UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

(Mark
One)


|                                              |                                                                                       
|--------------------------------------------- | --------------------------------------------------------------------------------------
|x:                                            | ANNUAL
  REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
  1934   
|                                              |                                                                                       
|For
  the fiscal year ended December 31, 2008
|                                              |                                                                                       
|o                                             | TRANSITION
  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934

For
the transition period from to

Commission
File No. 000-50878

|                                                        
|--------------------------------------------------------
|TAMALPAIS BANCORP                                       
|(Exact name of
  registrant as specified in its charter)

|                                                                 |                                       
|---------------------------------------------------------------- | --------------------------------------
|California                                                       | 68- 0175592                           
|(State or other
  jurisdiction of incorporation or organization) | (I.R.S. Employer
  Identification No.)

|                                                                    
|--------------------------------------------------------------------
|630 Las Gallinas Avenue, San
  Rafael, California 94903             
|(Address of principal
  executive offices)                          
|                                                                    
|Registrants telephone
  number including area code:(415)
  526-6400

Securities registered pursuant to
Section 12(b) of the Act:

|                             |                                            
|---------------------------- | -------------------------------------------
|Title of Each Class          | Name of Each Exchange
  on which Registered
|                             |                                            
|Common
  Stock, No Par Value | Nasdaq Capital Market                      

Securities registered pursuant to
Section 12(g) of the Act: None

Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o  No x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes o  No x

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 past 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 x  No o

Indicate by check mark if disclosure of delinquent
filers in response to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

|                           |                      |                          |                             
|-------------------------- | -------------------- | ------------------------ | ----------------------------
|Large accelerated filer  o | Accelerated filer  o | Non-accelerated filer  o | Smaller Reporting Company  x

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

The aggregate market value of the registrants voting
stock held by non-affiliates computed by reference to the average bid and asked
prices of such stock, as of June 30, 2008 was $39,993,219.

The number of registrants shares of Common Stock
outstanding as of March 10, 2009 was 3,823,634.

The following documents are incorporated by reference
in Part III of this Form 10-K: Items 10 through 14 of registrants
definitive Proxy Statement for its June 2009 Annual Meeting of Shareholders.



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TABLE OF CONTENTS

|            |                                                                                                                |  |     
|----------- | -------------------------------------------------------------------------------------------------------------- |  | ----
|            |                                                                                                                |  | PAGE
|            |                                                                                                                |  |     
|PART I      | 3                                                                                                             
|            |                                                                                                                |  |     
|Item 1.     | Business                                                                                                       |  | 3   
|            |                                                                                                                |  |     
|Item 1A.    | Risk Factors                                                                                                   |  | 21  
|            |                                                                                                                |  |     
|Item 1B.    | Unresolved Staff Comments                                                                                      |  | 21  
|            |                                                                                                                |  |     
|Item 2.     | Properties                                                                                                     |  | 22  
|            |                                                                                                                |  |     
|Item 3.     | Legal Proceedings                                                                                              |  | 23  
|            |                                                                                                                |  |     
|Item 4.     | Submission of Matters to a Vote of Security Holders                                                            |  | 23  
|           
|PART II     | 23                                                                                                            
|           
|Item 5.     | Market for Registrants Common Equity, Related Shareholder Matters
  and Issuer Purchases of Equity Securities |  | 23  
|            |                                                                                                                |  |     
|Item 6.     | Selected Financial Data                                                                                        |  | 25  
|            |                                                                                                                |  |     
|Item 7.     | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                        |  | 27  
|            |                                                                                                                |  |     
|Item 7A.    | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 58  
|            |                                                                                                                |  |     
|Item 8.     | Consolidated Financial Statements and Supplementary Data                                                       |  | 59  
|            |                                                                                                                |  |     
|Item 9.     | Changes In and Disagreements with Accountants on Accounting and
  Financial Disclosure                         |  | 104 
|            |                                                                                                                |  |     
|Item 9A.    | Controls and Procedures                                                                                        |  | 104 
|            |                                                                                                                |  |     
|Item 9A (T) | Controls and Procedures                                                                                        |  | 104 
|            |                                                                                                                |  |     
|Item 9B.    | Other Information                                                                                              |  | 104 
|            |                                                                                                                |  |     
|PART III    | 105                                                                                                           
|           
|Item 10.    | Directors, Executive Officers and Corporate Governance                                                         |  | 105 
|            |                                                                                                                |  |     
|Item 11.    | Executive Compensation                                                                                         |  | 105 
|            |                                                                                                                |  |     
|Item 12.    | Security Ownership of Certain Beneficial Owners and Management and
  Related Shareholder Matters               |  | 105 
|            |                                                                                                                |  |     
|Item 13.    | Certain Relationships, Related Transactions and Director Independence                                          |  | 105 
|            |                                                                                                                |  |     
|Item 14.    | Principal Accountant Fees and Services                                                                         |  | 105 
|            |                                                                                                                |  |     
|PART IV     | 105                                                                                                           
|           
|Item 15.    | Exhibits and Financial Statement Schedules                                                                     |  | 105 



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Forward-Looking Statements

In addition to the historical information, this Annual
Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, with respect to the financial
condition, results of operation and business of Tamalpais Bancorp and its
subsidiaries. Actual results could differ materially from management
expectations, projections and estimates. These include, but are not limited to,
statements that relate to or are dependent on estimates or assumptions relating
to the prospects of loan growth, credit quality, changes in securities or
financial markets, and certain operating efficiencies resulting from the
operations of Tamalpais Bank and Tamalpais Wealth Advisors. These
forward-looking statements involve certain risks and uncertainties.

Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities: (1) competitive pressure among
financial services companies increases significantly; (2) changes in the
interest rate environment reduce interest margins; (3) general economic
conditions, internationally, nationally or in the State of California are less
favorable than expected; (4) legislation or regulatory requirements or changes
adversely affect the businesses in which the consolidated organization is or
will be engaged; (5) the ability to satisfy the requirements of the
Sarbanes-Oxley Act and other regulations governing internal controls; (6)
decline in real estate values in the Companys operating market areas; (7)
volatility or significant changes in the equity and bond markets which can
affect overall growth and profitability of the wealth advisors business; (8)
changes in liquidity levels in capital markets; (9) changes in the quality or
composition of Tamalpais Banks loan and investment portfolios; (10) changes in
accounting principles, policies or guidelines; and, (11) other risks detailed
in the Tamalpais Bancorp filings with the Securities and Exchange Commission.
When relying on forward-looking statements to make decisions with respect
Tamalpais Bancorp, investors and others are cautioned to consider these and
other risks and uncertainties. Tamalpais Bancorp disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements contained in this report to reflect
future events or developments.

Moreover, wherever phrases such as or similar to In
Managements opinion or Management considers are used, such statements are
as of and based upon the knowledge of Management at the time made and are
subject to change by the passage of time and/or subsequent events and,
accordingly, such statements are subject to the same risks and uncertainties
noted above with respect to forward-looking statements.

PART I

ITEM 1. BUSINESS

Tamalpais Bancorp (the Company), formerly known as
Epic Bancorp, was incorporated under the laws of the State of California on
December 20, 1988 and is the parent company for Tamalpais Bank (the Bank) and
Tamalpais Wealth Advisors (TWA), formerly known as Epic Wealth Management
(EWM).

As of December 31, 2008, the consolidated Company
was comprised of three entities, Tamalpais Bancorp, the Bank, and TWA. The
Bank, established in 1991, offers a full range of banking services targeting
small-to-medium sized businesses, professionals and not-for-profit
organizations. TWA, established in January 2005, offers investment advisory and
financial planning services to the general community and to clients of the Bank
to enable them to reach their personal and financial goals.

The Company also has two unconsolidated subsidiaries
used as business trusts in connection with the issuance of trust preferred
securities as described in Note 8, Borrowings of this Form 10-K.

The Companys principal source of cash flow is
dividends from the Bank. Legal limitations are imposed on the amount of
dividends that may be paid and loans that may be made by the Bank to the
Company.

3

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The Companys outstanding equity securities consist of
one class of no par value, Common Stock. The principal executive offices of the
Company are located at 630 Las Gallinas Avenue, San Rafael, California, 94903,
telephone number (415) 526-6400, facsimile number (415) 485-3742.The
Company makes available free of charge on its website at www.tambancorp.com its
annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments thereto, and reports of insider
transactions on Forms 3, 4, and 5 as soon as reasonably practicable after the
Company, or insiders, as the case may be, file such reports with, or furnishes
them to the Securities and Exchange Commission (SEC). Investors are
encouraged to access these reports and the other information about the
Companys business on its website. The Company may also be contacted via
electronic mail at info@tambancorp.com.

Tamalpais Bank

Through the fiscal year ended December 31, 2008, the
Bank was a California industrial bank. On January 30, 2009, the Company filed
amended Articles of Incorporation for the Bank with the Secretary of State of
the State of California whereby the Bank converted from a California Industrial
Bank to a California State Chartered Commercial Bank. The Bank continues to be
under the supervision of the California Department of Financial Institutions
(DFI) and the Federal Deposit Insurance Corporation (FDIC). The Banks
deposit accounts are insured by the FDIC up to the maximum amount permitted by
law.

The Bank operates seven full service branches in Marin
County, located north of San Francisco, California. The Bank focuses on
relationship-based community banking, providing each customer with a number of
services, familiarizing itself with, and addressing itself to, customer needs.
These customers demand the convenience and personal service that a local,
independent financial institution can offer. The Bank attracts deposits, loans
and lines of credit from small-to-medium sized businesses, not-for-profit
organizations, individuals, merchants, and professionals who live and/or work
in the communities comprising the Banks market areas.

The Banks deposit products include checking products
for both business and personal accounts, tiered money market accounts offering
a variety of access methods, tax qualified deposits accounts (e.g., IRAs),
certificates of deposit accounts and certificate of deposit account registry services
(CDARS), which is a network through which the Bank offers FDIC insurance up
to $50 million by placing deposits in multiple banks participating in the
network. The Bank also offers commercial cash management products and
DepositNOW Remote Deposit Capture which is a check clearing tool that allows
customers to deposit checks without going to the Bank. A courier service is
available to the Banks professional and business clients. Additionally, the
Bank offers its depositors 24-hour access to their accounts by telephone and to
both consumer and business accounts through its Internet banking products.
Automatic teller machines (ATMs) are available at each branch location and at
United Market in San Anselmo and Woodland Market in Kentfield. The Banks ATM
network is linked to both the STAR and PLUS networks and is also a member of
the MoneyPass® nationwide network whereby customers have access to more than
11,500 surcharge-free ATMs.

The Bank does not offer international banking services
or trust services. The Bank holds no patents, registered trademarks, licenses
(other than licenses required by the appropriate banking regulatory agencies),
franchises or concessions. However, the Bank has a pending trademark
registration for Community Counts with the United States Patent and Trademark
Office.

The Banks lending programs include commercial and
retail lending programs including commercial and industrial real estate loans,
commercial loans to businesses including SBA loans, mortgages for multifamily
real estate, revolving lines of credit and term loans, consumer loans including
secured and unsecured lines of credit, land and construction lending for
commercial real estate, single family residences and apartment buildings.

4

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Tamalpais Wealth Advisors

As part of its strategic plan to increase market share
in Marin County and to further service its high-net worth business and consumer
base the Company established TWA, a registered investment advisor under the
Investment Advisers Act of 1940, as amended. TWA provides investment
management, financial planning and advice to high-net worth individuals,
families and institutions in the Marin County and surrounding marketplace.

Market Area

The Company is headquartered in Marin County,
California, which has a population of 252,485, the second highest household
income in the state and the highest per capita income out of the 3,111 counties
nationwide, according to data from the U.S. Census Bureau and USDA. In Marin
County, the median price for a single family home is $675,000 according to
DataQuick December 2008 home sales report. The per capita income is $44,962,
which is the highest in the nation, and household income is $83,870, which is
the second highest in the State, according to data from U.S. Census Bureau.
Marin County had $8.2 billion in total deposits as of June 30, 2008 according
to data from the FDIC, the most recent date for which data is available.

The Companys market area consists of Marin County and
the Greater Bay Area including San Francisco, Alameda, Contra Costa, San Mateo,
Santa Clara, Sonoma and Napa counties. The Banks deposit gathering efforts are
focused primarily in the Marin County communities surrounding its full service
branches.

2008 was a challenging year not only on the national level,
but within the state of California and more specifically the Companys primary
market area. The ongoing recession that began in the fourth quarter of 2007
has severely impacted the national, state and local housing market. Based on
data as of December 2008 the median home price in Marin and San Francisco
Counties has dropped to $562,500 and $616,500, down 26% and 16% from year
earlier periods, respectively. These substantial declines in value have
continued through the first months of 2009.

Unemployment rate in California have increased
dramatically, rising to 9.10% in December 2008 and continuing to increase to
10.9% by February 2009. Unemployment rates in Marin and San Francisco counties
have increased to 5.50% and 6.50% in December 2008 and continued to increase to
6.8% and 8.3% by February 2009. Although the Companys market areas have
historically weathered economic downturns better than other areas of the State,
the decline in home values and rising unemployment, among other factors, have
affected the ability of borrowers to satisfy their financial obligations on a
national, state, and local level.

Company Strategy

During the past several years, the Company has adopted
a business strategy of developing a business-based banking approach as a means
of increasing shareholder value and market share in Marin County. The Companys
strategy of providing financial services and advice to business owners and
individuals to help them grow and prosper incorporates a relationship-based
approach to customer service and marketing. The Company has demonstrated
expertise in providing the full service banking needs of its business clients
through flexible financing and cash management services. The Company has also
focused its sales efforts on building the balances of more profitable,
noninterest bearing and lower-cost transaction accounts in order to reduce the
cost of funds.

Employees and directors of the Company maintain a high
level of involvement and visibility within the community and the not-for-profit
sector. The Companys strategy incorporates:

5

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| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | tailoring loan and deposit products such as business
  lines of credit, commercial real estate, term loans and cash management
  services to small-to-medium sized businesses;            
| |   |                                                                                                                                                                                           
| |  | growing business banking by expanding the team of
  experienced business bankers focusing on relationship banking including
  generating business deposits and related loan opportunities;
| |   |                                                                                                                                                                                           
| |  | controlling general and administrative expenses;                                                                                                                                          
| |   |                                                                                                                                                                                           
| |  | increasing core deposits while reducing volatile
  funding sources;                                                                                                                       
| |   |                                                                                                                                                                                           
| |  | increasing capital and related ratios;                                                                                                                                                    
| |   |                                                                                                                                                                                           
| |  | focusing on credit quality with common sense real
  estate lending and a diversified loan portfolio;                                                                                      
| |   |                                                                                                                                                                                           
| |  | increasing non-interest income to a greater portion
  of total revenue; and,                                                                                                              
| |   |                                                                                                                                                                                           
| |  | utilizing new technologies to better meet the
  financial needs of businesses and professionals.                                                                                          

Company Risks

Whether or not the Company can achieve its financial
goals depends on risks and uncertainties that may be beyond the Companys
control. Risks and uncertainties that could affect the ability to grow deposits
and loans include, among others:

| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | competitive pressures in the Banks marketing area;                                                                                                    
| |   |                                                                                                                                                        
| |  | changes in the interest rate environment;                                                                                                              
| |   |                                                                                                                                                        
| |  | general economic conditions, nationally, regionally
  and in the Banks operating market areas;                                                        
| |   |                                                                                                                                                        
| |  | decreases in the value of real property in the
  Banks operating market area;                                                                         
| |   |                                                                                                                                                        
| |  | changes in business conditions and inflation;                                                                                                          
| |   |                                                                                                                                                        
| |  | loss of key management; and,                                                                                                                           
| |   |                                                                                                                                                        
| |  | volatility or significant changes in the equity and
  bond markets which can affect overall growth and profitability of the wealth
  advisors business.

The national economy has been in an increasingly
deepening recession since the fourth quarter of 2007. The sub-prime and Alt-A
lending crisis that began in the summer 2007 was a primary ignition point for
the severe economic downturn causing a liquidity shortage, particularly among
large mortgage lenders. Financial institutions of all sizes suffered from deteriorating
asset quality, constrained liquidity and reduced capital bases. This has caused
increased competition for retail deposits, as these institutions needed to
offer above market rates for retail deposits due to their inability to raise
liquidity through capital market sources. Massive asset write downs from
mortgage related investments, real estate loans, preferred stock, and other
debt and equity securities has created a capital shortage throughout the
industry.

In the fourth quarter 2008 the Company experienced a
significant increase in nonperforming assets. Nonperforming assets totaled
$17.2 million at year end 2008, up from $4.3 million at the end of the third
quarter and up from $466,000 million at year end 2007. The increase in
nonperforming assets has continued through the first two months of 2009. Small
business owners have seen reduced revenues due to declining economic activity
and rising unemployment has caused some borrowers to become delinquent on loan
payments as savings accounts and other liquidity sources are depleted, and the
value of land and construction loans have been severely impacted by the decline
in home values.

The Company has ongoing programs to evaluate the
adequacy of its allowance for loan losses in the current economic conditions.
These programs involve using quantitative analysis to stress test the credit
risk inherent in the loan portfolio under various default assumptions and
incorporating current industry probabilities of default. In addition, the
Company has enhanced its process of evaluating specific nonperforming loans for
impairment.

6

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This process involves, among other factors, obtaining updated
appraisals, current financial statements, current credit reports, and verifying
current net worth and liquidity positions of selected borrowers. The ongoing
viability of businesses are also evaluated, including land and construction
loans that have been impacted by the downturn in home values.

Based on these processes in place and coupled with the
increased level of nonperforming assets in the first two months of 2009, the
allowance for loan losses is expected to increase throughout 2009. In addition,
as updated appraisals and financial information are received on specific
nonperforming assets, specific impairment charges are also likely to increase
in 2009. Although the magnitude of these increases cannot be estimated at this
time, the Company projects that the Bank will continue to be well capitalized
as defined by federal banking agencies.

During the last few months of 2008, the liquidity
squeeze that forced the excessively high rates from the large regional and
national banks have abated somewhat as much of the stimulus capital infusion
have been retained for liquidity, reducing the critical need for retail
funding. Global market and economic conditions continue to be disrupted and
deteriorating, and the disruption has been particularly acute in the financial
sector. Although the Company remains well capitalized in light of these recent
events, the cost and availability of funds may be adversely affected by
illiquid capital markets.

Recently, the federal government announced various
programs under the Emergency Economic Stabilization Act of 2008 (EESA)
intended to inject liquidity and stabilize the financial industry. EESA
includes the Treasury Capital Purchase Program (TCPP), Troubled Assets Relief
Program (TARP), FDIC Temporary Liquidity Guarantee Program (TLGP) and the
Money Market Investor Funding Facility. In the fourth quarter, the Bank elected
to participate in the TLGP program, which provides unlimited FDIC insurance
coverage, effective October 14, 2008, on transaction accounts until December
31, 2009. This insurance is in addition to the temporary FDIC increase in
insurance coverage from $100,000 to $250,000 on all deposit accounts. The
Company has applied to participate in the TCPP program assuming the application
is approved by Treasury and the Board of Directors makes the final decision to
participate.

It cannot be determined whether these recent steps taken
by the federal government will result in significant improvement in the
financial and economic conditions affecting the banking industry. Despite the
federal governments recent fiscal and monetary measures, if the U.S. economy
were to remain in a recessionary condition for an extended period, this would
present additional significant challenges for the U.S. banking and financial
services industry.

Managements discussion and analysis of financial
condition and results of operations is intended to provide a better
understanding of the significant changes in trends relating to the Companys
financial condition, results of operations, liquidity and interest rate
sensitivity.

2008 Accomplishments

The Company has achieved favorable financial
performance and has made progress in achieving its strategic goals over the
past several years. The following are among the accomplishments that the
Company achieved in financial performance and executing its strategic and
business plan initiatives in 2008:

| |   |                                                                                                                                                                                                                                                                                                                                                                                           | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Despite an increasingly difficult economic
  environment, the Company was able to produce positive results. Net income for
  fiscal year 2008 was $4,829,000, a 14.7% increase over net income of
  $4,209,000 in 2007. Diluted earnings per share of $1.26 increased 17.8% over
  2007. The tax equivalent net interest margin improved twenty nine basis
  points in the year to 3.79%.
| |   |                                                                                                                                                                                                                                                                                                                                                                                           | 
| |  | The Company has had sixty consecutive profitable
  quarters.                                                                                                                                                                                                                                                                                                                             

7

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The balance sheet grew to record levels. Total
  assets as of December 31, 2008 was $703.4 million, and loans and deposits
  both grew at annualized rates of over 10% in the quarter.                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | All three companies were unified under the Tamalpais
  brand which will increase the visibility of all entities to constituents as
  the Bank increases its commercial banking focus on small and medium sized
  companies in the San Francisco Bay Area.                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | Tamalpais Bancorp, the parent company for Tamalpais
  Bank and Tamalpais Wealth Advisors, applied to become a Bank Holding Company
  and Tamalpais Bank applied to convert from an Industrial Bank Company to a
  California State Commercial Bank in order to bring consistency and clarity to
  the Companys mission as a business bank. On January 30, 2009, the Bank
  converted from a California industrial bank to a California chartered
  commercial bank, and the Company became a bank holding company.                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | There was heightened competition for
  deposits among Marin County banks in 2008. Even with this competition, the
  Bank was able to increase its deposit market share as of June 30, 2008 from
  4.76% to 5.14%, according to data from FDIC the most recent date for which
  data is available.                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | Tamalpais Bancorps efficiency ratio improved to
  59.2% in 2008 down from 66.5% in 2007 as revenue grew faster than operating
  expenses.                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | In 2008, the Bank introduced the Business Banking
  Group as a natural extension of the Banks services. Through this group the
  Bank has focused its sales efforts on building the balances of more
  profitable, noninterest bearing and lower-cost transaction accounts in order
  to reduce the cost of funds. Consequently, the Bank had its best year ever in
  generating noninterest checking accounts. The noninterest checking accounts
  increased by $10.0 million to $33.3 million in 2008 as compared to 2007, an
  increase of 43.0%.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | The Company initiated a cash dividend program in
  2004; the Company increased its quarterly dividend in November 2008 to $0.06
  per share which is 9.1% higher than the dividend declared in July and April
  of 2008.                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | The Company continued to utilize key customer
  loyalty measurement and analysis in 2008. The goal of this strategy is to
  enhance the service culture of the Company, build customer loyalty, improve
  internal business workflows and develop a meaningful measurement system. The
  Company uses Net Promoter Score methodology for feedback and measurement, and
  the results indicate that there is a highly loyal and satisfied customer
  base.                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |  | The Companys Community Outreach Program continues
  to make a significant impact in the communities the Company serves. The
  program includes:                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Community Counts in which the Bank donates directly
  to non-profit organizations designated by the Banks customers. The Company
  has allocated well over a million dollars to the Community Counts Program.                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Employees in Action in which employees and directors
  of the Company volunteer in the community. The Employees in Action program
  allows all employees from the date of hire 24 hours of volunteer time a year
  without taking time off. In 2008, employees and directors donated over 2,164
  hours to the community causes.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | The Company is the founder and primary sponsor of
  the Heart of Marin Awards which recognizes outstanding contributions to the
  Marin non-profit community.                                                                                                                                                                   
|
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | The Community Rooms of each branch of the Bank can
  be used by non-profits free of charge. Nearly 175 different non-profits
  conducted their meetings free of charge in 2008 in the branch Community
  Rooms.                                                                                                                 

8

---



New Facilities

Management believes that the likelihood of success of
its new branches is increased by placing new branches in proximity to existing
branches of other financial institutions with large deposit bases. Therefore,
the Banks branching strategy focused on opening branches in those geographies
that generally have at least $100 million in deposits. The Bank opened one new
branch in 2002 (Mill Valley), one new branch in 2003 (Greenbrae), two new
branches in 2004 (San Anselmo and Northgate - North San Rafael), one new branch
in 2005 (Corte Madera), and one new branch in 2006 (Tiburon/Belvedere). The
Northgate facility also serves as the Companys headquarters. The Company
intends to open future branches and loan production offices in similar business
and high net worth markets in the upcoming years.

Competition

The banking and financial services business in
California generally, and in the Companys market area specifically, is highly
competitive with respect to attracting both loan and deposit relationships. The
increasingly competitive environment is a result of many factors including, but
not limited to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| |  | The deepening recession that began in the fourth
  quarter of 2007 has caused decreased real estate values, increased
  unemployment, and reductions in the liquidity and net worth of businesses and
  consumers in the Companys primary markets.                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | The ongoing sub-prime and Alt-A lending crisis,
  which began in the summer of 2007 and continued into 2008, has caused a
  liquidity shortage, particularly among large mortgage lenders. This has
  caused increased competition for retail deposits, as these institutions
  needed to offer above market rates for retail deposits due to their inability
  to raise liquidity through capital market sources.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | Significant consolidation among financial
  institutions which has occurred over the past several years, resulting in a
  number of substantially larger competitors with greater resources than the
  Company.                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | Increasing integration among commercial banks,
  insurance companies, securities brokers, and investment banks.                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | Increased number of denovo banks.                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | Continued growth and increased market share of
  non-bank financial service providers that often specialize in a single
  product line such as credit cards or residential mortgages.                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | Increased Internet based competition causing the
  Bank to compete more frequently with remote entities soliciting customers in
  its primary market area via web based advertising and product delivery.                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | Introduction of new technologies which may bypass
  the traditional banking system for funds settlement.                                                                                                                                                                                                                                                                                                          

The Company competes for loans, deposits, investments,
fee based products, and customers for financial services with commercial banks,
savings and loans, credit unions, mortgage bankers, securities and brokerage
companies, registered investment advisor firms, insurance firms, finance
companies, mutual funds, and other non-bank financial service providers. Many of
these competitors are much larger than the Company in total assets, personnel,
resources and capitalization and enjoy greater access to capital markets and
can offer a broader array of products and services than the Company currently
offers.

9

---



As of June 30, 2008, approximately 91 banking offices
with $8.2 billion in total deposits served the Marin County market. The four
banking institutions with the greatest market share, Wells Fargo Bank, Bank of
America, Chase/Washington Mutual Bank and Westamerica Bank, had deposit market
shares of 19.42%, 18.08%, 9.88% and 9.58%, respectively, as of June 30, 2008,
the most recent date for which data is available, compared with the Banks
share of 5.14%.

The Company also competes for depositors funds with
money market mutual funds and with non-bank financial institutions such as
brokerage firms, investment management firms and insurance companies. Among the
competitive advantages held by certain of these non-bank financial institutions
is the ability to finance extensive advertising campaigns, and to allocate
investment assets to regions of California or other states with areas of
highest demand and often, therefore, highest yield. Large commercial banks also
have substantially greater lending limits than the Bank and the ability to
offer certain services which are not offered directly by the Bank.

In order to compete with other financial service
providers, the Company uses to the fullest extent possible the flexibility and
rapid response capabilities which are accorded by its independent status. This
includes an emphasis on:

| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | development and sale of specialized products and
  services tailored to meet its customers needs;
| |   |                                                                                                   
| |  | local, flexible, and fast decision making;                                                        
| |   |                                                                                                   
| |  | personal service and the resulting personal
  relationships of its staff and customers;           
| |   |                                                                                                   
| |  | referrals from employees, directors and satisfied
  customers; and,                               
| |   |                                                                                                   
| |  | local community involvement.                                                                      

Employees

As of December 31, 2008, the Company employed 80
full-time employees. The employees are not represented by a union or covered by
a collective bargaining agreement. The Company believes that its employee
relations are good.

Other Information

There were no expenditures made by the Company during
the last two fiscal years on material research activities relating to the
development of services.

The Companys business is not seasonal. The Company
intends to continue its business banking activities that have characterized the
Companys operations over the last year.

10

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Effect of Governmental Policies and
Legislation

The commercial banking business is not only affected
by general economic conditions but is also influenced by the monetary and
fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System
(the FRB). The FRB implements national monetary policies (with objectives
such as curbing inflation and combating recession) by its open-market
operations in United States Government securities which effect short term rates
such as the Fed Funds rate, by adjusting the required level of reserves for
financial institutions subject to its reserve requirements and by varying the
discount rates applicable to borrowings by depository institutions. The actions
of the FRB in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact on the Bank of any future changes in monetary policies
cannot be predicted.

From time to time, legislation is enacted which has
the effect of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between banks and
other financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, the California
legislature and before various bank regulatory and other professional agencies.

Supervision and Regulation

In 2008, Tamalpais Bancorp was a parent company to the
Bank and TWA, and the Bank was a California industrial bank. On January 30,
2009, the Bank converted from a California industrial bank to a California
chartered commercial bank, and the Company became a bank holding company under
the Bank Holding Company Act of 1956, as amended, (BHCA).

General

The Bank and holding company operations are subject to
extensive regulation by federal and state regulatory agencies. This regulation
is intended primarily for the protection of depositors and the Bank Insurance
Fund (BIF) and not for the benefit of shareholders. Moreover, major new
legislation and other regulatory changes affecting the Company, the Bank and
the financial services industry in general have occurred in the current and
recent years and can be expected to occur in the future. The nature, timing and
impact of new and amended laws and regulations cannot be accurately predicted.
The following information describes some of the more significant laws,
regulations, and policies that are applicable to the Company and the Bank, and
does not purport to be complete and is qualified in its entirety by reference
to all particular statutory or regulatory provisions.

Regulation
and Supervision of The Company

As a bank holding company, the Company is subject to
regulation and examination by the FRB under the BHCA. The Company is required
to file with the FRB periodic reports and such additional information as the
FRB may require.

The FRB may require the Company to terminate an
activity or terminate control of or liquidate or divest certain subsidiaries,
affiliates or investments if the FRB believes the activity or the control of
the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any bank subsidiary. The FRB also has the
authority to regulate provisions of certain bank holding company debt,
including the authority to impose interest ceilings and reserve requirements on
such debt. Under certain circumstances, the Company must file written notice
and obtain FRB approval prior to purchasing or redeeming its equity securities.
Further, the Company is required by the FRB to maintain certain levels of
capital.

The Company is required to obtain prior FRB approval
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior FRB approval is also required for the merger or consolidation
of a bank holding company with another bank holding company. Similar state
banking agency approvals may also be required. Certain competitive, management,
financial and other factors are considered by the bank regulatory agencies in
granting these approvals.

11

---



With certain exceptions, bank holding companies are
prohibited from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or furnishing services to
subsidiaries. However, subject to prior notice or FRB approval, bank holding
companies may engage in, or acquire shares of companies engaged in, those
nonbanking activities determined by the FRB to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto.

FRB regulations require that bank holding companies
serve as a source of financial and managerial strength to subsidiary banks and
commit resources as necessary to support each subsidiary bank. A bank holding
companys failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the FRB to be an unsafe
and unsound banking practice or a violation of FRB regulations or both. The
FRBs bank holding company rating system also emphasizes risk management and
evaluation of the potential impact of nondepository entities on safety and soundness.

The Company is also treated as a bank holding company
under the California Financial Code. As such, the Company and its subsidiaries
are subject to periodic examination by, and may be required to file reports
with, the DFI.

Directors, officers and principal shareholders of the
Company have had and will continue to have banking transactions with the Bank
in the ordinary course of business. Any loans and commitments to lend included
in such transactions are made in accordance with applicable law, on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons of similar
creditworthiness, and on terms not involving more than the normal risks of
collection or presenting other unfavorable features.

Securities
Registration

The Companys securities are registered with the SEC
under the Securities Exchange Act of 1934, as amended. As such, the Company is
subject to the information, proxy solicitation, insider trading, corporate
governance, and other requirements and restrictions of the Exchange Act.

Regulation
and Supervision of The Bank

The Bank is a California state-chartered commercial
bank and its deposits are insured by FDIC to the extent provided by law. The
Bank is subject to primary supervision, periodic examination and regulation by
the DFI and the FDIC, as the Banks primary federal regulator. In general,
under the California Financial Code, California banks have all the powers of a
California corporation, subject to the general limitation of state bank powers
under the Federal Deposit Insurance Act (FDIA) to those permissible for
national banks. Specific federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. The regulatory structure also gives the bank regulatory agencies
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Furthermore, the Bank is required to maintain certain
levels of capital, and is also subject to consumer protection laws.

12

---



If, as a result of an examination of the Bank, the
FDIC or the DFI should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of the Banks operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to those regulatory agencies. Such remedies include the power to
enjoin unsafe or unsound practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the Bank, to assess civil monetary
penalties, to remove officers and directors and take possession and close and
liquidate the Bank.

Regulation
of Non-banking Affiliates  TWA

TWA is registered with the SEC as an investment
adviser and is subject to various regulations and restrictions imposed by those
entities, as well as by various state authorities. Such regulations cover a
broad range of subject matters. Rules and regulations for registered investment
advisers cover such issues as sales and trading practices; use of client funds
and securities; the conduct of directors, officers, and employees;
record-keeping and recording; supervisory procedures to prevent improper
trading on material non-public information; and qualification and licensing of
sales personnel. The SECs risk assessment rules also apply to TWA as a
registered investment adviser. These rules require a registered investment
advisor to maintain and preserve records and maintain risk management policies
and procedures. In addition to federal registration, state securities
commissions require the registration of certain investment advisors.

Violations of federal, state and FINRA rules or
regulations may result in the revocation of investment advisor licenses,
imposition of censures or fines, the issuance of cease and desist orders, and
the suspension or expulsion of officers and employees from the securities
business firm.

Dividends
and Other Transfer of Funds

Dividends from the Bank constitute the principal
source of funds to the Company. The Company is a legal entity separate and
distinct from the Bank. The Companys ability to pay cash dividends is limited
by California law such that shareholders of the Company may receive dividends
when and as declared by the Board of Directors out of funds legally available
for such purpose. With certain exceptions, a California corporation may not pay
a dividend to its shareholders unless: (i) its retained earnings equal at least
the amount of the proposed dividend, or (ii) after giving effect to the
dividend, the corporations assets would equal at least 1.25 times its
liabilities and, for corporations with classified balance sheets, the current
assets of the corporation would be at least equal to its current liabilities
or, if the average of the earnings of the corporation before taxes on income
and before interest expense for the two preceding fiscal years was less than
the average of the interest expense of the corporation for those fiscal years,
at least equal to 1.25 times its current liabilities.

The FDIC and the DFI have authority to prohibit the
Bank from engaging in activities that, in their opinion, constitute unsafe or
unsound practices in conducting its business. It is possible, depending upon
the financial condition of the bank in question and other factors, that the
FDIC and DFI could assert that the payment of dividends or other payments
might, under some circumstances, be an unsafe or unsound practice. Furthermore,
the FDIC has established guidelines with respect to the maintenance of
appropriate levels of capital by banks under its jurisdiction. Compliance with
the standards set forth in such guidelines and the restrictions that are or may
be imposed under the prompt corrective action provisions of federal law could
limit the amount of dividends which the Bank may pay. An insured depository
institution is prohibited from paying management fees to any controlling
persons or, with certain limited exceptions, making capital distributions if
after such transaction the institution would be undercapitalized. The DFI may
impose similar limitations on the Bank. Under certain circumstances, dividends
could be prohibited under the Trust Preferred Securities.

Capital
Adequacy

The federal banking agencies have adopted risk-based
minimum capital guidelines for bank holding companies and banks that are
expected to provide a measure of capital that reflects the degree of risk
associated with a banking organizations operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet
items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as commercial loans.

13

---



The federal banking agencies require a minimum ratio
of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio
of Tier 1 capital to risk-adjusted assets of 4%. In addition to the
risked-based guidelines, federal banking regulators require banking organizations
to maintain a minimum amount of Tier 1 capital to average assets, referred to
as the leverage ratio. For a banking organization rated in the highest of the
five categories used by regulators to rate banking organizations, the minimum
leverage ratio must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above minimum guidelines and ratios. As of
December 31, 2008, the Banks ratios exceeded applicable regulatory
requirements. As of December 31, 2008, the Company was not a banking holding
company and, therefore, not subject to the FRBs capital requirements.

Prompt
Corrective Action and Other Enforcement Mechanisms

The Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), among other things, identifies five capital categories
for insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for prompt corrective action for insured depository
institutions that do not meet minimum capital requirements to be classified as
well-capitalized or adequately capitalized. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to
meet the capital guidelines could also subject a banking institution to capital
raising requirements. An undercapitalized institution must develop a capital
restoration plan.

An institution that, based upon its capital levels, is
classified as well capitalized, adequately capitalized, or undercapitalized,
may be treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. Banking agencies have also adopted
regulations which mandate that regulators take into consideration: (i)
concentrations of credit risk; (ii) interest rate risk (when the interest rate
sensitivity of an institutions assets does not match the sensitivity of its
liabilities or its off-balance-sheet position); and, (iii) risks from non-traditional
activities, as well as an institutions ability to manage those risks, when
determining the adequacy of an institutions capital. This evaluation will be
made as a part of the institutions regular safety and soundness examination.
In addition, the banking agencies have amended their regulatory capital
guidelines to incorporate a measure for market risk. In accordance with the
amended guidelines, the Company and any company with significant trading
activities must incorporate a measure for market risk in its regulatory capital
calculations.

Safety
and Soundness Standards

FDICIA imposes certain specific restrictions on
transactions and requires federal banking regulators to adopt overall safety
and soundness standards for depository institutions related to internal
control, loan underwriting and documentation and asset growth. Among other
things, FDICIA limits the interest rates paid on deposits by undercapitalized
institutions, restricts the use of brokered deposits, limits the aggregate
extensions of credit by a depository institution to an executive officer,
director, principal shareholder or related interest, and reduces deposit
insurance coverage for deposits offered by undercapitalized institutions for
deposits by certain employee benefit accounts. The federal banking agencies may
require an institution to submit to an acceptable compliance plan as well as
have the flexibility to pursue other more appropriate or effective courses of
action given the specific circumstances and severity of an institutions
noncompliance with one or more standards.

14

---



In December 2006, the FRB and FDIC issued joint
guidance relating to institutions concentrations in commercial real estate
lending. These agencies have observed that commercial real estate concentrations
have been rising over the past several years and have reached levels that could
create safety and soundness concerns in the event of a significant economic
downturn. While these agencies are not establishing a limit on the amount of
commercial real estate lending that an institution may conduct, they have
established a threshold which examiners may use to identify institutions with
potential concentration risk. Any institution that: (1) has experienced rapid
growth in commercial real estate lending; (2) has notable exposure to a
specific type of commercial real estate; or, (3) is approaching or exceeds the
supervisory criteria may be identified for further examination.

Premiums
for Deposit Insurance and Assessments for Examinations

The Banks deposits are insured by the FDIC to the
maximum amount permitted by law which is temporarily $250,000 for all deposit
accounts until December 31, 2009. The FDIC enacted a new rule, effective
January 1, 2007, under which the FDIC uses a risk-based assessment system to
assign one of four risk categories to insured financial institutions. The new
premium rate structure imposes a minimum assessment of five to seven cents for
every $100 of domestic deposits on institutions that are assigned to the lowest
risk category. This category encompasses substantially all insured
institutions, including the Bank.

|                                     |  |  |                   |  |  |                    |  |  |                     |  |  |                   
|------------------------------------ |  |  | ----------------- |  |  | ------------------ |  |  | ------------------- |  |  | ------------------
|                                     |  |  | Risk
  Category I |  |  | Risk
  Category II |  |  | Risk
  Category III |  |  | Risk
  Category IV
|                                     |  |  |                   |  |  |                    |  |  |                     |  |  |                   
|Initial Base Assessment Rate         |  |  | 10-14             |  |  | 20                 |  |  | 30                  |  |  | 45                
|Secured Liability Adjustment (added) |  |  | 0
  to 7          |  |  | 0
  to 10          |  |  | 0
  to 15           |  |  | 0
  to 22.5       
|Brokered Deposit Adjustment (added)  |  |  | N/A               |  |  | 0
  to 10          |  |  | 0
  to 10           |  |  | 0
  to 10         
|Total Base Assessment Rate           |  |  | 8
  to 21         |  |  | 18
  to 40         |  |  | 28
  to 55          |  |  | 43
  to 77.5      

Pursuant to the Federal Deposit Insurance Reform Act
of 2005, the FDIC is authorized to set the reserve ratio for the Deposit
Insurance Fund (DIF) annually at between 1.15% and 1.50% of estimated insured
deposits. The FDIC may increase or decrease the assessment rate schedule on a
semi-annual basis. In an effort to restore capitalization levels and to ensure
the DIF will adequately cover projected losses from future bank failures, the
FDIC, in October 2008, proposed a rule to alter the way in which it
differentiates for risk in the risk-based assessment system and to revise
deposit insurance assessment rates, including base assessment rates. First
quarter 2009 assessment rates were increased to between 12 and 50 cents for
every $100 of domestic deposits, with most banks paying between 12 and 14
cents.

On February 27, 2009, the FDIC approved an interim
rule to institute a one-time special emergency assessment of 20 cents per $100
in domestic deposits on June 30, 2009, to be collected by September 30, 2009,
to restore the DIF reserves depleted by recent bank failures. The interim rule
also permits the FDIC to impose an additional special emergency assessment
after June 30, 2009 of up-to-10 basis points, if necessary. The FDIC also
adopted amendments to its restoration plan for the DIF to implement changes to
the risk-based assessment system and set assessment rates to provide that most
banks will now pay initial base rates ranging from 12 cents per $100 to 16
cents per $100 on an annual basis, beginning on April 1, 2009. Changes to the
assessment system include higher rates for institutions that rely significantly
on secured liabilities, which may increase the FDICs loss in the event of
failure without providing additional assessment revenue. Assessments will also
be higher for institutions that rely significantly on brokered deposits but,
for well-managed and well-capitalized institutions, only when accompanied by
rapid asset growth.

Additionally, the Bank has elected to participate in
the FDIC program whereby noninterest bearing transaction account deposits will
be insured without limitation through December 31, 2009. The Bank is required
to pay an additional premium to the FDIC of ten basis points on the amount of
balances in noninterest bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000.

15

---



Insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operation, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC or
the institutions primary regulator. The termination of deposit insurance for
the Bank would have a material adverse effect on the Companys condition since
it would result in the revocation of the Banks charter and the cessation of
its operations as a going concern.

In October of 2006, FDICs Board adopted a final rule
governing the distribution and use of the $4.7 billion one-time assessment
credit and a temporary final rule that expires at the end of 2009 governing
dividends from the insurance fund. The Bank had assessment credits of
approximately $70,000 as of December 31, 2006 and which were used in 2007.

