UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549


FORM
10-K


(Mark
One)


xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year endedDecember
31,
2009
or





 ̈TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from    to





000-50974


(Commission
File Number)




Bridge Capital
Holdings


(Exact
name of registrant as specified in its charter)





California
                80-0123855(State
      or other jurisdiction of
                (I.R.S.
      Employer Identification Number)incorporation
      or organization)





55 Almaden Boulevard, San
Jose, CA   95113


(Address of principal executive offices,
Zip Code)





Registrant’s
telephone number, including area code:  (408) 423-8500





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





Name
      of each exchangeTitle of each class
                  on which registeredCommon
      Stock, no par value
                  Nasdaq
      Capital Market





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


Title of each
class


None





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




Bridge
Capital Holdings (1) has filed all reports required to be filed by section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days.


Yes x
No ̈.





Indicate
by checkmark if disclosure of delinquent filers pursuant 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.   ̈





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
the definitions of “large accelerated filer” and “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):


Large
      accelerated filer  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer  ̈
            Smaller reporting companyx(Do
      not check if a smaller reporting company)





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





The
aggregate market value of the voting stock held by non-affiliates of Bridge
Capital Holdings was $35,049,225 as of June 30, 2009.





As of
March 1, 2010, Bridge Capital Holdings had 7,098,164 shares of common stock
outstanding.





Documents
incorporated by reference: The Company’s Proxy Statement for its 2010 Annual
Meeting of Shareholders is incorporated herein by reference in Part III, Items
10 through 14.







Forward-looking
Statements





IN ADDITION TO THE HISTORICAL
INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING INFORMATION
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, AND WHICH ARE
SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS. THE READER OF THIS
ANNUAL REPORT SHOULD UNDERSTAND THAT ALL SUCH FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO VARIOUS UNCERTAINTIES AND RISKS THAT COULD AFFECT THEIR
OUTCOME.  THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHERS, (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY
INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCES
MARGINS; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,
CONTINUE TO DETERIORATE OR FAIL TO IMPROVE,  RESULTING IN, AMONG OTHER
THINGS, FURTHER DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY
ENVIRONMENT; (5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; (6) COSTS AND
EXPENSES OF COMPLYING WITH THE INTERNAL CONTROL PROVISIONS OF THE SARBANES-OXLEY
ACT AND OUR DEGREE OF SUCCESS IN ACHIEVING COMPLIANCE; (7) CHANGES IN SECURITIES
MARKETS; (8) FUTURE CREDIT LOSS EXPERIENCE; (9) CIVIL DISTURBANCES OR TERRORIST
THREATS OR ACTS, OR APPREHENSION ABOUT POSSIBLE FUTURE OCCURANCES OF ACTS OF
THIS TYPE; (10) THE INVOLVEMENT OF THE UNITED STATES IN WAR OR OTHER
HOSTILITIES; AND (11) THE MATTERS DISCUSSED IN THIS REPORT UNDER “ITEM 1A – RISK
FACTORS” AND “ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS – CRITICAL ACCOUNTING POLICIES.
THEREFORE,THE INFORMATION IN THIS ANNUAL
REPORT SHOULD BE CAREFULLY CONSIDERED AGAINST THESE UNCERTAINTIES AND RISKS WHEN
EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY.





FORWARD-LOOKING
STATEMENTS ARE GENERALLY IDENTIFIABLE BY THE USE OF TERMS SUCH AS "BELIEVE,"
"EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE," "PROJECT," "ASSUME," "PLAN,"
"PREDICT," "FORECAST," “IN MANAGEMENT’S OPINION,” “MANAGEMENT CONSIDERS” OR
SIMILAR EXPRESSIONS.  WHEREVER SUCH PHRASES 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.  THE COMPANY
DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO UPDATE ANY
FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.





2




PART 1




Item
1.  Business




General





Bridge
Capital Holdings (the “Company”) is a bank holding company.  The
Company was incorporated in the State of California on April 6, 2004 for the
purpose of becoming the holding company for its subsidiary, Bridge Bank,
National Association (the “Bank:”).  As a bank holding company, the
Company is supervised by the Board of Governors of the Federal Reserve
System.





The Company acquired 100% of the voting
shares of the Bank effective October 1, 2004 following approval of the Bank’s
shareholders on May 20, 2004.Information in this report dated
prior to September 30, 2004 is for the Bank.   Prior to becoming
a subsidiary of the Company, the common stock of the Bank had been registered
with the Comptroller of the Currency (the “Comptroller”) under the Securities
and Exchange Act of 1934, as amended.  After becoming the Bank’s
holding company, the Company’s common stock was registered with the Securities
and Exchange Commission.  Filings by Bridge Capital Holdings are made
with the SEC rather than the Comptroller and are available on the SEC’s website,
http://www.sec.gov
as well as on the Company’s website http://www.bridgebank.com.





The Bank
is a national banking association chartered by the Comptroller.  The
Bank was organized on December 6, 2000 and commenced operations on May 14,
2001.





The Bank
engages in general commercial banking business, and accepts checking and savings
deposits, makes commercial, real estate, auto and other installment and term
loans, and provides other customary banking services.  The Bank
attracts the majority of its loan and deposit business from the residents and
numerous small and middle market businesses and professional firms located in
Santa Clara County. Its headquarters office is located at 55 Almaden Boulevard,
San Jose, California 95113.  It maintains two branch offices and five
loan production offices, primarily in the Silicon Valley and San Francisco Bay
Areas of California.





The Bank
provides the local business and professional community with banking services
tailored to the unique needs of the Silicon Valley.  In addition, the
Bank provides some specialized services to its customers.  These
services include courier deposit services to key locations or customers
throughout the Bank's service area, Small Business Administration (SBA) loans,
factoring and asset-based loans and Internet banking. The Bank reserves the
right to change its business plan at any time and no assurance can be given
that, if the Bank's proposed business plan is followed, it will prove
successful.





The Bank
does not offer trust services, but it will attempt to make such services
available to the Bank's customers through correspondent
institutions.  The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (the “FDIC”) up to applicable limits, and the Bank
is a member of the Federal Reserve System.





In 2002,
the Bank opened a full-service branch office in Palo Alto,
California.  Also in 2002, it established a U.S. Small Business
Administration Lending Group and launched Bridge Capital Finance Group, a
factoring and asset-based lending group. During the year ended December 31,
2003, the Bank opened an office in downtown San Jose.  In 2005, the
Bank launched its Technology Banking Group and the International Banking
Group.




Deposits





The Bank
offers a wide range of deposit accounts designed to attract small and medium
size commercial businesses as well as business professionals and retail
customers, including a complete line of checking and savings products, such as
passbook savings, “Money Market Deposit” accounts which require minimum balances
and frequency of withdrawal limitations, NOW accounts, and bundled
accounts.





Additional
deposit services include a full complement of convenience oriented services,
including direct payroll and social security deposit, post-paid bank-by-mail,
and Internet banking, including on-line access to account
information.  However, at this time, the Bank does not open accounts
through the Internet.  Any plans to offer online account opening must
be approved in advance by the Comptroller.  No assurance can be given
that, if applied for, such approval will be obtained.




3




As the
Bank has no automated teller machines, the Bank may refund all or portion of
transaction charges incurred by its customers for their use of another bank’s
ATM.  The majority of the Bank's deposits are obtained from businesses
located in the Bank's primary service area.




Lending
Activities





The Bank
engages in a full range of lending products designed to meet the specialized
needs of its customers, including commercial lines of credit and term loans,
constructions loans, and equipment loans. Additionally, the Bank extends
accounts receivable, factoring and inventory financing to qualified
customers.  Loans are also offered through the Small Business
Administration guarantee 7(a) and 504 loan programs (described below under “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—FINANCIAL CONDITION AND EARNING ASSETS—Loan Portfolio”).





The Bank
finances real estate construction projects, primarily for the construction of
owner occupied and 1 to 4 unit residential developments and commercial
buildings.





The Bank
directs its commercial lending principally toward businesses whose demands for
credit fall within the Bank’s lending limit.  In the event there are
customers whose commercial loan demands exceed the Bank’s lending limits, the
Bank seeks to arrange for such loans on a participation basis with other
financial institutions.





The Bank
also extends lines of credit to individual borrowers, and provides homeowner
equity loans, home improvement loans, auto financing, credit and debit cards and
overdraft/cash reserve accounts.




Business
Hours





In order
to attract loan and deposit business, the Bank maintains lobby hours currently
between 9:00 a.m. and 5:00 p.m. Monday through Friday.





For
additional information concerning the Bank, see Selected Financial Data under
Item 6 on page 25.




Competition





The
banking business in Santa Clara County, as it is elsewhere in California, is
highly competitive, and each of the major branch banking institutions operating
in California has one or more offices in the Bank's service area.  The
Bank competes in the marketplace for deposits and loans, principally against
these banks, independent community banks, savings and loan associations, thrift
and loan companies, credit unions, mortgage banking companies, and
non-bank  institutions such as mutual fund companies and investment
brokerage firms that claim a portion of the market.





Larger
banks may have a competitive advantage because of higher lending limits and
major advertising and marketing campaigns.  They also perform
services, such as trust services, discount brokerage and insurance services,
which the Bank is not authorized or prepared to offer currently. The Bank has
made arrangements with its correspondent banks and with others to provide such
services for its customers.  For borrowers requiring loans in excess
of the Bank's legal lending limit, the Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limit.  As of December 31, 2009, the Bank's
unsecured legal lending limit to a single borrower and such borrower's related
parties was $18.0 million based on regulatory capital of $119.8
million.  However, for risk management purposes, the Bank has
established internal policies, which at present provide lending limits that are
less than the Bank’s legal lending limit.





The
Bank's business is concentrated in its service area, which primarily encompasses
Santa Clara County, and also includes, to a lesser extent, the contiguous areas
of Alameda, San Mateo and Santa Cruz counties.  In certain lines of
business the Bank has extended beyond its primary service area.





In order
to compete with major financial institutions in its primary service area, the
Bank uses to the fullest extent possible the flexibility that is accorded by its
independent status.  This includes an emphasis on specialized
services, local promotional activity, and personal contacts by the Bank's
officers, directors and employees.  The Bank also seeks to provide
special services and programs for individuals in its primary service area who
are employed in the agricultural, professional and business fields, such as
loans for equipment, furniture, and tools of the trade or expansion of practices
or businesses.




4




Banking
is a business that depends on interest rate differentials.  In
general, the difference between the interest rate paid by the Bank to obtain its
deposits and its other borrowings and the interest rate received by the Bank on
loans extended to its customers and on securities held in the Bank's portfolio
comprises the major portion of the Bank's earnings.





Commercial
banks compete with savings and loan associations, credit unions, other financial
institutions and other entities for funds.  For instance, yields on
corporate and government debt securities and other commercial paper affect the
ability of commercial banks to attract and hold deposits.  Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending
institutions.





The
interest rate differentials of the Bank, and therefore its earnings, are
affected not only by general economic conditions, both domestic and foreign, but
also by the monetary and fiscal policies of the United States as set by statutes
and as implemented by federal agencies, particularly the Federal Reserve
Board.  This agency can and does implement national monetary policy,
such as seeking to curb inflation and combat recession, by its open market
operations in United States government securities, adjustments in the amount of
interest free reserves that banks and other financial institutions are required
to maintain, and adjustments to the discount rates applicable to borrowing by
banks from the Federal Reserve Board.  These activities influence the
growth of bank loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits.




Supervision and
Regulation




Recent
Developments




In
response to the current economic downturn and financial instability, legislative
and other governmental initiatives have been, and will likely continue to be
introduced and implemented, which could substantially intensify the regulation
of the financial services industry.  The Company cannot predict
whether or when potential legislation will be enacted, the
effect  that it, or any implemented regulations or supervisory
policies would have on its’ financial condition or results of
operations.




Emergency
Economic Stabilization Act and American Recovery and Reinvestment
Act





On
October 3, 2008, Congress adopted the Emergency Economic Stabilization Act
(“EESA”), including a Troubled Asset Relief Program (“TARP”).  TARP
gave the United States Treasury Department (“Treasury”) authority to deploy up
to $700 billion into the financial system for the purpose of improving liquidity
in capital markets.  On October 14, 2008, Treasury announced plans to
direct $250 billion of this authority into preferred stock investments in banks
and bank holding companies through a Capital Purchase Program
(“CPP”).  Certain terms of this CPP are as follows:





·
            Treasury’s
      preferred stock earns 5% dividends for the first five years and 9%
      dividends thereafter; dividends on preferred stock issued by holding
      companies are cumulative; dividends on preferred stock issued by banks
      without holding companies are
non-cumulative;


·
            No
      increase in common stock dividends for three years while Treasury is an
      investor;


·
            Treasury’s
      consent is required for stock
repurchases;


·
            Treasury
      receives warrants for common stock equal to 15% of Treasury’s total
      investment, with an exercise price based on the common stock’s market
      price;


·
            Participating
      bank executives must agree to certain compensation restrictions and
      executive compensation above $500,000 may not be claimed as a tax
      deduction;


·
            If
      an issuer fails to pay dividends for six quarters, whether or not
      consecutive, Treasury is entitled to appoint two persons to the issuer’s
      board of directors.





In
December of 2008, in order to continue to support our current and prospective
clients during this period of extreme economic uncertainty, the Company elected
to participate in the CPP by issuing $23,864,000 in preferred stock to
Treasury.





Under
EESA, certain temporary increases in FDIC deposit insurance have also been
approved.





·
            Until
      December 31, 2013, the amount of deposit insurance provided by the FDIC is
      increased from $100,000 to $250,000.  This temporary increase is
      automatic.


·
            In
      addition, any depository institution will be able to provide full deposit
      insurance coverage until June 30, 2010, for non-interest bearing deposit
      transaction accounts, attorney trust accounts, and NOW accounts paying not
      more than 50 basis points of interest regardless of dollar
      amount.  These accounts are mainly payment-processing accounts,
      such as payroll accounts used by businesses.  Participants will
      be charged a 10-basis point surcharge to current insurance assessments for
      this additional coverage.  Bridge Bank is participating is this
      aspect of the program.


5




The
transaction documents for the Capital Purchase Program give Treasury the
unilateral right to change or add additional terms to the
agreements.





The
American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law on
February 17, 2009. ARRA includes a wide variety of programs intended to
stimulate the economy. In addition, ARRA imposes executive compensation and
expenditure limits on all previous and future TARP CPP recipients, such as the
Company, and expands the class of employees to whom the limits and restrictions
apply. ARRA also provides the opportunity for additional repayment flexibility
for existing TARP CPP recipients.





Among
other things, ARRA prohibits the payment of bonuses, other incentive
compensation and severance to certain of the Company’s most highly paid
employees (except in the form of restricted stock subject to specified
limitations and conditions), and requires each TARP recipient to comply with
certain other executive compensation related requirements.  The
Treasury guidelines adopted regulations in June 2009 to provide additional
guidance regarding how the executive compensation restrictions under the ARRA
and EESA are to be applied.




Bank
Holding Company Act




The
Company is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended (“BHCA”).  As a bank holding company, Bridge
Capital Holdings is subject to examination by the Federal Reserve Board (“FRB”).
Pursuant to the BHCA, the Company is also subject to limitations on the kinds of
businesses in which it can engage directly or through
subsidiaries.  The Company may, of course, manage or control
banks.  Generally, however, the Company is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
five percent of any class of voting shares of an entity engaged in non-banking
activities, unless the FRB finds such activities to be "so closely related to
banking" as to be deemed "a proper incident thereto" within the meaning of the
BHCA.  As a bank holding company, the Company may not acquire more
than five percent of the voting shares of any domestic bank without the prior
approval of (or, for “well managed” companies, prior written notice to) the
FRB.





The BHCA
includes minimum capital requirements for bank holding companies.  See
the section titled “Regulation and Supervision – Regulatory Capital
Requirements”.  Under certain conditions, the FRB may conclude that
certain actions of a bank holding company, such as the payment of a cash
dividend, would constitute an unsafe and unsound banking practice.




“Source
of Strength” Policy




Regulations
and policies of the FRB also require a bank holding company to serve as a source
of financial and managerial strength to its subsidiary banks. It is the FRB's
policy that a bank holding company should stand ready to use available resources
to provide adequate capital funds to a subsidiary bank during periods of
financial stress or adversity and that it should maintain the financial
flexibility and capital-raising capacity needed to obtain additional resources
for assisting the subsidiary bank.




Securities
and Exchange Commission




Under
Section 13 of the Securities Exchange Act of 1934 (“Exchange Act”) and the
Securities and Exchange Commission’s (SEC’s) rules, the Company must
electronically file periodic and current reports as well as proxy statements
with the SEC.  The Company electronically files the following reports
with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), and Form
8-K (Current Report).  The Company may prepare additional filings as
required.  The SEC maintains an Internet site, http://www.sec.gov,
at which all forms filed electronically may be accessed.  Our SEC
filings are also available on our website at http://www.bridgebank.com.





6





Sarbanes-Oxley
Act


The
Sarbanes-Oxley Act of 2002 implemented legislative reforms intended to address
corporate and accounting fraud.  In addition to the establishment of
an accounting oversight board to enforce auditing, quality control and
independence standards, the law restricts provision of both auditing and
consulting services by accounting firms.  To ensure auditor
independence, any non-audit services being provided to an audit client require
pre-approval by the company's audit committee members.  In addition,
the audit partners assigned to the company must be rotated every five
years.  The Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate the certification requirement.  In addition, under
the Act legal counsel are required to report evidence of a material violation of
the securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.




In
addition, longer prison terms and increased penalties apply to corporate
executives who violate federal securities laws, the period during which certain
types of suits can be brought against a company or its officers is extended, and
bonuses issued to top executives prior to restatement of a company's financial
statements are subject to disgorgement if the restatement was due to corporate
misconduct.  Executives are also prohibited from insider trading
during retirement plan "blackout" periods, and loans to company executives are
restricted.  The Act accelerates the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations.  Directors and executive
officers must also provide information for most changes in ownership in a
company's securities within two business days of the change.





The Act
also prohibits any officer or director of a company or any other person acting
under their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent public or certified accountant engaged in
the audit of the company's financial statements for the purpose of rendering the
financial statement's materially misleading. The Act requires the SEC to
prescribe rules requiring inclusion of an internal control report and assessment
by both management and the external auditors in the annual report to
stockholders.  In addition, the Act requires that each financial
report required to be prepared in accordance with (or reconciled to) accounting
principles generally accepted in the United States and filed with the SEC
reflect all material correcting adjustments that are identified by a "registered
public accounting firm" in accordance with accounting principles generally
accepted in the United States and the rules and regulations of the
SEC.





The
Company’s chief executive officer and chief financial officer are each required
to certify that the Company’s quarterly and annual reports do not contain any
untrue statement of a material fact.  The rules have several
requirements, including having these officers certify that: they are responsible
for establishing, maintaining and regularly evaluating the effectiveness of the
Bank’s internal controls; they have made certain disclosures to the Company’s
auditors and the audit committee of the Board of Directors about the Company’s
internal controls; and they have included information in the Company’s quarterly
and annual reports about their evaluation and whether there have been
significant changes in the Bank’s internal controls or in other factors that
could significantly affect internal controls subsequent to the
evaluation.




Regulation
of the Bank




The Bank
is regulated and supervised by the Comptroller of the Currency and is subject to
periodic examination by the Comptroller.  Deposits of the Bank's
customers are insured by the FDIC up to the maximum limit of $100,000 (increased
to $250,000 through 2013 and unlimited for certain non-interest bearing deposits
accounts through June 2010; see “Recent Developments-Emergency Economic
Stabilization Act” above) , and, as an insured bank, the Bank is subject to
certain regulations of the FDIC.  As a national bank, the Bank is a
member of the Federal Reserve System and is also subject to the regulations of
the FRB.




The
regulations of those federal bank regulatory agencies govern most aspects of the
Bank's business and operations, including but not limited to, requiring the
maintenance of non-interest bearing reserves on deposits, limiting the nature
and amount of investments and loans which may be made, regulating the issuance
of securities, restricting the payment of dividends and regulating bank
expansion and bank activities. The Bank also is subject to the requirements and
restrictions of various consumer laws and regulations.




Statutes,
regulations and policies affecting the banking industry are frequently under
review by Congress and by the federal bank regulatory agencies that are charged
with supervisory and examination authority over banking
institutions.  Changes in the banking and financial services industry
are likely to occur in the future.  Some of the changes may create
opportunities for the Bank to compete in financial markets with less
regulation.  However, these changes also may create new competitors in
geographic and product markets which have historically been limited by law to
insured depository institutions such as the Bank.  Changes in the
statutes, regulations, or policies that affect the Bank cannot necessarily be
predicted and may have a material effect on the Bank’s business and
earnings.  In addition, the regulatory agencies which have
jurisdiction over the Bank have broad discretion in exercising their supervisory
powers.




The OCC
can pursue an enforcement action against the Bank for unsafe and unsound
practices in conducting its business, or for violations of any law, rule or
regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency, or any written agreement with the
agency.  During periods of economic stress, regulatory oversight can
be expected to increase and regulatory agencies become more aggressive in
responding to concerns and trends identified in examinations.  One
result of this heightened activity is an increase in the issuance of enforcement
actions.Enforcement
actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance of
deposits, the imposition of civil money penalties and removal and prohibition
orders against institution-affiliated parties.




7




In
addition to the regulation and supervision outlined above, banks must be
prepared for judicial scrutiny of their lending and collection
practices.  For example, some banks have been found liable for
exercising remedies which their loan documents authorized upon the borrower’s
default.  This has occurred in cases where the exercise of those
remedies was determined to be inconsistent with the previous course of dealing
between the bank and the borrower.  As a result, banks must exercise
caution, incur expense and face exposure to liability when dealing with
delinquent loans.




The
following description of selected statutory and regulatory provisions and
proposals is not intended to be a complete description of these provisions or of
the many laws and regulations to which the Bank is subject, and is qualified in
its entirety by reference to the particular statutory or regulatory provisions
discussed.




Effect
of State Law




The laws
of the State of California affect the Bank's business and operations. For
example, under 12 U.S.C. 36, as amended by the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994, state laws regarding community
reinvestment, consumer protection, fair lending and establishment of intrastate
branches may affect the operations of national banks in states other than their
home states. On a similar basis, 12 U.S.C. 85 provides that state law,
in most circumstances, determines the maximum rate of interest which a national
bank may charge on a loan.  As California law exempts all
state-chartered and national banks from the application of its usury laws,
national banks are also provided such an exemption by
12 U.S.C. 85.




Interstate
Banking




The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“Interstate Banking Act”) regulates the interstate activities of banks and bank
holding companies and establishes a framework for nationwide interstate banking
and branching.  In general, a bank in one state has generally been
permitted to merge with a bank in another state without the need for explicit
state law authorization.  However, when the Interstate Banking Act was
enacted states were given the ability to prohibit interstate mergers with banks
in their own state by “opting-out” (enacting state legislation applying to all
out-of-state banks prohibiting such mergers).




Adequately
capitalized and managed bank holding companies have been permitted to acquire
banks located in any state, subject to two exceptions: first, a state may still
prohibit bank holding companies from acquiring a bank which is less than five
years old; and second, no interstate acquisition can be consummated by a bank
holding company if the acquirer would control more than 10% of the deposits held
by insured depository institutions nationwide or 30% or more of the deposits
held by insured depository institutions in any state in which the target bank
has branches.




A bank
may also establish and operate de novo branches in any state in which the bank
does not maintain a branch if that state has enacted legislation to expressly
permit all out-of-state banks to establish branches in that state.




Among
other things, the Interstate Banking Act amended the Community Reinvestment Act
to require that in the event a bank has interstate branches, the appropriate
federal banking regulatory agency must prepare for that institution a written
evaluation of (i) the bank’s record of CRA performance and (ii) the bank’s CRA
performance in each applicable state.  Interstate branches are now
prohibited from being used as deposit production offices.  Also, a
foreign (other state) bank is permitted to establish branches in any state other
than its home state to the same extent that a bank chartered by the foreign
(other state) bank’s home state may establish such branches.




California
law expressly prohibits a foreign (other state) bank which does not already have
a California branch office from (i) purchasing a branch office of a California
bank (as opposed to purchasing the entire bank) and thereby establishing a
California branch office or (ii) establishing a California branch on a de novo
basis.


8




The
Interstate Banking Act has contributed to the accelerated consolidation of the
banking industry as a number of the largest bank holding companies have expanded
into different parts of the country that were previously
restricted.  The Interstate Banking Act and California law are
expected to continue to increase competition in the environment in which the
Bank operates to the extent that out-of-state financial institutions may
directly or indirectly enter the Bank’s market areas.




