UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2006

or

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

Commission File Number: 0-27384

CAPITAL CORP OF THE WEST

(Exact name of registrant as specified in its charter)

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

550 West Main, Merced, CA 95340

(Address of principal executive offices)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨

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

The number of shares outstanding of the registrant’s common stock, no par value, as of November 1, 2006 was 10,740,000. No shares of preferred stock, no par value, were outstanding at November 1, 2006.

-1-

Capital Corp of the West

Table of Contents

PART I. -- FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)	3
Consolidated Statements of Income and Comprehensive Income (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	5
Consolidated Statements of Cash Flows (unaudited)	6
Notes to the Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures about Market Risk	29
Item 4. Controls and Procedures	29

PART II. -- OTHER INFORMATION

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

-2-

Capital Corp of the West

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands)	September 30, 2006			December 31, 2005
Assets
Cash and noninterest-bearing deposits in other banks	$	46,104		$	61,331
Federal funds sold		49,690			30,250
Time deposits at other financial institutions		350			350
Investment securities available for sale, at fair value		263,526			318,155
Investment securities held to maturity, at cost; fair value of $170,327 and $178,233 at September 30, 2006 and December 31, 2005		172,578			181,025
Loans, net of allowance for loan losses of $14,796 and $14,776 at September 30, 2006 and December 31, 2005		1,251,404			1,054,120
Interest receivable		8,571			8,305
Premises and equipment, net		38,833			28,970
Goodwill		1,405			1,405
Other intangible assets		-			23
Cash value of life insurance		42,762			31,796
Investment in housing tax credit limited partnerships		8,440			8,745
Other assets		29,996			32,281
Total assets	$	1,913,659		$	1,756,756
Liabilities
Deposits:
Noninterest-bearing demand	$	277,152		$	310,284
Negotiable orders of withdrawal		197,142			216,594
Savings		404,199			426,581
Time, under $100		282,862			216,016
Time, $100 and over		412,541			235,025
Total deposits		1,573,896			1,404,500
Other borrowings		152,629			201,728
Junior subordinated debentures		31,960			16,496
Accrued interest, taxes and other liabilities		13,101			11,787
Total liabilities		1,771,586			1,634,511
Shareholders’ Equity
Preferred stock, no par value; 10,000,000 shares authorized; none outstanding		-			-
Common stock, no par value; 54,000,000 shares authorized; 10,736,497 and 10,575,361 issued and outstanding at September 30, 2006 and December 31, 2005		63,904			59,785
Retained earnings		80,440			65,049
Accumulated other comprehensive loss, net		(2,271	)		(2,589	)
Total shareholders’ equity		142,073			122,245
Total Liabilities and Shareholders’ Equity	$	1,913,659		$	1,756,756

See accompanying notes to consolidated financial statements

-3-

Capital Corp of the West

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands, except per share data)	2006		2005			2006			2005
Interest income:
Interest and fees on loans	$	26,009	$	19,106		$	73,440		$	51,572
Interest on deposits with other financial institutions		5		2			14			17
Interest on investments held to maturity:
Taxable		882		1,065			2,723			3,243
Non-taxable		950		900			2,844			2,492
Interest on investments available for sale:
Taxable		3,063		2,384			9,826			7,703
Non-taxable		11		11			33			33
Interest on federal funds sold		100		19			193			91
Total interest income		31,020		23,487			89,073			65,151
Interest expense:
Interest on negotiable orders of withdrawal		373		102			1,038			160
Interest on savings deposits		2,259		1,406			6,041			3,515
Interest on time deposits, under $100		2,666		1,578			7,443			4,248
Interest on time deposits, $100 and over		4,840		1,743			10,305			4,196
Interest on other borrowings		2,050		1,364			6,807			4,152
Interest on junior subordinated debentures		683		327			1,456			972
Total interest expense		12,871		6,520			33,090			17,243
Net interest income		18,149		16,967			55,983			47,908
Provision for loan losses		200		1,035			400			1,356
Net interest income after provision for loan losses		17,949		15,932			55,583			46,552
Noninterest income:
Service charges on deposit accounts		1,550		1,554			4,475			4,447
Gain on sale of securities		-		-			622			-
Increase in cash value of life insurance		366		310			966			770
Other		1,240		802			3,147			2,458
Total noninterest income		3,156		2,666			9,210			7,675
Noninterest expenses:
Salaries and related expenses		7,293		5,538			21,487			16,748
Premises and occupancy		1,422		1,205			3,866			3,256
Equipment		1,096		1,035			3,129			2,936
Professional fees		478		418			1,952			1,620
Supplies		237		236			776			808
Marketing		360		231			1,213			855
Community support donations		264		178			773			573
Intangible amortization		-		11			23			34
Other		1,842		1,448			5,355			4,480
Total noninterest expenses		12,992		10,300			38,574			31,310
Income before provision for income taxes		8,113		8,298			26,219			22,917
Provision for income taxes		2,284		2,845			8,579			7,350
Net income	$	5,829	$	5,453		$	17,640		$	15,567
Comprehensive income:
Unrealized gain (loss) on interest rate floor	$	135	$	(177	)	$	(161	)	$	(177	)
Unrealized gain (loss) on securities		3,372		(894	)		479			(1,381	)
Comprehensive income	$	9,336	$	4,382		$	17,958		$	14,009
Basic earnings per share	$	0.54	$	0.52		$	1.65		$	1.49
Diluted earnings per share	$	0.53	$	0.50		$	1.61		$	1.44

See accompanying notes to consolidated financial statements

-4-

Capital Corp of the West

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

	Common Stock							Accumulated other
(Amounts in thousands)	Number of shares		Amounts		Retained earnings			Comprehensive (loss) gain			Total
Balance, December 31, 2005		10,575	$	59,785	$	65,049		$	(2,589	)	$	122,245
Exercise of stock options, including tax benefit of $911		161		4,119		-			-			4,119
Net change in fair value of available for sale investment securities, net of tax effect of $347		-		-		-			479			479
Net change in fair value of interest rate floor, net of tax benefit of $117		-		-		-			(161	)		(161	)
Cash dividends		-		-		(2,249	)		-			(2,249	)
Net income		-		-		17,640			-			17,640
Balance, September 30, 2006		10,736	$	63,904	$	80,440		$	(2,271	)	$	142,073

See accompanying notes to consolidated financial statements

-5-

Capital Corp of the West

Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
(Dollars in thousands)	2006			2005
Operating activities:
Net income	$	17,640		$	15,567
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses		400			1,356
Depreciation, amortization and accretion, net		5,442			5,571
Origination of loans held for sale		(2,380	)		(5,013	)
Proceeds from sales of loans		1,662			1,606
Increase in cash value of life insurance		(966	)		(770	)
Death benefit income from bank owned life insurance		(179	)		(539	)
Gain on sale of available for sale investment securities		(622	)		-
Gain on sale of other real estate owned		(190	)		-
Non-cash stock option compensation expense		566			-
Net decrease (increase) in interest receivable & other assets		1,964			(1,654	)
Net increase in accrued interest, taxes and other liabilities		1,314			2,758
Net cash provided by operating activities		24,651			18,882
Investing activities:
Investment securities purchased - available for sale securities		(2,944	)		(53,282	)
Investment securities purchased - held to maturity securities		(3,659	)		(28,996	)
Proceeds from maturities of available for sale investment securities		38,591			51,434
Proceeds from maturities of held to maturity investment securities		11,404			12,204
Net decrease in time deposits in other financial institutions		-			3,000
Proceeds from sales of available for sale securities		20,483			29,537
Loans purchased		(30,015	)		-
Net increase in loans		(169,379	)		(141,302	)
Purchases of premises and equipment		(11,984	)		(6,097	)
Net purchases of bank owned life insurance		(10,000	)		(2,393	)
Net cash used in investing activities		(157,503	)		(135,895	)
Financing activities:
Net (decrease) increase in demand, NOW and savings deposits		(74,966	)		57,824
Net increase in certificates of deposit		244,362			76,527
Net decrease in other borrowings		(49,099	)		(18,970	)
Issuance of junior subordinated debentures		15,464			-
Payment of cash dividends		(2,249	)		(1,354	)
Issuance of shares pursuant to 401K and ESOP plans		-			300
Exercise of stock options		2,642			1,149
Tax benefits related to exercise of stock options		911			394
Net cash provided by financing activities		137,065			115,870
Net increase (decrease) in cash and cash equivalents		4,213			(1,143	)
Cash and cash equivalents at beginning of period		91,581			57,819
Cash and cash equivalents at end of period	$	95,794		$	56,676
Supplemental disclosure of noncash investing and financing activities:
Interest rate floor unrealized loss, net of taxes	$	(161	)	$	(177	)
Interest paid		31,855			17,050
Income tax payments		8,150			5,275
Investment securities unrealized gain (loss), net of tax	$	479		$	(1,381	)