Consumer
Protection Laws and Regulations

The bank regulatory agencies are focusing greater
attention on compliance with consumer protection laws and their implementing
regulations. Examination and enforcement have become more intense in nature,
and insured institutions have been advised to monitor carefully compliance with
various consumer protection laws and their implementing regulations. The Bank
is subject to many federal consumer protection statutes and regulations,
including Community Reinvestment Act, Equal Credit Opportunity Act, Truth in
Lending Act, Fair Housing Act, Home Mortgage Disclosure Act and Real Estate
Settlement Procedures Act. Penalties under these statutes may include fines,
reimbursements and other penalties. Due to heightened regulatory concern
related to compliance with these and other statutes generally, the Bank may
incur additional compliance costs.

The
Community Reinvestment Act (CRA) and Fair Lending Developments

The Bank is subject to certain fair lending
requirements and reporting obligations involving lending, investing and other
CRA activities. CRA requires the Bank to identify the communities served by the
Banks offices and to identify the types of credit and investments the Bank is
prepared to extend within such communities including low and moderate income
neighborhoods. It also requires the Banks regulators to assess the Banks
performance in meeting the credit needs of its community and to take such
assessment into consideration in reviewing application for mergers,
acquisitions, relocation of existing branches, opening of new branches and
other transactions. A bank may be subject to substantial penalties and
corrective measures for a violation of certain fair lending laws. The federal
banking agencies may take compliance with such laws and CRA in consideration
when regulating and supervising other banking activities.

A banks compliance with its CRA obligations is
determined based on a performance-based evaluation system which bases CRA
ratings on an institutions lending, service and investment performance. An
unsatisfactory rating may be the basis for denying a merger application. The
Banks latest CRA examination was completed by the FDIC and received an overall
rating of outstanding in complying with its CRA obligations.

Gramm-Leach-Bliley
Financial Services Modernization Act (GLB Act)

In November 1999, the GLB Act was enacted. The GLB Act
repeals provisions of the Glass-Steagall Act which restricted the affiliation
of Federal Reserve member banks with firms engaged principally in specified
securities activities, and which restricted officer, director or employee
interlocks between a member bank and any company or person primarily engaged
in specified securities activities. In addition, the GLB Act contains
provisions that expressly preempt any state law restricting the establishment
of financial affiliations, primarily related to insurance. The general effect
of the law is to establish a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms and other
financial service providers by revising and expanding the BHCA framework to
permit a holding company to engage in a full range of financial activities
through a new entity known as a financial holding company. Financial
activities is broadly defined to include not only banking, insurance and
securities activities, but also merchant banking and additional activities that
the FRB, in consultation with the Secretary of the Treasury, determines to be
financial in nature, incidental to such financial activities or complementary
activities that do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally.

16

---



The GLB Act provides that no company may acquire
control of an insured savings association unless that company engages, and
continues to engage, only in the financial activities permissible for a
financial holding company, unless the company is grandfathered as a unitary
savings and loan holding company. The GLB Act grandfathers any company that was
a unitary savings and loan holding company on May 4, 1999 or became a unitary
savings and loan holding company pursuant to an application pending on that
date. The GLB Act also permits national banks to engage in expanded activities
through the formation of financial subsidiaries. A national bank may have a
subsidiary engaged in any activity authorized for national banks directly or
any financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking, which
may only be conducted through a subsidiary of a financial holding company.
Financial activities include all activities permitted under new sections of the
BHCA or permitted by regulation.

To the extent that the GLB Act permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. The GLB Act is intended to grant
to community banks powers as a matter of right that larger institutions have
accumulated on an ad hoc basis and which unitary savings and loan holding
companies already possess. Nevertheless, the GLB Act may have the result of increasing
the amount of competition that the Company faces from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources than the Company has.

Customer
Information Security

The federal bank regulatory agencies have established
standards for safeguarding nonpublic personal information about customers that
implement provisions of the GLBA (the Guidelines). Among other things, the
Guidelines require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate committee
thereof, to develop, implement and maintain a comprehensive written information
security program designed to ensure the security and confidentiality of customer
information, to protect against any anticipated threats or hazards to the
security or integrity of such information, and to protect against unauthorized
access to or use of such information that could result in substantial harm or
inconvenience to any customer.

Bank
Secrecy Act (BSA)

The BSA is a tool that the U.S. government uses to
fight drug trafficking, money laundering and other crimes. Under the BSA,
financial institutions are required to file certain reports, including
suspicious activities reports and currency transaction reports, with the
Financial Crimes Enforcement Network under certain circumstances. Financial
institutions are also required to have policies and procedures in place to
ensure compliance with the BSA. If a financial institution fails to timely file
a report or fails to implement its BSA policies and procedures, it could
subject the institution to enforcement action or civil money penalties. In July
2007, federal banking regulators issued the Intercompany Statement on Enforcement
of Bank Secrecy Act/Anti-Money Laundering Requirements to provide greater
consistency among the agencies in enforcement decisions in BSA matters and to
offer insight into the considerations that form the basis of such BSA
enforcement decisions.

On October 26, 2001, the President signed the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (USA PATRIOT) Act of 2001. The USA PATRIOT Act also made
significant changes to BSA. Under the USA PATRIOT Act, financial institutions
are subject to prohibitions against specified financial transactions and
account relationships as well as enhanced due diligence and of identifying
customers when establishing new relationships and standards in their dealings with
foreign financial institutions and foreign customers. For example, the enhanced
due diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:

17

---



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to conduct enhanced scrutiny of account relationships
  to guard against money laundering and report any suspicious transaction;                                                                                  
| |   |                                                                                                                                                                                                                   
| |  | to ascertain the identity of the nominal and
  beneficial owners of, and the source of funds deposited into, each account as
  needed to guard against money laundering and report any suspicious
  transactions; 
| |   |                                                                                                                                                                                                                   
| |  | to ascertain for any foreign bank, the shares of
  which are not publicly traded, the identity of the owners of the foreign
  bank, and the nature and extent of the ownership interest of each such owner;
  and,
| |   |                                                                                                                                                                                                                   
| |  | to ascertain whether any foreign bank provides
  correspondent accounts to other foreign banks and, if so, the identity of
  those foreign banks and related due diligence information.                           

Under the USA PATRIOT Act, financial institutions are
to establish anti-money laundering programs to enhance their BSA. The USA
PATRIOT Act sets forth minimum standards for these programs, including the
development of internal policies, procedures, and controls, designation of a
compliance officer, ongoing employee training program, and independent audit
function to test the programs. Management believes that the Bank is currently
in compliance with the USA PATRIOT Act.

Sarbanes-Oxley
Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002
(SOX), was signed into law to address corporate and accounting fraud. SOX
establishes a new accounting oversight board that will enforce auditing
standards and restricts the scope of services that accounting firms may provide
to their public company audit clients. Among other things, SOX also: (i)
requires chief executive officers and chief financial officers to certify to
the accuracy of periodic reports filed with the SEC; (ii) imposes new
disclosure requirements regarding internal controls, off-balance-sheet
transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates the time
frame for reporting of insider transactions and periodic disclosures by public
companies; and, (iv) requires companies to disclose whether or not they have
adopted a code of ethics for senior financial officers and whether the audit
committee includes at least one audit committee financial expert.

Under SOX, the SEC is required to regularly and
systematically review corporate filings, based on certain enumerated factors.
To deter wrongdoing, SOX: (i) subjects bonuses issued to top executives to
disgorgement if a restatement of a companys financial statements was due to
corporate misconduct; (ii) prohibits an officer or director from misleading or
coercing an auditor; (iii) prohibits insider trades during pension fund
blackout periods; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and, (v) extends the period during which certain securities
fraud lawsuits can be brought against a company or its officers. As a public
reporting company, the Company was required to provide managements report on
internal control over financial reporting beginning with its 2008 Annual Report
on Form 10-K. The auditors attestation report on internal controls over
financial reporting is not required until 2009 unless there is a deferment
announced during 2009. The Company has adopted a code of ethics (Code of
Ethics) that applies to its executive officers. A copy of the Code of Ethics
is filed as an exhibit hereto.

California
Financial Information Privacy Act/Fair Credit Reporting Act

In 1970, the Federal Fair Credit Reporting Act (the
FCRA) was enacted to insure the confidentiality, accuracy, relevancy and
proper utilization of consumer credit report information. Under the framework
of the FCRA, the United States has developed a highly advanced and efficient
credit reporting system. The information contained in that broad system is used
by financial institutions, retailers and other creditors of every size in
making a wide variety of decisions regarding financial transactions. Employers
and law enforcement agencies have also made wide use of the information
collected and maintained in databases made possible by the FCRA. The FCRA
affirmatively preempts state law in a number of areas, including the ability of
entities affiliated by common ownership to share and exchange information
freely, and the requirements on credit bureaus to reinvestigate the contents of
reports in response to consumer complaints, among others.

18

---



Congress enacted the FACT Act, (Fair and Accurate
Credit Transaction Act) of 2003, which has the effect of avoiding the sunset
preemption provision of the Fair Credit Reporting Act (FCRA) that were due to
expire on December 31, 2003. The President signed the FACT Act into law on December
4, 2003. In general, the FACT Act amends the FCRA and, in addition, provides
that, when the implementing regulations have been issued and become effective,
the FACT Act preempts elements of the California Financial Information Privacy
Act. A series of regulations and announcements were promulgated during 2004,
including a joint FTC/Federal Reserve announcement of effective dates for FCRA
amendments, the FTCs Free Credit Report rule, revisions to the FTCs FACT
Act Rules, the FTCs final rules on identity theft and proof of identity, the
FTCs final regulation on consumer information and records disposal, and the
FTCs final summaries and notices. Regulations implementing this provision of
FACT Act have a mandatory effective date of October 1, 2008. FACT Act section
114, which requires institutions to develop and implement a written program to
detect, prevent, and mitigate identity theft for certain new and existing
accounts, must have been in place by November 1, 2008.

Regulation
W

Transactions between a bank and its affiliates are
governed by Sections 23A and 23B of the Federal Reserve Act. The Federal
Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks
in the same manner and to the same extent as if they were members of the
Federal Reserve System. The FRB also issued Regulation W, which became
effective on April 1, 2003, which codifies prior regulations under Sections 23A
and 23B of the Federal Reserve Act and provides interpretative guidance with
respect to affiliate transactions. Affiliates of a bank include, among other
entities, the banks parent company and companies that are under common control
with the bank. The Company is considered to be an affiliate of the Bank. In
general, subject to certain specified exemptions, a bank or its subsidiaries
are limited in their abilities to engage in covered transactions with
affiliates:

| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | to an amount equal to 10% of the banks capital and
  surplus, in the case of covered transactions with any one affiliate; and,
| |   |                                                                                                                                
| |  | to an amount equal to 20% of the banks capital and
  surplus, in the case of covered transactions with all affiliates.        

A covered transaction includes, among other things,
a loan or extension of credit to an affiliate; a purchase of securities issued
by an affiliate; a purchase of assets from an affiliate, with some exceptions;
and the issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. In addition, a bank and its subsidiaries may engage in certain
transactions only on terms and under circumstances that are substantially the
same, or at least as favorable to the bank or its subsidiary, as those
prevailing at the time for comparable transactions with nonaffiliated
companies.

Programs
to Mitigate Identity Theft

In November 2007, federal banking agencies together
with the NCUA and FTC adopted regulations under the Fair and Accurate Credit
Transactions Act of 2003 to require financial institutions and other creditors
to develop and implement a written identity theft prevention program to detect,
prevent and mitigate identity theft in connection with certain new and existing
accounts. Covered accounts generally include consumer accounts and other
accounts that present a reasonably foreseeable risk of identity theft. Each
institutions program must include policies and procedures designed to: (i)
identify indicators, or red flags, of possible risk of identity theft based;
(ii) detect the occurrence of red flags; (iii) respond appropriately to red
flags that are detected; and, (iv) ensure that the program is updated
periodically as appropriate to address changing circumstances. The regulations
include guidelines that each institution must consider and, to the extent
appropriate, include in its program.

19

---



Recent
Developments

The U.S. and global economies have experienced and are
experiencing significant stress and disruptions in the financial sector.
Dramatic slowdowns in the housing industry with falling home prices and
increasing foreclosures and unemployment have created strains on financial
institutions, including government-sponsored entities and investment banks. As
a result, many financial institutions have sought and continue to seek
additional capital or to merge with larger and stronger institutions.

In response to the financial crisis affecting the
banking and financial markets, in October 2008, the Emergency Economic
Stabilization Act of 2008 (the EESA) was signed into law. Pursuant to the
EESA, the U.S. Treasury (the Treasury) has the authority to, among other
things, purchase up to $700 billion of mortgages, mortgage backed securities
and certain other financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the U.S. financial markets.

In addition, the Treasury was authorized to purchase
equity stakes in U.S. financial institutions. Under this program, known as the
Capital Purchase Program of the Troubled Asset Relief Program (the TARP
Capital Purchase Program), from the $700 billion authorized by the EESA, the
Treasury is making $250 billion of capital available to U.S. financial
institutions through the purchase of preferred stock or subordinated debentures
by the Treasury. In conjunction with the purchase of preferred stock from
publicly-held financial institutions, the Treasury is receiving warrants to
purchase common stock with an aggregate market price equal to 15% of the total
amount of the preferred investment. Participating financial institutions are
required to adopt the Treasurys standards for executive compensation and
corporate governance for the period which the Treasury holds equity issued
under the TARP Capital Purchase Program and are restricted from increasing
dividends to common shareholders or repurchasing common stock for three years
without the consent of the Treasury. The Company has applied to participate in
the TARP Capital Purchase Program and if the application is approved by
Treasury the Board of Directors will make the final decision whether to
participate.

Further, after receiving a recommendation from the
boards of the FDIC and the Federal Reserve Board, the Treasury signed the
systemic risk exception to the FDIC Act, enabling the FDIC to temporarily
provide a 100% guarantee of the senior debt of all FDIC-insured institutions
and their holding companies, as well as deposits in non-interest bearing
transaction deposit accounts under the TLGP program. The Company has elected to
participate in the TLGP program. Coverage under the TLGP was available for 30
days without charge and thereafter at a cost of seventy five basis points per
annum for senior unsecured debt and ten basis points per annum for non-interest
bearing transaction deposits above the deposit insurance limit.

On February 10, 2009, Treasury announced a Financial
Stability Plan to address aspects of the economys difficulties. The plan
intended to revise the form of capital injections into financial institutions,
increases the size and scope of a previously announced non-recourse lending
facility by the Federal Reserves non-recourse lending facility, facilitate the
creation of a public-private investment fund to purchase troubled assets from
financial institutions, and allocate $50 billion for homeowner/foreclosure
assistance. The plan would substantially increase the amount of funds injected
into the nations financial system.

On February 17, 2009, President Obama signed into law
the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA provides
similar and additional limitations and requirements with respect to executive compensation
and also amends Section 111 of EESA. The actual effect of the combination of
the limitations in EESA, certain guidance issued by Treasury on February 4,
2009, and ARRA is not yet certain.

20

---



ITEM 1A  RISK FACTORS

Not Required.

ITEM 1B  UNRESOLVED STAFF
COMMENTS

None.

21

---



ITEM 2  PROPERTIES

The
following table sets forth information relating to each of the Companys
offices as of December 31, 2008:

|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|------------------------------------------- |  | ------------------- | ------ | ------------------------------------ |  | ---------------------------- |  | ---------------- | ---------- |  |  | ----- | 
|                                            |  | Leased
  Or
  Owned |        | Original Date
  Leased or
  Acquired |  | Date of
  Lease
  Expiration |  | Square
  Footage |           
|                                            |  |                     |        |                                      |  |                              |  |                  |           
|Administrative Offices:                     |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|630 Las Gallinas Ave.                       |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|San Rafael, California 94903                |  |                     | Leased |                                      |  | 6/1/2005                     |  |                  | 6/1/2015   |  |  | 9,453 | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|Tamalpais Bancorp                           |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|630 Las Gallinas Ave.                       |  |                     | Leased |                                      |  | 1/1/2007                     |  |                  | 2/1/2009   |  |  | 190   | 
|San Rafael, California 94903                |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|Full Service Branch Offices Currently Open: |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|851 Irwin St., Suite 100                    |  |                     | Leased |                                      |  | 8/18/1998                    |  |                  | 2/28/2009  |  |  | 3,417 | 
|San Rafael, California 94901                |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|453-455 Miller Ave.                         |  |                     | Leased |                                      |  | 5/1/2002                     |  |                  | 4/31/2012  |  |  | 3,026 | 
|Mill Valley, California 94941               |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|575 Sir Francis Drake Blvd.                 |  |                     | Leased |                                      |  | 7/23/2002                    |  |                  | 7/31/2012  |  |  | 2,600 | 
|Greenbrae, California 94904                 |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|100 Sir Francis Drake Blvd.                 |  |                     | Leased |                                      |  | 11/15/2002                   |  |                  | 11/15/2017 |  |  | 3,300 | 
|San Anselmo, California 94960               |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|630 Las Gallinas Ave., Suite 100            |  |                     | Leased |                                      |  | 6/1/2005                     |  |                  | 6/1/2015   |  |  | 2,500 | 
|San Rafael, California 94903                |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|71 Casa Buena Drive                         |  |                     | Leased |                                      |  | 12/29/2003                   |  |                  | 12/29/2013 |  |  | 3,746 | 
|Corte Madera, California 94925              |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|1652 Tiburon Boulevard                      |  |                     | Leased |                                      |  | 8/15/2005                    |  |                  | 8/15/2015  |  |  | 2,230 | 
|Tiburon, California 94920                   |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|851 Grant Avenue                            |  |                     | Leased |                                      |  | 6/25/2008                    |  |                  | 6/25/2018  |  |  | 2,755 | 
|Novato, California 94947                    |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|Loan Production Offices:                    |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|50 Old Couthouse Square                     |  |                     | Leased |                                      |  | 1/1/2007                     |  |                  | 1/1/2009   |  |  | 1,353 | 
|Santa Rosa, California 95404                |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|Tamalpais Wealth Advisors:                  |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|630 Las Gallinas Ave.                       |  |                     | Leased |                                      |  | 7/19/2007                    |  |                  | 2/1/2009   |  |  | 700   | 
|San Rafael, California 94903                |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|Stand Alone ATM Machines:                   |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|735 College Ave.                            |  |                     | Leased |                                      |  | 5/29/2003                    |  |                  | 5/29/2009  |  |  | 12    | 
|Kentfield, California 94904                 |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|                                            |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 
|100 Redhill Boulevard                       |  |                     | Leased |                                      |  | 9/12/2005                    |  |                  | 2/1/2009   |  |  | 25    | 
|San Anselmo, California 94960               |  |                     |        |                                      |  |                              |  |                  |            |  |  |       | 

The Novato lease is subject to landlord building
completion and occupancy. Management believes that its existing facilities are
suitable and adequate for its present needs and that the Companys insurance
coverage on its properties and tenant improvements are adequate.

22

---



ITEM 3  LEGAL PROCEEDINGS

The Company is involved in various claims and legal
proceedings arising out of the ordinary course of business. Management is of
the opinion, based on its review with counsel of the development of such
matters to date, that the ultimate disposition of such matters will not materially
affect the consolidated financial position or results of operations of the
Company.

ITEM 4  SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered
by this Annual Report, the Board of Directors approved an amendment to the
Articles of Incorporation of Tamalpais Bancorp to authorize the creation of a
class of preferred stock. The amendment to the Articles of Incorporation was
approved by the shareholders through the solicitation of written consents in
lieu of a shareholders meeting. Of the 3,823,634 shares entitled to vote,
53.49% have voted to consent to the change in the Companys Articles of
Incorporation, 43,046 shares (1.13% of shares entitled to vote) have voted to
withhold consent, and 2,530 shares (0.07% of shares entitled to vote) have
abstained.

PART II

ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUERS PURCHASE OF EQUITY SECURITIES

The Companys common stock is traded on the NASDAQ
Capital Market under the symbol TAMB.

At February 27, 2009, 3,823,634 shares of the
Companys common stock, no par value, which reflects the 7% stock dividend
declared on January 30, 2007, were outstanding and held by approximately 887
holders of record. The following table sets forth, for the periods indicated,
the range of high and low trade prices per share of the Companys common stock.

|               |  |                               |       |     |   |       | 
|-------------- |  | ----------------------------- | ----- | --- | - | ----- | 
|               |  | Sales Price of
  Common Stock |      
|               |  |                               |      
|               |  | High                          |       | Low |  
|               |  |                               |       |     |  
|2008           |  |                               |       |     |   |       | 
|First Quarter  |  | $                             | 13.00 |     | $ | 9.52  | 
|Second Quarter |  |                               | 12.85 |     |   | 10.30 | 
|Third Quarter  |  |                               | 13.00 |     |   | 9.40  | 
|Fourth Quarter |  |                               | 12.25 |     |   | 7.76  | 
|               |  |                               |       |     |   |       | 
|2007           |  |                               |       |     |   |       | 
|First Quarter  |  | $                             | 15.47 |     | $ | 13.87 | 
|Second Quarter |  |                               | 15.35 |     |   | 13.13 | 
|Third Quarter  |  |                               | 13.96 |     |   | 11.67 | 
|Fourth Quarter |  |                               | 12.84 |     |   | 10.35 | 

The prices have been adjusted to reflect the 7% stock
dividend declared in 2007. The Companys closing price on December 31, 2008 was
$8.47 per share, compared to the closing price one year earlier of $11.07 per
share.

23

---



Dividends

The Company initiated a cash dividend program in 2004.
The Board of Directors evaluates the payment of dividends on a quarterly basis.
The shareholders of the Company will be entitled to receive dividends when and
as declared by its Board of Directors, out of funds legally available, subject
to the dividend preference, if any, on preferred shares that may be outstanding
and also subject to the restrictions of the California General Corporation Law.
There are no preferred shares outstanding at this time. There is no assurance,
however, that any dividends will be paid since they are dependent upon
earnings, cash balances, financial condition, asset quality, and capital
requirements of the Company and its subsidiaries as well as general economic
conditions. See Supervision and Regulation  Dividends and Other Transfer of
Funds. See also Note 13 to the Consolidated Financial Statements.

In January 2007, the Board of Directors declared a 7%
stock dividend payable on February 14, 2007 to shareholders of record on
January 31, 2007. Cash was paid in lieu of issuing fractional shares. Earnings
per share amounts and information with respect to stock options have been
restated for all years presented to reflect the stock dividend.

The Company paid a cash dividend of $0.06 per share in
November 2008, $0.055 in August and May 2008 and $0.05 in February 2008. The
Company paid a cash dividend of $0.05 in November 2007 and $0.045 per share in
May and August 2007. The Company paid four cash dividends of $0.04 per share in
2006.

Stock Repurchase

The Company repurchases shares of its common stock in
the open market to optimize the Companys use of equity capital and enhance
shareholder value and with the intention of lessening the dilutive impact of
issuing new shares to meet stock performance, option plans and other ongoing
requirements.

In September 2007, the Company received Board of
Director approval to repurchase up to 5% of the shares of the Companys common
stock in the open market over the next twelve months. The repurchase plan
represents approximately 200,649 shares of the Companys common stock
outstanding as of July 28, 2007, as reported on the Companys most recent Form
10-Q filed with the SEC on August 10, 2007. The repurchase program allows the
Company to purchase common shares for a period of approximately twelve months
from the approval date in the open market. The Company executed these transactions
pursuant to the safe harbor provisions of the SECs Rule 10b-18. All shares
repurchased were made in open market transactions and were part of the publicly
announced repurchase program. No shares were purchased during the fiscal year
ended December 31, 2008 and the repurchase plan was terminated.

The following table lists shares repurchased over the
twelve months since the September 2007 approval.

|                       |  |                                      |         |                                    |   |                                                                           |  |                                                                         |         |  |  |         | 
|---------------------- |  | ------------------------------------ | ------- | ---------------------------------- | - | ------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ------- |  |  | ------- | 
|Period                 |  | Total Number
  of Shares
  Purchased |         | Average
  Price
  Paid
  Per Share |   | Total Number of
  Shares Purchased
  as Part of Publicly
  Announced Plan |  | Maximum Number
  of Shares that May
  Yet Be Purchased
  Under the Plan |        
|                       |  |                                      |         |                                    |   |                                                                           |  |                                                                         |        
|                       |  |                                      |         |                                    |   |                                                                           |  |                                                                         |         |  |  |         | 
|September
  9-30, 2007 |  |                                      | 75,000  |                                    | $ | 12.78                                                                     |  |                                                                         | 75,000  |  |  | 125,649 | 
|October
  1-31, 2007   |  |                                      | 59,776  |                                    |   | 12.49                                                                     |  |                                                                         | 134,776 |  |  | 65,873  | 
|November
  1-30, 2007  |  |                                      | 61,440  |                                    |   | 12.15                                                                     |  |                                                                         | 196,216 |  |  | 4,433   | 
|                       |  |                                      |         |                                    |   |                                                                           |  |                                                                         |         |  |  |         | 
|Total                  |  |                                      | 196,216 |                                    | $ | 12.47                                                                     |  |                                                                         | 405,992 |  |  | 195,955 | 
|                       |  |                                      |         |                                    |   |                                                                           |  |                                                                         |         |  |  |         | 

24

---



Securities Authorized for Issuance
Under Equity Compensation Plans

The following table summarizes information as of
December 31, 2008 with respect to equity compensation plans. All plans have
been approved by the shareholders.

|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                                                             |  | Number of
  securities to be
  issued upon
  exercise of
  outstanding
  options, warrants,
  and rights
  (a) |         | Weighted-average
  exercise price of
  outstanding
  options, warrants
  and rights
  (b) |  | Number of securities
  remaining available for
  future issuance under
  equity compensation
  plans (excluding
  securities reflecting in
  column (a)
  (c) | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|Plan Category                                                |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|                                                            
|Equity compensation plans approved by
  security holders:    |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|1997 Incentive Stock Option Plan                             |  |                                                                                                                | 202,843 |                                                                                           |  | 11.80                                                                                                                                                         |  |  |        | 
|2006 Incentive Stock Option Plan                             |  |                                                                                                                | 209,529 |                                                                                           |  | 12.32                                                                                                                                                         |  |  | 88,308  | 
|2003 Non-Employee Directors Stock Option
  Plan             |  |                                                                                                                | 97,420  |                                                                                           |  | 12.21                                                                                                                                                         |  |  | 28,840  | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|Equity compensation plans not approved by
  security holders |  |                                                                                                                |        |                                                                                           |  |                                                                                                                                                              |  |  |        | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 
|Total                                                        |  |                                                                                                                | 509,792 |                                                                                           |  | 12.09                                                                                                                                                         |  |  | 117,148 | 
|                                                             |  |                                                                                                                |         |                                                                                           |  |                                                                                                                                                               |  |  |         | 

ITEM 6 
SELECTED FINANCIAL DATA

The following table sets forth selected financial
condition and results of operations data as of, and for the years ended,
December 31, 2008, 2007, 2006, 2005 and 2004. This information should be read
in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations included herein and the consolidated
financial statements and notes thereto included herein.

25

---



|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|----------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|At or For the Year Ended December 31,(Dollars in thousands) |  | 2008 |           | 2007 |   | 2006      |   | 2005 |           | 2004 |  
|                                                            |  |      |           |      |   |           |   |      |           |      |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Financial Condition Data:                                   |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Total assets                                                |  | $    | 703,390   |      | $ | 556,815   |   | $    | 503,514   |      | $ | 461,839   |   | $ | 425,610   |  
|Available-for-sale securities                               |  |      | 56,416    |      |   | 40,661    |   |      | 26,516    |      |   | 15,118    |   |   | 22,040    |  
|Held-to-maturity securities                                 |  |      | 10,774    |      |   | 14,515    |   |      | 21,823    |      |   | 28,844    |   |   | 40,851    |  
|Federal Home Loan Bank restricted stock                     |  |      | 8,652     |      |   | 6,886     |   |      | 5,892     |      |   | 6,198     |   |   | 6,934     |  
|Pacific Coast Bankers Bank restricted
  stock              |  |      | 50        |      |   | 50        |   |      | 50        |      |   | 50        |   |   | 50        |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Loans receivable, net of allowance for loan
  losses        |  |      | 584,450   |      |   | 464,699   |   |      | 421,335   |      |   | 382,424   |   |   | 325,651   |  
|Deposits                                                    |  |      | 460,301   |      |   | 361,175   |   |      | 369,805   |      |   | 313,399   |   |   | 274,620   |  
|Federal Home Loan Bank advances                             |  |      | 183,085   |      |   | 146,508   |   |      | 86,251    |      |   | 107,812   |   |   | 115,781   |  
|Junior Subordinated Debentures                              |  |      | 13,403    |      |   | 13,403    |   |      | 13,403    |      |   | 10,310    |   |   | 10,310    |  
|Long term debt                                              |  |      | 6,000     |      |   |          |   |      |          |      |   |          |   |   |          |  
|Other liabilities                                           |  |      | 3,228     |      |   | 2,797     |   |      | 3,175     |      |   | 3,472     |   |   | 1,724     |  
|Total stockholders equity                                  |  |      | 37,373    |      |   | 32,933    |   |      | 30,881    |      |   | 26,845    |   |   | 23,175    |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Statement of Operations Data:                               |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Interest income                                             |  | $    | 43,172    |      | $ | 39,041    |   | $    | 35,815    |      | $ | 28,724    |   | $ | 21,602    |  
|Interest expense                                            |  |      | 19,864    |      |   | 21,482    |   |      | 18,185    |      |   | 11,728    |   |   | 7,602     |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net interest income                                         |  |      | 23,308    |      |   | 17,559    |   |      | 17,630    |      |   | 16,996    |   |   | 14,000    |  
|Provision for loan losses                                   |  |      | 3,191     |      |   | 244       |   |      | 439       |      |   | 632       |   |   | 874       |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net interest income after provision for
  loan losses       |  |      | 20,117    |      |   | 17,315    |   |      | 17,191    |      |   | 16,364    |   |   | 13,126    |  
|Noninterest income                                          |  |      | 2,187     |      |   | 2,546     |   |      | 2,176     |      |   | 1,634     |   |   | 814       |  
|Noninterest expenses                                        |  |      | 15,090    |      |   | 13,365    |   |      | 13,036    |      |   | 11,262    |   |   | 8,783     |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Income (loss) before income tax expense
  (benefit)         |  |      | 7,214     |      |   | 6,496     |   |      | 6,331     |      |   | 6,736     |   |   | 5,157     |  
|Income tax expense (benefit)                                |  |      | 2,385     |      |   | 2,287     |   |      | 2,402     |      |   | 2,639     |   |   | 1,709     |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net income (loss)                                           |  | $    | 4,829     |      | $ | 4,209     |   | $    | 3,929     |      | $ | 4,097     |   | $ | 3,448     |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Per Share Data:                                             |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Earnings (loss) per shareBasic                             |  | $    | 1.26      |      | $ | 1.07      |   | $    | 0.99      |      | $ | 1.04      |   | $ | 0.90      |  
|Earnings (loss) per shareDiluted                           |  |      | 1.26      |      |   | 1.07      |   |      | 0.99      |      |   | 1.01      |   |   | 0.87      |  
|Common shares outstanding at end of period                  |  |      | 3,823,634 |      |   | 3,818,284 |   |      | 3,960,852 |      |   | 3,937,239 |   |   | 3,922,301 |  
|Book value per share                                        |  | $    | 9.78      |      | $ | 8.62      |   | $    | 7.80      |      | $ | 6.82      |   | $ | 5.91      |  
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Performance Ratios and Other Data:                          |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Return on average assets                                    |  |      | 0.76      | %    |   | 0.81      | % |      | 0.81      | %    |   | 0.92      | % |   | 0.90      | %
|Return on average stockholders equity                       |  |      | 13.7      | %    |   | 12.9      | % |      | 13.8      | %    |   | 16.5      | % |   | 17.2      | %
|Efficiency ratio                                            |  |      | 59.2      | %    |   | 66.5      | % |      | 65.8      | %    |   | 60.5      | % |   | 59.3      | %
|                                                            |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Tamalpais Bank Capital Ratios:                              |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Tier 1 risk based capital                                   |  |      | 9.2       | %    |   | 9.2       | % |      | 9.7       | %    |   | 9.1       | % |   | 10.0      | %
|Total risk based capital                                    |  |      | 10.5      | %    |   | 10.2      | % |      | 10.8      | %    |   | 10.1      | % |   | 11.0      | %
|Tier 1 leverage capital                                     |  |      | 8.1       | %    |   | 8.3       | % |      | 8.6       | %    |   | 7.7       | % |   | 8.1       | %

26

---



Earnings
per share, book value per share and common shares outstanding have been
adjusted for the January 2007 7% stock dividend.

ITEM 7  MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion
address information pertaining to the financial condition and results of
operations of the Company that may not be otherwise apparent from a review of
the consolidated financial statements and related footnotes. It should be read
in conjunction with those statements and notes found therein as well as the
other information presented throughout the report. Average balances, including
balances used in calculating certain financial ratios, are generally comprised
of average daily balances.

In
January 2007, the Board of Directors declared a 7% stock dividend. Earnings per
share and book value per share amounts have been restated for prior periods to
reflect the stock dividend.

In
September 2007, the Company received Board of Director approval to repurchase
up to 5% of the share of the Companys common stock over the next twelve months
from the approval date in the open market. The repurchase plan represents
approximately 200,649 of the Companys then-outstanding shares as of July 28,
2007, as reported on the Companys Form 10-Q filed with the Securities and
Exchange Commission (SEC) on August 10, 2007. As of December 31, 2008, the
Company repurchased 196,216 shares at prices ranging from $11.65 to $13.00 for
a total cost of $2.5 million.

For
discussion of stock dividends and share repurchases, see Note 18 of the Notes
to Consolidated Financial Statements.

Critical Accounting Policies

The accounting policies are integral to understanding
the results reported. The most complex accounting policies require managements
judgment to ascertain the valuation of assets, liabilities, commitments and
contingencies. The Company has established detailed policies and control
procedures that are intended to ensure valuation methods are well controlled
and applied consistently from period to period. In addition, the policies and
procedures are intended to ensure that the process for changing methodologies
occurs in an appropriate manner. The following is a brief description of the
current accounting policies involving significant management valuation
judgments.

Allowance
for Loan Losses

The allowance for loan
losses represents managements best estimate of losses inherent in the existing
loan portfolio. The allowance for loan losses is increased by the provision for
loan losses charged to expense and reduced by loans charged-off, net of
recoveries. The Company evaluates the allowance for loan loss on a quarterly
basis and believes that the allowance for loan loss is a critical accounting
estimate because it is based upon managements assessment of various factors
affecting the collectability of the loans, including current and projected
economic conditions, past credit experience, delinquency status, the value of
the underlying collateral, if any, and a continuing review of the portfolio of
loans and commitments.

The Company determines the appropriate level of the
allowance for loan losses, primarily on an analysis of the various components
of the loan portfolio, including all significant credits on an individual
basis. The Company segments the loan portfolios into as many components as
practical. Each component would normally have similar characteristics, such as
risk classification, past due status, type of loan, industry or collateral. The
Company analyzes the following components of the portfolio and provides for
them in the allowance for loan losses.

27

---



| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All significant credits on an individual basis that
  are classified doubtful.                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | All other significant credits reviewed individually.
  If no allocation can be determined for such credits on an individual basis,
  they shall be provided for as part of an appropriate pool.                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | All other loans that are not included by the credit
  grading system in the population of loans reviewed individually, but are
  delinquent or are classified or designated special mention (e.g. pools of
  smaller delinquent, special mention and classified commercial and industrial,
  and real estate loans).
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | Homogenous loans that have not been reviewed
  individually, or are not delinquent, classified, or designated as special
  mention (e.g. pools of real estate mortgages).                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | All other loans that have not been considered or
  provided for elsewhere (e.g. pools of commercial and industrial loans that
  have not been reviewed, classified, or designated special mention and other
  off-balance sheet commitments to lend).                                                               

No assurance can be given that the Company will not
sustain loan losses that are sizable in relation to the amount reserved, or
that subsequent evaluations of the loan portfolio will not require an increase
in the allowance. Prevailing factors in association with the methodology may
include improvement or deterioration of individual improvement or deterioration
of individual commitments or pools of similar loans, or loan concentrations.

Available-for-Sale
Securities

Statement of Financial Accounting Standards (SFAS)
115 requires that available-for-sale securities be carried at fair value. This
is a critical accounting estimate in that the fair value of a security is
based on quoted market prices or if quoted market prices are not available,
fair values are extrapolated from the quoted prices of similar instruments.
Adjustments to the available-for-sale securities fair value impact the
consolidated financial statements by increasing or decreasing assets and
stockholders equity.

Servicing
Asset

The Company services SBA and non-SBA loans for
investors and records a related mortgage servicing asset. The servicing
calculations contain certain assumptions such as the expected life of the loan
and the discount rate used to compute the present value of future cash flows.
Exposure results from the loan life assumption if loans prepay faster than
expected. Exposures results from the discount rate assumption if prime rate
adjusts severely and permanently, which can cause adjustments to the income
statement.

Supplemental
Employee Retirement Plan

The Company has entered into supplemental employee
retirement agreements with certain executive officers. The liability under
these agreements is measured in accordance with SFAS No. 87. The liability is
based on estimates involving life expectancy, length of time before retirement,
appropriate discount rate, forfeiture rates and expected benefit levels. Should
these estimates prove materially different from actual results, the Company
could incur additional or reduced future expense.

Deferred
Tax Assets

Deferred income taxes reflect the estimated future tax
effects of temporary differences between the reported amount of assets and
liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. The Company uses an estimate of future earnings to
support the position that the benefit of the deferred tax assets will be
realized. If future income should prove non-existent or less than the amount of
the deferred tax assets within the tax years to which they may be applied, the
asset may not be realized and the net income will be reduced.

28

---



Accounting
Change

From time to time, the Financial Accounting Standards
Board issues pronouncements which govern the accounting treatment for the
Companys financial statements. For a description of the recent pronouncements
applicable to the Company, see Note 1 to the Consolidated Financial Statements
included in this report.

SUMMARY

Results of Operations

In 2008, the Federal Reserve lowered its Federal funds
rate (the rate at which banks may borrow from each other) by two hundred basis
points resulting in lower offered deposit rates by the Bank, which positively
affected the interest margin. However, the variable rate loans adjusted
downward with the decline in the Prime Rate, subject to any contracted floor
rates. These changes resulted in a significant improvement to the net interest
margin.

The ongoing and deepening recession has caused
declining real estate values and has reduced the liquidity and net worth of
businesses and consumers in the Companys market area. This resulted in
increased loan delinquencies, nonperforming assets and loss provisions than
previous years.

The Company reported on a consolidated basis net
income of $4,829,000 as compared to $4,209,000 for 2008, an increase of
$620,000, or 14.7%. Diluted earnings per share was $1.26 for the twelve months
ended December 31, 2008 as compared to $1.07 for the twelve months ended
December 31, 2007, an increase of 17.8%.

Total assets reached $703,390,000 in 2008, an increase
of $146,575,000 or 26.3% from the prior year. Total deposits were $460,301,000
in 2008, an increase of $99,126,000 or 27.4% from the prior year. Total loans
receivable, net, were $584,450,000 in 2008 as compared to $464,699,000 in 2007,
representing an increase of $119,751,000, or 25.8%.

The increase in net income and fully diluted earnings
per share as of December 31, 2008 over the prior year period was primarily the
result of the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest income for December 31, 2008 was
  $43,172,000, an increase of $4,131,000, or 10.6% over 2007. The increase in
  net income was largely due to the increased earning asset base as a result of
  an increase in the size of the Banks loan portfolio partially offset by a
  decreasing earning asset yield to 7.03% from 7.79%, a seventy six basis point
  decrease in 2008 as compared to 2007.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                 
| |  | Interest expense decreased $1,618,000, or 7.5% from
  2007 to 2008. The decrease was primarily due to the following:                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             | Interest expense on deposits decreased $3,809,000,
  or 24.1%, from 2007 to 2008 and is primarily due to a decreasing interest
  rate environment in 2008 as compared to 2007.                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             | Interest expense on Junior Subordinated Debentures
  decreased $487,000, or 43.4% from 2007 to 2008. In 2007 the Company
  refinanced $10 million in trust preferred securities with a floating interest
  rate of three-month LIBOR plus 1.44% from a floating interest rate of
  three-month LIBOR plus 3.65%.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             | Partially offsetting these decreases was an increase
  in interest expense on borrowed funds of $2,466,000, or 54.1%, in 2008 as
  compared to 2007 as a result of the Bank borrowing more funds to support the
  loan growth for the year.                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             | The Company obtained a new $6 million credit
  facility in 2008, thus there was an increase in interest expense for long
  term debt of $212,000, or 100% from 2008 as compared to 2007.                                                                                                                        

29

---



Partially offsetting the increase in interest income
and the decrease in interest expense, which had positive impacts on net income,
were decreases in non-interest income, an increase in the provision for loan
losses and an increase in non-interest expense as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2008, non-interest income decreased $359,000, or
  14.1% over 2007. These decreases are primarily related to the gain on sale of
  loans of $182,000 which occurred in 2008 versus the gain on sale of loans of
  $585,000 in 2007, registered investment services fee income generated by TWA
  decreased $2,000, or 0.3% and there was a loss on sale of securities, net of
  $6,000, or 100%. Partially offsetting these decreases in 2008 as compared to
  2007 were increases in loan servicing of $3,000, or 1.5% and other income
  increased $48,000, or 4.1% as a result of fees generated from retail and
  commercial banking operations.                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | The provision for loan losses in 2008 was
  $3,191,000, an increase of $2,947,000, or 1208.0% as compared to the same
  period prior year. The increase in the provision reflects strong loan growth
  and an increased allowance for uncertainty in the market and loan portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In 2008, non-interest expense increased $1,724,000,
  or 12.9% to $15,090,000 as compared to the same period prior year. The
  increase in 2008 as compared to 2007 is primarily a result of an increase of
  $1,154,000, or 15.7% in salaries and benefits as a result of planned
  increases in staff, an increase of $604,000, or 29.0% in other administrative
  expenses as a result of the growth of the Company, an increase in data
  processing of $141,000, or 30.0%, and an increase in occupancy of $13,000, or
  0.9%. Partially offsetting these increases were decreases of $61,000, or
  16.6% in advertising, $64,000, or 8.7% in professional fees and $62,000, or
  6.8% in equipment and depreciation.