Change
in Bank Control




The Bank
Holding Company Act of 1956, as amended, and the Change in Bank Control Act of
1978, as amended, together with regulations of the FRB and the Comptroller,
require that, depending on the particular circumstances, either FRB approval
must be obtained or notice must be furnished to the Comptroller and not
disapproved prior to any person or company acquiring "control" of a national
bank, such as the Bank, subject to exemptions for some
transactions.  Control is conclusively presumed to exist if an
individual or company (i) acquires 25% or more of any class of voting securities
of the bank or (ii) has the direct or indirect power to direct or cause the
direction of the management and policies of the Bank, whether through ownership
of voting securities, by contract or otherwise; provided that no individual will
be deemed to control the Bank solely on account of being director, officer or
employee of the Bank.  Control is presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities and
either the company has registered securities under Section 12 of the
Exchange Act or no other person will own a greater percentage of that class of
voting securities immediately after the transaction.




Regulation
W




The FRB
has adopted Regulation W to comprehensively implement sections 23A
and 23B of the Federal Reserve Act.




Sections 23A
and 23B and Regulation W limits transactions between a bank and its
affiliates and limit a bank’s ability to transfer to its affiliates the benefits
arising from the bank's access to insured deposits, the payment system and the
discount window and other benefits of the Federal Reserve system.  The
statute and regulation impose quantitative and qualitative limits on the ability
of a bank to extend credit to, or engage in certain other transactions with, an
affiliate (and a non-affiliate if an affiliate benefits from the
transaction).  However, certain transactions that generally do not expose a
bank to undue risk or abuse the safety net are exempted from coverage under
Regulation W.





Historically,
a subsidiary of a bank was not considered an affiliate for purposes of Sections
23A and 23B, since their activities were limited to activities permissible for
the bank itself.  However, the Gramm-Leach-Bliley Act authorized
“financial subsidiaries” that may engage in activities not permissible for a
bank.  These financial subsidiaries are now considered
affiliates.  Certain transactions between a financial subsidiary and
another affiliate of a bank are also covered by sections 23A and 23B
and under Regulation W.





Tying
Arrangements and Transactions with Affiliated Persons




A bank is
prohibited from tie-in arrangements in connection with any extension of credit,
sale or lease of property or furnishing of services.  For example,
with some exceptions, a bank may not condition an extension of credit on a
promise by its customer to obtain other services provided by it, its holding
company or other subsidiaries (if any), or on a promise by its customer not to
obtain other services from a competitor.




Directors,
officers and principal shareholders of the Bank, and the companies with which
they are associated, may have banking transactions with the Bank in the ordinary
course of business.  Any loans and commitments to loan included in
these transactions must be made in compliance with the requirements of
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 risk of collectability or presenting other unfavorable
features.





Capital
Adequacy Requirements





Federal regulations establish
guidelines for calculating “risk-adjusted” capital ratios.  These
guidelines, which apply to banks and bank holding companies, establish a
systematic approach of assigning risk weights to bank assets and commitments,
making capital requirements more sensitive to differences in risk profiles among
banking organizations.  For these purposes, “Tier 1” capital consists
of common equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries and excludes
goodwill.  “Tier 2” capital consists of cumulative perpetual preferred
stock, limited-life preferred stock, mandatory convertible securities,
subordinated debt and (subject to a limit of 1.25% of risk-weighted assets)
general loan loss reserves.  In calculating the relevant ratio, a
bank’s assets and off-balance sheet commitments are risk-weighted; thus, for
example, generally loans are included at 100% of their book value while assets
considered less risky are included at a percentage of their book value (20%, for
example, for inter-bank obligations and Government Agency securities, and 0% for
vault cash and U.S. Government securities).  Under these regulations,
to be considered adequately capitalized, banks and bank holding companies are
required to maintain a risk-based capital ratio of 8%, with Tier 1 risk-based
capital (primarily shareholders’ equity) constituting at least 50% of total
qualifying capital or 4% of risk-weighted assets.The
Comptroller may impose additional capital requirements on banks based on market
risk.


9




The
risk-based capital ratio focuses principally on broad categories of credit risk,
and may not take into account many other factors that can affect a bank’s
financial condition.  These factors include overall interest rate risk
exposure; liquidity, funding and market risks; the quality and level of
earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management’s overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional
activities.  The Comptroller has addressed many of these areas in
related rule-making proposals. In addition to evaluating capital ratios, an
overall assessment of capital adequacy must take account of each of these other
factors including, in particular, the level and severity of problem and
adversely classified assets. For this reason, the final supervisory judgment on
a bank’s capital adequacy may differ significantly from the conclusions that
might be drawn solely from the absolute level of the bank’s risk-based capital
ratio.  The Comptroller has stated that banks generally are expected
to operate above the minimum risk-based capital ratio.  Banks
contemplating significant expansion plans, as well as those institutions with
high or inordinate levels of risk, are required to hold capital consistent with
the level and nature of the risks to which they are exposed.




Further,
the banking agencies have adopted modifications to the risk-based capital
regulations to include standards for interest rate risk
exposures.  Interest rate risk is the exposure of a bank’s current and
future earnings and equity capital arising from movements in interest
rates.  While interest rate risk is inherent in a bank’s role as a
financial intermediary, it introduces volatility to bank earnings and to the
economic value of the bank.  The banking agencies have addressed this
problem by implementing changes to the capital standards to include a bank’s
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor that the banking agencies consider in evaluating an
institution’s capital adequacy.  Bank examiners consider a bank’s
historical financial performance and its earnings exposure to interest rate
movements as well as qualitative factors such as the adequacy of a bank’s
internal interest rate risk management.




Finally,
institutions with significant trading activities must measure and hold capital
for exposure to general market risk arising from fluctuations in interest rates,
equity prices, foreign exchange rates and commodity prices and exposure to
specific risk associated with debt and equity positions in the trading
portfolio.  General market risk refers to changes in the market value
of on-balance-sheet assets and off-balance-sheet items resulting from broad
market movements.  Specific market risk refers to changes in the
market value of individual positions due to factors other than broad market
movements and includes such risks as the credit risk of an instrument’s
issuer.  The additional capital requirements apply to institutions
with trading assets and liabilities equal to 10.0% or more of total assets or
trading activity of $1.0 billion or more.  The federal banking
agencies may apply the market risk regulations on a case by case basis to
institutions not meeting the eligibility criteria if necessary for safety and
soundness reasons.




Under
certain circumstances, the Comptroller may determine that the capital ratios for
a national bank must be maintained at levels which are higher than the minimum
levels required by the guidelines.  A national bank which does not
achieve and maintain required capital levels may be subject to supervisory
action by the Comptroller through the issuance of a capital directive to ensure
the maintenance of required capital levels.  In addition, the Bank is
required to meet certain guidelines of the Comptroller concerning the
maintenance of an adequate allowance for loan and lease losses.




The
federal banking agencies, including the OCC, have adopted regulations
implementing a system of prompt corrective action under the Federal Deposit
Insurance Corporation Improvement Act (“FDICIA”).  The regulations
establish five capital categories with the following
characteristics:  (1) ”Well capitalized,” consisting of
institutions with a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of
5.0% or greater and which are not operating under an order, written agreement,
capital directive or prompt corrective action directive; (2) ”Adequately
capitalized,” consisting of institutions with a total risk-based capital ratio
of 8.0% or greater, a Tier 1 risk-based capital of 4.0% or greater and a
leverage ratio of 4.0% or greater and which do not meet the definition of a
“well capitalized” institution; (3) ”Undercapitalized,” consisting of
institutions with a total risk-based capital ratio of less than 8.0%, a
Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of
less than 4.0%; (4) ”Significantly undercapitalized,” consisting of
institutions with a total risk-based capital ratio of less than 6.0%, a
Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of
less than 3.0%; and (5) ”Critically undercapitalized,” consisting of
institutions with a ratio of tangible equity to total assets that is equal to or
less than 2.0%.




The
regulations establish procedures for the classification of financial
institutions within the capital categories, for filing and reviewing capital
restoration plans required under the regulations, and for the issuance of
directives by the appropriate regulatory agency, among other
matters.  See “Supervision and Regulation — Prompt Corrective Action”
for additional discussion regarding regulations.


10




An
institution that is less than well-capitalized cannot accept brokered deposits
without the consent of the FDIC.  The appropriate federal banking
agency, after notice and an opportunity for a hearing, is authorized to treat a
well capitalized, adequately capitalized or undercapitalized insured depository
institution as if it had a lower capital-based classification if it is in an
unsafe and unsound condition or engaging in an unsafe and unsound
practice.  Thus, an adequately capitalized institution can be
subjected to the restrictions (described below) that are imposed on
undercapitalized institutions (provided that a capital restoration plan cannot
be required of the institution), and an undercapitalized institution can be
subjected to the restrictions (also described below) applicable to significantly
undercapitalized institutions.  See “Supervision and Regulation —
Prompt Corrective Action” for additional discussion regarding federal banking
agency supervision.




An
insured depository institution cannot make a capital distribution (as broadly
defined to include, among other things, dividends, redemptions and other
repurchases of stock), or pay management fees to any person or persons that
control the institution, if it would be undercapitalized following the
distribution.  However, a federal banking agency may (after
consultation with the FDIC) permit an insured depository institution to
repurchase, redeem, retire or otherwise acquire its shares if (i) the action is
taken in connection with the issuance of additional shares or obligations in at
least an equivalent amount and (ii) the action will reduce the institution’s
financial obligations or otherwise improve its financial
condition.  An undercapitalized institution is generally prohibited
from increasing its average total assets, and is also generally prohibited from
making acquisitions, establishing new branches, or engaging in any new line of
business except under an accepted capital restoration plan or with the approval
of the FDIC.  In addition, a federal banking agency has authority with
respect to undercapitalized depository institutions to take any of the actions
it is required to or may take with respect to a significantly undercapitalized
institution (as described below) if it determines “that those actions are
necessary to carry out the purpose” of FDICIA.




The
federal banking agencies have adopted a joint agency policy statement to provide
guidance on managing interest rate risk.  The statement indicates that
the adequacy and effectiveness of a bank’s interest rate risk management process
and the level of its interest rate exposures are critical factors in the
agencies’ evaluation of the bank’s capital adequacy.  If a bank has
material weaknesses in its risk management process or high levels of exposure
relative to its capital, the agencies will direct it to take corrective
action.  These directives may include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, or reduce levels of exposure, or to
undertake some combination of these actions.




At
December 31, 2009, the Company and the Bank have capital ratios that place them
in the “well capitalized” category. See Footnote 16 to the Bank’s Financial
Statements included under Item 8 of this Annual Report.




Payment
of Dividends





Historically
the Company has not paid dividends but has retained earnings to support
growth.  The ability of the Company to make dividend payments is
subject to statutory and regulatory restrictions.  A California
corporation such as the Company may make a distribution to its shareholders if
the corporation’s retained earnings equal at least the amount of the proposed
distribution.  In the event sufficient retained earnings are not
available for the proposed distribution, a California corporation may
nevertheless make a distribution to its shareholders if, after giving effect to
the distribution, the corporation’s assets equal at least 125 percent of its
liabilities and certain other conditions are met.  Most bank holding
companies are unable to meet this last test and so must have sufficient retained
earnings to fund a proposed distribution.





The
primary source of funds for payment of dividends by the Company to its
shareholders will be the receipt of dividends and management fees from the
Bank.  FDIC policies generally allow cash dividends to be paid only
from net operating income, and do not permit dividends to be paid until an
appropriate allowance for loans and lease losses has been established and
overall capital is adequate.  See “Supervision and Regulation –
Capital Adequacy Requirements” for additional discussion regarding capital
adequacy.





The Board
of Directors of a national bank may declare the payment of dividends depending
upon the earnings, financial condition and cash needs of the bank and general
business conditions.  A national bank may not pay dividends from its
capital.  All dividends must be paid out of net profits then on hand,
after deducting losses and bad debts.  The approval of the Comptroller
is required for the payment of dividends if the total of all dividends declared
by the bank in any calendar year would exceed the total of its net profits of
that year combined with its retained net profits of the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock.




In
addition to the above requirements, guidelines adopted by the Comptroller set
forth factors which are to be considered by a national bank in determining the
payment of dividends.  A national bank, in assessing the payment of
dividends, is to evaluate the bank's capital position, its maintenance of an
adequate allowance for loan and lease losses, and the need to revise or develop
a comprehensive capital plan.




11




The
Comptroller also has broad authority to prohibit a national bank from engaging
in banking practices which it considers to be unsafe or unsound.  It
is possible, depending upon the financial condition of the national bank in
question and other factors, that the Comptroller may assert that the payment of
dividends or other payments by a bank is considered an unsafe or unsound banking
practice and therefore, implement corrective action to address such a
practice.




Accordingly,
the future payment of cash dividends by the Company will not only depend upon
the Bank's earnings during any fiscal period but will also depend upon the
assessment of its Board of Directors of capital requirements and other factors,
including dividend guidelines and the maintenance of an adequate allowance for
loan and lease losses.




Provisions
of the CPP prohibit any increase in common stock dividends without Treasury’s
approval so long as the Company’s preferred stock issued under the CPP remains
outstanding.




Community
Reinvestment Act





Pursuant
to the Community Reinvestment Act (“CRA”) of 1977, the federal regulatory
agencies that oversee the banking industry are required to use their authority
to encourage financial institutions to help meet the credit needs of the local
communities in which such institutions are chartered, consistent with safe and
sound banking practices.  When conducting an examination of a
financial institution such as the Bank, the agencies assess the institution’s
record of meeting the credit needs of its entire community, including low- and
moderate- income neighborhoods.  This record is taken into account in
an agency’s evaluation of an application for creation or relocation of domestic
branches or for merger with another institution.  Failure to address
the credit needs of a bank’s community may also result in the imposition of
certain other regulatory sanctions, including a requirement that corrective
action be taken.





Institutions with $250.0 million or
more in assets are required to compile and report data on their lending
activities to measure the performance of their loan portfolio.  Some
of this data is already required under other laws, such as the Equal Credit
Opportunity Act.  Institutions have the option of being evaluated for
CRA purposes in relation to their own pre-approved strategic plan.  A
strategic plan must be submitted to the institution’s regulator three months
before its effective date and must be published for public
comment.




Audit
Requirements




Depository
institutions are required to have an annual examination of their financial
records.  Depository institutions with assets greater than $500.0
million are required to have annual, independent audits and to prepare all
financial statements in compliance with generally accepted accounting
principles.  Depository institutions are also required to have an
independent audit committee comprised entirely of outside directors, independent
of the institution’s management.




The
Bank’s accounting and reporting policies conform to generally accepted
accounting principles and the practices prevalent in the banking
industry.




Insurance
Premiums and Assessments




The FDIC
has authority to impose a special assessment on members of the Deposit Insurance
Fund (the “DIF”) to insure that there will be sufficient assessment income for
repayment of DIF obligations and for any other purpose which it deems
necessary.  The FDIC is authorized to set semi-annual assessment rates
for DIF members at levels sufficient to maintain the DIF’s reserve ratio to a
designated level of 1.25% of insured deposits.




Under
FDICIA, the FDIC has developed a risk-based assessment system, which provides
that the assessment rate for an insured depository institution will vary
according to the level of risk incurred in its activities.  Through
December 31, 2009, an institution’s risk category was based upon whether the
institution is well capitalized, adequately capitalized or less than adequately
capitalized.  Each insured depository institution is also to be
assigned to one of three supervisory groups:  Group A
institutions were financially sound institutions with a few minor weaknesses;
group B institutions were institutions that demonstrate weaknesses which,
if not corrected, could result in significant deterioration; and group C
institutions were institutions for which there is a substantial probability that
the FDIC will suffer a loss in connection with the institution unless effective
action is taken to correct the areas of weakness. The FDIC assigns each DIF
member institution an annual FDIC assessment rate on DIF insured
deposits.


12




Effective
April 1, 2009, banks pay from 12 basis points to 45 basis points, subject to
potential adjustment down to 7 basis points or up to 77.5 basis points, on
deposits annually for deposit insurance.  The FDIC adopted changes to
the deposit insurance assessment system beginning with the second quarter of
2009 to make the increase in assessments fairer by requiring riskier
institutions to pay a larger share.  Institutions would be classified
into one of four risk categories.  Within each category, the FDIC is
able to assess higher rates to institutions with a significant reliance on
secured liabilities, which generally raises the FDIC's loss in the event of
failure without providing additional assessment revenue.  The changes
also would assess higher rates for institutions with a significant reliance on
brokered deposits but, for well-managed and well-capitalized institutions, only
when accompanied by rapid asset growth.  They also provide incentives
in the form of a reduction in assessment rates for institutions to hold
long-term unsecured debt and, for smaller institutions, high levels of Tier 1
capital.  Together, the changes are intended improve the way the
system differentiates risk among insured institutions and help ensure that the
reserve ratio returns to at least 1.15 percent within a revised target of seven
years.  In May 2009, the FDIC announced a special emergency assessment
of 5 basis points times assets less Tier 1 capital, not to exceed 10 basis
points times the institution’s normal assessment base.  In November
2009, the FDIC adopted a rule requiring banks to prepay assessments through
2012.




Prompt
Corrective Action




The FDIC
has authority: (a) to request that an institution’s primary regulatory
agency (in the case of the Bank, the Comptroller) take enforcement action
against it based upon an examination by the FDIC or the agency, (b) if no
action is taken within 60 days and the FDIC determines that the institution is
in an unsafe and unsound condition or that failure to take the action will
result in continuance of unsafe and unsound practices, to order that action be
taken against the institution, and (c) to exercise this enforcement
authority under “exigent circumstances” merely upon notification to the
institution’s primary regulatory agency.  This authority gives the
FDIC the same enforcement powers with respect to any institution and its
subsidiaries and affiliates as the primary regulatory agency has with respect to
those entities.




An
undercapitalized institution is required to submit an acceptable capital
restoration plan to its primary federal bank regulatory agency.  The
plan must specify (a) the steps the institution will take to become
adequately capitalized, (b) the capital levels to be attained each year,
(c) how the institution will comply with any regulatory sanctions then in
effect against the institution and (d) the types and levels of activities
in which the institution will engage.  The banking agency may not
accept a capital restoration plan unless the agency determines, among other
things, that the plan “is based on realistic assumptions, and is likely to
succeed in restoring the institution’s capital” and “would not appreciably
increase the risk . . . to which the institution is
exposed.”  A requisite element of an acceptable capital restoration
plan for an undercapitalized institution is a guaranty by its parent holding
company that the institution will comply with the capital restoration
plan.  Liability with respect to this guaranty is limited to the
lesser of (i) 5% of the institution’s assets at the time when it becomes
undercapitalized and (ii) the amount necessary to bring the institution
into capital compliance with applicable capital standards as of the time when
the institution fails to comply with the plan.  The guaranty liability
is limited to companies controlling the undercapitalized institution and does
not affect other affiliates.  In the event of a bank holding company’s
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to priority of payment over the claims of
other creditors, including the holders of the company’s long-term
debt.




FDICIA
provides that the appropriate federal regulatory agency must require an insured
depository institution that is significantly undercapitalized, or that is
undercapitalized and either fails to submit an acceptable capital restoration
plan within the time period allowed by regulation or fails in any material
respect to implement a capital restoration plan accepted by the appropriate
federal banking agency, to take one or more of the following
actions:  (a) sell enough shares, including voting shares, to
become adequately capitalized; (b) merge with (or be sold to) another
institution (or holding company), but only if grounds exist for appointing a
conservator or receiver; (c) restrict specified transactions with banking
affiliates as if the “sister bank” exception to the requirements of
Section 23A of the Federal Reserve Act did not exist; (d) otherwise
restrict transactions with bank or non-bank affiliates; (e) restrict
interest rates that the institution pays on deposits to “prevailing rates” in
the institution’s “region”; (f) restrict asset growth or reduce total
assets; (g) alter, reduce or terminate activities; (h) hold a new
election of directors; (i) dismiss any director or senior executive officer
who held office for more than 180 days immediately before the institution
became undercapitalized, provided that in requiring dismissal of a director or
senior executive officer, the agency must comply with procedural requirements,
including the opportunity for an appeal in which the director or officer will
have the burden of proving his or her value to the institution; (j) employ
“qualified” senior executive officers; (k) cease accepting deposits from
correspondent depository institutions; (l) divest non-depository affiliates
which pose a danger to the institution; (m) be divested by a parent holding
company; and (n) take any other action which the agency determines would
better carry out the purposes of the prompt corrective action
provisions.




In
addition to the foregoing sanctions, without the prior approval of the
appropriate federal banking agency, a significantly undercapitalized institution
may not pay any bonus to any senior executive officer or increase the rate of
compensation for a senior executive officer without regulatory
approval.  If an undercapitalized institution has failed to submit or
implement an acceptable capital restoration plan the appropriate federal banking
agency is not permitted to approve the payment of a bonus to a senior executive
officer.


13




Not later
than 90 days after an institution becomes critically undercapitalized, the
institution’s primary federal bank regulatory agency must appoint a receiver or
a conservator, unless the agency, with the concurrence of the FDIC, determines
that the purposes of the prompt corrective action provisions would be better
served by another course of action.  Any alternative determination
must be documented by the agency and reassessed on a periodic
basis.  Notwithstanding the foregoing, a receiver must be appointed
after 270 days unless the FDIC determines that the institution has positive
net worth, is in compliance with a capital plan, is profitable or has a
sustainable upward trend in earnings, and is reducing its ratio of
non-performing loans to total loans, and unless the head of the appropriate
federal banking agency and the chairperson of the FDIC certify that the
institution is viable and not expected to fail.




The FDIC
is required, by regulation or order, to restrict the activities of critically
undercapitalized institutions.  The restrictions must include
prohibitions on the institution’s doing any of the following without prior FDIC
approval:  entering into any material transactions not in the usual
course of business, extending credit for any highly leveraged transaction;
engaging in any “covered transaction” (as defined in Section 23A of the
Federal Reserve Act) with an affiliate; paying “excessive compensation or
bonuses”; and paying interest on “new or renewed liabilities” that would
increase the institution’s average cost of funds to a level significantly
exceeding prevailing rates in the market.




Potential
Enforcement Actions and Supervisory Agreements




Under
federal law, national banks and their institution-affiliated parties may be the
subject of potential enforcement actions by the Comptroller for unsafe and
unsound practices in conducting their businesses, or for violations of any law,
rule or regulation or provision, any consent order with any agency, any
condition imposed in writing by the agency or any written agreement with the
agency.  During periods of economic stress, regulatory oversight can
be expected to increase and regulatory agencies become more aggressive in
responding to concerns and trends identified in examinations.  One
result of this heightened activity is an increase in the issuance of enforcement
actions.  Enforcement actions may include the imposition of a
conservator or receiver, cease-and-desist orders and written agreements, the
termination of insurance of deposits, the imposition of civil money penalties
and removal and prohibition orders against institution-affiliated
parties.




USA
PATRIOT Act




Pursuant
to USA PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and "know your customer" 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:





·
            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.





The USA
PATRIOT Act, requires financial institutions to establish anti-money laundering
programs and sets forth minimum standards for these programs,
including:





·
            The
      development of internal policies, procedures, and
  controls;





·      The
designation of a compliance officer;





·      An
ongoing employee training program; and





·
            An
      independent audit function to test the
programs.




The Bank
has adopted comprehensive policies and procedures to address the requirements of
the USA PATRIOT Act, and management believes that the Bank is currently in
compliance with the Act.


14




Money
Laundering Control Act




The Money
Laundering Control Act of 1986 provides sanctions for the failure to report high
levels of cash deposits to non-bank financial institutions.  Federal
banking regulators possess the power to revoke the charter or appoint a
conservator for any institution convicted of money
laundering.  Offending banks could lose their federal deposit
insurance, and bank officers could face lifetime bans from working in financial
institutions.  The Community Development Act, which includes a number
of provisions that amend the Bank Secrecy Act, allows the Secretary of the
Treasury to exempt specified currency transactions from reporting requirements
and permits the federal bank regulatory agencies to impose civil money penalties
on banks for violations of the currency transaction reporting
requirements.




Gramm-Leach-Bliley
Act





The
Gramm-Leach-Bliley Act, adopted in 1999, eliminated many of the barriers that
separated the insurance, securities and banking industries since the Great
Depression.  The major provisions of the Gramm-Leach-Bliley Act
are:


.


Financial Holding Companies and
Financial Activities.Title Iestablishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the BHC Act framework to permit a holding company system to engage
in a full range of financial activities through qualification as a new entity
known as a financial holding company.





