in each.





**Net
      Interest Income Variance Analysis:**


**Three
                Months Ended****September
                30, 2007 Compared to September 30, 2006*****(Amounts
                in thousands)***
            
            **Rate**
            
            
            **Volume**
            
            
            **Total****Increase
                (decrease) in interest  income:**Federal
                funds sold
            
            $
            (12
            )
            
            $
            135
            
            
            $
            123Time
                deposits at other institutions
            
            
            0
            
            
            
            (4
            )
            
            
            (4
            )Taxable
                investment securities
            
            
            249
            
            
            
            (496
            )
            
            
            (247
            )Tax-exempt
                investment securities
            
            
            (51
            )
            
            
            (74
            )
            
            
            (125
            )Loans
            
            
            95
            
            
            
            2,318
            
            
            
            2,413**Total:**
            
            **$**
            **281**
            
            
            **$**
            **1,879**
            
            
            **$**
            **2,160****Increase
                in interest expense:**Interest
                bearing demand
            
            $
            354
            
            
            $
            66
            
            
            $
            420Savings
                deposits
            
            
            863
            
            
            
            656
            
            
            
            1,519Time
                deposits
            
            
            456
            
            
            
            (777
            )
            
            
            (321
            )Federal
                funds purchased
            
            
            0
            
            
            
            (29
            )
            
            
            (29
            )Other
                borrowings
            
            
            125
            
            
            
            680
            
            
            
            805Junior
                subordinated debentures
            
            
            (47
            )
            
            
            0
            
            
            
            (47
            )**Total:**
            
            ****
            **1,751**
            
            
            ****
            **596**
            
            
            ****
            **2,347****Decrease
                in net interest income:**
            
            **$**
            **(1,470**
            **)**
            
            **$**
            **1,283**
            
            
            **$**
            **(187**
            **)**







**Nine
                Months Ended****September
                30, 2007 Compared to September 30, 2006***(Amounts
                in thousands)*
            
            **Rate**
            
            
            **Volume**
            
            
            **Total****Increase
                (decrease) in interest  income:**Federal
                funds sold
            
            $
            104
            
            
            $
            1,459
            
            
            $
            1,563Time
                deposits at other institutions
            
            
            0
            
            
            
            (5
            )
            
            
            (5
            )Taxable
                investment securities
            
            
            548
            
            
            
            (1,922
            )
            
            
            (1,374
            )Tax-exempt
                investment securities
            
            
            (81
            )
            
            
            (127
            )
            
            
            (208
            )Loans
            
            
            268
            
            
            
            6,360
            
            
            
            6,628**Total:**
            
            **$**
            **839**
            
            
            **$**
            **5,765**
            
            
            **$**
            **6,604****Increase
                in interest expense:**Interest
                bearing demand
            
            $
            1,047
            
            
            $
            129
            
            
            $
            1,176Savings
                deposits
            
            
            3,625
            
            
            
            1,132
            
            
            
            4,757Time
                deposits
            
            
            3,190
            
            
            
            1,511
            
            
            
            4,701Federal
                funds purchased
            
            
            2
            
            
            
            (900
            )
            
            
            (898
            )Other
                borrowings
            
            
            751
            
            
            
            (153
            )
            
            
            598Junior
                subordinated debentures
            
            
            (58
            )
            
            
            622
            
            
            
            564**Total:**
            
            ****
            **8,557**
            
            
            ****
            **2,341**
            
            
            ****
            **10,898****Decrease
                in net interest income:**
            
            **$**
            **(7,718**
            **)**
            
            **$**
            **3,424**
            
            
            **$**
            **(4,294**
            **)**





-18-




PROVISION
      FOR LOAN LOSSES





The
      provision for loan losses was $732,000 and $4,645,000 for the three and nine
      months ended September 30, 2007 compared to $200,000 and $400,000 for the three
      and nine months ended September 30, 2006, this represents an increase of
      $532,000 and $4,245,000 in 2007 compared to 2006. For an explanation of the
      increase in the provision for loan losses during 2007, see "ALLOWANCE FOR LOAN
      LOSSES" elsewhere herein.  As of September 30, 2007 the allowance for
      loan losses was $15,285,000 or 1.12% of total loans compared to $14,031,000
      or
      1.15% of total loans as of December 31, 2006.  At September 30, 2007,
      non-performing assets totaled $12,734,000 or 0.65% of total assets,
      non-performing loans totaled $3,284,000 or 0.24% of total gross loans and the
      allowance for loan losses totaled 465.44% of non-performing loans.  At
      December 31, 2006, non-performing assets totaled $2,435,000 or 0.12% of total
      assets, non-performing loans totaled $2,375,000 or 0.19% of total gross loans
      and the allowance for loan losses totaled 590.78% of non-performing
      loans.  No assurance can be given that non-performing loans will not
      increase or that the allowance for loan losses will be adequate to cover losses
      inherent in the loan portfolio.  For more information related to
      non-performing loans, see the section titled “NON-PERFORMING ASSETS” on
      page 25 of this report.







NON-INTEREST
      INCOME





Non-interest
      income increased by $1,960,000 and $2,499,000 or 62% and 27% to $5,116,000
      and
      $11,709,000 for the three and nine months ended September 30, 2007,
      respectively, compared to the same time periods in 2006.  Service
      charges on deposit accounts increased by $491,000 and $1,359,000 or 32% and
      30%
      to $2,041,000 and $5,834,000 for the three and nine months ended September
      30,
      2007, respectively, compared with the same periods in 2006.  The
      increase in service charges on deposit accounts for the three and nine month
      periods was the result of increased Bank focus on service charges as a way
      to
      increase non-interest income and a greater number of accounts opened than closed
      that incur service charges.  The gain on sale of securities increased
      by $835,000 and $213,000 compared to same time periods of 2006.  The
      increase of $100,000 and $338,000 for the three and nine months ended September
      30, 2007 in cash surrender value of life insurance policies was the result
      of
      higher average earning balances compared to the same time periods in
      2006.  Income on bank owned life insurance policy increased by
      $814,000 for three and nine months ended September 30, 2007.  Other
      categories of noninterest income had normal fluctuations in the ordinary course
      of business.








NON-INTEREST
      EXPENSE





Non-interest
      expenses increased by $2,364,000 and $6,835,000 or 18% for both periods to
      $15,356,000 and $45,409,000 for the three and nine months ended September 30,
      2007 compared to the same time periods in 2006.  The primary
      components of non-interest expenses were salaries and employee benefits,
      premises and occupancy expenses, equipment depreciation expense, communication
      expenses, professional fees, supplies expenses, marketing expenses, intangible
      amortization and other operating expenses which include the provision for
      unfunded commitments.





Salaries
      and related expenses increased by $313,000 and $1,396,000 or 4% and 6% to
      $7,606,000 and $22,883,000 for the three and nine months ended September 30,
      2007.  This compares to the $7,293,000 and $21,487,000 for the same
      time periods in 2006.  The increase was primarily the result of normal
      salary progression, increased support staff used to support branch operations,
      the staffing of new branch offices, regulatory compliance support functions,
      and
      increased expense in 2007 associated with share-based payment as part of
      salaries and related benefits.  Share-based payment expense increased
      $86,000 and $501,000 for the three and nine months ended September 30, 2007
      compared to the same time periods in 2006.  Premises and occupancy
      expense increased by $413,000 and $1,274,000 or 29% and 33% for the three and
      nine months ended September 30, 2007 compared to the same time periods in
      2006.  The primary reason for the increase in 2007 was related to the
      opening of new branch facilities in 2006 and 2007.  Equipment expense
      increased by $286,000 and $732,000 or 26% and 23% for the three and nine months
      ended September 30, 2007 compared to the same time periods in
      2006.  The increase in equipment depreciation expense is related to
      the opening of new facilities and equipment upgrades in existing
      facilities.  When comparing the results for the three and nine months
      ended September 30, 2007 to the same periods in 2006, professional fees
      increased by $747,000 and $943,000 or 156% and 48%, respectively.  The
      increase in professional fees is primarily attributable to increased fees
      associated with merger and acquisition activity which did not occur in
      2006.  Legal and consulting fees associated with merger and
      acquisition activity were $297,000 and $418,000 for the three and nine months
      ended September 30, 2007.  Marketing expense increased primarily due
      to a marketing campaign of the thirty year anniversary of the Bank and certain
      time deposit promotions.  Supplies expense decreased primarily because
      of increased attention to use of supplies and conservation.  Other
      expenses increased primarily due to the provision for unfunded commitments
      increasing by $214,000 and $1,797,000 to $195,000 and $1,790,000 for the three
      and nine months ended September 30, 2007 compared to a reduction of $19,000
      and
      $7,000 recorded for the three and nine months ended September 30,
      2006.  The increase in the provision for unfunded commitments in the
      three month ended September 30, 2007 was primarily driven by an increase of
      $127,000 for mechanics liens that have been placed against and an additional
      $136,000 recorded for unfunded loan commitments.  For more information
      related to the non-performing construction loan, see the section titled
“NON-PERFORMING ASSETS” on page 28 or for more information related to the
      provision for unfunded commitments, see the section titled “RESERVE FOR UNFUNDED
      COMMITMENTS” on page 28.  Community support donations decreased
      primarily because they are provided as a percentage of income and have decreased
      as earnings have decreased.