Financial Condition

In 2008 and 2007, the Companys return on average
assets (ROA) was 0.76% and 0.81%, respectively. The Companys return on
average equity (ROE) was 13.74% in 2008 compared to 12.89% in 2007. The
increase in ROE is primarily due to the increase of the net interest income in
2008 and to the stock buy back program in the third and fourth quarters of
2007. Management continues to balance the desire to increase the return ratios
with the desire to increase the Banks deposit penetration in Marin County and
loan growth throughout its lending territories while maintaining its credit
quality. For the twelve month period from June 2007 to June 2008 (the latest
date for which the information is available), the Banks market share of total
Marin County deposits increased from 4.76% to 5.14%, or 8.0%.

As of December 31, 2008, consolidated total assets
were $703,390,000 as compared to $556,815,000 at December 31, 2007, which
represents an increase of 26.3%. Contributing to the growth of assets in 2008
was an increase of: $11,461,000, or 257.1% in cash and due from banks,
$122,930,000, or 26.2% in gross outstanding loans, total investment securities
of $12,014,000, or 21.8%, BOLI of $442,000, or 4.3%, FHLB restricted stock of
$1,766,000, or 25.6%, accrued interest receivable of $641,000, or 19.9%, and
other assets of $1,855,000, or 30.5%. In January 2009, the FHLB announced that
it would not be paying a dividend in the fourth quarter of 2008 and the
likelihood of future dividends from the FHLB is unknown at this time. Partially
offsetting these increases was a decrease in bank premises and equipment, net
of $719,000, or 15.4% and the Federal funds sold balance decreased $566,000, or
99.9%.

As of December 31, 2008, consolidated total
liabilities were $666,017,000 as compared to $523,882,000 at December 31, 2007,
which represents an increase of 27.1%. Contributing to the increase in
liabilities in 2008 was an increase in FHLB advances of $36,578,000, or 25.0%
which was primarily attributable to increased levels of borrowings to support
loan growth. Also, the Company in 2008 obtained a $6 million credit facility
from Pacific Coast Bankers Bank. An initial disbursement of $3 million was
received on March 31, 2008 and an additional disbursement for $2 million was
received in June 2008. The Company obtained an additional $1 million credit
facility from Pacific Coast Bankers Bank in June 2008. These facilities were
primarily utilized to support loan growth and to increase the capital position
of the Bank.

30

---



There was an increase in total deposits of
$99,126,000, or 27.4%. In the current economic environment, the Bank has
experienced intense competition for deposits. This is primarily due to a
combination of business and consumers having fewer funds to deposit and higher
deposit rates offered by competitors in order to maintain their funding base.
During this time, the Bank has maintained a rational approach to retaining
relationship deposits without seeking deposits that are solely rate sensitive.
Accrued interest payable and other liabilities increased $431,000, or 15.4%
from 2008 as compared to 2007.

Stockholders equity increased $4,441,000, or 13.5% to
$37,373,000 in 2008 as compared to the same period prior year. This was
attributable to net income of $4,829,000, shared-based compensation of $286,000
and stock options exercised of $50,000 partially offset by unrealized security
holding gain of $107,000 and $831,000 of cash dividends declared during the
period.

As of December 31, 2008, TWA had approximately $283
million in assets under management as compared to $281 million for the same
period prior year.

Summary of Quarterly Results of
Operations

The following table below sets forth the results of
operations for the four quarters of 2008 and 2007.

|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|----------------------------------------------------- |  | ------------------- | ------ | ------------------- | - | ------- |  | ------- | ------ | ------- | - | -------- |  | ------- | ----- | ------- | - | ----- |  | - | ----- |  | - | ----- | -
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|                                                      |  | 2008 Quarters Ended |        | 2007 Quarters Ended |  
|                                                      |  | Dec. 31             |        | Sept. 30            |   | June 30 |  | Mar. 31 |        | Dec. 31 |   | Sept. 30 |  | June 30 |       | Mar. 31 |  
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Interest income                                       |  | $                   | 11,007 |                     | $ | 11,220  |  | $       | 10,722 |         | $ | 10,224   |  | $       | 9,934 |         | $ | 9,967 |  | $ | 9,624 |  | $ | 9,517 |  
|Interest expense                                      |  |                     | 4,809  |                     |   | 5,012   |  |         | 4,890  |         |   | 5,153    |  |         | 5,393 |         |   | 5,454 |  |   | 5,409 |  |   | 5,227 |  
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Net interest Income                                   |  |                     | 6,198  |                     |   | 6,208   |  |         | 5,832  |         |   | 5,071    |  |         | 4,541 |         |   | 4,513 |  |   | 4,215 |  |   | 4,290 |  
|Provision for loan losses                             |  |                     | 1,594  |                     |   | 653     |  |         | 599    |         |   | 345      |  |         | 204   |         |   | 116   |  |   | 10    |  |   | (86   | )
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Net interest income after provision
  for loan losses |  |                     | 4,604  |                     |   | 5,555   |  |         | 5,233  |         |   | 4,726    |  |         | 4,337 |         |   | 4,397 |  |   | 4,205 |  |   | 4,376 |  
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Noninterest income                                    |  |                     | 523    |                     |   | 523     |  |         | 477    |         |   | 664      |  |         | 692   |         |   | 609   |  |   | 746   |  |   | 500   |  
|Noninterst expense                                    |  |                     | 3,905  |                     |   | 3,785   |  |         | 3,763  |         |   | 3,636    |  |         | 3,267 |         |   | 3,552 |  |   | 3,272 |  |   | 3,275 |  
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Income before provision for income taxes              |  |                     | 1,222  |                     |   | 2,293   |  |         | 1,947  |         |   | 1,754    |  |         | 1,762 |         |   | 1,454 |  |   | 1,679 |  |   | 1,601 |  
|Provision for income taxes                            |  |                     | 372    |                     |   | 807     |  |         | 681    |         |   | 526      |  |         | 623   |         |   | 469   |  |   | 612   |  |   | 583   |  
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Net Income                                            |  | $                   | 850    |                     | $ | 1,486   |  | $       | 1,266  |         | $ | 1,228    |  | $       | 1,139 |         | $ | 985   |  | $ | 1,067 |  | $ | 1,018 |  
|Net Income per common share                           |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  
|Basic                                                 |  | $                   | 0.22   |                     | $ | 0.39    |  | $       | 0.33   |         | $ | 0.32     |  | $       | 0.30  |         | $ | 0.25  |  | $ | 0.27  |  | $ | 0.26  |  
|Diluted                                               |  | $                   | 0.22   |                     | $ | 0.39    |  | $       | 0.33   |         | $ | 0.32     |  | $       | 0.30  |         | $ | 0.25  |  | $ | 0.27  |  | $ | 0.25  |  
|                                                      |  |                     |        |                     |   |         |  |         |        |         |   |          |  |         |       |         |   |       |  |   |       |  |   |       |  

The per-share amounts have been adjusted for the stock
dividend declared in January 2007.

31

---



Results of Operations

Net interest income is the difference between the
interest earned on loans, investments and other interest earning assets and the
interest expense on deposits and other interest bearing liabilities, and is the
most significant component of the Companys earnings.

Net interest income is impacted by changes in general
market interest rates and by changes in the amounts and composition of interest
earning assets and interest bearing liabilities. Comparisons of net interest
income are frequently made using net interest margin and net interest rate
spread. Net interest margin is expressed as net interest income divided by
average earning assets. Net interest rate spread is the difference between the
average rate earned on total interest earning assets and the average rate
incurred on total interest bearing liabilities. Both of these measures are
reported on a taxable equivalent basis. Net interest margin is the higher of
the two because it reflects interest income earned on assets funded with
non-interest bearing sources of funds, which includes demand deposits and
stockholders equity.

The average balance of nonperforming loans is included
in the average balance of loans. Because nonperforming loans do not accrue
income, an increase in nonperforming loans will result in a decrease in asset
yield.

As of December 31, 2008 compared to 2007, rates paid
on interest-bearing liabilities declined faster than yields on earning assets,
resulting in a twenty nine basis point increase in net interest margin. As of
December 31, 2007 compared to 2006, rates paid on interest-bearing liabilities
increased faster than yields on earning assets, resulting in a twenty one basis
point decrease in net interest margin. The following table presents average
daily balances of assets, liabilities, and shareholders equity during 2008,
2007 and 2006, along with total interest income earned and expense paid, and
the average yields earned or rates paid thereon and the net interest margin for
the years ended December 31, 2008, 2007 and 2006.

32

---



TAMALPAIS BANCORP AND SUBSIDIARIES

Average Balance Sheets (Unaudited)

|                                                          |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|--------------------------------------------------------- |  | ------------------------------- | ------- | ---------------------------- | - | ----------------------- |  | ----------------- | ---- | ---------------------------- | - | ----------------------- | - | ----------------- | ------ | ---------------------------- |  | ----------------------- | - | - | ------- | - | - | ------ |  |  | ---- | -
|                                                          |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|                                                          |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|                                                          |  | For the Year Ended December 31, |        
|(dollars in thousands)                                    |  | 2008                            |         | 2007                         |   | 2006                    | 
|                                                          |  |                                 |         |                              |   |                         | 
|                                                          |  | Average
  Balance               |         | Interest
  Income/
  Expense |   | Yields
  Earned/
  Paid |  | Average
  Balance |      | Interest
  Income/
  Expense |   | Yields
  Earned/
  Paid |   | Average
  Balance |        | Interest
  Income/
  Expense |  | Yields
  Earned/
  Paid |  
|Assets                                                    |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|Investment securities - Munis (1,2)                      |  | $                               | 6,307   |                              | $ | 248                     |  |                   | 5.54 | %                            | $ | 3,116                   |   | $                 | 123    |                              |  | 5.57                    | % | $ |        |   | $ |       |  |  |     |  
|Investment securities - Taxable (2)                       |  |                                 | 51,606  |                              |   | 2,433                   |  |                   | 4.71 | %                            |   | 49,496                  |   |                   | 2,327  |                              |  | 4.70                    | % |   | 46,893  |   |   | 1,902  |  |  | 4.06 | %
|Other investments                                         |  |                                 | 8,031   |                              |   | 298                     |  |                   | 3.71 | %                            |   | 5,348                   |   |                   | 293    |                              |  | 5.48                    | % |   | 6,035   |   |   | 324    |  |  | 5.37 | %
|Interest bearing deposits in other financial institutions |  |                                 | 669     |                              |   | 31                      |  |                   | 4.63 | %                            |   | 899                     |   |                   | 40     |                              |  | 4.45                    | % |   | 1,167   |   |   | 44     |  |  | 3.77 | %
|Federal funds sold                                        |  |                                 | 6,301   |                              |   | 111                     |  |                   | 1.76 | %                            |   | 3,129                   |   |                   | 161    |                              |  | 5.15                    | % |   | 6,378   |   |   | 314    |  |  | 4.92 | %
|Loans (3)                                                 |  |                                 | 541,544 |                              |   | 40,051                  |  |                   | 7.40 | %                            |   | 439,262                 |   |                   | 36,097 |                              |  | 8.22                    | % |   | 415,368 |   |   | 33,230 |  |  | 8.00 | %
|Total Interest Earning Assets                             |  |                                 | 614,458 |                              |   | 43,172                  |  |                   | 7.03 | %                            |   | 501,250                 |   |                   | 39,041 |                              |  | 7.79                    | % |   | 475,841 |   |   | 35,814 |  |  | 7.53 | %
|Allowance for loan losses                                 |  |                                 | (5,790  | )                            |   |                         |  |                   |      |                              |   | (4,663                  | ) |                   |        |                              |  |                         |   |   | (4,528  | ) |   |        |  |  |      |  
|Cash and due from banks                                   |  |                                 | 4,430   |                              |   |                         |  |                   |      |                              |   | 4,425                   |   |                   |        |                              |  |                         |   |   | 5,377   |   |   |        |  |  |      |  
|Net premises, furniture and equipment                     |  |                                 | 4,319   |                              |   |                         |  |                   |      |                              |   | 4,998                   |   |                   |        |                              |  |                         |   |   | 4,927   |   |   |        |  |  |      |  
|Other assets                                              |  |                                 | 19,296  |                              |   |                         |  |                   |      |                              |   | 14,426                  |   |                   |        |                              |  |                         |   |   | 5,035   |   |   |        |  |  |      |  
|Total Assets                                              |  | $                               | 636,713 |                              |   |                         |  |                   |      |                              | $ | 520,436                 |   |                   |        |                              |  |                         |   | $ | 486,652 |   |   |        |  |  |      |  
|                                                          |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|Liabilities and Shareholders Equity                      |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|Interest bearing checking                                 |  | $                               | 7,193   |                              |   | 44                      |  |                   | 0.61 | %                            | $ | 7,513                   |   |                   | 46     |                              |  | 0.61                    | % | $ | 7,301   |   |   | 45     |  |  | 0.62 | %
|Savings deposits (4)                                      |  |                                 | 151,014 |                              |   | 3,576                   |  |                   | 2.37 | %                            |   | 153,199                 |   |                   | 6,336  |                              |  | 4.14                    | % |   | 155,426 |   |   | 6,176  |  |  | 3.97 | %
|Time deposits                                             |  |                                 | 228,140 |                              |   | 8,367                   |  |                   | 3.67 | %                            |   | 183,671                 |   |                   | 9,415  |                              |  | 5.13                    | % |   | 161,739 |   |   | 7,286  |  |  | 4.50 | %
|Other borrowings                                          |  |                                 | 167,854 |                              |   | 7,028                   |  |                   | 4.19 | %                            |   | 103,088                 |   |                   | 4,562  |                              |  | 4.43                    | % |   | 101,051 |   |   | 3,636  |  |  | 3.60 | %
|Long term debt                                            |  |                                 | 4,011   |                              |   | 213                     |  |                   | 5.31 | %                            |   |                        |   |                   |       |                              |  |                        |   |   |        |   |   |       |  |  |     |  
|Junior Subordinated Debentures                            |  |                                 | 13,403  |                              |   | 636                     |  |                   | 4.75 | %                            |   | 15,135                  |   |                   | 1,123  |                              |  | 7.42                    | % |   | 11,524  |   |   | 1,041  |  |  | 9.03 | %
|Total Interest Bearing Liabilities                        |  |                                 | 571,615 |                              |   | 19,864                  |  |                   | 3.48 | %                            |   | 462,606                 |   |                   | 21,482 |                              |  | 4.64                    | % |   | 437,041 |   |   | 18,184 |  |  | 4.16 | %
|Noninterest deposits                                      |  |                                 | 26,562  |                              |   |                         |  |                   |      |                              |   | 20,764                  |   |                   |        |                              |  |                         |   |   | 17,874  |   |   |        |  |  |      |  
|Other liabilities                                         |  |                                 | 3,401   |                              |   |                         |  |                   |      |                              |   | 4,406                   |   |                   |        |                              |  |                         |   |   | 3,291   |   |   |        |  |  |      |  
|Total Liabilities                                         |  |                                 | 601,578 |                              |   |                         |  |                   |      |                              |   | 487,776                 |   |                   |        |                              |  |                         |   |   | 458,206 |   |   |        |  |  |      |  
|Shareholders Equity                                      |  |                                 | 35,135  |                              |   |                         |  |                   |      |                              |   | 32,660                  |   |                   |        |                              |  |                         |   |   | 28,446  |   |   |        |  |  |      |  
|Total Liabilities and                                     |  | $                               | 636,713 |                              |   |                         |  |                   |      |                              | $ | 520,436                 |   |                   |        |                              |  |                         |   | $ | 486,652 |   |   |        |  |  |      |  
|Shareholders Equity                                      |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|                                                          |  |                                 |         |                              |   |                         |  |                   |      |                              |   |                         |   |                   |        |                              |  |                         |   |   |         |   |   |        |  |  |      |  
|Net interest income                                       |  |                                 |         |                              | $ | 23,308                  |  |                   |      |                              |   |                         |   | $                 | 17,559 |                              |  |                         |   |   |         |   | $ | 17,630 |  |  |      |  
|Net interest spread (5)                                   |  |                                 |         |                              |   |                         |  |                   | 3.55 | %                            |   |                         |   |                   |        |                              |  | 3.15                    | % |   |         |   |   |        |  |  | 3.37 | %
|Net interest margin (6)                                   |  |                                 |         |                              |   |                         |  |                   | 3.79 | %                            |   |                         |   |                   |        |                              |  | 3.50                    | % |   |         |   |   |        |  |  | 3.71 | %

|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Yields on securities and
  certain loans have been adjusted upward to a fully taxable equivalent
  (FTE) basis in order to reflect the effect of income which is exempt from
  federal income taxation at the current statutory tax rate.
|    |                                                                                                                                                                                                                                              
|(2) | The yields for securities
  were computed using the average amortized cost and therefore do not give
  effect for changes in fair value.                                                                                                     
|    |                                                                                                                                                                                                                                              
|(3) | Loans, net of unearned
  income, include non-accrual loans but do not reflect average reserves for
  possible loan losses. (4) Savings deposits include Money Market accounts.                                                               
|    |                                                                                                                                                                                                                                              
|(5) | Net interest spread is the
  interest differential between total interest earning assets and total
  interest-bearing liabilities.                                                                                                           
|    |                                                                                                                                                                                                                                              
|(6) | Net interest margin is the net yield on
  average interest earning assets.                                                                                                                                                                   

In 2008, the Banks net interest income before the
provision for loan losses increased $5,749,000 over 2007 and was impacted by a
strong growth in loans and decline in cost of funds partially offset by lower
loan yields in a declining interest rate environment. In 2007, the Banks net
interest income before provision for loan losses decreased $71,000 as compared
to the same period in 2006. The decrease is attributable to a higher cost of
funds driven by competition for deposits, as well as increased levels of
borrowings to support loan growth.

2008
Compared to 2007

In 2008, the Banks net interest margin (NIM) was
3.79%, an increase of 8.3% from the NIM of 3.50% in 2007. The increase in the
NIM in 2008 as compared to the same period prior year is primarily attributable
to the Banks lower cost of funds in response to ongoing decreases in the
Federal funds rates and discount rates resulting in lower funding costs
partially offset by lower loan yields in a declining interest rate environment.

33

---



The Banks yield on average interest earning assets
decreased to 7.03% as of December 31, 2008 from 7.79% as of December 31, 2007
as a result of the following.

The yield on the loan portfolio decreased eighty two
basis points from 8.22% in 2007 to 7.40% in 2008 which is primarily a result of
the growth in loans held in the portfolio partially offset by the effect of
competitive pressures on rates offered by the Bank as a result of a decrease in
the interest rates implemented by the Federal Reserve Board in 2008. The yield
on the loan originations were lower and maturities and paydowns of loans were
at higher yields. The yield on the Banks Federal funds sold decreased to 1.76%
in 2008 from 5.15% in 2007. The decrease in the yield for the Federal funds
sold is the result of the Federal Reserve decreasing the Federal funds interest
rate (the interest rate banks charge each other for short term borrowings) in
2008 by two hundred basis points. The yield on the investment securities  taxable
in 2008 remained relatively unchanged as compared to the same period for 2007.
The yield on other investments decreased to 3.71% in 2008 from 5.48% in 2007.
The yield on interest bearing deposits in other financial institutions
increased eighteen basis points from 2008 as compared to 2007.

The rate paid on average interest bearing liabilities
decreased from 4.64% to 3.48% when comparing 2008 versus 2007. The rate paid on
saving deposits decreased from 4.14% to 2.37% from 2007 as compared to 2008 and
the rate paid on time deposits decreased one hundred forty six basis points
from 5.13% to 3.67% from 2007 as compared to 2008. These decreases are
primarily attributable to the result of the previously discussed decreases in
market interest rates originating from actions taken by the Federal Reserve in
2008. The rate on other borrowings decreased twenty four basis points from 2008
as compared to 2007. The junior subordinated rate paid on debentures decreased
from 7.42% to 4.75% at 2008 when compared to 2007. The decrease in the interest
rate paid on debentures is attributable to the Company obtaining an issuance of
$10 million in new trust preferred securities that bears a floating interest
rate of three-month LIBOR plus 1.44% as compared to the Companys existing
securities which bore a floating interest rate of three-month LIBOR plus 3.65%
which was redeemed with proceeds of the new issuance. New long term debt for $6
million was obtained in 2008 which had an average cost of 5.31%.

2007
Compared to 2006

In 2007, the Banks net interest margin (NIM) was
3.50%, a decrease from the NIM of 3.71% in 2006. The decrease in the NIM in
2007 as compared to the same period prior year is primarily attributable to
funding costs increases not being offset fully by rising yields on loans and
investments due to relatively stable intermediate and long-term interest rates.

The Banks yield on average interest earning assets
was favorably impacted by the increasing interest rate environment resulting in
a higher yield of 7.79% in 2007 as compared to 7.53% in 2006. The yield on the
loan portfolio increased twenty two basis points from 8.00% in 2006 to 8.22% in
2007 which is primarily a result of the growth in loans held in the portfolio
partially offset by the effect of competitive pressures on rates offered by the
Bank. The yield on the loan originations were at higher yields and maturities
and paydowns of loans at lower yields. In addition, the increase in
nonperforming loans decreased loan yields. The yield on the Banks Federal
funds sold increased to 5.15% in 2007 from 4.92% in 2006. The increase in the
yield for the Federal funds sold is the result of interest rate increases
implemented by the Federal Reserve Board by increasing the Federal funds
interest rate (the interest rate banks charge each other for short term
borrowings) from June 2004 through June 2006. Partially offsetting these
increases in the interest rates, the Federal Reserve Board decreased the
Federal funds interest rate by 50, 25 and 25 basis points in September, October
and December 2007, respectively. The average balance for investment securities
in 2007 of $52,612,000 represents an increase of 12.2% from 2006, and an
increase in yield from 4.06% in 2006 to 5.14% in 2007. The yield increase
primarily relates to purchasing more securities with higher yields than the
maturities and paydowns of securities at lower yields. Other investments and
interest bearing deposits in other financial institutions increased eleven and
sixty eight basis points, respectively, from 2007 as compared to 2006.

34

---



The rate paid on average interest bearing liabilities
increased from 4.16% in 2006 to 4.64% in 2007 due to increased competition for
deposits. The rate paid on savings deposits increased from 3.97% to 4.14% from
2007 as compared to 2006 and time deposits increased sixty three basis points
from 4.50% to 5.13% from 2007 as compared to 2006. The increases are
attributable to higher rates offered on these products. The rate on other
borrowings increased eighty three basis points from 2006 as compared to 2007 as
a result of the previously discussed changes in market interest rates
originating from prior actions taken by the Federal Reserve Board as described
in the paragraph above. The junior subordinated debentures decreased one
hundred sixty one basis points in 2007 as compared to 2006. The decrease in the
interest rate paid on debentures is attributable to the Company obtaining an
issuance of $10 million in new trust preferred securities that bear a floating
interest rate of three-month LIBOR plus 1.44% as compared to the Companys
existing securities which had bear a floating interest rate of three-month
LIBOR plus 3.65%, which was redeemed from the proceeds of the new issuance.

Analysis of Volume and Rate Changes
on Net Interest Income and Expenses

The following sets forth changes in interest income
and interest expense for each major category of average interest-earning assets
and interest-bearing liabilities, and the amount of change attributable to
volume and rate changes for the periods indicated. Changes not solely
attributable to volume or rate have been allocated to volume and rate changes
in proportion to the relationship of the absolute dollar amounts of the changes
in each.

|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|------------------------- |  | ----------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------- | - | ------ | - | ------ | ------ | ---- | - | ----- | - | - | ----- | - | - | ----- | -
|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|                          |  | Year ended December 31, 2008
  Compared to Year ended December 31, 2007 |       | Year ended December 31, 2007
  Compared to Year ended December 31, 2006 |  
|                          |  |                                                                         |       |                                                                         |  
|                          |  | Volume                                                                  |       | Rate                                                                    |   | Total  |   | Volume |        | Rate |   | Total |  
|                          |  | (Dollars
  in Thousands)                                                |      
|Increase/(decrease) in    |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Interest Income           |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Investment securities     |  | $                                                                       | 245   |                                                                         | $ | (14    | ) | $      | 231    |      | $ | 247   |   | $ | 301   |   | $ | 548   |  
|Other investments         |  |                                                                         | 118   |                                                                         |   | (113   | ) |        | 5      |      |   | (38   | ) |   | 7     |   |   | (31   | )
|Interest-bearing deposits |  |                                                                         | (11   | )                                                                       |   | 2      |   |        | (9     | )    |   | (11   | ) |   | 7     |   |   | (4    | )
|Federal Funds Sold        |  |                                                                         | 98    |                                                                         |   | (148   | ) |        | (50    | )    |   | (167  | ) |   | 14    |   |   | (153  | )
|Loans                     |  |                                                                         | 7,817 |                                                                         |   | (3,863 | ) |        | 3,954  |      |   | 1,947 |   |   | 920   |   |   | 2,867 |  
|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|                          |  |                                                                         | 8,267 |                                                                         |   | (4,136 | ) |        | 4,131  |      |   | 1,978 |   |   | 1,249 |   |   | 3,227 |  
|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Increase/(decrease) in    |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Interest Expense          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Interest-bearing checking |  | $                                                                       | (2    | )                                                                       | $ |       |   | $      | (2     | )    | $ | 1     |   | $ |      |   |   | 1     |  
|Savings deposits          |  |                                                                         | (89   | )                                                                       |   | (2,671 | ) |        | (2,760 | )    |   | (89   | ) |   | 249   |   |   | 160   |  
|Time Deposits             |  |                                                                         | 1,981 |                                                                         |   | (3,029 | ) |        | (1,048 | )    |   | 1,056 |   |   | 1,073 |   |   | 2,129 |  
|FHLB and other borrowings |  |                                                                         | 2,908 |                                                                         |   | (228   | ) |        | 2,680  |      |   | 76    |   |   | 851   |   |   | 927   |  
|Junior Subordinated Debt  |  |                                                                         | (117  | )                                                                       |   | (371   | ) |        | (488   | )    |   | 289   |   |   | (208  | ) |   | 81    |  
|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|                          |  |                                                                         | 4,681 |                                                                         |   | (6,299 | ) |        | (1,618 | )    |   | 1,333 |   |   | 1,965 |   |   | 3,298 |  
|Increase/(decrease) in    |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Net Interest Income       |  | $                                                                       | 3,586 |                                                                         | $ | 2,163  |   | $      | 5,749  |      | $ | 645   |   | $ | (716  | ) | $ | (71   | )
|                          |  |                                                                         |       |                                                                         |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  

Non-interest Income

Non-interest income is comprised of gain on sale of
loans, net, loss on sale of securities, net, fees generated by TWA and other
income. Non-interest income for the years ended December 31, 2008, 2007, and
2006 was $2,187,000, $2,546,000 and $2,176,000, respectively, for a decrease of
$359,000, or 14.1% for the year ended December 31, 2008, as compared with the
same period in 2007, and an increase of $370,000, or 17.0% for the year ended
December 31, 2007 as compared with the same period in 2006.

35

---



The following table sets forth information regarding
the non-interest income for the periods shown.

|                                                   |  |                                |       |                   |   |                    |  |                   |       |                    |                       |            |                       |            |       |   |   |      |   |  |        |  
|-------------------------------------------------- |  | ------------------------------ | ----- | ----------------- | - | ------------------ |  | ----------------- | ----- | ------------------ | --------------------- | ---------- | --------------------- | ---------- | ----- | - | - | ---- | - |  | ------ | -
|                                                   |  |                                |       |                   |   |                    |  |                   |       |                    | 2008 compared to 2007 |            | 2007 compared to 2006 |           
|                                                   |  |                                |       |                   |   |                    |  |                   |       |                    |                       |            |                       |           
|                                                   |  | For the Year EndedDecember 31, |       | Amount
  Increase |   | Percent
  Increase |  | Amount
  Increase |       | Percent
  Increase |                      
|                                                   |  | 2008                           |       | 2007              |   | 2006               |  | (Decrease)        |       | (Decrease)         |                       | (Decrease) |                       | (Decrease) |      
|                                                   |  |                                |       |                   |   |                    |  |                   |       |                    |                       |            |                       |            |      
|                                                   |  | (Dollars
  in thousands)       |       |                   |   |                    |  |                   |       |                    |                       |            |                       |            |      
|Gain on sale of loans, net                         |  | $                              | 182   |                   | $ | 585                |  | $                 | 792   |                    | $                     | (403       | )                     |            | -68.9 | % | $ | (207 | ) |  | -26.1  | %
|Loss on sale of securities, net                    |  |                                | (6    | )                 |   |                   |  |                   | (2    | )                  |                       | (6         | )                     |            | 100.0 | % |   | 2    |   |  | -100.0 | %
|Loan servicing                                     |  |                                | 182   |                   |   | 179                |  |                   | 161   |                    |                       | 3          |                       |            | 1.7   | % |   | 18   |   |  | 11.2   | %
|Registered Investment Advisory Services fee income |  |                                | 600   |                   |   | 601                |  |                   | 507   |                    |                       | (1         | )                     |            | -0.2  | % |   | 94   |   |  | 18.5   | %
|Other income                                       |  |                                | 1,229 |                   |   | 1,181              |  |                   | 718   |                    |                       | 48         |                       |            | 4.1   | % |   | 463  |   |  | 64.5   | %
|                                                   |  |                                |       |                   |   |                    |  |                   |       |                    |                       |            |                       |            |       |   |   |      |   |  |        |  
|Total                                              |  | $                              | 2,187 |                   | $ | 2,546              |  | $                 | 2,176 |                    | $                     | (359       | )                     |            | -14.1 | % | $ | 370  |   |  | 17.0   | %
|                                                   |  |                                |       |                   |   |                    |  |                   |       |                    |                       |            |                       |            |       |   |   |      |   |  |        |  

In 2008 as compared to 2007, the gain on sale of
loans, net, decreased $402,000, or 68.9%. This decrease was primarily due to
the Bank not selling the government guaranteed portions of the SBA loans in
2008 as compared to 2007. Loan sales in 2008 were limited to SBA 504 loans for
which the Bank did not receive as large a premium. There may be periods in the
future quarters where no loan sales may occur.

In 2007 as compared to 2006, the gain on sale of
loans, net, decreased $207,000, or 26.1%. This decrease was primarily due to
the $6.2 million sale of the government guaranteed portion of seventeen Small
Business Administration (SBA) loans and one Business & Industry
(B&I) loan for $1.6 million that was sold through the United States
Department of Agriculture (USDA) in 2007 versus the sale of $7.8 million of
the government guaranteed portion of eighteen SBA loans for the same period in
2006. The reason for the decline in the gain on sale of loans was that the
loans were sold at lower yields in 2007 as compared to 2006.

In 2008 as compared to 2007, loss on sale of
securities, net, decreased $6,000, or 100%. This decrease is attributable to
the Bank selling securities in the third quarter of 2008 versus no sale of
securities in 2007. In 2007 as compared to 2006, loss on sale of securities,
net, increased $2,000, or 100%. This decrease is attributable to the Bank
selling securities in 2006 versus no sale of securities in 2007.

Loan servicing income for 2008 was $182,000,
representing an increase of $3,000, or 1.7% over the same period prior year.
Loan servicing income in 2007 was $179,000, representing an increase of
$18,000, or 11.2% over the same period the prior year. These increases are
attributable to the increase in the number of loans that the Bank is servicing
for others.

Advisory Services fee income from 2008 as compared to
2007 decreased $1,000, or 0.2%. The decrease was primarily attributable to the
market declines affecting fees. In 2007, Advisory Services fee income increased
$94,000, or 18.5% as compared to 2007. This increase is primarily attributable
to the growth provided by TWA in financial advisory services inclusive of investment
management and financial planning to high-net worth individuals, families and
institutions.

In 2008, TWA had approximately $283.0 million in
assets under management of which $67.4 million represents the Banks investment
portfolio. In 2007, TWA had approximately $281.0 million in assets under
management of which $55.2 million represents the Banks investment portfolio.
TWA has required capital infusions from the Company. In 2008, 2007 and 2006,
capital infusions totaled $165,000, $115,000 and $436,000, respectively.

Other income increased $48,000, or 4.1% in 2008 as
compared to the same period prior year. The increase is primarily attributable
to the Bank obtaining a BOLI policy in April 2007 which contributed $54,000 to
other income and an increase of NSF fees of $66,000 as a result of increasing
service charges on checks drawn against insufficient funds. Additionally,
debit card fee income increased $44,000 and deposit account service charges
increased $24,000 as a result of the growth of the Company. Partially
offsetting these increases were a decrease in Travelers expense fee income of
$36,000, miscellaneous fee income of $43,000 and a other than temporary
impaired charge of $62,000 related to Municipal Securities insured by MBIA,
AMBAC, and XLCA from 2008 as compared to 2007.

36

---



Other income increased $463,000, or 64.5% in 2007 as
compared to the same period prior year. The increase is primarily attributable
to the Bank obtaining a BOLI policy in April 2007 which contributed $387,000 to
other income. NSF fees increased $119,000 as a result of managements efforts
to increase service charges on checks drawn against insufficient funds and
prepayment penalties on loans increased $117,000. Partially offsetting these
increases was a decrease in miscellaneous fee income of $61,000.

Non-interest Expense

Non-interest expense consists of salaries and employee
benefits, occupancy, advertising, professional, data processing, equipment and
depreciation and other administrative expenses. The Companys non-interest
expense for the years ended December 31, 2008, 2007 and 2006 was $15,090,000,
$13,365,000 and $13,036,000, respectively. The increase for the year ended
December 31, 2008 was $1,724,000, or 12.9% as compared with the same period in
2007 and the increase for the year ended December 31, 2007 was $329,000, or
2.5% as compared with the same period in 2006.

|                           |  |                                 |        |      |   |                   |  |                     |        |                   |                       |                     |                       |            |       |   |   |      |   |  |       |  
|-------------------------- |  | ------------------------------- | ------ | ---- | - | ----------------- |  | ------------------- | ------ | ----------------- | --------------------- | ------------------- | --------------------- | ---------- | ----- | - | - | ---- | - |  | ----- | -
|                           |  |                                 |        |      |   |                   |  |                     |        |                   | 2008 compared to 2007 |                     | 2007 compared to 2006 |           
|                           |  |                                 |        |      |   |                   |  |                     |        |                   |                       |                     |                       |           
|                           |  | For the Year Ended December 31, |        |      |   | Amount
  Increase |  | Percent 
  Increase |        | Amount
  Increase |                       | Percent 
  Increase |                      
|                           |  | 2008                            |        | 2007 |   | 2006              |  | (Decrease)          |        | (Decrease)        |                       | (Decrease)          |                       | (Decrease) |      
|                           |  |                                 |        |      |   |                   |  |                     |        |                   |                       |                     |                       |            |      
|                           |  | (Dollars in thousands)          |        |      |   |                   |  |                     |        |                   |                       |                     |                       |            |      
|Salaries and benefits      |  | $                               | 8,489  |      | $ | 7,336             |  | $                   | 7,935  |                   | $                     | 1,153               |                       |            | 15.7  | % | $ | (599 | ) |  | -7.5  | %
|Occupancy                  |  |                                 | 1,482  |      |   | 1,469             |  |                     | 1,410  |                   |                       | 13                  |                       |            | 0.9   | % |   | 59   |   |  | 4.2   | %
|Advertising                |  |                                 | 308    |      |   | 369               |  |                     | 368    |                   |                       | (61                 | )                     |            | -16.5 | % |   | 1    |   |  | 0.3   | %
|Professional               |  |                                 | 674    |      |   | 738               |  |                     | 337    |                   |                       | (64                 | )                     |            | -8.7  | % |   | 401  |   |  | 119.0 | %
|Data processing            |  |                                 | 610    |      |   | 469               |  |                     | 364    |                   |                       | 141                 |                       |            | 30.1  | % |   | 105  |   |  | 28.8  | %
|Equipment and depreciation |  |                                 | 839    |      |   | 900               |  |                     | 851    |                   |                       | (61                 | )                     |            | -6.8  | % |   | 49   |   |  | 5.8   | %
|Other administrative       |  |                                 | 2,688  |      |   | 2,084             |  |                     | 1,771  |                   |                       | 604                 |                       |            | 29.0  | % |   | 313  |   |  | 17.7  | %
|                           |  |                                 |        |      |   |                   |  |                     |        |                   |                       |                     |                       |            |       |   |   |      |   |  |       |  
|Total                      |  | $                               | 15,090 |      | $ | 13,365            |  | $                   | 13,036 |                   | $                     | 1,725               |                       |            | 12.9  | % | $ | 329  |   |  | 2.5   | %
|                           |  |                                 |        |      |   |                   |  |                     |        |                   |                       |                     |                       |            |       |   |   |      |   |  |       |  

Salaries and benefits are the largest components of
non-interest expense. In 2008, salaries and benefits increased by $1,153,000,
or 15.7%. This increase is primarily due to the Companys planned increases in
full time equivalent (FTE) employees. The Company expanded its staff and
management to 80 FTE in 2008 as compared to 77 for the same period prior year
to strengthen its commercial and small business banking operations.
Additionally, the Company had a higher incentive bonus accrual and commission
payouts, regular salary adjustments, payroll taxes and higher employee and
medical benefits for 2008 as compared to 2007.

In 2007, salaries and benefits costs decreased by
$599,000, or 7.5% primarily due to the timing of when FTE employees were hired
during the respective periods as compared to the same period prior year. The
number of FTE employees increased to 77 as of December 31, 2007, up from 75 at
December 31, 2006. Partially offsetting these decreases, the Company had
regular salary adjustments and higher medical benefits and workers
compensation costs for 2007 as compared to 2006. Additionally, annual bonuses
to certain employees and officers of the Company were paid in 2007 whereas
there were no comparable bonus payouts in 2006.

The 2008 increase of $13,000, or 0.9% in occupancy and
equipment costs is largely due to the annual rental adjustments in the branch
and administrative facilities. The 2007 increase of $59,000, or 4.2% as
compared to 2006 in occupancy and equipment costs is largely due to the Company
occupying new leased spaces which includes the addition of the Banks
Tiburon/Belvedere branch which opened in September 2006. Additionally, there
were annual rent increases in the branch and administrative facilities.

Advertising costs from 2008 to 2007 decreased $61,000,
or 16.5%. The Company reduced the promotional expenses in 2008 as compared to
the same period prior year. Advertising costs from 2006 to 2007 remained
relatively unchanged.

37

---



Professional services decreased $64,000, or 8.7% in
2008 compared to the same period prior year. The decrease is largely
attributable to the Company obtaining additional outside consulting services
for compliance and marketing in 2007 as compared to 2008. Professional services
increased $401,000, or 119% in 2007 compared to the same period the prior year.
The increase is largely attributable to the Company obtaining additional
outside consulting services for compliance and marketing as a result of the
growth of the Company compared to the same period prior year.

Data processing costs increased $141,000, or 30.1% in
2008 as compared to 2007 and is attributable to third party IT support as a
result of the growth of the Company. In 2007 data processing costs were
$469,000, an increase of $105,000, or 28.8% compared to 2006. This increase is
attributable to the additional data processing costs as a result of the growth
of the Company.

The change in equipment and depreciation expense for
2008 decreased $61,000, or 6.8% as compared to the same period prior year. The
decrease is primarily attributable to fewer new purchases and leasehold
improvements being made in 2008 as compared to 2007. The 2007 increase of
$49,000, or 5.8% in equipment and depreciation expense over the same period
prior year is primarily attributable to new purchase and leasehold improvements
of the Company as a result of growth.

Other administrative expenses in 2008 of $2,688,000
represents an increase of $604,000, or 29.0% increase over 2007. The increase
is attributable to increases in item processing expense of $29,000, CDARS fee
expense of $42,000, SBA loan servicing of $21,000, FDIC insurance premiums of
$193,000, office supplies of $41,000, ATM/Debit card expense of $36,000,
finance and bank charges of $21,000, D&O liability insurance of $17,000 and
amortization of the Affordable Housing Project of $195,000 partially offset by
a decrease in hazard insurance services of $21,000 from 2008 as compared to
2007.

Other administrative expenses in 2007 of $2,084,000
represents an increase of $313,000, or 17.7% increase over 2006. The increase
is attributable to a nonrecurring expense of $200,000 for the expensing of
unamortized placement fees on the $10 million for the trust preferred
securities which were paid off on October 1, 2007. Additionally, there were
increases in ATM/debit card expenses of $28,000, FDIC insurance premiums of
$28,000, amortization expense of the Affordable Housing Project of $119,000 and
loan loss reserve for off balance sheet commitments of $73,000 partially offset
by a decrease in office supplies of $28,000 and directors expenses of $14,000.

The efficiency ratio measures the Companys
productivity. It is the cost required to generate each dollar of revenue. The
Companys efficiency ratio (the ratio of non-interest expense divided by the
sum of non-interest income and net interest income) was 59.2% and 66.5% as of
2008 and 2007, respectively.

Provision for Loan Losses

The Bank formally assesses the adequacy of the
allowance for loan losses on a quarterly basis. The Bank provides as an expense
an amount needed to bring the allowance for loan losses to a level necessary to
provide adequate coverage for probable loan losses. The adequacy of the
allowance for loan losses is evaluated based on several factors, including
growth of the loan portfolio, analysis of probable losses in the portfolio and
recent loss experience. Actual losses on loans are charged against the
allowance, and the allowance is increased through the provision for loan losses
charged to expense.

The U.S. economy is experiencing significantly reduced
business activity as a result of, among other factors, disruptions in the
financial system, dramatic declines in the housing market and increasing
unemployment rate. Over the last two quarters, there has been unprecedented
volatility and deterioration in the financial markets, witnessing the failure
of well-known companies and including a national recession. In this
environment, loan quality has already shown a weakness as a result of general
economic conditions and could deteriorate even further. Consequently, the Bank
has increased the provision for loan losses.

38

---



In 2008 the provision for loan losses was $3,191,000
as compared to $244,000 in 2007, representing an increase of $2,947,000, or
1208.0%. The increase in the provision is the result of a higher growth in the
Banks loan portfolio and an overall deterioration in credit quality, and an
increased provision associated with specific nonperforming loans. The provision
for loan losses reflects the amount deemed necessary to maintain the allowance
at a level considered adequate to provide for probable losses inherent in the
portfolio. The provision for loan losses was $244,000 as of December 31, 2007,
a $196,000, or 44.5% decrease as compared to the same period prior year. The
decrease in the provision was the result of a continued strong asset quality as
calculated through the Banks internal loan grading system.

Income Taxes

The Company reported a provision for income taxes of
$2,386,000, $2,287,000 and $2,403,000 for years 2008, 2007 and 2006,
respectively, an increase of $99,000, or 4.3% for 2008 as compared to 2007 and
a decrease of $116,000, or 4.8% for 2007 as compared to 2006. The effective tax
rate for years 2008, 2007 and 2006 was 33.1%, 35.2% and 37.9%, respectively.