Subject
to the approval of the Comptroller and certain other conditions, activities
permissible for financial subsidiaries of national banks include, but are not
limited to, the following:  (a) lending, exchanging, transferring,
investing for others, or safeguarding money or securities; (b) providing certain
insurance products (c) providing financial, investment, or economic advisory
services, including advising an investment company; (d) issuing or selling
instruments representing interests in pools of assets permissible for a bank to
hold directly; and (e) underwriting, dealing in, or making a market in
securities.





Securities Activities. Title
II narrows the exemptions from the securities laws previously enjoyed by
banks.





Insurance
Activities.  Title III restates the proposition that the states
are the functional regulators for all insurance activities, including the
insurance activities of federally-chartered banks, and bars the states from
prohibiting insurance activities by depository institutions.





Privacy.Under Title V,
federal banking regulators were required to adopt rules that have limited the
ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some circumstances,
allow consumers to prevent disclosure of certain personal information to a
nonaffiliated third party.  Under the rules, financial institutions
must provide:





·
            initial
      notices to customers about their privacy policies, describing the
      conditions under which they may disclose nonpublic personal information to
      nonaffiliated third parties and
affiliates;





·
            annual
      notices of their privacy policies to current customers;
  and





·
            a
      reasonable method for customers to "opt out" of disclosures to
      nonaffiliated third parties.





Safeguarding Confidential Customer
information.  Under Title V, federal banking regulators were
required to adopt rules requiring financial institutions to implement a program
to protect confidential customer information, and the federal banking agencies
have adopted guidelines requiring financial institutions to establish an
information security program.   The federal bank regulatory
agencies have established standards for safeguarding nonpublic personal
information about customers that implement provisions of the Gramm-Leach Bliley
Act (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.





Community Reinvestment Act Sunshine
Requirements.The
federal banking agencies have adopted regulations implementing Section 711 of
Title VII, the CRA Sunshine Requirements. The regulations require
nongovernmental entities or persons and insured depository institutions and
affiliates that are parties to written agreements made in connection with the
fulfillment of the institution's CRA obligations to make available to the public
and the federal banking agencies a copy of each agreement.  The Bank
is not a party to any agreement that would be the subject of reporting pursuant
to the CRA Sunshine Requirements.


15





Fair
Credit Reporting





The Fair
Credit Reporting Act (the “FCRA”) was adopted to ensure 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, the requirements on credit bureaus to reinvestigate the contents of
reports in response to consumer complaints, among others.





Consumer
Laws and Regulations





The Bank
must also comply with consumer laws and regulations that are designed to protect
consumers in transactions with banks.  While the list is not
exhaustive, these laws and regulations include the Truth in Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act,
among others.  These laws and regulations mandate disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans.  The Bank must
comply with the applicable provisions of these consumer protection laws and
regulations as part of its ongoing regulatory compliance and customer relations
efforts.




Exposure
to and Management of Risk




The
federal banking agencies examine banks and bank holding companies with respect
to their exposure to and management of different categories of
risk.  Categories of risk identified by the agencies include legal
risk, operational risk, market risk, credit risk, interest rate risk, price
risk, foreign exchange risk, transaction risk, compliance risk, strategic risk,
credit risk, liquidity risk, and reputation risk.  This examination
approach causes bank regulators to focus on risk management procedures, rather
than simply examining every asset and transaction.  This approach
supplements rather than replaces existing rating systems based on the evaluation
of an institution’s capital, assets, management, earnings and
liquidity.




Safety
and Soundness Standards




Federal
banking regulators have adopted guidelines prescribing standards for safety and
soundness.  The guidelines create standards for a wide range of
operational and managerial matters including (a) internal controls, information
systems, and internal audit systems; (b) loan documentation; (c) credit
underwriting; (d) interest rate exposure; (e) asset growth; (f) compensation and
benefits; and (g) asset quality and earnings.  Although meant to be
flexible, an institution that falls short of the guidelines’ standards may be
requested to submit a compliance plan or be subjected to regulatory enforcement
actions.




Impact
of Government Monetary Policy




The
earnings of the Bank are and will be affected by the policies of regulatory
authorities, including the Federal Reserve.  An important function of
the Federal Reserve is to regulate the national supply of bank
credit.  Among the instruments used to implement these objectives are
open market operations in U.S. Government securities, changes in reserve
requirements against bank deposits, and changes in the discount rate which banks
pay on advances from the Federal Reserve System.  These instruments
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also affect interest
rates on loans or interest rates paid for deposits.  The monetary
policies of the FRB have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.  The effect, if any, of such policies upon the future business
earnings of the Bank cannot be predicted.




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; (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 this
program.


16




Legislation
and Proposed Changes




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
institutions.  Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress and before various bank regulatory
agencies.  For example, certain proposals to substantially revise the
structure of regulation of financial services are under
consideration.  No prediction can be made as to the likelihood of any
major changes or the impact that new laws or regulations might have on the
Company or the Bank.




Conclusion




It is
impossible to predict with any certainty the competitive impact the laws and
regulations described above will have on commercial banking in general and on
the business of the Company in particular, or to predict whether or when any of
the proposed legislation and regulations described above will be
adopted.  It is anticipated that banking will continue to be a highly
regulated industry.  Additionally, there has been a continued
lessening of the historical distinction between the services offered by
financial institutions and other businesses offering financial services, and the
trend toward nationwide interstate banking is expected to
continue.  As a result of these factors, it is anticipated banks will
experience increased competition for deposits and loans and, possibly, further
increases in their cost of doing business.





Item 1A.  Risk
Factors





RISK
FACTORS





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





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





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





Risks
Related to the Credit Crisis




Current
market developments may adversely affect our industry, business and results of
operations.




Dramatic
declines in the housing market during the prior year, with falling home prices
and increasing foreclosures and unemployment, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment
banks.  These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities, have caused
many financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail.  Many lenders and
institutional investors, concerned about the stability of the financial markets
generally and the strength of counterparties, have reduced or ceased to provide
funding to borrowers, including other financial institutions.  The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets and reduced business activity
could materially and adversely affect our business, financial condition and
results of operations.




The
soundness of other financial institutions could adversely affect
us.




Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships.  We routinely execute
transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, mutual and hedge funds,
and other institutional clients.  Many of these transactions expose us
to credit risk in the event of default of our counterparty or
client.  In addition, our credit risk may be increased when the
collateral we hold cannot be realized or is liquidated at prices not sufficient
to recover the full amount of the secured obligation.  There is no
assurance that any such losses would not materially and adversely affect our
results of operations or earnings.


17




Current
levels of market volatility are unprecedented.




The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months.  Recently, the volatility and disruption has
reached unprecedented levels. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without
regard to those issuers’ underlying financial strength.  If current
levels of market disruption and volatility continue or worsen, there can be no
assurance that we will not experience an adverse effect, which may be material,
on our ability to access capital and on our business, financial condition and
results of operations.




There
can be no assurance that the recently enacted Emergency Economic Stabilization
Act of 2008 (“EESA”) and American Recovery and Reinvestment Act (“ARRA”) will
help stabilize the U.S. financial system.




On
October 3, 2008, President Bush signed into law the EESA, which evolved
from the U.S. Treasury’s initial proposal in response to the financial crises
affecting the banking system and financial markets and going concern threats to
investment banks and other financial institutions. This was followed by the ARRA
on February 17, 2009.  The U.S. Treasury and banking regulators are
implementing a number of programs under this legislation to address capital and
liquidity issues in the banking system.  There can be no assurance,
however, as to the actual impact that the EESA or ARRA will have on the
financial markets, including the extreme levels of volatility and limited credit
availability currently being experienced.  The failure of the EESA or
ARRA to help stabilize the financial markets and a continuation or worsening of
current financial market conditions could materially and adversely affect our
business, financial condition, results of operations, access to credit or the
trading price of our common stock.




Premiums
for federal deposit insurance will increase and may increase more.




The
Federal Deposit Insurance Corporation uses the Deposit insurance Fund (“DIF”) to
cover insured deposits in the event of a bank failure, and maintains the fund by
assessing member banks an insurance premium.  Recent failures have
caused the DIF to fall below the minimum balance required by law, forcing the
FDIC to consider action to rebuild the fund by raising the insurance premiums
assessed member banks.  The FDIC has announced an increase in the
premium of seven basis points in January 2009, with additional increases for
institutions with greater risk profiles starting in the second
quarter.  It announced an additional emergency assessment on February
27, 2009.  Depending on the frequency and severity of bank failures,
future increases in premiums or assessments could be significant and negatively
affect our earnings.




As
a financial services company, adverse changes in general business or economic
conditions could have a material adverse effect on our financial condition and
results of operations.




The
United States is currently in a serious economic downturn, as are economies
around the world.  Financial markets are volatile, business and
consumer spending has declined, and overall business activities have
slowed.  A sustained or continuing weakness or weakening in business
and economic conditions generally or specifically in the principal markets in
which we do business could have one or more of the following adverse impacts on
our business:




·
            a
      decrease in the demand for loans and other products and services offered
      by us;




·
            a
      decrease in the value of our loans held for
  sale;




·
            an
      increase or decrease in the usage of unfunded
  commitments;




·
            an
      impairment of certain intangible assets, such as
  goodwill;




·
            an
      increase in the number of clients and counterparties who become
      delinquent, file for protection under bankruptcy laws or default on their
      loans or other obligations to us.  An increase in the number of
      delinquencies, bankruptcies or defaults could result in a higher level of
      nonperforming assets, net charge-offs, provision for loan losses, and
      valuation adjustments on loans held for
sale.




18




Market
and Interest Rate Risk




Changes
in interest rates could reduce income and cash flow




The
discussion in this report under “Item 7a Quantitative and Qualitative
Disclosures About Market Risk” is incorporated by reference in this
paragraph.  The Company’s income and cash flow depend to a great
extent on the difference between the interest earned on loans and investment
securities, and the interest paid on deposits and other borrowings (the
“interest rate spread”). We cannot control or prevent changes in the level of
interest rates.  They fluctuate in response to general economic
conditions and the policies of various governmental and regulatory agencies, in
particular, the FRB. Changes in monetary policy, including changes in interest
rates, will influence the origination of loans, the purchase of investments, the
generation of deposits and the rates received on loans and investment securities
and paid on deposits and other liabilities.





Recent
decreases in market interest rates have caused the Company’s interest rate
spread to decline significantly, which reduces revenue and net
income.  Sustained low levels of market interest rates will likely
continue to put pressure on our profitability.  Any material reduction
in interest rate spread could have a material adverse effect on our business,
profitability and financial position.





Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition




Liquidity
is essential to our business.  An inability to raise funds through
deposits, borrowings, capital offerings and other sources could have a
substantial negative effect on our liquidity.  Our access to funding
sources in amounts adequate to finance our activities, or on terms attractive to
us, could be impaired by factors that impact us specifically or the financial
services industry in general.  Factors that could detrimentally impact
our access to liquidity sources include a reduction in the level of business
activity due to a market downturn or adverse regulatory action against us, or a
decrease in depositor or investor confidence in us.  Further, as a
business bank, a significant portion of our deposits are raised from companies
in amounts that exceed levels covered by FDIC insurance.  In addition,
our ability to borrow could also be impaired by factors that are not specific to
us, such as the severe disruption of the financial markets or negative views and
expectations about the prospects for the financial services industry as a whole
as the recent turmoil faced by banking in the domestic and worldwide credit
markets deteriorates.




The
timing of conversion of Series B and B1 preferred stock depends on the trading
price of our common stock




As
described in the “Capital Resources” section of Managements Discussion and
Analysis, as a response to the significantly increased risk and uncertainty
presented by rapid deterioration in real estate values and economic conditions
generally, the Company decided to raise additional capital.  In the
fourth quarter of 2008, the Company completed a private placement of Series B
and B1 mandatorily convertible preferred stock of $30.0
million.  Series B and B1 shares pay a dividend of 10% for a minimum
period of eighteen months prior to conversion to common stock.  At
that time, the preferred shares will convert to common shares, provided that the
trading price of common shares averages $10 for the twenty days preceding
conversion.  If this trading price is not achieved, the preferred
shares will remain outstanding with voting rights equal to common shareholders
at the dividend rate of 10%, which reduces cash flow available to pay dividends
to common shareholders.  We can give no assurance about whether or
when the trading value of our common shares would trigger conversion of Series B
and B1 preferred shares.




Risks
Related to the nature and geographical location of Bridge Capital Holdings’
business




Bridge
Capital Holdings’ invests in loans that contain inherent credit risks that may
cause us to incur losses




In our
business as a lender, we face the risk that borrowers will fail to pay their
loans when due.  If borrower defaults cause large aggregate losses, it
could have a material adverse impact on our business, profitability and
financial condition.    The Company closely monitors the
markets in which it conducts its lending operations and adjusts its strategy to
control exposure to loans with higher credit risk.  Asset reviews are
performed using grading standards and criteria similar to those employed by bank
regulatory agencies.  We have established an evaluation process
designed to determine the adequacy of our allowance for loan
losses.  While this process uses historical and other objective
information, the classification of loans and the forecasts and establishment of
loan losses are dependent to a great extent on our subjective assessment based
upon our experience and judgment.  During 2008, the rapid
deterioration of real estate values prompted us to take substantial charges and
provisions to the allowance for loan losses.  We can provide no
assurance that the credit quality of our loans will not deteriorate in the
future and that such deterioration will not adversely affect the Company and
that our allowance for loan losses will be adequate to absorb actual losses in
the future.


19




Bridge
Capital Holdings' operations are concentrated geographically in California, and
poor economic conditions may cause us to incur losses.




Substantially
all of Bridge Capital Holdings' business is located in California. Bridge
Capital Holdings' financial condition and operating results will be subject to
changes in economic conditions in California. In the early to mid-1990s,
California experienced a significant and prolonged downturn in its economy,
which adversely affected financial institutions. Economic conditions in
California are subject to various uncertainties at this time, including the
decline in the technology sector, the California state government's budgetary
difficulties and continuing fiscal difficulties.  The Company will be
subject to changes in economic conditions. We can provide no assurance that
conditions in the California economy will not deteriorate in the future and that
such deterioration will not adversely affect Bridge Capital
Holdings.




The
markets in which Bridge Capital Holdings operates are subject to the risk of
earthquakes and other natural disasters




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




Substantial
competition in the California banking market could adversely affect
us




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




Regulatory
Risks




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




Various
statutory provisions restrict the amount of dividends our subsidiaries can pay
to us without regulatory approval. In addition, if any subsidiary of ours were
to liquidate, that subsidiary's creditors will be entitled to receive
distributions from the assets of that subsidiary to satisfy their claims against
it before we, as a holder of an equity interest in the subsidiary, will be
entitled to receive any of the assets of the subsidiary.




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




We are subject to significant federal
and state regulation and supervision, which is primarily for the benefit and
protection of our customers and not for the benefit of investors. In the past,
our business has been materially affected by these regulations. This trend is
likely to continue in the future. Laws, regulations or policies, including
accounting standards and interpretations currently affecting us and our
subsidiaries, may change at any time. Regulatory authorities may also change
their interpretation of these statutes and regulations.  During
periods of economic stress, regulatory oversight can be expected to increase and
regulatory agencies become more aggressive in responding to concerns and trends
identified in examinations.  Such a regulatory response may effect,
among other things, growth rates, business mix,  capital levels and
payment of dividends   Therefore, our business may be adversely
affected by any future changes in laws, regulations, policies or interpretations
or regulatory approaches to compliance and enforcement, including legislative
and regulatory reactions to the current credit crisis, the terrorist attack on
September 11, 2001 and future acts of terrorism, and major U.S. corporate
bankruptcies and reports of accounting irregularities at U.S. public
companies.




20


As noted
above, on October 3, 2008, President Bush signed into law the EESA, which
evolved from the U.S. Treasury’s initial proposal in response to the financial
crises affecting the banking system and financial markets and going concern
threats to investment banks and other financial institutions. This was followed
by the ARRA on February 17, 2009.  Each of these laws contains
provisions that allow for significantly increased supervisory activities as
determined by regulatory agencies for Companies that accepted TARP
capital.  We can give no assurance as to what form these authorities
might take or whether and when they could be invoked.  The laws also
set limits on executive compensation which may adversely impact our ability to
attract and/or retain qualified executives.





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





See
“Supervision and Regulation – Legislation and Proposed Changes” for additional
discussion regarding adverse effects of, or changes in, banking or other laws
and regulations and governmental fiscal or monetary policies.




Systems,
Accounting and Internal Control Risks




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





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





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





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





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





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


21




Item
1B.  Unresolved Staff Comments





None





Item
2.  Properties




At
December 31, 2009, the Company’s operations included facilities as
follows:





The
principal executive office and a full service banking office are located at 55
Almaden Boulevard, City of San Jose, County of Santa Clara, State of
California.  The office consists of approximately 42,337 square feet
on three floors of an eight-story office building.  24,767 square feet
of the space was originally sublet from a prior tenant in a sublease which
commenced December 26, 2003 and terminated December 31, 2006.  The
sublease provided for an initial base rent of $28,730 with annual escalations to
$45,819 in the final year of the sublease.  The Bank has entered into
a direct lease with the landlord, which commenced immediately following the
expiration of the sublease term on January 1, 2007 for 120 months ending on
December 31, 2016.  The direct lease provides for an initial
twelve-month period of reduced rent followed by a base rent of $47,305 beginning
on January 1, 2008 and increasing 3.0% on each anniversary date
thereafter.   The Bank has also entered into an additional direct
lease with the landlord to occupy 17,570 square feet, which commenced November
1, 2006 and terminates on December 31, 2016.  The direct lease
provides for an initial twelve-month period with no rent followed by an initial
base rent of $36,897 with annual escalations to $48,142 in the final year of the
lease.  The foregoing description is qualified by reference to the
lease agreement dated November 1, 2006 Exhibit 10.16 to this
Report.





An
additional full service banking office is located at 525 University Avenue, City
of Palo Alto, County of Santa Clara, State of California.  The office
consists of approximately 6,495 square feet located in Suite 31 in the building
known as the Palo Alto Office Center.  The Lease is an amendment to a
lease which ended November 30, 2006 and is for a term of 86 months commencing on
February 1, 2007 and ending on January 31, 2014.  The Lease provides
for a base rent of $29,228 through the first anniversary of the lease
date.  Effective with the first anniversary date the lease payments
will be adjusted by a factor that is tied to the Consumer Price
Index.  The foregoing description is qualified by reference to the
lease agreement dated October 15, 2001 attached as exhibit 10.6 to this Report
and the amendment to this lease agreement dated March 9, 2006 exhibit 10.17 to
this Report.





In
addition, the Bank operates loan production offices in San Francisco,
Pleasanton, and Southern California as well as Dallas, Texas and Reston,
Virginia.





Item 3.  Legal
Proceedings




The
Company is not a defendant in any material pending legal proceedings and no such
proceedings are known to be contemplated.  No director, officer,
affiliate, more than 5.0% shareholder of the Company or any associate of these
persons is a party adverse to the Company or has a material interest adverse to
the Company in any material legal proceeding.




Item
4.  Reserved


22


PART II





Item 5.  Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities





The
Company's Common Stock trades on the Nasdaq Capital Market under the symbol
“BBNK”.    The following table summarizes those trades of
which the Company has knowledge, setting forth the high and low sales prices for
the periods indicated.





Sales
      Price ofCommon Stock (1)Three Months Ended
                
                Low
                
                
                HighMarch
      31, 2007
                
                $
                20.00
                
                
                $
                22.60June
      30, 2007
                
                $
                21.25
                
                
                $
                23.70September
      30, 2007
                
                $
                20.86
                
                
                $
                24.58December
      31, 2007
                
                $
                21.00
                
                
                $
                23.00March
      31, 2008
                
                $
                17.77
                
                
                $
                22.43June
      30, 2008
                
                $
                11.73
                
                
                $
                21.28September
      30, 2008
                
                $
                9.00
                
                
                $
                14.04December
      31, 2008
                
                $
                3.30
                
                
                $
                11.46March
      31, 2009
                
                $
                3.70
                
                
                $
                7.55June
      30, 2009
                
                $
                4.50
                
                
                $
                6.39September
      30, 2009
                
                $
                5.25
                
                
                $
                7.31December
      31, 2009
                
                $
                6.45
                
                
                $
                7.47





(1)
Prices represent the actual trading history on the Nasdaq Capital
Market.  Additionally, since trading in the Company’s common stock is
limited, the range of prices stated is not necessarily representative of prices
which would result from a more active market.





The
Company had 254 common shareholders of record as of December 31,
2009.





The
Company's shareholders are entitled to receive dividends, when and as declared
by its Board of Directors, out of funds legally available, subject to statutory
and regulatory restrictions.  See “Supervision and Regulation –
Payment of Dividends” for additional discussion regarding
dividends.  A California corporation such as Bridge Capital Holdings
generally may make a distribution to its shareholders if the corporation’s
retained earnings equal at least the amount of the proposed
distribution.





In a
policy statement, the FRB has advised bank holding companies that it believes
that payment of cash dividends in excess of current earnings from operations is
inappropriate and may be cause for supervisory action.  As a result of
this policy, banks and their holding companies may find it difficult to pay
dividends out of retained earnings from historical periods prior to the most
recent fiscal year or to take advantage of earnings generated by extraordinary
items such as sales of buildings or other large assets in order to generate
profits to enable payment of future dividends.  Additionally, the
FRB’s position that holding companies are expected to provide a source of
managerial and financial strength to their subsidiary banks potentially
restricts a bank holding company’s ability to pay dividends.





So long
as the Company’s Series B and B-1 preferred stock is outstanding, the Company
cannot pay dividends on common stock unless full dividends have been declared
and paid on the preferred stock.  So long as Treasury holds Series C
preferred stock issued by the Company, the Company is subject to additional
restrictions on payment of dividends on common stock.





The
Company has not declared dividends on its common stock since inception of the
Bank’s existence.  In the future, the Company may consider cash and
stock dividends, subject to the restrictions on the payment of cash dividends as
described above, depending upon the level of earnings, management's assessment
of future capital needs and other factors considered by the Board of
Directors.


23





The
following chart reflects the total return performance of the Company’s common
stock for the years ended December 31, 2009, 2008, 2007, 2006, 2005, and 2004,
including the performance of shares of common stock of the Bank prior to the
formation of the Company as holding company for the Bank on October 1,
2004.











Period EndingIndex
                              
                              12/31/04
                              
                              
                              12/31/05
                              
                              
                              12/31/06
                              
                              
                              12/31/07
                              
                              
                              12/31/08
                              
                              
                              12/31/09Bridge
      Capital Holdings
                              
                              
                              100.00
                              
                              
                              
                              115.77
                              
                              
                              
                              127.91
                              
                              
                              
                              134.42
                              
                              
                              
                              25.03
                              
                              
                              
                              45.36NASDAQ
      Composite
                              
                              
                              100.00
                              
                              
                              
                              101.37
                              
                              
                              
                              111.03
                              
                              
                              
                              121.92
                              
                              
                              
                              72.49
                              
                              
                              
                              104.31SNL
      Western Bank
                              
                              
                              100.00
                              
                              
                              
                              104.11
                              
                              
                              
                              117.48
                              
                              
                              
                              98.12
                              
                              
                              
                              95.54
                              
                              
                              
                              87.73




24


Item 6.  Selected
Financial Data





The
following table presents certain consolidated financial information concerning
the business of the Company.  This information should be read in
conjunction with the Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained elsewhere herein.