See accompanying notes to consolidated financial statements

-6-

Capital Corp of the West

Notes to Consolidated Financial Statements

September 30, 2006 and December 31, 2005

(Unaudited)

GENERAL COMPANY

Capital Corp of the West (the “Company”) is a bank holding company incorporated under the laws of the State of California on April 26, 1995. On November 1, 1995, the Company became registered as a bank holding company and is the holder of all of the capital stock of County Bank (the “Bank”). The Company's primary asset is the Bankand the Bank is the Company's primary source of income. As of November 1, 2006, the Company had outstanding 10,740,000 shares of Common Stock, no par value, held by approximately 2,500 shareholders. There were no preferred shares outstanding at November 1, 2006. The Company had one wholly-owned inactive nonbank subsidiary, Capital West Group (“CWG”) at September 30, 2006. The Bank has one wholly-owned active nonbank subsidiary, and one wholly-owned inactive nonbank subsidiary. The active subsidiary is Merced Area Investment & Development, Inc. (“MAID”), the inactive subsidiary is County Asset Advisors (“CAA”). All references herein to the Company includes direct subsidiaries of the Company as well as the Bank and the Bank's subsidiaries, unless the context otherwise requires.

GENERAL BANK

The Bank was organized on August 1, 1977, as County Bank of Merced, a California state banking corporation. The Bank commenced operations in 1977. In November 1992, the Bank changed its legal name to County Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits. The Bank is a member of the Federal Reserve System.

INDUSTRY AND MARKET AREA

The Bank engages in general commercial banking business primarily in Fresno, Madera, Mariposa, Merced, Sacramento, San Francisco, San Joaquin, Santa Clara, Stanislaus, and Tuolomne counties. The Bank has twenty-five full service branch offices; two of which are located in Merced with the branch located in downtown Merced currently serving as both a branch and as administrative headquarters. There are offices in Atwater, Hilmar, Los Banos, Sonora, Stockton, two offices in Modesto and two offices in Turlock. In 1997, the Bank also opened an office in Madera and purchased three branch offices from Bank of America in Livingston, Dos Palos and Mariposa. During 1999, the Bank opened its first office in Fresno, and in 2000 expanded its presence in Fresno by adding an additional office. On January 18, 2001 the Bank opened a loan production office in San Francisco that during 2001 was converted into a full service branch. During 2003 and 2004, the Bank added one full service branch facility in Fresno each year. During 2005 the Bank opened a loan production office in Sacramento which was converted into a full service branch and opened a full service branch in Clovis. During 2006, the Bank added one full service branch facility in San Jose, Riverbank, and Clovis. The Bank’s administrative headquarters also provide accommodations for the activities of Bank's wholly-owned real estate subsidiaries.

OTHER FINANCIAL NOTES

All adjustments which in the opinion of Management are necessary for a fair presentation of the Company’s financial position at September 30, 2006 and December 31, 2005 and the results of operations for the three and nine month periods ended September 30, 2006 and 2005, and the statements of cash flows for the three and nine months ended September 30, 2006 and 2005 have been included therein. The interim results for the three and nine months ended September 30, 2006 are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2005.

-7-

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

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

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period plus potential common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

The following table provides a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation of the three and nine month periods ended September 30, 2006 and 2005:

	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
(Dollars in thousands, except per share data)	2006		2005		2006		2005
Basic EPS computation:
Net income	$	5,829	$	5,453	$	17,640	$	15,567
Average common shares outstanding		10,731		10,506		10,673		10,480
Basic EPS	$	0.54	$	0.52	$	1.65	$	1.49
Diluted EPS Computations:
Net income	$	5,829	$	5,453	$	17,640	$	15,567
Average common shares outstanding		10,731		10,506		10,673		10,480
Effect of stock options		239		342		274		329
		10,970		10,848		10,947		10,809
Diluted EPS	$	0.53	$	0.50	$	1.61	$	1.44

INTANGIBLE ASSETS

The Company has intangible assets consisting of core deposit premiums and goodwill. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to goodwill have not been amortized after December 31, 2001 but are reviewed at least annually for potential impairment. During the third quarter of 2006, management determined there had been no impairment of goodwill. As of September 30, 2006 the Company had fully amortized core deposit premiums. As of December 31, 2005, the Company had unamortized core deposit premiums of $23,000. Amortization of core deposit premiums and other intangibles was $0 and $11,000 during the third quarter of 2006 and 2005. Core deposit premiums of $460,000 and $4,340,000 were initially recorded as a result of purchasing deposits from Town and Country Finance and Thrift in July, 1996 and the purchase of three branches from Bank of America in December, 1997, respectively.

-8-

BORROWED FUNDS

For the nine months ended September 30, 2006, the Company decreased other borrowings which were obtained primarily from the Federal Home Loan Bank and Pacific Coast Bankers’ Bank. The decrease in other borrowings totaled $49,099,000 for the nine months ended September 30, 2006. The Company increased its subordinated debentures outstanding from $16,496,000 to $31,960,000 or an increase of $15,464,000 for the nine months ended September 30, 2006. The additional subordinated debentures were issued primarily to improve liquidity and provide a long term financing source that qualifies as regulatory capital under existing regulations.

Share-Based Payment

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

On January 1, 2006, the Company began recording share-based payment expense in accordance with Statement of Financial Accounting Standards No. 123-R, Share-based Payment, (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified prospective transition method provided for under SFAS 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock option awards now includes quarterly amortization of the remaining unvested portion of stock options outstanding prior to January 1, 2006. Share-based payment expense was recorded as a non-cash expense increase in salaries and benefits expense, which had the effect of reducing net income, earnings per share, and diluted earnings per share. Share-based payment expense also had the effect of lowering income from continuing operations reported in the Consolidated Statement of Cash Flow for 2006. Under SFAS 123R, stock options are valued at fair value using an acceptable model. Share-based payment expense is recorded on a ratable basis in the period in which the stock option vests. The Company uses the Black-Scholes-Merton closed form model, an acceptable model under SFAS 123R, for estimating the fair value of stock options. For the valuation of stock options, the Company used the following assumptions: a risk free rate of 4.8%; a volatility rate of 26.89%; an expected dividend rate of 0.90%; and an expected term of 5.85 years for the quarter ended September 30, 2006 and a risk free rate of 4.66%; a volatility rate of 28.85%; an expected dividend rate of 0.75%; and an expected term of 5.91 years for the nine months ended September 30, 2006. For the valuation of stock options during the year ended December 31, 2005, the Company used the following assumptions: a risk free rate of 3.86%; a volatility rate of 30.46%; an expected dividend rate of 0.40%; and an expected term of 6.32 years.

Prior to January 1, 2006, the Company accounted for share-based payment expense using the intrinsic method, where the difference between the exercise price and the fair market value of the option on the date of grant is recognized as share-based payment expense.