The provision reflects accruals for taxes at the
applicable rates for federal income and California franchise taxes based upon
reported pre-tax income and adjusted for the effects of all permanent
differences between income for tax and financial reporting purposes. The
Company manages its effective tax rate through tax benefits associated through
the purchase of Bank Owned Life Insurance (BOLI) (the revenue from BOLI is
tax-free), earnings on qualified municipal securities which are primarily tax
free, tax credits associated with Affordable Housing Fund investments and
lending in Enterprise Zones.

See Note 12 of the Notes to the Consolidated Financial
Statements for additional discussion of the Provision for Income Taxes.

FINANCIAL CONDITION

Investment Securities

The Company purchases mortgage-backed securities and
other investments as a source of interest income, credit risk diversification,
manage rate sensitivity, and maintain a reserve of readily saleable assets to
meet liquidity and loan requirements. Sales of Federal Funds and short-term
loans to other banks are regularly utilized. Placement of funds in certificates
of deposit with other financial institutions may be made as alternative
investments pending utilization of funds for loans or other purposes.
Securities may be pledged to meet security requirements imposed as a condition
to secure Federal Home Loan Bank advances, the receipt of public fund deposits
and for other purposes. Investment securities are held in safekeeping by an
independent custodian. The Bank does not hold common or preferred stock of
either the Federal National Mortgage Association (Fannie Mae) or the Federal
Home Loan Mortgage Corporation (Freddie Mac) or non-agency backed securities.

As of December 31, 2008 and 2007, the carrying
values of securities pledged were $67,190,000 and $55,175,000, respectively,
representing the entire investment securities portfolio. Not all of the
securities pledged as collateral were required to securitize existing
borrowings. The Companys policy is to stagger the maturities and to utilize
the cash flow of the investments to meet the overall liquidity requirements.

As of December 31, 2008 and 2007, the investment
portfolio consisted of agency mortgage-backed securities, U.S. agency
securities, municipal securities and agency collateralized mortgage
obligations. Throughout 2008 the Company has pursued a strategy to purchase
GNMA securities backed by the full faith and credit of the U.S. Government. The
Company also owned $8,652,000 and $6,886,000 in Federal Home Loan Bank stock
and $50,000 of Pacific Coast Bankers Bank stock as of December 31, 2008
and December 31, 2007, respectively. Interest-bearing time deposits in
other financial institutions amounted to $558,000 and $627,000 as of
December 31, 2008 and December 31, 2007, respectively.

39

---



At December 31, 2008, $10,774,000 of the
securities were classified as held-to-maturity and $56,416,000 of the
securities were classified as available-for-sale. At December 31, 2007,
$14,515,000 of the securities were classified as held-to-maturity and
$40,661,000 of the Companys securities were classified as available-for-sale.
The Federal Home Loan Bank stock and the Pacific Coast Bankers Bank stock are
not classified since they have no stated maturities. Available-for-sale
securities are bonds, notes, debentures, and certain equity securities that are
not classified as trading securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of capital
until realized. Gains and losses on the sale of available-for-sale securities
are determined using the specific identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity. Held-to-maturity securities consist of bonds, notes and debentures
for which the Company has the positive intent and the ability to hold to
maturity and are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.

The following tables summarize the amounts and
distribution of the Companys investment securities, held as of the dates
indicated, and the weighted average yields:

|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|----------------------------------- |  | ------------------------ | ------ | -------------------------- | - | --------------------------- |  | ------------------------ | ---- | - | - | ------ | 
|                                    |  | As of December 31, 2008  |       
|                                    |  |                          |       
|                                    |  | Amortized
  Cost         |        | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |     
|                                    |  |                          |        |                            |   |                             |  |                          |     
|                                    |  | (Dollars
  in Thousands) |       
|Available-for-sale                  |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                        | 14,944 |                            | $ | 369                         |  | $                        | (115 | ) | $ | 15,198 | 
|U.S. Agency Securities              |  |                          | 5,167  |                            |   | 125                         |  |                          |     |   |   | 5,292  | 
|Municipal Securities                |  |                          | 5,225  |                            |   | 69                          |  |                          | (38  | ) |   | 5,256  | 
|Collateralized Mortgage Obligations |  |                          | 30,177 |                            |   | 496                         |  |                          | (3   | ) |   | 30,670 | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Total Available-for-sale            |  | $                        | 55,513 |                            | $ | 1,059                       |  | $                        | (156 | ) | $ | 56,416 | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Held-to-maturity                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                        | 10,774 |                            | $ | 15                          |  | $                        | (290 | ) | $ | 10,499 | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 

40

---



|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|----------------------------------- |  | ------------------------ | ------ | -------------------------- | - | --------------------------- |  | ------------------------ | ---- | - | - | ------ | 
|                                    |  | As of December 31, 2007  |       
|                                    |  |                          |       
|                                    |  | Amortized
  Cost         |        | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |     
|                                    |  |                          |        |                            |   |                             |  |                          |     
|                                    |  | (Dollars
  in Thousands) |       
|Available-for-sale                  |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                        | 15,687 |                            | $ | 180                         |  | $                        | (132 | ) | $ | 15,735 | 
|U.S. Agency Securities              |  |                          | 7,409  |                            |   | 65                          |  |                          |     |   |   | 7,474  | 
|Municipal Securities                |  |                          | 5,799  |                            |   | 98                          |  |                          | (17  | ) |   | 5,880  | 
|Collateralized Mortgage Obligations |  |                          | 11,420 |                            |   | 152                         |  |                          |     |   |   | 11,572 | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Total Available-for-sale            |  | $                        | 40,315 |                            | $ | 495                         |  | $                        | (149 | ) | $ | 40,661 | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Held-to-maturity                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                        | 14,515 |                            | $ | 2                           |  | $                        | (192 | ) | $ | 14,325 | 
|                                    |  |                          |        |                            |   |                             |  |                          |      |   |   |        | 

|                                   |  |                    |        |                          |  |         |   |       |        |  |  |      |  
|---------------------------------- |  | ------------------ | ------ | ------------------------ |  | ------- | - | ----- | ------ |  |  | ---- | -
|                                   |  | As of December 31, |       
|                                   |  |                    |       
|                                   |  | 2008               |        | 2007                     | 
|                                   |  |                    |        |                          | 
|                                   |  | Balance            |        | Yield                    |  | Balance |   | Yield |       
|                                   |  |                    |        |                          | 
|                                   |  |                    |        | (Dollars
  in Thousands) | 
|Available for sale                 |  |                    |        |                          |  |         |   |       |        |  |  |      |  
|Mortgage backed securities         |  | $                  | 15,198 |                          |  | 5.23    | % | $     | 15,735 |  |  | 4.76 | %
|U.S. Agency Securities             |  |                    | 5,292  |                          |  | 3.99    |   |       | 7,474  |  |  | 5.35 |  
|Municipal Securities               |  |                    | 5,256  |                          |  | 5.66    |   |       | 5,880  |  |  | 3.98 |  
|Collateralized Mortgage Obligation |  |                    | 30,670 |                          |  | 4.63    |   |       | 11,572 |  |  | 5.55 |  
|                                   |  |                    |        |                          |  |         |   |       |        |  |  |      |  
|                                   |  | $                  | 56,416 |                          |  | 4.83    | % | $     | 40,661 |  |  | 4.98 | %
|                                   |  |                    |        |                          |  |         |   |       |        |  |  |      |  
|                                   |  |                    |        |                          |  |         |   |       |        |  |  |      |  
|Held to maturity                   |  |                    |        |                          |  |         |   |       |        |  |  |      |  
|Mortgage backed securities         |  | $                  | 10,774 |                          |  | 4.02    | % | $     | 14,515 |  |  | 4.17 | %
|                                   |  |                    |        |                          |  |         |   |       |        |  |  |      |  

The Bank does not hold any high risk collateralized
mortgage obligations or structured notes as of December 31, 2008. The mortgage
related securities are backed by GNMA, FNMA, or FHLMC or are collateralized by
securities backed by these agencies. See Note 2 to the Consolidated Financial
Statements for additional disclosures relating to the maturities and fair
values of the investment portfolio at December 31, 2008 and 2007.

Loans

Loans, net, increased by $120,000,000, or 25.8% as of
December 31, 2008 as compared to the same period prior year. During the last
few years, the Company has emphasized the growth of its commercial loan
portfolio and has augmented its traditional commercial and multifamily loans
and services with small business lending. The Bank seeks to maintain a loan
portfolio that is well balanced in terms of borrowers, collateral, geographies,
industries and maturities. The recent downward pressure on real estate values
demands continued diligence and prudent underwriting of real estate loans, and
economic pressure may reduce demand for other types of loans. The Bank has not
participated in subprime lending and it has low exposure to residential
mortgages, construction and land loans.

41

---



The following table sets forth components of total net
loans outstanding in each category at the dates indicated:

|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|-------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                   |  | At December 31,          |        
|                                                   |  |                          |        
|                                                   |  | 2008                     |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|                                                   |  |                          |        
|                                                   |  | (Dollars
  in thousands) |        
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|One-to-four family residential                     |  | $                        | 33,695  |      | $ | 22,098  |   | $    | 16,742  |      | $ | 16,995  |   | $ | 13,878  |  
|Multifamily residential                            |  |                          | 171,136 |      |   | 123,077 |   |      | 120,287 |      |   | 121,176 |   |   | 126,099 |  
|Commercial real estate                             |  |                          | 322,861 |      |   | 246,258 |   |      | 220,049 |      |   | 183,288 |   |   | 147,357 |  
|Land                                               |  |                          | 10,905  |      |   | 9,369   |   |      | 8,316   |      |   | 9,777   |   |   | 9,150   |  
|Construction real estate                           |  |                          | 31,077  |      |   | 28,988  |   |      | 33,188  |      |   | 26,003  |   |   | 9,157   |  
|Consumer loans                                     |  |                          | 2,111   |      |   | 2,045   |   |      | 2,545   |      |   | 2,785   |   |   | 3,925   |  
|Commercial, non real estate                        |  |                          | 18,913  |      |   | 36,250  |   |      | 23,553  |      |   | 24,725  |   |   | 17,746  |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total gross loans                                  |  |                          | 590,698 |      |   | 468,085 |   |      | 424,680 |      |   | 384,749 |   |   | 327,312 |  
|Net deferred loan costs                            |  |                          | 1,845   |      |   | 1,529   |   |      | 1,327   |      |   | 1,907   |   |   | 1,939   |  
|Total loans receivable, net of deferred loan costs |  |                          | 592,543 |      |   | 469,614 |   |      | 426,007 |      |   | 386,656 |   |   | 329,251 |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses                          |  |                          | (8,093  | )    |   | (4,915  | ) |      | (4,672  | )    |   | (4,232  | ) |   | (3,600  | )
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Loans receivable, net                              |  | $                        | 584,450 |      | $ | 464,699 |   | $    | 421,335 |      | $ | 382,424 |   | $ | 325,651 |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  

Outstanding loan commitments at December 31, 2008
and December 31, 2007 primarily consisted of undisbursed construction
loans, lines of credit, and commitments to originate commercial real estate and
multifamily loans. Based upon past experience, the outstanding loan commitments
may grow throughout the year if loan demand increases, subject to economic
conditions. As of December 31, 2008, the hospitality industry was identified as
a concentration of credit as it represents 13.4% of the loan portfolio. Additionally,
as of December 31, 2008 and December 31, 2007, approximately 90.7%
and 89.8%, respectively, of the Banks loans were secured by real estate.
Commercial real estate is comprised of 20% owner user, 2% investor, 11% owner
user SBA and 2% owner user SBA. Although management believes this concentration
to have no more than the normal risk of collectability, a substantial decline
in the economy in general, or a decline in real estate values in the Companys
primary market areas in particular, could have an adverse impact on the
collectability of these loans and requires an additional increase in the
provision for loan losses. The Bank monitors the effects of current and
expected market conditions as well as other factors on the collectability of
real estate loans.

Real estate construction loans are primarily interim
loans to finance the construction of commercial, multifamily and single family
residential property. These loans are typically short-term. Other real estate
loans consist primarily of loans made based on the property and/or the
borrowers individual and business cash flows. Maturities on real estate loans
other than construction loans are generally restricted to fifteen years (on an
amortization of thirty years with a balloon payment due in fifteen years). Any
loans extended for greater than five years generally have re-pricing provisions
that adjust the interest rate to market rates at times prior to maturity.

Commercial and industrial loans and lines of credit
are made for the purpose of providing working capital, covering fluctuations in
cash flows, financing the purchase of equipment, or for other business
purposes. Such loans and lines of credit include loans with maturities ranging
from one to five years.

Consumer loans and lines of credit are made for the
purpose of financing various types of consumer goods and other personal
purposes. Consumer loans and lines of credits generally provide for the monthly
payment of principal and interest or interest only payments with periodic
principal payments.

42

---



In extending credit and commitments to borrowers, the
Company generally requires collateral and/or guarantees as security. The
repayment of such loans is expected to come from cash flow or from proceeds
from the sale of selected assets of the borrowers. The Companys requirement
for collateral and/or guarantees is determined on a case-by-case basis in
connection with managements evaluation of the creditworthiness of the
borrower. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing properties,
residences and other real property. The Company secures its collateral by
perfecting its security interest in business assets, obtaining deeds of trust,
or outright possession among other means.

As of December 31, 2008 and 2007, the loan portfolio
was primarily comprised of floating and adjustable interest rate loans. The
following table sets forth the repricing percentages of the adjustable rate
loans as of December 31, 2008 and 2007.

|                                   |  |                      |       |                     |  |       |  
|---------------------------------- |  | -------------------- | ----- | ------------------- |  | ----- | -
|                                   |  | December 31, 
  2008 |       | December 31,
  2007 | 
|                                   |  |                      |       |                     | 
|Reprice within one year            |  |                      | 40.9  | %                   |  | 44.8  | %
|Reprice within one to two years    |  |                      | 9.5   | %                   |  | 5.3   | %
|Reprice within two to three years  |  |                      | 10.7  | %                   |  | 12.3  | %
|Reprice within three to four years |  |                      | 12.0  | %                   |  | 8.8   | %
|Reprice within four to five years  |  |                      | 19.1  | %                   |  | 18.1  | %
|Reprice after five years           |  |                      | 7.8   | %                   |  | 10.7  | %
|                                   |  |                      |       |                     |  |       |  
|Total                              |  |                      | 100.0 | %                   |  | 100.0 | %
|                                   |  |                      |       |                     |  |       |  

The following table sets forth the maturity
distribution of loans as of December 31, 2008 and December 31, 2007.
At those dates, the Bank had no loans with maturity greater than thirty years.
In addition, the table shows the distribution of such loans between those loans
with predetermined (fixed) interest rates and those with adjustable (floating)
interest rates. Adjustable interest rates generally fluctuate with changes in
the various pricing indices, primarily the six-month constant maturity treasury
index, six month LIBOR, and Prime Rate.

|                                                 |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|------------------------------------------------ |  | ---------------------------- | ------ | ------------------------------ | - | ----------------------------- |  | ----- | ------- |  | - | ------- | 
|                                                 |  | At December 31, 2008         |       
|                                                 |  |                              |       
|                                                 |  | Maturing
  Within
  One Year |        | Maturing
  One to
  Five Years |   | Maturing
  After
  Five Years |  | Total |        
|                                                 |  |                              |        |                                |   |                               |  |       |        
|                                                 |  | (Dollars
  in Thousands)     |       
|One-to-four family residential                   |  | $                            | 1,280  |                                | $ | 1,500                         |  | $     | 30,915  |  | $ | 33,695  | 
|Multifamily residential                          |  |                              | 2,110  |                                |   | 1,713                         |  |       | 167,313 |  |   | 171,136 | 
|Commercial real estate                           |  |                              | 16,899 |                                |   | 23,965                        |  |       | 281,997 |  |   | 322,861 | 
|Land                                             |  |                              | 900    |                                |   | 9,167                         |  |       | 838     |  |   | 10,905  | 
|Construction real estate                         |  |                              | 26,173 |                                |   |                              |  |       | 4,904   |  |   | 31,077  | 
|Consumer loans                                   |  |                              | 125    |                                |   | 1,763                         |  |       | 223     |  |   | 2,111   | 
|Commercial, non real estate                      |  |                              | 8,707  |                                |   | 6,666                         |  |       | 3,540   |  |   | 18,913  | 
|                                                 |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|Total                                            |  | $                            | 56,194 |                                | $ | 44,774                        |  | $     | 489,730 |  | $ | 590,698 | 
|                                                 |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|                                                 |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|Loans with predetermined interest rates          |  | $                            | 945    |                                | $ | 478                           |  | $     | 133     |  | $ | 1,556   | 
|Loans with floating or adjustable interest rates |  |                              | 55,249 |                                |   | 44,296                        |  |       | 489,597 |  |   | 589,142 | 
|                                                 |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|                                                 |  | $                            | 56,194 |                                | $ | 44,774                        |  | $     | 489,730 |  | $ | 590,698 | 
|                                                 |  |                              |        |                                |   |                               |  |       |         |  |   |         | 

43

---



Allowance for Loan Losses

The Bank maintains an allowance for loan losses to
provide for potential losses in the loan portfolio. Additions to the allowance
are made by charges to operating expenses in the form of a provision for loan
losses. All loans that are judged to be uncollectible are charged against the
allowance while any recoveries are credited to the allowance. Management has
instituted loan policies which includes using grading standards and criteria
similar to those employed by bank regulatory agencies to adequately evaluate
and assess the analysis of risk factors associated with its loan portfolio and
to enable management to assess such risk factors prior to granting new loans,
and to assess the sufficiency of the allowance. Actual loan losses could differ
materially from managements estimate if actual loss factors and conditions
differ significantly from the assumptions utilized. Management conducts a
critical evaluation of the loan portfolio quarterly. This evaluation is an
assessment of the following factors including the results of the internal loan
review, any external loan review and any regulatory examination, loan loss
experience, estimated potential loss exposure on each credit, concentrations of
credit, value of collateral, any known impairment in the borrowers ability to
repay and present economic conditions. Loans receiving lesser grades fall under
the classified category, which includes all nonperforming and potential
problem loans, and receive an elevated level of attention to ensure collection.
Foreclosed or repossessed loan collateral, other real estate owned (OREO),
is recorded at the lower of cost or appraised value less estimated costs.

There are, however, limitations to any credit risk
grading process. The volume of loans makes it impractical to re-grade every
loan every quarter. Therefore, it is possible that some currently performing
loans not recently graded will not be as strong as their last grading and an
insufficient portion of the allowance will have been allocated to them. Grading
and loan review often must be done without knowing whether all relevant facts
are at hand. Troubled borrowers may deliberately or inadvertently omit information
from reports or conversations with lending officers regarding their financial
condition and the diminished strength of repayment sources.

Each month the Bank also reviews the allowance and
makes additional transfers to the allowance as needed. At December 31,
2008 and December 31, 2007, the allowance for loan losses was 1.37% and
1.05%, respectively, of loans outstanding. While no assurance can be given,
management believes that the increase in the allowance is adequate to reflect
the increase in the loan portfolio balance, non-accrual loans and the overall
economic downturn, which may adversely affect small businesses and borrowers in
the Banks market areas. The Bank is working diligently with all borrowers to
proactively identify and address difficulties as they arise. As of December 31,
2008 and 2007, charge-offs of loans totaled $37,000 and $1,000, respectively,
and recoveries on previously charged-off loans totaled $25,000 and $0,
respectively. There were eighteen nonperforming loans as of December 31, 2008,
one nonperforming loan as of December 31, 2007 and one foreclosed property that
was transferred to other real estate owned as of December 31, 2008. After the
additional charges to the allowance for loan losses for the fourth quarter, the
Bank continues to be well capitalized under regulatory capital requirements.

As of December 31, 2008 and 2007, the ratio of the
allowance for loan losses to nonperforming loans was 48.3% and 1054.7%,
respectively. Although the Company deems these levels adequate as of such
periods, no assurance can be given that further economic difficulties or other
circumstances which would adversely affect the borrowers and their ability to
repay outstanding loans will not occur. These losses would be reflected in
increased losses in the loan portfolio, which losses could possibly exceed the
amount then reserved for loan losses.

44

---



The following table summarizes the loan loss
experience, transactions in the allowance for loan losses and certain pertinent
ratios for the periods indicated:

|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                         |  | For the year ended December 31, |        
|                                                                                                         |  | 2008                            |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |  
|                                                                                                         |  | (Dollars
  In Thousands)        |        
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Gross Loans Outstanding, Period End                                                                      |  | $                               | 592,543 |      | $ | 469,613 |   | $    | 426,007 |      | $ | 386,657 |   | $ | 329,251 |  
|Average Amount of Loans Outstanding                                                                      |  |                                 | 541,544 |      |   | 439,262 |   |      | 415,368 |      |   | 371,024 |   |   | 291,999 |  
|Period end non-performing loans outstanding                                                              |  |                                 | 16,758  |      |   | 466     |   |      |        |      |   | 35      |   |   | 393     |  
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Loans Loss Reserve Balance, Beginning of Period                                                          |  | $                               | 4,915   |      | $ | 4,671   |   | $    | 4,232   |      | $ | 3,600   |   | $ | 2,726   |  
|Net Charge-offs                                                                                          |  |                                 | (37     | )    |   | (1      | ) |      |        |      |   |        |   |   |        |  
|Recoveries                                                                                               |  |                                 | 25      |      |   |        |   |      |        |      |   |        |   |   |        |  
|Additions/(Reductions) charged to operations                                                             |  |                                 | 3,191   |      |   | 245     |   |      | 439     |      |   | 632     |   |   | 874     |  
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for Loan and Lease Loss, End of Period                                                         |  | $                               | 8,094   |      | $ | 4,915   |   | $    | 4,671   |      | $ | 4,232   |   | $ | 3,600   |  
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Ratio of Net Charge-offs/(Recoveries) During the
  Period to Average Loans Outstanding During the Period |  |                                 | 0.00    | %    |   | 0.00    | % |      | 0.00    | %    |   | 0.00    | % |   | 0.00    | %
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Ratio of Allowance for Loan Losses to Loans at Period
  End                                              |  |                                 | 1.37    | %    |   | 1.05    | % |      | 1.10    | %    |   | 1.09    | % |   | 1.09    | %
|                                                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  

Nonperforming Assets

The Bank manages credit losses by consistently
enforcing conservative underwriting and administration procedures and
aggressively pursuing collection efforts with troubled debtors. The Bank
closely monitors the markets in which it conducts its lending operations and
continues its strategy to control exposure to loans with high credit risk and
to increase diversification of earning assets. Internal and external loan
reviews are performed frequently using grading standards and criteria similar
to those employed by bank regulatory agencies. Management has evaluated loans
that it considers to carry additional risk above the normal risk of
collectability, and by taking actions where possible to reduce credit risk exposure
by methods that include, but are not limited to, seeking liquidation of the
loan by the borrower, seeking additional tangible collateral or other repayment
support, converting the property through judicial or non-judicial foreclosure
proceedings, and other collection techniques.

All significant nonaccrual loans have been evaluated
for impairment and have been assigned specific reserves as deemed necessary.
Going forward, the Bank will continue to review all impaired loans on a
quarterly basis in accordance with Statement of Financial Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a Loan. The Banks policy
is to place loans on non-accrual status when, for any reason, principal or
interest is past due for ninety days or more unless they are both well secured
and in the process of collection or if the Bank determines that there is little
to no chance of being paid current by the borrower. In addition, some loans
secured by real estate with temporarily impaired values and commercial loans to
borrowers experiencing financial difficulties are placed on nonaccrual status
even though the borrowers continue to repay the loans as scheduled. Such loans
are classified by Management as performing nonaccrual and are included in
total nonaccrual loans. Any interest accrued, but unpaid, is reversed against
current income. Interest received on non-accrual loans is credited to income
only upon receipt and in certain circumstances may be applied to principal
until the loan has been repaid in full, at which time the interest received is
credited to income. Nonaccrual loans are reinstated to accrual status when
improvements in credit quality eliminate the doubt as to the full
collectability of both interest and principal.

When appropriate or necessary to protect the Companys
interests, real estate taken as collateral on a loan may be taken by the
Company through foreclosure or a deed in lieu of foreclosure. Real property
acquired in this manner is known as other real estate owned, or OREO. OREO is
carried on the books as an asset at fair value less estimated costs to sell.
OREO represents an additional category of nonperforming assets. The Company
did not have any OREO as of December 31, 2007 and one OREO for $417,000 as of
December 31, 2008.

45

---



The following table provides information with respect
to the components of the nonperforming assets at the dates indicated.

|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|---------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ----- | - | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                           |  | Balances as of December 31, |       
|                                                           |  |                             |       
|                                                           |  | 2008                        |        | 2007 |   | 2006  |   | 2005 |       | 2004 |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |  
|                                                           |  | (Dollars
  in Thousands)    |       
|Non-accrual loans                                          |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|Construction real estate                                   |  | $                           | 2,411  |      | $ |      |   | $    |      |      | $ |      |   | $ |      |  
|Multifamily residential                                    |  |                             | 1,464  |      |   |      |   |      |      |      |   |      |   |   | 393   |  
|Consumer                                                   |  |                             |       |      |   |      |   |      |      |      |   | 35    |   |   |      |  
|Commercial real estate                                     |  |                             | 12,883 |      |   | 466   |   |      |      |      |   |      |   |   |      |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|                                                           |  | $                           | 16,758 |      | $ | 466   |   | $    |      |      | $ | 35    |   | $ | 393   |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|Restructured Loans                                         |  | $                           |       |      |   |      |   |      |      |      |   |      |   |   |      |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|Other real estate owned                                    |  | $                           | 417    |      |   |      |   |      |      |      |   |      |   |   |      |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|                                                           |  |                             |        |      |   |       |   |      |       |      |   |       |   |   |       |  
|Nonperforming assets as a percent of total loans           |  |                             | 2.91   | %    |   | 0.10  | % |      | 0.00  | %    |   | 0.01  | % |   | 0.12  | %
|Nonperforming assets as a percent of total assets          |  |                             | 2.44   | %    |   | 0.08  | % |      | 0.00  | %    |   | 0.01  | % |   | 0.09  | %
|Allowance for Loan Losses                                  |  | $                           | 8,093  |      | $ | 4,915 |   | $    | 4,671 |      | $ | 4,232 |   | $ | 3,600 |  
|Allowance for Loan Losses/loans outstanding at period  end |  |                             | 1.37   | %    |   | 1.05  | % |      | 1.10  | %    |   | 1.09  | % |   | 1.09  | %

As of December 31, 2008, there were eighteen loans
totaling $16,758,000 which were on non-accrual status as follows. Three of the
non-accruals were multifamily loans totaling $1,464,000, two non-accruals were
construction real estate totaling $2,411,000 and thirteen of the non-accruals
were commercial real estate loans totaling $12,883,000.

Included in these totals are as follows:

| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The $3,300,000 commercial bridge loan secured by
  real estate which is located in Scottsdale, AZ and was transferred to OREO in
  February 2009. The October 2008 appraised value of this loan was $4.3 million
  and it is one of three out-of-state loans for the Bank.
| |   |                                                                                                                                                                                                                                                                           
| |  | The $5,400,000 commercial bridge loan secured by
  real estate and is located in San Francisco, CA and was originated in April
  2007. It is zoned for residential condominium development and the original
  loan-to-value was at 64%.                                   
| |   |                                                                                                                                                                                                                                                                           
| |  | The $2,167,000 construction loan is located in
  Carmel Valley, CA and is zoned for hospitality with a 50% participation with
  another lender and had an original loan-to-value ratio of 25%.                                                                            

These three non-accrual loans represent 63% of the
total nonperforming assets. The Bank also has one foreclosed OREO loan located
in the Banks primary market. This property entered into contract on February
27, 2009 to be sold with an anticipated closing date of March 31, 2009 with
full collection of net book value. The gross interest income that would
have been recorded had non-accrual loans been current totaled $497,000 for the
year ended December 31, 2008. As of December 31, 2008, there were no
restructured loans.

As of December 31, 2007, there was one commercial real
estate loan on non-accrual status for $466,000 which was located in the Banks
primary market area. This loan was sixty days delinquent and the property is
being marketed for sale. Due to the estimated loan-to-value ratio of less than
55%, the Bank does not expect to recognize a loss on this loan and anticipates
recovering all principal and interest. As of December 31, 2007, there were no
restructured loans. The gross interest income that would have been recorded had
this non-accrual loan been current would have been $10,000.

46

---



The following table provides information with respect
to delinquent but still accruing loans at the dates indicated.

|                                              |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 
|--------------------------------------------- |  | --------------------------- | ------ | ---- | - | ---- |  | ---- | ----- | ---- | - | --- |  | - | -- | 
|                                              |  | Balances as of December 31, |       
|                                              |  |                             |       
|                                              |  | 2008                        |        | 2007 |   | 2006 |  | 2005 |       | 2004 |  
|                                              |  |                             |        |      |   |      |  |      |       |      |  
|                                              |  | (Dollars
  in Thousands)    |       
|Loans delinquent 60-89 days and accruing      |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 
|Commercial real estate                        |  | $                           | 6,566  |      | $ | 139  |  | $    | 1,137 |      | $ | 308 |  | $ |   | 
|Consumer loans                                |  |                             | 26     |      |   |     |  |      |      |      |   |    |  |   |   | 
|Multifamily                                   |  |                             | 6,237  |      |   | 414  |  |      | 268   |      |   |    |  |   |   | 
|Land and Construction                         |  |                             |       |      |   |     |  |      | 531   |      |   | 534 |  |   |   | 
|Commercial, non real estate                   |  |                             |       |      |   |     |  |      |      |      |   |    |  |   | 62 | 
|                                              |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 
|                                              |  | $                           | 12,829 |      | $ | 553  |  | $    | 1,936 |      | $ | 842 |  | $ | 62 | 
|                                              |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 
|Loans delinquent 90 days or more and accruing |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 
|Commercial real estate                        |  | $                           |       |      | $ |     |  | $    |      |      | $ |    |  | $ |   | 
|                                              |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 
|                                              |  | $                           |       |      | $ |     |  | $    |      |      | $ |    |  | $ |   | 
|                                              |  |                             |        |      |   |      |  |      |       |      |   |     |  |   |    | 

Total nonperforming assets could increase in the
future if the national and local economies weaken further which may adversely
affect the small businesses in the market area. The performance of any
individual loan can be impacted by external factors such as the economy and
interest rate environment, or factors particular to the borrower.

Refer to Note 3 and 4 of the Consolidated Financial
Statements and the Business section of this Annual Report for additional
information concerning loans.

Deposits

The principal source of funds for the Bank are core
deposits (non-interest and interest-bearing transaction accounts, money market
accounts, savings accounts, and certificates of deposits) from the Banks
market areas. At December 31, 2008, total deposits were $460,301,000
representing an increase of $99,126,000, or 27.4% over the December 31, 2007
balance. The Companys deposit growth plan for 2008 (and to continue into 2009)
was to concentrate its efforts on increasing noninterest-bearing demand
accounts. As of December 31, 2008, these accounts increased $10,005,000, or 43.0%
as compared to the same period prior year. The Bank also experienced increases
in interest-bearing demand accounts, money market and savings and time deposits
accounts greater and less than $100,000.

The Company obtained wholesale deposits through deposit
brokers of $84.8 million (18.5% of deposits) and $32.1 million (8.9% of
deposits) and through non-brokered wholesale sources of $89.3 million (19.4% of
deposits) and $46.2 million (12.8% of deposits) as of December 31, 2008 and
2007, respectively. These deposits, some of which were certificates of deposit
of $100,000 or more, were obtained for generally longer terms than can be
acquired through retail sources as a means to control interest rate risk or
were acquired to fund all short term differences between loan and deposit
growth rates. However, based on the amount of wholesale funds maturing in each
month, the Company may not be able to replace all wholesale deposits with
retail deposits upon maturity. To the extent that the Company needs to renew maturing
wholesale deposits at then current interest rates, the Company incurs the risk
of paying higher interest rates for these potentially volatile sources of
funds.

In 2004, the Bank established a relationship with
Reserve Funds, an institutional money manager that offers a money market
savings based sweep product to community banks. Under this program, end
investors use the Reserve Funds as a conduit to invest money market savings
deposits in a consortium of community banks. The end investors receive a rate
of interest that is generally higher than alternative money market funds, the
community banks receive large money market savings balances, and the Reserve
Funds receives a fee by acting as the conduit. The Bank began accepting
deposits from this program in November 2004. In 2008, the Bank terminated
its relationship with the Reserve Funds and established a relationship with
Total Bank Solutions in 2008. As of December 31, 2008 and 2007, the deposits
were $30.0 million and $15.0 million, respectively. As of
December 31, 2008 the rate was 2.25% as compared to a rate of 4.73% as of
December 31, 2007.

47

---



On October 30, 2008, the Bank renewed a $15.0 million
time deposit from the State of California through the State Treasurer. This is
included in non-brokered wholesale certificates of deposits. The time deposit
bears interest at the rate of 0.84% and matured on January 29, 2009. On
November 19, 2008, the Bank renewed a $5.0 million time deposit from the State
of California through the State Treasurer. The time deposit bears interest at
the rate of 0.18% and matured on February 19, 2009. On December 19, 2008, the
Bank renewed a $15.0 million time deposit from the State of California through
the State Treasurer. The time deposit bears interest at the rate of 0.26% and
matures on June 17, 2009. Assets pledged as collateral to the State consists of
$38.4 million of the investment portfolio as of December 31, 2008.

In an effort to expand the Companys market share, the
Company is continuing a business plan to develop the retail presence in Marin
County through an expanding network of full service branches. The Company
operated three branches during the first quarter of 2004, opened two new
branches in the second quarter of 2004, one new branch in 2005, and one new
branch in the third quarter 2006.

The following table summarizes the distribution of
deposits and the period ending rates paid for the periods indicated:

|                                           |  |                          |         |                   |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  
|------------------------------------------ |  | ------------------------ | ------- | ----------------- |  | ------------------------- | - | ------- | ---- | ------------- | - | ------------------------- |  | ------- | ----- | ------------- |  | ------------------------- | - | - | ------- |  |  | ----- | - |  | ---- | -
|                                           |  | December 31, 2008        |         | December 31, 2007 |  | December 31, 2006         |  
|                                           |  |                          |         |                   |  |                           |  
|                                           |  | Balance                  |         | Deposit
  Mix     |  | Weighted
  Average
  Rate |   | Balance |      | Deposit
  Mix |   | Weighted
  Average
  Rate |  | Balance |       | Deposit
  Mix |  | Weighted
  Average
  Rate |  
|                                           |  |                          |         |                   |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |  
|                                           |  | (Dollars
  in Thousands) |        
|Noninterest-bearing deposits               |  | $                        | 33,260  |                   |  | 7.2                       | % |         | 0.00 | %             | $ | 23,255                    |  |         | 6.4   | %             |  | 0.00                      | % | $ | 18,135  |  |  | 4.9   | % |  | 0.00 | %
|Interest-bearing checking deposits         |  |                          | 9,736   |                   |  | 2.1                       | % |         | 0.09 | %             |   | 6,874                     |  |         | 1.9   | %             |  | 0.18                      | % |   | 8,433   |  |  | 2.3   | % |  | 0.61 | %
|Money Market and savings deposits          |  |                          | 156,479 |                   |  | 34.1                      | % |         | 1.79 | %             |   | 138,276                   |  |         | 38.3  | %             |  | 3.55                      | % |   | 150,012 |  |  | 40.6  | % |  | 4.48 | %
|Certificates of deposit $100,000 or more   |  |                          | 132,643 |                   |  | 28.8                      | % |         | 2.19 | %             |   | 110,588                   |  |         | 30.6  | %             |  | 4.72                      | % |   | 129,011 |  |  | 34.9  | % |  | 5.14 | %
|Certificates of deposit less than $100,000 |  |                          | 128,183 |                   |  | 27.8                      | % |         | 3.39 | %             |   | 82,182                    |  |         | 22.8  | %             |  | 4.77                      | % |   | 64,214  |  |  | 17.4  | % |  | 4.97 | %
|                                           |  |                          |         |                   |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  
|Total deposits                             |  | $                        | 460,301 |                   |  | 100.0                     | % |         | 2.19 | %             | $ | 361,175                   |  |         | 100.0 | %             |  | 3.89                      | % | $ | 369,805 |  |  | 100.0 | % |  | 4.49 | %
|                                           |  |                          |         |                   |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  

The following table summarizes the distribution and
original source of certificates of deposit for the periods indicated:

|                                                 |  |                        |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |                  |  |                              |   |   |         |  |  |       |   |  |      |  
|------------------------------------------------ |  | ---------------------- | ------- | ------------------- |  | ------------------------- | - | ------- | ---- | ------------- | - | ------------------------- |  | ------- | ----- | ---------------- |  | ---------------------------- | - | - | ------- |  |  | ----- | - |  | ---- | -
|                                                 |  | December
  31, 2008    |         | December
  31, 2007 |  | December
  31, 2006       |  
|                                                 |  |                        |         |                     |  |                           |  
|                                                 |  | Balance                |         | Deposit
  Mix       |  | Weighted
  Average
  Rate |   | Balance |      | Deposit
  Mix |   | Weighted
  Average
  Rate |  | Balance |       | Deposit
  
  Mix |  | Weighted
  
  Average
  Rate |  
|                                                 |  |                        |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |                  |  |                              |  
|                                                 |  | (Dollars in Thousands) |        
|Retail certificates
  of deposit                 |  | $                      | 86,702  |                     |  | 33.2                      | % |         | 3.04 | %             | $ | 114,469                   |  |         | 59.4  | %                |  | 4.85                         | % | $ | 151,692 |  |  | 78.5  | % |  | 5.11 | %
|Brokered
  certificates of deposit               |  |                        | 84,784  |                     |  | 32.5                      | % |         | 3.29 | %             |   | 32,082                    |  |         | 16.6  | %                |  | 4.76                         | % |   | 13,124  |  |  | 6.8   | % |  | 4.72 | %
|Non-brokered
  wholesale certificates of deposit |  |                        | 89,340  |                     |  | 34.3                      | % |         | 2.11 | %             |   | 46,219                    |  |         | 24.0  | %                |  | 4.47                         | % |   | 28,409  |  |  | 14.7  | % |  | 5.10 | %
|                                                 |  |                        |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |                  |  |                              |   |   |         |  |  |       |   |  |      |  
|Total time
  deposits                            |  | $                      | 260,826 |                     |  | 100.0                     | % |         | 2.80 | %             | $ | 192,770                   |  |         | 100.0 | %                |  | 4.74                         | % | $ | 193,225 |  |  | 100.0 | % |  | 5.08 | %
|                                                 |  |                        |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |                  |  |                              |   |   |         |  |  |       |   |  |      |  

48

---



The following schedule shows the maturity of the time
deposits as of December 31, 2008:

|                               |  |                          |         |               |  |                           |   |        |      |               |   |                           |  |  |       |   |  |      |  
|------------------------------ |  | ------------------------ | ------- | ------------- |  | ------------------------- | - | ------ | ---- | ------------- | - | ------------------------- |  |  | ----- | - |  | ---- | -
|                               |  | Amount                   |         | Deposit
  Mix |  | Weighted
  Average
  Rate |   | Amount |      | Deposit
  Mix |   | Weighted
  Average
  Rate | 
|                               |  |                          |         |               |  |                           |   |        |      |               |   |                           | 
|                               |  | (Dollars
  in thousands) |        
|Three months or less           |  | $                        | 30,380  |               |  | 22.9                      | % |        | 2.70 | %             | $ | 55,784                    |  |  | 43.4  | % |  | 1.63 | %
|Over 3 through 6 months        |  |                          | 18,499  |               |  | 13.9                      | % |        | 2.84 | %             |   | 34,975                    |  |  | 27.3  | % |  | 1.76 | %
|Over 6 through 12 months       |  |                          | 23,829  |               |  | 18.0                      | % |        | 3.21 | %             |   | 18,662                    |  |  | 14.6  | % |  | 2.87 | %
|Over 12 months through 2 years |  |                          | 29,365  |               |  | 22.1                      | % |        | 3.80 | %             |   | 9,962                     |  |  | 7.8   | % |  | 3.86 | %
|Over 2 through 3 years         |  |                          | 20,261  |               |  | 15.3                      | % |        | 4.08 | %             |   | 7,336                     |  |  | 5.7   | % |  | 4.14 | %
|Over 3 through 4 years         |  |                          | 9,645   |               |  | 7.3                       | % |        | 4.30 | %             |   | 463                       |  |  | 0.4   | % |  | 4.25 | %
|Over 4 through 5 years         |  |                          | 664     |               |  | 0.5                       | % |        | 4.04 | %             |   | 1,001                     |  |  | 0.8   | % |  | 4.21 | %
|                               |  |                          |         |               |  |                           |   |        |      |               |   |                           |  |  |       |   |  |      |  
|Total                          |  | $                        | 132,643 |               |  | 100.0                     | % |        | 3.39 | %             | $ | 128,183                   |  |  | 100.0 | % |  | 2.19 | %
|                               |  |                          |         |               |  |                           |   |        |      |               |   |                           |  |  |       |   |  |      |  

Contractual Obligations

The Company has entered into non-cancelable contracts
for leased premises and other agreements. The Company has no capital leases.
The following table summarizes the significant contractual obligations and
commitments as of December 31, 2008.

|                                          |  |        |            |           |   |             |  |           |            |       |   |            |  |   |             | 
|----------------------------------------- |  | ------ | ---------- | --------- | - | ----------- |  | --------- | ---------- | ----- | - | ---------- |  | - | ----------- | 
|Contractual
  Obligations at December 31, |  | 1 year |            | 2-3 years |   | 4-5 years   |  | > 5 years |            | Total |  
|                                          |  |        |            |           |   |             |  |           |            |       |  
|                                          |  |        |            |           |   |             |  |           |            |       |   |            |  |   |             | 
|Operating leases                          |  | $      | 848,000    |           | $ | 2,008,000   |  | $         | 1,691,000  |       | $ | 1,714,000  |  | $ | 6,261,000   | 
|Borrowings                                |  |        | 50,000,000 |           |   | 104,085,000 |  |           | 29,000,000 |       |   | 6,000,000  |  |   | 189,085,000 | 
|Debt                                      |  |        |           |           |   |            |  |           |           |       |   | 19,403,000 |  |   | 19,403,000  | 
|                                          |  |        |            |           |   |             |  |           |            |       |   |            |  |   |             | 
|                                          |  | $      | 50,848,000 |           | $ | 106,093,000 |  | $         | 30,691,000 |       | $ | 27,117,000 |  | $ | 214,749,000 | 
|                                          |  |        |            |           |   |             |  |           |            |       |   |            |  |   |             | 

Borrowed Funds

In response to the current markets strong competition
for deposit accounts, the Company has supplemented its funding base by
increasing FHLB borrowings. The borrowings obtained in 2008 have generally been
at lower rates and longer terms than alternative retail certificate of
deposits. The average term of FHLB borrowings has also been extended as a means
to control interest rate risk.