(dollars in thousands, except per share data)
                    
                    As of and for the year endedDecember 31,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Statement
      of Operations Data:Interest
      income
                    
                    $
                    44,572
                    
                    
                    $
                    58,692
                    
                    
                    $
                    66,745
                    
                    
                    $
                    52,962
                    
                    
                    $
                    34,118Interest
      expense
                    
                    
                    6,763
                    
                    
                    
                    13,827
                    
                    
                    
                    19,160
                    
                    
                    
                    14,271
                    
                    
                    
                    6,615Net
      interest income
                    
                    
                    37,809
                    
                    
                    
                    44,865
                    
                    
                    
                    47,585
                    
                    
                    
                    38,691
                    
                    
                    
                    27,503Provision
      for credit losses
                    
                    
                    (9,200
                    )
                    
                    
                    (31,520
                    )
                    
                    
                    (2,275
                    )
                    
                    
                    (1,372
                    )
                    
                    
                    (2,162
                    )Net
      interest income after provision for credit losses
                    
                    
                    28,609
                    
                    
                    
                    13,345
                    
                    
                    
                    45,310
                    
                    
                    
                    37,319
                    
                    
                    
                    25,341Other
      income
                    
                    
                    10,312
                    
                    
                    
                    9,971
                    
                    
                    
                    6,713
                    
                    
                    
                    3,837
                    
                    
                    
                    4,197Other
      expenses
                    
                    
                    (38,071
                    )
                    
                    
                    (36,318
                    )
                    
                    
                    (33,574
                    )
                    
                    
                    (27,279
                    )
                    
                    
                    (19,981
                    )Income
      before income taxes
                    
                    
                    850
                    
                    
                    
                    (13,002
                    )
                    
                    
                    18,449
                    
                    
                    
                    13,877
                    
                    
                    
                    9,557Income
      taxes
                    
                    
                    585
                    
                    
                    
                    5,661
                    
                    
                    
                    (7,583
                    )
                    
                    
                    (5,243
                    )
                    
                    
                    (3,832
                    )Net
      income (loss)
                    
                    $
                    1,435
                    
                    
                    $
                    (7,341
                    )
                    
                    $
                    10,866
                    
                    
                    $
                    8,634
                    
                    
                    $
                    5,725Preferred
      Dividends
                    
                    
                    4,203
                    
                    
                    
                    152
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net income available
      to common shareholders
                    
                    $
                    (2,768
                    )
                    
                    $
                    (7,493
                    )
                    
                    $
                    10,866
                    
                    
                    $
                    8,634
                    
                    
                    $
                    5,725Per
      Share Data:Basic
      income (loss) per share
                    
                    $
                    (0.42
                    )
                    
                    $
                    (1.15
                    )
                    
                    $
                    1.70
                    
                    
                    $
                    1.38
                    
                    
                    $
                    0.93Diluted
      income (loss) per share
                    
                    
                    (0.42
                    )
                    
                    
                    (1.15
                    )
                    
                    
                    1.57
                    
                    
                    
                    1.27
                    
                    
                    
                    0.85Book
      value per common share
                    
                    
                    7.81
                    
                    
                    
                    8.51
                    
                    
                    
                    10.04
                    
                    
                    
                    7.77
                    
                    
                    
                    6.36Cash
      dividend per common share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      Sheet Data:Balance
      sheet totals:Assets
                    
                    $
                    844,067
                    
                    
                    $
                    947,596
                    
                    
                    $
                    774,832
                    
                    
                    $
                    721,979
                    
                    
                    $
                    536,520Loans,
      net
                    
                    
                    558,977
                    
                    
                    
                    679,451
                    
                    
                    
                    642,265
                    
                    
                    
                    531,956
                    
                    
                    
                    432,667Deposits
                    
                    
                    705,046
                    
                    
                    
                    777,245
                    
                    
                    
                    671,356
                    
                    
                    
                    644,987
                    
                    
                    
                    468,158Shareholders'
      equity
                    
                    
                    109,314
                    
                    
                    
                    112,490
                    
                    
                    
                    65,084
                    
                    
                    
                    49,094
                    
                    
                    
                    39,714Average
      balance sheet amounts:Assets
                    
                    $
                    868,166
                    
                    
                    $
                    831,958
                    
                    
                    $
                    750,538
                    
                    
                    $
                    606,506
                    
                    
                    $
                    465,944Loans,
      net
                    
                    
                    593,352
                    
                    
                    
                    671,065
                    
                    
                    
                    581,253
                    
                    
                    
                    458,648
                    
                    
                    
                    348,592Deposits
                    
                    
                    719,001
                    
                    
                    
                    725,952
                    
                    
                    
                    665,925
                    
                    
                    
                    535,472
                    
                    
                    
                    411,678Shareholders'
      equity
                    
                    
                    110,447
                    
                    
                    
                    67,551
                    
                    
                    
                    56,192
                    
                    
                    
                    44,646
                    
                    
                    
                    36,017Selected
      Ratios:Return
      on average equity
                    
                    
                    1.30
                    %
                    
                    
                    -10.87
                    %
                    
                    
                    19.34
                    %
                    
                    
                    19.34
                    %
                    
                    
                    15.90
                    %Return
      on average assets
                    
                    
                    0.17
                    %
                    
                    
                    -0.88
                    %
                    
                    
                    1.45
                    %
                    
                    
                    1.42
                    %
                    
                    
                    1.23
                    %Efficiency
      ratio
                    
                    
                    79.12
                    %
                    
                    
                    66.23
                    %
                    
                    
                    61.83
                    %
                    
                    
                    64.14
                    %
                    
                    
                    63.03
                    %Total
      risk based capital ratio
                    
                    
                    19.45
                    %
                    
                    
                    16.90
                    %
                    
                    
                    11.67
                    %
                    
                    
                    11.74
                    %
                    
                    
                    11.58
                    %Net
      chargeoffs (recoveries) to average gross loans
                    
                    
                    1.92
                    %
                    
                    
                    3.14
                    %
                    
                    
                    0.17
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.06
                    %Allowance
      for loan losses to total gross loans
                    
                    
                    2.78
                    %
                    
                    
                    2.65
                    %
                    
                    
                    1.32
                    %
                    
                    
                    1.36
                    %
                    
                    
                    1.35
                    %Average
      equity to average assets
                    
                    
                    12.72
                    %
                    
                    
                    8.12
                    %
                    
                    
                    7.49
                    %
                    
                    
                    7.36
                    %
                    
                    
                    7.73
                    %




25


Item  7.   Management's
Discussion and Analysis of Financial Condition and Results of
Operations





In
addition to the historical information, this annual report contains certain
forward-looking information 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, and which are subject to the “Safe Harbor” created by those
sections.   The reader of this annual report should understand
that all such forward-looking statements are subject to various uncertainties
and risks that could affect their outcome.  The Company’s actual
results could differ materially from those suggested by such forward-looking
statements.  Such risks and uncertainties include, among others, (1)
competitive pressure in the banking industry increases significantly; (2)
changes in interest rate environment reduces margin; (3) general economic
conditions, either nationally or regionally are less favorable than expected,
resulting in, among other things, a deterioration in credit quality; (4) changes
in the regulatory environment; (5) changes in business conditions and inflation;
(6) costs and expenses of complying with the internal control provisions of the
Sarbanes-Oxley Act and our degree of success in achieving compliance; (7)
changes in securities markets; (8) future credit loss experience; (9) civil
disturbances of terrorist threats or acts, or apprehension about possible future
occurrences of acts of this type; and (10) the involvement of the United States
in war or other hostilities.  Therefore, the information in this
annual report should be carefully considered when evaluating the business
prospects of the Company.




Critical Accounting
Policies




Our
accounting policies are integral to understanding the results reported.
Accounting policies are described in detail in Note 1 to the Consolidated
Financial Statements. Our most complex accounting policies require management’s
judgment to ascertain the valuation of assets, liabilities, commitments and
contingencies. We have established detailed policies and 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 our 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 provision for loan losses is
determined based on management’s assessment of several factors: reviews and
evaluation of specific loans, changes in the nature and volume of the loan
portfolio, current economic conditions and the related impact on specific
borrowers and industry groups, historical loan loss experiences, the level of
classified and nonperforming loans and the results of regulatory
examinations.





Loans are
considered impaired if, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. The
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate
stipulated in the loan agreement, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. In measuring
the fair value of the collateral, management uses assumptions and methodologies
consistent with those that would be utilized by unrelated third
parties.





Changes
in the financial condition of individual borrowers, economic conditions,
historical loss experience, and the condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan losses and the associated provision for loan losses.





The
accrual of interest on loans is discontinued and any accrued and unpaid interest
is reversed when, in the opinion of management, there is significant doubt as to
the collectability of interest or principal or when the payment of principal or
interest is ninety days past due, unless the amount is well-secured and in the
process of collection.




Sale of SBA
Loans




The
Company has the ability and the intent to sell all or a portion of certain SBA
loans in the loan portfolio and, as such, carries the saleable portion of these
loans at the lower of aggregate cost or fair value.  At December 31,
2009 and December 31, 2008, the fair value of SBA loans exceeded aggregate cost
and therefore, SBA loans were carried at aggregate cost.


26




In
calculating gain on the sale of SBA loans, the Bank performs an allocation based
on the relative fair values of the sold portion and retained portions of the
loan.  The Company assumptions are validated by reference to external
market information.




Available-for-Sale
Securities




The fair
value of most securities classified as available-for-sale is based on quoted
market prices. If quoted market prices are not available, fair values are
extrapolated from the quoted prices of similar instruments.




Supplemental Employee
Retirement Plan




The
Company has entered into supplemental employee retirement agreements with
certain executive and senior officers.  The measurement of the
liability under these agreements includes estimates involving life expectancy,
length of time before retirement, and expected benefit levels.  Should
these estimates prove materially wrong, we could incur additional or reduced
expense to provide the benefits.




Deferred Tax
Assets




Our
deferred tax assets are explained in Note 8 to the Consolidated Financial
Statements. The Company has sufficient taxable income from current and prior
periods to support our position that the benefit of our deferred tax assets will
be realized.  As such, we have provided no valuation allowance against
our deferred tax assets.




Operating
Results




For the
year ended December 31, 2009, the Company reported a net loss available to
common shareholders of $(2.8) million or $(0.42) basic and $(0.42) diluted
earnings per share, compared with a net loss of $(7.5) million or $(1.15) basic
and $(1.15) diluted earnings per share for the year ended December 31, 2008 and
net income of $10.9 million or $1.70 basic and $1.57 diluted earnings per share
for the year ended December 31, 2007. The net loss available to common
shareholders for 2009 was reduced by preferred dividends of $4.2
million.  There were no preferred dividends during 2008 and
2007.   The increase in earnings during 2009 compared to 2008
resulted primarily from a decrease in provision for credit
losses.  The decrease in earnings during 2008 compared to 2007
resulted primarily from an increase of $29.2 million for the provision for loan
losses, offset, in part, by a decrease in the provision for income taxes of
$13.2 million.  See the specific sections below for details regarding
these changes.




Net Interest Income and
Margin




Net
interest income is the principal source of the Company’s operating
earnings.  Net interest income is affected by changes in the nature
and volume of earning assets held during the year, the rates earned on such
assets and the rates paid on interest-bearing liabilities.  The
following table shows the composition of average earning assets and average
funding sources, average yields and rates, and the net interest margin for the
three years ended December 31, 2009, 2008 and 2007.


27





AVERAGE
BALANCES, RATES AND YIELDS





(dollars in thousands)
                                              
                                              Year Ended December 31,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007Interest
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              Interest
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              InterestAverage
                                              
                                              
                                              Income/
                                              
                                              
                                              Yields/
                                              
                                              
                                              Average
                                              
                                              
                                              Income/
                                              
                                              
                                              Yields/
                                              
                                              
                                              Average
                                              
                                              
                                              Income/
                                              
                                              
                                              Yields/Balance
                                              
                                              
                                              Expense
                                              
                                              
                                              Rates
                                              
                                              
                                              Balance
                                              
                                              
                                              Expense
                                              
                                              
                                              Rates
                                              
                                              
                                              Balance
                                              
                                              
                                              Expense
                                              
                                              
                                              RatesAssetsInterest
      earning assets (2):Loans
      (1)
                                              
                                              $
                                              612,318
                                              
                                              
                                              $
                                              43,350
                                              
                                              
                                              
                                              7.1
                                              %
                                              
                                              $
                                              686,107
                                              
                                              
                                              $
                                              56,302
                                              
                                              
                                              
                                              8.2
                                              %
                                              
                                              $
                                              590,443
                                              
                                              
                                              $
                                              61,008
                                              
                                              
                                              
                                              10.3
                                              %Federal
      funds sold
                                              
                                              
                                              167,434
                                              
                                              
                                              
                                              395
                                              
                                              
                                              
                                              0.2
                                              %
                                              
                                              
                                              74,635
                                              
                                              
                                              
                                              1,066
                                              
                                              
                                              
                                              1.4
                                              %
                                              
                                              
                                              52,166
                                              
                                              
                                              
                                              2,648
                                              
                                              
                                              
                                              5.1
                                              %Interest
      bearing deposits
                                              
                                              
                                              16,843
                                              
                                              
                                              
                                              363
                                              
                                              
                                              
                                              2.2
                                              %
                                              
                                              
                                              3,757
                                              
                                              
                                              
                                              119
                                              
                                              
                                              
                                              3.2
                                              %
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Investment
      securities
                                              
                                              
                                              28,259
                                              
                                              
                                              
                                              464
                                              
                                              
                                              
                                              1.6
                                              %
                                              
                                              
                                              24,218
                                              
                                              
                                              
                                              1,205
                                              
                                              
                                              
                                              5.0
                                              %
                                              
                                              
                                              60,901
                                              
                                              
                                              
                                              3,089
                                              
                                              
                                              
                                              5.1
                                              %Total
      earning assets
                                              
                                              
                                              824,854
                                              
                                              
                                              
                                              44,572
                                              
                                              
                                              
                                              5.4
                                              %
                                              
                                              
                                              788,717
                                              
                                              
                                              
                                              58,692
                                              
                                              
                                              
                                              7.4
                                              %
                                              
                                              
                                              703,510
                                              
                                              
                                              
                                              66,745
                                              
                                              
                                              
                                              9.5
                                              %Noninterest
      earning assets:Cash
      and due from banks
                                              
                                              
                                              17,965
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              18,638
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              25,284All
      other assets (3)
                                              
                                              
                                              25,347
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              24,603
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              21,744TOTAL
                                              
                                              $
                                              868,166
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              831,958
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              750,538Liabilities
      and shareholders'
      equityInterest-bearing
      liabilities:Deposits:Demand
                                              
                                              $
                                              4,776
                                              
                                              
                                              
                                              5
                                              
                                              
                                              
                                              0.1
                                              %
                                              
                                              $
                                              5,139
                                              
                                              
                                              
                                              12
                                              
                                              
                                              
                                              0.2
                                              %
                                              
                                              $
                                              5,382
                                              
                                              
                                              
                                              40
                                              
                                              
                                              
                                              0.7
                                              %Savings
                                              
                                              
                                              292,464
                                              
                                              
                                              
                                              2,150
                                              
                                              
                                              
                                              0.7
                                              %
                                              
                                              
                                              380,460
                                              
                                              
                                              
                                              8,155
                                              
                                              
                                              
                                              2.1
                                              %
                                              
                                              
                                              371,371
                                              
                                              
                                              
                                              13,783
                                              
                                              
                                              
                                              3.7
                                              %Time
                                              
                                              
                                              128,367
                                              
                                              
                                              
                                              3,261
                                              
                                              
                                              
                                              2.5
                                              %
                                              
                                              
                                              111,834
                                              
                                              
                                              
                                              4,259
                                              
                                              
                                              
                                              3.8
                                              %
                                              
                                              
                                              88,542
                                              
                                              
                                              
                                              4,281
                                              
                                              
                                              
                                              4.8
                                              %Other
                                              
                                              
                                              26,431
                                              
                                              
                                              
                                              1,347
                                              
                                              
                                              
                                              5.1
                                              %
                                              
                                              
                                              28,554
                                              
                                              
                                              
                                              1,401
                                              
                                              
                                              
                                              4.9
                                              %
                                              
                                              
                                              17,802
                                              
                                              
                                              
                                              1,056
                                              
                                              
                                              
                                              5.9
                                              %Total
      interest-bearingLiabilities
                                              
                                              
                                              452,038
                                              
                                              
                                              
                                              6,763
                                              
                                              
                                              
                                              1.5
                                              %
                                              
                                              
                                              525,987
                                              
                                              
                                              
                                              13,827
                                              
                                              
                                              
                                              2.6
                                              %
                                              
                                              
                                              483,097
                                              
                                              
                                              
                                              19,160
                                              
                                              
                                              
                                              4.0
                                              %Noninterest-bearing
      liabilities:Demand
      deposits
                                              
                                              
                                              293,394
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              228,519
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              200,630Accrued
      expenses and other liabilities
                                              
                                              
                                              12,287
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              9,901
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              10,619Shareholders'
      equity
                                              
                                              
                                              110,447
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              67,551
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              56,192TOTAL
                                              
                                              $
                                              868,166
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              831,958
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              750,538Net
      interest income and margin
                                              
                                              
                                              
                                              
                                              
                                              $
                                              37,809
                                              
                                              
                                              
                                              4.6
                                              %
                                              
                                              
                                              
                                              
                                              
                                              $
                                              44,865
                                              
                                              
                                              
                                              5.7
                                              %
                                              
                                              
                                              
                                              
                                              
                                              $
                                              47,585
                                              
                                              
                                              
                                              6.8
                                              %





1)
            Includes
      amortization of loan fees of $4.3 million for 2009, $5.5 million for 2008
      and $5.9 million for 2007.  Nonperforming loans have been
      included in average loan balances.





2)
            Interest
      income is reflected on an actual basis, not on a fully taxable equivalent
      basis.  Yields are based on amortized
  cost.





3)
            Net
      of average allowance for credit losses of $17.5 million and average
      deferred loan fees of $1.4 million for 2009, $13.3 million and $1.8
      million for 2008, and $7.7 million and $1.5 million for 2007,
      respectively.





Interest
differential is affected by changes in volume, changes in rates and a
combination of changes in volume and rates. Volume changes are caused by changes
in the levels of average earning assets and average interest bearing deposits
and borrowings.  Rate changes result from changes in yields earned on
assets and rates paid on liabilities.  Changes not solely attributable
to volume or rates have been allocated to the rate component.


28





The
following table shows the effect on the interest differential of volume and rate
changes for the years ended December 31, 2009, 2008 and 2007:





(dollars in thousands)
                
                Year Ended December 31,2009 vs. 2008
                
                
                2008 vs. 2007Increase (decrease)
                
                
                Increase
      (decrease)due to change in
                
                
                due to change inAverage
                
                
                Average
                
                
                Total
                
                
                Average
                
                
                Average
                
                
                TotalVolume
                
                
                Rate
                
                
                Change
                
                
                Volume
                
                
                Rate
                
                
                ChangeInterest
      income:Loans
                
                $
                (5,224
                )
                
                $
                (7,728
                )
                
                $
                (12,952
                )
                
                $
                7,851
                
                
                $
                (12,557
                )
                
                $
                (4,706
                )Federal
      funds sold
                
                
                219
                
                
                
                (890
                )
                
                
                (671
                )
                
                
                321
                
                
                
                (1,903
                )
                
                
                (1,582
                )Other
                
                
                282
                
                
                
                (38
                )
                
                
                244
                
                
                
                119
                
                
                
                -
                
                
                
                119Investment
      securities
                
                
                66
                
                
                
                (807
                )
                
                
                (741
                )
                
                
                (1,825
                )
                
                
                (59
                )
                
                
                (1,884
                )Total
      interest income
                
                
                (4,656
                )
                
                
                (9,464
                )
                
                
                (14,120
                )
                
                
                6,465
                
                
                
                (14,518
                )
                
                
                (8,053
                )Interest
      expense:Demand
                
                
                (0
                )
                
                
                (7
                )
                
                
                (7
                )
                
                
                (1
                )
                
                
                (27
                )
                
                
                (28
                )Savings
                
                
                (646
                )
                
                
                (5,359
                )
                
                
                (6,005
                )
                
                
                195
                
                
                
                (5,823
                )
                
                
                (5,628
                )Time
                
                
                420
                
                
                
                (1,418
                )
                
                
                (998
                )
                
                
                887
                
                
                
                (909
                )
                
                
                (22
                )Other
                
                
                (108
                )
                
                
                54
                
                
                
                (54
                )
                
                
                528
                
                
                
                (183
                )
                
                
                345Total
      interest expense
                
                
                (334
                )
                
                
                (6,729
                )
                
                
                (7,064
                )
                
                
                1,610
                
                
                
                (6,942
                )
                
                
                (5,333
                )Change
      in net interest income
                
                $
                (4,322
                )
                
                $
                (2,735
                )
                
                $
                (7,056
                )
                
                $
                4,856
                
                
                $
                (7,576
                )
                
                $
                (2,720
                )





Net
interest income was $37.8 million in 2009, comprised of $44.6 million in
interest income and $6.8 million in interest expense.  Net interest
income was $44.9 million in 2008, comprised of $58.7 million in interest income
and $13.8 million in interest expense.  The decrease of $7.1 million
in net interest income in 2009 was primarily due to a decrease of $14.1 million
in interest income offset, in part, by a decrease of $7.1 million in interest
expense.





The
decrease of $2.7 million in net interest income in 2008 was primarily due to a
decrease of $8.1 million in interest income offset, in part, by a decrease of
$5.3 million in interest expense.





The net
interest margin (net interest income divided by average earning assets) was 4.6%
for the year ended December 31, 2009, as compared to 5.7% for the year ended
December 31, 2008 and 6.8% for 2007.  The decline in net interest
margin in 2009 was primarily the result of a decrease in short term interest
rates, a decrease in income from interest rate swaps, an increase in
nonperforming loans, and decreased balance sheet leverage.  During the
year ended December 31, 2009, the net settlement from interest rate swaps
contributed $0.4 million to support net interest income compared to $2.0 million
for the year ended December 31, 2008.  Nonperforming loans had a
negative impact on net interest margin of approximately of 24 basis points in
2009 compared to 15 basis points in 2008.  The decline in net interest
margin in 2007 compared to 2006 was primarily the result of growth in the volume
of average interest bearing liabilities and decreased balance sheet
leverage.





Average
loans represented 74.2% of average earning assets in 2009 compared to 87.0% in
2008 and 83.9% in 2007.  In addition, in 2009 the Bank’s ratio of
average loans to average deposits was 85.2% down from 94.5% in 2008 and 88.7% in
2007, reflecting slightly faster deposit funding relative to loan growth during
the year.





Net
interest income is the principal source of the Company’s operating
earnings.  Significant factors affecting net interest income are:
rates, volumes and mix of the loan, investment and deposit portfolios and
changes in short-term interest rates. The interest rate earned on a majority of
the Company’s assets, specifically the loan portfolio, adjust with changes in
short-term market rates.  As such, the nature of the Company’s balance
sheet is that, over time as short-term interest rates change, income on interest
earning assets has a greater impact on net interest income than interest paid on
liabilities.  The Company’s prime rate averaged 3.25%, 5.09%, and
8.05% for the years ended 2009, 2008, and 2007, respectively.




29




Interest
Income




For the
year ended December 31, 2009, the Company reported interest income of $44.6
million, a decrease of $14.1 million or 24.1% over $58.7 million reported in
2008.  The decrease in interest income primarily reflects a decrease
in short term interest rates, a decrease in income from interest rate swaps, and
an increase in nonperforming assets.  Average earning assets were
$824.9 million for the year ended December 31, 2009 an increase of $36.1 million
or 4.6% over $788.7 million for the year ended December 31, 2008.





For the
year ended December 31, 2008, the Company reported interest income of $58.7
million, a decrease of $8.1 million or 12.1% over $66.8 million reported in
2007.  The decrease in interest income primarily reflects a decrease
in short term interest rates and an increase in non-performing assets, offset,
in part by an increase in income from interest rate swaps.  Average
earning assets were $788.7 million for the year ended December 31, 2008 an
increase of $85.2 million or 12.1% over $703.5 million for the year ended
December 31, 2007.




Interest
Expense




Interest
expense was $6.8 million for the year ended December 31, 2009, which represented
a decrease of $7.1 million or 51.1% compared to $13.8 million for the year ended
December 31, 2008.  The decrease in interest expense reflects the
lower interest rates paid on liabilities in 2009 compared to
2008.  Average interest-bearing liabilities were $452.0 million for
the year ended December 31, 2009, a decrease of $73.9 million or 14.1% from
$526.0 million for the year ended December 31, 2008.





Interest
expense was $13.8 million for the year ended December 31, 2008, which
represented a decrease of $5.3 million or 27.8% compared to $19.2 million for
the year ended December 31, 2007.  The decrease in interest expense
reflects the lower interest rates paid on liabilities in 2008 compared to
2007.  Average interest-bearing liabilities were $526.0 million for
the year ended December 31, 2008, an increase of $42.9 million or 8.9% from
$483.1 million for the year ended December 31, 2007.




Credit Risk and Provision
for Credit Losses




The Bank
maintains an allowance for credit losses which is based, in part, on the loss
experience of the Bank and the California banking industry, the impact of
economic conditions within the Bank's market area, and, as applicable, the State
of California, the value of underlying collateral, loan performance and inherent
risks in the loan portfolio. The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating expense and
recoveries of previously charged-off loans.  Based on management’s
evaluation of such risks, additions of $9.2 million, $31.5 million, and $2.3
million were made to the allowance for credit losses in 2009, 2008 and 2007,
respectively.  The significant increase in provision for 2008 came in
response to increased risk posed by significant deterioration in real estate
values and economic conditions generally, in addition to charge offs taken on
specifically identified exposures in real estate loans. During 2009, the Bank
had $12.8 million in charge offs, primarily due to the significant decrease in
value of collateral securing real estate loans, and had recoveries of $1.1
million as compared to $21.7 million in charge offs and $120,000 in recoveries
in 2008 and $1.3 million in charge offs and $259,000 in recoveries in
2007.  The allowance for credit losses was $16.0 million representing
2.78% of total loans at December 31, 2009 as compared to $18.6 million
representing 2.65% of total loans at December 31, 2008 and $8.6 million
representing 1.32% of total loans at December 31, 2007.