-19-




PROVISION
      FOR INCOME TAXES




The
      Company recorded a decrease in the provision for income taxes of $1,291,000
      and
      $5,835,000 or 57% and 68% for the three and nine months ended September 30,
      2007
      compared to the expense recorded for the same time periods in
      2006.  The Company recorded an effective tax rate of 14% and 21% for
      the three and nine months ended September 30, 2007.  For the same time
      periods in 2006, the Company recorded an effective tax rate of 28% and
      33%.  The decrease in the effective tax rate is the result of
      nontaxable income representing a greater percentage of income before taxes
      and
      the recognition of increasing tax credits related to investments in housing
      tax
      credit limited partnerships.  The company had a tax benefit of
      $182,000 resulting from “true-up” of the 2006 accounting estimate with actual
      tax returns filed in the third quarter and a tax valuation reserve reversal
      of
      $160,000.  In the third quarter of 2007, the Bank also recorded a
      tax-free insurance benefit payment of $993,000.




Effective
      January 1, 2007, we adopted FASB Interpretation No. 48, *Accounting for
      Uncertainty in Income Taxes* (FIN 48). FIN 48 prescribes a
      more-likely-than-not threshold for financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      This interpretation also provides guidance on derecognition of income tax assets
      and liabilities, classification of current and deferred income tax assets and
      liabilities, accounting for interest and penalties associated with tax
      positions, accounting for income taxes in interim periods and income tax
      disclosures.  We
      recognize both interest and penalties as a component of income tax
      expense.  The Company did not have any accrued interest or penalties
      due to tax authorities at adoption or September 30, 2007.The
      Company has not recorded any cumulative effects of applying this interpretation
      as those positions that do not meet the threshold are not material to the
      Company's financial statements and due to management’s belief that all of the
      Company’s material tax positions are more-likely-than-not to be upheld, and
      fully realized upon audit.  The Company files a consolidated
      federal income tax return and the Company files income tax returns in the State
      of California.  The Bank is not subject to federal income tax
      examinations for taxable years prior to 2003, or state examinations prior to
      2002.




**Financial
      Condition**




Total
      assets at September 30, 2007 were $1,947,515,000, a decrease of $14,024,000
      or
      1% compared with total assets of $1,961,539,000 at December 31,
      2006.  Net loans were $1,348,953,000 at September 30, 2007, an
      increase of $138,223,000 or 11% compared with net loans of $1,210,730,000 at
      December 31, 2006.  Deposits were $1,531,249,000 at September 30,
      2007, a decrease of $84,092,000 or 5% compared with deposits of $1,615,341,000
      at December 31, 2006.  The decrease in total assets of the Company
      between December 31, 2006 and September 30, 2007 was primarily the result of
      federal funds sold being reduced by $137,800,000 to retire brokered deposits
      and
      fund reductions in other areas of the deposit portfolio.  For further
      information on the reduction of brokered deposits, see the “NET INTEREST INCOME”
section on page 17 of this report.




Total
      shareholders' equity was $156,104,000 at September 30, 2007, an increase of
      $8,524,000 or 6% from the $147,580,000 at December 31, 2006. The growth in
      shareholders’ equity between December 31, 2006 and September 30, 2007 was
      primarily achieved through the retention of accumulated earnings.




-20-




OFF-BALANCE
      SHEET COMMITMENTS




The
      following table shows the distribution of the Company's undisbursed loan
      commitments at the dates indicated.





September
                30,
            
            
            December
                31,*(In
                thousands)*
            
            2007
            
            
            2006Letters
                of credit
            
            $
            6,815
            
            
            $
            6,739Commitments
                to extend credit
            
            
            416,953
            
            
            
            445,189Total
            
            $
            423,768
            
            
            $
            451,928





As
      a
      financial services provider, the Bank routinely commits 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 the Bank’s loans.





RETIREMENT
      PLANS





The
      Company has a supplemental retirement plan covering fourteen current and former
      executive officers. This plan is a nonqualified defined benefit plan and is
      unsecured and unfunded. The Company has purchased insurance on the lives of
      the
      participants and intends to use the death benefits of these policies to offset
      the related retirement obligations.  For more information on the life
      insurance plans, see the section titled “CASH VALUE OF LIFE INSURANCE” contained
      in this report.





The
      following table sets forth the net periodic benefit cost recognized for the
      plan:





*(Dollars
                in thousands)*
            
            Three
                Months Ended September 30, 2007
            
            
            Nine
                Months Ended September 30, 2007Net
                pension cost included the following components:Service
                cost-benefits earned during the period
            
            $
            75
            
            
            $
            232Interest
                cost on projected benefit obligation
            
            
            53
            
            
            
            159Net
                periodic pension cost
            
            $
            128
            
            
            $
            391





During
      the nine months ended September 30, 2007, the Company contributed and paid
      out
      as benefits $112,000 to participants under the plan. For the year ending
      December 31, 2007, the Company expects to contribute and pay out as benefits
      $150,000 to participants under the plans.





CASH
      VALUE OF LIFE INSURANCE




The
      Bank
      maintains certain cash surrender value life insurance policies to, among other
      things, partially offset the cost of employee and director benefit
      programs.  The policies are also associated with a supplemental
      retirement plan for the Bank's executive management and deferred retirement
      benefits for participating board members.  The Bank has purchased
      insurance on the lives of the participants and intends to hold these policies
      until their death to obtain the death proceeds associated with the
      policies.  Income from these policies is reflected in non-interest
      income.  At September 30, 2007, the Bank held $43,574,000 in cash
      surrender value of life insurance, an increase of $523,000 from the $43,051,000
      maintained at December 31, 2006.




The
      Bank
      is the owner and beneficiary of life insurance policies on a former employee
      of
      the Bank who passed away in August 2007.  The Bank recorded a gain of
      $993,000 from the policies, or approximately $0.09 per diluted share in the
      third quarter.




-21-




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
      built.  The Bank had invested $12,304,000 and was committed to invest
      an additional amount of $1,496,000 in these partnerships as of September 30,
      2007.





INVESTMENT
      SECURITIES





At
      September 30, 2007 the Bank’s investment 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 indices 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.





The
        Company’s investment portfolio consists of Mortgage backed securities, US
        Government Agencies, Collateralized Mortgage Obligations, Municipal securities,
        preferred stock, and other securities/debt.  The majority of the
        Company’s investments are with government sponsored entities. Specifically,
        FHLMC, FNMA, FHLB, FFCB.  All of our MBS & CMOs, except for the
        two whole loan CMOs, also are with government sponsored entities (GNMA,
        FHLMC or FNMA).  The two whole loan CMOs, do not appear to have
        subprime exposure, as such, Management does not believe the investments are
        other than temporarily impaired.  All of our municipals have an A
        rating or higher and most are AAA rating either implicitly or are insured
        by a
        third party.   For those investments with a fair value below cost,
        Management has the intent and the ability to hold for
        recoverability.
  