The Company has secured advances from the Federal Home
Loan Bank at December 31, 2008 and December 31, 2007 amounting to
$183.1 million and $146.5 million, respectively, a 25.0% increase. The increase
in FHLB borrowings was primarily due to funding the rate of growth of the loan
portfolio while matching the duration of the  loan portfolio to
minimize interest rate risk. As of December 31, 2008, unused borrowing capacity
at the FHLB was $94.7 million under a formula based on eligible collateral.
Assets pledged as collateral to the FHLB consisted of $256.1 million of the
loan portfolio and $22.1 million of the investment securities portfolio as of
December 31, 2008. As of December 31, 2007, the unused borrowing capacity at
the FHLB was $107.0 million and assets pledged as collateral to the FHLB
consisted of $228.2 million of the loan portfolio and $25.3 million of the
investment securities portfolio as of December 31, 2007. The advances have been
outstanding at varying levels as of December 31, 2008. Total interest expense
on FHLB borrowings as of December 31, 2008 and 2007 was $7,019,000 and
$4,561,000, respectively.

49

---



Over time the Company expects that funds provided by
retail deposits obtained through the increasing branch network and Business
Banking group will be utilized to decrease FHLB borrowings during periods when
the growth in deposits exceeds the growth in loans.

Included in the FHLB borrowings of $183.1 million, as
of December 31, 2008, the Company has borrowings outstanding of $130.1 million
with FHLB for Advances for Community Enterprise (ACE) program. ACE provides
funds for projects and activities that result in the creation or retention of
jobs or provides services or other benefits for lowand-moderate-income people
and communities. ACE funds may be used to support community lending and
economic development, including small business, community facilities, and
public works projects. An advantage to using this program is that the interest
rates and fees are generally lower than rates and fees on regular FHLB
advances. The maximum amount of advances that a bank may borrow under the ACE
program depends on a banks total assets as of the previous year end. For the
Bank, the maximum amount of advances that can be borrowed for the 2008 year is
5% of total assets as of previous year end.

The following table sets forth certain information
regarding our FHLB advances at or for the dates indicated:

|                               |  |                          |         |                           |  |        |   |                           |         |  |  |      |  
|------------------------------ |  | ------------------------ | ------- | ------------------------- |  | ------ | - | ------------------------- | ------- |  |  | ---- | -
|                               |  | At December 31, 2008     |         | At December 31, 2007      | 
|                               |  |                          |         |                           | 
|                               |  | Amount                   |         | Weighted
  Average
  Rate |  | Amount |   | Weighted
  Average
  Rate |        
|                               |  |                          |         |                           |  |        |   |                           |        
|                               |  | (Dollars
  in Thousands) |        
|Three months or less           |  | $                        | 8,000   |                           |  | 3.76   | % | $                         | 22,423  |  |  | 3.69 | %
|Over 3 through 6 months        |  |                          | 12,000  |                           |  | 4.42   | % |                           | 4,000   |  |  | 3.65 | %
|Over 6 through 12 months       |  |                          | 30,000  |                           |  | 4.36   | % |                           | 8,000   |  |  | 4.03 | %
|Over 12 months through 2 years |  |                          | 60,090  |                           |  | 4.31   | % |                           | 42,000  |  |  | 4.55 | %
|Over 2 through 3 years         |  |                          | 43,995  |                           |  | 4.00   | % |                           | 48,090  |  |  | 4.52 | %
|Over 3 through 4 years         |  |                          | 16,000  |                           |  | 3.74   | % |                           | 19,995  |  |  | 4.69 | %
|Over 4 through 5 years         |  |                          | 13,000  |                           |  | 3.74   | % |                           | 2,000   |  |  | 4.64 | %
|                               |  |                          |         |                           |  |        |   |                           |         |  |  |      |  
|Total                          |  | $                        | 183,085 |                           |  | 4.14   | % | $                         | 146,508 |  |  | 4.38 | %
|                               |  |                          |         |                           |  |        |   |                           |         |  |  |      |  

|                                                              |  |                                       |         |      |   |         |   |   |         |  
|------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                              |  | At or For the Year Ended December 31, |        
|                                                              |  |                                       |        
|                                                              |  | 2008                                  |         | 2007 |   | 2006    |  
|                                                              |  |                                       |         |      |   |         |  
|                                                              |  | (Dollars
  in thousands)              |        
|FHLB advances:                                                |  |                                       |         |      |   |         |   |   |         |  
|Average balance outstanding                                   |  | $                                     | 167,854 |      | $ | 103,088 |   | $ | 101,051 |  
|Maximum amount outstanding at any month-end during the period |  |                                       | 183,085 |      |   | 146,508 |   |   | 126,088 |  
|Balance outstanding at end of period                          |  |                                       | 183,085 |      |   | 146,508 |   |   | 86,251  |  
|Average interest rate during the period                       |  |                                       | 4.19    | %    |   | 4.43    | % |   | 3.60    | %
|Average interest rate at end of period                        |  |                                       | 4.14    | %    |   | 4.38    | % |   | 3.95    | %

During 2002, the Bank issued a 30-year, $10,310,000
variable rate junior subordinated debenture. The security matured on
June 30, 2032 but was callable after September 30, 2007. The interest
rate on the debenture was paid quarterly at the three-month LIBOR plus 3.65%.
The debenture was subordinated to the claims of depositors and other creditors
of the Bank. In October 2007, the Company paid off the $10 million debenture.

During the second quarter of 2006, the Bank issued a
30-year, $3,093,000 variable rate junior subordinated debenture. The security
matures on September 1, 2036 but is callable after September 1, 2011. The
interest rate on the debenture is paid quarterly at the three-month LIBOR plus
175 basis points. As of December 31, 2008, the interest rate was 3.93%. The
debenture is subordinated to the claims of depositors and other creditors of
the Bank.

50

---



During the third quarter of 2007, the Bank issued a
30-year, $10,310,000 variable rate junior subordinated debenture. The security
matures on December 1, 2037 but is callable on December 1, 2012. The interest
rate on the debenture is paid quarterly at the three-month LIBOR plus 144 basis
points. As of December 30, 2008, the interest rate was 3.62%. The debenture is
subordinated to the claims of depositors and other creditors of the Bank. The
proceeds from this debenture were used to pay off the debenture issued in 2002.

Total interest expense attributable to the junior
subordinated debentures as of December 31, 2008 and 2007 was $636,000 and
$1,123,000 respectively.

On March 28, 2008, the Company obtained a $5 million
credit facility from Pacific Coast Bankers Bank. The credit facility bears
floating interest rate of three-month LIBOR plus 2.75% and will mature on March
28, 2018. The interest rate resets quarterly and the initial rate is set at a
pretax interest cost of 5.45%. The Company paid a loan fee of .50% of the loan
amount. An initial disbursement of $3 million was received on March 31, 2008.
The Company obtained an additional $2 million in disbursements in June 2008.
The facility is a non-revolving line of credit for the first twelve months with
quarterly interest only payments. After the first twelve months the facility
converts to a nine year amortizing loan with quarterly principal and interest
payments. The facility cannot be paid down below $3 million during the first
twelve months and can be prepaid without penalty after the first twelve months.
On April 14, 2008, the floating interest rate on the $5 million credit facility
that the Company obtained on March 28, 2008 was reduced from a rate of
three-month LIBOR plus 2.75% to three-month LIBOR plus 2.25%.

On June 26, 2008, the Company obtained a $1 million
credit facility from Pacific Coast Bankers Bank. The credit facility bears a
floating interest rate of three-month LIBOR plus 3.00% and will mature on June
26, 2018. The interest rate resets quarterly and the initial rate is set at a
pretax interest cost of 5.81%. The Company paid a loan fee of 0.75% of the loan
amount. The $1 million was disbursed on June 26, 2008. The facility is a
non-revolving line of credit for the first twelve months with quarterly
interest only payments. After the first twelve months the facility converts to
a nine-year amortizing loan with quarterly principal and interest payments. The
facility cannot be paid down below $1 million during the first twelve months
and can be prepaid without penalty after the first twelve months.

The Company used the net proceeds from this
transaction to fund the growth of the Bank and to increase the Banks capital
position. Total interest expense attributable to the long term debt as of
December 31, 2008 was $213,000.

Capital Resources

Under regulatory capital adequacy guidelines, capital
adequacy is measured as a percentage of risk-adjusted assets in which risk
percentages are applied to assets on the balance sheet as well as off-balance
sheet, such as unused loan commitments. The guidelines require that a portion
of total capital be core, or Tier 1 capital consisting of common stockholders
equity and perpetual preferred stock, less goodwill and certain other
deductions. Tier 2 capital consists of other elements, primarily non-perpetual
preferred stock, subordinated debt and mandatory convertible debt, plus the
allowance for loan losses, subject to certain limitations. The guidelines also
evaluate the leverage ratio, which is Tier 1 capital divided by average assets.

The Bank intends to maintain regulatory capital in
excess of the highest regulatory standard, referred to as well capitalized.
The Bank routinely projects its capital levels by analyzing forecasted
earnings, credit quality, securities valuation, shareholder dividends, asset
volumes, share repurchase activity, and other factors. Capital ratios are
reviewed by Management on a regular basis to ensure that capital exceeds the
prescribed regulatory minimums and is adequate to meet the Banks anticipated
future needs. For all periods presented, the Banks ratios exceed the
regulatory definition of well capitalized as defined in the regulations
issued by the FDIC. The Banks capital ratios have been computed in accordance
with regulatory accounting guidelines.

51

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The Banks capital adequacy ratios as of December 31,
2008 and 2007 are presented in the following table.

|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|-------------------------------------- |  | ------------------------ | ------ | ------------------------------- |  | ---------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ---- | -
|                                       |  | Actual Capital           |        | For Capital
  Adequacy Purposes |  | To Be Well
  Capitalized Under
  Prompt Corrective
  Action Provisions |  
|                                       |  |                          |        |                                 |  |                                                                        |  
|                                       |  | Amount                   |        | Ratio                           |  | Amount                                                                 |   | Ratio |        | Amount |  | Ratio |  
|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |  
|                                       |  | (Dollars
  In Thousands) |       
|As of December 31, 2008:               |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|                                      
|Total capital to risk-weighted assets  |  | $                        | 62,968 |                                 |  | 10.5                                                                   | % | $     | 48,159 |        |  | 8.0   | % | $ | 60,199 |  |  | 10.0 | %
|Tier 1 capital to risk-weighted assets |  |                          | 55,423 |                                 |  | 9.2                                                                    | % |       | 24,229 |        |  | 4.0   | % |   | 36,343 |  |  | 6.0  | %
|Tier 1 capital to average assets       |  |                          | 55,423 |                                 |  | 8.1                                                                    | % |       | 27,471 |        |  | 4.0   | % |   | 34,339 |  |  | 5.0  | %
|                                      
|As of December 31, 2007:               |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|                                      
|Total capital to risk-weighted assets  |  | $                        | 49,971 |                                 |  | 10.2                                                                   | % | $     | 39,386 |        |  | 8.0   | % | $ | 49,233 |  |  | 10.0 | %
|Tier 1 capital to risk-weighted assets |  |                          | 45,056 |                                 |  | 9.2                                                                    | % |       | 19,697 |        |  | 4.0   | % |   | 29,545 |  |  | 6.0  | %
|Tier 1 capital to average assets       |  |                          | 45,056 |                                 |  | 8.3                                                                    | % |       | 21,636 |        |  | 4.0   | % |   | 27,044 |  |  | 5.0  | %

Liquidity and Liability Management

Liquidity management for banks requires that funds
always be available to pay anticipated deposit withdrawals and maturing
financial obligations such as certificates of deposit promptly and fully in
accordance with their terms and to fund new loans. The major source of the
funds required is generally provided by payments and maturities of loans, sale
of loans, liquidation of assets, deposit inflows, investment security
maturities and paydowns, Federal funds lines, FHLB advances, other borrowings
and the acquisition of additional deposit liabilities. One method that banks
utilize for acquiring additional liabilities is through the acceptance of
brokered deposits (defined to include not only deposits received through
deposit brokers, but also deposits bearing interest in excess of 75 basis
points over market rates), typically attracting large certificates of deposit
at high interest rates, however its managements intention to reduce FHLB
advances and brokered deposits as a percentage of total funding over the next
two years. The Banks primary use of funds are for origination of loans, the
purchase of investment securities, maturing CDs, demand and saving deposit
withdrawals, repayment of borrowings and dividends to common shareholders.

To meet liquidity needs, the Company maintains a
portion of funds in cash deposits in other banks, Federal funds sold, and
investment securities. As of December 31, 2008, liquid assets were comprised of
$838 in Federal funds sold, $558,000 in interest-bearing deposits in other
financial institutions, $15,919,000 in cash and due from banks, and $56,416,000
in available-for-sale securities. Those liquid assets equaled 10.4% of total
assets at December 31, 2008. As of December 31, 2007, liquid assets were
comprised of $567,000 in Federal funds sold, $627,000 in interest-bearing
deposits in other financial institutions, $4,458,000 in cash and due from
banks, and $40,661,000 in available-for-sale securities. The liquid assets
equaled 8.3% of total assets at December 31, 2007.

In addition to liquid assets, liquidity can be
enhanced, if necessary, through short or long term borrowings. The Bank
anticipates that the Federal funds lines and FHLB advances will continue to be
important sources of funding in the future, and management expects there to be
adequate collateral for such funding requirements. A decline in the Banks credit
rating would adversely affect the Banks ability to borrow and/or the related
borrowing costs, thus impacting the Banks liquidity.

52

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As of December 31, 2008, the Bank has additional
borrowing capacity including unsecured lines of credit totaling $20.0 million
with two correspondent banks and a $5.0 million line of credit with the Federal
Reserve Bank of San Francisco to borrow through the Discount Window, which were not drawn upon at
December 31, 2008. The Bank is also a member of the FHLB San Francisco and has a
line of credit through pledged loans and securities for advances of $278.1
million, of which $94.7 million was available at December 31, 2008.

Management anticipates that cash and cash equivalents
on hand, deposits and borrowing capacity will provide adequate liquidity for
its operating, investing and financing needs and its regulatory liquidity
requirements for the foreseeable future, however, its managements intention to
reduce FHLB advances and brokered deposits as a percentage of total funding
over the next two years.

For non-banking functions, the Company is dependent
upon the payment of cash dividends from the Bank to service its commitments.
The FDIC and DFI have authority to prohibit the Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC and the DFI could
assert that the payment of dividends or other payments might, under some
circumstances, be an unsafe or unsound practice. Furthermore, the FDIC has
established guidelines with respect to the maintenance of appropriate levels of
capital by banks under its jurisdiction. The Company expects cash dividends
paid by the Bank to the Company to be sufficient to meet payment schedules. As
of December 31, 2008 and December 31, 2007, there were $831,000 and $561,000 in
dividends paid by the Company to the shareholders, respectively.

Net cash provided by operating activities totaled $6.0
million as of December 31, 2008, compared to $4.9 million for the same period
in 2007. The change was primarily the result of an increase in net income,
provision for loan losses and loans originated for sale partially offset by
proceeds from loan sales, net change in accrued interest receivable and other
assets and loans transferred to available-for-sale.

Net cash used in investing activities totaled $136.0
million as of December 31, 2008, compared to $61.0 million used by investing
activities for the same period in 2007. The change was primarily the result of
an increase in loans originated and purchase of investment securities
available-for-sale partially offset by proceeds from sales of investment
securities available-for-sale, maturity of investment securities
available-for-sale and a decrease in the purchase of bank owned life insurance.

Funds provided by financing activities totaled $140.9
million as of December 31, 2008, compared to funds provided by financing
activities of $48.9 million for the same period in 2007. The increase in net
cash provided by financing activities was primarily the result of an increase
in deposits, FHLB advances and issuance of long term debt.

The Company anticipates maintaining its cash levels in
2009 mainly through profitability and retained earnings. It is anticipated that
loan demand will be moderate during 2009, although such demand will be dictated
by economic and competitive conditions. The Company aggressively solicits
non-interest bearing demand deposits and money market checking deposit, which
are the least sensitive to interest rates. However, higher costing products,
including money market savings and certificates of deposits, have been less
stable during the recent period of increased rate competition from banks
affected by the subprime and mortgage lending crisis. The growth of deposit
balances is subject to heightened competition and the success of the Companys
sales efforts and delivery of superior customer service. Depending on economic
conditions, interest rate levels, and a variety of other conditions, deposit
growth may be used to fund loans, purchase investment securities or to reduce
short term borrowings. However, due to concerns regarding uncertainty in the
general economic environment, competition, and political uncertainty, loan
demand and levels of customer deposits are not certain.

53

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Market Risk Management

Market risk is the risk of loss from adverse changes
in market prices and rates. The Banks market risk arises primarily from
interest rate risk inherent in its loan and deposit functions. The careful
planning of asset and liability maturities and the matching of interest rates
to correspond with this maturity matching is an integral part of the active
management of an institutions net yield. To the extent maturities of assets
and liabilities do not match in a changing interest rate environment, net
yields may be affected. Even with perfectly matched re-pricing of assets and
liabilities, risks remain in the form of prepayment of assets, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates and basis risk. In an overall attempt to match assets and
liabilities, the Company takes into account rates and maturities to be offered
in connection with the certificates of deposit and variable rate loans. Because
of the ratio of rate sensitive assets to rate sensitive liabilities, the
Company is negatively affected by the increasing interest rates. Conversely,
the Company would be positively affected in a decreasing rate environment.

The Company has generally been able to control the
exposure to changing interest rates by maintaining a large percentage of
adjustable interest rate loans and the majority of the time certificates in
relatively short maturities. The majority of the loans have periodic and
lifetime interest rate caps and floors. The Company has also controlled the
interest rate risk exposure by locking in longer term fixed rate liabilities,
including FHLB borrowings, brokered certificates of deposit, and non-brokered
wholesale certificates of deposit. Its managements strategy to minimize the
use of FHLB advances, brokered deposits and non-brokered deposits beyond the
need for interest rate risk management.

Since interest rate changes do not affect all
categories of assets and liabilities equally or simultaneously, a cumulative
gap analysis alone cannot be used to evaluate the interest rate sensitivity
position. To supplement traditional gap analysis, the Company performs simulation
modeling to estimate the potential effects of changing interest rates. The
process allows the Company to explore the complex relationships within the gap
over time and various interest rate environments.

54

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The following table shows the Banks cumulative gap
analysis as of December 31, 2008:

|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | -------- | -------------------------- | - | ------------------- | - | ----------------- | ------- | ----- | - | ------- | - | - | ------- | -
|                                                                                       |  | At December 31, 2008     |         
|                                                                                       |  | Within
  Three
  Months  |          | Three to
  Twelve
  Months |   | One to
  Five Years |   | Over
  Five Years |         | Total |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |  
|                                                                                       |  | (Dollars
  in Thousands) |         
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Interest Earning Assets                                                                |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Securities                                                                             |  | $                        | 2,541    |                            | $ | 24,873              |   | $                 | 17,670  |       | $ | 22,105  |   | $ | 67,189  |  
|Federal Funds                                                                          |  |                          | 1        |                            |   |                    |   |                   |        |       |   |        |   |   | 1       |  
|Interest-bearing deposits in other financial                                           |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|institutions                                                                           |  |                          |         |                            |   | 388                 |   |                   | 170     |       |   |        |   |   | 558     |  
|Loans                                                                                  |  |                          | 92,494   |                            |   | 113,522             |   |                   | 264,691 |       |   | 121,836 |   |   | 592,543 |  
|FHLB and PCBB Stock                                                                    |  |                          | 8,702    |                            |   |                    |   |                   |        |       |   |        |   |   | 8,702   |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Total                                                                                  |  | $                        | 103,738  |                            | $ | 138,783             |   | $                 | 282,531 |       | $ | 143,941 |   | $ | 668,993 |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Interest-Bearing Liabilities                                                           |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Interest-bearing checking                                                              |  |                          | 9,736    |                            |   |                    |   |                   |        |       |   |        |   |   | 9,736   |  
|Money market and savings                                                               |  |                          | 156,479  |                            |   |                    |   |                   |        |       |   |        |   |   | 156,479 |  
|Time deposits                                                                          |  |                          | 86,164   |                            |   | 95,965              |   |                   | 78,697  |       |   |        |   |   | 260,826 |  
|FHLB advances                                                                          |  |                          | 8,000    |                            |   | 42,000              |   |                   | 133,085 |       |   |        |   |   | 183,085 |  
|Long term debt                                                                         |  |                          |         |                            |   |                    |   |                   |        |       |   | 6,000   |   |   | 6,000   |  
|Junior Subordinated Debentures                                                         |  |                          |         |                            |   |                    |   |                   |        |       |   | 13,403  |   |   | 13,403  |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Total                                                                                  |  | $                        | 260,379  |                            | $ | 137,965             |   | $                 | 211,782 |       | $ | 19,403  |   | $ | 629,529 |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Interest rate sensitivity gap                                                          |  | $                        | (156,641 | )                          | $ | 818                 |   | $                 | 70,749  |       | $ | 124,538 |   | $ | 39,464  |  
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  
|Cummulative interest rate sensitivity gap as a percentage of
  interest-earning assets |  |                          | -23.4    | %                          |   | -23.3               | % |                   | -12.7   | %     |   | 5.9     | % |   | 5.9     | %
|                                                                                       |  |                          |          |                            |   |                     |   |                   |         |       |   |         |   |   |         |  

The target cumulative one-year gap ratio is -15% to
15%. The policy limit for net earnings at risk for a +/- 200 basis points
change in rates is 25%, indicating a worst case 25% decrease in earnings given
a 200 basis point change in interest rates. The policy limit for a +/- 200
basis points change in rates is 15%, indicating a 15% decrease in net interest
income. Management strives to maintain rate sensitive assets on its books.

Management also evaluates the use of FHLB products
including longer-term bullet advances, amortizing advances, and interest rate
swaps as tools to control interest rate risk. If one of the interest rate risk
measures exceeds the policy limits, management adjusts product offerings and
repositions assets and liabilities to bring the interest rate risk measure back
within policy limits within a reasonable timeframe. The current one year gap
ratio is -23.3%. A negative gap indicates that in an increasing interest rate
environment, it is expected that net interest margin would decrease, and in a
decreasing interest rate environment, net interest margin would increase.

The Company believes that there are some inherent
weaknesses in utilizing the cumulative gap analysis as a means of monitoring
and controlling interest rate risk. Specifically, the cumulative gap analysis
does not address loans at their floor rates that cannot reset as rates change
and does not incorporate varying prepayment speeds as interest rates change.
The Company, therefore, relies more heavily on the dynamic simulation model to
monitor and control interest rate risk.

Interest Rate Sensitivity

The Company uses a dynamic simulation model to
forecast the anticipated impact of changes in market interest rates on its net
interest income and economic value of equity. Sensitivity of Net Interest
Income (NII) and Capital to interest rate changes arises when yields on loans
and investments change in a different time frame or amount from that of rates
on deposits and other interest-bearing liability. To mitigate interest rate
risk, the structure of the Statement of Condition is managed with the objective
of correlating the movements of interest rates on loans and investments with
those of deposits. The asset and liability policy sets limits on the acceptable
amount of change to NII and Capital in changing interest rate environments. The
Bank uses simulation models to forecast NII and Capital.

55

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Simulation of NII and Capital under various scenarios
of increasing or decreasing interest rates is the primary tool used to measure
interest rate risk. Using licensed software developed for this purpose,
management is able to estimate the potential impact of changing rates. A
simplified statement of condition is prepared on a quarterly basis as a
starting point, using as inputs, actual loans, investments and deposits.

In the simulation of NII and Capital under various
interest rate scenarios, the simplified statement of condition is processed
against two interest rate change scenarios. Each of these scenarios assumes
that the change in interest rates is immediate and interest rates remain at the
new levels. The model is used to assist management in evaluating and in
determining and adjusting strategies designed to reduce its exposure to these
market risks, which may include, for example, changing the mix of earning
assets or interest-bearing deposits.

The table below summarizes the effect on NII and
Capital due to changing interest rates as measured against the flat rate
scenario.

|                         |  |                                               |       |                                                    |  |        |   |      |        |   |  |        |  
|------------------------ |  | --------------------------------------------- | ----- | -------------------------------------------------- |  | ------ | - | ---- | ------ | - |  | ------ | -
|                         |  | Estimated Net
  Interest Income
  Sensitivity |       | Estimated
  Change in
  Economic Value
  of Equity | 
|Simulated
  Rate Changes |  | 2008                                          |       | 2007                                               |  | 2008   |   | 2007 |       
|                         |  |                                               |       |                                                    |  |        |   |      |       
|                         |  |                                               |       |                                                    |  |        |   |      |        |   |  |        |  
|+ 300 basis points       |  |                                               | -7.26 | %                                                  |  | -21.23 | % |      | -32.02 | % |  | -21.07 | %
|+ 200 basis points       |  |                                               | -4.83 | %                                                  |  | -9.97  | % |      | -20.40 | % |  | -12.54 | %
|+ 100 basis points       |  |                                               | -2.48 | %                                                  |  | -5.67  | % |      | -10.90 | % |  | -6.54  | %
|Unchanged                |  |                                               |      |                                                    |  |       |   |      |       |   |  |       |  
|- 100 basis points       |  |                                               | 1.04  | %                                                  |  | 6.13   | % |      | 13.87  | % |  | 9.95   | %
|- 200 basis points       |  |                                               | -2.91 | %                                                  |  | 11.49  | % |      | 28.78  | % |  | 24.18  | %
|- 300 basis points       |  |                                               | -8.17 | %                                                  |  | 21.22  | % |      | 46.88  | % |  | 37.97  | %

As illustrated in the above table, the Company is
currently liability sensitive. The implication of this is that the Companys
earnings will increase in a falling rate environment, as there are more
rate-sensitive liabilities subject to reprice downward than rate-sensitive
assets; conversely, earnings would decrease in a rising rate environment.
Therefore, an increase in market rates could adversely affect net interest
income. In contrast, a decrease in market rates may improve net interest income.

Management believes that all of the assumptions used
in the analysis to evaluate the vulnerability of its projected net interest
income and economic value of equity to changes in interest rates approximate
actual experiences and considers them to be reasonable. However, the interest
rate sensitivity of the Banks assets and liabilities and the estimated effects
of changes in interest rates on the Banks projected net interest income and
economic value of equity may vary substantially if different assumptions were
used or if actual experience differs from the projections on which they are
based.

The Asset Liability Committee meets quarterly to
monitor the investments, liquidity needs and oversee the asset-liability
management. In between meetings of the Committee, management oversees the
liquidity management.

56

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Return on equity and assets

The following table sets forth key ratios for the
periods ended December 31, 2008, 2007, and 2006.

|                                                                       |  |                    |       |      |  |       |   |  |       |  
|---------------------------------------------------------------------- |  | ------------------ | ----- | ---- |  | ----- | - |  | ----- | -
|                                                                       |  | As of December 31, |      
|                                                                       |  |                    |      
|                                                                       |  | 2008               |       | 2007 |  | 2006  |  
|                                                                       |  |                    |       |      |  |       |  
|                                                                       |  |                    |       |      |  |       |   |  |       |  
|Net income as a percentage of average assets                           |  |                    | 0.76  | %    |  | 0.81  | % |  | 0.81  | %
|Net income as a percentage of average equity                           |  |                    | 13.74 | %    |  | 12.89 | % |  | 13.81 | %
|Average equity as a percentage of average assets                       |  |                    | 5.52  | %    |  | 6.28  | % |  | 5.85  | %
|Dividends declared per share as a percentage of net income per
  share |  |                    | 4.76  | %    |  | 4.67  | % |  | 3.77  | %

In 2008, the Company grew its earning asset base, produced
additional other income and increased the dividends declared to $0.06 per share
in November 2008 from $0.05 per share in January 2008 and $0.055 per share in
May and August 2008. Dividends declared were $0.045 per share in May and August
2007, respectively, and increased to $0.05 per share in November 2007.

Inflation

The impact of inflation on a financial institution can
differ significantly from that exerted on other companies. Banks, as financial
intermediaries, have many assets and liabilities that may move in concert with
inflation both as to interest rates and value. However, financial institutions
are affected by inflations impact on noninterest expenses, such as salaries,
benefits and occupancy expenses.

Because of the ratio of rate sensitive assets to rate
sensitive liabilities, the Bank tends to benefit in the short-term from a
decreasing interest rate market and suffer in an increasing interest rate
market. The management of Federal Funds rate by the Federal Reserve has an
impact on the Companys earnings such that changes in interest rates may have a
corresponding impact on the ability of borrowers to repay loans with the Bank.

Off-Balance Sheet Arrangements

In the normal course of business, the Company is a
party to financial instruments with off-balance-sheet risk. These financial
instruments include commitments to extend credit and letters of credit. To
varying degrees, these instruments involve elements of credit and interest rate
risk in excess of the amount recognized in the statement of financial position.
The Companys exposure to credit loss in the event of non-performance by the
other party to the financial instruments for undisbursed loan funds and letters
of credit is represented by the contractual amount of those instruments.

At December 31, 2008 and December 31, 2007, the
amounts of the Companys undisbursed loan and line of credit funds were $23.2
million and $27.7 million, respectively, and there were no obligations under
standby and commercial letters of credit in either period. Refer to the
Consolidated Financial Statements for more qualitative and quantitative
disclosures about financial instruments with off-balance sheet risk.

57

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ITEM 7A 
QUANTITATIVE AND QUALITATIVE DISCLOSURE AOBUT MARKET RISK

Quantitative and Qualitative Disclosure About Market Risk

Market risk is the exposure to loss resulting from
changes in interest rates, foreign currency exchange rates, commodity prices
and equity prices. Although the Company manages other risks, for example,
credit quality and liquidity risk in the normal course of business, management
considers interest rate risk to be a principal market risk. Other types of
market risks, such as foreign currency exchange rate risk, do not arise in the
normal course of the Companys business activities. The majority of the
Companys interest rate risk arises from instruments, positions and
transactions entered into for purposes other than trading. They include loans,
securities available-for-sale, deposit liabilities, short-term borrowings and long-term
debt. Interest rate risk occurs when assets and liabilities reprice at
different times as interest rates change.

The Company manages interest rate risk through its
Asset Liability Committee (ALCO). The ALCO monitors exposure to interest rate
risk on a quarterly basis using both a traditional gap analysis and simulation
analysis. Traditional gap analysis identifies short and long-term interest rate
positions or exposure. Simulation analysis uses an income simulation approach
to measure the change in interest income and expense under rate shock
conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a multiplier or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses numerous asset and liability multipliers
consisting of bank-specific or default multipliers. The remaining step is to
simulate the timing effect of assets and liabilities by modeling a
month-by-month simulation to estimate the change in interest income and expense
over the next 12-month period. The results are then expressed as the change in
pre-tax net interest income over a 12-month period for +1%, +2% and +3% shocks.

58

---



ITEM 8 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  Contents

|                                                                                                                   |  |   
|------------------------------------------------------------------------------------------------------------------ |  | --
|Managements Report
  on Internal Control Over Financial Reporting                                                 |  | 60
|                                                                                                                   |  |   
|Report of
  Independent Registered Public Accounting Firm                                                          |  | 61
|                                                                                                                   |  |   
|Financial Statements                                                                                               |  |   
|                                                                                                                   |  |   
|Consolidated
  Balance Sheets December 31, 2008 and 2007                                                           |  | 62
|                                                                                                                   |  |   
|Consolidated
  Statements of Income For the Years Ended December 31, 2008, 2007 and 2006                           |  | 63
|                                                                                                                   |  |   
|Consolidated
  Statement of Changes in Stockholders Equity For the Years Ended December 31,
  2008, 2007 and 2006 |  | 64
|                                                                                                                   |  |   
|Consolidated
  Statements of Cash Flows For the Years Ended December 31, 2008, 2007 and 2006                       |  | 65
|                                                                                                                   |  |   
|Notes
  to Consolidated Financial Statements                                                                       |  | 66

59

---



Managements Report on Internal Control Over Financial
Reporting

Management of Tamalpais
Bancorp (the Company) is responsible for establishing and maintaining
adequate internal control over financial reporting. The Companys internal
control system was designed to provide reasonable assurance to the Companys
management and Board of Directors regarding the preparation and fair
presentation of published financial statements. The internal control system
contains monitoring mechanisms, and appropriate actions taken to correct
identified deficiencies.

All internal control
systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. In
addition, because of changes in conditions and circumstances, the effectiveness
of internal control over financial reporting may vary over time and controls
may become adequate, and the degree of compliance with the policies and
procedures may deteriorate, over time.

The Companys management
assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2008. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control  Integrated Framework.
Based on our assessment we believe that, as of December 31, 2008, the Companys
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f), is effective based on those criteria.

This annual report does not
include an attestation report of the Companys registered public accounting
firm regarding internal control over financial reporting. Managements report
was not subject to attestation by the Companys registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only managements report on this annual report.

60

---



Report of Independent Registered Public Accounting
Firm

Board of Directors
Tamalpais Bancorp
San Rafael, California

We have audited the accompanying consolidated balance
sheets of Tamalpais Bancorp and Subsidiaries (the Company) as of December 31,
2008 and 2007, and the related consolidated statements of income, changes in
stockholders equity and cash flows for each of the three years in the period
ended December 31, 2008. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Tamalpais Bancorp and Subsidiaries as of December 31, 2008 and
2007, and the results of its operations, changes in its stockholders equity,
and its cash flows for each of the three years in the period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.

|                                    | 
|----------------------------------- | 
|/s/ Vavrinek, Trine, Day & Co., LLP | 
|Rancho Cucamonga, California        | 
|March 27, 2009                      | 

61

---



TAMALPAIS BANCORP AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007

|                                                                                                                                                                |  |      |             |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                |  | 2008 |             | 2007 |  
|                                                                                                                                                                |  |      |             |      |  
|Assets                                                                                                                                                          |  |      |             |      |  
|Cash and cash equivalents:                                                                                                                                      |  |      |             |      |   |             |  
|Cash and due from banks                                                                                                                                         |  | $    | 15,918,826  |      | $ | 4,457,959   |  
|Federal funds sold                                                                                                                                              |  |      | 838         |      |   | 566,541     |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Total Cash and Cash Equivalents                                                                                                                                 |  |      | 15,919,664  |      |   | 5,024,500   |  
|Interest-bearing time deposits in other
  financial institutions                                                                                                |  |      | 558,034     |      |   | 627,387     |  
|Investment securities:                                                                                                                                          |  |      |             |      |   |             |  
|Available-for-sale                                                                                                                                              |  |      | 56,415,727  |      |   | 40,660,856  |  
|Held-to-maturity, at cost                                                                                                                                       |  |      | 10,773,579  |      |   | 14,514,528  |  
|Federal Home Loan Bank restricted stock, at
  cost                                                                                                              |  |      | 8,652,000   |      |   | 6,885,900   |  
|Pacific Coast Bankers Bank stock, at cost                                                                                                                      |  |      | 50,000      |      |   | 50,000      |  
|Loans receivable                                                                                                                                                |  |      | 592,543,181 |      |   | 469,613,486 |  
|Less: Allowance for loan losses                                                                                                                                 |  |      | (8,093,499  | )    |   | (4,914,553  | )
|                                                                                                                                                                |  |      |             |      |   |             |  
|                                                                                                                                                                |  |      | 584,449,682 |      |   | 464,698,933 |  
|Bank premises and equipment, net                                                                                                                                |  |      | 3,935,230   |      |   | 4,653,871   |  
|Accrued interest receivable                                                                                                                                     |  |      | 3,861,854   |      |   | 3,221,249   |  
|Cash surrender value of bank-owned life
  insurance                                                                                                             |  |      | 10,828,936  |      |   | 10,387,374  |  
|Other assets                                                                                                                                                    |  |      | 7,945,510   |      |   | 6,090,187   |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Total Assets                                                                                                                                                    |  | $    | 703,390,216 |      | $ | 556,814,785 |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Liabilities and Stockholders
Equity                                                                                                                            |  |      |             |      |   |             |  
|Liabilities                                                                                                                                                     |  |      |             |      |   |             |  
|Deposits:                                                                                                                                                       |  |      |             |      |   |             |  
|Noninterest-bearing deposits                                                                                                                                    |  | $    | 33,259,929  |      | $ | 23,254,723  |  
|Interest-bearing checking deposits                                                                                                                              |  |      | 9,735,689   |      |   | 6,874,465   |  
|Money market and saving deposits                                                                                                                                |  |      | 156,479,340 |      |   | 138,275,392 |  
|Certificates of deposit greater than or
  equal to $100,000                                                                                                     |  |      | 132,643,456 |      |   | 110,587,625 |  
|Certificates of deposit less than
$100,000                                                                                                                      |  |      | 128,182,646 |      |   | 82,182,492  |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Total Deposits                                                                                                                                                  |  |      | 460,301,060 |      |   | 361,174,697 |  
|Federal Home Loan Bank Advances                                                                                                                                 |  |      | 183,085,000 |      |   | 146,507,500 |  
|Long term debt                                                                                                                                                  |  |      | 6,000,000   |      |   |            |  
|Junior Subordinated Borrowings                                                                                                                                  |  |      | 13,403,000  |      |   | 13,403,000  |  
|Accrued interest payable and other
  liabilities                                                                                                                |  |      | 3,227,823   |      |   | 2,797,051   |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Total Liabilities                                                                                                                                               |  |      | 666,016,883 |      |   | 523,882,248 |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Commitments and Contingencies(Note
  14)                                                                                                                        |  |      |            |      |   |            |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Stockholders Equity                                                                                                                                            |  |      |             |      |   |             |  
|Common stock, no par value; 10,000,000
  shares authorized; 3,823,634 and 3,818,284 shares issued and outstanding at
  December 31, 2008 and 2007, respectively |  |      | 12,027,473  |      |   | 11,977,473  |  
|Additonal Paid-In-Capital                                                                                                                                       |  |      | 949,488     |      |   | 663,213     |  
|Retained earnings                                                                                                                                               |  |      | 24,082,473  |      |   | 20,084,667  |  
|Accumulated other comprehensive income                                                                                                                          |  |      | 313,899     |      |   | 207,184     |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Total Stockholders Equity                                                                                                                                      |  |      | 37,373,333  |      |   | 32,932,537  |  
|                                                                                                                                                                |  |      |             |      |   |             |  
|Total Liabilities and Stockholders
Equity                                                                                                                      |  | $    | 703,390,216 |      | $ | 556,814,785 |  
|                                                                                                                                                                |  |      |             |      |   |             |  

The accompanying
notes are an integral part of these consolidated financial statements.

62

---



TAMALPAIS
BANCORP AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF INCOMEFOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

|                                                     |  |      |            |      |   |            |  |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                     |  | 2008 |            | 2007 |   | 2006       | 
|                                                     |  |      |            |      |   |            | 
|Interest Income                                      |  |      |            |      |   |            |  |   |            |  
|Interest and fees on loans                           |  | $    | 40,052,345 |      | $ | 36,096,493 |  | $ | 33,228,862 |  
|Interest on investment securities                    |  |      | 2,680,668  |      |   | 2,450,353  |  |   | 1,902,396  |  
|Interest on Federal funds sold                       |  |      | 110,668    |      |   | 161,022    |  |   | 314,126    |  
|Interest on other investments                        |  |      | 298,165    |      |   | 293,064    |  |   | 324,485    |  
|Interest on deposits in other financial
institutions |  |      | 30,647     |      |   | 40,081     |  |   | 44,342     |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Total Interest Income                                |  |      | 43,172,493 |      |   | 39,041,013 |  |   | 35,814,211 |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Interest Expense                                     |  |      |            |      |   |            |  |   |            |  
|Interest expense on deposits                         |  |      | 11,987,917 |      |   | 15,797,174 |  |   | 13,507,085 |  
|Interest expense on borrowed funds                   |  |      | 7,027,569  |      |   | 4,561,481  |  |   | 3,636,467  |  
|Interest expense on long term debt                   |  |      | 212,803    |      |   |           |  |   |           |  
|Interest expense on Junior Subordinated
Debentures   |  |      | 635,787    |      |   | 1,123,231  |  |   | 1,040,962  |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Total Interest Expense                               |  |      | 19,864,076 |      |   | 21,481,886 |  |   | 18,184,514 |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Net Interest Income Before Provision For Loan
Losses |  |      | 23,308,417 |      |   | 17,559,127 |  |   | 17,629,697 |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Provision for Loan Losses                            |  |      | 3,190,957  |      |   | 243,956    |  |   | 439,472    |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Net Interest Income After Provision for Loan
Losses  |  |      | 20,117,460 |      |   | 17,315,171 |  |   | 17,190,225 |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Noninterest Income                                   |  |      |            |      |   |            |  |   |            |  
|Gain on sale of loans, net                           |  |      | 182,489    |      |   | 584,748    |  |   | 791,966    |  
|Loss on sale of securities, net                      |  |      | (5,780     | )    |   |           |  |   | (1,820     | )
|Loan servicing                                       |  |      | 182,093    |      |   | 179,422    |  |   | 161,142    |  
|Registered Investment Advisory Services fee
income   |  |      | 599,537    |      |   | 601,429    |  |   | 507,192    |  
|Other income                                         |  |      | 1,228,544  |      |   | 1,180,409  |  |   | 717,977    |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Total Noninterest Income                             |  |      | 2,186,883  |      |   | 2,546,008  |  |   | 2,176,457  |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Noninterest Expenses                                 |  |      |            |      |   |            |  |   |            |  
|Salaries and benefits                                |  |      | 8,489,707  |      |   | 7,335,918  |  |   | 7,934,800  |  
|Occupancy                                            |  |      | 1,481,267  |      |   | 1,468,659  |  |   | 1,409,557  |  
|Advertising                                          |  |      | 307,868    |      |   | 369,291    |  |   | 367,768    |  
|Professional                                         |  |      | 674,067    |      |   | 738,090    |  |   | 337,172    |  
|Data processing                                      |  |      | 610,092    |      |   | 469,495    |  |   | 364,223    |  
|Equipment and depreciation                           |  |      | 838,561    |      |   | 900,072    |  |   | 850,820    |  
|Other administrative                                 |  |      | 2,688,146  |      |   | 2,083,693  |  |   | 1,771,318  |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Total Noninterest Expense                            |  |      | 15,089,708 |      |   | 13,365,218 |  |   | 13,035,658 |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Income Before Income Taxes                           |  |      | 7,214,635  |      |   | 6,495,961  |  |   | 6,331,024  |  
|Provision for Income Taxes                           |  |      | 2,385,901  |      |   | 2,286,847  |  |   | 2,402,575  |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Net Income                                           |  | $    | 4,828,734  |      | $ | 4,209,114  |  | $ | 3,928,449  |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Earnings Per Share                                   |  |      |            |      |   |            |  |   |            |  
|Basic                                                |  | $    | 1.26       |      | $ | 1.07       |  | $ | 0.99       |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|                                                     |  |      |            |      |   |            |  |   |            |  
|Diluted                                              |  | $    | 1.26       |      | $ | 1.07       |  | $ | 0.99       |  
|                                                     |  |      |            |      |   |            |  |   |            |  

The accompanying
notes are an integral part of these consolidated financial statements.