Management
is of the opinion that the allowance for credit losses is maintained at a level
adequate for inherent losses in the loan portfolio.  However, the
Bank's loan portfolio, which includes approximately $183.0 million in real
estate loans, representing approximately 31.7% of the portfolio, could be
adversely affected if California economic conditions continue to contract and
the real estate market in the Bank's market area were to further
weaken.  The effect of such events, although uncertain at this time,
could result in an increase in the level of non-performing loans and Other Real
Estate Owned (“OREO”) and the level of the allowance for loan losses, which
could adversely affect the Bank's future growth and profitability.





See
“Allowance for Loan Losses” for additional discussion regarding the allowance
for credit losses and nonperforming assets.


30


Non-interest
Income




The
following table sets forth the components of other income and the percentage
distribution of such income for the years ended December 31, 2009, 2008 and
2007:





(dollars in thousands)
                
                Year Ended December 31,2009
                
                
                2008
                
                
                2007Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentOther
      income-cash flow hedge
                
                $
                3,286
                
                
                
                31.9
                %
                
                $
                3,870
                
                
                
                38.8
                %
                
                $
                -
                
                
                
                -Service
      charges on deposit accounts
                
                
                1,900
                
                
                
                18.4
                %
                
                
                1,166
                
                
                
                11.7
                %
                
                
                672
                
                
                
                10.0
                %Gain
      on sale of OREO
                
                
                1,628
                
                
                
                15.8
                %
                
                
                161
                
                
                
                1.6
                %
                
                
                -
                
                
                
                0.0
                %International
      fee income
                
                
                1,583
                
                
                
                15.4
                %
                
                
                1,830
                
                
                
                18.4
                %
                
                
                658
                
                
                
                9.8
                %Gain
      on sale of SBA loans
                
                
                615
                
                
                
                6.0
                %
                
                
                603
                
                
                
                6.0
                %
                
                
                3,564
                
                
                
                53.1
                %SBA
      loan servicing fee income
                
                
                436
                
                
                
                4.2
                %
                
                
                445
                
                
                
                4.5
                %
                
                
                442
                
                
                
                6.5
                %Increase
      in value-bank owned life insurance
                
                
                421
                
                
                
                4.1
                %
                
                
                400
                
                
                
                4.0
                %
                
                
                402
                
                
                
                6.0
                %Off-balance
      sheet management fee
                
                
                158
                
                
                
                1.5
                %
                
                
                351
                
                
                
                3.5
                %
                
                
                79
                
                
                
                1.2
                %Warrant
      income
                
                
                81
                
                
                
                0.8
                %
                
                
                3
                
                
                
                0.0
                %
                
                
                441
                
                
                
                6.6
                %Gain
      on sale of securities
                
                
                -
                
                
                
                0.0
                %
                
                
                711
                
                
                
                7.1
                %
                
                
                -
                
                
                
                0.0
                %Other
      non-interest income
                
                
                204
                
                
                
                2.1
                %
                
                
                431
                
                
                
                4.3
                %
                
                
                455
                
                
                
                6.8
                %$
                10,312
                
                
                
                100.0
                %
                
                $
                9,971
                
                
                
                100.0
                %
                
                $
                6,713
                
                
                
                100.0
                %





Non-interest
income totaled $10.3 million in 2009, an increase of $0.3 million or 3.4% over
$10.0 million in 2008.  Non-interest income of $10.0 million in 2008
represented an increase of $3.3 million or 48.5% over $6.7 million in
2007.  Non-interest income generally consists primarily of
international fee income, gains recognized on sales of SBA loans, and service
charge income on deposit accounts.  However, the increase in
non-interest income during the year ending December 31, 2009 was primarily
attributable to the increase in gain on sale of OREO of $1.5
million.





The
increase in non-interest income in 2008 compared to 2007 was primarily
attributable to the termination of interest rate swaps having a combined
notional value of $100.0 million.  Due to the significant decline in
short-term interest rates, the loan pools designated as hedged against the
interest rate swaps had decreased to a level that hedge accounting treatment was
no longer applicable.  As such, the Company determined that it was
economically beneficial to terminate the interest rate swaps and have the
ability to immediately recognize $3.9 million in non-interest income and
amortize a deferred gain of $4.7 million over the remaining term of the
designated hedging relationship ($3.3 million of this deferred gain was
recognized in 2009).





For the
year ended December 31, 2009 service charge income on deposit accounts was $1.9
million, representing an increase of $734,000, or 63.0%, compared to $1.2
million for the same period one year ago.  The service charge income
on deposit account for 2008 compared to $672,000 in 2007, representing an
increase of $494,000, or 73.5%.  The increase in 2009 and 2008 was
attributable to an increase in deposit accounts and deposit related analysis
charges.





The
Company generates international fee income on spot contracts (binding agreements
for the purchase or sale of currency for immediate delivery and settlement) and
forward contracts (a contractual commitment for a fixed amount of foreign
currency on a future date at an agreed upon exchange rate) in connection with
client’s cross-border activities. The transactions incurred are during the
ordinary course of business and are not speculative in nature.  The
Company recognizes income on a cash basis at the time of contract settlement in
an amount equal to the spread created by the exchange rate charged to the client
versus the actual exchange rate negotiated by the Company in the open
market.  During 2009, the Company recognized $1.6 million in
international fee income, representing a decrease of $247,000, or 13.5%,
compared to $1.8 million for the same period one year ago.  The
decrease was primarily caused by a decrease in client demand for international
services as a result of the current economic environment.  The
international fee income for 2008 compared to $658,000 in 2007, representing an
increase of $1.2 million, or 178.1%.  The increase was primarily
caused by increased client demand for international services and expansion of
the international department.




Revenue
from sales of SBA loans is dependant on consistent origination and funding of
new loan volumes, the timing of which may be impacted, from time to time, by (1)
increased competition from other lenders; (2) the relative attractiveness of SBA
borrowing to other financing options; (3) adjustments to programs by the SBA;
(4) changes in activities of secondary market participants and; (5) other
factors.  Gains recognized on sales of SBA loans were $615,000 in the
year ended December 31, 2009 which represented an increase of $12,000 or 2.0%
compared to $603,000 the same period one year earlier.  The gains
recognized on sales of SBA loans in 2008 compared to $3.6 million in 2007,
representing a decrease of $3.0 million, or 83.1%.  The decrease was
attributed to a lower volume of loans sold during the year.


31




Non-interest
Expenses






The
components of other expense as a percentage of average assets are set forth in
the following table for the years ended December 31, 2009, 2008 and
2007.





Year Ended December 31,(dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                20,286
                
                
                
                2.3
                %
                
                $
                21,399
                
                
                
                2.6
                %
                
                $
                20,990
                
                
                
                2.8
                %Occupancy
                
                
                3,457
                
                
                
                0.4
                %
                
                
                3,608
                
                
                
                0.4
                %
                
                
                3,390
                
                
                
                0.5
                %Data
      services
                
                
                2,526
                
                
                
                0.3
                %
                
                
                2,439
                
                
                
                0.3
                %
                
                
                1,917
                
                
                
                0.3
                %Professional
      services
                
                
                1,939
                
                
                
                0.2
                %
                
                
                1,174
                
                
                
                0.1
                %
                
                
                1,150
                
                
                
                0.2
                %Assessments
                
                
                2,629
                
                
                
                0.3
                %
                
                
                665
                
                
                
                0.1
                %
                
                
                377
                
                
                
                0.1
                %OREO
      expense
                
                
                1,231
                
                
                
                0.1
                %
                
                
                589
                
                
                
                0.0
                %
                
                
                1
                
                
                
                0.0
                %Deposit
      services/supplies
                
                
                1,015
                
                
                
                0.1
                %
                
                
                725
                
                
                
                0.1
                %
                
                
                955
                
                
                
                0.1
                %Marketing
                
                
                916
                
                
                
                0.1
                %
                
                
                1,312
                
                
                
                0.2
                %
                
                
                1,350
                
                
                
                0.2
                %Director/Shareholder
      expenses
                
                
                916
                
                
                
                0.1
                %
                
                
                1,078
                
                
                
                0.1
                %
                
                
                837
                
                
                
                0.1
                %Furniture
      and equipment
                
                
                920
                
                
                
                0.1
                %
                
                
                982
                
                
                
                0.1
                %
                
                
                947
                
                
                
                0.1
                %Other
                
                
                2,236
                
                
                
                0.3
                %
                
                
                2,347
                
                
                
                0.4
                %
                
                
                1,660
                
                
                
                0.2
                %$
                38,071
                
                
                
                4.4
                %
                
                $
                36,318
                
                
                
                4.4
                %
                
                $
                33,574
                
                
                
                4.5
                %





Non-interest
expenses were $38.1 million in 2009 as compared to $36.3 million in 2008 and
$33.6 million in 2007.  Non-interest expense increased approximately
$1.8 million in 2009 compared to 2008.  This increase was primarily
attributable to increased assessments, professional services and OREO
expense.  Non-interest expense increased approximately $2.7 million in
2008 compared to 2007.  This increase was primarily attributable to
increased OREO expense, data services, salaries and benefits cost, director and
shareholder cost and occupancy expense.  Non-interest expenses
measured as a percentage of average assets were 4.4% in 2009, as compared to
4.4% in 2008 and 4.5% in 2007.





Salaries
and related benefits is the largest component of the Bank’s non-interest
expense.  Salaries and benefits were $20.3 million for the year ended
December 31, 2009 as compared to $21.4 million and $21.0 million for the years
ended December 31, 2008 and 2007, respectively.  The Bank had 164 FTE
at December 31, 2009 as compared to 171 FTE at December 31, 2008 and 170 FTE at
December 31, 2007.  The decrease in salaries and related benefits in
2009 compared to 2008 and 2007 was primarily attributable to the decrease in
full time equivalent employees (FTE).





Occupancy
expense for the year ended December 31, 2009 was $3.5 million and represented a
decrease of approximately $151,000 over $3.6 million for the prior
year.  The decrease in occupancy expense was primarily attributed to
the termination of the Santa Clara lease in the fourth quarter of
2009.  Occupancy expense for the year ended December 31, 2008 was $3.6
million and represented an increase of approximately $218,000 over $3.4 million
for the prior year.  The increase was primarily due to the addition of
a loan production office in the technology lending group.





The
Company contracts with third-party vendors for most data processing needs and to
support technical infrastructure.  Data processing expense in 2009 was
$2.5 million which represented an increase of approximately $87,000 over $2.4
million one year earlier.  Data processing expense in 2008 was $2.4
million which represented an increase of approximately $522,000 over $1.9
million one year earlier.  The increases in data processing in both
years are primarily due to an increase in deposit transaction
volumes.





Legal and
professional expenses were $1.9 million for the years ended December 31, 2009,
which represents $765,000 increase over $1.2 million one year
earlier.   Legal and professional expenses were $1.2 million for
the year ended December 31, 2008 and 2007, respectively.   The
increase in legal and professional expenses was primarily due to loan related
legal fees.


32





Assessments
of $2.6 million for the year ended December 31, 2009 increased by $2.0 million,
or 295.3% from $665,000 for the year ended December 31, 2008.  The
assessments for 2008 compared to $377,000 for the year ended December 31,
2007.  In 2008, the FDIC proposed changes to the deposit insurance
assessment system that went into effect in the second quarter of
2009.  These changes were intended to apportion a larger percentage of
the increase in deposit assessment to institutions categorized as “riskier”
based on the four risk categories defined by the FDIC.  Under the new
assessment system, the Company’s FDIC assessment for 2009 was $1.8
million.  Additionally, on February 27, 2009, the FDIC announced a
special emergency assessment of 20 basis points.  This special
assessment, totaling $360k was paid on September 30, 2009.





OREO
expense for the year ended December 31, 2009 was $1.2 million, which represents
an increase of $642,000 over $589,000 for the same period one year
earlier.  This increase reflects an increase in OREO activity in 2009
compared to 2008 and 2007.  December 31, 2008 OREO expense was
$588,000 over virtually no expense in 2007.





As
pressure continues on net interest margins and net asset growth, management of
operating expenses will continue to be a priority.




Income
Taxes




The
Company’s effective tax rate was (68.8)% for the year ended December 31, 2009,
43.5% for the year ended December 31, 2008 and 41.1% for the year ended December
31, 2007.  See Note 8 to the financial statements for additional
information on income taxes.




Quarterly
Income




The
unaudited income statement data of the Bank, in the opinion of management,
includes all normal and recurring adjustments necessary to state fairly the
information set forth herein.  The results of operations are not
necessarily indicative of results for any future period.  The
following table shows the Bank’s unaudited quarterly income statement data for
the years 2009, 2008, and 2007.


33





(dollars in thousands, except share amounts)
                            
                            Three Months EndedMarch 31
                            
                            
                            June 30
                            
                            
                            September 30
                            
                            
                            December 31Year Ended December 31, 2009:Interest
      income
                            
                            $
                            11,960
                            
                            
                            $
                            11,476
                            
                            
                            $
                            10,515
                            
                            
                            $
                            10,621Interest
      expense
                            
                            
                            2,310
                            
                            
                            
                            1,783
                            
                            
                            
                            1,523
                            
                            
                            
                            1,147Net
      interest income
                            
                            
                            9,650
                            
                            
                            
                            9,693
                            
                            
                            
                            8,992
                            
                            
                            
                            9,474Provision
      for credit losses
                            
                            
                            3,650
                            
                            
                            
                            4,000
                            
                            
                            
                            650
                            
                            
                            
                            900Other
      income
                            
                            
                            4,004
                            
                            
                            
                            2,326
                            
                            
                            
                            1,689
                            
                            
                            
                            2,294Other
      expense
                            
                            
                            9,463
                            
                            
                            
                            9,343
                            
                            
                            
                            9,202
                            
                            
                            
                            10,064Income
      before income taxes
                            
                            
                            541
                            
                            
                            
                            (1,324
                            )
                            
                            
                            829
                            
                            
                            
                            804Income
      taxes
                            
                            
                            208
                            
                            
                            
                            (482
                            )
                            
                            
                            290
                            
                            
                            
                            (601
                            )Net
      income (loss)
                            
                            $
                            333
                            
                            
                            $
                            (842
                            )
                            
                            $
                            539
                            
                            
                            $
                            1,405Preferred
      dividends
                            
                            
                            1,017
                            
                            
                            
                            1,057
                            
                            
                            
                            1,064
                            
                            
                            
                            1,065Net
      income available to common shareholders
                            
                            $
                            (684
                            )
                            
                            $
                            (1,899
                            )
                            
                            $
                            (525
                            )
                            
                            $
                            340Earnings
      (loss) per share - basic
                            
                            $
                            (0.10
                            )
                            
                            $
                            (0.29
                            )
                            
                            $
                            (0.08
                            )
                            
                            $
                            0.05Earnings
      (loss) per share - diluted
                            
                            $
                            (0.10
                            )
                            
                            $
                            (0.29
                            )
                            
                            $
                            (0.08
                            )
                            
                            $
                            0.05Year
      Ended December 31, 2008:Interest
      income
                            
                            $
                            16,021
                            
                            
                            $
                            14,948
                            
                            
                            $
                            14,258
                            
                            
                            $
                            13,465Interest
      expense
                            
                            
                            3,989
                            
                            
                            
                            3,224
                            
                            
                            
                            3,271
                            
                            
                            
                            3,343Net
      interest income
                            
                            
                            12,032
                            
                            
                            
                            11,724
                            
                            
                            
                            10,987
                            
                            
                            
                            10,122Provision
      for credit losses
                            
                            
                            2,370
                            
                            
                            
                            6,200
                            
                            
                            
                            19,000
                            
                            
                            
                            3,950Other
      income
                            
                            
                            1,671
                            
                            
                            
                            1,715
                            
                            
                            
                            1,955
                            
                            
                            
                            4,630Other
      expense
                            
                            
                            8,736
                            
                            
                            
                            9,511
                            
                            
                            
                            9,802
                            
                            
                            
                            8,269Income
      before income taxes
                            
                            
                            2,597
                            
                            
                            
                            (2,272
                            )
                            
                            
                            (15,860
                            )
                            
                            
                            2,533Income
      taxes
                            
                            
                            1,075
                            
                            
                            
                            (945
                            )
                            
                            
                            (6,655
                            )
                            
                            
                            864Net
      income (loss)
                            
                            $
                            1,522
                            
                            
                            $
                            (1,327
                            )
                            
                            $
                            (9,205
                            )
                            
                            $
                            1,669Preferred
      dividends
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            152Net
      income available to common shareholders
                            
                            $
                            1,522
                            
                            
                            $
                            (1,327
                            )
                            
                            $
                            (9,205
                            )
                            
                            $
                            1,517Earnings
      (loss) per share - basic
                            
                            $
                            0.24
                            
                            
                            $
                            (0.20
                            )
                            
                            $
                            (1.41
                            )
                            
                            $
                            0.22Earnings
      (loss) per share - diluted
                            
                            $
                            0.23
                            
                            
                            $
                            (0.20
                            )
                            
                            $
                            (1.41
                            )
                            
                            $
                            0.23Year
      Ended December 31, 2007:Interest
      income
                            
                            $
                            15,378
                            
                            
                            $
                            16,936
                            
                            
                            $
                            17,627
                            
                            
                            $
                            16,804Interest
      expense
                            
                            
                            4,426
                            
                            
                            
                            5,010
                            
                            
                            
                            5,295
                            
                            
                            
                            4,429Net
      interest income
                            
                            
                            10,952
                            
                            
                            
                            11,926
                            
                            
                            
                            12,332
                            
                            
                            
                            12,375Provision
      for credit losses
                            
                            
                            200
                            
                            
                            
                            1,000
                            
                            
                            
                            475
                            
                            
                            
                            600Other
      income
                            
                            
                            1,294
                            
                            
                            
                            2,612
                            
                            
                            
                            1,435
                            
                            
                            
                            1,372Other
      expense
                            
                            
                            7,854
                            
                            
                            
                            8,422
                            
                            
                            
                            8,715
                            
                            
                            
                            8,583Income
      before income taxes
                            
                            
                            4,192
                            
                            
                            
                            5,116
                            
                            
                            
                            4,577
                            
                            
                            
                            4,564Income
      taxes
                            
                            
                            1,748
                            
                            
                            
                            2,133
                            
                            
                            
                            1,825
                            
                            
                            
                            1,877Net
      income
                            
                            $
                            2,444
                            
                            
                            $
                            2,983
                            
                            
                            $
                            2,752
                            
                            
                            $
                            2,687Preferred
      dividends
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      income available to common shareholders
                            
                            $
                            2,444
                            
                            
                            $
                            2,983
                            
                            
                            $
                            2,752
                            
                            
                            $
                            2,687Earnings
      per share - basic
                            
                            $
                            0.38
                            
                            
                            $
                            0.47
                            
                            
                            $
                            0.43
                            
                            
                            $
                            0.42Earnings
      per share - diluted
                            
                            $
                            0.35
                            
                            
                            $
                            0.43
                            
                            
                            $
                            0.40
                            
                            
                            $
                            0.39




34




FINANCIAL CONDITION AND
EARNING ASSETS





As of
December 31, 2009, total assets were $844.1 million, gross loans were $576.4
million and deposits were $705.0 million. Assets decreased $103.5 million, a
10.9% decrease from $947.6 million at December 31, 2008.  Gross loans
decreased $123.2 million, or 17.6% from $699.6 million at December 31,
2008.  Deposits decreased $72.2 million, a 9.3% decrease from $777.2
million at December 31, 2008.





As of
December 31, 2008, total assets were $947.6 million, gross loans were $699.6
million and deposits were $777.2 million. Assets increased $172.8 million, a
22.3% increase from $774.8 million at December 31, 2007.  Gross loans
increased $46.9 million, or 7.2% from $652.7 million at December 31,
2007.  Deposits increased $105.9 million, a 15.8% increase from $671.4
million at December 31, 2007.




Federal Funds
Sold




Federal
funds sold were $104.3 million at December 31, 2009 as compared to $199.5
million at December 31, 2008.  This decrease is primarily due to the
Company’s desire during the fourth quarter of 2008 to hold significant liquidity
on balance sheet as the credit crisis began to adversely impact the availability
of borrowings and liquidity of assets.  As of December 31, 2009, the
Company had begun restructuring the balance sheet in response to its current
exposure to the economic cycle.  The average balance of federal funds
sold was $167.4 million in 2009 and $74.6 million in 2008.  These
balances represented 23.3% and 10.3% of average deposits for 2009 and 2008,
respectively.  They are maintained primarily for the short-term
liquidity needs of the Bank.




Securities




The
following table shows the composition of the securities portfolio at December
31, 2009 and 2007.  As of December 31, 2008, the Company did not own
any investment securities.





(dollars in thousands)
                          
                          As of December 31,2009
                          
                          
                          2007Amortized
                          
                          
                          Fair
                          
                          
                          Amortized
                          
                          
                          FairCost
                          
                          
                          Value
                          
                          
                          Cost
                          
                          
                          ValueU.S.
      treasury
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          201
                          
                          
                          $
                          202U.S.
      government agencies
                          
                          
                          80,324
                          
                          
                          
                          80,277
                          
                          
                          
                          54,450
                          
                          
                          
                          55,280Mortgage
      backed securities
                          
                          
                          24,936
                          
                          
                          
                          24,728Total
      securities available for sale
                          
                          
                          105,260
                          
                          
                          
                          105,005
                          
                          
                          
                          54,651
                          
                          
                          
                          55,482Total
      investment securities
                          
                          $
                          105,260
                          
                          
                          $
                          105,005
                          
                          
                          $
                          54,651
                          
                          
                          $
                          55,482





The
maturities and yields of the investment portfolio at December 31, 2009 are shown
below:





Due after one year
                
                
                Due greater than(dollars in thousands)
                
                
                
                
                through five years
                
                
                five yearsWeighted
                
                
                
                
                
                WeightedAmortized
                
                
                
                
                
                Average
                
                
                
                
                
                AverageCost
                
                
                Amount
                
                
                Yield
                
                
                Amount
                
                
                YieldAs
      of December 31, 2009:U.S.
      treasury
                
                $
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -U.S.
      government agencies
                
                
                80,324
                
                
                
                80,324
                
                
                
                1.7
                %Mortgage
      backed securities
                
                
                24,936
                
                
                
                21,640
                
                
                
                2.5
                %
                
                
                3,296
                
                
                
                3.1
                %Total
      investment securities
                
                $
                105,260
                
                
                $
                101,964
                
                
                
                1.8
                %
                
                $
                3,296
                
                
                
                3.1
                %


35





Investment
securities are classified as available for sale.  Any unrealized gain
or loss on investment securities available for sale is reflected in the carrying
value of the security and reported net of income taxes in the equity section of
the balance sheet.  The pre-tax unrealized loss on securities
available for sale at December 31, 2009 was $255,000.  There was no
pre-tax unrealized gain or loss on securities available for sale at December 31,
2008.  The pre-tax unrealized loss on securities available for sale at
December 31, 2007 was $831,000.




Loan
Portfolio




The
following table shows the Bank’s loans by type and their percentage distribution
for the five years ended December 31, 2009, 2008, 2007, 2006 and
2005.





