**FORM
        10-Q**
 
 
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 
 þ
              Quarterly
                  Report Under Section 13 or 15(d) of the Securities Exchange Act
                  of 1934
                  for the Quarterly Period EndedJune
                  30, 2005
 or
  ̈
              Transition
                  Report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 for the Transition Period from _____________ to
                  ___________
  Commission
        File Number: 0-27384
   **CAPITAL
                  CORP OF THE WEST**(Exact
                  name of registrant as specified in its charter)
 
  
   California
              
              77-0405791(State
                  or other jurisdiction of incorporation or organization)
              
              IRS
                  Employer ID Number
 
  550
                  West Main, Merced, CA 95340(Address
                  of principal executive offices)
 
 Registrant’s
        telephone number, including area code: (209)
        725-2200
 
 Former
        name, former address and former fiscal year, if changed since last report: Not
        applicable
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required
        to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of
        1934
        during the preceding 12 months (or for such shorter period that the registrant
        was required to file such reports), and (2) has been subject to such
        filing
        requirements for the past 90 days.
 Yes þ No  ̈
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). Yes þ  No  ̈
 
 The
        number of shares outstanding of the registrant’s common stock, no par value, as
        of June 30, 2005 was 10,490,566. No shares of preferred stock, no par value,
        were outstanding at June 30, 2005.
  -1-
  **Capital
        Corp of the West**
 Table
        of
        Contents
 
 PART
        I.
        -- FINANCIAL INFORMATION
  Item
                  1. Financial StatementsConsolidated
                  Balance Sheets (unaudited)
              3Consolidated
                  Statements of Income and Comprehensive Income
                  (unaudited)
              4Consolidated
                  Statement of Changes in Shareholders’ Equity
                  (unaudited)
              5Consolidated
                  Statements of Cash Flows
                  (unaudited)
              6Notes
                  to the Consolidated Financial Statements
                  (unaudited)
              7Item
                  2. Management’s Discussion and Analysis of
                  Financial Condition and Results of Operations
              12Item
                  3. Quantitative and Qualitative Disclosures about
                  Market Risk
              30Item
                  4. Controls and Procedures
              31
 
 PART
        II.
        -- OTHER INFORMATION
  Item
                  1.Legal
                  Proceedings
              32Item
                  2.Unregistered
                  Sales of Equity Securities and Use of Proceeds
              32Item
                  3.Defaults
                  Upon Senior Securities
              32Item
                  4.Submission
                  of Matters to a vote of Security Holders
              32Item
                  5.Other
                  Information
              32Item
                  6.Exhibits
              32SIGNATURES
              33Exhibit
                  Index
              34
  -2-
 Table
            of Contents
  Capital
        Corp of the West
 Consolidated
        Balance Sheets
 (Unaudited)
  (Unaudited)
                June
                  30, 2005
              
              December
                  31, 2004(Dollars
                in thousands)**Assets**Cash
                  and noninterest-bearing deposits in other banks
              
              $
              47,186
              
              $
              40,454Federal
                  funds sold
              
              
              1,675
              
              
              17,365Time
                  deposits at other financial institutions
              
              
              350
              
              
              3,350Investment
                  securities available for sale, at fair value
              
              
              258,787
              
              
              269,189Investment
                  securities held to maturity at cost, fair value of $184,634 and
                  $168,265
                  at June 30, 2005 and December 31, 2004
              
              
              183,194
              
              
              166,987Loans,
                  net of allowance for loan losses of $13,404 and $13,605 at June
                  30, 2005
                  and December 31, 2004
              
              
              969,561
              
              
              871,488Interest
                  receivable
              
              
              6,969
              
              
              5,979Premises
                  and equipment, net
              
              
              24,731
              
              
              22,426Goodwill
              
              
              1,405
              
              
              1,405Other
                  intangibles
              
              
              46
              
              
              69Cash
                  value of life insurance
              
              
              28,215
              
              
              28,362Investment
                  in housing tax credit limited partnerships
              
              
              8,394
              
              
              8,623Other
                  assets
              
              
              13,936
              
              
              12,750Total
                  assets
              
              $
              1,544,449
              
              $
              1,448,447**Liabilities
                  and Shareholders’ Equity**DepositsNoninterest-bearing
                  demand
              
              $
              275,695
              
              $
              262,315Negotiable
                  orders of withdrawal
              
              
              169,443
              
              
              170,870Savings
              
              
              358,213
              
              
              360,319Time,
                  under $100,000
              
              
              207,003
              
              
              193,913Time,
                  $100,000 and over
              
              
              216,095
              
              
              166,740Total
                  deposits
              
              
              1,226,449
              
              
              1,154,157Borrowed
                  funds
              
              
              174,764
              
              
              164,119Junior
                  subordinated debentures
              
              
              16,496
              
              
              16,496Accrued
                  interest, taxes and other liabilities
              
              
              13,409
              
              
              10,194Total
                  liabilities
              
              
              1,431,118
              
              
              1,344,966Preferred
                  stock, no par value; 10,000,000 shares authorized; None
                  outstanding
              
              
              -
              
              
              -Common
                  stock, no par value; 54,000,000 shares authorized; 10,490,566 and
                  10,429,754 issued & outstanding at June 30, 2005 and December 31,
                  2004
              
              
              58,188
              
              
              57,139Retained
                  earnings
              
              
              55,269
              
              
              45,981Accumulated
                  other comprehensive (loss) income
              
              
              (126
              )
              
              361Total
                  shareholders’ equity
              
              
              113,331
              
              
              103,481Total
                  liabilities and shareholders’ equity
              
              $
              1,544,449
              
              $
              1,448,447
  See
        accompanying notes to consolidated financial statements
  -3-
 Table
            of Contents
  Capital
        Corp of the West
 Consolidated
        Statements of Income and Comprehensive Income
 (Unaudited)
  For
                  Three Months
              
              For
                  Six MonthsEnded
                  June 30,
              
              Ended
                  June 30,(Dollars
                  in thousands, except per share data)
              
              2005
              
              2004
              
              2005
              
              2004**Interest
                  income:**Interest
                  and fees on loans
              
              $
              16,977
              
              $
              13,591
              
              $
              32,466
              
              $
              26,739Interest
                  on deposits with other financial institutions
              
              
              2
              
              
              2
              
              
              15
              
              
              4Interest
                  on investments held to maturity:Taxable
              
              
              1,069
              
              
              564
              
              
              2,178
              
              
              1,165Non-taxable
              
              
              852
              
              
              512
              
              
              1,592
              
              
              992Interest
                  on investments available for sale:Taxable
              
              
              2,702
              
              
              2,585
              
              
              5,319
              
              
              5,238Non-taxable
              
              
              11
              
              
              10
              
              
              22
              
              
              21Interest
                  on federal funds sold
              
              
              37
              
              
              30
              
              
              72
              
              
              41Total
                  interest income
              
              
              21,651
              
              
              17,294
              
              
              41,664
              
              
              34,200**Interest
                  expense:**Interest
                  on negotiable orders of withdrawal
              
              
              38
              
              
              17
              
              
              58
              
              
              32Interest
                  on savings deposits
              
              
              1,104
              
              
              753
              
              
              2,109
              
              
              1,518Interest
                  on time deposits, under $100
              
              
              1,396
              
              
              1,052
              
              
              2,670
              
              
              2,135Interest
                  on time deposits, $100 and over
              
              
              1,333
              
              
              882
              
              
              2,453
              
              
              1,809Interest
                  on subordinated debentures
              
              
              334
              
              
              265
              
              
              645
              
              
              529Interest
                  on other borrowings
              
              
              1,445
              
              
              1,167
              
              
              2,788
              
              
              2,232Total
                  interest expense
              
              
              5,650
              
              
              4,136
              
              
              10,723
              
              
              8,255Net
                  interest income
              
              
              16,001
              
              
              13,158
              
              
              30,941
              
              
              25,945Provision
                  for loan losses
              
              
              101
              
              
              689
              
              
              321
              
              
              1,304Net
                  interest income after provision for loan losses
              
              
              15,900
              
              
              12,469
              
              
              30,620
              
              
              24,641**Noninterest
                  income:**Service
                  charges on deposit accounts
              
              
              1,526
              
              
              1,580
              
              
              2,893
              
              
              3,014Increase
                  in cash surrender value of life insurance policies
              
              
              202
              
              
              262
              
              
              460
              
              
              496Other
              
              
              612
              
              
              749
              
              
              1,656
              
              
              1,521Total
                  noninterest income
              
              
              2,340
              
              
              2,591
              
              
              5,009
              
              
              5,031**Noninterest
                  expenses:**Salaries
                  and related benefits
              
              
              5,657
              
              
              5,438
              
              
              11,210
              
              
              10,494Premises
                  and occupancy
              
              
              1,066
              
              
              764
              
              
              2,051
              
              
              1,543Equipment
              
              
              1,043
              
              
              746
              
              
              1,901
              
              
              1,572Professional
                  fees
              
              
              640
              
              
              398
              
              
              1,202
              
              
              768Supplies
              
              
              308
              
              
              178
              
              
              572
              
              
              400Marketing
              
              
              329
              
              
              152
              
              
              624
              
              
              500Intangible
                  amortization
              
              
              12
              
              
              166
              
              
              23
              
              
              333Other
              
              
              1,647
              
              
              1,478
              
              
              3,427
              
              
              3,041Total
                  noninterest expenses
              
              
              10,702
              
              
              9,320
              
              
              21,010
              
              
              18,714Income
                  before provision for income taxes
              
              
              7,538
              
              
              5,740
              
              
              14,619
              
              
              11,021Provision
                  for income taxes
              
              
              2,412
              
              
              1,860
              
              
              4,505
              
              
              3,497Net
                  income
              
              $
              5,126
              
              $
              3,880
              
              $
              10,114
              
              $
              7,524Comprehensive
                  income:Unrealized
                  gain (loss) on securities arising during the period
              
              
              1,182
              
              
              (3,829
              )
              
              (487
              )
              
              (2,784
              )Comprehensive
                  income
              
              $
              6,308
              
              $
              51
              
              $
              9,627
              
              $
              4,740Basic
                  earnings per share
              
              $
              0.49
              
              $
              0.68
              
              $
              0.97
              
              $
              1.32Diluted
                  earnings per share
              
              $
              0.47
              
              $
              0.66
              
              $
              0.94
              
              $
              1.27
  See
        accompanying notes to consolidated financial statements
  -4-
 Table
            of Contents
  Capital
        Corp of the West
 Consolidated
        Statement of Changes in Shareholders’ Equity
 (Unaudited)
  Common
                  Stock
              
              
              
              Accumulated
                  other(Amounts
                  in thousands)
              
              Number
                  of Shares
              
              Amounts
              
              Retained
                  Earnings
              
              Comprehensive
                  income
              
              TotalBalance,
                  December 31, 2004
              
              
              10,430
              
              $
              57,139
              
              $
              45,981
              
              $
              361
              
              $
              103,481Exercise
                  of stock options, Including tax effect of $262
              
              
              49
              
              
              749
              
              
              
              
              
              
              
              
              749Issuance
                  of shares pursuant to 401K and ESOP plans
              
              
              12
              
              
              300
              
              
              
              
              
              
              
              
              300Net
                  change in fair market value of investment securities, net of tax
                  benefit
                  of $353
              
              
              
              
              
              
              
              
              
              
              
              (487
              )
              
              (487
              )Cash
                  dividends
              
              
              
              
              
              
              
              
              (826)
              
              
              
              
              
              826Net
                  income
              
              
              
              
              
              
              
              
              10,114
              
              
              
              
              