63

---



TAMALPAIS
BANCORP AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITYFOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------ | ------------------ | ---------- | - | ------------- | ------- | -------- | -------- | ------------- | - | ------------------------------- | ---------- | ------------------- | - | -------- | - | - | ---------- | -
|                                                                                            |  | Common Stock |           |        | Additional Paid in |            |   | Comprehensive |         |          | Retained |               |   | Accumulated Other Comprehensive |            | Total Stockholders |  
|                                                                                            |  | Shares       |           | Amount |                    | Capital    |   | Income        |         | Earnings |          | Income/(Loss) |   | Equity                          |           
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Balance,January 1, 2006                                                                     |  |              | 3,679,663 |        | $                  | 10,207,688 |   | $             |        |          | $        |              |   | $                               | 16,899,835 |                     | $ | (262,445 | ) | $ | 26,845,078 |  
|                                                                                           
|Stock options exercised                                                                     |  |              | 22,068    |        |                    | 177,128    |   |               |        |          |          |              |   |                                 |           |                     |   |         |   |   | 177,128    |  
|Cash Dividends                                                                              |  |              |          |        |                    |           |   |               |        |          |          |              |   |                                 | (591,713   | )                   |   |         |   |   | (591,713   | )
|Share-based compensatione expense                                                           |  |              |          |        |                    |           |   |               | 381,993 |          |          |              |   |                                 |           |                     |   |         |   |   | 381,993    |  
|Comprehensive income                                                                        |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Net Income for the period                                                                   |  |              |          |        |                    |           |   |               |        |          | $        | 3,928,449     |   |                                 | 3,928,449  |                     |   |         |   |   | 3,928,449  |  
|Unrealized security holding gains (net of $92,556
tax benefit)                              |  |              |          |        |                    |           |   |               |        |          |          | 138,833       |   |                                 |           |                     |   | 138,833  |   |   | 138,833    |  
|Stock issued on 7% stock dividend declared on
January 26, 2007                              |  |              | 259,121   |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Less reclassification adjustment for realized
holding losses (net of
  tax benefit of $728) |  |              |          |        |                    |           |   |               |        |          |          | 1,092         |   |                                 |           |                     |   | 1,092    |   |   | 1,092      |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Total Comprehensive Income                                                                  |  |              |           |        |                    |            |   |               |         |          | $        | 4,068,374     |   |                                 |            |                     |   |          |   |   |            |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Balance,December 31, 2006                                                                   |  |              | 3,960,852 |        | $                  | 10,384,816 |   | $             | 381,993 |          |          |               |   | $                               | 20,236,571 |                     | $ | (122,520 | ) | $ | 30,880,860 |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|                                                                                           
|Stock options exercised                                                                     |  |              | 53,966    |        |                    | 248,138    |   |               |        |          |          |              |   |                                 |           |                     |   |         |   |   | 248,138    |  
|Redemption and retirement of stock                                                          |  |              | (196,216  | )      |                    | (2,455,627 | ) |               |        |          |          |              |   |                                 |           |                     |   |         |   |   | (2,455,627 | )
|Cash Dividends                                                                              |  |              |           |        |                    |            |   |               |        |          |          |              |   |                                 | (559,710   | )                   |   |         |   |   | (559,710   | )
|Cash paid in lieu of fractional shares of stock
dividend                                    |  |              | (318      | )      |                    |            |   |               |        |          |          |              |   |                                 | (1,162     | )                   |   |         |   |   | (1,162     | )
|7% stock dividend declared on January 26,
2007                                              |  |              |           |        |                    | 3,800,146  |   |               |         |          |          |               |   |                                 | (3,800,146 | )                   |   |         |   |   |            |  
|Share-based compensation expense                                                            |  |              |          |        |                    |           |   |               | 264,531 |          |          |              |   |                                 |           |                     |   |         |   |   | 264,531    |  
|Excess tax benefits from share-based
compensation                                           |  |              |          |        |                    |           |   |               | 16,689  |          |          |              |   |                                 |           |                     |   |         |   |   | 16,689     |  
|Comprehensive income                                                                        |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Net Income for the period                                                                   |  |              |          |        |                    |           |   |               |        |          | $        | 4,209,114     |   |                                 | 4,209,114  |                     |   |         |   |   | 4,209,114  |  
|Unrealized security holding gains (net of $219,803
tax expense)                             |  |              |          |        |                    |           |   |               |        |          |          | 329,704       |   |                                 |           |                     |   | 329,704  |   |   | 329,704    |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Total Comprehensive Income                                                                  |  |              |           |        |                    |            |   |               |         |          | $        | 4,538,818     |   |                                 |            |                     |   |          |   |   |            |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Balance,December 31, 2007                                                                   |  |              | 3,818,284 |        | $                  | 11,977,473 |   | $             | 663,213 |          |          |               |   | $                               | 20,084,667 |                     | $ | 207,184  |   | $ | 32,932,537 |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Stock options exercised                                                                     |  |              | 5,350     |        |                    | 50,000     |   |               |        |          |          |              |   |                                 |           |                     |   |         |   |   | 50,000     |  
|Cash Dividends                                                                              |  |              |           |        |                    |            |   |               |        |          |          |              |   |                                 | (830,928   | )                   |   |         |   |   | (830,928   | )
|Share-based compensation expense
compensation                                               |  |              |          |        |                    |           |   |               | 286,275 |          |          |              |   |                                 |           |                     |   |         |   |   | 286,275    |  
|Comprehensive income                                                                        |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Net Income for the period                                                                   |  |              |          |        |                    |           |   |               |        |          | $        | 4,828,734     |   |                                 | 4,828,734  |                     |   |         |   |   | 4,828,734  |  
|Unrealized gain/(loss) on cash flow hedge (net of
$176,506 tax benefit)                     |  |              |           |        |                    |            |   |               |         |          | $        | (264,759      | ) |                                 |            |                     |   |          |   |   |            |  
|Unrealized security holding gains (net of $222,831
tax expense)                             |  |              |          |        |                    |           |   |               |        |          |          | 371,474       |   |                                 |           |                     |   | 371,474  |   |   | 371,474    |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Total Comprehensive Income                                                                  |  |              |           |        |                    |            |   |               |         |          | $        | 4,935,449     |   |                                 |            |                     |   |          |   |   |            |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  
|Balance,December 31, 2008                                                                   |  |              | 3,823,634 |        | $                  | 12,027,473 |   | $             | 949,488 |          |          |               |   | $                               | 24,082,473 |                     | $ | 578,658  |   | $ | 37,638,092 |  
|                                                                                            |  |              |           |        |                    |            |   |               |         |          |          |               |   |                                 |            |                     |   |          |   |   |            |  

The accompanying
notes are an integral part of these consolidated financial statements.

64

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TAMALPAIS
BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

|                                                                |  |      |              |      |   |             |   |   |             |  
|--------------------------------------------------------------- |  | ---- | ------------ | ---- | - | ----------- | - | - | ----------- | -
|                                                                |  | 2008 |              | 2007 |   | 2006        |  
|                                                                |  |      |              |      |   |             |  
|Cash Flows From Operating Activities                            |  |      |              |      |   |             |   |   |             |  
|Net Income                                                      |  | $    | 4,828,734    |      | $ | 4,209,114   |   | $ | 3,928,449   |  
|Adjustments to Reconcile Net Income to
Net                      |  |      |              |      |   |             |   |   |             |  
|Cash Provided by Operating Activities:                          |  |      |              |      |   |             |   |   |             |  
|Depreciation and amortization of premises and
equipment         |  |      | 848,592      |      |   | 908,862     |   |   | 825,128     |  
|Provision for loan losses                                       |  |      | 3,190,957    |      |   | 243,956     |   |   | 439,472     |  
|Change in Deferred income taxes                                 |  |      | (428,408     | )    |   | (223,000    | ) |   | 173,000     |  
|Change in deferred costs, net of
amortization                   |  |      | 125,974      |      |   | 413,072     |   |   | 995,356     |  
|Change in loan servicing asset, net of
amortization             |  |      | 57,894       |      |   | (23,607     | ) |   | (94,845     | )
|Net amortization of investment
securities                       |  |      | 65,077       |      |   | 79,215      |   |   | 215,688     |  
|Share Based Compensation                                        |  |      | 286,275      |      |   | 264,531     |   |   | 381,993     |  
|FHLB stock dividends                                            |  |      | (386,500     | )    |   | (281,400    | ) |   | (313,000    | )
|Gain on Sale of Loans                                           |  |      | (166,293     | )    |   | (584,748    | ) |   | (791,966    | )
|Loans Originated for Sale                                       |  |      | (300,000     | )    |   | (11,383,875 | ) |   | (9,883,375  | )
|Proceeds from Loan Sales                                        |  |      | 7,345,593    |      |   | 11,994,373  |   |   | 10,675,341  |  
|Net Loss on sale of investment securities                       |  |      | 5,780        |      |   |            |   |   | 1,820       |  
|Loss on other-than-temporary investment                         |  |      | 62,045       |      |   |            |   |   |            |  
|Net change in bank owned life insurance                         |  |      | (441,562     | )    |   | (387,374    | ) |   |            |  
|Net change in accrued interest receivable and
other assets      |  |      | (2,682,518   | )    |   | (438,819    | ) |   | (2,077,510  | )
|Excess tax benefits from share-based
compensation               |  |      |             |      |   | (16,689     | ) |   |            |  
|Net change in accrued interest payable and other
liabilities    |  |      | 430,772      |      |   | 81,489      |   |   | (297,264    | )
|                                                                |  |      |              |      |   |             |   |   |             |  
|Net
  Cash Provided By Operating Activities                     |  |      | 12,842,412   |      |   | 4,855,100   |   |   | 4,178,287   |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Cash Flows From Investing Activities                            |  |      |              |      |   |             |   |   |             |  
|Loans originated or purchased, net of
repayments                |  |      | (129,908,065 | )    |   | (43,975,298 | ) |   | (40,345,292 | )
|Principal reduction in securities
available-for-sale            |  |      | 7,947,509    |      |   | 5,719,268   |   |   | 4,925,455   |  
|Principal reduction in securities
held-to-maturity              |  |      | 3,689,012    |      |   | 7,231,771   |   |   | 6,868,625   |  
|Purchase of investment securities
available-for-sale            |  |      | (29,417,111  | )    |   | (19,316,939 | ) |   | (18,191,843 | )
|Net change in interest earning deposits                         |  |      | 69,353       |      |   | 359,918     |   |   | (44,341     | )
|Purchase of Federal Home Loan Bank stock                        |  |      | (1,379,600   | )    |   | (2,246,500  | ) |   | (117,500    | )
|Redemption of Federal Home Loan Bank
stock                      |  |      |             |      |   | 1,533,900   |   |   | 736,200     |  
|Proceeds from sales of investment securities
available-for-sale |  |      | 4,258,911    |      |   |            |   |   | 2,036,120   |  
|Maturity of investment securities
available-for-sale            |  |      | 1,999,759    |      |   |            |   |   |            |  
|Purchase of bank owned life insurance                           |  |      |             |      |   | (10,000,000 | ) |   |            |  
|Purchase of property and equipment                              |  |      | (129,951     | )    |   | (287,818    | ) |   | (1,393,945  | )
|                                                                |  |      |              |      |   |             |   |   |             |  
|Net
  Cash Used By Investing Activities                         |  |      | (142,870,183 | )    |   | (60,981,698 | ) |   | (45,526,521 | )
|                                                                |  |      |              |      |   |             |   |   |             |  
|Cash Flows From Financing Activities                            |  |      |              |      |   |             |   |   |             |  
|Net change in deposits                                          |  |      | 99,126,363   |      |   | (8,629,987  | ) |   | 56,405,265  |  
|Net change in FHLB advances                                     |  |      | 36,577,500   |      |   | 60,256,723  |   |   | (21,561,275 | )
|Issuance of junior subordinated
debentures                      |  |      |             |      |   | 10,310,000  |   |   | 3,093,000   |  
|Redemption of junior subordinated
debentures                    |  |      |             |      |   | (10,310,000 | ) |   |            |  
|Issuance of long term debt                                      |  |      | 6,000,000    |      |   |            |   |   |            |  
|Cash Dividends paid                                             |  |      | (830,928     | )    |   | (559,710    | ) |   | (591,713    | )
|Cash paid in lieu of fractional shares of stock
dividend        |  |      |             |      |   | (1,162      | ) |   |            |  
|Excess tax benefits from share-based
compensation               |  |      |             |      |   | 16,689      |   |   |            |  
|Stock repurchases                                               |  |      |             |      |   | (2,455,627  | ) |   |            |  
|Stock option exercise proceeds                                  |  |      | 50,000       |      |   | 248,138     |   |   | 177,128     |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Net
  Cash Provided By Financing Activities                     |  |      | 140,922,935  |      |   | 48,875,064  |   |   | 37,522,405  |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Net Increase/(Decrease) in Cash and Cash
Equivalents            |  | $    | 10,895,164   |      | $ | (7,251,534  | ) | $ | (3,825,829  | )
|Cash and Cash Equivalents, Beginning of Year                    |  |      | 5,024,500    |      |   | 12,276,034  |   |   | 16,101,863  |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Cash and Cash Equivalents, End of Year                          |  | $    | 15,919,664   |      | $ | 5,024,500   |   | $ | 12,276,034  |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Supplemental Disclosure of Cash Flow Information                |  |      |              |      |   |             |   |   |             |  
|Cash paid during the year for:                                  |  |      |              |      |   |             |   |   |             |  
|Interest paid                                                   |  | $    | 19,813,303   |      | $ | 16,320,856  |   | $ | 18,145,932  |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Income taxes paid                                               |  | $    | 3,342,389    |      | $ | 2,200,000   |   | $ | 3,247,700   |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Non-Cash Investing Activities                                   |  |      |              |      |   |             |   |   |             |  
|Net change in accumulated other comprehensive
income            |  | $    | 106,715      |      | $ | 329,704     |   | $ | 139,925     |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Loans transferred to other real estate
owned                    |  | $    | 417,207      |      | $ |            |   | $ |            |  
|                                                                |  |      |              |      |   |             |   |   |             |  
|Transfer of loans held for investment to held for sale          |  | $    | 6,840,592    |      | $ |            |   | $ |            |  
|                                                                |  |      |              |      |   |             |   |   |             |  

The accompanying
notes are an integral part of these consolidated financial statements.

65

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TAMALPAIS
BANCORP AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 1: Summary of Significant Accounting Policies

Nature
of Operations

Tamalpais Bancorp, formerly known as Epic Bancorp,
(the Company) was incorporated on December 20, 1988 and is headquartered
in San Rafael, California and has two wholly owned subsidiaries, Tamalpais Bank
(the Bank) and Tamalpais Wealth Advisors (TWA). The Bank conducts business
as an industrial bank under the California State Banking Law and operates seven
branches in Marin County, California. The Bank provides a variety of financial
services to small-to-medium sized businesses and individuals and offers a full
range of commercial banking services. TWA offers investment advisory services
and financial planning to the general community and to clients of the Bank.

The consolidated financial statements of the Company
and subsidiaries are prepared in conformity with accounting principles and
reporting policies generally accepted in the United States of America and
prevailing practices within the banking industry. The more significant
accounting and reporting policies are discussed below.

Principles
of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All material
intercompany transactions and accounts have been eliminated in consolidation.

Investment
in Nonconsolidated Subsidiary

The Company accounts for its investments in its wholly
owned special purpose entities, San Rafael Capital Trust I (paid off in 2007),
II and III, using the equity method under which the subsidiaries net earnings
are recognized in the Companys statement of income.

Accounting
Estimates

Certain accounting policies underlying the preparation
of these financial statements require management to make estimates and
judgments. These estimates and judgments may affect reported amounts of assets
and liabilities, revenues and expenses, and disclosures of contingent assets
and liabilities. The most significant of these involve the Allowance for Loan
Losses, as discussed below under Allowance for Loan Losses.

Cash
and Cash Equivalents

For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, Federal funds sold,
money market mutual funds, and other investments with original maturities of
less than 90 days, presenting insignificant risk of changes in value due to
interest rate changes.

The Bank is required at times to maintain a reserve
balance with the Federal Reserve Bank. At December 31, 2008 and 2007, the Bank
met reserve balance requirements with vault cash and was not required to
maintain reserve balances with the Federal Reserve Bank.

66

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Investment
Securities

Investments in debt and equity securities are
classified as either held-to-maturity, trading, or available-for-sale.
Investments classified as held-to-maturity are those that the Company has the ability
and intent to hold until maturity and are reported at their remaining unpaid
principal balance, net of unamortized premiums or nonaccreted discounts.
Investments that are bought and held principally for the purposes of selling
them in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings. Investments that
will be held for indefinite periods of time, including securities that may be
sold in response to changes in market interest or prepayment rates, needs for
liquidity, and changes in the availability of and the yield of alternative
investments, are classified as available-for-sale. These investments are
carried at fair market value which is determined using published quotes as of
the close of business. If quoted market prices are not available, we obtain
pricing information from a reputable third-party service provider, who may
utilize valuation techniques that use current market-based or independently
sourced parameters, such as bid prices, dealer-quote prices, interest rates,
benchmark yield curves, prepayment speeds, and credit spreads. Unrealized gains
and losses are excluded from earnings and reported net of related tax and
recorded as other comprehensive income and included in shareholders equity
until realized.

The amortized cost of investment securities are
adjusted for amortization of premiums and accretion of discounts to maturity
or, in the case of mortgage-backed securities, over the estimated life of the
security, using a method that approximates the effective interest method. Such
amortization and accreted interest are included in interest income. Gains and
losses on sales of investments are recognized based on specific identification
and are included in noninterest income.

Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are
other than temporary result in write-downs of the individual securities to
their fair value. The related write-downs are included in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers: (1) the length of time and the extent to which the fair value has
been less than cost; (2) the financial condition and near-term prospects of the
issuer; and, (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery of fair value.

Loans

Loans are reported at their outstanding principal
balances net of any unearned income, charge-offs, unamortized deferred fees and
costs on originated loans and premiums and discounts on purchases loans. The
Banks decision to hold these loans for investment is based on the Banks
intent and ability to hold the portfolio for the foreseeable future or until
maturity or payoff.

The Banks loans are reported at the principal amount
outstanding net of deferred fees and the allowance for loan losses. Interest
income is accrued daily on the outstanding loan balances using the simple
interest method. The Banks policy is to place loans on non-accrual status
when, for any reason, principal or interest is past due for ninety days or more
unless they are both well secured and in the process of collection or if the
Bank determines that there is little to no chance of being paid current by the
borrower. In addition, some loans secured by real estate with temporarily
impaired values and commercial loans to borrowers experiencing financial
difficulties are placed on nonaccrual status even though the borrowers continue
to repay the loans as scheduled. When loans are placed on nonaccrual status,
any accrued but uncollected interest is reversed from current period interest
income, and additional income is recorded only as payments are received. Loans
are generally charged off at such time as the loan is classified as a loss.
Loan origination fees, net of direct underwriting costs, are deferred and
amortized to income by use of a method that approximates a level yield over the
contractual lives of the related loans. If a loan is paid off prior to
maturity, then the remaining unamortized deferred fee is immediately recognized
to interest income.

67

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The Bank defines a loan as impaired when it is
probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected future cash flows discounted at the loans
original effective interest rate or based on the loans observable market price
or the fair value of the collateral if the loan is collateral dependent. Since
most of the Banks loans are collateral dependent, the calculation of the
impaired loans is generally based on the fair value of the collateral. Income
recognition on impaired loans conforms to the method the Bank uses for income
recognition on nonaccrual loans. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded through a
valuation allowance. Nonaccrual loans are reinstated to accrual status when
improvements in the credit quality eliminate doubt as to the full
collectability of both interest and principal.

Loans
Held for Sale

Loans held for sale are reported at the lower of cost
or estimated market value. Gains or losses on loan sales are recognized at the
time of the sale and are determined by the difference between net sale proceeds
and the net book value of the loans less the estimated fair value of any
retained mortgage servicing rights.

Allowance
for Loan Losses

The allowance for loan losses is maintained at a level
deemed appropriate by management to provide for known losses as well as
unidentified losses in the loan portfolio. The allowance is based upon
managements assessment of various factors affecting the collectability of the
loans, including current and projected economic conditions, past credit
experience, delinquency status, the value of the underlying collateral, if any,
and review of the portfolio of loans and commitments.

The allowance for loan losses is based on estimates,
and ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. The allowance is
increased by provisions charged to expense and is reduced by net charge-offs.

Other
Real Estate Owned

Other real estate includes real estate acquired in
full or partial settlement of loan obligations. When property is acquired, any
excess of the recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property less estimated
selling costs is charged against the allowance for loan losses. A valuation
allowance for losses on other real estate is maintained to provide for declines
in value after acquisition. The allowance is established through a provision
for losses on other real estate which is included in other expenses. Subsequent
gains or losses on sales or writedowns resulting from further declines in fair
value are recorded in other income or expense as incurred. There was $417,000
in other real estate at December 31, 2008 and none at December 31, 2007. The
Bank entered into a contract with this property on February 27, 2009 to be sold
with an anticipated closing date of March 31, 2009 with full collection of
net book value.

68

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Investment
in Affordable Housing

The Company is a limited partner in a limited
partnership that invests in low-income housing projects that qualify for
Federal and/or State income tax credits. The investment is recorded in other
assets on the balance sheet and is accounted for using the equity method of
accounting.

Loan
Sales and Servicing

Servicing rights are recognized separately when they
are acquired through sale of loans. For sales of Small Business Administration
(SBA) loans prior to January 1, 2007, a portion of the cost of the loan was
allocated to the servicing right based on relative fair values. The Company
adopted SFAS No. 156, Accounting for Servicing of Financial Assets, on January 1,
2007, for sales of SBA loans beginning in 2007. Servicing rights are initially
recorded at fair value with the income statement effect recorded in gain on
sale of loans. Fair value is based on a valuation that calculates the present
value of estimated future cash flows from the servicing assets. The valuation
model uses assumptions that market participants would use in estimating cash
flows from servicing assets, such as the cost to service, discount rates and
prepayment speeds. The Company compares the valuation model inputs and results
to published industry data in order to validate the model results and
assumptions. All classes of servicing assets are subsequently measured using
the amortization method which requires servicing rights to be amortized into
noninterest income in proportion to, and over the period of, the estimate
future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based
upon the fair value of the rights as compared to the carrying amount. Impairment
is determined by stratifying rights into groupings based on predominant risk
characteristics, such as interest rate, loan type and investor type. For
purposes of measuring impairment, the Company has identified each servicing
asset with the underlying loan being serviced. A valuation allowance is
recorded when the fair value is below the carrying amount of the asset. If the
Company later determines that all or a portion of the impairment no longer
exists for a particular grouping, a reduction of the allowance may be recorded
as an increase to income. The fair values of servicing rights are subject to
significant fluctuations as a result of changes in estimated and actual
prepayment speeds and changes in the discount rates.

Servicing fee income which is reported on the income
statement as servicing income is recorded for fees earned for servicing loans.
The fees are based on a contractual percentage of the outstanding principal and
recorded as income when earned.

Premises
and Equipment

Furniture, equipment, and leasehold improvements are
recorded at cost and depreciated by the straight-line method over the shorter
of the estimated useful lives of the assets or lease terms. Furniture and
fixtures are depreciated over 5 to 8 years, and equipment is generally
depreciated over 3 to 10 years. Leasehold improvements are amortized over the
terms of the leases or their estimated useful lives, whichever is shorter. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the accounts, and any resulting
gain or loss is recognized in income for the period. The cost of maintenance
and repairs is charged to expense as incurred.

Advertising
Costs

Advertising costs are expensed as incurred.

69

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Income
Taxes

The Company files its income taxes on a consolidated
basis with its subsidiaries. The Company accounts for income taxes in
accordance with FAS 109, Accounting for Income Taxes, as interpreted by FIN 48,
resulting in two components of income tax expense: current and deferred.
Current income tax expense approximates taxes to be paid or refunded for the
current period. The Company determines deferred income taxes using the balance
sheet method. Under this method, the net deferred tax asset or liability is
based on the tax effects of the differences between the book and tax bases of
assets and liabilities, and recognizes enacted changes in tax rates and laws in
the period in which they occur.

Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax assets are
recognized subject to management judgment that realization is more likely than
not. A tax position that meets the more likely than not recognition threshold
is measured to determine the amount of benefit to recognize. The tax position
is measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon settlement. Interest and penalties are recognized
as a component of income tax expense.

Comprehensive
Income

Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains
and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income.

Off-Balance
Sheet Financial Instruments

Our interest rate swap contracts are designated and
qualified as fair value hedges. In the ordinary course of business, the Bank
enters into off-balance sheet financial instruments consisting of commitments
to extend credit. These financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.

Earnings
Per Share (EPS)

Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS 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.

Salary
Continuation Plan

The Company has entered into salary continuation plans
with certain executive officers. The liability is based on estimates involving
life expectancy, length of time before retirement, appropriate discount rate,
forfeiture rates and expected benefit levels. Should these estimates prove
materially different from actual results, the Company could incur additional or
reduced future expense.

70

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Share-Based
Compensation

On January 1, 2006, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment, or SFAS No. 123R, using the modified prospective method which
requires that compensation cost be recognized for all share-based payment
awards, (i.e., unvested stock options), based on the grant-date fair value.
Prior to January 1, 2006, the Company accounted for share-based payments, under
the recognition and measurement provisions of Accounting Principles Board, or
APB, Opinion No. 25, Accounting for Stock Issued to Employees, or Opinion 25,
as permitted by SFAS No. 123, Accounting for Stock-Based Compensation, or
SFAS No. 123. Under the provisions of Opinion 25, compensation cost for stock
options was not recognized for periods prior to January 1, 2006, as all options
granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant.

Derivative
Financial Instruments and Hedging Activities

As required by SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, all derivatives are
recognized as either assets or liabilities on the balance sheet and are
measured at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and resulting
designation. Derivatives used to hedge the exposure to changes in fair value of
an asset, liability or firm commitment attributable to a particular risk, such
as interest rate risk, are considered fair value hedges. Derivatives used to
hedge the exposure to variability in expected cash flows, or other types of
forecasted transactions, are considered cash flow hedges. The Bank has entered
into a cash flow hedge in 2008.

In a cash flow hedge, the effective portion of changes
in the fair value of the derivative are recorded in other comprehensive income
(loss) and recognized in earnings when the hedged transaction affects earnings.
The ineffective portion of changes in the fair value of cash flow hedges is
recognized directly in earnings. For derivatives not designated as hedges,
changes in fair value are recognized in earnings, in noninterest income.

The accrued net settlements on derivatives that
qualify for hedge accounting are recorded in interest income or interest
expense based on the item being hedged. Changes in fair value of derivatives
including accrued net settlements that do not qualify for hedge accounting are
reported in noninterest income.

When a cash flow hedge is discontinued, but the hedged
cash flows or forecasted transaction is still expected to occur, changes in
value that were accumulated in other comprehensive income are amortized or
accreted into earnings over the same periods which the hedged transactions will
affect earnings.

Reclassifications

Certain amounts in prior years financial statements
have been reclassified to conform with the current presentation. These
reclassifications have no effect on previously reported net income.

Current
Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of SFAS No. 115 (SFAS 159). This standard permits entities to
choose to measure many financial assets and liabilities and certain other items
at fair value. An enterprise will report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied on an
instrument-by-instrument basis, with several exceptions, such as those
investments accounted for by the equity method, and once elected, the option is
irrevocable unless a new election date occurs. The fair value option can be
applied only to entire instruments and not to portions thereof. SFAS 159 is
effective as of the beginning of an entitys fiscal year beginning after November
15, 2007. Early adoption is permitted as of the beginning of the previous
fiscal year provided that the entity makes that choice in the first 120 days of
that fiscal year and also elects to apply the provisions of SFAS No. 157, Fair
Value Measurements. The Company adopted FAS 159 and chose not to measure
eligible financial instruments at their fair value.

71

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

In November 2007, the Securities and Exchange
Commission staff issued Staff Accounting bulletin No. 109 (SAB 109). SAB 109
provides revised guidance on the valuation of written loan commitments
accounted for at fair value through earnings. Former guidance under SAB 105
indicated that the expected net future cash flows related to the associated
servicing of the loan should not be incorporated into the measurement of the
fair value of a derivative loan commitment. The new guidance under SAB 109
requires these cash flows to be included in the fair value measurement, and the
SAB requires this view to be applied on a prospective basis to derivative loan
commitments issued or modified in the first quarter of 2008. The Company does
not expect the application of SAB 109 in 2008 will have a significant effect on
its consolidated financial statements.

In December 2007, the FASB issued SFAS 141, Revised
2007 (SFAS 141R), Business Combinations. SFAS 141Rs objective is to improve
the relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after December 31, 2008.
The Company does not expect the implementation of SFAS 141R to have a material
impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements. SFAS 160s
objective is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 shall be effective for fiscal years and interim periods
within those fiscal years, beginning on or after December 15, 2008. The Company
does not expect the implementation of SFAS 160 to have a material impact on its
consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities  an amendment
of FASB Statement No. 133. This statement is intended to enhance the current
disclosure framework in Statement 133. The Statement requires enhanced
disclosures about an entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. This Statement is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. The Company is
evaluating the effects of this Statement on its consolidated financial
statements.

In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles in the
United States. SFAS No. 162 is effective 60 days following the SECs approval
of the Public Company Accounting Oversight Board (PCAOB) amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. The Company does not expect that SFAS No.
162 will have a material impact on its consolidated financial statements.

72

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

In May 2008, the FASB issued SFAS No. 163, Accounting
for Financial Guarantee Insurance Contracts, an interpretation of FASB
Statement No. 60. SFAS No. 163 seeks to bring consistency in the
recognition and measurement of claim liabilities. This statement clarifies how
SFAS No. 60 applies to financial guarantee contracts, including the recognition
and measurement to be used to account for premium revenue and claim
liabilities, increasing the comparability in financial reporting of financial
guarantee contracts by insurance enterprises. The Company must adopt SFAS No.
163 no later than January 1, 2009. The Company does not anticipate the adoption
of SFAS No. 163 to have a material impact on its consolidated financial
statements.

On January  1, 2008,  the Company also adopted the  provisions  of FAS 157,  Fair
Value  Measurements,  with the  exception  of the  requirements  that pertain to
nonfinancial assets and nonfinancial  liabilities covered by FASB Staff Position
(FSP) No. FAS 157-2.  FAS 157  defines  fair  value,  establishes  a  consistent
framework for measuring  fair value and expands disclosure  requirements for fair
value  measurements.  FSP FAS 157-2  delays  the  effective  date of the FAS 157
requirements  for  nonfinancial  assets and  nonfinancial  liabilities to fiscal
years beginning  after November 15, 2008.  Other real estate owned is an example
of a  nonfinancial  asset that the  Company  will be required to measure at fair
value on a non-recurring  basis in accordance with generally accepted accounting
principles.

In October 2008, the FASB issued FSP No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active. This FSP clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP was effective for the Company upon
issuance, including prior periods for which financial statements have not been
issued; and, therefore was effective for the Companys financial statements in
2008. Adoption of statements have not been issued; and, therefore was effective
for the Companys financial statements in 2008. Adoption of FSP No. FAS 157-3
did not have a significant impact on the Companys financial position, results
of operations or cash flows.

NOTE 2: Investment Securities

At December 31, 2008 and 2007, the investment
securities portfolio was comprised of securities classified as
available-for-sale and heldto-maturity, in accordance with SFAS No. 115,
resulting in investment securities available-for-sale being carried at fair
value and investment securities held-to-maturity being carried at cost,
adjusted for amortization of premiums and accretions of discounts.

The amortized cost, unrealized gains and losses, and
estimated fair value of the available-for-sale investment securities as of
December 31, 2008, follows:

|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|---------------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                                   |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                                   |  |                  |            |                            |   |                             |  |                          |         
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Mortgage backed securities         |  | $                | 14,944,115 |                            | $ | 369,234                     |  | $                        | (114,624 | ) | $ | 15,198,725 | 
|U.S. Agency Securities             |  |                  | 5,167,184  |                            |   | 124,861                     |  |                          |         |   |   | 5,292,045  | 
|Municipal Securities               |  |                  | 5,225,086  |                            |   | 68,801                      |  |                          | (38,362  | ) |   | 5,255,525  | 
|Collateralized Mortgage Obligation |  |                  | 30,176,960 |                            |   | 495,877                     |  |                          | (3,405   | ) |   | 30,669,432 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Total Available-for-sale           |  | $                | 55,513,345 |                            | $ | 1,058,773                   |  | $                        | (156,391 | ) | $ | 56,415,727 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

73

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The amortized cost, unrealized gains and losses, and
estimated fair value of the held-to-maturity investment securities as of
December 31, 2008, follows:

|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|-------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                           |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                           |  |                  |            |                            |   |                             |  |                          |         
|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Mortgage backed securities |  | $                | 10,773,579 |                            | $ | 15,041                      |  | $                        | (290,127 | ) | $ | 10,498,493 | 
|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

The amortized cost, unrealized gains and losses, and
estimated fair value of the available-for-sale investment securities as of
December 31, 2007, follows:

|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|---------------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                                   |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                                   |  |                  |            |                            |   |                             |  |                          |         
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Mortgage backed securities         |  | $                | 15,687,485 |                            | $ | 179,925                     |  | $                        | (132,168 | ) | $ | 15,735,242 | 
|U.S. Agency Securities             |  |                  | 7,409,372  |                            |   | 64,657                      |  |                          |         |   |   | 7,474,029  | 
|Municipal Securities               |  |                  | 5,798,501  |                            |   | 98,107                      |  |                          | (17,223  | ) |   | 5,879,385  | 
|Collateralized Mortgage Obligation |  |                  | 11,420,191 |                            |   | 152,009                     |  |                          |         |   |   | 11,572,200 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Total Available-for-sale           |  | $                | 40,315,549 |                            | $ | 494,698                     |  | $                        | (149,391 | ) | $ | 40,660,856 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

The amortized cost, unrealized gains and losses, and
estimated fair value of the held-to-maturity investment securities as of
December 31, 2007, follows:

|                             |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|---------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                             |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                             |  |                  |            |                            |   |                             |  |                          |         
|                             |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Mortgage
  backed securities |  | $                | 14,514,528 |                            | $ | 6,973                       |  | $                        | (196,695 | ) | $ | 14,324,806 | 
|                             |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

74

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The amortized cost and fair values of investment
securities availablefor-sale and held-to-maturity at December 31, 2008,
by expected maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. In addition, such
factors as prepayments and interest rates may affect the yield on the carrying
value of mortgage-backed securities. At December 31, 2008 and 2007, the Company
did not hold any high-risk collateralized mortgage obligations that entail
higher risks than standard mortgage-based securities.

|                          |  |          |                |                  |            |            |  |   |            | 
|------------------------- |  | -------- | -------------- | ---------------- | ---------- | ---------- |  | - | ---------- | 
|                          |  |          |                |                  | Securities |           
|                          |  |          |                |                  |            |           
|                          |  | Maturity |                | Amortized
  Cost |            | Fair Value | 
|                          |  |          |                |                  |            |            | 
|Available-for-Sale        |  |          |                |                  |            |            |  |   |            | 
|                          |  |          | 1 year or less |                  | $          | 3,207,902  |  | $ | 3,218,584  | 
|                          |  |          | 1 to 5 years   |                  |            | 19,099,289 |  |   | 19,309,447 | 
|                          |  |          | 5 to 10 years  |                  |            | 13,919,102 |  |   | 14,226,324 | 
|                          |  |          | Over 10 years  |                  |            | 19,287,052 |  |   | 19,661,372 | 
|                          |  |          |                |                  |            |            |  |   |            | 
|                          |  |          |                |                  | $          | 55,513,345 |  | $ | 56,415,727 | 
|                          |  |          |                |                  |            |            |  |   |            | 
|                          |  |          |                |                  |            |            |  |   |            | 
|Held-to-maturity, at cost |  |          | 1 year or less |                  | $          | 1,688,785  |  | $ | 1,688,019  | 
|                          |  |          | 1 to 5 years   |                  |            | 4,526,972  |  |   | 4,344,739  | 
|                          |  |          | 5 to 10 years  |                  |            |           |  |   |           | 
|                          |  |          | Over 10 years  |                  |            | 4,557,822  |  |   | 4,465,735  | 
|                          |  |          |                |                  |            |            |  |   |            | 
|                          |  |          |                |                  | $          | 10,773,579 |  | $ | 10,498,493 | 
|                          |  |          |                |                  |            |            |  |   |            | 

The Company held twenty seven and sixteen investment
securities that were in an unrealized loss position and are summarized and
classified according to the duration of the loss period for 2008 and 2007,
respectively, as outlined below.

75

---



TAMALPAIS BANCORP AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006

|                                   |  |                        |           |                        |   |            |   |                 |           |  |   |         |  
|---------------------------------- |  | ---------------------- | --------- | ---------------------- | - | ---------- | - | --------------- | --------- |  | - | ------- | -
|                                   |  | December 31, 2008      |          
|                                   |  |                        |          
|                                   |  | < 12 continuous months |           | > 12 continuous months |  
|                                   |  |                        |           |                        |  
|                                   |  | Fair Value             |           | Unrealized Loss        |   | Fair Value |   | Unrealized Loss |          
|                                   |  |                        |           |                        |   |            |   |                 |          
|Available-for-Sale                 |  |                        |           |                        |   |            |   |                 |           |  |   |         |  
|Mortgage backed securities         |  | $                      | 3,001,416 |                        | $ | (37,288    | ) | $               | 3,267,709 |  | $ | (77,336 | )
|Municipal Securities               |  |                        | 1,533,053 |                        |   | (38,362    | ) |                 |          |  |   |        |  
|Collateralized Mortgage Obligation |  |                        | 5,094,246 |                        |   | (3,405     | ) |                 |          |  |   |        |  
|                                   |  |                        |           |                        |   |            |   |                 |           |  |   |         |  
|Total Available-for-Sale           |  | $                      | 9,628,715 |                        | $ | (79,055    | ) | $               | 3,267,709 |  | $ | (77,336 | )
|                                   |  |                        |           |                        |   |            |   |                 |           |  |   |         |  

|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|-------------------------- |  | ---------------------- | --------- | ---------------------- | - | ---------- | - | --------------- | --------- |  | - | -------- | -
|                           |  | December 31, 2008      |          
|                           |  |                        |          
|                           |  | < 12 continuous months |           | > 12 continuous months |  
|                           |  |                        |           |                        |  
|                           |  | Fair Value             |           | Unrealized Loss        |   | Fair Value |   | Unrealized Loss |          
|                           |  |                        |           |                        |   |            |   |                 |          
|Held-to-Maturity           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|Mortgage-Backed Securities |  | $                      | 4,248,194 |                        | $ | (80,112    | ) | $               | 5,688,638 |  | $ | (210,015 | )
|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  

|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|-------------------------- |  | ---------------------- | --------- | ---------------------- | - | ---------- | - | --------------- | --------- |  | - | -------- | -
|                           |  | December 31, 2007      |          
|                           |  |                        |          
|                           |  | < 12 continuous months |           | > 12 continuous months |  
|                           |  |                        |           |                        |  
|                           |  | Fair Value             |           | Unrealized Loss        |   | Fair Value |   | Unrealized Loss |          
|                           |  |                        |           |                        |   |            |   |                 |          
|Available-for-Sale         |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|Mortgage backed securities |  |                        |          |                        |   |           |   |                 | 7,566,919 |  |   | (132,168 | )
|Municipal Securities       |  |                        | 1,036,240 |                        |   | (17,223    | ) |                 |          |  |   |         |  
|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|                           |  | $                      | 1,036,240 |                        | $ | (17,223    | ) | $               | 7,566,919 |  | $ | (132,168 | )
|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  

|                           |  |                        |        |                        |   |            |   |                 |            |  |   |          |  
|-------------------------- |  | ---------------------- | ------ | ---------------------- | - | ---------- | - | --------------- | ---------- |  | - | -------- | -
|                           |  | December 31, 2007      |       
|                           |  |                        |       
|                           |  | < 12 continuous months |        | > 12 continuous months |  
|                           |  |                        |        |                        |  
|                           |  | Fair Value             |        | Unrealized Loss        |   | Fair Value |   | Unrealized Loss |           
|                           |  |                        |        |                        |   |            |   |                 |           
|Held-to-Maturity           |  |                        |        |                        |   |            |   |                 |            |  |   |          |  
|Mortgage-Backed Securities |  | $                      | 81,241 |                        | $ | (108       | ) | $               | 12,251,385 |  | $ | (196,587 | )
|                           |  |                        |        |                        |   |            |   |                 |            |  |   |          |  

76

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Management periodically
evaluates each investment security in an unrealized loss position to determine
if the impairment is temporary or other-than-temporary. Management has
determined that no investment security is impaired due to credit quality and no
investment security is other-than-temporally impaired. This temporary
impairment is attributable to general changes in short-term and intermediate
interest rates as measured by the U.S. Treasury yield curve. The ratings of the
issuers were reviewed and no issuers were identified related to the ultimate
repayment of principal as a result of credit concerns on these securities.