-9-

Information as Reported in the Financial Statements

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

	Three Months Ended September 30, 2006			Nine Months Ended September 30, 2006
(Dollars in thousands)
Stock option compensation expense	$	131		$	566
Tax benefit recorded related to stock option compensation expense		(9	)		(37	)
Decrease in net income	$	122		$	529
Effect on:
Net income per share - basic	$	(0.01	)	$	(0.05	)
Net income per share - diluted	$	(0.01	)	$	(0.05	)

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

(Shares in thousands)	# of shares			Weighted-Average exercise price
Outstanding at January 1, 2006		752		$	17.44
Options granted		115		$	33.29
Options exercised		(163	)	$	15.00
Options forfeited		(9	)	$	32.84
Outstanding at September 30, 2006		695		$	20.44
Exercisable at September 30, 2006		573		$	17.74
Forfeited during the first nine months of 2006		9		$	32.84

Options grants during the first nine months of 2006:

	September 30,
(Shares in thousands)	2006				2005
	# of shares		Weighted-Average fair value		# of shares		Weighted-Average fair value
Options granted		115	$	11.15		169	$	9.83

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

(Shares in thousands)	# of shares			Weighted-Average fair value
Nonvested options at January 1, 2006		43		$	10.60
Options granted		115		$	11.15
Options vested		(27	)	$	11.15
Options forfeited		(9	)	$	10.60
Nonvested options at September 30, 2006		122		$	10.97

-10-

Vested option summary information as of September 30, 2006 is as follows:

(Shares and dollars in thousands)	# of shares		Aggregate intrinsic value		Weighted-Average remaining contractual life		Weighted-Average exercise price
Vested options exercisable at September 30, 2006		573	$	7,717		6.45	$	17.74
Total options outstanding at September 30, 2006		695	$	7,479		6.97	$	20.44

The vesting schedule for each option holder’s stock option contract is identical to the exercise schedule for each option contract. The total intrinsic value of options exercised was $919,000 and $266,000 for the quarters ended September 30, 2006 and September 30, 2005. Intrinsic value is defined as positive difference between the current market price for the underlying stock and the strike price of an option. The exercise price must be less than the current market price of the underlying stock to have intrinsic value. The total fair value of shares vested was $566,000 and $947,000 for the nine months ended September 30, 2006 and 2005. Total future compensation expense related to nonvested awards was $1,082,000 with a weighted average period to be recognized of 2.45 years as of September 30, 2006. There are 2,570,308 shares authorized for grant under the Company’s stock option plan.

Information Calculated as if SFAS 123R had been adopted and the stock option valuation and share-based payment expense were included in prior period Financial Statements.

(Dollars in thousands except per share amounts)	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income as reported	$	5,453		$	15,567
Share-based payment expense		(228	)		(947	)
Tax benefit related to share-based payment expense		(3	)		93
Net income, proforma	$	5,222		$	14,713
Basic earnings per share:
As reported	$	0.52		$	1.49
Pro forma	$	0.49		$	1.40
Diluted earnings per share:
As reported	$	0.50		$	1.44
Pro forma	$	0.48		$	1.36
Share-based payment expense, net of related tax effects, included in net income:
As reported	$	-		$	-
Pro forma	$	231		$	854

Share-based payment expense related to stock option activity was recorded at $566,000 for the nine months ended September 30, 2006 compared to $947,000 that would have been recorded for the nine months ended September 30, 2005. The $381,000 decrease is related to the November, 2005 action by the Board of Directors approving the accelerated vesting of all outstanding stock options at that time. The Board of Directors performed this action to mitigate the effect of the adoption of Financial Accounting Statement 123R. The Company received $3,553,000 and $1,543,000 in cash related to stock option exercises for the nine months ended September 30, 2006 and September 30, 2005. The Company recorded a tax benefit related to stock options of $911,000 and $394,000 for the nine months ended September 30, 2006 and September 30, 2005.

On November 29, 2005, the Company’s Board of Directors approved the 100% vesting of all existing unvested stock options outstanding. All the options affected had a positive intrinsic value, and were held by certain members of management and the Board of Directors. The Board took this action so that the Company would not be required to recognize equity compensation expense in the Consolidated Statements of Income and Comprehensive Income on the unvested portion of the stock options outstanding as of November 29, 2005. The unvested share-based payment expense related to this action was $2,409,000. During the three and nine months ended September 30, 2006, the additional amount of share-based payment expense that would have been recorded if the stock option vesting schedules had not been accelerated was $169,000 and $591,000, the tax benefit would have been $32,000 and $100,000, and net income would have been reduced by $134,000 and $491,000.

-11-

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140." SFAS No. 155 simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No.133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets," which provides such beneficial interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125," by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. This statement is effective for financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on the Company’s Consolidated Financial Statements.

In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, "Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140." SFAS No.156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the "amortization method" or "fair value method" for subsequent balance sheet reporting periods. SFAS No.156 is effective as of an entity's first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. Management does not expect the adoption of this statement to have a material impact on the Company’s Consolidated Financial Statements.

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

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, "Employers’ Fair Value Measurements” which defines and establishes a framework for measuring fair value used in FASB pronouncements that require or permit fair value measurement. This statement expands disclosures using fair value to measure assets and liabilities in interim and annual periods subsequent to the period of initial recognition. SFAS No. 157 is effective for financial statements issued for fiscal years after November 15, 2007, and interim periods within those years. Management does not expect the adoption of this statement to have a material impact on the Company’s Consolidated Financial Statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, "Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132R” requires the recognition of the funded status of a defined benefit plan, and that gains or losses and prior service costs or credits that arise during the period that are not recognized as net period benefit expenses be recorded in other comprehensive income. In addition, benefit plan assets and obligations should generally be measured as of the fiscal year-end statement of financial position. Disclosure is required in the notes to the financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses. SFAS No. 158 is effective, for companies with publicly traded securities, for fiscal years ending after December 15, 2006. Management does not expect the adoption of this statement to have a material impact on the Company’s Consolidated Financial Statements.

In September 2006, the Securities and Exchange Commission (SEC) issued SAB No. 108, “Quantifying Misstatements in Financial Statements” which outlined the approach the SEC believes should be used to quantify the misstatement of current year financial statements as a result of misstatements in prior year financial statements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Management does not expect the adoption of this bulletin to have a material impact on the Company’s Consolidated Financial Statements.

-12-

Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, “intends,” “plans,” “assumes,” “projects,” “predicts,” “forecasts,” and variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements.

Readers of the Company’s Form 10-Q should not base their investment decisions solely on forward looking statements and should consider all uncertainties and risks discussed throughout this report, as well as those discussed in the Company’s 2005 Annual Report on Form 10-K filed on March 14, 2006. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made. Some possible events or factors that could occur that may cause differences from expected results include the following: the Company’s loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to sell, or purchase certain loans or loan portfolios; or sell or buy participations of loans; the quality and adequacy of management of our borrowers; industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographical conditions, the mix of the loan portfolio and management’s judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Company and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent on liquidity requirements and market volatility, as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities and the wholesale and retail funding sources of the Company.

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

Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local and regional banks, savings and loan associations, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities which offer financial services; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and their integration into the Company, civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences or acts of this type, outbreak or escalation of hostilities in which the United States is involved, any declaration of war by the U.S. Congress or any other national or international calamity, crisis or emergency changes in laws and regulations, recently issued accounting pronouncements, government policies, regulations, and their enforcement (including Bank Secrecy Act-related matters, taxing statutes and regulations); restrictions on dividends that our subsidiaries are allowed to pay to us; the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulation on internal control; and management’s ability to manage these and other risks. For additional information relating to the risks of the Company's business see "Risk Factors" in the Company's Annual Report on Form 10-K.

-13-

Critical accounting policies and estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses and reserve for unfunded loan commitments, valuation of deferred income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates. (See caption “Allowance for Loan Losses” below in the current Form 10-Q and in the Company’s 2005 annual report for a more detailed discussion).

The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and its subsidiaries' financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto included in the Company’s Annual Report and Form 10-K.

Results Of Operations

Three and Nine Months Ended September 30, 2006 Compared With Three and Nine Months Ended September 30, 2005

OVERVIEW

For the three and nine months ended September 30, 2006 the Company reported net income of $5,829,000 and $17,640,000. This compares to $5,453,000 and $15,567,000 for the same period in 2005 and represents an increase of $376,000 and $2,073,000 or 7% and 13%. Basic and diluted earnings per share were $0.54 and $0.53 for the three months ended September 30, 2006 and $1.65 and $1.61 for the nine months ended September 30, 2006. This compares to basic and diluted earnings per share of $0.52 and $0.50 for the three months ended September 30, 2005 and $1.49 and $1.44 for the nine months ended September 30, 2005. This was an increase of $0.02 per share for basic and $0.03 for diluted earnings per share for the three months ended September 30, 2006 and $0.16 for basic and $0.17 for diluted earnings per share for the nine months ended September 30, 2006. The annualized return on average assets was 1.29% and 1.33% for the three and nine months ended September 30, 2006 compared to 1.39% and 1.37% for the three and nine months ended September 30, 2005. The Company's annualized return on average equity of 17.05% and 17.91% for the three and nine months ended September 30, 2006 compared to 18.84% and 18.77% for the three and nine months ended September 30, 2005.