  DERIVIATIVE
      INSTRUMENTS





Statement
      of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
      and Hedging Activities (SFAS 133), as amended and interpreted, establishes
      accounting and reporting standards for derivative instruments, including certain
      derivative instruments embedded in other contracts, and for hedging
      activities.  As required by SFAS 133, the Company records all
      derivatives on the balance sheet at fair value.  The accounting for changes
      in the fair value of derivatives depends on the intended use of the derivative
      and the resulting designation.  Derivatives used to hedge the exposure
      to changes in the fair value of an asset, liability, or firm commitment
      attributable to a particular risk, such as interest rate risk, are considered
      fair value hedges.  Derivatives used to hedge the exposure to
      variability in expected future cash flows, or other types of forecasted
      transactions, are considered cash flow hedges.  To qualify for hedge
      accounting, the Company must comply with the detailed rules and strict
      documentation requirements at the inception of the hedge, and hedge
      effectiveness is assessed at inception and periodically throughout the life
      of
      each hedging relationship.




The
      Company’s objective in using derivatives is to reduce its exposure to
      variability in cash flows relating to receipts on its prime-based variable-rate
      loans.  To accomplish this objective, the Company uses an interest
      rate floor contract to protect the Company against movements in interest rates
      below the floor’s strike rate over the life of the agreement.  The
      interest rate floor contract is with Wachovia Bank and is effective from October
      1, 2005 until September 1, 2010.  The contract’s cost was $1,270,000,
      and that cost is being amortized over the life of the contract.  The
      notional amount of the floor is $100,000,000 with a strike rate of 6.5% vs.
      the
      prime rate as published in the H15 bulletin from the Federal Reserve Bank for
      the first of each month.  The interest rate floor contract is
      designated as a cash flow hedge of the overall changes in cash flows below
      the
      interest rate floor contract’s strike rate of 6.5% on the Company’s designated
      prime-based interest receipts.  The hedged transactions are the
      forecasted interest receipts of the first prime-based interest payments received
      by the Company on designated prime-based loans each calendar month that, in
      aggregate for each month, are interest payments on $100 million principal of
      the
      Company’s then-existing pool of designated prime-based loans that reset on the
      first of every month.  With respect to the $100 million principal of
      the Company’s then existing pool of designated prime-based loans, the interest
      floor contract specifically designates the hedged transaction to be (i) for
      the
      first $1 million of the $100 million of floor notional:  the first
      prime-based interest payments received by the Company each calendar month until
      the maturity date of the floor that, in the aggregate for each period, are
      interest payments on $1 million principal of its then-existing prime-based
      loans
      that reset on the 1st of each
      month and
      with a 0.25% spread below prime (the “hedged transactions” for this portion of
      the floor); (ii) for the next $20 million of the $100 million of floor
      notional:  the first prime-based interest payments received by the
      Company each calendar month until the maturity date of the floor that, in the
      aggregate for each period, are interest payments on $20 million principal of
      its
      then-existing prime-based loans that reset on the 1st of each
      month and
      with a 0.00% spread to prime (the “hedged transactions” for this portion of the
      floor); (iii) for the next $2 million of this $100 million of floor
      notional:  the first prime-based interest payments received by the
      Company each calendar month until the maturity date of the floor that, in the
      aggregate for each period, are interest payments on $2 million principal of
      its
      then-existing prime-based loans that reset on the 1st of each
      month and
      with a 0.25% spread over prime (the “hedged transactions” for this portion of
      the floor);  (iv) for the next $17 million of the $100 million of
      floor notional:  the first prime-based interest payments received by
      the Company each calendar month until the maturity date of the floor that,
      in
      the aggregate for each period, are interest payments on $17 million principal
      of
      its then-existing prime-based loans that reset on the 1st of each
      month and
      with a 0.50% spread over prime (the “hedged transactions” for this portion of
      the floor);  (v) for the next $5 million of the $100 million of floor
      notional:  the first prime-based interest payments received by the
      Company each calendar month until the maturity date of the floor that, in the
      aggregate for each period, are interest payments on $5 million principal of
      its
      then-existing prime-based loans that reset on the 1st of each
      month and
      with a 0.75% spread over prime (the “hedged transactions” for this portion of
      the floor);  (vi) For the next $28 million of the $100 million of
      floor notional:  the first prime-based interest payments received by
      the Company each calendar month until the maturity date of the floor that,
      in
      the aggregate for each period, are interest payments on $28 million principal
      of
      its then-existing prime-based loans that reset on the 1st of each
      month and
      with a 1.00% spread over time (the “hedged transactions” for this portion of the
      floor);  (vii) for the next $12 million of the $100 million of floor
      notional:  the first prime-based interest payments received by the
      Company each calendar month until the maturity date of the floor that, in the
      aggregate for each period, are interest payments on $12 million principal of
      its
      then-existing prime-based loans that reset on the 1st of each
      month and
      with a 1.25% spread over time (the “hedged transactions” for this notional of
      the floor);  (viii) for the remaining $15 million of the $100 million
      of floor notional:  the first prime-based interest payments received
      by the Company each calendar month until the maturity date of the floor that,
      in
      the aggregate for each period, are interest payments on $15 million principal
      of
      its then-existing prime-based loans that reset on the 1st of each
      month and
      with a  1.50% spread over time (the “hedged transactions” of this
      portion of the floor).  The designation described above is consistent
      with the approach outlined in DIG Issue No. G25.  DIG Issue No. G25
      addresses the “first-payments-received technique” for identifying the hedged
      forecasted transactions in a cash flow hedge of the variable prime-based or
      other variable non-benchmark-rate-based interest payments for a rolling
      portfolio of prepayable interest-bearing financial assets or
      liabilities.  The pool of designated prime-based loans being hedged
      contains no optionality (no embedded caps or floors).  During 2007 and
      2006, the floor contract was used to hedge the variable cash flows associated
      with existing variable-rate loan assets that are based on the prime
      rate.  For accounting purposes, the interest floor contract is
      designated as a cash flow hedge of the overall changes in cash flows on the
      first prime-based interest payments received by the Company each calendar month
      during the term of the hedge that, in aggregate for each period, are interest
      payments on principal from specified portfolios equal to the notional amount
      of
      the floor.  For more information on the interest rate floor see the
      Note 1 in the derivative instruments and hedging activities section of the
      Company’s 2006 Annual Report and Form 10-K.





-22-




Both
      prospective and retrospective assessments of hedge effectiveness are based
      on
      the approach described in SFAS 133 Implementation Issue No. G20, “Assessing and
      Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge”
(Issue G20) at inception and on an ongoing basis.  Under this
      approach, the assessment of hedge effectiveness is based on total changes in
      the
      option’s cash flows.  The Company performs its effectiveness
      assessments and measures ineffectiveness by comparing the actual option with
      a
      hypothetically perfect option, as discussed in Issue G20.  Prospective
      and retrospective assessments of hedge effectiveness and measurements of hedge
      ineffectiveness are performed on a quarterly basis, when financial statements
      are reported.  The effective portion of changes in the fair value of
      the derivative is initially reported in other comprehensive income (outside
      of
      earnings) and subsequently reclassified to earnings (“interest and fees on
      loans” for the hedging relationship described above) when the hedged
      transactions affect earnings.  Ineffectiveness resulting from the
      hedge, if any, is recorded as a gain or loss in the consolidated statement
      of
      income and comprehensive income as part of noninterest income or noninterest
      expense.  The Company also monitors the risk of counterparty default
      on an ongoing basis.





Prepayments
      in hedged loan portfolios are treated in a manner consistent with the guidance
      in SFAS 133 Implementation Issue No. G25, “Cash Flow Hedges: Using the
      First-Payments-Received Technique in Hedging the Variable Interest Payments
      on a
      Group of Non-Benchmark-Rate-Based Loans,” which allows the designated forecasted
      transactions to be the variable prime-rate-based interest payments on a rolling
      portfolio of prepayable interest-bearing loans using the first-payments-received
      technique, thereby allowing interest payments from prime-based loans that prepay
      to be replaced with interest payments from newly originated prime-based
      loans.





As
      of
      September 30, 2007, no derivatives were designated as fair value hedges or
      hedges of net investments in foreign operations.  Additionally, the
      Company does not use derivatives for trading or speculative
      purposes.





To
      the
      extent the hedging relationship is effective, changes in the fair value of
      the
      floor each period will be deferred in accumulated other comprehensive income
      (AOCI), and the floor purchase price will be reclassified from AOCI to earnings
      (amortized) as adjustments to interest income on loans.