              10,114Balance,
                  June 30, 2005
              
              
              10,491
              
              $
              58,188
              
              $
              55,269
              
              $
              (126
              )
              $
              113,331
  See
        accompanying notes to consolidated financial statements
  -5-
 Table
            of Contents
  Capital
        Corp of the West
 Consolidated
        Statements of Cash Flows
 (Unaudited)
  (Dollars
                  in thousands)
              
              Six
                  months ended
                June
                  30,2005
              
              Six
                  months ended
                June
                  30,2004**Operating
                  activities:**Net
                  income
              
              $
              10,114
              
              $
              7,524Adjustments
                  to reconcile net income to net cash provided byoperating
                  activities:Provision
                  for loan losses
              
              
              321
              
              
              1,304Depreciation,
                  amortization and accretion, net
              
              
              3,634
              
              
              3,197Increase
                  in cash surrender value of life insurance policies
              
              
              (147
              )
              
              (3,478
              )Death
                  benefit income from bank owned life insurance
              
              
              539
              
              
              -Net
                  increase in interest receivable & other assets
              
              
              (1,978
              )
              
              135Net
                  increase (decrease) in accrued interest payable & other
                  liabilities
              
              
              3,215
              
              
              (1,937
              )Net
                  cash provided by operating activities
              
              
              15,698
              
              
              6,745**Investing
                  activities:**Investment
                  securities purchases - available for sale securities
              
              
              (53,126
              )
              
              (40,632
              )Investment
                  securities purchases - held to maturity securities
              
              
              (23,895
              )
              
              (9,283
              )Proceeds
                  from maturities of available for sale investment
                  securities
              
              
              25,827
              
              
              36,830Proceeds
                  from maturities of held to maturity investment securities
              
              
              6,684
              
              
              5,966Net
                  decrease in time deposits in other financial institutions
              
              
              3,000
              
              
              -Proceeds
                  from sales of available for sale securities
              
              
              37,000
              
              
              5,940Proceeds
                  from sales of loans
              
              
              1,346
              
              
              1,707Net
                  increase in loans
              
              
              (101,163
              )
              
              (57,625
              )Purchases
                  of premises and equipment
              
              
              (3,489
              )
              
              (2,723
              )Net
                  cash used in investing activities
              
              
              (107,816
              )
              
              (59,820
              )**Financing
                  activities:**Net
                  increase in demand, NOW and savings deposits
              
              
              9,847
              
              
              56,227Net
                  increase in certificates of deposit
              
              
              62,445
              
              
              (10,488
              )Net
                  proceeds from other borrowings
              
              
              10,645
              
              
              30,085Payment
                  of cash dividends
              
              
              (826
              )
              
              (574
              )Issuance
                  of shares pursuant to 401K and ESOP plans
              
              
              300
              
              
              624Exercise
                  of stock options
              
              
              749
              
              
              898Net
                  cash provided by financing activities
              
              
              83,160
              
              
              76,772Net
                  decrease in cash and cash equivalents
              
              
              (8,958
              )
              
              23,697Cash
                  and cash equivalents at beginning of period
              
              
              57,819
              
              
              45,482Cash
                  and cash equivalents at end of period
              
              $
              48,861
              
              $
              69,179**Cash
                  paid during the quarter:**Interest
                  paid
              
              $
              10,416
              
              $
              7,647Income
                  tax payments
              
              
              7,480
              
              
              7,561**Supplemental
                  disclosure of noncash investing****and
                  financing activities:**Investment
                  securities unrealized losses and swaps, net of tax
              
              $
              (487
              )
              $
              (2,784
              )
  See
        accompanying notes to consolidated financial statements


-6-
 Table
          of Contents




Capital
        Corpof the West
 Notes
        to
        Consolidated Financial Statements
 June
        30,
        2005 and December 31, 2004
 (Unaudited)
 
 GENERAL
        -
        COMPANY
 
 Capital
        Corp of the West (the “Company” or “Capital Corp”) is a bank holding company
        incorporated under the laws of the State of California on April 26, 1995.
        On
        November 1, 1995, the Company became registered as a bank holding company,
        and
        is a holder of all of the capital stock of County Bank (the “Bank”). During
        1998, the Company formed Capital West Group, a subsidiary that engages in
        the
        financial institution advisory business but is currently inactive. The Company's
        primary asset is the Bank **** and
        the
        Bank is the Company's primary source of income. The Company’s securities consist
        of 54,000,000 shares of common stock, no par value, and 10,000,000 shares
        of
        authorized preferred stock. As of June 30, 2005 there were 10,490,566 common
        shares outstanding, held of record by approximately 1,700 shareholders. There
        were no preferred shares outstanding. The Bank has three wholly owned
        subsidiaries, Merced Area Investment & Development, Inc. ("MAID"), County
        Asset Advisors ("CAA"), and County Investment Trust (“REIT”). CAA is currently
        inactive. The Company also has two unconsolidated trusts, County Statutory
        Trust
        and County Statutory Trust II (the “Trusts”). In the second quarter of 2002, the
        Company purchased Regency Investment Advisors, Inc (“RIA”). RIA was sold in
        October 2004. The Company has one wholly owned subsidiary, Capital West Group,
        Inc. (“CWG”). CWG is currently inactive. All references herein to the "Company"
        include the Company, the Company’s subsidiaries, the Bank and the Bank's
        subsidiaries, unless the context otherwise requires.
 
 GENERAL
        -
        BANK
 
 The
        Bank
        was organized on August 1, 1977, as County Bank of Merced, a California state
        banking corporation. The Bank commenced operations on December 22, 1977.
        In
        November 1992, the Bank changed its legal name to County Bank. The Bank’s
        securities consist of one class of Common Stock, no par value which is wholly
        owned by the Company. The Bank’s deposits are insured under the Federal Deposit
        Insurance Act by the Federal Deposit Insurance Corporation (“FDIC”) up to
        applicable limits stated therein. Like most state-chartered banks of its
        size in
        California, it is not a member of the Federal Reserve System.
 
 INDUSTRY
        AND MARKET AREA
 
 The
        Bank
        engages in general commercial banking business primarily in Fresno, Madera,
        Mariposa, Merced, San Francisco, San Joaquin, Stanislaus and Tuolomne counties.
        The Bank has twenty full service branch offices; two of which are located
        in
        Merced with the branch located in downtown Merced currently serving as both
        a
        branch and as administrative headquarters. There are offices in Atwater,
        Dos
        Palos, Hilmar, Livingston, Los Banos, Madera, Mariposa, San Francisco, Sonora,
        Stockton, two offices in Modesto, four in Fresno and two offices in Turlock.
        The
        Bank’s administrative headquarters also provides accommodations for the
        activities of MAID, the Bank's wholly owned real estate subsidiary .
  -7-
 Table
            of Contents
  OTHER
        FINANCIAL NOTES
 
 All
        adjustments which in the opinion of Management are necessary for a fair
        presentation of the Company’s financial position at June 30, 2005 and December
        31, 2004 and the results of operations for the three and six month periods
        ended
        June 30, 2005 and 2004, and the statements of cash flows for the six months
        ended June 30, 2005 and 2004 have been included. The interim results for
        the
        three and six months ended June 30, 2005 are not necessarily indicative of
        results to be expected for the full year. These financial statements should
        be
        read in conjunction with the financial statements and the notes included
        in the
        Company’s Annual Report on Form 10-K for the year ended December 31,
        2004.
 
 The
        accompanying unaudited financial statements have been prepared on a basis
        consistent with generally accepted accounting principles and with the
        instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
 
 Basic
        earnings per share (EPS) is computed by dividing net income available to
        shareholders by the weighted average number of common shares outstanding
        during
        the period. Diluted earnings per share is computed by dividing net income
        available to common shareholders by the weighted average number of common
        shares
        outstanding during the period plus potential common shares outstanding. Diluted
        earnings per share reflects the potential dilution that could occur if
        securities or other contracts to issue common stock were exercised or converted
        into common stock or resulted in the issuance of common stock that then shared
        in the earnings of the Company. Earnings per share data is adjusted for the
        effect of the nine for five stock split announced on March 29, 2005 with
        a
        distribution date of April 29, 2005.
 
 The
        following table provides a reconciliation of the numerator and denominator
        of
        the basic and diluted earnings per share computation of the three month periods
        ended June 30, 2005 and 2004:
 
 For
                  The Three Months
              
              For
                  The Six MonthsEnded
                  June 30,
              
              Ended
                  June 30,(Dollars
                  in thousands, except per share data)
              
              2005
              
              2004
              
              2005
              
              2004Basic
                  EPS computation:Net
                  income
              
              $
              5,126
              
              $
              3,880
              
              $
              10,114
              
              $
              7,524Average
                  common shares outstanding
              
              
              10,479
              
              
              10,283
              
              
              10,479
              
              
              10,247Basic
                  EPS
              
              $
              0.49
              
              $
              0.38
              
              $
              0.97
              
              $
              0.73Diluted
                  EPS Computations:Net
                  income
              
              $
              5,126
              
              $
              3,880
              
              $
              10,114
              
              $
              7,524Average
                  common shares outstanding
              
              
              10,479
              
              
              10,283
              
              
              10,466
              
              
              10,247Effect
                  of stock options
              
              
              323
              
              
              351
              
              
              330
              
              
              37210,802
              
              
              10,634
              
              
              10,796
              
              
              10,619Diluted
                  EPS
              
              $
              0.47
              
              $
              0.36
              
              $
              0.94
              
              $
              0.71
 
  -8-
 Table
            of Contents
  INTANGIBLE
        ASSETS
 
 The
        Company has intangible assets consisting of core deposit premiums and goodwill.
        Core deposit premiums are amortized using an accelerated method over a period
        of
        ten years. Intangible assets related to goodwill have not been amortized
        after
        December 31, 2001 but are reviewed periodically for potential impairment.
        During
        the second quarter of 2005, management determined there had been no impairment
        of goodwill. As of June 30, 2005 and December 31, 2004, the Company had
        unamortized core deposit premiums of $46,000 and $69,000, respectively.
        Amortization of core deposit premiums and other intangibles was $23,000 and
        $333,000 six months ended June 30, 2005 and 2004, respectively. Core deposit
        premiums of $460,000 and $4,340,000 were initially recorded as a result of
        purchasing deposits from Town and Country Finance and Thrift in July, 1996
        and
        the purchase of three branches from Bank of America in December, 1997,
        respectively.
 
 BORROWED
        FUNDS
 
 During
        the six months ended June 30, 2005, the Bank increased its short term
        borrowings. The borrowings were obtained from the Federal Home Loan Bank,
        Pacific Coast Bankers’ Bank, and Fed Funds purchased. The increase in borrowings
        totaled $10,645,000 between December 31, 2004 and June 30, 2005.
 
 STOCK
        COMPENSATION
 
 The
        Company provides stock-based compensation to certain officers and directors.
        The
        Company uses the intrinsic value method to account for its stock option plans
        (in accordance with the provisions of Accounting Principles Board Opinion
        No.
        25). Under this method, compensation expense is recognized for awards of
        options
        to purchase shares of common stock to employees under compensatory plans
        only if
        the fair market value of the stock at the option grant date (or other
        measurement date, if later) is greater than the amount the employee must
        pay to
        acquire the stock. Statement of Financial Accounting Standards No. 123,
        Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
        using the intrinsic value method or to adopt a fair value based model to
        account
        for stock option plans. The fair value based method results in recognizing
        as
        expense over the vesting period the fair value of all stock-based awards
        on the
        date of grant. The Company has elected to continue to use the intrinsic value
        method.
  -9-
 Table
            of Contents
  Had
        compensation cost for the Company’s option plans been determined in accordance
        with SFAS 123, the Company’s net income and earnings per share would have been
        reduced to the pro forma amounts indicated as follows:
 
 Three
                  months ended June, 30
              
              Six
                  months ended June 30,(dollars
                  in thousands except per share amounts)
              
              2005
              
              2004
              
              2005
              
              2004Net
                  income:As
                  reported
              
              $
              5,126
              
              $
              3,880
              
              $
              10,114
              
              $
              7,524Pro
                  forma
              
              $
              4,913
              
              $
              3,734
              
              $
              9,491
              
              $
              7,019Basic
                  earnings per share:As
                  reported
              
              $
              0.49
              
              $
              0.38
              
              $
              0.97
              
              $
              0.73Pro
                  forma
              
              $
              0.47
              
              $
              0.36
              
              $
              0.91
              
              $
              0.68Diluted
                  earnings per share:As
                  reported
              
              $
              0.47
              
              $
              0.37
              
              $
              0.94
              
              $
              0.71Pro
                  forma
              
              $
              0.45
              
              $
              0.35
              
              $
              0.88
              
              $
              0.66
 
 Compensation
        expense that would have been reported for the six months ended June 30, 2005
        for
        stock options was $719,000, compared to $578,000 for the same six months
        in
        2004. Compensation expense that would have been reported for the three months
        ended June 30, 2005 for stock options was $229,000, compared to $163,000
        for the
        same three months in 2004.
 