Proceeds from sales of investment securities
available-for-sale during 2008, 2007 and 2006 were $4,258,911, $0 and
$2,036,120, respectively. In 2008, 2007 and 2006, gross gains on those sales
were $11,840, $0 and $0, respectively, and gross losses on those sales were
$17,620, $0 and $1,820, respectively. Proceeds from principal reductions of
mortgage-backed securities in 2008, 2007 and 2006 were $7,947,509, $12,951,039,
and $11,794,080, respectively. Proceeds from principal reductions of
held-to-maturity securities in 2008, 2007, 2006 were $3,689,012, $0 and $0,
respectively. Included in stockholders equity at December 31, 2008 and
2007 were $106,715 and $207,184 of net unrealized gains (net of $222,831 and
$219,803 estimated tax expense for 2008 and 2007, respectively).

NOTE 3: Loans and Allowance for Loan Losses

The majority of the Banks loan activity is with
customers located in California, primarily in the Northern California region.
Although the Bank has a diversified loan portfolio, primarily all mortgage
loans are collateralized by real estate located in Northern California.
Approximately 90.7% of the loans are secured by real estate.

Outstanding loans at December 31, consisted of the
following:

|                               |  |      |             |      |   |             | 
|------------------------------ |  | ---- | ----------- | ---- | - | ----------- | 
|                               |  | 2008 |             | 2007 |  
|                               |  |      |             |      |  
|                               |  |      |             |      |   |             | 
|One-to-four family residential |  | $    | 33,695,013  |      | $ | 22,098,395  | 
|Multifamily residential        |  |      | 171,135,977 |      |   | 123,077,151 | 
|Commercial real estate         |  |      | 322,860,535 |      |   | 246,256,927 | 
|Land                           |  |      | 10,905,347  |      |   | 9,369,137   | 
|Construction real estate       |  |      | 31,076,822  |      |   | 28,987,172  | 
|Consumer loans                 |  |      | 2,111,004   |      |   | 2,045,327   | 
|Commercial, non real estate    |  |      | 18,913,301  |      |   | 36,250,405  | 
|                               |  |      |             |      |   |             | 
|                               |  |      | 590,697,999 |      |   | 468,084,514 | 
|Net deferred loan costs        |  |      | 1,845,182   |      |   | 1,528,972   | 
|                               |  |      |             |      |   |             | 
|                               |  | $    | 592,543,181 |      | $ | 469,613,486 | 
|                               |  |      |             |      |   |             | 

At December 31, 2008 and 2007, the Bank had three
loans with fixed rates of interest. There were no loans held for sale at
December 31, 2008 and 2007.

77

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Net unamortized premiums on purchased loans amounted
to $254,741 and $305,961 for 2008 and 2007, respectively.

The Bank also originates SBA loans. Depending on its
current asset/liability strategy, the Bank may sell the guaranteed portion of
the SBA loans to governmental agencies and institutional investors. The Bank
generally receives a premium in excess of the adjusted carrying value of the
loan at the time of sale. At December 31, 2008 and 2007 the unpaid balance
of SBA loans not sold totaled $75,142,440 and $52,624,535, respectively, and
are included in commercial real estate loans.

Nonaccruing loans totaled $16,758,314, $466,080 and $0
at December 31, 2008, 2007 and 2006 respectively. As of December 31,
2008, $16,758,314 loans on nonaccrual were classified as impaired. If interest
on nonaccrual loans had been recognized at the original interest rates,
interest income would have increased $496,900, $10,188 and $0 for the years
ended 2008, 2007 and 2006, respectively. No additional funds are committed to
be advanced in connection with impaired loans.

The following is a summary of information pertaining
to impaired loans:

|                                                    |  |      |            |      |   |         |  |   |   | 
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ------- |  | - | - | 
|                                                    |  | 2008 |            | 2007 |   | 2006    | 
|                                                    |  |      |            |      |   |         | 
|Impaired loans with a valuation allowance           |  | $    |           |      | $ |        |  | $ |  | 
|Impaired loans without a valuation
  allowance      |  |      | 16,758,314 |      |   | 466,080 |  |   |  | 
|                                                    |  |      |            |      |   |         |  |   |   | 
|Total impaired loans                                |  | $    | 16,758,314 |      | $ | 466,080 |  | $ |  | 
|                                                    |  |      |            |      |   |         |  |   |   | 
|Valuation allowance related to impaired
  loans     |  | $    |           |      | $ |        |  | $ |  | 
|                                                    |  |      |            |      |   |         |  |   |   | 
|Average recorded investment in impaired
  loans     |  | $    | 3,210,296  |      | $ | 729,355 |  | $ |  | 
|                                                    |  |      |            |      |   |         |  |   |   | 
|Cash receipts applied to reduce principal
  balance |  | $    | 492,298    |      | $ |        |  | $ |  | 
|                                                    |  |      |            |      |   |         |  |   |   | 
|Interest income recognized for cash
  payments      |  | $    | 97,369     |      | $ |        |  | $ |  | 
|                                                    |  |      |            |      |   |         |  |   |   | 

At December 31, 2008 and 2007, the Bank had no loans
past due 90 days or more in principal or interest and still accruing interest.
The Bank had no loans classified as troubled debt restructuring for December
31, 2008 and 2007.

78

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

A summary of activity in the allowance for loan losses
is as follows:

|                           |  |      |           |      |   |           |   |   |           | 
|-------------------------- |  | ---- | --------- | ---- | - | --------- | - | - | --------- | 
|                           |  | 2008 |           | 2007 |   | 2006      |  
|                           |  |      |           |      |   |           |  
|                           |  |      |           |      |   |           |   |   |           | 
|Balance, Beginning of Year |  | $    | 4,914,553 |      | $ | 4,671,596 |   | $ | 4,232,124 | 
|Provision for loan losses  |  |      | 3,190,957 |      |   | 243,956   |   |   | 439,472   | 
|Charge Offs                |  |      | (37,268   | )    |   | (999      | ) |   |           | 
|Recoveries                 |  |      | 25,257    |      |   |          |   |   |          | 
|                           |  |      |           |      |   |           |   |   |           | 
|Balance, End of Year       |  | $    | 8,093,499 |      | $ | 4,914,553 |   | $ | 4,671,596 | 
|                           |  |      |           |      |   |           |   |   |           | 

NOTE 4: Loan Servicing

Loans serviced for others are not included in the
accompanying balance sheets. The unpaid principal balances of loans serviced
for others were $27,206,436 and $31,282,950 at December 31, 2008 and 2007,
respectively. Included in these amounts are SBA loans sold to governmental
agencies and institutional investors. At December 31, 2008 and 2007, the
unpaid principal balance of SBA loans serviced for others totaled $19,205,760
and $22,784,269, respectively.

Activity for SBA servicing rights, included with other
assets on the balance sheet, that are measured at amortized cost and related
valuation allowance, fair value and key assumptions used to estimate the fair
value are as follows:

79

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The following summarizes servicing assets capitalized
and amortized:

|                                     |  |                                 |                 |      |   |                 |   |   |                 |  
|------------------------------------ |  | ------------------------------- | --------------- | ---- | - | --------------- | - | - | --------------- | -
|                                     |  | For the year ended December 31, |                
|                                     |  |                                 |                
|                                     |  | 2008                            |                 | 2007 |   | 2006            |  
|                                     |  |                                 |                 |      |   |                 |  
|                                     |  |                                 |                 |      |   |                 |   |   |                 |  
|Carrying Amount at Beginning of Year |  | $                               | 273,638         |      | $ | 250,031         |   | $ | 155,186         |  
|Additions from SBA Loan Sales        |  |                                 | 4,457           |      |   | 84,234          |   |   | 116,665         |  
|Amortization                         |  |                                 | (62,351         | )    |   | (60,627         | ) |   | (21,820         | )
|                                     |  |                                 |                 |      |   |                 |   |   |                 |  
|                                     |  |                                 | 215,744         |      |   | 273,638         |   |   | 250,031         |  
|                                     |  |                                 |                 |      |   |                 |   |   |                 |  
|Less Valuation Allowance             |  |                                 |                |      |   |                |   |   |                |  
|Carrying Amount at End of Year       |  | $                               | 215,744         |      | $ | 273,638         |   | $ | 250,031         |  
|                                     |  |                                 |                 |      |   |                 |   |   |                 |  
|Fair Value, Beginning of Year        |  |                                 | 367,789         |      |   | 392,344         |   |   | 228,434         |  
|Fair Value, End of Year              |  |                                 | 250,664         |      |   | 367,789         |   |   | 392,344         |  
|                                     |  |                                 |                 |      |   |                 |   |   |                 |  
|Discount Rates                       |  |                                 | 6.25% to 8.25   | %    |   | 8.00% to 8.75   | % |   | 8.50% to 9.25   | %
|Prepayment Speeds                    |  |                                 | 15.00% to 20.00 | %    |   | 15.00% to 20.00 | % |   | 15.00% to 20.00 | %

NOTE 5: Premises and Equipment

Premises and equipment at
December 31, 2008 and 2007 consisted of the following:

|                                               |  |      |           |      |   |           | 
|---------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                               |  | 2008 |           | 2007 |  
|                                               |  |      |           |      |  
|Furniture and equipment                        |  | $    | 2,656,250 |      | $ | 2,615,503 | 
|Leasehold improvements                         |  |      | 5,466,739 |      |   | 5,392,318 | 
|                                               |  |      |           |      |   |           | 
|                                               |  |      | 8,122,989 |      |   | 8,007,821 | 
|Less accumulated depreciation and amortization |  |      | 4,198,779 |      |   | 3,357,057 | 
|Construction-in-progress                       |  |      | 11,020    |      |   | 3,107     | 
|                                               |  |      |           |      |   |           | 
|Total                                          |  | $    | 3,935,230 |      | $ | 4,653,871 | 
|                                               |  |      |           |      |   |           | 

Depreciation and amortization expense included in
noninterest expense amounted to $848,592, $908,862 and $825,128 in 2008, 2007
and 2006, respectively.

NOTE 6: Investment in Affordable
Housing

In 2006, the Company agreed to invest $2,000,000 in a
limited liability partnership operating qualified affordable housing project to
receive tax benefits. In 2007, the Company agreed to invest $2,000,000 for
another limited liability partnership operating qualified affordable housing
project to receive tax benefits. These low-income housing credit (LIHC)
investments provide tax benefits to investors in the form of tax deductions
from operating losses and tax credits. Based upon the Companys contribution as
stated above, the Company will receive 6.13% interest in these investments.

80

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

For 2008 and 2007, the Company funded $1,095,800 and
$2,217,379, respectively, and the amortization expense was $446,205 and
$125,982, respectively. The total funding since inception is $3,874,277. The
Company has a commitment to fund as of December 31, 2008 and 2007 an additional
$125,723 and $1,221,533, respectively, for the purposes of obtaining tax
credits and for Community Reinvestment Act purposes. The investment is recorded
in other assets on the balance sheet and is accounted for using the equity
method of accounting. Under the equity method of accounting, the Company
recognizes its ownership share of the profits and losses of the fund. This
investment is regularly evaluated for impairment by comparing the carrying
value to the remaining tax credits expected to be received. Tax credits
received from the fund are accounted for in the period earned (the flow-through
method) and are included in income as a reduction of income tax expense.

The partnership must meet regulatory requirements for
affordable housing for a minimum 15-year compliance period to fully utilize the
tax credits. If the partnership ceases to qualify during the compliance period,
the credits may be denied for any period in which the projects are not in
compliance and a portion of the credits previously taken is subject to
recapture with interest.

NOTE 7: Deposits

Following is a summary of deposits at December 31,
2008 and 2007:

|                                        |  |         |             |               |  |                           |   |         |      |               |   |                           |  |  |       |   |  |      |  
|--------------------------------------- |  | ------- | ----------- | ------------- |  | ------------------------- | - | ------- | ---- | ------------- | - | ------------------------- |  |  | ----- | - |  | ---- | -
|                                        |  | 2008    |             | 2007          | 
|                                        |  |         |             |               | 
|                                        |  | Balance |             | Deposit
  Mix |  | Weighted
  Average
  Rate |   | Balance |      | Deposit
  Mix |   | Weighted
  Average
  Rate | 
|                                        |  |         |             |               |  |                           |   |         |      |               |   |                           | 
|                                        |  |         |             |               |  |                           |   |         |      |               |   |                           |  |  |       |   |  |      |  
|Noninterest-bearing
  deposits          |  | $       | 33,259,929  |               |  | 7.2                       | % |         | 0.00 | %             | $ | 23,254,723                |  |  | 6.4   | % |  | 0.00 | %
|Interest-bearing checking
  deposits    |  |         | 9,735,689   |               |  | 2.1                       | % |         | 0.09 | %             |   | 6,874,465                 |  |  | 1.9   | % |  | 0.18 | %
|Money Market and savings
  deposits     |  |         | 156,479,340 |               |  | 34.1                      | % |         | 1.79 | %             |   | 138,275,392               |  |  | 38.3  | % |  | 3.55 | %
|Certificates of deposit
  over $100,000 |  |         | 132,643,456 |               |  | 28.8                      | % |         | 2.19 | %             |   | 110,587,625               |  |  | 30.6  | % |  | 4.72 | %
|Certificates of deposit
  < $100,000    |  |         | 128,182,646 |               |  | 27.8                      | % |         | 3.39 | %             |   | 82,182,492                |  |  | 22.8  | % |  | 4.77 | %
|                                        |  |         |             |               |  |                           |   |         |      |               |   |                           |  |  |       |   |  |      |  
|Total
  deposits                        |  | $       | 460,301,060 |               |  | 100.0                     | % |         | 2.19 | %             | $ | 361,174,697               |  |  | 100.0 | % |  | 3.89 | %
|                                        |  |         |             |               |  |                           |   |         |      |               |   |                           |  |  |       |   |  |      |  

Interest expense on time certificates of deposits
greater than $100,000 was $4,744,376, $4,673,578 and $4,711,278 for 2008, 2007
and 2006, respectively.

81

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

At December 31, 2008, the scheduled maturities of
total time deposits are as follows:

|                         |  |   |             | 
|------------------------ |  | - | ----------- | 
|Year Ending December 31, |  |   | Total       | 
|                         |  |   |             | 
|2009                     |  | $ | 182,129,346 | 
|2010                     |  |   | 39,327,196  | 
|2011                     |  |   | 27,596,749  | 
|2012                     |  |   | 10,108,239  | 
|2013                     |  |   | 1,664,572   | 
|                         |  |   |             | 
|                         |  | $ | 260,826,102 | 
|                         |  |   |             | 

Brokered deposits, totaled $84,784,013 and $32,082,206
at December 31, 2008 and 2007, respectively, and are included as a
component of certificates of deposit.

NOTE 8: Borrowings

Total Federal Home Loan Bank (FHLB) borrowings were
$183,085,000 and $146,507,500 at December 31, 2008 and 2007. The following
table summarizes the borrowings:

|                           |  |                         |      |         |   |             | 
|-------------------------- |  | ----------------------- | ---- | ------- | - | ----------- | 
|Year Ending
  December 31, |  | Weighted
  Average Rate |      | Balance |  
|                           |  |                         |      |         |  
|2009                       |  |                         | 4.18 | %       | $ | 50,000,000  | 
|2010                       |  |                         | 4.31 | %       |   | 60,090,000  | 
|2011                       |  |                         | 4.00 | %       |   | 43,995,000  | 
|2012                       |  |                         | 3.74 | %       |   | 16,000,000  | 
|2013                       |  |                         | 3.74 | %       |   | 13,000,000  | 
|                           |  |                         |      |         |   |             | 
|                           |  |                         | 3.99 | %       | $ | 183,085,000 | 
|                           |  |                         |      |         |   |             | 

The maximum amount outstanding at any month end for
FHLB borrowings was $183,085,000 and $146,507,500, during 2008 and 2007,
respectively.

The Company maintains collateralized lines of credit
with the FHLB. The Company pledges both loans and investment securities to FHLB
as needed to secure borrowings. Loans with a borrowing capacity of $256,057,843
have been pledged to secure advances of $183,085,000 and investment securities
with a borrowing capacity of $22,082,145 have been pledged to secure advances
of $0. Advances have a fixed rate of interest and bear interest at a
weighted-average rate of 4.14% percent and range in maturity from within
thirteen days to five years. At December 31, 2008 and 2007, the Bank had unused
capacity with the FHLB of $94,699,711 and $106,959,921, respectively. The
Company also has available unused unsecured lines of credit totaling $20.0
million for Federal Funds transactions at December 31, 2008 and 2007.

82

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

On June 27, 2002, the Company issued 30-year,
$10,310,000 junior subordinated debentures. The variable rate debentures
(dividends issued at a quarterly LIBOR rate plus 3.65%, not to exceed 12% prior
to June 30, 2007) matures June 30, 2032 but is callable after
September 30, 2007. The debentures were issued in concurrence with the
Cumulative Trust Preferred Securities (the Trust Preferred Securities) of the
San Rafael Capital Trust I, a wholly owned non-consolidated subsidiary of the
Company. Proceeds of the Trust Preferred Securities were invested in the junior
subordinated debentures issued by the Company. The Company has the right,
assuming no default has occurred, to defer payments of interest on the junior
subordinated debentures at any time for a period not to exceed ten consecutive
semi-annual periods. The debenture is subordinated to the claims of depositors
and other creditors of the Bank. In October 2007, the Company paid off the
$10.3 million of the debentures.

During the second quarter of 2006, the Bank issued a
30-year, $3,093,000 variable rate junior subordinated debentures. The
debentures were issued in concurrence with the Cumulative Trust Preferred
Securities (the Trust Preferred Securities) of the San Rafael Capital Trust
II, a wholly owned non-consolidated subsidiary of the Company. The securities
mature on September 1, 2036. The junior subordinated debentures issued by the
Trust is redeemable in whole or in part on or after September 1, 2011, or at
any time in whole, but not in part, upon the occurrence of certain events. The
interest rate on the debentures is paid quarterly at the three-month LIBOR plus
175 bps. The debenture is subordinated to the claims of depositors and other
creditors of the Bank. As of December 31, 2008, the interest rate on the
junior subordinated debenture was 3.93%.

During the third quarter of 2007, the Bank issued a
30-year, $10,310,000 variable rate junior subordinated debentures. The
debentures were issued in concurrence with the Cumulative Trust Preferred
Securities (the Trust Preferred Securities) of the San Rafael Capital Trust
III, a wholly owned non-consolidated subsidiary of the Company. The proceeds
for this security was used to pay off the debentures issued in 2002. The
security matures on December 1, 2037 but is callable on December 1, 2012. The
interest rate on the debenture is paid quarterly at the three-month LIBOR plus
144 basis points. The debenture is subordinated to the claims of deposits and
other creditors of the Bank. As of December 30, 2008, the interest rate was
3.62%.

The Securities are included in Tier 1 capital for
regulatory capital adequacy determination purposes, subject to certain
limitations. The debentures are subordinated to the claims of depositors and
other creditors of the Bank. The Company fully and unconditionally guarantees
the obligations of the Trust with respect to the issuance of the Securities.

On March 28, 2008, the Company obtained a $5 million
credit facility from Pacific Coast Bankers Bank. The credit facility bears
floating interest rate of three-month LIBOR plus 2.75% and will mature on March
28, 2018. The interest rate resets quarterly and the initial rate is set at a
pretax interest cost of 5.45%. The Company paid a loan fee of .50% of the loan
amount. An initial disbursement of $3 million was received on March 31, 2008.
The Company obtained an additional $2 million in disbursements in June 2008.
The facility is a non-revolving line of credit for the first twelve months with
quarterly interest only payments. After the first twelve months the facility
converts to a nine year amortizing loan with quarterly principal and interest
payments. The facility cannot be paid down below $3 million during the first
twelve months and can be prepaid without penalty after the first twelve months.
On April 14, 2008, the floating interest rate on the $5 million credit facility
that the Company obtained on March 28, 2008 was reduced from a rate of
three-month LIBOR plus 2.75% to three-month LIBOR plus 2.25%.

On June 26, 2008, the Company obtained a $1 million
credit facility from Pacific Coast Bankers Bank. The credit facility bears a
floating interest rate of three-month LIBOR plus 3.00% and will mature on June
26, 2018. The interest rate resets quarterly and the initial rate is set at a
pretax interest cost of 5.81%. The Company paid a loan fee of 0.75% of the loan
amount. The $1 million was disbursed on June 26, 2008. The facility is a
non-revolving line of credit for the first twelve months with quarterly
interest only payments. After the first twelve months the facility converts to
a nine-year amortizing loan with quarterly principal and interest payments. The
facility cannot be paid down below $1 million during the first twelve months
and can be prepaid without penalty after the first twelve months.

83

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The Company used the net proceeds from this
transaction to fund the growth of the Bank and to increase the Banks capital
position. Total interest expense attributable to the long term debt as of
December 31, 2008 was $213,000.

NOTE 9: Benefit Plans

Salary Continuation Plan

The Salary Continuation Plan was established in 2002
for a key employee to provide incentive for the employee to continue the
employees current capacity. The Plan is intended to be an unfunded deferred
compensation plan for a select group of management or highly compensated
employees. In 2003, an additional employee was added to the Plan. The benefit
under this plan for the two key employees would be equal to payments of
$100,000 each per year for a period of 15 years. The first payout commenced on
January 1, 2005 and continues until January 1, 2015 and the second
payout commences on January 1, 2015, or upon retirement if later until January
1, 2030. The Bank has determined the net present value of both obligations to
be $1,210,291 and $1,177,910 for 2008 and 2007, respectively, assuming a
discount rate of seven percent, and has a recorded current year expense of
$75,900 for 2008, 2007 and 2006, respectively.

401(k) Savings Plan

The Company has a 401(k) tax deferred savings
plan which commenced on January 1996 and is available to all employees. Under
the plan, all eligible employees may elect to defer a percentage of their
annual salary, subject to limitations imposed by federal tax law. The Company
matches the employee deferrals at a rate set by the Board of Directors.
Matching contributions vest immediately after 90 days of employment with the
Company. The Company contributed $181,151, $182,465, and $193,695 to the plan
in 2008, 2007 and 2006, respectively and are included in salaries and
benefits.

NOTE 10: Bank Owned Life Insurance

In April 2007, the Bank has purchased life insurance
policies on the lives of certain officers of the Bank ($10,828,936 cash surrender
value at December 31, 2008) to finance employee benefit programs. The
investment in the Bank owned life insurance (BOLI) policies are reported in
other assets at the cash surrender value of the policies. The cash surrender
value includes both the Banks original premiums invested in the life insurance
policies and the accumulated accretion of policy income since inception of the
policies. Income of $441,562 and $387,374 was recognized on the life insurance
policies during 2008 and 2007, respectively, and is reported in other
non-interest income.

84

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 11: Fair Value of Financial Instruments

SFAS No. 107 requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following table presents the
carrying amounts and fair values of financial instruments at December 31,
2008 and 2007. SFAS No. 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.

85

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The estimated fair values of the Companys financial
instruments were as follows:

|                                                          |  |                   |             |            |   |                   |  |            |             |  |   |             | 
|--------------------------------------------------------- |  | ----------------- | ----------- | ---------- | - | ----------------- |  | ---------- | ----------- |  | - | ----------- | 
|                                                          |  | 2008              |             | 2007       |  
|                                                          |  |                   |             |            |  
|Financial assets:                                         |  | Carrying
  Amount |             | Fair Value |   | Carrying
  Amount |  | Fair Value |            
|                                                          |  |                   |             |            |   |                   |  |            |            
|Cash and cash equivalents                                 |  | $                 | 15,919,664  |            | $ | 15,919,664        |  | $          | 5,024,500   |  | $ | 5,024,500   | 
|Investment securities                                     |  |                   | 67,189,306  |            |   | 66,914,220        |  |            | 55,175,384  |  |   | 54,985,662  | 
|Interest-bearing deposits in other financial
institutions |  |                   | 558,034     |            |   | 558,034           |  |            | 627,387     |  |   | 627,387     | 
|Federal Home Loan Bank restricted stock                   |  |                   | 8,652,000   |            |   | 8,652,000         |  |            | 6,885,900   |  |   | 6,885,900   | 
|Pacific Coast Bankers Bank stock                         |  |                   | 50,000      |            |   | 50,000            |  |            | 50,000      |  |   | 50,000      | 
|Loans receivable, net                                     |  |                   | 584,449,682 |            |   | 619,231,000       |  |            | 464,698,933 |  |   | 479,687,447 | 
|Bank Owned Life Insurance                                 |  |                   | 10,828,936  |            |   | 10,828,936        |  |            | 10,387,374  |  |   | 10,387,374  | 
|Accrued interest receivable                               |  |                   | 3,861,854   |            |   | 3,861,854         |  |            | 3,221,249   |  |   | 3,221,249   | 
|                                                          |  |                   |             |            |   |                   |  |            |             |  |   |             | 
|Financial liabilities:                                    |  |                   |             |            |   |                   |  |            |             |  |   |             | 
|Deposits                                                  |  |                   | 460,301,060 |            |   | 470,525,000       |  |            | 361,174,697 |  |   | 363,873,000 | 
|Federal Home Loan Advances                                |  |                   | 183,085,000 |            |   | 189,518,000       |  |            | 146,507,500 |  |   | 149,422,000 | 
|Long Term Debt                                            |  |                   | 6,000,000   |            |   | 6,000,000         |  |            |            |  |   |            | 
|Junior subordinated debentures                            |  |                   | 13,403,000  |            |   | 13,403,000        |  |            | 13,403,000  |  |   | 13,403,000  | 
|Accrued interest payable                                  |  |                   | 116,043     |            |   | 116,043           |  |            | 30,287      |  |   | 30,287      | 

|                                |  |                   |            |                            |   |                   |  |                            |            |  |   |         | 
|------------------------------- |  | ----------------- | ---------- | -------------------------- | - | ----------------- |  | -------------------------- | ---------- |  | - | ------- | 
|                                |  | Notional
  Amount |            | Cost
  to Cede
  or Assume |   | Notional
  Amount |  | Cost
  to Cede
  or Assume |           
|                                |  |                   |            |                            |   |                   |  |                            |           
|Off-Balance Sheet
  Instruments |  |                   |            |                            |   |                   |  |                            |            |  |   |         | 
|Commitments to extend
  credit  |  | $                 | 74,915,000 |                            | $ | 749,150           |  | $                          | 87,694,000 |  | $ | 876,940 | 

The
following methods and assumptions were used by the Company in estimating fair
value disclosures:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash
  and Cash Equivalents:Cash and cash equivalents are valued
  at their carrying amounts because of the short-term nature of these
  investments.                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Investment
  Securities:Investment securities are valued at the quoted
  market prices, where available. If quoted market prices are not available, we
  obtain pricing information from a reputable third-party service provider, who
  may utilize valuation techniques that use current market-based or
  independently sourced parameters, such as bid prices, dealer-quoted prices,
  interest rates, benchmark yield curves, prepayment speeds, and credit
  spreads.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

86

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest-bearing
  Deposits with Other Financial Institutions:The carrying
  amounts of interest-bearing deposits maturing within ninety days approximate
  their fair values. Fair values of other interest-bearing deposits are
  estimated using discounted cash flow analyses based on current rates for
  similar types of deposits.                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Restricted
  Stock:The carrying values of restricted equity securities
  approximate fair values due to redemption provisions of the stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Loans:For variable rate loans that reprice frequently and with no
  significant change in credit risk, fair values are based on carrying amounts.
  The fair values for other loans (for example, fixed rate commercial real
  estate loans, variable rate loans with initial fixed rate periods, and
  variable rate loans at their contractual cap or floor rates) are estimated
  using discounted cash flow analysis, based on interest rates currently being
  offered for loans with similar terms to borrowers of similar credit quality.
  Loan fair value estimates include judgments regarding future expected loss
  experience and risk characteristics. The carrying amount of accrued interest
  receivable approximates its fair value.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Bank
  Owned Life Insurance: The fair value of bank owned life
  insurance is based on the estimated realizable market value of the underlying
  investments and insurance reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Deposits:The fair values disclosed for transaction accounts; for
  example, interest-bearing checking deposits are, by definition, equal to the
  amount payable on demand at the reporting date (that is, their carrying
  amounts). The fair values for certificates of deposit are estimated using a
  discounted cash flow calculation that applies interest rates currently being
  offered on certificates to a schedule of aggregated contractual maturities on
  such time deposits. The carrying amount of accrued interest payable
  approximates fair value.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Borrowings:The fair values of the Companys long term borrowings are
  estimated using discounted cash flow analyses based on the Companys current
  incremental borrowing rates for similar types of borrowing arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Off-balance
  Sheet Instruments: Fair values of loan commitments and
  financial guarantees are based upon fees currently charged to enter similar
  agreements, taking into account the remaining terms of the agreement and the
  counterparties credit standing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

87

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 12: Income Taxes

The current and deferred
components of the income tax provision for each of the three years ended
December 31, are as follows:

|                           |  |      |            |      |   |           |   |   |           | 
|-------------------------- |  | ---- | ---------- | ---- | - | --------- | - | - | --------- | 
|                           |  | 2008 |            | 2007 |   | 2006      |  
|                           |  |      |            |      |   |           |  
|Provision for income taxes |  |      |            |      |   |           |   |   |           | 
|Federal                    |  |      |            |      |   |           |   |   |           | 
|Current                    |  | $    | 3,098,566  |      | $ | 2,147,842 |   | $ | 1,926,892 | 
|Deferred                   |  |      | (1,113,497 | )    |   | (164,247  | ) |   | 170,000   | 
|                           |  |      |            |      |   |           |   |   |           | 
|                           |  |      | 1,985,069  |      |   | 1,983,595 |   |   | 2,096,892 | 
|                           |  |      |            |      |   |           |   |   |           | 
|State                      |  |      |            |      |   |           |   |   |           | 
|Current                    |  |      | 765,334    |      |   | 362,005   |   |   | 302,683   | 
|Deferred                   |  |      | (364,503   | )    |   | (58,753   | ) |   | 3,000     | 
|                           |  |      |            |      |   |           |   |   |           | 
|                           |  |      | 400,831    |      |   | 303,252   |   |   | 305,683   | 
|                           |  |      |            |      |   |           |   |   |           | 
|Total                      |  | $    | 2,385,900  |      | $ | 2,286,847 |   | $ | 2,402,575 | 
|                           |  |      |            |      |   |           |   |   |           | 

The effective tax rate of the Company for 2008, 2007,
and 2006 differs from the current Federal statutory income tax rate as follows:

|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |   |   |           |  |  |      | 
|-------------------------------------------------------- |  | ------ | --------- | ------- |  | ------ | - | ------- | --------- | ------ |  | ------- | - | - | --------- |  |  | ---- | 
|                                                         |  | 2008   |           | 2007    |  | 2006   |  
|                                                         |  |        |           |         |  |        |  
|                                                         |  | Amount |           | Percent |  | Amount |   | Percent |           | Amount |  | Percent |  
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |  
|Federal income tax at statutory rate                     |  | $      | 2,453,000 |         |  | 34.0   |   | $       | 2,209,000 |        |  | 34.0    |   | $ | 2,153,000 |  |  | 34.0 | 
|State franchise taxes, net of Federal income tax benefit |  |        | 248,000   |         |  | 3.4    |   |         | 226,000   |        |  | 3.5     |   |   | 227,000   |  |  | 3.6  | 
|Other, net                                               |  |        | (315,100  | )       |  | (4.3   | ) |         | (148,153  | )      |  | (2.2    | ) |   | 22,575    |  |  | 0.3  | 
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |   |   |           |  |  |      | 
|                                                         |  | $      | 2,385,900 |         |  | 33.1   |   | $       | 2,286,847 |        |  | 35.3    |   | $ | 2,402,575 |  |  | 37.9 | 
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |   |   |           |  |  |      | 

88

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

The following table shows the tax effect of the
Companys cumulative temporary differences as of December 31:

|                                                     |  |                  |       |      |   |       | 
|---------------------------------------------------- |  | ---------------- | ----- | ---- | - | ----- | 
|                                                     |  | 2008             |       | 2007 |  
|                                                     |  |                  |       |      |  
|Deferred Tax Assets                                  |  | (In
  Thousands) |      
|Reserve for loan losses                              |  | $                | 3,331 |      | $ | 2,022 | 
|Accruals                                             |  |                  | 648   |      |   | 600   | 
|State Income Tax                                     |  |                  | 260   |      |   |      | 
|Other                                                |  |                  | 190   |      |   | 253   | 
|                                                     |  |                  |       |      |   |       | 
|Total Deferred Tax Assets                            |  |                  | 4,429 |      |   | 2,875 | 
|                                                     |  |                  |       |      |   |       | 
|Deferred Tax Liabilities                             |  |                  |       |      |   |       | 
|Fixed assets                                         |  |                  | 440   |      |   | 422   | 
|Deferred loan costs                                  |  |                  | 436   |      |   | 383   | 
|Loan fees                                            |  |                  | 248   |      |   | 372   | 
|FHLB Stock Dividends                                 |  |                  | 509   |      |   | 386   | 
|Investment securities valuation
(available-for-sale) |  |                  | 209   |      |   | 138   | 
|Prepaid Expenses                                     |  |                  | 250   |      |   | 242   | 
|Other                                                |  |                  |      |      |   | 2     | 
|                                                     |  |                  |       |      |   |       | 
|Total Deferred Tax Liabilities                       |  |                  | 2,092 |      |   | 1,945 | 
|                                                     |  |                  |       |      |   |       | 
|Net Deferred Tax Assets                              |  | $                | 2,337 |      | $ | 930   | 
|                                                     |  |                  |       |      |   |       | 

Based upon the level of history taxable income and
projections for future taxable income over the periods during which the
deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the benefits of the deferred tax asset.

The Company is subject to federal income tax and
income tax of the state of California. The federal income tax returns for the
years ended December 31, 2008, 2007 and 2006 are open to audit by the federal
authorities and the California state tax returns for the years ended December
31, 2008, 2007, 2006 and 2005 are open to audit by state authorities.

In 2008, the Company had a Franchise Tax Board (FTB)
enterprise zone audit for fiscal years 2004 and 2005. The Company had to pay
$101,530 and $115,505 in taxes owed for 2004 and 2005, respectively, as a
result of this audit. The amounts paid were fully accrued in the income tax
expense. The FTB will be conducting another enterprise zone audit for fiscal
years 2006 and 2007 in 2009.

The Company adopted the provisions of FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, on
January 1, 2007. No adjustments were identified for unrecognized tax benefits
that required an adjustment to the January 1, 2007 beginning tax reserve. The
Company had no tax reserve for uncertain tax positions at December 31, 2007.
The Company does not anticipate providing a reserve for uncertain tax positions
in the next twelve months. The Company has elected to record interest and
penalties related to unrecognized tax benefits in tax expense. During the years
ended December 31, 2008, 2007 and 2006, neither the Bank nor the Company had an
accrual for interest and penalties associated with uncertain tax positions.

89

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 13: Regulatory Capital Requirements

Banks are subject to various regulatory capital
requirements administered by Federal banking agencies, specifically, the
Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on a Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, a Bank
must meet specific capital requirements that involve quantitative measures of a
Banks assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. A Banks capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.

Quantitative measures established by regulation to
ensure capital adequacy requires the Bank maintain certain minimum amounts and
ratios of total and Tier I capital to risk-weighted assets (as defined), and of
Tier 1 capital to average assets (as defined). As the Company is not subject to
Federal Reserve Board (FRB) supervision, management believes the capital requirements
are not applicable, on a consolidated basis, to the Company. Management
believes, as of December 31, 2008, the Bank meets all capital adequacy
requirements to which it is subject.

As of the most recent notification, the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum capital ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Banks category.

The following table sets forth the Banks actual
regulatory capital amounts and ratios (dollars amounts in thousands):

|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|-------------------------------------- |  | ------------------------ | ------ | ------------------------------- |  | ---------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ---- | -
|                                       |  | Actual Capital           |        | For Capital
  Adequacy Purposes |  | To Be Well
  Capitalized Under
  Prompt Corrective
  Action Provisions |  
|                                       |  |                          |        |                                 |  |                                                                        |  
|                                       |  | Amount                   |        | Ratio                           |  | Amount                                                                 |   | Ratio |        | Amount |  | Ratio |  
|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |  
|As of December 31, 2008:               |  | (Dollars
  in Thousands) |       
|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|Total capital to risk-weighted assets  |  | $                        | 62,968 |                                 |  | 10.5                                                                   | % | $     | 48,159 |        |  | 8.0   | % | $ | 60,199 |  |  | 10.0 | %
|Tier 1 capital to risk-weighted assets |  |                          | 55,423 |                                 |  | 9.2                                                                    | % |       | 24,229 |        |  | 4.0   | % |   | 36,343 |  |  | 6.0  | %
|Tier 1 capital to average assets       |  |                          | 55,423 |                                 |  | 8.1                                                                    | % |       | 27,471 |        |  | 4.0   | % |   | 34,339 |  |  | 5.0  | %
|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|As of December 31, 2007:               |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|                                       |  |                          |        |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |      |  
|Total capital to risk-weighted assets  |  | $                        | 49,971 |                                 |  | 10.2                                                                   | % | $     | 39,386 |        |  | 8.0   | % | $ | 49,233 |  |  | 10.0 | %
|Tier 1 capital to risk-weighted assets |  |                          | 45,056 |                                 |  | 9.2                                                                    | % |       | 19,697 |        |  | 4.0   | % |   | 29,545 |  |  | 6.0  | %
|Tier 1 capital to average assets       |  |                          | 45,056 |                                 |  | 8.3                                                                    | % |       | 21,636 |        |  | 4.0   | % |   | 27,044 |  |  | 5.0  | %

California State Banking Law restricts the payment of
dividends. Generally, payment of dividends by the Bank is also limited under
FDIC regulations. The amount that can be paid in any calendar year without
prior approval of the Department of Financial Institutions cannot exceed the
lesser of net profits (as defined) for the last three fiscal years less the
amount of any distributions made during that three year period, or retained
earnings. Under these restrictions, the Bank was able to declare dividends for
the years ended December 31, 2008 and 2007. As of December 31,
2008 and 2007 the Bank had declared and paid cash dividends to the Company of
$1,282,000 and $3,745,000, respectively.

90

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 14: Commitments and Contingencies

The Bank has entered into twelve operating leases with
nonaffiliates for office and branch space which expire through the year 2018.
Monthly payments under these eleven leases total $70,670 with some leases
having scheduled annual adjustments and other leases having annual adjustments
based on the Consumer Price Index.

Future minimum rent payments under the non-cancelable
operating leases are as follows:

|             |  |   |           | 
|------------ |  | - | --------- | 
|Year Ending  |  |   |           | 
|December 31, |  |   |           | 
|             |  |   |           | 
|2009         |  | $ | 848,036   | 
|2010         |  |   | 989,364   | 
|2011         |  |   | 1,018,899 | 
|2012         |  |   | 897,894   | 
|2013         |  |   | 793,444   | 
|Thereafter   |  |   | 1,713,642 | 
|             |  |   |           | 
|             |  | $ | 6,261,279 | 
|             |  |   |           | 

The above information is given for existing lease
commitments and is not a forecast of future rental expense. Rental expenses
included in occupancy expense for the years ended December 31, 2008, 2007
and 2006 were $982,389, $902,219 and $875,569, respectively.

The Bank entered into sublease arrangements for
portions of the leased space. Rental payments received for the years ended
December 31, 2008, 2007 and 2006 were $97,759, $89,754 and $43,608,
respectively.

As permitted or required under California law and to
the maximum extent allowable under that law, the Company has certain
obligations to indemnify its current and former officers and directors for
certain events or occurrences while the officer or director is, or was serving,
at the Companys request in such capacity. These indemnification obligations
are valid as long as the director or officer acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The maximum potential amount of future payments the Company could be required
to make under these indemnification obligations is unlimited; however, the
Company has a director and officer insurance policy that mitigates the
Companys exposure and enables the Company to recover a portion of any future
amounts paid. The Company believes the estimated fair value of these
indemnification obligations is minimal.

91

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 15: Concentration of Credit Risk

The majority of the Banks loan activity is with
customers located in California, primarily in the county of Marin, San
Francisco and Alameda. Although the Bank has a diversified loan portfolio, a
large portion of its loans are for commercial property, and 90.7% of the Banks
loans are secured by real estate. Additionally, the hospitality industry
represents 13.4% of the loan portfolio.

The Banks loan portfolio presents significant
geographic concentration as follows: San Francisco County 27%, Alameda County
12%, Marin County 14%, Sonoma County 10%, Contra Costa County 6%, San Mateo
County 7%, Santa Clara County 4%, Sacramento 3% and other 17%.

NOTE 16: Stock Options

The Company maintains an Employee Stock Option and
Stock Appreciation Plan (the Plan) in which options to purchase shares of the
Companys common stock, or rights to be paid based on the appreciation of the
options in lieu of exercising the options, are granted at the Board of
Directors discretion to certain employees. The Plan was originally established
in 1997 and was replaced by a new Plan in 2006. The 2006 Plan terminates in
2016 and provides for a maximum of 28,890 shares (561,668 after stock splits,
stock dividend and a revision to the original plan) of the Companys common
stock. Options are issued at the fair market value of the stock at the date of
grant. Options generally vest 20% on each anniversary of the grant for five
years or may be subject to vesting over a specific period of time, as
determined by the Board of Directors. Options have a contractual term of ten
years unless a shorter period is determined by the Board of Directors.

The Company also maintains a Non-Employee Directors
Stock Option Plan (the Directors Plan). The Directors Plan was established
in 2003 and terminates in 2013. The Directors Plan provides for the grant of
options for up to 71,690 shares of Company common stock, subject to adjustment
upon certain events, such as stock splits. However, at no time shall the total
number of shares issuable upon exercise of all outstanding options under the
Directors Plan or any other stock option plan of the Company and the total
number of shares provided for a stock bonus or similar plan of the Company
exceed thirty percent (30%) of its then outstanding shares of common stock.
Options are issued at the fair market value of the stock at the date of grant.
The options may vest immediately or may be subject to vesting over a specific
period of time, as determined by the Board of Directors. Each option will
expire 10 years after the date of grant, or if sooner, upon a specified period
after termination of service as a Director.

A summary of activity for the Companys options as of
December 31, 2008, 2007, and 2006 is presented below. Amounts have been
restated to reflect the 7% stock dividend declared in January 2007.