The
      increase of $295,000 or 94% in the fair value of the interest rate floor between
      December 31, 2006 and September 30, 2007 was primarily the result of a changing
      interest rate environment which caused a corresponding increase in the
      probability that the Company will receive future cash inflows related to this
      contract.  The Company recorded a reduction of interest income of
      $47,000 and $129,000 for the three and nine month ended September 30, 2007
      related to the amortization of the interest rate floor.  The Company
      recorded the reduction as a reclassification from other comprehensive income
      of
      $74,000 with a tax benefit of $54,000 for the nine months ended September 30,
      2007.  The Company recorded a reduction of interest income in the nine
      months of 2006 of $27,000 related to the amortization of the interest rate
      floor.  The Company recorded the reduction as a reclassification from
      other comprehensive income of $7,000 with a tax benefit of $5,000 in the nine
      months of 2006.  In the second quarter of 2007 the hedge became
      partially ineffective, requiring the Company under SFAS 133 to record a charge
      of $117,000 in noninterest expense.  The Company recorded the expense
      as a reclassification from AOCI of $68,000 with a tax benefit of
      $49,000.





In
      the
      third quarter of 2007, the Company expanded the scope of the loans and
      redesignated the hedge.   When the floor is redesignated in a new
      hedging relationship, the prospective impact (if there is no ineffectiveness
      noted in the analysis) would mirror hedge accounting with no ineffectiveness.
      However, the amortization now consists of two components: the new hedging
      relationship and the adjusted old hedging relationship.  At the time
      of redesignation, the floor will move from its value on that date to zero;
      therefore, the amount reclassified to AOCI over its remaining life will equal
      that value and must be amortized to interest income so that AOCI is zero at
      maturity.





At
      the
      same time, however, the cumulative AOCI balance includes an amount related
      to
      the “old” hedging relationship ($234,000), which must also be amortized to
      interest income.  If the hedged forecasted transactions for the
      original hedging relationship are probable of occurring, then the amounts in
      AOCI related to the old hedging relationship continue to be amortized to
      interest income. However, if the originally designated forecasted transactions
      become probable of not occurring, then the amounts deferred in AOCI related
      to
      those transactions should be reclassified to earnings immediately.





-23-




The
      amounts deferred in AOCI related to the “old” hedging relationship will continue
      to be monitored through the maturity date of the floor to ensure that the
      amortization to earnings of the balance does not need to be
      accelerated.





The
      fair
      value and notional amounts for the cash flow hedge at September 30, 2007 and
      December 31, 2006 are presented below.


September
                30, 2007
            
            
            December
                31, 2006*(Dollars
                in thousands)*
            
            Fair
                Value
            
            
            Notional
                Amount
            
            
            Fair
                Value
            
            
            Notional
                AmountPurchased
                option, interest rate floor
            
            $
            609
            
            
            $
            100,000
            
            
            $
            314
            
            
            $
            100,000







LOANS





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





As
      a
      result of the Company’s loan portfolio mix, the future quality of these assets
      could be affected by any adverse trends in its geographic market or in the
      broader economy. These trends are beyond the control of the
      Company.





The
      Bank’s business activity is with customers located primarily in the counties of
      Fresno, Madera, Mariposa, Merced, Sacramento, San Francisco, San Joaquin,
      Stanislaus, Santa Clara and Tuolumne in the state of California. The consumer
      and small business loan portfolio consists of loans to small businesses, home
      equity, credit cards and the purchase of financing contracts principally from
      automobile and recreational vehicle dealers. Individual loans and lines of
      credit are made in a variety of ways. In many cases collateral such as real
      estate, automobiles and equipment are used to support the extension of credit.
      Repayment, however, is largely dependent upon the borrower’s cash
      flow.





Commercial
      lending activities are spread across a wide spectrum of customers including
      loans to businesses, construction and permanent real estate financing, short
      and
      long term agricultural loans for production and real estate purposes and SBA
      financing. In most cases, collateral is taken to secure and reduce the Bank’s
      credit risk.  Each loan is submitted to an individual risk grading process
      as part of the Bank’s underwriting, but the borrowers’ ability to repay is
      dependent, in part, upon factors affecting the local and national
      economies.




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




*(Dollars
                in thousands)*
            
            September
                30, 2007
            
            
            December
                31, 2006**Loan
                Categories:**
            
            Dollar
                Amount
            
            
            Percent
                of loans
            
            
            Dollar
                Amount
            
            
            Percent
                of loansCommercial
            
            $
            365,633
            
            
            
            27
            %
            
            $
            320,121
            
            
            
            26
            %Agricultural
            
            
            86,318
            
            
            
            6
            
            
            
            81,568
            
            
            
            7Real
                estate construction
            
            
            143,047
            
            
            
            11
            
            
            
            136,152
            
            
            
            11Real
                estate construction residential
            
            
            38,564
            
            
            
            3
            
            
            
            41,081
            
            
            
            3Real
                estate mortgage
            
            
            605,875
            
            
            
            44
            
            
            
            502,355
            
            
            
            41Real
                estate mortgage residential
            
            
            26,648
            
            
            
            2
            
            
            
            39,725
            
            
            
            3Consumer
            
            
            98,153
            
            
            
            7
            
            
            
            103,759
            
            
            
            9Total
            
            
            1,364,238
            
            
            
            100
            %
            
            
            1,224,761
            
            
            
            100
            %Less
                allowance for loan losses
            
            
            (15,285
            )
            
            
            
            
            
            
            (14,031
            )**Net
                loans**
            ****
            **$**
            **1,348,953**
            ****
            ****
            ****
            ****
            ****
            ****
            **$**
            **1,210,730**
            ****
            ****
            ****





-24-




The
      Bank’s loan portfolio continues to be well diversified in terms of loan products
      and geography.  The Bank does not originate single family residential
      loans for the loan portfolio but merely functions in a loan brokerage
      capacity.  The Bank does not carry any sub-prime residential loans in
      its portfolio.  Our total residential real estate exposure totals $65
      million (residential mortgages and liens on residential properties of $6
      million, $20 million in home equity lines and residential construction loans
      of
      $39 million), or 5% of our loans.  It is also important to note that
      the Bank has never incurred a loss in our home equity portfolio.  The
      Bank’s agricultural loans aggregate $86 million or 6% of our loans and include
      no citrus or poultry exposures as of September 30, 2007.  While we are
      headquartered in Merced County, more than 70% of our real estate loans are
      located outside of Merced County.




The
      table
      that follows shows the regional distribution of the portfolio of real estate
      construction, real estate residential construction, real estate mortgage, and
      real estate residential mortgage on September 30, 2007.





*(Dollars
                in thousands)*
            
            San
                Francisco Bay Area
            
            
            Merced/
              Mariposa
            
            
            Stockton/
              Modesto
            
            
            Sacramento
            
            
            Fresno/
              Bakersfield
            
            
            All
                Other
            
            
            TotalReal
                estate construction
            
            $
            23,201
            
            
            $
            28,749
            
            
            $
            35,371
            
            
            $
            18,969
            
            
            $
            36,757
            
            
            $
            -
            
            
            $
            143,047Real
                estate construction residential
            
            
            6,090
            
            
            
            6,256
            
            
            
            5,007
            
            
            
            5,601
            
            
            
            15,610
            
            
            
            -
            
            
            
            38,564Real
                estate mortgage
            
            
            50,660
            
            
            
            190,982
            
            
            
            186,657
            
            
            
            49,237
            
            
            
            98,185
            
            
            
            30,154
            
            
            
            605,875Real
                estate mortgage residential
            
            
            742
            
            
            
            12,423
            
            
            
            7,865
            
            
            
            647
            
            
            
            4,971
            
            
            
            -
            
            
            
            26,648**Total**
            ****
            **$**
            **80,693**
            ****
            ****
            **$**
            **238,410**
            ****
            ****
            **$**
            **234,900**
            ****
            ****
            **$**
            **74,454**
            ****
            ****
            **$**
            **155,523**
            ****
            ****
            **$**
            **30,154**
            ****
            ****
            **$**
            **814,134**Owner
                occupied
            
            
            19,202
            
            
            
            115,571
            
            
            
            91,063
            
            
            
            35,568
            
            
            
            71,478
            
            
            
            12,394
            
            
            
            345,276Non-owner
                occupied
            
            $
            61,491
            
            
            $
            122,839
            
            
            $
            143,837
            
            
            $
            38,886
            
            
            $
            84,045
            
            
            $
            17,760
            
            
            $
            468,858





NON-PERFORMING
      ASSETS





Non-performing
      assets include non-accrual loans, loans 90 days or more past due, restructured
      loans and other real estate owned.