 RECLASSIFICATIONS
 
 Certain
        amounts previously reported in the 2004 financial statements have been
        reclassified to conform to the 2005 presentation. Additionally, in the first
        quarter of 2005, the Company reclassified the reserve for unfunded commitments
        from the allowance for losses to other liabilities, and reclassified the
        provision for unfunded commitments from the provision for loan losses to
        other
        noninterest expense. These reclassifications did not affect previously reported
        net income or total shareholders’ equity. Share and per share data for all
        periods have been adjusted to reflect the nine-for-five stock split which
        was
        effective on April 29, 2005 to shareholders of record on April 8,
        2005.
  -10-
 Table
            of Contents
  **Recent
        Accounting Pronouncements**
 
 In
        May
        2003, Financial Accounting Standards Board ("FASB") issued Statement
        No.
        150, *Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and
        Equity.* This
        Statement establishes standards for the classification and measurement of
        certain financial instruments with characteristics of both liabilities and
        equity. The Statement also includes required disclosures for financial
        instruments within its scope. For the Company, the Statement was effective
        for
        instruments entered into or modified after May 11, 2004 and otherwise will
        be
        effective as of January 1, 2004 except for mandatorily redeemable financial
        instruments. For certain mandatorily redeemable instruments, the Statement
        will
        be effective for the Company on January 1, 2005. The effective date has been
        deferred indefinitely for certain other types of mandatorily redeemable
        financial instruments. The Company does not currently have any financial
        instruments that are within the scope of this Statement.
 
 In
        December 2003, the Accounting Standards Executive Committee of the AICPA
        issued
        Statement of Position No. 03-3 (“SOP 03-3”), *Accounting
        for Certain Loans or Debt Securites Acquired in a Transfer.* SOP
        03-3
        addresses the accounting for differences between the contractual cash flows
        and
        the cash flows expected to be collected from purchased loans or debt securities
        if those differences are attributable, in part, to credit quality. SOP 03-3
        requires purchased loans and debt securities to be recorded initially at
        fair
        value based on the present value of the cash flows expected to be collected
        with
        no carryover of any valuation allowance previously recognized by the seller.
        Interest income should be recognized based on the effective yield from the
        cash
        flows expected to be collected. To the extent that the purchased loans or
        debt
        securities experience subsequent deterioration in credit quality, a valuation
        allowance would be established for any additional cash flows that are not
        expected to be received. However, if more cash flows subsequently are expected
        to be received than originally estimated, the effective yield would be adjusted
        on a prospective basis. SOP 03-3 will be effective for loans and debt securities
        acquired after December 31, 2004. Although we anticipate that the
        implementation of SOP 03-3 may require loan system and operational changes
        to
        track credit related losses on loans purchased starting in 2005, we do not
        expect these changes to have a significant effect on the consolidated financial
        statements.
  In
        March
        2004, the Emerging Issues Task Force (“EITF”) Issue No. 03-1 “The Meaning of
        Other-Than-Temporary Impairment and its Application to Certain Investments”
        consensus was published. Issue No. 03-1 contained new guidance effectively
        codifying the provisions of SEC Staff Accounting Bulletin No. 59 and creates
        a
        new model that calls for new judgments and additional evidence gathering.
        In
        September 2004, the FASB delayed the requirement to record impairment losses
        under EITF 03-1. The disclosure requirements of EITF 03-1 remain in effect.
        Management has done an analysis of the impact of this accounting pronouncement,
        which is discussed in the section of this report entitled, Financial Condition.
        The Company does not expect the adoption of the final EITF **** will
        have
        a material impact of the Company’s Consolidated Financial
        Statements.
  In
        December 2004, the FASB issued Statement of Financial Accounting Standards
        ("SFAS") No. 123 (Revised 2004), *Share-Based
        Payment* .
        The
        statement requires that compensation cost relating to share-based payment
        transactions be recognized in financial statements and that this cost be
        measured based on the fair value of the equity or liability instruments issued.
        SFAS No. 123 (Revised 2004) covers a wide range of share-based compensation
        arrangements including share options, restricted share plans, performance-based
        awards, share appreciation rights, and employee share purchase plans. In
        April,
        2005, the SEC delayed the required adoption date for this standard. The Company
        will adopt SFAS No 123 (Revised 2004) on January 1, 2006 and is currently
        evaluating the impact the adoption of the standard will have on the Company's
        results of operations. The impact on the second quarter and first six months
        of
        2004 and 2005 is discussed in the “Other Financial Notes” section of this
        report. SEC Staff Accounting Bulletin No. 107, *Share-Based
        Payment* provides
        guidance that will assist issuers in their initial implementation of FASB
        Statement No. 123 (revised 2004), *Share-Based
        Payment.* The
        SEC
        staff expressed its views regarding the interaction between Statement 123(R)
        and
        certain SEC rules and regulations. SAB 107 also provides the staff’s views on
        the valuation of share-based payment arrangements for public companies.
  In
          May
          2005, the FASB issued SFAS No. 154 *Accounting
          Changes and Error Corrections - a replacement of APB Opinion No. 20 and
          FASB
          Statement No. 3.* The
          Statement requires retrospective application to prior periods’ financial
          statements of voluntary changes in accounting principle, unless it is
          impracticable to determine either the period - specific effects of the
          cumulative effect of the change. When it is impracticable to determine
          the
          period - specific effects of an accounting change on one or more individual
          prior periods presented, the new accounting principle is to be applied
          to the
          balances of assets and liabilities as of the beginning of the earliest
          period
          for which retrospective application is practicable, with a corresponding
          adjustment made to the opening balance of retained earnings or other components
          of equity for that period. If it is impracticable to determine the cumulative
          effect of applying a change in accounting principle, the new accounting
          principle is to be applied prospectively from the earliest date practicable.
          If
          retrospective application for all periods is impracticable, the method
          used to
          report the change and the reason that retrospective application is impracticable
          are to be disclosed. The Company does not expect the adoption of FASB No.
          154 to
          have a significant effect on the Company’s Consolidated Financial
          Statements.
  -11-
 Table
            of Contents
  **Item
        2. Management'sDiscussion And Analysis Of Financial
        Condition** **And
        Results Of Operations**
 
 The
        following Management's Discussion and Analysis of Financial Condition and
        Results of Operations contains forward-looking statements that are subject
        to
        risks and uncertainties and include information about possible or assumed
        future
        results of operations. Many possible events or factors could affect the future
        financial results and performance of the company. This could cause results
        or
        performance to differ materially from those expressed in our forward-looking
        statements. Words such as “expects”, “anticipates”, ”believes”, “estimates”,
“intends,”“plans,”“assumes,”“projects,”“predicts,”“forecasts,” and variations of
        such words and other similar expressions are intended to identify such
        forward-looking statements. These statements are not guarantees of future
        performance and involve certain risks, uncertainties and assumptions which
        are
        difficult to predict. Therefore, actual outcomes and results may differ
        materially from what is expressed or forecasted in, or implied by, such
        forward-looking statements.
 
 Readers
        of the Company’s Form 10-Q should not rely solely on forward looking statements
        and should consider all uncertainties and risks discussed throughout this
        report, as well as those discussed in the Company’s 2004 Annual Report on Form
        10-K filed on or about March 15, 2005. These statements are representative
        only
        on the date hereof, and the Company undertakes no obligation to update any
        forward-looking statements made. Some possible events or factors that could
        occur that may cause differences from expected results include the following:
        the Company’s loan growth is dependent on economic conditions, as well as
        various discretionary factors, such as decisions to sell, or purchase certain
        loans or loan portfolios; or sell or buy participations of loans; the quality
        and adequacy of management of our borrowers; industry, product and geographic
        concentrations and the mix of the loan portfolio. The rate of charge-offs
        and
        provision expense can be affected by local, regional and international economic
        and market conditions, concentrations of borrowers, industries, products
        and
        geographical conditions, the mix of the loan portfolio and management’s
        judgements regarding the collectibility of loans. Liquidity requirements
        may
        change as a result of fluctuations in assets and liabilities and off-balance
        sheet exposures, which will impact the capital and debt financing needs of
        the
        Company and the mix of funding sources. Decisions to purchase, hold, or sell
        securities are also dependent on liquidity requirements and market volatility,
        as well as on and off-balance sheet positions. Factors that may impact interest
        rate risk include local, regional and international economic conditions,
        levels,
        mix, maturities, yields or rates of assets and liabilities and the wholesale
        and
        retail funding sources of the Company.
 
 The
        Company is also exposed to the potential of losses arising from adverse changes
        in market rates and prices which can adversely impact the value of financial
        products, including securities, loans, and deposits. In addition, the banking
        industry in general is subject to various monetary and fiscal policies and
        regulations, which include those determined by the Federal Reserve Board,
        the
        Federal Deposit Insurance Corporation and state regulators, whose policies
        and
        regulations could affect the Company’s results.
 
 Other
        factors that may cause actual results to differ from the forward-looking
        statements include the following: competition with other local and regional
        banks, savings and loan associations, credit unions and other nonbank financial
        institutions, such as investment banking firms, investment advisory firms,
        brokerage firms, mutual funds and insurance companies, as well as other entities
        which offer financial services; interest rate, market and monetary fluctuations;
        inflation; market volatility; general economic conditions; introduction and
        acceptance of new banking-related products, services and enhancements; fee
        pricing strategies, mergers and acquisitions and their integration into the
        Company, civil disturbances or terrorist threats or acts, or apprehension
        about
        the possible future occurrences or acts of this type, outbreak or escalation
        of
        hostilities in which the United States is involved, any declaration of war
        by
        the U.S. Congress or any other national or international calamity, crisis
        or
        emergency changes in laws and regulations, recently issued accounting
        pronouncements, government policies, regulations, and their enforcement
        (including Bank Secrecy Act-related matters, taxing statutes and regulations);
        restrictions on dividends that our subsidiaries are allowed to pay to us;
        the
        ability to satisfy requirements related to the Sarbanes-Oxley Act and other
        regulation on internal control; and management’s ability to manage these and
        other risks. For additional information relating to the risks of the Company's
        business see "Risk Factors" in the Company's Annual Report on Form 10-K.
  -12-
 Table
            of Contents
  **Critical
        accounting policies and estimates**
 