NET INTEREST INCOME

The Company's primary source of income is net interest income and is determined by the difference between interest income and fees derived from earning assets and interest paid on interest bearing liabilities. The following table illustrates the results and changes in interest income and interest expense for the three and nine months ended September 30, 2006 and September 30, 2005:

	For the three months ended September 30,							For the nine months ended September 30,
(Dollars in thousands)	2006		2005		Percent change			2006		2005		Percent change
Total interest income	$	31,020	$	23,487		32	%	$	89,073	$	65,151		37	%
Total interest expense		12,871		6,520		97	%		33,090		17,243		92	%
Net interest income	$	18,149	$	16,967		7	%	$	55,983	$	47,908		17	%

The following table illustrates the average balances affecting interest income and expense, and interest earned or paid on those balances on a tax adjusted basis for the periods indicated:

	For the three months ended September 30,									For the nine months ended September 30,
(Dollars in thousands)	2006			2005			Percent change			2006			2005			Percent change
Average interest earning assets	$	1,674,083		$	1,444,974			16	%	$	1,639,476		$	1,397,244			17	%
Average interest bearing liabilities	$	1,384,793		$	1,154,247			20	%	$	1,345,609		$	1,120,036			20	%
Average interest rate earned		7.42	%		6.54	%		13	%		7.34	%		6.32	%		16	%
Average interest rate paid		3.69	%		2.24	%		65	%		3.29	%		2.06	%		60	%
Net interest margin		4.37	%		4.75	%		(8	)%		4.64	%		4.67	%		(1	)%

The level of interest income is affected by changes in volume of and rates earned on interest-earning assets. Interest-earning assets consist primarily of loans, investment securities and federal funds sold. The increase in total interest income for the three and nine months ended September 30, 2006 was primarily the result of an increase in both the volume of interest-earning assets and the average interest rates earned. The increase in average interest earning assets during 2006 was made possible by increased asset generation from our existing branch network, the use of brokered time deposits, and the issuance of subordinated debt. The increase in interest rates earned during the three and nine months ended September 30, 2006 compared to the same period in 2005 was primarily the result of an increase in prevailing market interest rates. Short term interest rates have increased as Federal Reserve Board’s Open Market Committee continued to raise short term rates through June 2006. Interest expense is a function of the volume and rates paid on interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. The increase in interest-bearing liabilities during the three and nine months of 2006 when compared to the same period in 2005 was primarily the result of an increase in internally generated and brokered certificates of deposit of $100,000 and over. Brokered deposits totaled $124,258,000 as of September 30, 2006 compared to $20,871,000 outstanding at December 31, 2005, or an increase of $103,387,000 during the first nine months of 2006. In addition to the increase in brokered deposits, the Bank made a concerted effort to retain savings deposits that were previously swept out to other institutions. This action allowed the Bank to retain $49,840,000 in savings deposits on ledger. The increase in interest rates paid during the three and nine months ended September 30, 2006 when compared to 2005 was primarily the result of an increase in prevailing interest rates and a change in the mix within the deposit portfolio. Time deposits accounted for 44% of the deposit portfolio as of September 30, 2006 compared to 32% as of December 31, 2005. The increase in the time deposit portfolio was coupled with declines in the demand, NOW, and savings portion of the deposit portfolio to increase the average interest rate paid on interest bearing liabilities. Customers moving funds to lock in higher certificate of deposit term rates coupled with the use of brokered time deposits were the primary reasons for the increased time deposits recorded.

Net interest margin provides a measurement of the Company's ability to employ funds profitably during the period being measured. The Company's decrease in net interest margin in 2006 was primarily attributable to an increase of 141 and 128 basis points in the time deposit portfolio yield paid and an increase in average balances of $235,749,000 and $178,701,000 in the time deposit portfolio during the first three and nine months of 2006 compared to the same time period in 2005. Loans as a percentage of average interest-earning assets increased to 73% and 71% for the three and nine months ended September 30, 2006 compared with 70% and 68% for the three and nine months ended September 30, 2005. The increase in loans as a percentage on interest-earning assets is mainly attributable to increased loan production generated through our branch network. The loan growth occurred primarily in the secured and unsecured commercial loan segments of the portfolio. In addition the Bank recorded a reversal in interest income of $209,000 primarily relating to prior periods where excess interest was charged to certain loans. This matter combined with certain prior period unclaimed tax benefits associated with state housing tax credits (see “PROVISION FOR INCOME TAXES”) resulted in an inconsequential impact on any period including the current period. Management also believes that these two issues are individually inconsequential. Net interest income and the net interest margin are presented in the table on pages 18 and 19 on a taxable-equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on a 35% marginal tax rate.

-14-

AVERAGE BALANCES AND RATES EARNED AND PAID

The following table presents condensed average balance sheet information for the Company, together with average interest rates earned and paid on the various sources and uses of its funds for each of the periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded.

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS

	Three months ended								Three months ended
	September 30, 2006								September 30, 2005
	Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate			Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate
	(Dollars in thousands)
Assets
Federal funds sold	$	7,613			100		5.21	%	$	2,101		$	19		3.59	%
Time deposits at other financial institutions		350			5		5.67			350			2		2.27
Taxable investment securities		337,085			3,959		4.66			338,311			3,474		4.07
Nontaxable investment securities		103,312			1,249		4.80			95,153			1,205		5.02
Loans, gross:		1,225,723			26,009		8.42			1,009,059			19,106		7.51
Total interest-earning assets	$	1,674,083		$	31,322		7.42		$	1,444,974		$	23,806		6.54
Allowance for loan losses		(14,868	)							(13,968	)
Cash and due from banks		43,274								46,720
Premises and equipment, net		37,647								25,860
Interest receivable and other assets		73,820								60,418
Total assets	$	1,813,956							$	1,564,004
Liabilities And Shareholders' Equity
Negotiable order of withdrawal	$	197,546		$	372		0.75		$	180,577		$	102		0.22
Savings deposits		333,695			2,259		2.69			371,188			1,406		1.50
Time deposits		666,501			7,507		4.47			430,752			3,321		3.06
Other borrowings		155,091			2,066		5.29			155,234			1,364		3.49
Subordinated Debentures		31,960			667		8.28			16,496			327		7.86
Total interest-bearing liabilities		1,384,793			12,871		3.69			1,154,247			6,520		2.24
Noninterest-bearing deposits		276,923								281,328
Accrued interest, taxes and other liabilities		15,471								12,660
Total liabilities		1,677,187								1,448,235
Total shareholders' equity		136,769								115,769
Total liabilities and shareholders' equity	$	1,813,956							$	1,564,004
Net interest income and margin				$	18,451		4.37	%				$	17,286		4.75	%

(1)Tax-equivalent adjustments included in the nontaxable investment securities portfolio are $288,000 and $294,000 for the three months ended September 30, 2006 and 2005. Tax equivalent adjustments included in the taxable investment securities created by a dividends received deduction were $14,000 and $25,000 for the three months ended September 30, 2006 and 2005.

(2)Amounts of interest earned included loan fees of $950,000 and $890,000 and loan costs of $152,000 and $103,000 for the three months ended September 30, 2006 and 2005, respectively.