(dollars in thousands)
                
                As of December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Commercial
                
                $
                253,776
                
                
                $
                301,024
                
                
                $
                272,660
                
                
                $
                197,174
                
                
                $
                182,396Real
      estate construction
                
                
                20,601
                
                
                
                98,105
                
                
                
                85,378
                
                
                
                103,710
                
                
                
                84,792Land
      loans
                
                
                12,763
                
                
                
                23,535
                
                
                
                61,987
                
                
                
                41,811
                
                
                
                26,983Real
      estate other
                
                
                149,617
                
                
                
                134,767
                
                
                
                109,055
                
                
                
                73,502
                
                
                
                56,765Factoring
      and asset based lending
                
                
                66,660
                
                
                
                55,761
                
                
                
                57,662
                
                
                
                56,924
                
                
                
                38,184SBA
                
                
                67,629
                
                
                
                77,043
                
                
                
                56,945
                
                
                
                59,888
                
                
                
                46,867Other
                
                
                5,395
                
                
                
                9,371
                
                
                
                9,042
                
                
                
                7,771
                
                
                
                4,011Total
      gross loans
                
                
                576,441
                
                
                
                699,606
                
                
                
                652,729
                
                
                
                540,780
                
                
                
                439,998Unearned
      fee income
                
                
                (1,452
                )
                
                
                (1,601
                )
                
                
                (1,856
                )
                
                
                (1,495
                )
                
                
                (1,395
                )Total
      loan portfolio
                
                $
                574,989
                
                
                $
                698,005
                
                
                $
                650,873
                
                
                $
                539,285
                
                
                $
                438,603Commercial
                
                
                44.0
                %
                
                
                43.0
                %
                
                
                41.8
                %
                
                
                36.5
                %
                
                
                41.5
                %Real
      estate construction
                
                
                3.6
                %
                
                
                14.0
                %
                
                
                13.1
                %
                
                
                19.2
                %
                
                
                19.3
                %Land
      loans
                
                
                2.2
                %
                
                
                3.4
                %
                
                
                9.5
                %
                
                
                7.6
                %
                
                
                6.1
                %Real
      estate other
                
                
                26.0
                %
                
                
                19.3
                %
                
                
                16.7
                %
                
                
                13.6
                %
                
                
                12.8
                %Factoring
      and asset based lending
                
                
                11.6
                %
                
                
                8.0
                %
                
                
                8.8
                %
                
                
                10.5
                %
                
                
                8.7
                %SBA
                
                
                11.7
                %
                
                
                11.0
                %
                
                
                8.7
                %
                
                
                11.1
                %
                
                
                10.7
                %Other
                
                
                0.9
                %
                
                
                1.3
                %
                
                
                1.4
                %
                
                
                1.5
                %
                
                
                0.9
                %Total
      gross loans
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %





Gross
loan balances decreased to $576.4 million at December 31, 2009, which
represented a decrease of $123.2 million or 17.6% as compared to $699.6 million
at December 31, 2008. The decrease in loans was primarily in real estate
construction and commercial loans.  The decrease was a result of a
concerted effort to lower the composition of loans in these categories in order
to manage risk more effectively.  Gross loan balances increased to
$699.6 million at December 31, 2008, which represented an increase of $46.9
million or 7.2% as compared to $652.7 million at December 31, 2007. The increase
in loans was primarily in commercial and real estate term (includes longer term
real estate loans and home equity lines), without a concentration in any one
specific category of loans.  The increase was a result of general
marketing efforts.





The
Bank’s commercial loan portfolio represents loans to small and middle-market
businesses primarily in the Santa Clara county region as well as loans to
technology-based emerging growth companies.  Commercial loans were
$253.8 million at December 31, 2009, which represented a decrease of $47.2
million or 15.7% over $301.0 million at December 31, 2008.  At
December 31, 2009, commercial loans comprised 44.0% of total loans outstanding
as compared to 43.0% at December 31, 2008.   Commercial loans
were $301.0 million at December 31, 2008, which represented an increase of $28.4
million or 10.4% over $272.7 million at December 31, 2007.  At
December 31, 2008, commercial loans comprised 43.0% of total loans outstanding
as compared to 41.8% at December 31, 2007.





Other
real estate loans consist of commercial real estate and home equity lines of
credit.  Other real estate loans increased $14.9 million, or 11.0%, to
$149.6 million at December 31, 2009 as compared to $134.8 million at December
31, 2008.  The increase was primarily attributable to other real
estate term loans.  At December 31, 2009, other real estate term loans
were primarily comprised of office and industrial investment properties which
represented approximately 33% of the total and approximately 34% were to finance
buildings occupied by clients of the bank.  Less than 30% of term real
estate loans at December 31, 2009 were to finance retail
properties.  Other real estate loans increased $25.7 million or 23.6%
to $134.8 million at December 31, 2008 as compared to $109.1 million at December
31, 2007.  The increase was primarily attributable to other real
estate term loans.  At December 31, 2008, other real estate term loans
were primarily comprised of office and industrial investment properties which
represented approximately 56% of the total and approximately 36% were to finance
buildings occupied by clients of the bank.  Less than 20% of term real
estate loans at December 31 were to finance retail properties.  At
December 31, 2009, other real estate loans represented 26.0% of total loans as
compared to 19.3% at December 31, 2008 and 16.7% at December 31,
2007.


36





The
Bank’s land loan portfolio consists of land and land development loans related
to future construction credits.  Land loans decreased $10.8 million or
45.8% to $12.8 million at December 31, 2009 as compared to $23.5 million at
December 31, 2008.  Land loan balances at December 31, 2009 comprised
2.2% of total loans as compared to 3.4% at December 31, 2008.  In 2009
and 2008, collateral values securing land loans declined severely as residential
development projects declined in value.  Consequently the Bank
undertook a focused effort to reduce outstanding balances in this category of
loans through valuation charges and collections.    Land
loans decreased $38.4 million to $23.5 million at December 31, 2008 compared to
$62.0 million at December 31, 2007.  Land loan balances at December
31, 2008 comprised 3.4% of total loans as compared to 9.5% at December 31,
2007.





Approximately
half of the Bank’s construction loan portfolio consists of loans to finance
individual single-family residential homes in markets in the Peninsula and South
Bay region of Silicon Valley.  The remainder is comprised of
commercial and multi-family development projects.  Construction loans
decreased $77.5 million, or 79.0%, to $20.6 million at December 31, 2009 as
compared to $98.1 million at December 31, 2008.  Construction loan
balances at December 31, 2009 comprised 3.6% of total loans as compared to 14.0%
at December 31, 2008. Construction loans increased $12.7 million, or 14.9%, to
$98.1 million at December 31, 2008 as compared to $85.4 million at December 31,
2007.  Construction loan balances at December 31, 2008 comprised 14.0%
of total loans as compared to 13.1% at December 31, 2007.





Factoring
and asset-based lending represents purchased accounts receivable (factoring) and
a structured accounts receivable lending program where the Bank receives client
specific payment for client invoices.  Under the factoring program,
the Bank purchases accounts receivable invoices from its clients and then
receives payment directly from the party obligated for the
receivable.   In most cases the Bank purchases the receivables
subject to recourse from the Bank’s factoring client.  The asset-based
lending program requires a security interest in all of a client’s accounts
receivable.  At December 31, 2009, factoring and asset based loans
totaled $66.7 million or 11.6% of total loans as compared to $55.8 million or
8.0% of total loans at December 31, 2008.





The SBA
line of business operates primarily in Santa Clara County.  The Bank,
as a Preferred Lender, originates SBA loans and participates in the SBA 7A and
504 SBA lending programs.  Under the 7A program, a loan is made for
commercial or real estate purposes.  The SBA guarantees these loans
and the guarantee may range from 70% to 90% of the total loan.  In
addition, the loan could be collateralized by a deed of trust on real
estate.





Under the
504 program, the Bank lends directly to the borrower and takes a first deed of
trust to the subject property.  In addition the SBA, through a
Community Development Corporation makes an additional loan to the borrower and
takes a deed of trust subject to the Bank’s position.  The Bank’s
position in relation to the real estate “piggyback” loans can range from 50% to
70% loan to value.





At
December 31, 2009, SBA loans comprised $67.6 million or 11.7% of total loans as
compared to $77.0 million or 11.0% of total loans at December 31,
2008.  The Bank has the intent to sell all or a portion of the SBA
loans and, as such, carries the saleable portion of SBA loans at the lower of
aggregate cost or fair value.  At December 31, 2009 and 2008, the fair
value of SBA loans exceeded aggregate cost and therefore, SBA loans were carried
at aggregate cost.





Other
loans consist primarily of loans to individuals for personal uses, such as
installment purchases, overdraft protection loans and a variety of other
consumer purposes.  At December 31, 2009, other loans totaled $5.4
million as compared to $9.4 million at December 31, 2008.




Allowance for Loan
Losses




A
consequence of lending activities is the potential for loss.  The
amount of such losses will vary from time to time depending upon the risk
characteristics of the loan portfolio as affected by economic conditions, rising
interest rates and the financial experience of the borrowers.  The
allowance for loan losses, which provides for the risk of losses inherent in the
credit extension process, is increased by the provision for loan losses charged
to expense and decreased by the amount of charge-offs net of
recoveries.  There is no precise method of estimating specific losses
or amounts that ultimately may be charged off on particular segments of the loan
portfolio.  Similarly, the adequacy of the allowance for loan losses
and the level of the related provision for loan losses are determined in
management’s judgment based on consideration of:


37




-
              Economic
      conditions
 -
              Borrowers’
      financial condition
 -
              Loan
      impairment
 -
              Evaluation
      of industry trends
 -
              Historic
      losses, migrations and delinquency
trends
 -
              Industry
      and other concentrations
 -
              Loans
      which are contractually current as to payment terms but demonstrate a
      higher degree of risk as identified by
  management
 -
              Continuing
      evaluation of the performing loan
portfolio
 -
              Periodic
      review and evaluation of problem
loans
 -
              Off
      balance sheet risks
 -
              Assessments
      by regulators and other third
parties
 
 In
addition to the internal assessment of the loan portfolio, the Bank also retains
a consultant who performs credit reviews on a regular basis and then provides an
assessment of the adequacy of the allowance for loan losses. The federal banking
regulators also conduct examinations of the loan portfolio
periodically.
 
 The
following table summarizes the activity in the allowance for loan losses for the
years ended December 31, 2009, 2008, 2007, 2006, and 2005.
 
 (dollars
      in thousands)
                  
                  Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Balance,
      beginning of period
                  
                  $
                  18,554
                  
                  
                  $
                  8,608
                  
                  
                  $
                  7,329
                  
                  
                  $
                  5,936
                  
                  
                  $
                  4,146Loans
      charged off by category:Commercial
      and other
                  
                  
                  3,108
                  
                  
                  
                  1,995
                  
                  
                  
                  562
                  
                  
                  
                  -
                  
                  
                  
                  384Real
      estate construction
                  
                  
                  4,561
                  
                  
                  
                  5,536
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate land
                  
                  
                  2,674
                  
                  
                  
                  13,518
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate other
                  
                  
                  2,452
                  
                  
                  
                  645
                  
                  
                  
                  16
                  
                  
                  
                  -
                  
                  
                  
                  -Factoring
      and asset-based lending
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  677
                  
                  
                  
                  -
                  
                  
                  
                  -Consumer
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      charge-offs
                  
                  
                  12,795
                  
                  
                  
                  21,694
                  
                  
                  
                  1,255
                  
                  
                  
                  -
                  
                  
                  
                  384Recoveries
      by category:Commercial
      and other
                  
                  
                  739
                  
                  
                  
                  83
                  
                  
                  
                  259
                  
                  
                  
                  21
                  
                  
                  
                  12Real
      estate construction
                  
                  
                  206
                  
                  
                  
                  37
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate land
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate other
                  
                  
                  108
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Factoring
      and asset-based lending
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Consumer
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      recoveries
                  
                  
                  1,053
                  
                  
                  
                  120
                  
                  
                  
                  259
                  
                  
                  
                  21
                  
                  
                  
                  12Net
      (recoveries) charge-offs
                  
                  
                  11,742
                  
                  
                  
                  21,574
                  
                  
                  
                  996
                  
                  
                  
                  (21
                  )
                  
                  
                  372Provision
      charged to expense
                  
                  
                  9,200
                  
                  
                  
                  31,520
                  
                  
                  
                  2,275
                  
                  
                  
                  1,372
                  
                  
                  
                  2,162Balance,
      end of year
                  
                  $
                  16,012
                  
                  
                  $
                  18,554
                  
                  
                  $
                  8,608
                  
                  
                  $
                  7,329
                  
                  
                  $
                  5,936
 
 The
decrease in the allowance for loan losses of $2.6 million from December 31, 2008
to $16.0 million at December 31, 2009 is attributable to (1) a decrease in gross
loan balances and, more particularly, a significant decrease in real estate
construction loans; and (2) a decrease in unidentified probable, estimable
losses due to stress from the credit crisis and general deterioration in
economic conditions.
 
 Based on
an evaluation of the individual credits, historical credit loss experienced by
loan type and economic conditions, management has allocated the allowance for
loan losses as a percentage of total gross loans at December 31 of the previous
five years as follows:
  38





(dollars in thousands)
                    
                    As of December 31,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Commercial
      and other
                    
                    $
                    6,313
                    
                    
                    $
                    6,179
                    
                    
                    $
                    3,124
                    
                    
                    $
                    1,831
                    
                    
                    $
                    2,029Real
      estate other
                    
                    
                    5,173
                    
                    
                    
                    2,495
                    
                    
                    
                    2,356
                    
                    
                    
                    1,152
                    
                    
                    
                    721Real
      estate construction
                    
                    
                    1,376
                    
                    
                    
                    5,197
                    
                    
                    
                    783
                    
                    
                    
                    1,082
                    
                    
                    
                    742Land
      loans
                    
                    
                    764
                    
                    
                    
                    1,592
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Factoring
      / asset based lending
                    
                    
                    1,061
                    
                    
                    
                    1,222
                    
                    
                    
                    1,239
                    
                    
                    
                    1,415
                    
                    
                    
                    443SBA
                    
                    
                    1,175
                    
                    
                    
                    1,673
                    
                    
                    
                    1,053
                    
                    
                    
                    1,803
                    
                    
                    
                    1,975Other
                    
                    
                    150
                    
                    
                    
                    196
                    
                    
                    
                    53
                    
                    
                    
                    46
                    
                    
                    
                    26$
                    16,012
                    
                    
                    $
                    18,554
                    
                    
                    $
                    8,608
                    
                    
                    $
                    7,329
                    
                    
                    $
                    5,936Commercial
      and other
                    
                    
                    1.1
                    %
                    
                    
                    0.9
                    %
                    
                    
                    0.5
                    %
                    
                    
                    0.3
                    %
                    
                    
                    0.5
                    %Real
      estate other
                    
                    
                    0.9
                    %
                    
                    
                    0.4
                    %
                    
                    
                    0.4
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.2
                    %Real
      estate construction
                    
                    
                    0.2
                    %
                    
                    
                    0.7
                    %
                    
                    
                    0.1
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.2
                    %Land
      loans
                    
                    
                    0.1
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Factoring
      / asset based lending
                    
                    
                    0.2
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.3
                    %
                    
                    
                    0.1
                    %SBA
                    
                    
                    0.2
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.3
                    %
                    
                    
                    0.4
                    %Other
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %2.8
                    %
                    
                    
                    2.7
                    %
                    
                    
                    1.3
                    %
                    
                    
                    1.4
                    %
                    
                    
                    1.3
                    %





Beginning
in the second quarter of 2008, deterioration in economic conditions within the
Company's market area and, as applicable, the State of California and/or
national macroeconomic conditions resulted in increased stress to the loan
portfolio, specifically construction and land development loans outside of the
Company’s primary market of Santa Clara County and contiguous portions of San
Mateo and Alameda counties.





In
response to the deteriorating market conditions, the Company undertook steps to
aggressively reduce the exposure to construction and land development loans with
particular emphasis on loans outside of its primary
market.  Management curtailed new loan origination, thoroughly
reviewed collateral values of projects approaching maturity and conservatively
evaluated the market prospects of collateral for indications of
impairments.





At
December 31, 2009, the Company’s land development portfolio was reduced to $12.8
million with just $5.5 million remaining exposure outside of the primary market
area.  Further, over 50% of the remaining loans in this category are
underwritten to amortizing term structures supported by cash flow from liquidity
of the borrowers.





Construction
loans at December 31, 2009 were reduced to $20.6 million with $2.9 million
remaining on projects outside of the primary market area.  In
addition, at that date $6.9 million, or 33.4%, were loans to finance commercial
projects and $7.8 million, or 37.7% were loans to finance residential projects
of five or more units.





The
aggressive management of credits in this category has resulted in elevated
levels of nonperforming assets as loans are placed on nonaccrual through the
marketing phase of the underlying project.  In addition, loans placed
on nonaccrual have been reduced to the level of indicated
impairments.  This has resulted in an elevated level of
charge-offs.  Management believes that this practice results in a
recorded level of nonperforming assets that generally has been reduced to a net
liquidation value, and as these assets are liquidated do not expect to incur
additional significant losses.  Non performing loans at December 31,
2009, on average, have been reduced by approximately 40% of the remaining
contractual balance, which was taken as a charge-off against the allowance for
loan losses.





In response to the elevated level of
charge-offs, migration of construction and land portfolios, and general
deterioration in economic conditions the Company also increased provisions for
potential loans losses and built the reserve to approximately 2.78% of total
loans.  The coverage ratio, the ratio of allowance for loan losses to
nonperforming loans was 94.14% at December 31, 2009.  Management
believes that the coverage ratio reflects the conservative charge-off practice
and that the allowance is adequate for losses not specifically identified in
impairment analyses.





At
December 31, 2009 nonperforming assets represented 2.79% of total assets,
compared to 1.78% of total assets on December 31, 2008.  Nonperforming
assets have increased primarily as a result of substantial deterioration in the
real estate market and the Company’s commitment to aggressively manage credit
exposure.  The following summarizes nonperforming assets at December
31, 2009, 2008, 2007, 2006, and 2005.


39





As of December 31,(dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Loans
      accounted for on a non-accrual basis
                
                $
                17,009
                
                
                $
                15,772
                
                
                $
                4,914
                
                
                $
                437
                
                
                $
                2,320Loans
      with principal or interest contracturally past due 90 days or
      more
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Nonperforming
      loans
                
                
                17,009
                
                
                
                15,772
                
                
                
                4,914
                
                
                
                437
                
                
                
                2,320Other
      real estate owned
                
                
                6,509
                
                
                
                1,096
                
                
                
                425
                
                
                
                -
                
                
                
                -$
                23,518
                
                
                $
                16,868
                
                
                $
                5,339
                
                
                $
                437
                
                
                $
                2,320





At
December 31, 2009, there were three loans totaling $12.0 million that were
restructured and in compliance with modified terms.  These loans were
considered performing loans and, as such, were accruing interest as of December
31, 2009.  There were no loans restructured and in compliance with
modified terms as of December 31, 2008.





The
accrual of interest on loans is discontinued and any accrued and unpaid interest
is reversed when, in the opinion of management, there is significant doubt as to
the collectability of interest or principal or when the payment of principal or
interest is ninety days past due, unless the amount is well-secured and in the
process of collection.  There were twenty-four non-accrual loans
(representing twenty-two relationships) totaling $17.0 million at December 31,
2009 as compared to sixteen non-accrual loans totaling $15.8 million at December
31, 2008 and four non-accrual loans at December 31, 2007 totaling $4.9
million.  Nonperforming loans have increased primarily as a result of
substantial deterioration in the real estate market.  The following
table sets forth the components of nonperforming loans as of December 31,
2009:





(dollars
in thousands)





December 31, 2009Classification
                                                    
                                                    Amount
                                                    
                                                    CollateralLand
                                                    
                                                    
                                                    2,431
                                                    
                                                    Lots
      for retail development in Sacramento CountyLand
                                                    
                                                    
                                                    946
                                                    
                                                    Losts
      for commercial development in Ventura CountyLand
                                                    
                                                    
                                                    501
                                                    
                                                    Lots
      for single family homes in IdahoLand
                                                    
                                                    
                                                    413
                                                    
                                                    Lots
      for single family homes and commercial office space in Alameda
      CountyLand
                                                    
                                                    
                                                    336
                                                    
                                                    Lots
      for single family homes in Calaveras CountyLand
                                                    
                                                    
                                                    233
                                                    
                                                    Raw
      land for recreational use in Calaveras CountyLand
                                                    
                                                    
                                                    40
                                                    
                                                    Lots
      for single family homes in Calaveras CountyLand
                                                    
                                                    
                                                    40
                                                    
                                                    Lots
      for single family homes in Calaveras County4,940Construction
                                                    
                                                    
                                                    3,274
                                                    
                                                    Residential
      Condos in Santa Clara CountyConstruction
                                                    
                                                    
                                                    346
                                                    
                                                    Single
      family residence in San Mateo County3,620Real
      estate other
                                                    
                                                    
                                                    3,051
                                                    
                                                    Commercial
      office space in San Mateo CountyReal
      estate other
                                                    
                                                    
                                                    2,985
                                                    
                                                    Commercial
      office space in San Mateo CountyReal
      estate other
                                                    
                                                    
                                                    1,258
                                                    
                                                    Retail
      development in Southern CaliforniaReal
      estate other
                                                    
                                                    
                                                    502
                                                    
                                                    Single
      family residence in Central CaliforniaReal
      estate other
                                                    
                                                    
                                                    287
                                                    
                                                    Commercial
      office space in Santa Clara CountyReal
      estate other
                                                    
                                                    
                                                    172
                                                    
                                                    Light
      industrial warehouse space in Santa Clara CountyReal
      estate other
                                                    
                                                    
                                                    194
                                                    
                                                    Single
      family residence in San Francisco County8,449Total
      nonperforming loans
                                                    
                                                    $
                                                    17,009




40




Management
undertakes significant processes in order to identify potential problem loans in
a timely manner.  In addition to regular interaction with the
Company’s borrowers, the relationship managers review the credit ratings for
each loan on a monthly basis and identify any potential
downgrades.  For commercial, SBA, and factoring/asset-based loans, the
Company receives quarterly financial statements and other pertinent reporting,
such as borrowing bases for asset-based facilities, so as to identify any
deteriorating financial trends.  Covenant compliance for these loans
is also monitored on a quarterly basis.  For real estate construction
and land loans, the development, construction and lease up or sell out status of
each project is monitored on a monthly basis.  For loans secured by
standing commercial or residential property, the Company receives updated rent
rolls and operating statements on an annual basis.  In addition, home
equity loans are reviewed annually for deterioration in either the underlying
property value or the borrower’s payment history.  Management also
engages a third party loan review firm that reviews the loan portfolio every
four months to further identify potential problem loans.  The loan
review includes assessment of underwriting, quality of legal documents,
management of the loan relationship, and adherence to the credit policy along
with acceptable risk mitigation and rationale for exceptions to the
policy.




As part
of the loan approval process, management identifies the nature and type of
underlying collateral supporting individual loans.  Prior to or at the
time of initial advances, any required lien positions are verified using UCC
lien searches for personal property collateral, or title insurance for real
property collateral.  The Company engages a third party loan review
firm to conduct an annual review of its loan documentation and the related
policies and procedures regarding the loan documentation process.




The
Company primarily relies on fair market appraisals to determine the value of
underlying collateral.  Appraisals are required for real property
secured loans of $250,000 or more, including increases to existing loans of
$250,000 or more.  In the event there is evidence of deterioration in
values, an evaluation of the collateral value and/or a full new appraisal is
required for an extension of the loan maturity.  Potential problem
loans are reappraised at a minimum of every 6-12 months depending on current
economic conditions. The appraisals are performed by Board approved appraisers
that have appropriate licensing and experience.  When a prospective
loan amount exceeds $1.5 million, the completed appraisal is further reviewed by
a qualified third party review appraiser.  To determine the value of
underlying collateral for formula lines of credit that are predicated on a
borrowing base of eligible assets, the Company requires a pre loan funding field
audit of the borrower’s financial records to verify the accounts receivable,
their eligibility for inclusion in the borrowing base, performance of the
collateral and any asset concentrations.




On a
monthly basis, relationship managers assess the collateral position of
individual loans and identify any potential collateral shortfalls which, if left
uncorrected, could result in deterioration of the repayment prospects for the
loan at some future date.  Any potential collateral shortfalls are
incorporated into a written corrective action plan.  The status of the
correction action plans are reviewed by executive management.  Review
of ability to acquire additional collateral and the related timeframes are
addressed on an individual loan basis.




At the
time a loan is classified as substandard (which includes any loans on
non-accrual), the Company performs an impairment analysis of the collateral
based on appraisals, field audits, other market value indicators, and
Management’s judgment.  Any shortfall between the collateral’s
realization value and the loan balance is charged-off at that
time.  Impairment analyses are updated on a monthly
basis.  Additionally, as underlying collateral is reappraised the
value of the collateral is reassessed and any additional charge-off is taken at
that time.  A similar practice is followed for downward adjustments to
the Company’s OREO carrying value.





Management
is of the opinion that the allowance for credit losses is maintained at a level
adequate for known and unidentified losses inherent in the loan
portfolio.  However, the Company's construction and land loan
portfolios, representing approximately 5.8% of the total loan portfolio, could
be adversely affected if California economic conditions and the real estate
market in the Company's market area were to weaken.  The effect of
such events, although uncertain at this time, could result in an increase in the
level of non-performing loans and other real estate owned and the level of the
allowance for loan losses, which could adversely affect the Company's future
growth and profitability.




Funding




Deposits
represent the Bank’s principal source of funds.  Most of the Bank’s
deposits are obtained from professionals, small- to medium sized businesses and
individuals within the Bank’s market area.  The Bank’s deposit base
consists of non-interest and interest-bearing demand deposits, savings and money
market accounts and certificates of deposit.  The following table
summarizes the composition of deposits as of December 31, 2009, 2008 and
2007.