 The
        Company’s discussion and analysis of its financial condition and results of
        operations is based upon the Company’s consolidated financial statements, which
        have been prepared in accordance with accounting principles generally accepted
        in the United States. The preparation of these financial statements requires
        the
        Company to make estimates and judgments that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, and related disclosure of contingent
        assets and liabilities. On an on-going basis, the Company evaluates its
        estimates, including those related to the adequacy of the allowance for loan
        losses, intangible assets, valuation of deferred income taxes and contingencies.
        The Company bases its estimates on historical experience and on various other
        assumptions that are believed to be reasonable under the circumstances, the
        results of which form the basis for making judgments about the carrying values
        of assets and liabilities that are not readily apparent from other sources.
        Actual results may differ from these estimates under different assumptions
        or
        conditions. (See caption “Allowance for Loan Losses” for a more detailed
        discussion).  The
        critical accounting policies and accounting estimates are further discussed
        in
        Note 1 of the Company’s 2004 Annual Report.
  The
        following discussion and analysis is designed to provide a better understanding
        of the significant changes and trends related to the Company and its
        subsidiaries' financial condition, operating results, asset and liability
        management, liquidity and capital resources and should be read in conjunction
        with the Consolidated Financial Statements of the Company and the Notes thereto.
  -13-
 Table
            of Contents
  Results
        Of Operations
 
 **Three
        and Six Months Ended June 30, 2005 Compared With Three and Six Months
        Ended
        June 30, 2004**
  OVERVIEW
  For
        the
        three months ended June 30, 2005 the Company reported net income of $5,126,000
        and for the six months ended June 30, 2005 the Company reported net income
        of
        $10,114,000. This compares to $3,880,000 and $7,524,000 for the same periods
        in
        2004 and represents an increase of $1,246,000 or 32% and $2,590,000 or 34%
        respectively. Basic and fully diluted earnings per share were $0.49 and $0.47
        for the three months ended June 30, 2005 and $0.97 and $0.94 for the six
        months
        ended June 30, 2005. This compares to basic and fully diluted earnings per
        share
        of $0.38 and $0.36 for the three months ended June 30, 2004 and $0.73 and
        $0.71
        for the six months ended June 30, 2004. This represents an increase of $0.11
        per
        share for basic and fully diluted earnings per share for the three months
        ended
        June 30, 2004 and $0.24 and $0.23 for the six months ended June 30, 2004.
        The
        basic and fully diluted earnings per share are reflective of the nine for
        five
        stock split that was announced in March, 2005, with a distribution date of
        April
        29, 2005. The annualized return on average assets was 1.35% and 1.36% for
        the
        three and six months ended June 30, 2005 compared to 1.20% and 1.19% for
        the
        same periods in 2004. The Company's annualized return on average equity was
        18.63% and 18.73% for the three and six months ended June 30, 2005 compared
        to
        16.34% and 16.09% for the same time periods in 2004.
  NET
        INTEREST INCOME
  The
        Company's primary source of income is net interest income and is determined
        by
        the difference between interest income and fees derived from earning assets
        and
        interest paid on interest bearing liabilities. Net interest income for the
        three
        and six months ended June 30, 2005 totaled $16,001,000 and $30,941,000
        respectively. This represented an increase of $2,843,000 and $4,996,000 or
        22%
        and 19% when compared to the $13,158,000 and $25,945,000 achieved during
        the
        three and six months ended June 30, 2004.
  Total
        interest and fees on earning assets were $21,651,000 and $41,664,000 for
        the
        three and six months ended June 30, 2005, an increase of $4,357,000 and
        $7,464,000 or 25% and 22% respectively from the $17,294,000 and $34,200,000
        for
        the same period in 2004. The level of interest income is affected by changes
        in
        volume of and rates earned on interest-earning assets. Interest-earning assets
        consist primarily of loans, investment securities and federal funds sold.
        The
        increase in total interest income for the three and six months ended June
        30,
        2005 was primarily the result of an increase in volume of interest-earning
        assets and the yield returned on those assets. Average interest-earning assets
        for the three and six months ended June 30, 2005 were $1,400,224,000 and
        $1,372,465,000 compared with $1,198,896,000 and $1,174,503,000 for the three
        and
        six months ended June 30, 2004, an increase of $201,328,000 and $197,962,000
        or
        17% and 17%. Average interest rates earned on interest-earning assets were
        6.29%
        and 6.21% for the three and six months ended June 30, 2005 compared with
        5.85%
        and 5.91% for the same three and six months of 2004, an increase of 44 and
        30
        basis points or 7.5% and 5.1%. The modest increase in interest rates earned
        in
        the second quarter of 2005 compared to the same period in 2004 was primarily
        the
        result of an increase in market interest rates during this time
        period.
  -14-
 Table
            of Contents
  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. Total interest expense was $5,650,000 and $10,723,000
        for
        the three and six months ended June 30, 2005, compared with $4,136,000 and
        $8,255,000 for the three and six months ended June 30, 2004, an increase
        of
        $1,514,000 and $2,468,000 or 37% and 30%. This increase was primarily the
        result
        of an increase in the volume of interest-bearing liabilities. Average
        interest-bearing liabilities were $1,122,421,000 and $1,102,645,000 for the
        three and six months ended June 30, 2005 compared with $987,596,000 and
        $969,855,000 for the same three and six months in 2004, an increase of
        $134,825,000 and $132,790,000 or 14% and 14%. Average interest rates paid
        on
        interest-bearing liabilities were 2.02% and 1.96% for the three and six months
        ending June 30, 2005 compared with 1.68% and 1.71% for the same three and
        six
        months of 2004, an increase of 34 and 25 basis points or 20.2% and 14.6%.
        The
        increase was primarily the result of increased market interest rates and
        the
        corresponding repricing of maturing, lower yielding liabilities during the
        period.
  The
        increase in interest-earning assets and interest-bearing liabilities was
        primarily the result of increased market penetration within our target markets
        which has been accomplished by increasing the utilization of existing facilities
        and the addition of branches in Fresno, California.
  The
        Company's taxable equivalent net interest margin, the ratio of net interest
        income to average interest-earning assets, was 4.67% and 4.63% for the three
        and
        six months ended June 30, 2005 compared with 4.48% and 4.51% for the same
        period
        in 2004. Net interest margin provides a measurement of the Company's ability
        to
        employ funds profitably during the period being measured. The Company's increase
        in net interest margin in 2005 was primarily attributable to a gain of 41
        and 32
        basis points in the loan portfolio yield for the three and six months ended
        June
        30, 2005 and an increase of 40 and 25 basis points in taxable investment
        securities for the three and six months ended June 30, 2005 as compared to
        the
        same time period in 2004. Loans as a percentage of average interest-earning
        assets remained at 67% for the three and six months ended June 30, 2005 as
        compared to the same time period in 2004. AVERAGE
        BALANCES AND RATES EARNED AND PAID
  -15-
 Table
            of Contents
  The
        following table presents condensed average balance sheet information for
        the
        Company, together with interest rates earned and paid on the various sources
        and
        uses of its funds for each of the periods indicated. Nonaccruing loans are
        included in the calculation of the average balances of loans, but the nonaccrued
        interest on such loans is excluded.
 
 AVERAGE
        BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
 Three
                  months ended
              
              Three
                  months endedJune
                  30, 2005
              
              June
                  30, 2004Average
                Balance
              
              Taxable
                Equivalent
                Interest
              
              Taxable
                Equivalent
                Yield/rate
              
              Average
                Balance
              
              Taxable
                EquivalentInterest
              
              Taxable
                EquivalentYield/rate(Dollars
                  in thousands)**Assets**Federal
                  funds sold
              
              $
              5,423
              
              $
              37
              
              
              2.74
              %
              $
              12,286
              
              $
              30
              
              
              0.98
              %Time
                  deposits at other financial institutions
              
              
              350
              
              
              3
              
              
              3.44
              
              
              350
              
              
              2
              
              
              2.29Taxable
                  investment securities (1)
              
              
              363,164
              
              
              3,806
              
              
              4.20
              
              
              334,739
              
              
              3,175
              
              
              3.80Nontaxable
                  investment securities (1)
              
              
              90,250
              
              
              1,143
              
              
              5.08
              
              
              52,905
              
              
              695
              
              
              5.27Loans,
                  gross: (2)
              
              
              941,037
              
              
              16,977
              
              
              7.24
              
              
              798,616
              
              
              13,591
              
              
              6.83Total
                  interest-earning assets
              
              $
              1,400,224
              
              $
              21,966
              
              
              6.29
              
              $
              1,198,896
              
              $
              17,493
              
              
              5.85Allowance
                  for loan losses
              
              
              (13,483
              )
              
              
              
              
              
              
              
              (13,847
              )Cash
                  and due from banks
              
              
              43,410
              
              
              
              
              
              
              
              
              39,503Premises
                  and equipment, net
              
              
              24,407
              
              
              
              
              
              
              
              
              18,053Interest
                  receivable and other assets
              
              
              59,949
              
              
              
              
              
              
              
              
              50,534Total
                  assets
              
              $
              1,514,507
              
              
              
              
              
              
              
              $
              1,293,139**Liabilities
                  And Shareholders' Equity**Negotiable
                  order of withdrawal
              
              $
              177,019
              
              $
              38
              
              
              0.09
              
              $
              143,762
              
              $
              17
              
              
              0.05Savings
                  deposits
              
              
              358,658
              
              
              1,104
              
              
              1.23
              
              
              352,525
              
              
              753
              
              
              0.86Time
                  deposits
              
              
              391,483
              
              
              2,729
              
              
              2.80
              
              
              351,422
              
              
              1,934
              
              
              2.21Other
                  borrowings
              
              
              178,765
              
              
              1,445
              
              
              3.24
              
              
              123,391
              
              
              1,167
              
              
              3.79Subordinated
                  Debentures
              
              
              16,496
              
              
              334
              
              
              8.12
              
              
              16,496
              
              
              265
              
              
              6.44Total
                  interest-bearing liabilities
              
              
              1,122,421
              
              
              5,650
              
              
              2.02
              
              
              987,596
              
              
              4,136
              
              
              1.68Noninterest-bearing
                  deposits
              
              
              270,117
              
              
              
              
              
              
              
              
              207,103Accrued
                  interest, taxes and other liabilities
              
              
              11,887
              
              
              
              
              
              
              
              
              3,432Total
                  liabilities
              
              
              1,404,425
              
              
              
              
              
              
              
              
              1,198,131Total
                  shareholders' equity
              
              
              110,082
              
              
              
              
              
              
              
              
              95,008Total
                  liabilities and shareholders' equity
              
              $
              1,514,507
              
              
              
              
              
              
              
              $
              1,293,139Net
                  interest income and margin (3)
              
              
              
              
              $
              16,316
              
              
              4.67
              %
              
              
              
              $
              13,357
              
              
              4.48
              %
  (1)
              Tax-equivalent
                    adjustments included in the nontaxable investment securities
                    portfolio are
                    $302,000 and $173,000 for the three months ended June 30, 2005
                    and 2004.
                    Tax equivalent adjustments included in the taxable investment
                    securities
                    created by the dividends received deduction were $35,000 and
                    $26,000 for
                    the three months ended June 30, 2005 and 2004. The effective
                    tax rate used
                    was 35%.
 (2)
              Amounts
                  of interest earned included loan fees of $922,000 and $629,000
                  and loan
                  costs of $75,000 and $101,000 for the three months ended June 30,
                  2005 and
                  2004, respectively.
 (3)
              Net
                  interest margin is computed by dividing net interest income by
                  total
                  average interest-earning assets.
  -16-
 Table
            of Contents
  AVERAGE
        BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
 Six
                  months ended
              
              Six
                  months endedJune
                  30, 2005
              
              June
                  30, 2004Average
                Balance
              
              Taxable
                Equivalent
                Interest
              
              Taxable
                Equivalent
                Yield/rate
              
              Average
                Balance
              
              Taxable
                EquivalentInterest
              
              Taxable
                Equivalent
                Yield/rate(Dollars
                  in thousands)**Assets**Federal
                  funds sold
              
              $
              5,584
              
              $
              72
              
              
              2.60
              %
              $
              8,251
              
              $
              41
              
              
              1.00
              %Time
                  deposits at other financial institutions
              