Non-performing
      loans are those in which the borrower fails to perform in accordance with the
      original terms of the obligation and include loans on non-accrual status, loans
      past due 90 days or more and restructured loans.  The Bank generally
      places loans on non-accrual 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 are
      adequately secured and, in the opinion of management, is deemed in the process
      of collection.  Interest income on non-accrual 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 non-accrual 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.




-25-




The
      following table summarizes non-performing assets of the Company at September
      30,
      2007 and December 31, 2006:


September
                30, 2007
            
            
            December
                31, 2006*(Dollars
                in thousands)*Non-accrual
                loans
            
            $
            3,156
            
            
            $
            2,375Accruing
                loans past due 90 days or more
            
            
            128
            
            
            
            -Total
                non-performing loans
            
            
            3,284
            
            
            
            2,375Other
                real estate owned
            
            
            9,450
            
            
            
            60**Total
                non-performing assets**
            ****
            **$**
            **12,734**
            ****
            ****
            **$**
            **2,435**Non-performing
                loans to total loans
            
            
            0.24
            %
            
            
            0.19
            %Non-performing
                assets to total assets
            
            
            0.65
            %
            
            
            0.12
            %





During
      the first nine months of 2007, eight customers with loans that totaled
      $15,654,000 were placed on non-accrual status, while ten customers with loans
      that totaled approximately $14,873,000 were removed from non-accrual
      status.




The
      increase in non-accrual loans of $781,000 between September 30, 2007 and
      December 31, 2006 was primarily the result of a problem with specific customers
      and not a general degradation of overall credit quality in the
      portfolio.  During the third quarter of 2007, the Bank recorded a
      charge off against the specific reserve taken in the second quarter of
      $2,833,000 in the allowance for loan losses.  A specific reserve of
      $1,646,000 was recorded in unfunded commitments related to a construction loan
      in Rocklin, California.  The specific reserve related to unfunded
      commitments was recorded to recognize the Bank’s estimate of liability for
      mechanic liens placed against the property.  For more information on
      the specific reserve related to the mechanic liens, see the section titled
      “RESERVE FOR UNFUNDED COMMITMENTS” on page 28 of this report.  In
      the third quarter, Management received a third party appraisal on this property
      and concluded that a reserve should be established for this property based
      on
      the market value which is what willing market participants would pay for the
      property at the time.  Subsequent to the end of the second quarter,
      the Bank foreclosed on the property on July 25, 2007 and charged-off $2,833,000
      of the specific reserve recorded in the second quarter related to the
      loan.  The charge-off resulted in the property being recorded at a net
      realizable value of $9,389,000.




Contractual
      accrued interest income on loans on non-accrual status as of September 30,
      2007
      and December 31, 2006, which would have been recognized if the loans had been
      current in accordance with their original terms, was approximately $163,000
      and
      $137,000, respectively.




At
      September 30, 2007, non-performing assets represented 0.65% of total assets,
      an
      increase of 53 basis points when compared to the 0.12% at December 31,
      2006.  Non-performing loans represented 0.24% of total gross loans at
      September 30, 2007, an increase of 5 basis points compared to the 0.19% at
      December 31, 2006.  Non-performing loans that were secured by first
      deeds of trust on real property were $2,171,000 and $473,000 at September 30,
      2007 and December 31, 2006.  The increase in non-performing loans that
      were secured by first deeds of trust on real property was primarily the result
      of collateral taken on individual customer loans that have been placed on
      non-accrual.  Other forms of collateral such as inventory and
      equipment secured a portion of the non-performing loans as of each
      date.  No assurance can be given that the collateral securing
      non-performing loans will be sufficient to prevent losses on such
      loans.




At
      September 30, 2007 the Company had $9,450,000 invested in two real estate
      properties that were acquired through foreclosure.  At December 31,
      2006, the Company had $60,000 invested in two real estate properties that were
      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.  No assurance can be given that
      the Company will sell the properties during 2007 or at any time or for an amount
      that will be sufficient to recover the Company’s investment in these
      properties.




Management
      defines impaired loans, regardless of past due status, as those on which
      principal and interest are not expected to be collected under the original
      contractual loan repayment terms.  An impaired loan is charged off at
      the time management believes the collection process has been
      exhausted.  At September 30, 2007 and December 31, 2006, impaired
      loans were measured based on the present value of future cash flows discounted
      at the loan's effective rate, the loan's observable market price or the fair
      value of collateral if the loan is collateral-dependent.  Impaired
      loans at September 30, 2007 were $3,284,000.




Except
      for loans that are disclosed above, there were no assets as of September 30,
      2007, 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 non-performing
      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.


-26-


ALLOWANCE
      FOR LOAN LOSSES





The
      following table summarizes the loan loss experience of the Company for the
      nine
      months ended September 30, 2007 and 2006, and for the year ended December 31,
      2006.





September
                30,
            
            
            December
                31,*(Dollars
                in thousands)*
            
            2007
            
            
            2006
            
            
            2006**Allowance
                for Loan Losses:**Balance
                at beginning of period
            
            $
            14,031
            
            
            $
            14,776
            
            
            $
            14,776Provision
                for loan losses
            
            
            4,645
            
            
            
            400
            
            
            
            400Charge-offs:Commercial
                and  agricultural
            
            
            3,273
            
            
            
            942
            
            
            
            2,134Real
                estate - construction
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            499
            
            
            
            319
            
            
            
            495Total
                charge-offs
            
            
            3,772
            
            
            
            1,261
            
            
            
            2,629RecoveriesCommercial
                and agricultural
            
            
            275
            
            
            
            763
            
            
            
            1,337Real-Estate
                – construction
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            106
            
            
            
            118
            
            
            
            147Total
                recoveries
            
            
            381
            
            
            
            881
            
            
            
            1,484Net
                (charge-offs) recoveries
            
            
            (3,391
            )
            
            
            (380
            )
            
            
            (1,145
            )**Balance
                at end of period**
            ****
            **$**
            **15,285**
            ****
            ****
            **$**
            **14,796**
            ****
            ****
            **$**
            **14,031**Loans
                outstanding at period-end
            
            $
            1,364,238
            
            
            $
            1,266,200
            
            
            $
            1,224,761Average
                loans outstanding
            
            $
            1,270,114
            
            
            $
            1,168,887
            
            
            $
            1,187,156Annualized
                net charge-offs to average loans
            
            
            0.36
            %
            
            
            0.04
            %
            
            
            0.10
            %Allowance
                for loan lossesTo
                total loans
            
            
            1.12
            %
            
            
            1.17
            %
            
            
            1.15
            %To
                non-performing loans
            
            
            465.44
            %
            
            
            443.92
            %
            
            
            590.78
            %To
                non-performing assets
            
            
            120.03
            %
            
            
            436.07
            %
            
            
            576.22
            %




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 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
      non-performing 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 of $732,000 and
      $4,645,000 in the three and nine months ended September 30, 2007 compared with
      $200,000 and $400,000 in the same time periods of 2006.  During the
      third quarter of 2007, the Bank recorded a charge off of $2,833,000 in the
      allowance for loan losses related to a construction loan in Rocklin,
      California.  For more information related to the construction loan in
      Rocklin California, see the section titled “NON-PERFORMING ASSETS” on
      page 25 of this report.  The Company had net charge-offs of
      $3,391,000 for the nine months ended September 30, 2007 compared with net
      charge-offs of $380,000 for the same nine months in 2006.  The
      increased charge-offs occurred primarily because of the charge-off taken on
      the
      construction loan in Rocklin, CA.




-27-




During
      the third quarter of 2006, the Company enhanced its methodology used to compute
      the adequacy of the Allowance for Loan Losses.  Prior to the third
      quarter 2006, the Company utilized regulatory guidance as a measuring metric
      to
      determine the level of the allowance for loan losses required.




In
      the
      third quarter of 2006, management completed their data collection and historical
      loss calculations, and began using documented historical net loss experience
      by
      loan type to develop a statistically relevant model to reserve for inherent
      losses in the loan portfolio.   This enhanced methodology
      resulted in an allowance that was materially the equivalent of the figure
      developed under the prior method.  There was no provision adjustment
      recorded relevant to this enhancement in methodology.




The
      allowance for loan losses 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 and require the Company to make
      additional provisions to the allowance for loan losses.  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 for loan losses 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.