41





(dollars in thousands)
                        
                        As of December 31,2009
                        
                        
                        2008
                        
                        
                        2007Amount
                        
                        
                        Percent
                        
                        
                        Amount
                        
                        
                        Percent
                        
                        
                        Amount
                        
                        
                        PercentNoninterest-bearing  demand
                        
                        $
                        333,171
                        
                        
                        
                        47.26
                        %
                        
                        $
                        284,319
                        
                        
                        
                        36.58
                        %
                        
                        $
                        198,641
                        
                        
                        
                        29.59
                        %Interest-bearing
      demand
                        
                        
                        4,830
                        
                        
                        
                        0.69
                        %
                        
                        
                        4,267
                        
                        
                        
                        0.55
                        %
                        
                        
                        5,350
                        
                        
                        
                        0.80
                        %Money
      market and savings
                        
                        
                        275,850
                        
                        
                        
                        39.13
                        %
                        
                        
                        335,200
                        
                        
                        
                        43.13
                        %
                        
                        
                        372,923
                        
                        
                        
                        55.55
                        %Certificates
      of deposit:Less
      than $100
                        
                        
                        29,782
                        
                        
                        
                        4.22
                        %
                        
                        
                        92,997
                        
                        
                        
                        11.96
                        %
                        
                        
                        22,896
                        
                        
                        
                        3.41
                        %$100
      and more
                        
                        
                        61,413
                        
                        
                        
                        8.70
                        %
                        
                        
                        60,462
                        
                        
                        
                        7.78
                        %
                        
                        
                        71,546
                        
                        
                        
                        10.66
                        %Total
      deposit portfolio
                        
                        $
                        705,046
                        
                        
                        
                        100.00
                        %
                        
                        $
                        777,245
                        
                        
                        
                        100.00
                        %
                        
                        $
                        671,356
                        
                        
                        
                        100.00
                        %





Deposits
decreased $72.2 million or 9.3% from $777.2million at December 31, 2008 to
$705.0 million at December 31, 2009. The decrease in deposits was primarily in
money market and savings, and certificates of deposit less than
$100,000.




Leverage




Total gross loan balances at December
31, 2009 were $576.4 million.  The resulting loan to deposit ratio was
82.93%. Other earning assets at December 31, 2009 were primarily comprised of
investment securities, federal funds sold and interest-bearing deposits of
$219.2 million.  To date, the Company has deployed other earning
assets primarily in federal funds sold to address the potential volatility of
deposit balances and to accommodate projected loan funding, and in short term
fixed rate investments to mitigate interest rate risk associated with the
Company’s asset-sensitive balance sheet.   When deploying other
earning assets, the Company implements strategic decisions that may have
a beneficial or adverse impact on net interest income and on the net interest
margin to manage the business through a variety of economic cycles.





During the fourth quarter of 2008 and
throughout 2009, as part of a strategic decision the Companyeffectively
repositioned the composition of its balance sheet and improved its liquidity
position by deploying other earning assets primarily in federal funds in direct
response to the recent economic downturn and potential volatility of the deposit
portfolio.




Capital
Resources




The
Company's capital resources consist of shareholders' equity, trust preferred
securities and (for regulatory purposes) the allowance for credit losses
(subject to limitations).  At December 31, 2009, the Company’s capital
resources decreased $3.0 million to $135.7 million from $138.7 million at
December 31, 2008.  Tier 1 capital decreased $2.7 million to $106.5
million primarily due to net income. Tier 2 capital decreased $315,000 primarily
due to the decrease in the allowance for loan losses.




The
Company and the Bank are subject to the capital guidelines and regulations
governing capital adequacy for bank holding companies and national
banks.  Additional capital requirements may be imposed on banks based
on market risk. The FDIC requires a leverage ratio of 8.00% for new banks during
the first three years of operation.




After the
first three years of operations, the Comptroller requires a minimum leverage
ratio of 3.00% for national banks that have received the highest composite
regulatory rating (a regulatory measurement of capital, assets, management,
earnings and liquidity) and that are not anticipating or experiencing any
significant growth.  All other institutions are required to maintain a
leverage ratio of at least 100 to 200 basis points above the 3.00%
minimum.




The
Comptroller's regulations also require national banks to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of
8.00%.  Risk-based capital ratios are calculated with reference to
risk-weighted assets, including both on and off-balance sheet exposures, which
are multiplied by certain risk weights assigned by the Comptroller to those
assets.  At least one-half of the qualifying capital must be in the
form of Tier 1 capital.


42




The
risk-based capital ratio focuses principally on broad categories of credit risk,
and might not take into account many other factors that can affect a bank’s
financial condition.  These factors include overall interest rate risk
exposure; liquidity, funding and market risks; the quality and level of
earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management’s overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional
activities.  The Comptroller has addressed many of these areas in
related rule-making proposals. In addition to evaluating capital ratios, an
overall assessment of capital adequacy must take account of each of these other
factors including, in particular, the level and severity of problem and
adversely classified assets. For this reason, the final supervisory judgment on
a bank’s capital adequacy may differ significantly from the conclusions that
might be drawn solely from the absolute level of the Company’s risk-based
capital ratio.  The Comptroller has stated that banks generally are
expected to operate above the minimum risk-based capital ratio.  Banks
contemplating significant expansion plans, as well as those institutions with
high or inordinate levels of risk, should hold capital consistent with the level
and nature of the risks to which they are exposed.




Further,
the banking agencies have adopted modifications to the risk-based capital
regulations to include standards for interest rate risk
exposures.  Interest rate risk is the exposure of a bank’s current and
future earnings and equity capital arising from movements in interest
rates.  While interest rate risk is inherent in a bank’s role as
financial intermediary, it introduces volatility to bank earnings and to the
economic value of the Company.  The banking agencies have addressed
this problem by implementing changes to the capital standards to include a
bank’s exposure to declines in the economic value of its capital due to changes
in interest rates as a factor that the banking agencies consider in evaluating
an institution’s capital adequacy.  Bank examiners consider a bank’s
historical financial performance and its earnings exposure to interest rate
movements as well as qualitative factors such as the adequacy of a bank’s
internal interest rate risk management.




Finally,
institutions with significant trading activities must measure and hold capital
for exposure to general market risk arising from fluctuations in interest rates,
equity prices, foreign exchange rates and commodity prices and exposure to
specific risk associated with debt and equity positions in the trading
portfolio.  General market risk refers to changes in the market value
of on-balance-sheet assets and off-balance-sheet items resulting from broad
market movements.  Specific market risk refers to changes in the
market value of individual positions due to factors other than broad market
movements and includes such risks as the credit risk of an instrument’s
issuer.  The additional capital requirements apply effective January
1, 1998 to institutions with trading assets and liabilities equal to 10.0% or
more of total assets or trading activity of $1.0 billion or more.  The
federal banking agencies may apply the market risk regulations on a case-by-case
basis to institutions not meeting the eligibility criteria if necessary for
safety and soundness reasons.




In
connection with the recent regulatory attention to market risk and interest rate
risk, the federal banking agencies will evaluate an institution in its periodic
examination on the degree to which changes in interest rates, foreign exchange
rates, commodity prices or equity prices can affect a financial institution’s
earnings or capital.  In addition, the agencies focus in the
examination on an institution’s ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.




Under
certain circumstances, the Comptroller may determine that the capital ratios for
a national bank shall be maintained at levels, which are higher than the minimum
levels required by the guidelines.  A national bank which does not
achieve and maintain adequate capital levels as required may be subject to
supervisory action by the Comptroller through the issuance of a capital
directive to ensure the maintenance of required capital levels.  In
addition, the Company is required to meet certain guide­lines of the
Comptroller concerning the maintenance of an adequate allowance for loan and
lease losses.




In
response to increasing risk perceived in the economic environment, during the
fourth quarter of 2008 the Company raised $53.9 million of additional
capital.  The following is a summary of these issuances:




Private
Placement




On
December 4, 2008, investors agreed to purchase $30 million of the Company’s
Series B and B-1 Mandatorily Convertible Cumulative Perpetual Preferred Stock in
a private placement, subject to the United States Department of the Treasury
approving our participation in the TARP Capital Purchase Program (see discussion
below) and the Company satisfying all legal requirements for selling equity
securities to the Treasury under the program.




On
December 17, 2008, the Company completed the private placement sale of 131,901
shares of its Series B Mandatorily Convertible Cumulative Perpetual Preferred
Stock and 168,099 shares of its Series B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock, for aggregate consideration of $30 million, which is
$100 per share for both series of shares, to a private fund.  The
Series B and Series B-1 shares (collectively the “shares”) accrue dividends at a
rate of 10% per annum, payable quarterly.


43





The
holders of the Series B  and B-1 preferred shares have voting rights
at a rate of 10 votes per share and may convert their shares in to shares of the
Company’s common stock at a conversion rate of $10 per share, subject to
customary adjustments for splits, dividends and other similar
transactions.





Each
Series B and B-1 preferred share shall automatically convert to common stock
after the later of 18 months or such time that shareholder and regulatory
approvals, to the extent required for conversion, are received (“Mandatory
Conversion Date”).  If the average closing price of the Company’s
common stock does not equal or exceed $10 per share over the 20 consecutive
trading days immediately prior to the Mandatory Conversion Date (the Current
Market Price Condition), such date will be extended for successive six-month
periods until the Current Market Price Condition is met.





The
Company can force conversion of the shares into common stock on or after January
15, 2010 through September 30, 2010, if (a) the Company fully pays the accrued
dividends and prepays the dividends that would have accrued up through September
30, 2010, (b) the Company’s shareholders have approved the conversion and (c)
the Current Market Price condition is met.  Subsequent to September
30, 2010, the Company can force conversion of the shares into common stock if
the above three conditions are met, with the only exception being the necessity
to pay all dividends accrued through the date of conversion as opposed to
prepaying any such amount.





Troubled
Assets Relief Program (TARP)





On
November 13, 2008, the United States Department of the Treasury (the Treasury)
approved the Company’s participation in the TARP Capital Purchase Program,
subject to the Company raising additional equity in an amount satisfactory to
the Treasury.  On December 4, 2008, investors agreed to purchase $30
million of the Company’s Series B and B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock in a private placement (see discussion above), subject
to the Treasury approving the Company’s participation in the TARP Capital
Purchase Program and its ability to satisfy all legal requirements for selling
equity securities to the Treasury under the program.  Based on
discussions with the Treasury representatives, the Company understood that
raising $30 million would satisfy the requirement of the Company raising
additional equity.





On
December 23, 2008, the Company issued 23,864 shares of its Fixed Rate Cumulative
Perpetual Series C Preferred Stock, having a liquidation value of $23,864,000,
to the Treasury. Dividends accrue at the rate of 5% per annum for the first five
years and then 9% per annum thereafter.  The dividends will be paid
only as declared by the Board of Directors of the Company.  However,
in the event such dividends have not been paid for six or more quarters, whether
or not consecutive, the Holders of the Series C Preferred shares will have the
right to elect two members to the Company’s Board of Directors.





In
addition the Company issued a warrant to purchase up to 396,412 shares of the
Company’s common stock at a purchase price of $9.03 per share, subject to
certain adjustment provisions such as stock splits, issuances of Common Stock at
or below a specified price relative to the then current market price of the
stock, and other provisions.  The Warrant expires ten years from the
issuance date.  The Warrant is exercisable in whole or in part at any
time except that the Treasury may not exercise more than one-half of the shares
underlying the Warrant prior to the earlier of i) December 31, 2009 or ii) the
date on which the Company receives gross proceeds of not less than $23,864,000
in one or more Qualified Equity Offerings.  In addition, the Treasury
has agreed not to exercise voting power with respect to any shares of Common
Stock issued upon exercise of the Warrant.





Prior to
December 31, 2011, unless the Company has redeemed the Series C Preferred shares
or the Treasury has transferred the Series C Preferred Shares to a third party,
consent of the Treasury will be required for the Company to 1) pay any dividend
or other distribution to the holders of the Common Stock or 2) redeem, purchase
or acquire any shares of Common Stock or other equity securities other than in
connection with benefit plans consistent with past practices.  In
addition, the Company’s ability to declare common dividends or repurchase Common
Stock or other equity securities will be subject to restrictions in the event
the Company fails to declare and pay, or set aside for payment, the full amount
of dividends on the Series C Preferred Shares.  Finally, the Company
has agreed, so long as the Treasury holds any securities of the Company, to
ensure that its benefit plans with respect to its senior executive officers
comply with the applicable provisions of the Emergency Economic Stabilization
Act of 2008 and the American Recovery and Reinvestment Act of 2009.





Issuance
costs of $570,000 incurred in connection with the issuance of both the private
placement and TARP securities have been charged against Additional Paid in
Capital.


44





The
Company is subject to capital adequacy guidelines issued by the Board of
Governors and the OCC. The Company is required to maintain total capital equal
to at least 8.0% of assets and commitments to extend credit, weighted by risk,
of which at least 4.0% must consist primarily of common equity including
retained earnings (Tier 1 capital) and the remainder may consist of subordinated
debt, cumulative preferred stock or a limited amount of allowance for credit
losses.  Certain assets and commitments to extend credit present less
risk than others and will be assigned to lower risk-weighted categories
requiring less capital allocation than the 8.0% total ratio.  For
example, cash and government securities are assigned to a 0.0% risk-weighted
category, most home mortgage loans are assigned to a 50.0% risk-weighted
category requiring a 4.0% capital allocation and commercial loans are assigned
to a 100.0% risk-weighted category requiring an 8.0% capital
allocation.  As of December 31, 2009, the Company's and the Bank’s
total risk-based capital ratios were 19.45% and 17.11%, respectively (11.67% for
the Company and 11.30% for the Bank at December 31, 2008).





The
following table reflects the Company's capital ratios for the period ended
December 31, 2009 and 2008 as well as the minimum capital ratios required to be
deemed “well capitalized” under the regulatory framework.





(dollars in thousands)
                                        
                                        As of December 31,2009
                                        
                                        
                                        2008Amount
                                        
                                        
                                        Ratio
                                        
                                        
                                        Amount
                                        
                                        
                                        RatioCompany
      Capital RatiosTier
      1 Capital
                                        
                                        $
                                        106,489
                                        
                                        
                                        
                                        15.26
                                        %
                                        
                                        $
                                        109,221
                                        
                                        
                                        
                                        13.31
                                        %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                        
                                        $
                                        41,861
                                        
                                        
                                        
                                        6.00
                                        %
                                        
                                        $
                                        49,252
                                        
                                        
                                        
                                        6.00
                                        %Total
      Capital
                                        
                                        $
                                        135,678
                                        
                                        
                                        
                                        19.45
                                        %
                                        
                                        $
                                        138,725
                                        
                                        
                                        
                                        16.90
                                        %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                        
                                        $
                                        69,768
                                        
                                        
                                        
                                        10.00
                                        %
                                        
                                        $
                                        82,086
                                        
                                        
                                        
                                        10.00
                                        %Company
      leverageTier
      1 Capital
                                        
                                        $
                                        106,489
                                        
                                        
                                        
                                        12.53
                                        %
                                        
                                        $
                                        109,221
                                        
                                        
                                        
                                        12.36
                                        %(to
      Average Assets)Total
      capital minimum requirement
                                        
                                        $
                                        42,494
                                        
                                        
                                        
                                        5.00
                                        %
                                        
                                        $
                                        44,170
                                        
                                        
                                        
                                        5.00
                                        %Bank
      Risk Based Capital RatiosTier
      1 Capital
                                        
                                        $
                                        110,517
                                        
                                        
                                        
                                        15.85
                                        %
                                        
                                        $
                                        106,137
                                        
                                        
                                        
                                        12.94
                                        %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                        
                                        $
                                        41,837
                                        
                                        
                                        
                                        6.00
                                        %
                                        
                                        $
                                        49,206
                                        
                                        
                                        
                                        6.00
                                        %Total
      Capital
                                        
                                        $
                                        119,323
                                        
                                        
                                        
                                        17.11
                                        %
                                        
                                        $
                                        116,388
                                        
                                        
                                        
                                        14.19
                                        %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                        
                                        $
                                        69,728
                                        
                                        
                                        
                                        10.00
                                        %
                                        
                                        $
                                        82,010
                                        
                                        
                                        
                                        10.00
                                        %Bank
      leverageTier
      1 Capital
                                        
                                        $
                                        110,517
                                        
                                        
                                        
                                        13.01
                                        %
                                        
                                        $
                                        106,137
                                        
                                        
                                        
                                        12.03
                                        %(to
      Average Assets)Total
      capital minimum requirement
                                        
                                        $
                                        42,459
                                        
                                        
                                        
                                        5.00
                                        %
                                        
                                        $
                                        44,125
                                        
                                        
                                        
                                        5.00
                                        %




The
federal banking agencies, including the OCC, have adopted regulations
implementing a system of prompt corrective action under FDICIA.  The
regulations establish five capital categories with the following
characteristics:  (1) ”Well capitalized,” consisting of
institutions with a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of
5.0% or greater and which are not operating under an order, written agreement,
capital directive or prompt corrective action directive; (2) ”Adequately
capitalized,” consisting of institutions with a total risk-based capital ratio
of 8.0% or greater, a Tier 1 risk-based capital of 4.0% or greater and a
leverage ratio of 4.0% or greater and which do not meet the definition of a
“well capitalized” institution; (3) ”Undercapitalized,” consisting of
institutions with a total risk-based capital ratio of less than 8.0%, a
Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of
less than 4.0%; (4) ”Significantly undercapitalized,” consisting of
institutions with a total risk-based capital ratio of less than 6.0%, a
Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of
less than 3.0%; and (5) ”Critically undercapitalized,” consisting of
institutions with a ratio of tangible equity to total assets that is equal to or
less than 2.0%.


45





Financial
institutions classified as undercapitalized or below are subject to various
limitations including, among other matters, certain supervisory actions by bank
regulatory authorities and restrictions related to (i) growth of assets, (ii)
payment of interest on subordinated indebtedness, (iii) payment of dividends or
other capital distributions, and (iv) payment of management fees to a parent
holding company.  The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions that fail to meet
minimum capital requirements.  Such action may result in orders to,
among other matters, augment capital and reduce total
assets.  Critically undercapitalized financial institutions may also
be subject to appointment of a receiver or implementation of a capitalization
plan.




Stock Repurchase
Program





Effective
May 5 2008, the Company announced a stock repurchase program to repurchase up to
$5.0 million in shares of the Company for a nineteen month period extending to
December 31, 2009.  Buying under the program was at management’s
discretion taking into consideration such factors as the market price of the
stock, available cash flow, general economic conditions and other
factors.  As of December 31, 2009, no share repurchases had
occurred.





Item 7a. Quantitative and
Qualitative Disclosures about Market Risk




Liquidity/Interest Rate
Sensitivity




The Bank
strives to manage its liquidity to provide adequate funds at an acceptable cost
to support the borrowing requirements and deposit flows of its customers.
Liquidity requirements are evaluated by taking into consideration factors such
as deposit concentrations, seasonality and maturities, loan and lease demand,
capital expenditures and prevailing and anticipated economic
conditions.  The Bank’s business is generated primarily through
customer referrals and employee business development efforts.





The Bank
is primarily a business and professional bank and, as such, its deposit base is
more susceptible to economic fluctuations.  The Bank strives to
maintain a balanced position of liquid assets to volatile and cyclical deposits.
At December 31, 2009, liquid assets as a percentage of deposits were 33.2% as
compared to 29.0% in 2008.  In addition to cash and due from banks,
liquid assets include interest-bearing deposits with other banks, federal funds
sold, and unpledged securities available for sale.





Management
regularly reviews general economic and financial conditions, both external and
internal, and determines whether the positions taken with respect to liquidity
and interest rate sen­sitivity continue to be appropriate.  The
Bank utilizes a monthly "Gap" report as well as a quarterly simulation model to
identify interest rate sensitivity over the short- and
long-term.  Management considers the results of these analyses when
implementing its interest rate risk management activities, including the
utilization of certain interest rate hedges.





The
following table sets forth the distribution of repricing opportunities, based on
contractual terms, of the Company's earning assets and interest-bearing
liabilities at December 31, 2009, the interest rate sensitivity gap (i.e.
interest rate sensitive assets less interest rate sensitive liabilities), the
cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio (i.e. interest rate gap divided by interest rate sensitive assets) and the
cumulative interest rate sensitivity gap ratio.


46





(dollars
      in thousands)
                
                As of December 31, 2009After
      three
                
                
                After
      six
                
                
                After
      oneWithin
                
                
                months but
                
                
                months but
                
                
                year but
                
                
                Afterthree
                
                
                within
      six
                
                
                within one
                
                
                within
                
                
                fivemonths
                
                
                months
                
                
                year
                
                
                five years
                
                
                years
                
                
                TotalFederal
      funds sold
                
                $
                104,260
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                104,260Interest
      bearing deposits in other banks
                
                
                1,225
                
                
                
                3,185
                
                
                
                2,385
                
                
                
                3,185
                
                
                
                -
                
                
                
                9,980U.S.
      treasury and agency securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                101,709
                
                
                
                3,296
                
                
                
                105,005Loans
                
                
                168,826
                
                
                
                41,760
                
                
                
                96,981
                
                
                
                128,747
                
                
                
                140,127
                
                
                
                576,441Total
      earning assets
                
                $
                274,311
                
                
                $
                44,945
                
                
                $
                99,366
                
                
                $
                233,641
                
                
                $
                143,423
                
                
                $
                795,686Interest
      checking, money market and savings deposits
                
                
                280,680
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                280,680Certificates
      of deposit:Less
      than $100,000
                
                
                12,005
                
                
                
                5,667
                
                
                
                6,055
                
                
                
                6,055
                
                
                
                -
                
                
                
                29,782$100,000
      or more
                
                
                30,755
                
                
                
                15,913
                
                
                
                12,996
                
                
                
                1,749
                
                
                
                -
                
                
                
                61,413Total
      interest-bearing liabilities
                
                
                323,440
                
                
                
                21,580
                
                
                
                19,051
                
                
                
                7,804
                
                
                
                0
                
                
                
                371,875Interest
      rate gap
                
                $
                (49,129
                )
                
                $
                23,365
                
                
                $
                80,315
                
                
                $
                225,837
                
                
                $
                143,423
                
                
                $
                423,811Cumulative
      interest rate gap
                
                $
                (49,129
                )
                
                $
                (25,764
                )
                
                $
                54,551
                
                
                $
                280,388
                
                
                $
                423,811Interest
      rate gap ratio
                
                
                (0.18
                )
                
                
                0.52
                
                
                
                0.81
                
                
                
                0.97
                
                
                
                1.00Cumulative
      interest rate gap ratio
                
                
                (0.18
                )
                
                
                (0.08
                )
                
                
                0.13
                
                
                
                0.43
                
                
                
                0.53





Based on
the contractual terms of its assets and liabilities, the Bank’s balance sheet at
December 31, 2009 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at December 31, 2009 the volume of assets
that might reprice within the next year exceeded the volume of liabilities that
might reprice.  This position provides a hedge against rising interest
rates, but has a detrimental effect during times of rate
decreases.  Net interest income is negatively impacted by a decline in
interest rates and positively impacted by an increase in interest
rates.  To partially mitigate the adverse impact of declining rates,
the majority of variable rate loans made by the Bank have been written with a
minimum “floor” rate.





The
following table shows maturity and interest rate sensitivity of the loan
portfolio at December 31, 2009 and 2008.  At December 31, 2009,
approximately 71.5% of the loan portfolio is priced with floating interest rates
which limit the exposure to interest rate risk on long-term loans.