              
              1,112
              
              
              15
              
              
              2.72
              
              
              350
              
              
              4
              
              
              1.72Taxable
                  investment securities (1)
              
              
              365,925
              
              
              7,569
              
              
              4.17
              
              
              330,265
              
              
              6,459
              
              
              3.92Nontaxable
                  investment securities (1)
              
              
              84,354
              
              
              2,139
              
              
              5.11
              
              
              50830
              
              
              1346
              
              
              5.31Loans,
                  gross: (2)
              
              
              915,490
              
              
              32,466
              
              
              7.15
              
              
              784,807
              
              
              26,739
              
              
              6.83Total
                  interest-earning assets
              
              $
              1,372,465
              
              $
              42,261
              
              
              6.21
              
              $
              1,174,503
              
              $
              34,589
              
              
              5.91Allowance
                  for loan losses
              
              
              (13,501
              )
              
              
              
              
              
              
              
              (13,659
              )Cash
                  and due from banks
              
              
              41,856
              
              
              
              
              
              
              
              
              39,410Premises
                  and equipment, net
              
              
              23,756
              
              
              
              
              
              
              
              
              17,460Interest
                  receivable and other assets
              
              
              58,941
              
              
              
              
              
              
              
              
              49,310Total
                  assets
              
              $
              1,483,517
              
              
              
              
              
              
              
              $
              1,267,024**Liabilities
                  And Shareholders' Equity**Negotiable
                  order of withdrawal
              
              $
              171,764
              
              $
              58
              
              
              0.07
              
              $
              139,220
              
              
              32
              
              
              0.05Savings
                  deposits
              
              
              359,989
              
              
              2,109
              
              
              1.18
              
              
              346,485
              
              
              1518
              
              
              0.88Time
                  deposits
              
              
              382,754
              
              
              5,123
              
              
              2.70
              
              
              356,538
              
              
              3,944
              
              
              2.22Other
                  borrowings
              
              
              171,642
              
              
              2,788
              
              
              3.28
              
              
              111,116
              
              
              2,232
              
              
              4.03Subordinated
                  Debentures
              
              
              16,496
              
              
              645
              
              
              7.88
              
              
              16,496
              
              
              529
              
              
              6.43Total
                  interest-bearing liabilities
              
              
              1,102,645
              
              
              10,723
              
              
              1.96
              
              
              969,855
              
              
              8,255
              
              
              1.71Noninterest-bearing
                  deposits
              
              
              261,743
              
              
              
              
              
              
              
              
              198,844Accrued
                  interest, taxes and other liabilities
              
              
              11,150
              
              
              
              
              
              
              
              
              4770Total
                  liabilities
              
              
              1,375,538
              
              
              
              
              
              
              
              
              1,173,469Total
                  shareholders' equity
              
              
              107,979
              
              
              
              
              
              
              
              
              93,555Total
                  liabilities and shareholders' equity
              
              $
              1,483,517
              
              
              
              
              
              
              
              $
              1,267,024Net
                  interest income and margin (3)
              
              
              
              
              $
              31,538
              
              
              4.63
              %
              
              
              
              $
              26334
              
              
              4.51
              %
  (1)
              Tax-equivalent
                    adjustments included in the nontaxable investment securities
                    portfolio are
                    $525,000
                    and $333,000 for the six months ended June 30, 2005 and 2004.
                    Tax
                    equivalent adjustments included in the taxable investment securities
                    created by a dividends received deduction were $72,000 and $57,000
                    for the
                    six months ended June 30, 2005 and 2004. The effective tax rate
                    used was
                    35%.
 (2)
              Amounts
                  of interest earned included loan fees of $1,567,000 and $1,140,000
                  and
                  loan costs of $145,000 and $203,000 for the six months ended June
                  30, 2005
                  and 2004, respectively.
 (3)
              Net
                  interest margin is computed by dividing net interest income by
                  total
                  average interest-earning assets.
  -17-
 Table
            of Contents
  NET
        INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
  The
        following table sets forth, for the periods indicated, a summary of the changes
        in average asset and liability balances and interest earned and interest
        paid
        resulting from changes in average asset and liability balances (volume) and
        changes in average interest rates and the total net change in interest income
        and expenses. The changes in interest due to both rate and volume have been
        allocated to volume and rate changes in proportion to the relationship of
        the
        absolute dollar amount of the change in each.
 
 Net
        Interest Income Variance Analysis:
 
 Three
                  months endedJune
                  30, 2005 compared to June 30, 2004(Dollar
                  in thousands)
              
              Volume
              
              Rate
              
              Total(Decrease)
                  increase in interest income:Federal
                  funds sold
              
              $
              (24
              )
              $
              31
              
              $
              7Time
                  deposits at other financial institutions
              
              
              -
              
              
              1
              
              
              1Taxable
                  investment securities
              
              
              282
              
              
              349
              
              
              631Tax-exempt
                  investment securities
              
              
              474
              
              
              (26
              )
              
              448Loans
              
              
              2,533
              
              
              853
              
              
              3,386Total:
              
              $
              3,265
              
              $
              1,208
              
              $
              4,473Increase
                  (decrease) in interest expense:Interest
                  bearing demand
              
              $
              5
              
              $
              16
              
              $
              21Savings
                  deposits
              
              
              13
              
              
              338
              
              
              351Time
                  deposits
              
              
              238
              
              
              557
              
              
              795Other
                  borrowings
              
              
              464
              
              
              (186
              )
              
              278Subordinated
                  Debentures
              
              
              -
              
              
              69
              
              
              69Total:
              
              $
              720
              
              $
              794
              
              $
              1,514Increase
                  (decrease) in net interest income
              
              $
              2,545
              
              $
              414
              
              $
              2,959
  
 Six
                  months endedJune
                  30, 2005 compared to June 30, 2004(Dollar
                  in thousands)
              
              Volume
              
              Rate
              
              TotalIncrease
                  (decrease) in interest income:Federal
                  funds sold
              
              $
              (6
              )
              $
              37
              
              $
              31Time
                  deposits at other financial institutions
              
              
              8
              
              
              3
              
              
              11Taxable
                  investment securities
              
              
              723
              
              
              385
              
              
              1,110Tax-exempt
                  investment securities
              
              
              799
              
              
              (6
              )
              
              793Loans
              
              
              4,599
              
              
              1,128
              
              
              5,727Total:
              
              $
              6,125
              
              $
              1,547
              
              $
              7,672Increase
                  (decrease) in interest expense:Interest
                  bearing demand
              
              $
              9
              
              $
              17
              
              $
              26Savings
                  deposits
              
              
              61
              
              
              530
              
              
              591Time
                  deposits
              
              
              306
              
              
              873
              
              
              1,179Other
                  borrowings
              
              
              748
              
              
              (192
              )
              
              556Subordinated
                  Debentures
              
              
              -
              
              
              116
              
              
              116Total:
              
              $
              1,124
              
              $
              1,344
              
              $
              2,468Increase
                  (decrease) in net interest income
              
              $
              5,001
              
              $
              203
              
              $
              5,204
  -18-
 Table
            of Contents
  PROVISION
        FOR LOAN LOSSES
  The
        provision for loan losses for the three and six months ended June 30, 2005
        was
        $101,000 and $321,000 compared with $689,000 and $1,304,000 for the three
        and
        six months ended June 30, 2004, a decrease of $588,000 and $983,000 or 85%
        and
        75%. See "Allowance for Loan Losses" contained herein. As
        of
        June 30, 2005 the allowance for loan losses was $13,404,000 or 1.36% of total
        loans compared to $13,605,000 or 1.54% of total loans as of December 31,
        2004.
        At June 30, 2005, nonperforming assets totaled $2,325,000 or 0.15% of total
        assets, nonperforming loans totaled $2,265,000 or 0.23% of total loans and
        the
        allowance for loan losses totaled 592% of nonperforming loans. At December
        31,
        2004, nonperforming assets totaled $4,454,000 or 0.31% of total assets,
        nonperforming loans totaled $4,394,000 or 0.50% of total loans and the allowance
        for loan losses totaled 310% of nonperforming loans.  The
        primary reason the provision for loan loss decreased in 2005 compared to
        2004 is
        a lower level of criticized and nonperforming loans.No assurance
        can be given that nonperforming loans will not increase or that the allowance
        for loan losses will be adequate to cover losses inherent in the loan portfolio.
  NONINTEREST
        INCOME
  Noninterest
        income decreased by $251,000 and $22,000 or 10% and less than 1% to $2,340,000
        and $5,009,000 for the three and six months ended June 30, 2005 compared
        with
        $2,591,000 and $5,031,000 in the same period during 2004. Service charges
        on
        deposit accounts decreased by $54,000 and $121,000 or 3% and 4% to $1,526,000
        and $2,893,000 for the three and six months ended June 30, 2005 compared
        with
        $1,580,000 and $3,014,000 for the same period in 2004. The decrease was
        primarily the result of growth obtained from existing customers in 2005 that
        resulted in larger balances per customer and a relatively smaller number
        of fee
        paying deposit customers. Also, the larger account balances reduced fees
        paid by
        deposit customers, especially commercial accounts that utilize account analysis
        to determine customer fees charged. Other noninterest income decreased by
        $137,000 or 18% for the three month period ended June 30, 2005 and increased
        by
        $135,000 or 9% when compared to the same period in 2004. The primary reason
        for
        the increased other income in the current year was the receipt of $539,000
        in
        death benefit proceeds received from a bank owned life insurance policy on
        a
        retired executive manager during the first quarter of 2005.
 