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





September
                30, 2007
            
            
            December
                31, 2006
            
            
            December
                31, 2005*(Dollars
                in thousands)*
            
            Amount
            
            
            Loans
                % to total loans
            
            
            Amount
            
            
            Loans
                % to total loans
            
            
            Amount
            
            
            Loans
                % to total loansCommercial
                and Agricultural
            
            $
            5,213
            
            
            
            34
            %
            
            $
            4,983
            
            
            
            33
            %
            
            $
            6,024
            
            
            
            32
            %Real
                Estate (Construction)
            
            
            6,539
            
            
            
            13
            
            
            
            1,658
            
            
            
            15
            
            
            
            2,474
            
            
            
            16Real
                Estate (Mortgage)
            
            
            2,385
            
            
            
            46
            
            
            
            3,882
            
            
            
            44
            
            
            
            5,598
            
            
            
            44Consumer
            
            
            1,148
            
            
            
            7
            
            
            
            3,508
            
            
            
            8
            
            
            
            680
            
            
            
            8**Total**
            ****
            **$**
            **15,285**
            ****
            ****
            ****
            **100**
            **%**
            ****
            **$**
            **14,031**
            ****
            ****
            ****
            **100**
            **%**
            ****
            **$**
            **14,776**
            ****
            ****
            ****
            **100**
            **%**








OTHER
      ASSETS





At
      September 30, 2007, the Company recorded a balance in other assets of
      $31,072,000 and $23,593,000 at December 31, 2006, an increase of
      32%.  The primary reason for the change in other assets is due to a
      $12,332,000 and $8,665,000 loan participation funding receivable at September
      30, 2007 and December 31, 2006, respectively.  During January 2007 and
      October 2007, those funding receivables were collected from the participating
      banks.







RESERVE
      FOR UNFUNDED COMMITMENTS





The
      reserve for unfunded commitments included in other liabilities as of September
      30, 2007 and for the year ended,December 31, 2006, is presented
      below.





September
                30, 2007
            
            
            December
                31,*(Dollars
                in thousands)*
            
            2007
            
            
            2006
            
            
            2006Balance
                at the beginning of period
            
            $
            710
            
            
            $
            717
            
            
            $
            717Provision
                for credit losses
            
            
            144
            
            
            
            (7
            )
            
            
            (7
            )Provision
                for bonded stop notices
            
            
            1,646
            
            
            
            -
            
            
            
            -**Balance
                at the end of period**
            ****
            **$**
            **2,500**
            ****
            ****
            **$**
            **710**
            ****
            ****
            **$**
            **710**
            ****




During
      2007, the Bank recorded a specific reserve of $1,646,000 in unfunded commitments
      related to a construction loan in Rocklin, California.  The specific
      reserve related to unfunded commitments was recorded to recognize the Bank’s
      estimate of liability for mechanic liens placed against the
      property.  For more information related to the specific reserve
      related to this loan, see the section titled “NON-PERFORMING ASSETS” on page 25
      of this report.




-28-




EXTERNAL
      FACTORS AFFECTING ASSET QUALITY




For
      a
      discussion on external factors affecting asset quality, see Part II Item 1A.
      Risk Factors in this report.






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.   The Company also has the ability to access
      significant amounts of asset liquidity through borrowings from the Federal
      Home
      Loan Bank secured by pledged loans. Deposit growth and access to credit lines
      established with correspondent banks and market sources of funds are considered
      by the Company as additional sources of liability liquidity.  The
      Company’s primary source of liquidity is from dividends received from the
      Bank.  Dividends from the Bank are subject to certain regulatory
      restrictions.




The
      Company reviews its liquidity position on a regular basis based upon its current
      position and expected trends of loans and deposits. 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 $290,056,000 and $452,421,000 on September 30, 2007 and
      December 31, 2006, respectively, and constituted 15% 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
      market value of pledged securities was $292,883,000 at September 30, 2007
      compared with $280,182,000 at December 31, 2006.




Although
      the Company's primary sources of liquidity include liquid assets and the Bank’s
      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 $310,271,000 of which $107,500,000 was outstanding as of
      September 30, 2007 and $239,289,000 of which $46,500,000 was outstanding as
      of
      December 31, 2006.  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.




-29-




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
      generated through retention of retained earnings.  The Company's
      shareholders' equity increased by $8,524,000 or 6% between September 30, 2007
      and December 31, 2006.  This increase was achieved through the
      retention of accumulated earnings and the exercise of stock
      options.




The
      Company is subject to various regulatory capital requirements administered
      by
      the federal banking agencies.  Failure to meet minimum capital
      requirements can initiate mandatory and possibly additional discretionary
      actions by the regulators that, if undertaken, could have a material adverse
      effect on the Company’s consolidated financial statements.  Management
      believes, as of September 30, 2007, that the Company and the Bank met all
      applicable capital requirements.  The Company’s leverage capital ratio
      at September 30, 2007 was 9.85% as compared with 9.33% as of December 31,
      2006.  The Company’s total risk based capital ratio at September 30,
      2007 was 12.16% as compared to 12.49% as of December 31, 2006.




The
      Company has received regulatory approval for the acquisitions of The California
      Stockmen’s Bank and Bay View Funding. Both acquisitions were completed in the
      fourth quarter of 2007.  Management anticipates the Company will
      remain well capitalized after the acquisitions by issuing additional trust
      preferred securities to meet the regulatory requirements.  See
      Subsequent Events Note.




In
      the
      opinion of management, the Company’s and Bank’s actual capital amounts and
      ratios met all regulatory requirements as of September 30, 2007 and are
      summarized as follows:


(Dollars
                  in thousands)
              
              Actual
              
              
              For
                  Regulatory 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)
              
              $
              206,925
              
              
              
              12.16
              %
              
              $
              136,114
              
              
              
              8
              %
              
              $
              170,142
              
              
              
              10
              %Tier
                  1 capital (to risk weighted assets)
              
              $
              187,672
              
              
              
              11.03
              %
              
              $
              68,057
              
              
              
              4
              %
              
              $
              102,085
              
              
              
              6
              %Leverage
                  ratio(1)
              
              $
              187,672
              
              
              
              9.85
              %
              
              $
              76,229
              
              
              
              4
              %
              
              $
              95,286
              
              
              
              5
              %**The
                  Bank:**Total
                  capital (to risk weighted assets)
              
              $
              183,236
              
              
              
              10.83
              %
              
              $
              135,411
              
              
              
              8
              %
              
              $
              169,264
              
              
              
              10
              %Tier
                  1 capital (to risk weighted assets)
              
              $
              163,983
              
              
              
              9.69
              %
              
              $
              67,706
              
              
              
              4
              %
              
              $
              101,558
              
              
              
              6
              %Leverage
                  ratio(1)
              
              $
              163,983
              
              
              
              8.64
              %
              
              $
              75,915
              
              
              
              4
              %
              
              $
              94,894
              
              
              
              5
              %


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





The
      Company’s and Bank’s actual capital amounts and ratios met all regulatory
      requirements as of December 31, 2006 and were summarized as
      follows:




*(Dollars
                in thousands)*
            
            Actual
            
            
            For
                Regulatory 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)
            
            $
            193,721
            
            
            
            12.49
            %
            
            $
            124,119
            
            
            
            8
            %
            
            $
            155,148
            
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            178,764
            
            
            
            11.52
            %
            
            $
            62,059
            
            
            
            4
            %
            
            $
            93,089
            
            
            
            6
            %Leverage
                ratio(1)
            
            $
            178,764
            
            
            
            9.33
            %
            
            $
            76,644
            
            
            
            4
            %
            
            $
            95,806
            
            
            
            5
            %**The
                Bank:**Total
                capital (to risk weighted assets)
            
            $
            167,238
            
            
            
            10.83
            %
            
            $
            123,523
            
            
            
            8
            %
            
            $
            154,404
            
            
            
            10
            %Tier
                I capital (to risk weighted assets)
            
            $
            152,281
            
            
            
            9.86
            %
            
            $
            61,762
            
            
            
            4
            %
            
            $
            92,643
            
            
            
            6
            %Leverage
                ratio(1)
            
            $
            152,281
            
            
            
            7.98
            %
            
            $
            76,313
            
            
            
            4
            %
            
            $
            95,392
            
            
            
            5
            %


(1)
      The
      leverage ratio consists of Tier 1 capital divided by quarterly average assets.
      The minimum leverage ratio allowed by bank regulators 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.