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

-15-

AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS

	Nine months ended								Nine months ended
	September 30, 2006								September 30, 2005
	Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate			Average Balance			Taxable Equivalent Interest		Taxable Equivalent Yield/rate
	(Dollars in thousands)
Assets
Federal funds sold	$	5,250			193		4.92	%	$	4,411		$	91		2.76	%
Time deposits at other financial institutions		350			14		5.35			855			17		2.66
Taxable investment securities		362,508			12,609		4.65			356,963			11,043		4.14
Nontaxable investment securities		102,481			3,756		4.90			87,993			3,344		5.08
Loans, gross:		1,168,887			73,440		8.40			947,022			51,572		7.28
Total interest-earning assets	$	1,639,476		$	90,012		7.34		$	1,397,244		$	66,067		6.32
Allowance for loan losses		(15,074	)							(13,658	)
Cash and due from banks		46,146								43,495
Premises and equipment, net		33,733								24,465
Interest receivable and other assets		69,644								59,095
Total assets	$	1,773,925							$	1,510,641
Liabilities And Shareholders' Equity
Negotiable order of withdrawal	$	205,209		$	1,038		0.68		$	174,734		$	160		0.12
Savings deposits		353,195			6,041		2.29			363,763			3,515		1.29
Time deposits		577,631			17,749		4.11			398,930			8,444		2.83
Other borrowings		187,414			6,856		4.89			166,113			4,152		3.34
Subordinated Debentures		22,160			1,407		8.49			16,496			972		7.88
Total interest-bearing liabilities		1,345,609			33,091		3.29			1,120,036			17,243		2.06
Noninterest-bearing deposits		281,828								268,343
Accrued interest, taxes and other liabilities		15,169								11,657
Total liabilities										1,400,036
Total shareholders' equity		131,319								110,605
Total liabilities and shareholders' equity	$	1,773,925							$	1,510,641
Net interest income and margin				$	56,921		4.64	%				$	48,824		4.67	%

(1)Tax-equivalent adjustments included in the nontaxable investment securities portfolio are $879,000 and $819,000 for the nine months ended September 30, 2006 and 2005. Tax equivalent adjustments included in the taxable investment securities created by a dividends received deduction were $60,000 and $97,000 for the nine months ended September 30, 2006 and 2005.

(2)Amounts of interest earned included loan fees of $2,805,000 and $2,457,000 and loan costs of $377,000 and $248,000 for the nine months ended September 30, 2006 and 2005, respectively.

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

-16-

NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE

The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in average asset and liability balances (Volume) and changes in average interest rates (Rate) 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 ended
	September 30, 2006 compared to September 30, 2005
(In thousands)	Volume			Rate			Total
Increase (decrease) in interest income:
Federal funds sold	$	69		$	12		$	81
Time deposits at other financial institutions		-			3			3
Taxable investment securities		(12	)		496			484
Tax-exempt investment securities		100			(56	)		44
Loans		4,419			2,485			6,904
Total:	$	4,576		$	2,940		$	7,516
Increase in interest expense:
Interest bearing demand	$	10		$	260		$	270
Savings deposits		(152	)		1,005			853
Time deposits		2,272			1,914			4,186
Other borrowings		(1	)		703			702
Junior subordinated debentures		322			18			340
Total:	$	2,451		$	3,900		$	6,351
Increase in net interest income	$	2,125		$	(960	)	$	1,165

	Nine months ended
	September 30, 2006 compared to September 30, 2005
(In thousands)	Volume			Rate			Total
Increase (decrease) in interest income:
Federal funds sold	$	20		$	82		$	102
Time deposits at other financial institutions		(5	)		2			(3	)
Taxable investment securities		174			1,391			1,565
Tax-exempt investment securities		452			(39	)		413
Loans		13,204			8,664			21,868
Total:	$	13,845		$	10,100		$	23,945
Increase in interest expense:
Interest bearing demand	$	33		$	845		$	878
Savings deposits		(34	)		2,560			2,526
Time deposits		4,633			4,672			9,305
Other borrowings		586			2,118			2,704
Junior subordinated debentures		355			80			435
Total:	$	5,573		$	10,275		$	15,848
Increase in net interest income	$	8,272		$	(175	)	$	8,097

Net interest income changes that occurred due to volume / rate differences were allocated to volume and rate changes based on the relative change in each in comparison to the total.

-17-

PROVISION FOR LOAN LOSSES

The provision for loan losses was $200,000 and $400,000 for the three and nine months ended September 30, 2006 compared with $1,035,000 and $1,356,000 for the three and nine months ended September 30, 2005, a decrease of $835,000 or 81% and $956,000 or 71%. See "Allowance for Loan Losses" elsewhere herein. As of September 30, 2006 the allowance for loan losses was $14,796,000 or 1.17% of total loans compared to $14,776,000 or 1.38% of total loans as of December 31, 2005. At September 30, 2006, nonperforming assets totaled $3,393,000 or 0.18% of total assets, nonperforming loans totaled $3,333,000 or 0.26% of total loans and the allowance for loan losses totaled 444% of nonperforming loans. At December 31, 2005, nonperforming assets totaled $1,960,000 or 0.11% of total assets, nonperforming loans totaled $1,900,000 or 0.18% of total loans and the allowance for loan losses totaled 778% of nonperforming loans. No assurance can be given that nonperforming loans will not increase or that the allowance for loan losses will be adequate to cover losses inherent in the loan portfolio.

NONINTEREST INCOME

Noninterest income increased by $490,000 or 18% to $3,156,000 and $1,535,000 or 20% to $9,210,000 for the three and nine months ended September 30, 2006 compared with $2,666,000 and $7,675,000 for the same period during 2005. Service charges on deposit accounts decreased by $4,000 or 1% to $1,550,000 and increased by $28,000 or 1% to $4,475,000 for the three and nine months ended September 30, 2006 compared with $1,554,000 and $4,447,000 for the same period in 2005. The increase in service charges on deposit accounts for the nine month period was primarily the result of increased fees associated with increased fees charged on rejected items. The decrease for the three month period is associated with lower activity in fee products related to the Company’s bill pay service. The increase of $366,000 and $966,000 for the three months and nine months ended September 30, 2006 in cash surrender value of life insurance policies was the result of a higher earnings rate and increased balances year over year. In the second quarter of 2006 the Company recognized a gain on the sale of securities of $622,000. The investment portfolio securities that were sold included approximately $6,917,000 in FHLMC preferred stock and $12,882,000 in an adjustable rate mutual fund. The FHLMC preferred stock was sold due to a recent increase in market value that was made possible by an increase in short term interest rates that occurred during the second quarter. The investment in the adjustable rate mutual fund was sold so that the sales proceeds could be reinvested in higher yielding investments. An increase in prepayments of mortgage notes purchased at a premium by the fund have had a detrimental effect on the Bank’s total return on this investment. There was no gain on the sale of securities recognized for the same time period in 2005 or for the third quarter of 2006. Other noninterest income increased by $438,000 or 55% and $689,000 or 28% for the three and nine month period ended September 30, 2006 when compared to the same period in 2005. The primary reason for the increase in other noninterest income is attributable to service fees associated with the addition of the asset based lending portfolio, in the first quarter of 2006, of $152,000 and $389,000, for the three and nine months ended September 30, 2006. In addition, the Bank recognized a $190,000 gain on the sale of other real estate owned and accrual of a $179,000 of a bank owned life insurance payment in the third quarter.

NONINTEREST EXPENSE

Noninterest expenses increased by $2,692,000 or 26% to $12,992,000 and $7,264,000 or 23% to $38,574,000 for the three and nine months ended September 30, 2006 compared with $10,300,000 and $31,310,000 for the same period in 2005. The primary components of noninterest expenses were salaries and employee benefits, premises and occupancy expenses, equipment expenses, professional fees, supplies expenses, marketing expenses, intangible amortization and other operating expenses.