 NONINTEREST
        EXPENSE **** ****
 
 Noninterest
        expenses increased by $1,382,000 and $2,359,000 or 15% and 13% to $10,702,000
        and $21,010,000 for the three and six months ended June 30, 2005 compared
        with
        $9,320,000 and $18,651,000 for the same period in 2004. The primary components
        of noninterest expenses were salaries and employee benefits, premises and
        occupancy expenses, equipment expenses, professional fees, supplies expenses,
        marketing expenses, intangible amortization and other operating expenses.
  For
        the
        three and six months ended June 30, 2005, salaries and related benefits
        increased by $219,000 and $716,000 or 4% and 7% to $5,657,000 and $11,210,000
        from the $5,438,000 and $10,494,000 recorded for the same period in 2004.
        The
        increase was primarily the result of normal salary progression and increased
        support staff used in operations and regulatory compliance support functions.
        Premises and occupancy expense increased by $302,000 and $508,000 or 40%
        and 33%
        to $1,066,000 and $2,051,000 for the three and six months ending June 30,
        2005
        from $764,000 and $1,543,000 during the same period in 2004. The primary
        reason
        for the increase in 2005 was the addition of a new customer support center
        in
        late 2004. Equipment expenses increased by $297,000 and $329,000 or 40% and
        21%
        to $1,043,000 and $1,901,000 during the three and six months ended June 30,
        2005
        from the $746,000 and $1,572,000 experienced during the same period in 2004.
        The
        additional equipment expenses were primarily the result of branch and department
        equipment upgrades. When comparing the results of the three and six months
        ended
        June 30, 2005 to the three and six months ended June 30, 2004, professional
        fees
        increased by $242,000 and $434,000 or 61% and 57%, marketing expenses increased
        by $177,000 and $124,000 or 116% and 25%, supplies expenses increased by
        $130,000 and $172,000 or 73% and 43%, intangible amortization expenses decreased
        by $154,000 and $310,000 or 93% and 93%, and other expenses increased $169,000
        and $386,000 or 11% and 13% from 2004 levels. Increased professional fees
        in
        2005 were attributable to the costs associated with the Sarbanes-Oxley Act
        and
        Bank Secrecy Act (“BSA”) compliance efforts and increased internal and external
        audit expenses. The increase in marketing expenses was primarily the result
        of
        increased advertising expenses. The increase in supplies expenses was related
        to
        increased administrative supplies for the customer support center. The decrease
        in intangible amortization expense was related to the complete amortization
        of
        the premium paid on branch deposits purchased from Bank of America in December
        1997. The increase in Other expenses were primarily the result of
        increased
        correspondent bank charges caused by increased transaction volumes.
  -19-
 Table
            of Contents
  PROVISION
        FOR INCOME TAXES
  The
        Company recorded an increase of $552,000 and $1,008,000 or 30% and 29% in
        the
        income tax provision to $2,412,000 and $4,505,000 for the three and six months
        ended June 30, 2005 compared to the $1,860,000 and $3,497,000 recorded for
        the
        same period in 2004. In 2005 the Company achieved an effective tax rate of
        32%
        and 31% for the three and six months ended June 30, 2005. This compares to
        a
        2004 effective tax rate of 32% for the three and six months ended June 30,
        2004.
        The effective tax rate for the six months ended June 30, 2005 was equivalent
        to
        the rate recorded during the same period in 2004 primarily due to the receipt
        of
        $539,000 in nontaxable bank owned life insurance death benefits during the
        first
        quarter of 2005, increased nontaxable municipality interest income in 2005
        that
        was offset by increased fully taxable income in 2005 over 2004 levels. Excluding
        the bank owned life insurance death benefits, and the increase in nontaxable
        municipality interest income, the income tax rate for the six months ended
        June
        30, 2005 would have been slightly below 32%.
  **Financial
        Condition**
  Total
        assets at June 30, 2005 were $1,544,449,000, an increase of $96,002,000 or
        7%
        compared with total assets of $1,448,447,000 at December 31, 2004. Net loans
        were $969,561,000 at June 30, 2005, an increase of $98,073,000 or 11% compared
        with net loans of $871,488,000 at December 31, 2004. Deposits were
        $1,226,449,000 at June 30, 2005, an increase of $72,292,000 or 6% compared
        with
        deposits of $1,154,157,000 at December 31, 2004. The increase in total assets
        of
        the Company between December 31, 2004 and June 30, 2005 was primarily funded
        by
        an increase in borrowings and deposits. Cash inflows generated from the
        increased deposits and borrowings were primarily used to fund growth in the
        loan
        and investment portfolios, and to fund increased expenditures on branch and
        support operations facilities and equipment.
  Total
        shareholders' equity was $113,331,000 at June 30, 2005, an increase of
        $9,850,000 or 10% from the $103,481,000 at December 31, 2004. The growth
        in
        shareholders’ equity between December 31, 2004 and June 30, 2005 was primarily
        achieved through the retention of accumulated earnings.
  OFF-BALANCE
        SHEET COMMITMENTS
  The
        following table shows the distribution of the Company's undisbursed loan
        commitments at the dates indicated.
 
 **June
                  30,**
              
              **December
                  31,**(Dollars
                  in thousands)
              
              **2005**
              
              **2004**Letters
                  of credit
              
              $
              19,523
              
              $
              13,875Commitments
                  to extend credit
              
              
              389,674
              
              
              393,039Total
              
              $
              409,197
              
              $
              406,914
 
 In
        2005,
        the Company reclassified the reserve for unfunded lending commitments from
        the
        allowance for loan losses to other liabilities. The reclassifications had
        no
        effect on the income before provision for income taxes as reported. The
        reclassified allowance for loan losses for the three and six months ended
        June
        30, 2005 and 2004, and for the year ended December 31, 2004, is presented
        on
        page 23 and the reserve for unfunded commitments is presented on page
        25.
  -20-
 Table
            of Contents
  CASH
        VALUE OF LIFE INSURANCE
  The
        Bank
        maintains certain cash surrender value life insurance policies to help offset
        some of the cost of employee benefit programs. They are also associated with
        a
        salary continuation plan for the Company's executive management and deferred
        retirement benefits for participating board members. These plans are informally
        linked with universal life insurance policies maintained by the Bank. Income
        from these policies is reflected in noninterest income. At June 30, 2005,
        the
        Bank held $28,215,000 in cash surrender value life insurance, a decrease
        of
        $147,000 from the $28,362,000 maintained at December 31, 2004.
  INVESTMENT
        IN HOUSING TAX CREDIT LIMITED PARTNERSHIPS
  The
        Bank
        invests in housing tax credit limited partnerships to help meet the Bank’s
        Community Reinvestment Act low income housing investment requirements as
        well as
        to obtain federal and state income tax credits. These partnerships provide
        the
        funding for low-income housing projects that might not otherwise be created.
        The
        Bank had invested $11,024,000 in these partnerships as of June 30, 2005 and
        $10,901,000 as of the year ended December 31, 2004, which represents an increase
        of $123,000 or 1%. The Company does not anticipate making additional significant
        investments in these partnerships during the remainder of 2005.
 
 INVESTMENT
        SECURITIES
 
 At
        June
        30, 2005 equity securities included $14.7 million of preferred stock issued
        by
        the Federal National Mortgage Association and the Federal Home Loan Mortgage
        Corporation. These issues of preferred stock are tied to various short term
        indexes ranging from the one year LIBOR interest rate to the five year U.S.
        Treasury rate. These securities have investment grade credit ratings from
        the
        securities rating agencies and are callable by the issuer at par. At June
        30,
        2005, the unrealized loss on these securities totaled $206,000 compared to
        a
        $209,000 unrealized gain at December 31, 2004, after recording a $3,709,000
        other than temporary impairment charge during the fourth quarter of 2004.
 
 NONPERFORMING
        ASSETS
 
 Nonperforming
        assets include nonaccrual loans, loans 90 days or more past due, restructured
        loans and other real estate owned.
  Nonperforming
        loans are those which the borrower fails to perform in accordance with the
        original terms of the obligation and include loans on nonaccrual status,
        loans
        past due 90 days or more and restructured loans. The Company generally places
        loans on nonaccrual status and accrued but unpaid interest is reversed against
        the current year's income when interest or principal payments become 90 days
        or
        more past due unless the outstanding principal and interest is adequately
        secured and, in the opinion of management, is deemed in the process of
        collection. Interest income on nonaccrual loans is recorded on a cash basis.
        Payments may be treated as interest income or return of principal depending
        upon
        management's opinion of the ultimate risk of loss on the individual loan.
        Cash
        payments are treated as interest income where management believes the remaining
        principal balance is fully collectible. Additional loans not 90 days past
        due
        may also be placed on nonaccrual status if management reasonably believes
        the
        borrower will not be able to comply with the contractual loan repayment terms
        and collection of principal or interest is in question.
  A
        "restructured loan" is a loan on which interest accrues at a below market
        rate
        or upon which certain principal has been forgiven so as to aid the borrower
        in
        the final repayment of the loan, with any interest previously accrued, but
        not
        yet collected, being reversed against current income. Interest is reported
        on a
        cash basis until the borrower's ability to service the restructured loan
        in
        accordance with its terms is established. The Company had no restructured
        loans
        as of the dates indicated in the table below.
  -21-
 Table
            of Contents
  The
        following table summarizes nonperforming assets of the Company at June 30,
        2005
        and December 31, 2004:
 
 June
                  30,
              
              December
                  31,2005
              
              2004(Dollars
                  in thousands)Nonaccrual
                  loans
              
              $
              2,265
              
              $
              4,394Accruing
                  loans past due 90 days or more
              
              
              -
              
              
              -Total
                  nonperforming loans
              
              
              2,265
              
              
              4,394Other
                  real estate owned
              
              
              60
              
              
              60Total
                  nonperforming assets
              
              $
              2,325
              
              $
              4,454Nonperforming
                  loans to total loans
              
              
              0.23
              %
              
              0.50
              %Nonperforming
                  assets to total assets
              
              
              0.15
              %
              
              0.31
              %
  Contractual
        accrued interest income on loans on nonaccrual status as of June 30, 2005
        and
        2004, that would have been recognized if the loans had been current in
        accordance with their original terms was approximately $101,000 and $61,000,
        respectively.
  At
        June
        30, 2005, nonperforming assets represented 0.15% of total assets, a decrease
        of
        16 basis points when compared to the 0.31% at December 31, 2004. Nonperforming
        loans represented 0.23% of total loans at June 30, 2005, a decrease of 27
        basis
        points compared to the 0.50% at December 31, 2004. Nonperforming loans that
        were
        secured by first deeds of trust on real property were $2,184,000 and $4,390,000
        at June 30, 2005 and December 31, 2004. The decrease in nonperforming loans
        and
        nonperforming assets was primarily the result of the continuation of a strong
        real estate market that has allowed for successful workouts on a few struggling
        commercial real estate and agricultural properties. Other forms of collateral
        such as inventory and equipment secured a portion of the nonperforming loans
        as
        of each date. No assurance can be given that the collateral securing
        nonperforming loans will be sufficient to prevent losses on such loans.
  At
        June
        30, 2005 and December 31, 2004, the Company had $60,000 invested in one property
        that had been acquired through foreclosure. The property was carried at the
        lower of its estimated market value, as evidenced by an independent appraisal,
        or the recorded investment in the related loan, less estimated selling expenses.
        At foreclosure, if the fair value of the real estate is less than the Company's
        recorded investment in the related loan, a charge is made to the allowance
        for
        loan losses. The Company does not expect to sell its one remaining property
        within the next twelve month period due to the fact that the property is
        subject
        to a lifetime tenancy for the current occupant of the residence. During the
        second quarter of 2005, no new foreclosure properties were acquired or sold.
        No
        assurance can be given that the Company will sell the remaining property
        during
        2005 or at any time or the amount for which the property might be sold.
  Management
        defines impaired loans, regardless of past due status on loans, as those
        on
        which principal and interest are not expected to be collected under the original
        contractual loan repayment terms. An impaired loan is charged off at the
        time
        management believes the collection process has been exhausted. At June 30,
        2005
        and December 31, 2004, impaired loans were measured based on the present
        value
        of future cash flows discounted at the loan's effective rate, the loan's
        observable market price or the fair value of collateral if the loan is
        collateral-dependent. Impaired loans at June 30, 2005 were $2,265,000 for
        which
        the Company made provisions to the allowance for loan losses of approximately
        $340,000.
  Except
        for loans that are disclosed above, there were no assets as of June 30, 2005,
        where known information about possible credit problems of the borrower caused
        management to have serious doubts as to the ability of the borrower to comply
        with the present loan repayment terms and which may become nonperforming
        assets.
        Given the magnitude of the Company's loan portfolio, however, it is always
        possible that current credit problems may exist that may not have been
        discovered by management.
  -22-
 Table
            of Contents
  **Allowance
        for Loan Losses**
 
 The
        following table summarizes the loan loss experience of the Company for the
        six
        months ended June 30, 2005 and 2004, and for the year ended December 31,
        2004.
 