-30-




DEPOSITS




Deposits
      are the Company's primary source of funds.  At September 30, 2007, the
      Company had a deposit mix of 30% in savings deposits, 39% in time deposits,
      15%
      in interest-bearing checking accounts and 16% in noninterest-bearing demand
      accounts compared to 27% in savings deposits, 41% in time deposits, 14% in
      interest-bearing checking accounts and 18% in noninterest-bearing demand
      accounts at December 31, 2006.  Noninterest-bearing demand deposits
      enhance the Company's net interest income by lowering its cost of
      funds.





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 September 30, 2007, the Company had brokered deposits
      of $2,606,000.  At December 31, 2006, the Company’s brokered deposits
      totaled $92,943,000.  The decrease in brokered deposits during 2007
      was due to management’s decision to allow these high cost funds to mature
      without renewal.  The Bank has a policy target for brokered deposits
      of no more than 15% of the Bank’s asset base.  Brokered deposits did
      not exceed the policy limit as of September 30, 2007.




Maturities
      of time certificates of deposits of $100,000 or more outstanding at September
      30, 2007 and December 31, 2006 are summarized as follows:





*(Dollars
                in thousands)*
            
            September
                30, 2007
            
            
            December
                31, 2006Three
                months or less
            
            $
            131,318
            
            
            $
            190,565Over
                three to six months
            
            
            66,428
            
            
            
            103,261Over
                six to twelve months
            
            
            16,144
            
            
            
            50,555Over
                twelve months
            
            
            34,258
            
            
            
            21,853**Total**
            ****
            **$**
            **248,148**
            ****
            ****
            **$**
            **366,234**
            ****







FEDERAL
      FUNDS PURCHASED AND OTHER BORROWED FUNDS




For
      the
      nine months ended September 30, 2007 and for the year ended December 31, 2006,
      the Bank did not have recorded any federal funds purchased.  Other
      borrowed funds have increased primarily to secure liquidity for future
      anticipated growth





In
      December 2005, the Bank entered into a repurchase agreement with an embedded
      LIBOR floor for $100,000,000 with J.P. Morgan. This agreement has a maturity
      date of December 15, 2010. The repurchase agreement will help to insulate the
      Company from the effects of a downward rate environment. For more information
      about the agreement, see Note 5 on “Other Borrowings” in the Company’s 2006
      Annual Report and Form 10-K.




-31-




RETURN
      ON
      EQUITY AND ASSETS




Nine
                Months Ended September 30,
            
            
            Year
                ended December 312007
            
            
            2006
            
            
            2006Annualized
                return on average assets
            
            
            0.76
            %
            
            
            1.33
            %
            
            
            1.25
            %Annualized
                return on average equity
            
            
            9.39
            %
            
            
            17.91
            %
            
            
            16.85
            %Average
                equity to average assets
            
            
            8.05
            %
            
            
            7.40
            %
            
            
            7.44
            %Dividend
                payout ratio
            
            
            21.19
            %
            
            
            12.73
            %
            
            
            13.70
            %







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.






SUBSEQUENT
      EVENTS





On
      October 5, 2007, the Company completed the acquisition of Bay View Funding,
      a
      factoring business headquartered in San Mateo, California. On a preliminary
      basis, the initial purchase price for BVF was $11.7 million in
      cash.  Further, payments of approximately $2.0 million have been
      withheld as a contingency reserve and earn-out payments of up to $3.3 million
      may be made if certain growth targets are achieved over the next two
      years.  While our accounting for this acquisition is not yet
      finalized, we currently estimate minimum initial goodwill of approximately
      $9.7
      million with a $2 million amount ascribed to an identified customer base
      intangible.  Goodwill could change dependant on the determination of
      the final accounting.





On
      November 2, 2007, the Company completed the acquisition of the 11 branches
      of
      The California Stockmen’s Bank. County Bank expects to assume, based on
      September 30, 2007 financial information received assets and liabilities,
      primarily consisting of $196 million in deposits and $172 million of loans.
      The
      loan yield was 7.48% and the funding costs were 2.61% for a net interest margin
      of 4.87%.  The Bank expects to leverage this low-cost funding source
      post-acquisition.  The Company, at this time, continues to estimate
      the purchase price at $27.4 million with $6 million attributable to the core
      deposit intangible and $21+ million representing goodwill.  This
      transaction will be accounted for as a business combination.




In
      October 2007, the Company formed County Statutory Trust IV (CST IV), a
      wholly-owned special purpose entity, for the purpose of issuing trust preferred
      securities.  On October 31, 2007, CST IV issued $25,000,000 in trust
      preferred securities.  The securities have a maturity date of October
      31, 2037 and bear a variable rate (repricing quarterly) of the three-month
      LIBOR
      rate plus a spread of 3.25%.  Interest will be paid
      quarterly.  Concurrent with the issuance of the trust preferred
      securities, CST IV used the proceeds of the trust preferred securities offering
      to purchase a like amount of junior subordinated debt securities of the
      Company.  The Company will pay interest on the junior subordinated
      debt securities to CST IV, which represents the sole source of dividend
      distributions to the holders of the trust preferred securities.  After
      December 15, 2012, the Company will have the unrestricted option to repay at
      par.  See the Company's 2006 Annual Report and Form 10-K for details
      regarding the Company's existing trust preferred entities, which are similar
      in
      nature to CST IV.


-32-


**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 it 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.  Management monitors the asset and liability changes on an
      ongoing basis and provides report information and recommendations to the ALCO
      committee in regards to those changes.





It
      is the
      opinion of management that there has been no material change in the Company’s
      market risk during the first nine months of 2007 when compared to the level
      of
      market risk at December 31, 2006.  If interest rates were to suddenly
      and materially fall from levels experienced during the nine months of 2007,
      the
      Company could become susceptible to an increased level of market
      risk.








**Item
      4. Controls and Procedures**





EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES





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





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


-33-


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.  The Company is also party to legal proceedings related to
      foreclosed property of which the Company has already recorded a specific reserve
      of $1.6 million related to the Company’s best estimate of probable loss on this
      legal matter.  The Company’s maximum exposure related to this matter
      is $3.038 million.  In addition to the routine litigation incidental
      to its business, the Company is a defendant in a lawsuit brought by Pacific
      Coast Bankers Bank. Management believes that the allegations are unfounded
      and
      that judgment against the Company is not probable. In the opinion of management,
      pending and threatened litigation, where liabilities have not been reserved,
      have a remote likelihood of having a material adverse effect on the financial
      condition or results of operations of the Company.





**Item
      1A.  Risk Factors**




Readers
      and prospective investors in our securities should carefully consider the
      following risk factors as well as the other information contained or
      incorporated by reference in this report.





The
      risks
      and uncertainties described below are not the only ones facing us. Additional
      risks and uncertainties that management is not aware of or focused on or that
      management currently deems immaterial may also impair our business operations.
      This report is qualified in its entirety by these risk factors.





If
      any of
      the following risks actually occur, the Company’s financial condition and
      results of operations could be materially and adversely affected. If this were
      to happen, the value of the Company’s securities could decline significantly,
      and shareholders could lose all or part of their investment.





**Market
      and Interest Rate Risk**





***Changes
      in interest rates could reduce income and cash flow***





The
      discussion in this report under “Market and Interest Rate Risk Management” and
“Earnings Sensitivity” is incorporated by reference in this paragraph. The
      Company’s income and cash flow depend to a great extent on the difference
      between the interest earned on loans and investment securities, and the interest
      paid on deposits and other borrowings. We cannot control or prevent changes
      in
      the level of interest rates. They fluctuate in response to general economic
      conditions and the policies of various governmental and regulatory agencies,
      in
      particular, the FRB. Changes in monetary policy, including changes in interest
      rates, will influence the origination of loans, the purchase of
      investments, the generation of deposits and the rates received on loans and
      investment securities and paid on deposits and other liabilities.





**Risks
      related to the nature and geographical location of Capital Corp of the West’s
      business**





***Capital
      Corp of the West invests in loans that contain inherent credit risks that may
      cause us to incur losses***





The
      Company closely monitors the markets in which it conducts its lending operations
      and adjusts its strategy to control exposure to loans with higher credit risk.
      Asset reviews are performed using grading standards and criteria similar to
      those employed by bank regulatory agencies. We can provide no assurance that
      the
      credit quality of our loans will not deteriorate in the future and that such
      deterioration will not adversely affect Capital Corp of the
      West.