For the three and nine months ended September 30, 2006, salaries and related expenses increased by $1,755,000 or 32% and $4,739,000 or 28% to $7,293,000 and $21,487,000. This compares to the $5,538,000 and $16,748,000 for the three and nine months ended September 30, 2005. The increase was primarily the result of normal salary progression, increased support staff used to support branch operations, the staffing of new branch offices, regulatory compliance support functions, and the recognition of share-based payment expense as part of salaries and related benefits expense in 2006 due to the adoption of SFAS No. 123R. Premises and occupancy expense increased by $217,000 or 18% and $610,000 or 19% to $1,422,000 and $3,866,000 for the three and nine months ended September 30, 2006. This compares to the $1,205,000 and $3,256,000 recorded for the same period in 2005. The primary reason for the increase in 2006 was related to the opening of new branch facilities opened and the remodeling of existing facilities. Equipment expenses increased by $61,000 or 6% and increased by $193,000 or 7% to $1,096,000 and $3,129,000 for the three and nine months ended September 30, 2006. This compares with the $1,035,000 and $2,936,000 recorded for the three and nine months ended September 30, 2005. The additional equipment expenses were primarily the result of branch and department equipment upgrades and purchases related to the opening of new branch offices. When comparing the results for the three and nine months ended September 30, 2006 to the same periods in September 30, 2005, professional fees increased by $60,000 or 14% for the three months and increased by $332,000 or 20% for the nine months, marketing expenses increased by $129,000 or 56% and $358,000 or 42%, supplies expenses increased by $1,000 or 1% and decreased by $32,000 or 4%, community support donations increased by $86,000 or 48% and $200,000 or 35%, intangible amortization expenses decreased by $11,000 due to being fully amoritized, and other noninterest expenses increased $394,000 or 27% and $875,000 or 20% from 2005 levels. The increase in marketing expense was primarily the result of increased advertising expenses related to branch support and loan and deposit gathering efforts. The decrease in supplies expenses in the nine month period was primarily related to decreased administrative supplies used at the customer support center. The increased other noninterest expenses were primarily the result of increased correspondent bank charges caused by increased activity, and increased communications costs which were attributable to the opening of new facilities. Noninterest expenses associated with branches opened since January 1, 2005 approximate $400,000 for third quarter of 2006 and $900,000 for the first nine months of 2006.

-18-

PROVISION FOR INCOME TAXES

The Company recorded a decrease in the provision for income taxes of $561,000 or 20% and an increase of $1,229,000 or 17% to $2,284,000 and $8,579,000 for the three and nine months ended September 30, 2006 compared to the $2,845,000 and $7,350,000 recorded for the same time period. During the three and nine months ended September 30, 2006, the Company recorded an effective tax rate of 28% and 33%. For the same time period in 2005, the Company recorded an effective tax rate of 34% and 32%. The receipt of $179,000 in the third quarter of 2006 and $539,000 in the first quarter of 2005 in nontaxable bank owned life insurance death benefits lowered the effective tax rate experienced in 2006 and 2005. In 2006, adjustments related to prior year unclaimed state housing tax credits in the amount of $187,000 lowered the effective tax rate for the three months ended September 30, 2006. This matter combined with certain prior period interest income reversals of interest income associated with excess interest being charged on certain loans (see “NET INTEREST INCOME”) resulted in an inconsequential impact on any period including the current period. Management also believes that these two issues are individually inconsequential. Excluding the bank owned life insurance death benefits and adjustments, the income tax rate for the first nine months of 2005 would have been 33%, compared to 34% for the same time period in 2006. This decrease in the nine month year over year income tax rate is primarily due to increased realized housing tax credit benefits partially offset by the nondeductibility of incentive stock option compensation expense recorded in conformity with SFAS No. 123R during 2006.

Financial Condition

Total assets at September 30, 2006 were $1,913,659,000, an increase of $156,903,000 or 9% compared with total assets of $1,756,756,000 at December 31, 2005. Net loans were $1,251,404,000 at September 30, 2006, an increase of $197,284,000 or 19% compared with net loans of $1,054,120,000 at December 31, 2005. Deposits were $1,573,896,000 at September 30, 2006, an increase of $169,396,000 or 12% compared with deposits of $1,404,500,000 at December 31, 2005. The increase in total assets of the Company between December 31, 2005 and September 30, 2006 was primarily funded by an increase in time deposit growth. Cash inflows generated from the increased deposits were primarily used to fund growth in the loan portfolio and to fund infrastructure expenditures related to branch expansion.

Total shareholders' equity was $142,073,000 at September 30, 2006, an increase of $19,828,000 or 16% from the $122,245,000 at December 31, 2005. The growth in shareholders’ equity between December 31, 2005 and September 30, 2006 was primarily achieved through the retention of accumulated earnings.

OFF-BALANCE SHEET COMMITMENTS

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

	September 30,		December 31,
(In thousands)	2006		2005
Letters of credit	$	8,219	$	15,160
Commitments to extend credit		459,788		495,313
Total	$	468,007	$	510,473

As a financial services provider; we routinely commit to extend credit, including loan commitments, standby letters of credit and financial guarantees. A significant portion of commitments to extend credit may expire without being drawn upon. These commitments are subject to the same credit policies and approval process used for our loans.

-19-

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 September 30 2006, the Bank held $42,762,000 in cash surrender value life insurance, an increase of $10,966,000 from the $31,796,000 maintained at December 31, 2005. During the third quarter of 2006, the Company purchased an additional $10,000,000 in bank owned life insurance.

INVESTMENT IN HOUSING TAX CREDIT LIMITED PARTNERSHIPS

The Bank invests in housing tax credit limited partnerships to help meet the Bank’s Community Reinvestment Act low income housing investment requirements as well as to obtain federal and state income tax credits. These partnerships provide the funding for low-income housing projects that might not otherwise be created. The Bank had invested a total of $11,973,000 in these investments as of September 30, 2006 and $11,727,000 as of December 31, 2005.

INVESTMENT SECURITIES

At September 30, 2006 equity securities included $5,093,000 of preferred stock issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These issues of preferred stock are tied to various short term indexes ranging from the one year LIBOR interest rate to the five year U.S. Treasury rate. These securities have AA- credit ratings from the securities rating agencies and are callable by the issuer at par. During the second quarter of 2006 the Company sold $5,908,000 of these securities at a pretax gain of $1,009,000.

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

-20-

INTEREST RATE FLOOR

During the third quarter of 2005, the Company purchased an interest rate floor from Wachovia Bank. The interest rate floor provides the Company with partial protection against an interest rate downturn on loans that are indexed off the Prime rate through September 1, 2010. For more information on the interest rate floor see the Note 1 in the derivative instruments and hedging activities section.

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

	September 30, 2006				December 31, 2005
(In thousands)	Fair Value		Notional Amount		Fair Value		Notional Amount
Purchased option, interest rate floor	$	438	$	100,000	$	743	$	100,000

The decrease of $305,000 or 41% in the fair value of the interest rate floor between December 31, 2005 and September 30, 2006 was primarily the result of an increasing interest rate environment which caused a corresponding reduction in the probability that the Company will receive any future cash inflows related to this contract.

NONPERFORMING ASSETS

Nonperforming assets include nonaccrual loans, loans 90 days or more past due, restructured loans and other real estate owned.

Nonperforming loans are those which the borrower fails to perform in accordance with the original terms of the obligation and include loans on nonaccrual status, loans past due 90 days or more and restructured loans. The Company generally places loans on nonaccrual status and accrued but unpaid interest is reversed against the current year's income when interest or principal payments become 90 days or more past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, is deemed in the process of collection. Interest income on nonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principal depending upon management's opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible. Additional loans not 90 days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question.

A "restructured loan" is a loan on which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is reported on a cash basis until the borrower's ability to service the restructured loan in accordance with its terms is reestablished. The Company had no restructured loans as of the dates indicated in the table below.

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

	September 30, 2006			December 31, 2005
(Dollars in thousands)
Nonaccrual loans	$	3,333		$	1,692
Accruing loans past due 90 days or more		-			208
Total nonperforming loans		3,333			1,900
Other real estate owned		60			60
Total nonperforming assets	$	3,393		$	1,960
Nonperforming loans to total loans		0.26	%		0.18	%
Nonperforming assets to total assets		0.18	%		0.11	%

-21-

During the first nine months of 2006, eight customers with loans that totaled $2,550,000 were placed on nonaccrual status, while four customers with loans that totaled approximately $633,000 were removed from nonaccrual status.

The increase in nonaccrual loans of $1,641,000 between September 30, 2006 and December 31, 2005 was primarily the result of individual customers with specific problems and not a degradation of overall credit quality.

Contractual accrued interest income on loans on nonaccrual status as of September 30, 2006 and 2005, which would have been recognized if the loans had been current in accordance with their original terms, was approximately $292,000 and $152,000, respectively.