92

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|---------------------------------------- |  | ------------------- | ------- | ----------------------------------- | - | ---------------------------------------- |  | ------------------------------------------------- | ----- |  |  | ---- | 
|                                         |  | December 31, 2008   |        
|                                         |  |                     |        
|                                         |  | Number of 
  Shares |         | Weighted
  average
  Exercise Price |   | Total
  Intrinsic Value
  (in thousands) |  | Average Remaining
  Contractual Term
  (in years) |      
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |      
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|Options outstanding, beginning of period |  |                     | 410,339 |                                     | $ | 12.26                                    |  |                                                   |      |  |  |     | 
|Granted                                  |  |                     | 185,750 |                                     | $ | 11.74                                    |  |                                                   |      |  |  |     | 
|Cancelled/forfeited                      |  |                     | (80,947 | )                                   | $ | 12.42                                    |  |                                                   |      |  |  |     | 
|Exercised                                |  |                     | (5,350  | )                                   | $ | 9.35                                     |  | $                                                 | 12    |  |  |     | 
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|                                        
|Options outstanding, end of year         |  |                     | 509,792 |                                     | $ | 12.09                                    |  | $                                                 | 1,845 |  |  | 7.28 | 
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|Exercisable (vested), end of period      |  |                     | 221,899 |                                     | $ | 11.77                                    |  | $                                                 | 732   |  |  | 5.66 | 
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 

|                                         |  |                     |          |                                     |   |                                          |  |                                                   |     |  |  |      | 
|---------------------------------------- |  | ------------------- | -------- | ----------------------------------- | - | ---------------------------------------- |  | ------------------------------------------------- | --- |  |  | ---- | 
|                                         |  | December 31, 2007   |         
|                                         |  |                     |         
|                                         |  | Number of 
  Shares |          | Weighted
  average
  Exercise Price |   | Total
  Intrinsic Value
  (in thousands) |  | Average Remaining
  Contractual Term
  (in years) |    
|                                         |  |                     |          |                                     |   |                                          |  |                                                   |    
|                                         |  |                     |          |                                     |   |                                          |  |                                                   |     |  |  |      | 
|Options outstanding, beginning of period |  |                     | 510,734  |                                     | $ | 11.36                                    |  |                                                   |    |  |  |     | 
|Granted                                  |  |                     | 80,000   |                                     | $ | 13.44                                    |  |                                                   |    |  |  |     | 
|Cancelled/forfeited                      |  |                     | (126,429 | )                                   | $ | 12.66                                    |  |                                                   |    |  |  |     | 
|Exercised                                |  |                     | (53,966  | )                                   | $ | 4.57                                     |  |                                                   | 351 |  |  |     | 
|                                         |  |                     |          |                                     |   |                                          |  |                                                   |     |  |  |      | 
|                                        
|Options outstanding, end of year         |  |                     | 410,339  |                                     | $ | 12.26                                    |  | $                                                 | 488 |  |  | 7.22 | 
|                                         |  |                     |          |                                     |   |                                          |  |                                                   |     |  |  |      | 
|Exercisable (vested), end of period      |  |                     | 211,392  |                                     | $ | 11.52                                    |  | $                                                 | 95  |  |  | 6.43 | 
|                                         |  |                     |          |                                     |   |                                          |  |                                                   |     |  |  |      | 

93

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|---------------------------------------- |  | ------------------- | ------- | ----------------------------------- | - | ---------------------------------------- |  | ------------------------------------------------- | ----- |  |  | ---- | 
|                                         |  | Number of 
  Shares |         | Weighted
  average
  Exercise Price |   | Total
  Intrinsic Value
  (in thousands) |  | Average Remaining
  Contractual Term
  (in years) |      
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |      
|Options outstanding, beginning of period |  |                     | 541,321 |                                     | $ | 11.19                                    |  |                                                   |      |  |  |     | 
|Granted                                  |  |                     | 39,590  |                                     | $ | 13.45                                    |  |                                                   |      |  |  |     | 
|Cancelled/forfeited                      |  |                     | (46,564 | )                                   | $ | 13.10                                    |  |                                                   |      |  |  |     | 
|Exercised                                |  |                     | (23,613 | )                                   | $ | 7.50                                     |  |                                                   |      |  |  |     | 
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|Options outstanding, end of year         |  |                     | 510,734 |                                     | $ | 11.36                                    |  | $                                                 | 1,117 |  |  | 7.23 | 
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 
|Exercisable (vested), end of period      |  |                     | 259,873 |                                     | $ | 9.99                                     |  | $                                                 | 925   |  |  | 6.36 | 
|                                         |  |                     |         |                                     |   |                                          |  |                                                   |       |  |  |      | 

NOTE 17: Share-Based Compensation

Effective January 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R),
using the modified prospective transition method and, therefore, have not
restated results for prior periods. Share-based compensation expense for all
share-based compensation awards granted after January 1, 2006 is based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R.

The Company recognizes these compensation costs on a
straight-line basis over the requisite service period of the award. SFAS No.
123R requires that an estimate of future forfeitures be made and that
compensation cost be recognized only for shares that are expected to vest. The
Company estimates forfeitures and adjusts annually estimated forfeitures to
actual forfeitures and only recognizes expense for those shares expected to
vest. Certain of the Companys share-based award grants contain terms that
provide for a graded vesting schedule whereby portions of the award vest in
increments over the requisite service period.

The Company determines fair value at grant date using
the Black-Scholes pricing model that takes into account the stock price at the
grant date, exercise price, expected life of the option, volatility of the
underlying stock, expected dividend yield and risk-free interest rate over the
expected life of the option. The weighted average assumptions used in the
pricing model for options granted during 2008, 2007 and 2006 are noted in the
following table. The expected term of options granted is derived from
historical data on employee exercise and post-vesting employment termination
behavior. The risk free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of the
grant. Expected volatility is based on the historical volatility of the
Companys stock.

94

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

|                          |  |                    |   |      |       |      |  |       |   | 
|------------------------- |  | ------------------ | - | ---- | ----- | ---- |  | ----- | - | 
|                          |  | As of December 31, |  
|                          |  | 2008               |   | 2007 |       | 2006 | 
|                          |  |                    |   |      |       |      | 
|Risk-free interest rate   |  | 3.42               | % |      | 4.66  | %    |  | 4.89  | % | 
|Expected dividend yield   |  | 1.50               | % |      | 1.40  | %    |  | 0.82  | % | 
|Expected life in years    |  | 7                  |   |      | 7     |      |  | 7     |   | 
|Expected price volatility |  | 24.24              | % |      | 25.61 | %    |  | 27.18 | % | 

The weighted average grant date fair value of options
granted for 2008, 2007 and 2006 was $4.21, $4.53 and $4.41, respectively. As of
December 31, 2008, 2007, and 2006 there was $1,186,985, $1,067,006 and
$1,022,625, respectively, of total unrecognized compensation cost related to
non-vested share-based compensation arrangements and the weighted average
period over which the cost is expected to be recognized is 3.25, 2.92 and 3.16
years, respectively.

The Black-Scholes option valuation model requires the
input of highly subjective assumptions, including the expected life of the
stock based award and stock price volatility. The assumptions listed above
represent managements best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if other
assumptions had been used, the Companys recorded share-based compensation
expense could have been materially different from that reflected in these
consolidated financial statements. In addition, the Company is required to
estimate the expected forfeitures rate and only recognize expense for those
shares expected to vest. If the Companys actual forfeiture rate is materially
different from the estimate, the share-based compensation expense could be
materially different.

NOTE 18: Shareholders Equity

In January 2007, the Board of Directors declared a 7%
stock dividend payable on February 14, 2007 to shareholders of record on
January 31, 2007. Cash was paid in lieu of issuing fractional shares. Earnings
per share amounts and information with respect to stock options have been
restated for all years presented to reflect the stock dividends.

In 2008, the Company paid cash dividends per common
share of $0.06 in November 2008, $0.055 in May 2008 and $0.05 in January 2008.
In 2007, the Company paid cash dividends per common share of $0.05 in October
2007, $0.045 in July and April 2007. The cash dividends were
recorded as a reduction to retained earnings.

Under SFAS no. 123R which was implemented in January
2006, the fair value of stock options on the grant date is recorded as an
expense on the income statement with a corresponding increase in common stock.
See Note 16 and 17 for further information on accounting for stock options and
share-based payments.

In September 2007, the Company received Board of
Director approval to repurchase up to 5% of the shares of the Companys common
stock in the open market over the next twelve months. The repurchase plan
represents approximately 200,649 shares of the Companys common stock
outstanding as of July 28, 2007. The repurchase program allows the Company
common shares for a period of approximately twelve months from the approval
date in the open market. In 2007, the Company repurchased 196,216 shares at
prices ranging from $11.65 to $13.00 for a total cost of $2,445,627. No shares
were repurchased in 2008. The Company executed these transactions pursuant to
the safe harbor provisions of the SECs Rule 10b-18. All shares repurchased
were made in open market transactions and were part of the publicly announced
repurchase program.

95

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 19: Earnings Per Share (EPS)

Earnings per share of common stock is calculated on
both a basic and diluted basis based on the weighted average number of common
shares outstanding. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. 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 from the issuance of common stock that then shared in earnings.

The following table reconciles the numerator and
denominator of the Basic and Diluted earnings per share computations:

|                                                             |  |                    |           |      |   |           |  |   |           | 
|------------------------------------------------------------ |  | ------------------ | --------- | ---- | - | --------- |  | - | --------- | 
|                                                             |  | As of December 31, |          
|                                                             |  | 2008               |           | 2007 |   | 2006      | 
|                                                             |  |                    |           |      |   |           | 
|Net Income as Reported                                       |  | $                  | 4,828,734 |      | $ | 4,209,114 |  | $ | 3,928,449 | 
|Weighted average shares:                                     |  |                    |           |      |   |           |  |   |           | 
|Basic weighted average number of common shares outstanding   |  |                    | 3,820,535 |      |   | 3,950,541 |  |   | 3,968,130 | 
|Dilutive effect of stock options                             |  |                    | 17,569    |      |   | 1,177     |  |   | 4,299     | 
|                                                             |  |                    |           |      |   |           |  |   |           | 
|Diluted weighted average number of common shares
outstanding |  |                    | 3,838,104 |      |   | 3,951,718 |  |   | 3,972,429 | 
|                                                             |  |                    |           |      |   |           |  |   |           | 
|                                                             |  |                    |           |      |   |           |  |   |           | 
|Net income per common share:                                 |  |                    |           |      |   |           |  |   |           | 
|Basic                                                        |  | $                  | 1.26      |      | $ | 1.07      |  | $ | 0.99      | 
|Diluted                                                      |  | $                  | 1.26      |      | $ | 1.07      |  | $ | 0.99      | 

NOTE 20: Transactions with Related Parties

In the ordinary course of business, the Bank has
granted loans to, and accepted deposits from, certain directors, officers,
principal shareholders and the companies with which they are associated. All
such loans and deposits were made under terms which are consistent with the
Banks normal lending and deposit policies with the exception of the Companys
Employee Loan Program. As part of the Employee Loan Program, all employees,
including executive officers, are eligible to receive mortgage loans at one
percent below the industry prevailing interest rate at the time of loan
origination. All loans to executive officers under the Employee Loan Program
are made by the Bank in compliance with the applicable restrictions of Section
22(h) of the Federal Reserve Act.

96

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

An analysis of the activity with respect to related
party loans during 2008 and 2007 are as follows.

|                                             |  |      |           |      |   |           | 
|-------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                             |  | 2008 |           | 2007 |  
|                                             |  |      |           |      |  
|                                             |  |      |           |      |   |           | 
|Outstanding Balance,
  beginning of the year |  | $    | 2,020,000 |      | $ | 520,000   | 
|Credit granted, including
  renewals         |  |      |          |      |   | 1,500,000 | 
|Repayments                                   |  |      |          |      |   |          | 
|                                             |  |      |           |      |   |           | 
|Outstanding Balance, end
  of year           |  | $    | 2,020,000 |      | $ | 2,020,000 | 
|                                             |  |      |           |      |   |           | 

The Bank accepts deposits from shareholders, directors
and employees in the normal course of business, and the terms are comparable to
those with non-affiliated parties. At December 31, 2008 and 2007, the Bank
held deposits from related parties of $549,770 and $1,102,079, respectively.

NOTE 21: Financial Instruments with Off-Balance Sheet Risk

The Bank makes commitments to extend credit in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit in the form of loans
or through lines of credit. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.

The Bank is exposed to credit losses in the event of
non performance by the borrower, in the contract amount of the commitment. The
Bank uses the same credit policies in making commitments as it does for
on-balance sheet instruments and evaluates each customers creditworthiness on
a case by case basis. The amount of collateral obtained if deemed necessary by
the Bank is based on managements credit evaluation of the borrower. Collateral
held varies but primarily consists of residential and commercial property.

As of December 31, 2008, the Company has no outstanding
standby Letters of Credit, approximately $51,726,000 in commitments to fund
commercial real estate, construction, and land development loans, $9,071,000 in
commitments to fund revolving, open ended lines secured by 1-4 family
residential properties, and $14,118,000 in other unused commitments. As of
December 31, 2007, the Company has no outstanding standby Letters of Credit,
approximately $26,475,000 in commitments to fund commercial real estate,
construction, and land development loans, $23,806,000 in commitments to fund
revolving, open ended lines secured by 1-4 family residential properties, and
$37,413,000 in other unused commitments.

The Bank has set aside an allowance for losses in the
amount of $70,601 and $72,647 as of December 31, 2008 and 2007, respectively,
for these commitments, which is recorded in accrued interest payable and other
liabilities.

97

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 22: Fair Value Measurement

On January 1, 2008, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 157 (SFAS 157), Fair Value
Measurements, with the exception of the requirements that pertain to
nonfinancial assets and nonfinancial liabilities covered by FASB Staff Position
(FSP) No. SFAS 157-2. SFAS 157 defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure requirements for fair
value measurements. FSP SFAS 157-2 delays the effective date of the FAS 157
requirements for nonfinancial assets and nonfinancial liabilities to fiscal
years beginning after November 15, 2008. There was no cumulative effect
adjustment to beginning retained earnings recorded upon adoption and no impact
on the financial statements in 2008.

Fair Value Hierarchy

In accordance with SFAS 157, the Company must group
its assets and liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1  Valuation is based upon
  quoted market prices (unadjusted) in active markets for identical assets or
  liabilities in active exchange markets, such as the New York Stock Exchange.
  Level 1 also includes U.S. Treasury and federal agency securities, which are
  traded by dealers or brokers in active markets. Valuations are obtained from
  readily available pricing sources for market transactions involving identical
  assets or liabilities.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Level 2  Valuation is based upon
  quoted prices for similar instruments in active markets, quoted prices for
  identical or similar instruments in markets that are not active, and
  model-based valuation techniques for which all significant assumptions are
  observable in the market. Level 2 securities include mortgage-backed
  securities, municipal bonds, collateralized mortgage obligations and impaired
  loans.                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Level 3  Valuation is generated
  from model-based techniques that use significant assumptions not observable
  in the market. These unobservable assumptions reflect the Companys estimates
  of assumptions that market participants would use in pricing the asset or
  liability. Valuation techniques include use of option pricing models, discounted
  cash flow models and similar techniques.                                                             

The following table presents information about the
Companys assets and liabilities measured at fair value on a recurring and
nonrecurring basis as of December 31, 2008. Recurring assets are initially
measured at fair value and are required to be remeasured at fair value in the
financial statements at each reporting date. Assets measured on a nonrecurring
basis are assets that, as a result of an event or circumstance, were required
to be remeasured at fair value after initial recognition in the financial
statements at some time during the reporting period.

98

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|----------------------------------------------------------- |  | ----------------- | ---------- | ----------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------- |  | --------------------------------------------- | ---------- |  | - | -
|                                                            |  |                   |            |                                                                   | Fair Value Measurements
  at December 31, 2008 Using
|                                                            |  |                   |            |                                                                   |                                                     
|Description                                                 |  | December 31, 2008 |            | Quoted Prices in Active
  Markets for Idential Assets
  (Level 1) |                                                      | Significant Other
  Observable Inputs
  (Level 2) |  | Significant Unobservable
  Inputs
  (Level 3)
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                              
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                              
|Assets and liabilities
  measured on a recurring basis:     |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|Available-for-sale
  securities                             |  | $                 | 56,415,727 |                                                                   | $                                                    |                                                  |  | $                                             | 56,415,727 |  | $ | 
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|                                                            |  | $                 | 56,415,727 |                                                                   | $                                                    |                                                  |  | $                                             | 56,415,727 |  | $ | 
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|Assets and liabilities
  measured on a non recurring basis: |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|Impaired loans                                              |  | $                 | 16,758,314 |                                                                   | $                                                    |                                                  |  | $                                             | 16,758,314 |  | $ | 
|Other real estate owned                                     |  |                   | 417,207    |                                                                   |                                                      |                                                  |  |                                               | 417,207    |  |   | 
|Derivative financial
  liabilities                          |  |                   | 449,889    |                                                                   |                                                      |                                                  |  |                                               | 449,889    |  |   | 
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  
|                                                            |  | $                 | 17,625,410 |                                                                   | $                                                    |                                                  |  | $                                             | 17,625,410 |  | $ | 
|                                                            |  |                   |            |                                                                   |                                                      |                                                   |  |                                               |            |  |   |  

The following method was
used to estimate the fair value of each class of financial instrument above:

Securities  Fair values for available-for-sale
securities are based on quoted market prices when available or through the use
of alternative approaches, such as matrix or model pricing or indicators from
market makers, when market quotes are not readily accessible or available.

Impaired loans  An impaired loan is measured as a
practical expedient, at the loans carrying value, observable market price or
the fair market value of the collateral if the loan is collateral dependent.

Derivatives The fair value of derivative financial
instruments is based on the income approach using observable Level 2 market
inputs, reflecting market expectations of future interest rates as of the measurement
date. Standard valuation techniques are used to calculate the present value of
the future expected cash flows assuming an orderly transaction. Valuation
adjustments may be made to reflect both the Banks own credit risk and the
counterpartys credit quality in determining the fair value of the derivatives.
Level 2 inputs for the valuations are limited to observable market prices for
London Interbank Offered Rate (LIBOR) cash rates (for the very short term),
quoted prices for LIBOR futures contracts (two years and less), observable
market prices for LIBOR swap rates (at commonly quoted intervals from two years
to beyond the derivatives maturity), and 1-month and 3-month LIBOR basis
spreads at commonly quoted intervals. Mid-market pricing of the inputs is used
as a practical expedient in the fair value measurements. Key inputs for
interest rate valuations are used to project spot rates at resets specified by
each swap, as well as to discount those future cash flows to present value at
measurement date. When the value of any collateral placed with counterparties
is less than the interest rate derivative liability, the interest rate
liability position is further discounted to reflect the potential credit risk
to counterparties. The Bank has used the spread over LIBOR on the Federal Home
Loan Bank San Francisco (FHLB) fixed-rate credit advance with the duration
corresponding to the swaps to calculate this credit-risk related discount of
future cash flows.

99

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

Other real estate owned  Other real estate owned represents real
estate which the Company has taken control of in partial or full satisfaction
of loans. At the time of foreclosure, other real estate owned is recorded at
the fair value of the real estate less costs to sell, which becomes the
propertys new basis.

NOTE 23: Derivative Financial Instruments and Hedging
Activities

Interest rate swaps are used
from time to time as part of the Banks asset/liability risk management
strategy. Swaps are agreements in which the Bank and another party agree to
exchange interest payments (e.g., fixed-rate for variable-rate payments)
computed on a notional principal amount. Such modification of the interest rate
characteristics of the debenture protects the Bank against an adverse effect on
earnings and the net interest margin due to fluctuating interest rates. The
credit risk associated with swap transactions is the risk of default by the
counterparty. To minimize this risk, the Bank enters into interest rate
agreements only with highly rated counterparties that management believes to be
creditworthy. The notional amounts of these agreements do not represent amounts
exchanged by the parties and thus, are not a measure of the potential loss
exposure.

In October 2008, the Bank
entered into an interest rate swap contract with a notional amount of $13
million to hedge the interest rate risk associated with the $13 million of the
variable rate junior subordinated debentures. The interest rate swaps held by
the Bank are scheduled to mature in December 2013. The swap effectively
converts the debt from variable rate to fixed rate and qualifies for cash flow
hedge accounting under SFAS No. 133. The fair value of this interest rate swap
contract amounted to a payable of approximately $450,000 at December 31, 2008
and was reported in other liabilities on the consolidated balance sheet. The
effective portion of changes in fair value of the swap is recorded in other
comprehensive income and subsequently reclassified into interest expense as a
yield adjustment in the same period in which the related interest on the
variable rate debentures affect earnings. The ineffective portion of changes in
fair value is recognized directly in earnings as interest expense. There was no
ineffectiveness recorded in interest income as of December 31, 2008.

100

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 24: Subsequent Events

On January 21, 2009, the
Board of Directors of the Company declared a $0.06 per share cash dividend,
payable on February 27, 2009, to shareholders of record as of February 13,
2009.

October 28, 2008, the Board
of Directors of the Company elected to apply to the Board of Governors of the
Federal Reserve System to become a Bank Holding Company. On the same date, the
Board of Directors of the Bank elected to apply to the California Department of
Financial Institutions and the Federal Deposit Insurance Corporation (FDIC)
to convert the Banks charter from a California Industrial Banking Company to a
California State Commercial Bank. On January 8, 2009, the Company received the
written consent from a majority of its shareholders to amend its Articles of
Incorporation.

On January 30, 2009, the
Company filed amended Articles of Incorporation for the Bank with the Secretary
of State of the State of California whereby the Bank converted from a
California Industrial Bank to a California State Chartered Commercial Bank. On
January 30, 2009, the Company also notified the Federal Reserve Bank of San
Francisco and the FDIC that the amendment to the Banks Articles of
Incorporation amending the purpose clause to provide that the Bank is
authorized to conduct a commercial banking business was filed with the
California Secretary of State.

Accordingly as of January
30, 2009, the Bank is now a commercial bank and the transaction by which the
Company is to become a bank holding company was consummated as of that date.

101

---



TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

NOTE 25: Condensed Financial Information of Tamalpais Bancorp
(Parent Company)

|                                                   |  |      |            |      |   |            |   |   |            |  
|-------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                   |  | 2008 |            | 2007 |   | 2006       |  
|                                                   |  |      |            |      |   |            |  
|                                                  
|Balance Sheets                                     |  |      |            |      |   |            |   |   |            |  
|                                                  
|Assets                                             |  |      |            |      |   |            |   |   |            |  
|Cash and cash equivalents                          |  | $    | 148,878    |      | $ | 111,166    |   | $ | 123,420    |  
|Investment in subsidiary                           |  |      | 56,165,232 |      |   | 45,781,157 |   |   | 43,443,282 |  
|Investment in nonconsolidated subsidiary           |  |      | 407,632    |      |   | 408,961    |   |   | 403,552    |  
|Prepaids and other assets                          |  |      | 235,891    |      |   | 144,280    |   |   | 536,759    |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Total Assets                                       |  | $    | 56,957,633 |      | $ | 46,445,564 |   | $ | 44,507,013 |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Liabilities                                        |  |      |            |      |   |            |   |   |            |  
|Junior subordinated debentures                     |  |      | 13,403,000 |      |   | 13,403,000 |   |   | 13,403,000 |  
|Other long term debt                               |  |      | 6,000,000  |      |   |           |   |   |           |  
|Accrued interest payable and other
liabilities     |  |      | 181,300    |      |   | 110,027    |   |   | 223,153    |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Total Liabilities                                  |  |      | 19,584,300 |      |   | 13,513,027 |   |   | 13,626,153 |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Stockholders Equity                               |  |      |            |      |   |            |   |   |            |  
|Common stock                                       |  |      | 12,976,962 |      |   | 8,840,540  |   |   | 10,766,809 |  
|Retained earnings                                  |  |      | 24,082,472 |      |   | 23,884,813 |   |   | 20,236,571 |  
|Accumulated other comprehensive (loss)             |  |      | 313,899    |      |   | 207,184    |   |   | (122,520   | )
|                                                   |  |      |            |      |   |            |   |   |            |  
|Total Stockholders Equity                         |  |      | 37,373,333 |      |   | 32,932,537 |   |   | 30,880,860 |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Total Liabilities and Stockholders
Equity         |  | $    | 56,957,633 |      | $ | 46,445,564 |   | $ | 44,507,013 |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|                                                  
|Statements of Income                               |  |      |            |      |   |            |   |   |            |  
|                                                  
|Equity in undistributed income of subsidiaries     |  | $    | 5,854,101  |      | $ | 5,471,496  |   | $ | 5,118,465  |  
|Other income                                       |  |      | 18,837     |      |   | 41,130     |   |   | 31,057     |  
|Interest expense on junior subordinated debentures |  |      | (635,787   | )    |   | (1,123,231 | ) |   | (1,040,962 | )
|Interest expense on long term debt                 |  |      | (210,282   | )    |   |           |   |   |           |  
|Other expenses                                     |  |      | (933,135   | )    |   | (1,095,434 | ) |   | (1,078,037 | )
|                                                   |  |      |            |      |   |            |   |   |            |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Income Before Income Taxes                         |  |      | 4,093,734  |      |   | 3,293,961  |   |   | 3,030,523  |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Income Tax Benefit                                 |  |      | 735,000    |      |   | 915,153    |   |   | 897,926    |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|                                                   |  |      |            |      |   |            |   |   |            |  
|Net Income                                         |  | $    | 4,828,734  |      | $ | 4,209,114  |   | $ | 3,928,449  |  
|                                                   |  |      |            |      |   |            |   |   |            |  

102

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TAMALPAIS
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2008, 2007 AND 2006

|                                                                                           |  |      |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                           |  | 2008 |            | 2007 |   | 2006       |  
|                                                                                           |  |      |            |      |   |            |  
|                                                                                          
|Statements of Cash Flows                                                                   |  |      |            |      |   |            |   |   |            |  
|                                                                                          
|Cash Flows from Operating Activities                                                       |  |      |            |      |   |            |   |   |            |  
|Net income                                                                                 |  | $    | 4,828,734  |      | $ | 4,209,114  |   | $ | 3,928,449  |  
|Adjustments to reconcile net income to net
  cash provided/(used) by operating activities: |  |      |            |      |   |            |   |   |            |  
|Equity in undistributed income of
  Subsidiaries                                           |  |      | (5,854,101 | )    |   | (5,471,496 | ) |   | (5,118,465 | )
|Share-based compensation                                                                   |  |      | 73,517     |      |   | 114,545    |   |   | 90,146     |  
|Net change in assets and liabilities                                                       |  |      | 472,311    |      |   | 504,934    |   |   | (179,056   | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net cash used by operating activities                                                      |  |      | (479,539   | )    |   | (642,903   | ) |   | (1,278,926 | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Cash Flows from Investing Activities                                                       |  |      |            |      |   |            |   |   |            |  
|Capital contributions to Subsidiaries                                                      |  |      | (5,983,821 | )    |   | (345,990   | ) |   | (3,086,000 | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net cash used by investing activities                                                      |  |      | (5,983,821 | )    |   | (345,990   | ) |   | (3,086,000 | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Cash Flows from Financing Activities                                                       |  |      |            |      |   |            |   |   |            |  
|Repurchase of Stock                                                                        |  |      |           |      |   | (2,455,627 | ) |   |           |  
|Issuance of junior subordinated
debentures                                                 |  |      |           |      |   |           |   |   | 3,093,000  |  
|Issuance of debt                                                                           |  |      | 6,000,000  |      |   |           |   |   |           |  
|Dividends received from Bank                                                               |  |      | 1,282,000  |      |   | 3,745,000  |   |   | 1,585,000  |  
|Cash dividends paid to shareholders                                                        |  |      | (830,928   | )    |   | (560,872   | ) |   | (591,713   | )
|Stock options exercised                                                                    |  |      | 50,000     |      |   | 248,138    |   |   | 177,128    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net cash provided by financing
activities                                                  |  |      | 6,501,072  |      |   | 976,639    |   |   | 4,263,415  |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net (Decrease)/Increase in Cash and Cash
  Equivalents                                     |  |      | 37,712     |      |   | (12,254    | ) |   | (101,511   | )
|Cash and Cash Equivalents, Beginning of
  Year                                             |  |      | 111,166    |      |   | 123,420    |   |   | 224,931    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Cash and Cash Equivalents, End of Year                                                     |  | $    | 148,878    |      | $ | 111,166    |   | $ | 123,420    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Supplemental Cash Flow Information                                                         |  |      |            |      |   |            |   |   |            |  
|Cash paid during the year for:                                                             |  |      |            |      |   |            |   |   |            |  
|Interest                                                                                   |  | $    | 597,062    |      | $ | 1,049,121  |   | $ | 1,022,612  |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Non-Cash Investing Activities                                                              |  |      |            |      |   |            |   |   |            |  
|Net change in accumulated other
  comprehensive income                                     |  | $    | 106,715    |      | $ | 329,704    |   | $ | 139,925    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  

103

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ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Companys management carried out an evaluation,
under the supervision and with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2008, pursuant to Exchange Act
Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures as of December 31, 2008 are effective in timely alerting them
to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys periodic filings under
the Exchange Act.

The Companys management, including the CEO and CFO,
does not expect that the Companys Disclosure Controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control systems are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

(b) Changes in Disclosure Controls and Procedures

For the year ended December 31, 2008, there have
not been any significant changes in the Companys internal controls or in other
factors that could significantly affect disclosure or financial reporting
controls subsequent to the date of their evaluation. The Company is not aware
of any significant deficiencies or material weaknesses; therefore, no
corrective actions were taken.

ITEM 9A (T)
 CONTROLS AND PROCEDURES

See Managements Report on Internal Control Over
Financial Reporting in this Annual Report.

ITEM 9B  OTHER INFORMATION

A Form 8-K was filed during the fourth quarter of this
fiscal year to report that Tamalpais Bancorp elected to apply to the Board of
Governors of the Federal Reserve System to become a Bank Holding Company.
Additionally, the Board of Directors of Tamalpais Bank elected to apply to the
California Department of Financial Institution and the FDIC to convert the
Banks charter from a California Industrial Banking Company to a California
State Commercial Bank.

104

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On January 30, 2009, the Company filed amended
Articles of Incorporation for the Bank with the Secretary of State of the State
of California whereby the Bank converted from a California Industrial Bank to a
California State Chartered Commercial Bank. A copy of the amendment to the
Articles of Incorporation is attached as Exhibit 3.4 to this document.

PART III

ITEM 10  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE

The information required in response to this item is
incorporated by reference from the information contained in the sections
captioned Nominees for Director, Executive Officers Who Are Not Directors
and Executive Compensation  Compliance with Section 16(a) of the Securities
Exchange Act of 1934, in the Registrants Proxy Statement for the 2009 Annual
Meeting of Shareholders (the Proxy Statement) which will be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934.

ITEM 11  EXECUTIVE COMPENSATION

The information in response to this item is
incorporated by reference from the information contained in the section
captioned Executive Compensation in the Registrants Proxy Statement for the
2009 Annual Meeting which will be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required in response to this item is
incorporated by reference from the information contained in the section
captioned Beneficial Ownership of the Common Stock in the Registrants Proxy
Statement for the 2009 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934.

ITEM 13  CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE

The information required in response to this item is
incorporated by reference from the information contained in the section
captioned Certain Transactions in the Registrants Proxy Statement for the
2009 Annual Meeting which will be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934.

ITEM 14  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this item is
incorporated by reference from the information contained in the section
captioned Ratification of the Selection of Independent Auditors in the
Registrants Proxy Statement for the 2009 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A of the Securities Exchange Act of
1934.

PART IV

ITEM 15  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

105

---



See Index to Exhibits of this Annual Report on
Form 10-K.

INDEX TO EXHIBITS

|                 |  |                                                                                                                                                                      
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number |  | Description of Exhibit                                                                                                                                               
|                 |  |                                                                                                                                                                      
|                 |  |                                                                                                                                                                      
|3.1              |  | Articles of Incorporation of Bancorp (1)                                                                                                                             
|                 |  |                                                                                                                                                                      
|3.2              |  | Bylaws of the Bancorp (9)                                                                                                                                            
|                 |  |                                                                                                                                                                      
|3.3              |  | Amendment and Restated Bylaws of the Bancorp (7)                                                                                                                     
|                 |  |                                                                                                                                                                      
|3.4              |  | Amendment to Articles of Incorporation                                                                                                                               
|                 |  |                                                                                                                                                                      
|4.1              |  | Amended and Restated Trust Agreement (8)                                                                                                                             
|                 |  |                                                                                                                                                                      
|4.2              |  | Trust Preferred Securities Guarantee Agreement (1)                                                                                                                   
|                 |  |                                                                                                                                                                      
|4.3              |  | Floating Rate Junior Subordinated Deferrable
  Interest Debenture of Tamalpais Bancorp (1)                                                                           
|                 |  |                                                                                                                                                                      
|4.4              |  | Form of Certificate Evidencing Capital Securities of
  San Rafael Trust II (1)                                                                                       
|                 |  |                                                                                                                                                                      
|4.5              |  | Form of Common Security Certificate of San Rafael
  Trust II (2)                                                                                                     
|                 |  |                                                                                                                                                                      
|4.6              |  | Amended and Restated Trust Agreement (6)                                                                                                                             
|                 |  |                                                                                                                                                                      
|4.7              |  | Trust Preferred Securities Guarantee Agreement (6)                                                                                                                   
|                 |  |                                                                                                                                                                      
|4.8              |  | Floating Rate Junior Subordinated Deferrable
  Interest Debenture of Tamalpais Bancorp (6)                                                                           
|                 |  |                                                                                                                                                                      
|4.9              |  | Form of Certificate Evidencing Capital Securities of
  San Rafael Trust II (6)                                                                                       
|                 |  |                                                                                                                                                                      
|4.10             |  | Form of Common Security Certificate of San Rafael
  Trust II (6)                                                                                                     
|                 |  |                                                                                                                                                                      
|4.11             |  | Amended and Restated Trust Agreement dated 7-25-07
  (9)                                                                                                             
|                 |  |                                                                                                                                                                      
|4.12             |  | Trust Preferred Securities Guarantee Agreement dated
  7-25-07 (9)                                                                                                   
|                 |  |                                                                                                                                                                      
|4.13             |  | Floating Rate Junior Subordinated Deferrable
  Interest Debenture of Tamalpais Bancorp dated 7-25-07 (9)                                                             
|                 |  |                                                                                                                                                                      
|4.14             |  | Form of Certificate Evidencing Capital Securities of
  San Rafael Trust III dated 7-25-07 (9)                                                                        
|                 |  |                                                                                                                                                                      
|4.15             |  | Form of Common Security Certificate of San Rafael
  Trust III dated 7-25-07 (9)                                                                                      
|                 |  |                                                                                                                                                                      
|10.1             |  | Tamalpais Bancorp 2006 Employee Stock Option and
  Stock Appreciation Rights Plan (3) *                                                                              
|                 |  |                                                                                                                                                                      
|10.2             |  | Salary Continuation Plan for Mark Garwood (1)*                                                                                                                       
|                 |  |                                                                                                                                                                      
|10.3             |  | Tamalpais Bank Defined Contribution Plan; Tamalpais
  Bank Defined Contribution Trust; EGTRRA Amendment for 401(k) Plans; Defined
  Contribution Plan Amendment (1) *

106

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|      |  |                                                                                                                                      
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------
|10.4  |  | Tamalpais Bancorp 2003 Non-Employee Directors Stock
  Option Plan and Agreement (2)*                                                 
|      |  |                                                                                                                                      
|10.5  |  | Agreement signed on July 19, 2005 between TWA and
  Kit M. Cole (4)                                                                  
|      |  |                                                                                                                                      
|10.7  |  | Tiburon lease agreement between Tamalpais Bank and
  Main Street Properties (3)                                                      
|      |  |                                                                                                                                      
|10.8  |  | Las Gallinas lease agreement between Tamalpais Bank
  and Citibank (4)                                                               
|      |  |                                                                                                                                      
|10.9  |  | Tamalpais Bancorp 2006 Employee Stock Option and
  Stock Appreciation Plan (5)                                                       
|      |  |                                                                                                                                      
|10.10 |  | Bank-Owned Life Insurance (BOLI) Program (8)                                                                                         
|      |  |                                                                                                                                      
|10.11 |  | 2008 Executive Bonuses *                                                                                                             
|      |  |                                                                                                                                      
|10.12 |  | Agreement with Pacific Coast Bankers Bank, as
  amended (10)                                                                         
|      |  |                                                                                                                                      
|10.13 |  | Amendment to Mark Garwoods SERP Agreement (11)                                                                                      
|      |  |                                                                                                                                      
|10.14 |  | Approval of Executive Severance Plan                                                                                                 
|      |  |                                                                                                                                      
|11    |  | Earnings Per Share (See Note 18 to Consolidated
  Financial Statements of this report)                                               
|      |  |                                                                                                                                      
|14    |  | Code of Ethics                                                                                                                       
|      |  |                                                                                                                                      
|21    |  | Subsidiaries of the Bancorp: Tamalpais Bank; San
  Rafael Capital Trust II; San Rafael Capital Trust III; Tamalpais Wealth
  Advisors
|      |  |                                                                                                                                      
|23    |  | Consent of Independent Registered Public Accounting
  Firm                                                                           
|      |  |                                                                                                                                      
|24    |  | Power of Attorney                                                                                                                    
|      |  |                                                                                                                                      
|31.1  |  | Certification of Principal Executive Officer
  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                             
|      |  |                                                                                                                                      
|31.2  |  | Certification of Principal Financial Officer
  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                             
|      |  |                                                                                                                                      
|32.1  |  | Certificate of Principal
  Executive Officer Pursuant to 18 U.S.C. Section 1350                                                      
|      |  |                                                                                                                                      
|32.2  |  | Certificate of Principal
  Financial Officer Pursuant to 18 U.S.C. Section 1350                                                      

|    |                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Employment Agreement or Compensation Plan.                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                       
|(1) | Attached as Exhibits 3.1, 3.2, 4.1, 4.2, 4.3, 4.4,
  10.2, 10.3, and 10.4, respectively, to Registration Statement
  No. 333-105991 filed by Tamalpais Bancorp with the Securities and
  Exchange Commission under the Securities Act of 1933, and incorporated herein
  by reference.
|    |                                                                                                                                                                                                                                                                                       
|(2) | Attached as Exhibits 99.1 and 99.2, respectively to
  Registration Statement No. 333-132197 on Form S-8 filed by Tamalpais Bancorp
  with the Securities and Exchange Commission, and incorporated herein by
  reference.                                                             

107

---



|     |                                                                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3)  | Attached as Exhibit 10.1 to Registration Statement
  No. 333-135143 filed by Tamalpais Bancorp with the SEC at Incorporation by
  reference.                                                                      
|     |                                                                                                                                                                                                                   
|(4)  | Attached as Exhibits 10.1 and 10.2 to the Quarterly
  Report on Form 10-Q for the quarter ended June 30, 2005 filed by Tamalpais
  Bancorp with the Securities and Exchange Commission                            
|     |                                                                                                                                                                                                                   
|(5)  | Attached as Exhibit 10.1 to Registration Statement
  No. 333-135143 filed by Tamalpais Bancorp with the SEC at Incorporation by
  reference.                                                                      
|     |                                                                                                                                                                                                                   
|(6)  | Attached as Exhibits 4.1, 4.2, 4.3, 4.4 and 4.5,
  respectively to the Quarterly Report on Form 10-Q for Quarter ended June 30,
  2006 filed by Tamalpais Bancorp with Securities and Exchange Commission.        
|     |                                                                                                                                                                                                                   
|(7)  | Attached as Exhibit 3.2 to the Quarterly Report on
  Form 10-Q for the quarter ended June 30, 2007 filed by Tamalpais Bancorp with
  the Securities and Exchange Commission.                                      
|     |                                                                                                                                                                                                                   
|(8)  | Attached as Exhibit 10.1 to the Quarterly Report on
  Form 10-Q for the quarter ended March 31, 2007 filed by Tamalpais Bancorp
  with the Securities and Exchange Commission.                                    
|     |                                                                                                                                                                                                                   
|(9)  | Attached as Exhibits 3.2, 4.1, 4.2, 4.3, 4.4 and
  4.5, respectively, to the Quarterly Report on Form 10-Q for Quarter ended
  June 30, 2007 filed by Tamalpais Bancorp with Securities and Exchange
  Commission.
|     |                                                                                                                                                                                                                   
|(10) | Attached as Exhibit 10.1 to the Quarterly Report on
  Form 10-Q for the quarter ended June 30, 2008 and September 30, 2008 filed by
  Tamalpais Bancorp with the Securities and Exchange Commission               
|     |                                                                                                                                                                                                                   
|(11) | Attached as Exhibit 10.2 to the Quarterly Report on
  Form 10-Q for the quarter ended September 30, 2008 filed by Tamalpais Bancorp
  with the Securities and Exchange Commission                                 

108

---



SIGNATURES

In accordance with the requirements of Section 13
of the Securities Exchange Act of 1934, Tamalpais Bancorp has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                                |  |                                
|------------------------------- |  | -------------------------------
|By: /s/ MARK GARWOOD            |  | By: /s/ MICHAEL MOULTON        
|                                |  |                                
|Chief
  Executive Officer       |  | Chief
  Financial Officer      
|(Principal
  Executive Officer) |  | (Principal
  Financial Officer)
|March 27, 2009                  |  | March 27, 2009                 

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.

|                         |  |                                                                      |  |               
|------------------------ |  | -------------------------------------------------------------------- |  | --------------
|Signature                |  | Title                                                                |  | Date          
|                         |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ CAROLYN B. HORAN     |  | Director and Chairman of the Board                                   |  | March 27, 2009
|                         |  |                                                                      |  |               
|Carolyn B. Horan         |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ RICHARD E. SMITH     |  | Director                                                             |  | March 27, 2009
|                         |  |                                                                      |  |               
|Richard E. Smith         |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ EVELYN S. DILSALVER  |  | Director                                                             |  | March 27, 2009
|                         |  |                                                                      |  |               
|Evelyn S. Dilsalver      |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ ALLAN G. BORTEL      |  | Director                                                             |  | March 27, 2009
|                         |  |                                                                      |  |               
|Allan G. Bortel          |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ PAUL DAVID SCHAEFFER |  | Director                                                             |  | March 27, 2009
|                         |  |                                                                      |  |               
|Paul David Schaeffer     |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ MARK GARWOOD         |  | Director and Chief Executive Officer (Principal
  Executive Officer) |  | March 27, 2009
|                         |  |                                                                      |  |               
|Mark Garwood             |  |                                                                      |  |               
|                         |  |                                                                      |  |               
|/s/ LARRY E. ROSENBERGER |  | Director                                                             |  | March 27, 2009
|                         |  |                                                                      |  |               
|Larry Rosenberger        |  |                                                                      |  |               

109

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