 **June
                  30**
              
              **December
                  31**(Dollars
                  in thousands)
              
              **2005**
              
              **2004**
              
              **2004****Allowance
                  for Loan Losses:**Balance
                  at beginning of period
              
              $
              13,605
              
              $
              12,524
              
              $
              12,524Provision
                  for loan losses
              
              
              321
              
              
              1,304
              
              
              2,731Charge-offs:Commercial
                  and agricultural
              
              
              970
              
              
              878
              
              
              1,860Real
                  estate - mortgage
              
              
              -
              
              
              -
              
              
              -Consumer
              
              
              151
              
              
              152
              
              
              436Total
                  charge-offs
              
              
              1,121
              
              
              1,030
              
              
              2,296RecoveriesCommercial
                  and agricultural
              
              
              470
              
              
              143
              
              
              344Real-Estate
                  - mortgage
              
              
              -
              
              
              -
              
              
              12Consumer
              
              
              129
              
              
              140
              
              
              290Total
                  recoveries
              
              
              599
              
              
              283
              
              
              646Net
                  charge-offs
              
              
              522
              
              
              747
              
              
              1,650Balance
                  at end of period
              
              $
              13,404
              
              $
              13,081
              
              $
              13,605Loans
                  outstanding at period-end
              
              $
              982,965
              
              $
              817,731
              
              $
              885,093Average
                  loans outstanding
              
              $
              915,490
              
              $
              784,807
              
              $
              813,050Annualized
                  net charge-offs to average loans
              
              
              0.11
              %
              
              0.19
              %
              
              0.20
              %Allowance
                  for loan lossesTo
                  total loans
              
              
              1.36
              %
              
              1.60
              %
              
              1.54
              %To
                  nonperforming loans
              
              
              591.78
              %
              
              264.74
              %
              
              309.63
              %To
                  nonperforming assets
              
              
              576.51
              %
              
              261.54
              %
              
              305.46
              %
  The
        Company maintains an allowance for loan losses at a level considered by
        management to be adequate to cover the inherent risks of loss associated
        with
        its loan portfolio under prevailing and anticipated economic conditions.
        In
        determining the adequacy of the allowance for loan losses, management takes
        into
        consideration growth trends in the portfolio, examination of financial
        institution supervisory authorities, prior loan loss experience for the Company,
        concentrations of credit risk, delinquency trends, 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 the fluctuating value of the collateral, changes in weather
        conditions and the availability of adequate water resources in the Company's
        local market area. The normal risks considered by management with respect
        to
        real estate construction loans include fluctuation in real estate values,
        the
        demand for improved commercial and industrial properties and housing, the
        availability of permanent financing in the Company's market area and borrowers'
        ability to obtain permanent financing. The normal risks considered by management
        with respect to real estate mortgage loans include fluctuations in the value
        of
        real estate. Additionally, the Company relies on data obtained through
        independent appraisals for significant properties to determine loss exposure
        on
        nonperforming loans.
  -23-
 Table
            of Contents
  The
        balance in the allowance is affected by the amounts provided from operations,
        amounts charged off and recoveries of loans previously charged off. The Company
        recorded a provision for loan losses in the first six months of 2005 of $321,000
        compared with $1,304,000 in the same period of 2004. The decrease was related
        to
        an overall improvement in graded loans in the first half of 2005 when compared
        to the same period in 2004. The Company's charge-offs, net of recoveries,
        were
        $522,000 for the six months ended June 30, 2005 compared with $747,000 for
        the
        same six months in 2004. The decrease primarily occurred due to increased
        recoveries obtained from the commercial and agricultural segment of the loan
        portfolio. The increased recoveries in this segment were primarily attributable
        to recoveries specific to individual borrowers rather than market or industry
        conditions that apply to a broader customer base.
  As
        of
        June 30, 2005, the allowance for loan losses was $13,404,000 or 1.36% of
        total
        loans outstanding, compared with $13,605,000 or 1.54% of total loans outstanding
        as of December 31, 2004 and $13,081,000 or 1.60% of total loans outstanding
        as
        of June 30, 2004.
  The
        Company uses a method developed by management for determining the appropriate
        level of its allowance for loan losses. This method applies relevant risk
        factors to the entire loan portfolio, including nonperforming loans. The
        methodology is based, in part, on the Company's loan grading and classification
        system. The Company grades its loans through internal reviews and periodically
        subjects loans to external reviews which then are assessed by the Company's
        audit committee and management. Credit reviews are performed on a monthly
        basis
        and the quality grading process occurs on a quarterly basis. Risk factors
        applied to the performing loan portfolio are based on the Company's past
        loss
        history considering the current portfolio's characteristics, current economic
        conditions and other relevant factors. General reserves are applied to various
        categories of loans at percentages ranging up to 1.8% based on the Company's
        assessment of credit risks for each category. Risk factors are applied to
        the
        carrying value of each classified loan: (i) loans internally graded
        "Watch"
        or "Special Mention" carry a risk factor from 1.0% to 2.0%;
        (ii) "Substandard" loans carry a risk factor from 15% to 40% depending
        on
        collateral securing the loan, if any; (iii) "Doubtful" loans carry a 50%
        risk
        factor; and (iv) "Loss" loans are charged off 100%. In addition, a portion
        of
        the allowance is specially allocated to identified problem credits. The analysis
        also includes reference to factors such as the delinquency status of the
        loan
        portfolio, inherent risk by type of loans, industry statistical data,
        recommendations made by the Company's regulatory authorities and outside
        loan
        reviewers, and current economic environment. Important components of the
        overall
        credit rating process are the asset quality rating process and the internal
        loan
        review process.
  The
        allowance is based on estimates and ultimate future losses may vary from
        current
        estimates. It is always possible that future economic or other factors may
        adversely affect the Company's borrowers, and thereby cause loan losses to
        exceed the current allowance. In addition, there can be no assurance that
        future
        economic or other factors will not adversely affect the Company's borrowers,
        or
        that the Company's asset quality may not deteriorate through rapid growth,
        failure to enforce underwriting standards, failure to maintain appropriate
        underwriting standards, failure to maintain an adequate number of qualified
        loan
        personnel, failure to identify and monitor potential problem loans or for
        other
        reasons, and thereby cause loan losses to exceed the current allowance.
  The
        allocation of the allowance to loan categories is an estimate by management
        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.
  -24-
 Table
            of Contents
  RESERVE
        FOR UNFUNDED LENDING COMMITMENTS
 
 The
        reserve for unfunded lending commitments at June 30, 2005 and 2004, and December
        31, 2004, is presented below.
 
 **June
                  30**
              
              **December
                  31****2005**
              
              **2004**
              
              **2004**(Dollars
                  in thousands)**Balance
                  at the beginning of period**
              
              $
              679
              
              $
              739
              
              $
              739Reduction
                  in accruals for credit commitment losses
              
              
              (12
              )
              
              (63
              )
              
              (60
              )Balance
                  at the end of period
              
              $
              667
              
              $
              676
              
              $
              679
  EXTERNAL
        FACTORS AFFECTING ASSET QUALITY
  As
        a
        result of the Company's loan portfolio mix, the future quality of its assets
        could be affected by adverse economic trends in its region or in the
        agricultural community. These trends are beyond the control of the Company.
  California
        is an earthquake-prone region. Accordingly, a major earthquake could result
        in
        material loss to the Company. At times the Company's service area has
        experienced other natural disasters such as floods and droughts. The Company's
        properties and substantially all of the real and personal property securing
        loans in the Company's portfolio are located in California. The Company faces
        the risk that many of its borrowers face uninsured property damage, interruption
        of their businesses or loss of their jobs from earthquakes, floods or droughts.
        As a result these borrowers may be unable to repay their loans in accordance
        with their terms and the collateral for such loans may decline significantly
        in
        value. The Company's service area is a largely agricultural region and therefore
        is highly dependent on a reliable supply of water for irrigation purposes.
        The
        area obtains nearly all of its water from the run-off of melting snow in
        the
        mountains of the Sierra Nevada to the east. Although such sources have usually
        been available in the past, water supply can be adversely affected by light
        snowfall over one or more winters or by any diversion of water from its present
        natural courses. Any such natural disaster could impair the ability of many
        of
        the Company's borrowers to meet their obligations to the Company.
  Parts
        of
        California have experienced significant floods in the late 1990s. No assurance
        can be given that future flooding will not have an adverse impact on the
        Company
        and its borrowers and depositors.
  -25-
 Table
            of Contents
  LIQUIDITY
  In
        order
        to maintain adequate liquidity, the Company must have sufficient resources
        available at all times to meet its cash flow requirements. The need for
        liquidity in a banking institution arises principally to provide for deposit
        withdrawals, the credit needs of its customers and to take advantage of
        investment opportunities as they arise. The Company may achieve desired
        liquidity from both assets and liabilities. The Company considers cash and
        deposits held in other banks, federal funds sold, other short term investments,
        maturing loans and investments, payments of principal and interest on loans
        and
        investments and potential loan sales as sources of asset liquidity. Deposit
        growth and access to credit lines established with correspondent banks and
        market sources of funds are considered by the Company as sources of liability
        liquidity. The holding company’s primary source of liquidity is from dividends
        received from the Bank. Dividends from the Bank are subject to certain
        regulatory restrictions.
  The
        Company reviews its liquidity position on a regular basis based upon its
        current
        position and expected trends of loans and deposits. These assets include
        cash
        and deposits in other banks, time deposits at other financial institutions,
        available-for-sale securities and federal funds sold. The Company's liquid
        assets totaled $307,998,000 and $330,358,000 on June 30, 2005 and December
        31,
        2004, respectively, and constituted 20% and 23% of total assets on both those
        dates. Liquidity is also affected by the collateral requirements of its public
        deposits and certain borrowings. Total pledged securities were $376,417,000
        at
        June 30, 2005 compared with $321,688,000 at December 31, 2004.
  Although
        the Company's primary sources of liquidity include liquid assets and a stable
        deposit base, the Company maintains lines of credit with the Federal Reserve
        Bank of San Francisco, Federal Home Loan Bank of San Francisco, Pacific Coast
        Bankers' Bank, Union Bank of California, Wells Fargo Bank and First Tennessee
        Bank aggregating $280,788,000 of which $168,588,000 was outstanding as of
        June
        30, 2005 and $217,832,000 of which $155,326,000 was outstanding as of December
        31, 2004. The increase in borrowings outstanding during the first half of
        2005
        produced an inflow of funds that were used to purchase additional investment
        securities. Management believes that the Company maintains adequate amounts
        of
        liquid assets to meet its liquidity needs. The Company's liquidity might
        be
        insufficient if deposit withdrawals were to exceed anticipated levels. Deposit
        withdrawals can increase if a company experiences financial difficulties,
        receives adverse publicity for other reasons, or if its pricing, products
        or
        services are not competitive with those offered by other institutions.
  CAPITAL
        RESOURCES
  Capital
        serves as a source of funds and helps protect depositors against potential
        losses. The primary source of capital for the Company has been internally
        generated capital through retained earnings. The Company's shareholders'
        equity
        increased by $9,850,000 or 9.5% from December 31, 2004 to June 30, 2005.
        This
        increase was caused by the retention of accumulated earnings.
  The
        Company is subject to various regulatory capital requirements administered
        by
        the federal banking agencies. Failure to meet minimum capital requirements
        can
        initiate mandatory and possibly additional discretionary actions by the
        regulators that, if undertaken, could have a material adverse effect on the
        Company’s financial statements. Management believes, as of June 30, 2005, that
        the Company and the Bank met all applicable capital requirements. The Company’s
        leverage capital ratio at June 30, 2005 was 8.44% as compared with 8.46%
        as of
        December 31, 2004. The Company’s total risk based capital ratio at June 30, 2005
        was 11.53% as compared to 11.55% as of December 31, 2004.
  -26-
 Table
            of Contents
  The
        Company’s and Bank’s actual capital amounts and ratios met all regulatory
        requirements as of June 30, 2005 and were summarized as follows:
  Dollars
                  in thousands
              
              Actual
              
              For
                  Capital
                Adequacy
                  Purposes
              
              To
                  Be Well Capitalized
                Under
                  Prompt Corrective
                Action
                  Provisions:Consolidated
              
              Amount
              
              RatioAs
                  ofJune
                  30, 2005Total
                  capital (to risk weighted assets)
              
              $
              141,751
              
              
              11.53
              %
              $
              98,340
              
              
              8.0
              %
              $
              122,925
              
              
              10.0
              %Tier
                  1 capital (to risk weighted assets)
              
              
              127,680
              
              
              10.39
              
              
              49,170
              
              
              4.0
              
              
              73,755
              
              
              6.0Leverage
                  ratio*
              
              
              127,680
              
              
              8.44
              
              
              60,522
              
              
              4.0
              
              
              75,653
              
              
              5.0The
                  Bank:As
                  of June 30, 2005Total
                  capital (to risk weighted assets)
              
              $
              129,420
              
              
              10.55
              %
              $
              98,164
              
              
              8.0
              %
              $
              122,705
              
              
              10.0
              %Tier
                  1 capital (to risk weighted assets)
              
              
              115,349
              
              
              9.40
              
              
              49,082
              
              
              4.0
              
              
              73,623
              
              
              6.0Leverage
                  ratio*
              
              
              115,349
              
              
              7.64
              
              
              60,380
              
              
              4.0
              
              
              75,475
              
              
              5.0
  *
        The
        leverage ratio consists of Tier 1 capital divided by adjusted quarterly average
        assets. The minimum leverage ratio is 3 percent for banking organizations
        that
        do not anticipate significant growth and that have well-diversified risk,
        excellent asset quality and in general, are considered top-rated
        banks.
  -27-
 Table
            of Contents
  The
        Company issues dividends solely at the discretion of the Company’s Board of
        Directors, subject to compliance with regulatory requirements. In order to
        pay
        any cash dividends, the Company must receive payments of dividends or management
        fees from the Bank. There are certain regulatory limitations on the payment
        of
        cash dividends by banks.
 