At September 30, 2006, nonperforming assets represented 0.18% of total assets, an increase of 7 basis points when compared to the 0.11% at December 31, 2005. Nonperforming loans represented 0.26% of total loans at September 30, 2006, an increase of 8 basis points compared to the 0.18% at December 31, 2005. Nonperforming loans that were secured by first deeds of trust on real property were $1,209,000 and $1,684,000 at September 30, 2006 and December 31, 2005. The decrease in nonperforming loans that were secured by first deeds of trust on real property was primarily the result of the foreclosure and sale of property secured by a loan during the third quarter resulting in a gain realized from the sale of $190,000. 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.

In May 2006, the Bank obtained two properties through foreclosure. During September 2006, one of these properties was sold.  At September 30, 2006 the Company had $60,000 invested in two real estate properties that were acquired through foreclosure. At December 31, 2005, the Company had $60,000 invested in one real estate property that was acquired through foreclosure. These properties were carried at the lower of their estimated market value, as evidenced by an independent appraisal, or the recorded investment in the related loan, less estimated selling expenses. At foreclosure, if the fair value of the real estate is less than the Company's recorded investment in the related loan, a charge is made to the allowance for loan losses. The Company expects to sell one of two properties within the next twelve month period. No assurance can be given that the Company will sell the properties during 2006 or at any time or for an amount that will be sufficient to recover the Company’s investment in these properties.

-22-

Management defines impaired loans, regardless of past due status on loans, as those on which principal and interest are not expected to be collected under the original contractual loan repayment terms. An impaired loan is charged off at the time management believes the collection process has been exhausted. At September 30, 2006 and December 31, 2005, impaired loans were measured based on the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price or the fair value of collateral if the loan is collateral-dependent. Impaired loans at September 30, 2006 were $3,333,000 for which the Company made provisions to the allowance for loan losses of approximately $464,000.

Except for loans that are disclosed above, there were no assets as of September 30, 2006, where known information about possible credit problems of the borrower causes management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become nonperforming assets. Given the scope and extent of the Company's loan portfolio, however, it is always possible that current credit problems may exist that may not have yet been identified by the Bank’s credit officers.

Allowance for Loan Losses

The following table summarizes the loan loss experience of the Company for the nine months ended September 30, 2006 and 2005, and for the year ended December 31, 2005.

	September 30,						December 31,
(Dollars in thousands)	2006			2005			2005
Allowance for Loan Losses:
Balance at beginning of period	$	14,776		$	13,605		$	13,605
Provision for loan losses		400			1,356			2,051
Charge-offs:
Commercial and agricultural		942			1,078			1,664
Real estate - mortgage		-			-			-
Consumer		319			240			318
Total charge-offs		1,261			1,318			1,982
Recoveries
Commercial and agricultural		763			783			903
Real-Estate - mortgage		-			-			-
Consumer		118			172			199
Total recoveries		881			955			1,102
Net charge-offs		380			363			880
Balance at end of period	$	14,796		$	14,598		$	14,776
Loans outstanding at period-end	$	1,266,200		$	1,027,231		$	1,068,896
Average loans outstanding	$	1,168,887		$	947,022		$	968,492
Annualized net charge-offs to average loans		0.04	%		0.05	%		0.09	%
Allowance for loan losses
To total loans		1.17	%		1.42	%		1.38	%
To nonperforming loans		443.92	%		711.75	%		777.68	%
To nonperforming assets		436.07	%		691.52	%		753.88	%

-23-

The Company maintains an allowance for loan losses at a level considered by management to be sufficient to cover the inherent risks of loss associated with its loan portfolio under prevailing economic conditions. In determining the adequacy of the allowance for loan losses, management takes into consideration, among other things, growth trends in the portfolio, examination by financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, specific credit risks, general economic conditions, the interest rate environment and internal and external credit reviews. In addition, the risks management considers vary depending on the nature of the loan. The normal risks considered by management with respect to agricultural loans include, among other things, the fluctuating value of the collateral, changes in weather conditions and the availability of adequate water resources in the Company's local market area. The normal risks considered by management with respect to real estate construction loans include, among other things, fluctuation in real estate values, the demand for improved commercial and industrial properties and housing, the availability of permanent financing in the Company's market area and borrowers' ability to obtain permanent financing. The normal risks considered by management with respect to real estate mortgage loans include, among other things, fluctuations in the value of real estate. Additionally, the Company relies on data obtained through independent appraisals for significant properties to determine loss exposure on nonperforming loans.

The balance in the allowance is affected by the amounts provided from operations, amounts charged off and recoveries of loans previously charged off. The Company recorded a provision for loan losses in the first nine months of 2006 of $400,000 compared with $1,356,000 in the same period of 2005. The decrease was related to the overall improvement in the credit risks associated with the Bank’s individual credit relationships during the first nine months of 2006 when compared to the same period in 2005. The Company had net chargeoffs of $380,000 for the nine months ended September 30, 2006 compared with net charge-offs of $363,000 for the same nine months in 2005. The increased chargeoffs occurred primarily within the consumer segment of the loan portfolio.

As of September 30, 2006, the allowance for loan losses was $14,796,000 or 1.17% of total loans outstanding, compared with $14,776,000 or 1.38% of total loans outstanding as of December 31, 2005 and $14,598,000 or 1.42% of total loans outstanding as of September 30, 2005.

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

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

-24-

The allowance is based on estimates and ultimate future losses may vary from current estimates. It is possible that future economic or other factors may adversely affect the Company's borrowers, and thereby cause loan losses to exceed the current allowance. In addition, there can be no assurance that future economic or other factors will not adversely affect the Company's borrowers, or that the Company's asset quality may not deteriorate through rapid growth, failure to enforce underwriting standards, failure to maintain appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, failure to identify and monitor potential problem loans or for other reasons, and thereby cause loan losses to exceed the current allowance.

The allocation of the allowance to loan categories is an estimate by credit officers of the relative risk characteristics of loans in those categories. No assurance can be given that losses in one or more loan categories will not exceed the portion of the allowance allocated to that category or even exceed the entire allowance.

OTHER ASSETS

At September 30, 2006, the Company recorded a balance in other assets of $29,296,000 and $32,281,000 at December 31, 2005. The majority of the balance in other assets was primarily due to a $13,332,000 and $16,296,000 loan participation funding receivable at September 30, 2006 and December 31, 2005. During October 2006 and January 2006, the respectively, funding receivables were collected from the participating banks.

RESERVE FOR UNFUNDED LENDING COMMITMENTS

The reserve for unfunded lending commitments included in other liabilities at September 30, 2006 and 2005, and December 31, 2005, is presented below:

	September 30,					December 31,
(Dollars in thousands)	2006			2005		2005
Balance at the beginning of period	$	717		$	679	$	679
Provision for credit losses		(7	)		24		38
Balance at the end of period	$	710		$	703	$	717

EXTERNAL FACTORS AFFECTING ASSET QUALITY

As a result of the Company's loan portfolio mix, the future quality of its assets could be affected by adverse economic trends in its region or in the agricultural community. These trends are beyond the control of the Company.

California is an earthquake-prone region. Accordingly, a major earthquake could result in material loss to the Company. At times the Company's service area has experienced other natural disasters such as floods and droughts. The Company's properties and substantially all of the real and personal property securing loans in the Company's portfolio are located in California. The Company faces the risk that many of its borrowers face uninsured property damage, interruption of their businesses or loss of their jobs from earthquakes, floods or droughts. As a result these borrowers may be unable to repay their loans in accordance with their terms and the collateral for such loans may decline significantly in value. The Company's service area is a largely agricultural region and therefore is highly dependent on a reliable supply of water for irrigation purposes. The area obtains nearly all of its water from the run-off of melting snow in the mountains of the Sierra Nevada to the east. Although such sources have usually been available in the past, water supply can be adversely affected by light snowfall over one or more winters or by any diversion of water from its present natural courses. Any such natural disaster could impair the ability of many of the Company's borrowers to meet their obligations to the Company.

Parts of California have experienced significant floods during 2006. No assurance can be given that future flooding will not have an adverse impact on the Company and its borrowers and depositors.

-25-

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 $337,070,000 and $410,086,000 on September 30, 2006 and December 31, 2005, respectively, and constituted 18% 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 $274,508,000 at September 30, 2006 compared with $452,337,000 at December 31, 2005.