-34-


**Deterioration
      of local economic conditions could hurt our profitability**.




Our
      operations are primarily located in the Central Valley of California. As a
      result of this geographic concentration, our financial results depend largely
      upon economic conditions in these areas. The local economy relies heavily on
      real estate, agriculture and ranching. A significant downturn in any or all
      of
      these industries could result in a decline in the local economy in general,
      which could in turn negatively impact us. Poor economic conditions could cause
      us to incur losses associated with higher default rates and decreased collateral
      values in our loan portfolio. Also, if there were significant recessionary
      conditions in our market area, our financial condition would be negatively
      impacted.




***The
      markets in which Capital Corp of the West operates are subject to the risk
      of
      earthquakes and other natural disasters***





Most
      of
      the properties of Capital Corp of the West are located in California. Also,
      most
      of the real and personal properties which currently secure the Company's loans
      are located in California. California is a state which is prone to earthquakes,
      brush fires, drought, flooding and other natural disasters. In addition to
      possibly sustaining damage to its own properties, if there is a major
      earthquake, flood or other natural disaster, Capital Corp of the West faces
      the
      risk that many of its borrowers may experience uninsured property losses, or
      sustained job interruption and/or loss which may materially impair their ability
      to meet the terms of their loan obligations. A major earthquake, flood or other
      natural disaster in California could have a material adverse effect on Capital
      Corp of the West's business, financial condition, results of operations and
      cash
      flows.





***Substantial
      competition in the California banking market could adversely affect
      us***





Banking
      is a highly competitive business. We compete actively for loan, deposit, and
      other financial services business in California. Our competitors include a
      large
      number of state and national banks, thrift institutions and credit unions,
      as
      well as many financial and non-financial firms that offer services similar
      to
      those offered by us. Other competitors include large financial institutions
      that
      have substantial capital, technology and marketing resources. Such large
      financial institutions may have greater access to capital at a lower cost than
      us, which may adversely affect our ability to compete effectively.





***Risks
      associated with potential acquisitions or divestitures or restructuring may
      adversely affect us***





We
      may
      seek to acquire or invest in financial and non-financial companies,
      technologies, services or products that complement our business. There can
      be no
      assurance that we will be successful in completing any such acquisition or
      investment as this will depend on the availability of prospective target
      opportunities at valuation levels which we find attractive and the competition
      for such opportunities from other bidders. In addition, we continue to evaluate
      the performance of all of our subsidiaries, businesses and business lines and
      may sell, liquidate or otherwise divest a subsidiary, business or business
      line.
      Any acquisitions, divestitures or restructuring may result in the issuance
      of
      potentially dilutive equity securities, significant write-offs, including those
      related to goodwill and other intangible assets, and/or the incurrence of debt,
      any of which could have a material adverse effect on our business,
      financial condition and results of operations. Acquisitions, divestitures or
      restructuring could involve numerous additional risks including difficulties
      in
      obtaining any required regulatory approvals and in the assimilation or
      separation of operations, services, products and personnel, the diversion
      of management's attention from other business concerns, higher than expected
      deposit attrition (run-off), divestitures required by regulatory authorities,
      the disruption of our business, and the potential loss of key employees. There
      can be no assurance that we will be successful in addressing these or any other
      significant risks encountered.


-35-


**Regulatory
      Risks**





***Restrictions
      on dividends and other distributions could limit amounts payable to
      us***





As
      a
      holding Company, a substantial portion of our cash flow typically comes from
      dividends of our Bank. Various statutory provisions restrict the amount of
      dividends our Bank can pay to us without regulatory approval.





***Adverse
      effects of, or changes in, banking or other laws and regulations or governmental
      fiscal or monetary policies could adversely affect us***





We
      are
      subject to significant federal and state regulation and supervision, which
      is
      primarily for the benefit and protection of our customers and not for the
      benefit of investors. In the past, our business has been materially affected
      by
      these regulations. This trend is likely to continue in the future. Laws,
      regulations or policies, including accounting standards and interpretations
      currently affecting us and our subsidiaries, may change at any time. Regulatory
      authorities may also change their interpretation of these statutes and
      regulations. Therefore, our business may be adversely affected by any future
      changes in laws, regulations, policies or interpretations or regulatory
      approaches to compliance and enforcement, including legislative and regulatory
      reactions to acts of terrorism, and major U.S. corporate bankruptcies and
      reports of accounting irregularities at U.S. public companies.





Additionally,
      our business is affected significantly by the fiscal and monetary policies
      of
      the federal government and its agencies. We are particularly affected by the
      policies of the FRB, which regulates the supply of money and credit in the
      U.S.
      Under long-standing policy of the FRB, the Company is expected to act as a
      source of financial strength for its subsidiary banks. As a result of that
      policy, we may be required to commit financial and other resources to our
      subsidiary bank in circumstances where we might not otherwise do so. Among
      the
      instruments of monetary policy available to the FRB are (a) conducting open
      market operations in U.S. government securities, (b) changing the discount
      rates of borrowings by depository institutions, and (c) imposing or
      changing reserve requirements against certain borrowings by banks and their
      affiliates. These methods are used in varying degrees and combinations to
      directly affect the availability of bank loans and deposits, as well as the
      interest rates charged on loans and paid on deposits. The policies of the FRB
      may have a material effect on our business, results of operations and financial
      condition.





**Systems,
      Accounting and Internal Control Risks**





***The
      accuracy of the Company’s judgments and estimates about financial and accounting
      matters will impact operating results and financial
      condition***





The
      discussion under “Critical Accounting Policies and Estimates” in this report and
      the information referred to in that discussion is incorporated by reference
      in
      this paragraph. The Company’s makes certain estimates and judgments in preparing
      its financial statements. The quality and accuracy of those estimates and
      judgments will have an impact on the Company’s operating results and financial
      condition.


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***The
      Company’s information systems may experience an interruption or breach in
      security***





The
      Company relies heavily on communications and information systems to conduct
      its
      business. Any failure, interruption or breach in security of these systems
      could
      result in failures or disruptions in the Company’s customer relationship
      management and systems. There can be no assurance that any such failures,
      interruptions or security breaches will not occur or, if they do occur, that
      they will be adequately corrected by the Company. The occurrence of any
      such failures, interruptions or security breaches could damage the Company’s
      reputation, result in a loss of customer business, subject the Company to
      additional regulatory scrutiny, or expose the Company to litigation and possible
      financial liability, any of which could have a material adverse effect on the
      Company’s financial condition and results of operations.





***The
      Company’s controls and procedures may fail or be
      circumvented***





Management
      regularly reviews and updates the Company’s internal control over financial
      reporting, disclosure controls and procedures, and corporate governance policies
      and procedures. Any system of controls and procedures, however well designed
      and
      operated, is based in part on certain assumptions and can provide only
      reasonable, not absolute, assurances that the objectives of the system are
      met.
      Any failure or circumvention of the Company’s controls and procedures or failure
      to comply with regulations related to controls and procedures could have a
      material adverse effect on the Company’s business, results of operations
      and financial condition.




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




None.




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




None.




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




None.




**Item
      5. Other Information.**




On
      September 26, 2007, the Company renewed the existing Shareholder Rights
      Agreement entered into on September 26, 1997.  The final expiration
      date of the new Shareholder Rights Agreement is September 26, 2012. In the
      opinion of management, except as noted above, there is no additional information
      relating to these periods being reported which warrants inclusion in the
      report.




**Item
      6. Exhibits**




See
      Exhibit Index


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**SIGNATURES**




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




CAPITAL
      CORP OF THE WEST




(Registrant)







Date:
                November 9, 2007
            By
                /s/   Thomas T. HawkerThomas
                T. HawkerPresident
                andChief
                Executive Officer








Date:
                November 9, 2007
            By
                /s/   David A. HeaberlinDavid
                A. HeaberlinChief
                Financial Officer/Treasurer


-38-


Exhibit
      Index




Exhibit
              Description2.1
              Purchase
                  and Assumption Agreement by and between National Bank of Arizona
                  and
                  County Bank dated June 11, 2007 (incorporated by reference to Exhibit
                  2.1
                  on Form 8-K of the registrant filed November 8, 2007).2.2
              Stock
                  Purchase Agreement between Capital Corp of the
                  West and Bay View Funding31.1
              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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