 On
        October 26, 2004, the Bank entered into a written agreement (the Agreement)
        with
        the FRBSF relating to certain deficiencies identified by the FRB with respect
        to
        the Bank’s compliance with BSA and other applicable laws and regulations
        relating to anti-money laundering (“AML”). CCOW has filed a Form 8-K containing
        the Bank’s Agreement with the FRBSF with the SEC.
 
 The
        banking industry, including the Bank, is subject to significantly increased
        regulatory scrutiny and enforcement regarding BSA matters. Under the Agreement,
        the Bank will, among other actions to be taken, (i) develop a written program
        designed to improve the Bank’s system of internal controls to ensure compliance
        with applicable provisions of the BSA; (ii) develop an enhanced written customer
        due diligence program designed to reasonably ensure the identification and
        reporting of all known or suspected violations of law and suspicious
        transactions against or involving the Bank; (iii) establish enhanced written
        policies and procedures designed to strengthen the Bank’s internal controls and
        audit program, and (iv) submit quarterly progress reports to the FRBSF detailing
        actions taken to secure compliance with the Agreement.
 
 The
        Bank
        has already made significant progress in addressing the deficiencies identified
        by the FRBSF. The compliance effort will entail certain additional expenditures.
        In addition, while the Agreement is in place, its effect may be to limit
        the
        Bank’s ability to engage in certain expansionary activity. Neither of these
        effects are expected to have a material adverse impact on the financial
        condition nor results of operations of the Bank or the Company.
  DEPOSITS
  Deposits
        are the Company's primary source of funds. At June 30, 2005, the Company
        had a
        deposit mix of 29% in savings deposits, 34% in time deposits, 14% in
        interest-bearing checking accounts and 23% in noninterest-bearing demand
        accounts. Noninterest-bearing demand deposits enhance the Company's net interest
        income by lowering its costs of funds.
  The
        Company obtains deposits primarily from the communities it serves. No material
        portion of its deposits has been obtained from or is dependent on any one
        person
        or industry. The Company's business is not seasonal in nature. The Company
        accepts deposits in excess of $100,000 from customers. These deposits are
        priced
        to remain competitive. At June 30, 2005, the Company had brokered deposits
        of
        $20,966,000 and $99,000 at December 31, 2004.
  Maturities
        of time certificates of deposits of $100,000 or more outstanding at June
        30,
        2005 and December 31, 2004 are summarized as follows:
  **June
                  30, 2005**
              
              **December
                  31, 2004****(Dollars
                  in thousands)**Three
                  months or less
              
              $
              72,393
              
              $
              77,105Over
                  three to six months
              
              
              30,591
              
              
              20,366Over
                  six to twelve months
              
              
              55,971
              
              
              38,086Over
                  twelve months
              
              
              57,140
              
              
              31,183Total
              
              $
              216,095
              
              $
              166,740
  -28-
 Table
            of Contents
  **Borrowed
        Funds**
  Borrowed
        funds increased by $10,645,000 or 6% to $174,764,000 at June 30, 2005 compared
        to the $164,119,000 outstanding at December 31, 2004. The increase in borrowed
        funds during the first six months of 2005 was primarily due to the use of
        a
        leveraged investment strategy that utilizes additional FHLB borrowings to
        fund
        purchases of investment securities within the Bank’s investment
        portfolio.
  **Return
        on Equity and Assets**
 Six
                  months ended
              
              Six
                  months ended
              
              Year
                  endedJune
                  30
              
              June
                  30
              
              December
                  312005
              
              2004
              
              2004Annualized
                  return on average assets
              
              
              1.36
              %
              
              1.20
              %
              
              0.94
              %Annualized
                  return on average equity
              
              
              18.73
              %
              
              16.34
              %
              
              12.69
              %Dividend
                  payout ratio
              
              
              10.31
              %
              
              7.58
              %
              
              9.00
              %Average
                  equity to average assets
              
              
              7.28
              %
              
              7.35
              %
              
              7.41
              %
  **Impact
        of Inflation**
  The
        primary impact of inflation on the Company is its effect on interest rates.
        The
        Company’s primary source of income is net interest income which is affected by
        changes in interest rates. The Company attempts to limit inflation’s impact on
        its net interest margin through management of rate sensitive assets and
        liabilities and the analysis of interest rate sensitivity. The effect of
        inflation on premises and equipment, as well as on interest expenses, has
        not
        been significant for the periods covered in this report.
  -29-
 Table
            of Contents
  **Item
        3.** **Quantitative
        and Qualitative Disclosures about Market Risk**
 
 In
        the
        normal course of business, the Company is exposed to market risk which includes
        both price and liquidity risk. Price risk is created from fluctuations in
        interest rates and the mismatch in repricing characteristics of assets,
        liabilities, and off balance sheet instruments at a specified point in time.
        Mismatches in interest rate repricing among assets and liabilities arise
        primarily through the interaction of the various types of loans versus the
        types
        of deposits that are maintained as well as from management's discretionary
        investment and funds gathering activities. Liquidity risk arises from the
        possibility that the Company may not be able to satisfy current and future
        financial commitments or that the Company may not be able to liquidate financial
        instruments at market prices. Risk management policies and procedures have
        been
        established and are utilized to manage the Company's exposure to market risk.
        Quarterly testing of the Company’s assets and liabilities under both increasing
        and decreasing interest rate environments are performed to insure the Company
        does not assume a magnitude of risk that is outside approved policy
        limits.
 
 The
        Company’s success is largely dependent upon its ability to manage interest rate
        risk. Interest rate risk can be defined as the exposure of the Company’s net
        interest income to adverse movements in interest rates. Although the Company
        manages other risks, such as credit and liquidity risk in the normal course
        of
        its business, management considers interest rate risk to be its most significant
        market risk and could potentially have the largest material effect on the
        Company’s financial condition and results of operations. Correspondingly, the
        overall strategy of the Company is to manage interest rate risk, through
        balance
        sheet structure, to be interest rate neutral.
 
 The
        Company’s interest rate risk management is the responsibility of the
        Asset/Liability Management Committee (ALCO), which reports to the Board of
        Directors. ALCO establishes policies that monitors and coordinates the Company’s
        sources, uses and pricing of funds. ALCO is also involved in formulating
        the
        economic projections for the Company’s budget and strategic plan. ALCO sets
        specific rate sensitivity limits for the Company. ALCO monitors and adjusts
        the
        Company’s exposure to changes in interest rates to achieve predetermined risk
        targets that it believes are consistent with current and expected market
        conditions. Balance sheet management personnel monitor the asset and liability
        changes on an ongoing basis and provide report information and recommendations
        to the ALCO committee in regards to those changes.
 
 It
        is the
        opinion of management there has been no material change in the Company’s market
        risk during the first half of 2005 when compared to the level of market risk
        at
        December 31, 2004. If interest rates were to suddenly and materially fall
        from
        levels experienced during the first half of 2005, the Company could become
        susceptible to an increased level of market risk.
  -30-
 Table
            of Contents
  **Item
        4.** **Controls
        and Procedures**
 
 Evaluation
        Of Disclosure Controls And Procedures
 
 Under
        the
        supervision and with the participation of the Company’s management, including
        its chief executive officer and chief financial officer, the Company conducted
        an evaluation of the effectiveness of the design and operation of its disclosure
        controls and procedures as defined by Rule 13a-15(e) under the Securities
        Exchange Act of 1934.
 
 Based
        on
        the evaluation, the chief executive officer and chief financial officer
        concluded that as of the end of the period covered by this report the disclosure
        controls and procedures were adequate and effective, and that the material
        information required to be included in this report, including information
        from
        the Company’s consolidated subsidiaries, was properly recorded, processed,
        summarized and reported, and was made known to the chief executive officer
        and
        chief financial officer by others within the Company in a timely manner,
        particularly during the period when this quarterly report on Form 10-Q was
        being
        prepared.
 
 Changes
        In Internal Control over Financial Reporting
 
 There
        was
        no change in our internal control over financial reporting that occurred
        during
        our most recent fiscal quarter that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial
        reporting.
  -31-
 Table
            of Contents
  **PART
        II - Other Information**
  **Item
        1.**  **Legal
        Proceedings**
  The
        Company is a party to routine litigation in the ordinary course of its business.
        In the opinion of management, pending and threatened litigation is not likely
        to
        have a material adverse effect on the financial condition or results of
        operations of the Company.
  **Item
        2.** **Unregistered
        Sales of Equity Securities and Use of Proceeds.**
  None.
  **Item
        3.**  **Defaults
        Upon Senior Securities.**
  None.
  **Item
        4.**  **Submission
        of Matters to a Vote of Securities Holders.**
  (a.)
              Our
                  Annual Meeting of Shareholders for 2005 was held April 26, 2005.
                  The
                  number of shares represented in person or by proxy and constituting
                  a
                  quorum was 4,198,581, which equaled approximately 72% of the shares
                  outstanding.
  (b.)
              The
                  following are the results of the election of directors in Class
                  III of the
                  Board:
 Election
                  of directors
              Votes
                  For
              Votes
                  WithheldG.
                  Michael Graves
              4,039,094
              159,487Tom
                  A.L. Van Groningen
              4,132,445
              66,136Curtis
                  R. Grant
              4,131,491
              67,090David
                  Bonnar
              4,062,616
              135,965
  **Item
        5.**   **Other
        Information.**
  In
        the
        opinion of management, there is no additional information relating to these
        periods being reported which warrants inclusion in the report.
  **Item
        6. Exhibits**
  See
        Exhibit Index
  -32-
 Table
            of Contents
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  CAPITAL
        CORP OF THE WEST
 (Registrant)
  
 Date:
                  August 4, 2005
              By/s/
                  Thomas T. HawkerThomas
                  T. HawkerPresident
                  andChief
                  Executive Officer
 
 
 Date:
                  August 4, 2005
              By/s/
                  R. Dale McKinneyR.
                  Dale McKinneyChief
                  Financial Officer
  -33-
 Table
            of Contents
  Exhibit
        Index
 
 Exhibit  Description
  31.1
                Certification
                    of Registrant's Chief Executive Officer
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    200231.2
                Certification
                    of Registrant's Chief Financial Officer
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    200232.1
                Certification
                    of Registrant’s Chief Executive Officer
                    Pursuant to 18 U.S.C. Section 135032.2
                Certification
                    of Registrant’s Chief Financial Officer
                    Pursuant to 18 U.S.C. Section
                    1350
  -34-