Although the Company's primary sources of liquidity include liquid assets and our deposit base, the Company maintains lines of credit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco, Pacific Coast Banker’s Bank, Union Bank of California, Wells Fargo Bank and First Tennessee Bank aggregating $233,292,000 of which $48,400,000 was outstanding as of September 30, 2006 and $260,684,000 of which $93,384,000 was outstanding as of December 31, 2005. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financial difficulties or receives adverse publicity for other reasons, or if its pricing, products or services are not competitive with those offered by other institutions.

CAPITAL RESOURCES

Capital serves as a source of funds and helps protect depositors against potential losses. The primary source of capital for the Company has been internally generated capital through retained earnings. The Company's shareholders' equity increased by $19,828,000 or 16% from December 31, 2005 to September 30, 2006. This increase was achieved through the retention of accumulated earnings and the exercise of stock options.

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material adverse effect on the Company’s financial statements. Management believes, as of September 30, 2006, that the Company and the Bank met all applicable capital requirements. The Company’s leverage capital ratio at September 30, 2006 was 9.60% as compared with 8.57% as of December 31, 2005. The Company’s total risk based capital ratio at September 30, 2006 was 11.91% as compared to 11.13% as of December 31, 2005.

-26-

In the opinion of management, the Company’s and Bank’s actual capital amounts and ratios met all regulatory requirements as of September 30, 2006 and are summarized as follows:

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions:
The Company:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)	$	189,549		11.91	%	$	127,335		8.0	%	$	159,169		10.0	%
Tier 1 capital (to risk weighted assets)		173,938		10.93			63,668		4.0			95,501		6.0
Leverage ratio(1)		173,938		9.60			72,502		4.0			90,628		5.0
The Bank:
Total capital (to risk weighted assets)	$	162,680		10.27	%	$	126,760		8.0	%	$	158,450		10.0	%
Tier 1 capital (to risk weighted assets)		147,069		9.28			63,380		4.0			95,070		6.0
Leverage ratio(1)		147,069		8.14			72,229		4.0			90,287		5.0

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

The Company’s and Bank’s actual capital amounts and ratios met all regulatory requirements as of December 31, 2005 and were summarized as follows:

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
The Company:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)	$	154,592		11.13	%	$	111,151		8	%	$	138,939		10	%
Tier I capital (to risk weighted assets)		139,099		10.01			55,576		4			83,364		6
Leverage ratio(1)		139,099		8.57			64,960		4			81,200		5
The Bank:
Total capital (to risk weighted assets)	$	141,945		10.24		$	110,868		8	%	$	138,585		10	%
Tier I capital (to risk weighted assets)		126,452		9.12			55,434		4			83,151		6
Leverage ratio(1)		126,452		7.80			64,830		4			81,038		5

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

The Company declares dividends solely at the discretion of the Company’s Board of Directors, subject to compliance with regulatory requirements. In order to pay any cash dividends, the Company must receive payments of dividends or management fees from the Bank. There are certain regulatory limitations on the payment of cash dividends by banks.

DEPOSITS

Deposits are the Company's primary source of funds. At September 30, 2006, the Company had a deposit mix of 26% in savings deposits, 44% in time deposits, 13% in interest-bearing checking accounts and 17% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company's net interest income by lowering its cost of funds.

-27-

The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company's business is not seasonal in nature. The Company accepts time deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At September 30, 2006, the Company had brokered deposits of $124,258,000. At December 31, 2005, the Company’s brokered deposits totaled $20,861,000. The increase in brokered deposits during the first nine months of 2006 was related to loan funding requirements. The Bank has a policy target for brokered deposits of no more than 15% of the Bank’s asset base. Brokered deposits did not exceed the policy limit as of September 30, 2006. The Bank increased its policy limit to 15 percent for 7 percent of assets in the third quarter. This policy change reflects management’s belief that the risks related to this higher level of brokered deposits are manageable, and the liquidity provided by them is a valuable source of cash inflows that is available for making investments or paying down borrowings.

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

(Dollars in thousands)	September 30, 2006		December 31, 2005
Three months or less	$	145,133	$	106,874
Over three to six months		134,287		24,365
Over six to twelve months		111,404		39,005
Over twelve months		21,717		64,781
Total	$	412,541	$	235,025

Federal Funds Purchased and Other Borrowed Funds

The total of federal funds purchased and other borrowed funds decreased by $49,099,000 or 24% to $152,629,000 at September 30, 2006 compared to the $201,728,000 outstanding at December 31, 2005. Other borrowed funds have decreased primarily by the repayment of obligations obtained from maturities that occurred within the Company’s investment portfolio and the issuance of a $15,464,000 subordinated debenture, decreasing the need for other borrowings.

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

Return on Equity and Assets

	Nine Months Ended September 30,						Three Months Ended September 30,			Year ended December 31
	2006			2005			2006			2005
Annualized return on average assets		1.33	%		1.37	%		1.29	%		1.36	%
Annualized return on average equity		17.91	%		18.77	%		17.05	%		18.54	%
Average equity to average assets		7.40	%		7.32	%		7.54	%		7.34	%
Dividend payout ratio		12.73	%		10.07	%		14.79	%		9.00	%

Impact of Inflation

The primary impact of inflation on the Company is its effect on interest rates. The Company’s primary source of income is net interest income which is affected by changes in interest rates. The Company attempts to limit inflation’s impact on its net interest margin through management of rate sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of inflation on premises and equipment, as well as on interest expenses, has not been significant for the periods covered in this report.

-28-

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, the Company is exposed to market risk which includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and the mismatch in repricing characteristics of assets, liabilities, and off balance sheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities arise primarily through the interaction of the various types of loans versus the types of deposits that are maintained as well as from management's discretionary investment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not be able to satisfy current and future financial commitments or that the Company may not be able to liquidate financial instruments at market prices. Risk management policies and procedures have been established and are utilized to manage the Company's exposure to market risk. Quarterly testing of the Company’s assets and liabilities under both increasing and decreasing interest rate environments are performed to insure the Company does not assume a magnitude of risk that is outside approved policy limits.

The Company’s success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Company’s net interest income to adverse movements in interest rates. Although the Company manages other risks, such as credit and liquidity risk in the normal course of its business, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Company’s financial condition and results of operations. Correspondingly, the overall strategy of the Company is to manage interest rate risk, through balance sheet structure, to be interest rate neutral.

The Company’s interest rate risk management is the responsibility of the Asset/Liability Management Committee (ALCO), which provides monthly reports to the Board of Directors. ALCO establishes policies that monitor and coordinate the Company’s sources, uses and pricing of funds. ALCO is also involved in formulating the economic projections for the Company’s budget and strategic plan. ALCO sets specific rate sensitivity limits for the Company. ALCO monitors and adjusts the Company’s exposure to changes in interest rates to achieve predetermined risk targets that it believes are consistent with current and expected market conditions. Balance sheet management personnel monitor the asset and liability changes on an ongoing basis and provide report information and recommendations to the ALCO committee in regards to those changes.

It is the opinion of management there has been no material change in the Company’s market risk during the first nine months of 2006 when compared to the level of market risk at December 31, 2005. If interest rates were to suddenly and materially fall from levels experienced during the first nine months of 2006, the Company could become susceptible to an increased level of market risk.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

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

-29-

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II - Other Information

Item 1. Legal Proceedings

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

The Bank was subject to one lawsuit where the legal costs incurred by the Bank have totaled over $250,000, the amount of the Company’s insurance deductible. During the month of July 2006, a settlement agreement was executed related to this lawsuit. The settlement was funded by the Bank’s insurance carrier and was settled to the mutual satisfaction of the parties.

Item 1A. Risk Factors

See “External Factors Affecting Asset Quality” in Part I.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

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

Item 6. Exhibits

See Exhibit Index

-30-

SIGNATURES

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

CAPITAL CORP OF THE WEST

(Registrant)

Date: November 9, 2006	By /s/ Thomas T. Hawker
	Thomas T. Hawker
	President and
	Chief Executive Officer

Date: November 9, 2006	By /s/ David A. Heaberlin
	David A. Heaberlin
	Chief Financial Officer/Treasurer

-31-

Exhibit Index

Exhibit	Description
31.1	Certification of Registrant's Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Registrant's Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2	Certification of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

-32-