47




(dollars in thousands)
                
                As of December 31, 2009Due after oneDue one year
                
                
                year through
                
                
                Due afterAmount
                
                
                or less
                
                
                five years
                
                
                five yearsCommercial
                
                $
                253,776
                
                
                $
                143,154
                
                
                $
                86,671
                
                
                $
                23,951Real
      estate construction
                
                
                20,601
                
                
                
                19,302
                
                
                
                
                
                
                
                1,299Real
      estate land
                
                
                12,763
                
                
                
                9,519
                
                
                
                1,038
                
                
                
                2,206Real
      estate other
                
                
                149,617
                
                
                
                22,217
                
                
                
                46,696
                
                
                
                80,704Factoring
      and asset based lending
                
                
                66,660
                
                
                
                61,540
                
                
                
                5,120
                
                
                
                -SBA
                
                
                67,629
                
                
                
                3,843
                
                
                
                2,304
                
                
                
                61,482Other
                
                
                5,395
                
                
                
                4,567
                
                
                
                828
                
                
                
                -Total
      loans
                
                $
                576,441
                
                
                $
                264,142
                
                
                $
                142,657
                
                
                $
                169,642





As of December 31, 2008Due after oneDue one year
                
                
                year through
                
                
                Due afterAmount
                
                
                or less
                
                
                five years
                
                
                five yearsCommercial
                
                $
                301,024
                
                
                $
                167,110
                
                
                $
                106,946
                
                
                $
                26,968SBA
                
                
                98,105
                
                
                
                98,105
                
                
                
                -
                
                
                
                -Real
      estate construction
                
                
                23,535
                
                
                
                16,442
                
                
                
                4,834
                
                
                
                2,259Real
      estateother
                
                
                134,767
                
                
                
                19,673
                
                
                
                36,475
                
                
                
                78,619Factoring
      and asset based lending
                
                
                55,761
                
                
                
                54,761
                
                
                
                1,000
                
                
                
                -Other
                
                
                77,043
                
                
                
                6,874
                
                
                
                4,318
                
                
                
                65,851Total
      loans
                
                
                9,371
                
                
                
                9,100
                
                
                
                271
                
                
                
                -$
                699,606
                
                
                $
                372,065
                
                
                $
                153,844
                
                
                $
                173,697




Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations




The
definition of “off-balance sheet arrangements” includes any transaction,
agreement or other contractual arrangement to which an entity is a party under
which we have:




•
            Any
      obligation under a guarantee contract that has the characteristics as
      defined in paragraph 3 of FASB Interpretation No. 45, “Guarantor’s
      Accounting and Disclosure Requirements for Guarantee including Indirect
      Guarantees of Indebtedness to Others” (“FIN
  45”);




•
            A
      retained or contingent interest in assets transferred to an unconsolidated
      entity or similar arrangement that serves as credit, liquidity or market
      risk support to that entity for such assets, such as a subordinated
      retained interest in a pool of receivables transferred to an
      unconsolidated entity;




•
            Any
      obligation, including a contingent obligation, under a contract that would
      be accounted for as a derivative instrument, except that it is both
      indexed to the registrant’s own stock and classified in stockholders’
      equity; or




•
            Any
      obligation, including contingent obligations, arising out of a material
      variable interest, as defined in FASB Interpretation No. 46,
      “Consolidation of Variable Interest Entities” (“FIN 46”), in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to the registrant, or engages in leasing, hedging or
      research and development services with the
  registrant.





In the
ordinary course of business, we have issued certain guarantees which qualify as
off-balance sheet arrangements.  As of December 31, 2009 those
guarantees include the following:





Financial Letters of Credit in the
amount of $14.1 million




48





The table
below summarizes the Bank’s off-balance sheet contractual
obligations.








(dollars in thousands)
                    
                    As of December 31, 2009Payments due by periodLess Than
                    
                    
                    1 - 3
                    
                    
                    3 - 5
                    
                    
                    More thanContractural Obligations
                    
                    Total
                    
                    
                    1 year
                    
                    
                    years
                    
                    
                    years
                    
                    
                    5 yearsLong-term
      contracts
                    
                    $
                    872
                    
                    
                    $
                    567
                    
                    
                    $
                    305
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      leases
                    
                    
                    11,161
                    
                    
                    
                    1,620
                    
                    
                    
                    3,357
                    
                    
                    
                    3,195
                    
                    
                    
                    2,989Total
                    
                    $
                    12,033
                    
                    
                    $
                    2,187
                    
                    
                    $
                    3,662
                    
                    
                    $
                    3,195
                    
                    
                    $
                    2,989


49





Item 8.  Financial
Statements and Supplementary Data





INDEX TO
FINANCIAL STATEMENTS





PageReports
      of Independent Registered Public Accounting Firm
                                
                                51-52Balance
      Sheets, December 31, 2009 and 2008
                                
                                53Statements
      of Operations for the years ended December 31, 2009, 2008
      and  2007
                                
                                54Statement
      of Shareholders' Equity and Comprehensive Income for the years endedDecember 31, 2009, 2008 and 2007
                                
                                55Statements
      of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
                                
                                56Notes
      to Financial Statements
                                
                                57-79





All
schedules have been omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the Financial Statements or notes
thereto.





* * * *
*


50


Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Shareholders


Bridge
Capital Holdings





We have
audited the consolidated balance sheets of Bridge Capital Holdings and
Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in shareholders’ equity and comprehensive
income, and cash flows for each of the years in the three year period ended
December 31, 2009.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express opinions on these consolidated financial statements based on our
audits.





We have
also audited, in accordance with the standards of the Public Company Oversight
Board (United States), Bridge Capital Holdings and Subsidiary’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 16,
2010, expressed an unqualified opinion.





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 consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinions.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bridge Capital
Holdings and Subsidiary as of December 31, 2009 and 2008 and the consolidated
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.











Palo
Alto, California


March 16,
2010


51





Report
of Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


Bridge
Capital Holdings and Subsidiary


San Jose,
California





We have
audited Bridge Capital Holdings and Subsidiary’s (the Company) internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting.  Our responsibility is to express an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audit also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in conformity
with U.S. generally accepted accounting principles.  A company’s
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that (1) in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company;  (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and the receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board, the consolidated balance sheet of the Company as of December
31, 2009 and the related consolidated statements of operations, shareholders’
equity and comprehensive income and cash flows for the year then ended, and our
report dated March 16, 2010 expressed an unqualified opinion on those financial
statements.











Palo
Alto, California


March 16,
2010


52


Bridge Capital Holdings and Subsidiary


Consolidated
Balance Sheets


(dollars
in thousands)





As of December 31,2009
                
                
                2008Assets:Cash
      and due from banks
                
                $
                14,893
                
                
                $
                18,421Federal
      funds sold
                
                
                104,260
                
                
                
                199,525Total
      cash and equivalents
                
                
                119,153
                
                
                
                217,946Interest
      bearing deposits in other banks
                
                
                9,980
                
                
                
                7,268Investment
      securities available for sale
                
                
                105,005
                
                
                
                -Loans,
      net of allowance for credit losses of $16,012 at December 31, 2009 and
      $18,554 at December 31, 2008
                
                
                558,977
                
                
                
                679,451Premises
      and equipment, net
                
                
                3,566
                
                
                
                4,790Other
      real estate owned
                
                
                6,509
                
                
                
                1,096Accrued
      interest receivable
                
                
                2,829
                
                
                
                3,137Other
      assets
                
                
                38,048
                
                
                
                33,908Total
      assets
                
                $
                844,067
                
                
                $
                947,596Liabilities
      and Shareholders' Equity:Deposits:Demand
      noninterest-bearing
                
                $
                333,171
                
                
                $
                284,319Demand
      interest-bearing
                
                
                4,830
                
                
                
                4,267Savings
                
                
                275,850
                
                
                
                335,200Time
                
                
                91,195
                
                
                
                153,459Total
      deposits
                
                
                705,046
                
                
                
                777,245Junior
      subordinated debt securities
                
                
                17,527
                
                
                
                17,527Other
      borrowings
                
                
                -
                
                
                
                30,000Accrued
      interest payable
                
                
                121
                
                
                
                511Other
      liabilities
                
                
                12,059
                
                
                
                9,823Total
      liabilities
                
                
                734,753
                
                
                
                835,106Commitments
      and contingencies
                
                
                -
                
                
                
                -Shareholders'
      Equity:Preferred
      stock, no par value; 10,000,000 shares authorized;  323,864
      shares issued and outstanding at December 31, 2009;
                
                
                53,864
                
                
                
                53,864Common
      stock, no par value; 30,000,000 shares authorized; 7,098,164 shares issued
      and outstanding at December 31, 2009; 6,888,424 shares issued and
      outstanding at December 31, 2008;
                
                
                37,293
                
                
                
                36,833Additional
      paid in capital
                
                
                3,626
                
                
                
                2,822Retained
      earnings
                
                
                15,148
                
                
                
                17,916Accumulated
      other comprehensive income
                
                
                (617
                )
                
                
                1,055Total
      shareholders' equity
                
                
                109,314
                
                
                
                112,490Total
      liabilities and shareholders' equity
                
                $
                844,067
                
                
                $
                947,596





The
accompanying notes are an integral part of the financial
statements.


53


Bridge Capital Holdings and Subsidiary


Consolidated
Statements of Operations


(dollars
in thousands, except share data)





Year Ended December 31,2009
                
                
                2008
                
                
                2007Interest
      Income:Loans
                
                $
                43,350
                
                
                $
                56,302
                
                
                $
                61,008Federal
      funds sold
                
                
                395
                
                
                
                1,066
                
                
                
                2,648Interest
      bearing deposits in other banks
                
                
                363
                
                
                
                119
                
                
                
                -Investment
      securities available for sale
                
                
                464
                
                
                
                1,205
                
                
                
                3,089Total
      interest income
                
                
                44,572
                
                
                
                58,692
                
                
                
                66,745Interest
      Expense:Deposits
                
                
                5,415
                
                
                
                12,426
                
                
                
                18,104Other
                
                
                1,348
                
                
                
                1,401
                
                
                
                1,056Total
      interest expense
                
                
                6,763
                
                
                
                13,827
                
                
                
                19,160Net
      interest income
                
                
                37,809
                
                
                
                44,865
                
                
                
                47,585Provision
      for credit losses
                
                
                9,200
                
                
                
                31,520
                
                
                
                2,275Net
      interest income after provision for credit losses
                
                
                28,609
                
                
                
                13,345
                
                
                
                45,310Non-Interest
      Income:Other
      income - CF hedges
                
                
                3,286
                
                
                
                3,870
                
                
                
                -Service
      charges on deposit accounts
                
                
                1,900
                
                
                
                1,166
                
                
                
                672Gain
      on sale - OREO
                
                
                1,628
                
                
                
                161
                
                
                
                -International
      fee income
                
                
                1,583
                
                
                
                1,830
                
                
                
                658Gain
      on sale of SBA loans
                
                
                615
                
                
                
                603
                
                
                
                3,564SBA
      loan servicing fee income
                
                
                436
                
                
                
                445
                
                
                
                442Other
      non-interest income
                
                
                864
                
                
                
                1,896
                
                
                
                1,377Total
      non-interest income
                
                
                10,312
                
                
                
                9,971
                
                
                
                6,713Operating
      Expenses:Salaries
      and benefits
                
                
                20,286
                
                
                
                21,399
                
                
                
                20,990Occupancy
      and equipment
                
                
                4,377
                
                
                
                4,590
                
                
                
                4,337Assessments
                
                
                2,629
                
                
                
                665
                
                
                
                377Data
      services
                
                
                2,526
                
                
                
                2,439
                
                
                
                1,917Professional
      services
                
                
                1,939
                
                
                
                1,174
                
                
                
                1,150OREO
      expense
                
                
                1,231
                
                
                
                589
                
                
                
                1Deposit
      services/supplies
                
                
                1,015
                
                
                
                725
                
                
                
                605Other
                
                
                4,068
                
                
                
                4,737
                
                
                
                4,197Total
      operating expenses
                
                
                38,071
                
                
                
                36,318
                
                
                
                33,574Income
      (loss) before income taxes
                
                
                850
                
                
                
                (13,002
                )
                
                
                18,449Income
      taxes
                
                
                (585
                )
                
                
                (5,661
                )
                
                
                7,583Net
      income (loss)
                
                $
                1,435
                
                
                $
                (7,341
                )
                
                $
                10,866Preferred
      dividends
                
                
                4,203
                
                
                
                152
                
                
                
                -Net
      income available to common shareholders
                
                $
                (2,768
                )
                
                $
                (7,493
                )
                
                $
                10,866Basic
      earnings per share
                
                $
                (0.42
                )
                
                $
                (1.15
                )
                
                $
                1.70Diluted
      earnings per share
                
                $
                (0.42
                )
                
                $
                (1.15
                )
                
                $
                1.57Average
      common shares outstanding
                
                
                6,571,479
                
                
                
                6,502,376
                
                
                
                6,380,100Average
      common and equivalent shares outstanding
                
                
                6,571,479
                
                
                
                6,502,376
                
                
                
                6,925,904





The
accompanying notes are an integral part of the financial
statements.


54


Bridge Capital Holdings and Subsidiary


Consolidated
Statement of Shareholders' Equity and Comprehensive Income


For
the three Years Ended December 31, 2009


(dollars
in thousands, except share data)





Accumulated
                        
                        
                        TotalCommon
      Stock and
                        
                        
                        Preferred
                        
                        
                        
                        
                        
                        Other
                        
                        
                        Share-Additional
      Paid in Capital
                        
                        
                        Stock
                        
                        
                        Retained
                        
                        
                        Comprehensive
                        
                        
                        holders'Shares
                        
                        
                        Amount
                        
                        
                        Amount
                        
                        
                        Earnings
                        
                        
                        Income
      (loss)
                        
                        
                        EquityBalance
      at December 31, 2006
                        
                        
                        6,349,824
                        
                        
                        $
                        35,427
                        
                        
                        $
                        -
                        
                        
                        $
                        14,543
                        
                        
                        $
                        (876
                        )
                        
                        $
                        49,094Restricted
      stock issued
                        
                        
                        30,575
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Stock
      options exercised
                        
                        
                        105,231
                        
                        
                        
                        801
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        801Tax
      benefit from exercise of non qualified stock options
                        
                        
                        -
                        
                        
                        
                        316
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        316Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        1,153
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,153Other
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,854
                        
                        
                        
                        2,854Net
      income for the year
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,866
                        
                        
                        
                        -
                        
                        
                        
                        10,866Balance
      at December 31, 2007
                        
                        
                        6,485,630
                        
                        
                        $
                        37,697
                        
                        
                        $
                        -
                        
                        
                        $
                        25,409
                        
                        
                        $
                        1,978
                        
                        
                        $
                        65,084Restricted
      stock issued
                        
                        
                        255,240
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Stock
      options exercised
                        
                        
                        147,554
                        
                        
                        
                        572
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        572Issuance
      of preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        53,864
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        53,864Preferred
      stock issuance cost
                        
                        
                        -
                        
                        
                        
                        (469
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (469
                        )Tax
      benefit from exercise of non qualified stock options
                        
                        
                        -
                        
                        
                        
                        508
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        508Dividends
      paid on preferred stock
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (152
                        )
                        
                        
                        -
                        
                        
                        
                        (152
                        )Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        1,347
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,347Other
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (923
                        )
                        
                        
                        (923
                        )Net
      (loss) for the year
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,341
                        )
                        
                        
                        -
                        
                        
                        
                        (7,341
                        )Balance
      at December 31, 2008
                        
                        
                        6,888,424
                        
                        
                        $
                        39,655
                        
                        
                        $
                        53,864
                        
                        
                        $
                        17,916
                        
                        
                        $
                        1,055
                        
                        
                        $
                        112,490Restricted
      stock issued
                        
                        
                        209,740
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Stock
      options exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Preferred
      stock issuance cost
                        
                        
                        -
                        
                        
                        
                        (101
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (101
                        )Tax
      benefit from exercise of non qualified stock options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Dividends
      paid on preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,203
                        )
                        
                        
                        -
                        
                        
                        
                        (4,203
                        )Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        1,365
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,365Other
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,672
                        )
                        
                        
                        (1,672
                        )Net
      income for the year
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,435
                        
                        
                        
                        -
                        
                        
                        
                        1,435Balance
      at December 31, 2009
                        
                        
                        7,098,164
                        
                        
                        $
                        40,919
                        
                        
                        $
                        53,864
                        
                        
                        $
                        15,148
                        
                        
                        $
                        (617
                        )
                        
                        $
                        109,314





The
accompanying notes are an integral part of the financial
statements.


55


Bridge
Capital Holdings and Subsidiary


Consolidated
Statements of Cash Flows


(dollars
in thousands)





Year
      Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Cash
      Flows From Operating Activities:Net
      (loss) income
                        
                        $
                        1,435
                        
                        
                        $
                        (7,341
                        )
                        
                        $
                        10,866Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Provision
      for credit losses
                        
                        
                        9,200
                        
                        
                        
                        31,520
                        
                        
                        
                        2,275Depreciation
      and amortization
                        
                        
                        1,550
                        
                        
                        
                        1,565
                        
                        
                        
                        1,041BOLI
      income
                        
                        
                        (421
                        )
                        
                        
                        (400
                        )
                        
                        
                        (402
                        )Gain
      on sale of OREO, net
                        
                        
                        (738
                        )
                        
                        
                        -
                        
                        
                        
                        -Deferred
      income tax (credit)
                        
                        
                        (433
                        )
                        
                        
                        (4,835
                        )
                        
                        
                        (1,854
                        )Stock
      based compensation
                        
                        
                        1,365
                        
                        
                        
                        1,347
                        
                        
                        
                        1,153Proceeds
      from loan sales
                        
                        
                        18,164
                        
                        
                        
                        20,774
                        
                        
                        
                        90,334Loans
      originated for sale
                        
                        
                        (15,360
                        )
                        
                        
                        (45,267
                        )
                        
                        
                        (86,427
                        )Gain
      on sale of securities
                        
                        
                        -
                        
                        
                        
                        711
                        
                        
                        
                        -Increase
      in accrued interest receivable and other assets
                        
                        
                        (6,489
                        )
                        
                        
                        (4,890
                        )
                        
                        
                        (2,019
                        )Increase
      in accrued interest payable and other liabilities
                        
                        
                        2,116
                        
                        
                        
                        3,557
                        
                        
                        
                        722Net
      cash provided (used in) by operating activities
                        
                        
                        10,389
                        
                        
                        
                        (3,259
                        )
                        
                        
                        15,689Cash
      Flows From Investing Activities:Purchase
      of securities available for sale
                        
                        
                        (106,450
                        )
                        
                        
                        -
                        
                        
                        
                        (38,462
                        )Proceeds
      from paydowns/maturities of securities available for sale
                        
                        
                        1,445
                        
                        
                        
                        54,039
                        
                        
                        
                        28,100Proceeds
      from sale of OREO
                        
                        
                        6,864
                        
                        
                        
                        -
                        
                        
                        
                        -Purchase
      of interest bearing deposits
                        
                        
                        (2,712
                        )
                        
                        
                        (7,268
                        )
                        
                        
                        -Net
      (increase) decrease in loans
                        
                        
                        96,931
                        
                        
                        
                        (44,884
                        )
                        
                        
                        (117,341
                        )Purchase
      of fixed assets
                        
                        
                        (326
                        )
                        
                        
                        (1,373
                        )
                        
                        
                        (2,841
                        )Net
      cash used in investing activities
                        
                        
                        (4,248
                        )
                        
                        
                        514
                        
                        
                        
                        (130,544
                        )Cash
      Flows From Financing Activities:Net
      increase (decrease) in deposits
                        
                        
                        (72,199
                        )
                        
                        
                        105,889
                        
                        
                        
                        26,368Proceeds
      from sale of preferred stock
                        
                        
                        -
                        
                        
                        
                        53,864
                        
                        
                        
                        -Proceeds
      from sale of common stock
                        
                        
                        -
                        
                        
                        
                        572
                        
                        
                        
                        1,117Preferred
      stock issuance cost
                        
                        
                        (101
                        )
                        
                        
                        (469
                        )Payment
      of cash dividends
                        
                        
                        (2,634
                        )
                        
                        
                        -
                        
                        
                        
                        -Increase
      (decrease) in other borrowings
                        
                        
                        (30,000
                        )
                        
                        
                        20,000
                        
                        
                        
                        10,000Net
      cash provided by financing activities
                        
                        
                        (104,934
                        )
                        
                        
                        179,856
                        
                        
                        
                        37,485Net
      (Decrease) Increase in Cash and Equivalents:
                        
                        
                        (98,793
                        )
                        
                        
                        177,111
                        
                        
                        
                        (77,370
                        )Cash
      and equivalents at beginning of period
                        
                        
                        217,946
                        
                        
                        
                        40,835
                        
                        
                        
                        118,205Cash
      and equivalents at end of period
                        
                        $
                        119,153
                        
                        
                        $
                        217,946
                        
                        
                        $
                        40,835Other
      Cash Flow Information:Cash
      paid for interest
                        
                        $
                        5,095
                        
                        
                        $
                        13,386
                        
                        
                        $
                        18,389Cash
      paid for income taxes
                        
                        $
                        19
                        
                        
                        $
                        4,647
                        
                        
                        $
                        9,450Transfer
      of loans to OREO
                        
                        $
                        11,539
                        
                        
                        $
                        1,096
                        
                        
                        $
                        -





The
accompanying notes are an integral part of the financial
statements.


56


BRIDGE
CAPITAL HOLDINGS





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER
31, 2009, 2008 and 2007





1.           SIGNIFICANT ACCOUNTING
POLICIES




Business- Bridge Bank, N.A.
commenced business in Santa Clara, California on May 14, 2001.  Its
main office is located at 55 Almaden Blvd, San Jose, California,
95113.  The Bank conducts commercial and retail banking business,
which includes accepting demand, savings and time deposits and making
commercial, real estate and consumer loans.  It also issues cashier’s
checks, sells travelers checks and provides other customary banking
services.





On
October 1, 2004, the Bank announced completion of a bank holding company
structure which was approved by shareholders at the Bank's annual shareholders'
meeting held on May 20, 2004. The bank holding company, formed as a California
corporation, is named Bridge Capital Holdings.  Information in this
report dated prior to September 30, 2004 is for Bridge Bank, N.A.





Bridge
Capital Holdings (the “Company”) was formed for the purpose of serving as the
holding company for Bridge Bank, N.A. and is supervised by the Board of
Governors of the Federal Reserve System. Effective October 1, 2004, Bridge
Capital Holdings acquired 100% of the voting shares of Bridge Bank, N.A.. As a
result of the transaction, the former shareholders of Bridge Bank, N.A. received
one share of common stock of Bridge Capital Holdings for every one share of
common stock of Bridge Bank, N.A. owned.





Prior to
the share exchange, the common stock of the Bank had been registered with the
Office of Comptroller of the Currency.  As a result of the share
exchange, common stock of Bridge Capital Holdings is now registered with the
Securities and Exchange Commission.  Filings under the federal
securities laws are made with the SEC rather than the Office of the Comptroller
of the Currency and are available on the SEC’s website, http://www.sec.gov as
well as on the Company’s website http://www.bridgebank.com.




Principles of
Consolidation-The
financial statements include the accounts of Bridge Capital Holdings and its
subsidiary, Bridge Bank, N.A. (“the Bank”) collectively referred to herein as
“the Company”.




Basis of
Presentation – The accounting and reporting policies of Bridge Capital
Holdings and Bridge Bank, N.A. conform to generally accepted accounting
principles and prevailing practices within the banking
industry.




Reclassifications
- Certain reclassifications were made to prior years’ presentations to conform
to the current year.  These reclassifications had no effect on net
income or earnings per share.




Use of
Estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities as of the dates and for the
periods presented.  A significant estimate included in the
accompanying financial statements is the allowance for loan
losses.  Actual results could differ from those
estimates.




Recent Accounting
Pronouncements – During the current year, the FASB issued guidance
regarding the following new accounting standards:





·
            Subsequent
      Events


In
May 2009 and February 2010, the FASB issued guidance which requires the
effects of events that occur subsequent to the balance-sheet date be evaluated
through the date the financial statements are either issued or available to be
issued.   Entities are to disclose the date through which
subsequent events have been evaluated and whether that date is the date the
financial statements were issued or the date the financial statements were
available to be issued. Entities are required to reflect in their financial
statements the effects of subsequent events that provide additional evidence
about conditions at the balance-sheet date (recognized subsequent
events).  Entities are also prohibited from reflecting in their
financial statements the effects of subsequent events that provide evidence
about conditions that arose after the balance-sheet date (nonrecognized
subsequent events), but requires information about those events to be disclosed
if the financial statements would otherwise be misleading.  This
guidance was effective for annual financial periods ended after June 15, 2009
with prospective application.  The Company adopted the guidance for
the year ended December 31, 2009 by including the required disclosures in Note 1
to the financial statements.




57





·
            Accounting Standards
      Codification and the Hierarchy of Generally Accepted Accounting
      Principles


In June
2009, accounting standards were revised to establish the Accounting Standards
Codification (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with Generally Accepted
Accounting Principles (“GAAP”).  The Codification does not change
current GAAP, but is intended to simplify user access to all authoritative GAAP
by providing all the authoritative literature related to a particular topic in
one place.  The Codification is effective for annual periods ended
after September 15, 2009, and as of the effective date, all existing accounting
standard documents were superseded.  Adoption of the Codification in
2009 did not have a material impact on the Company’s financial
statements.





·
            Fair Value
      Measurements


In April
2009, accounting standards were amended to provide additional guidance for
determining the fair value of a financial asset or financial liability when the
volume and level of activity for such asset or liability decreased significantly
and also to provide guidance for determining whether a transaction is
orderly.  The amendments were effective for annual reporting periods
ended after June 15, 2009.  Adoption of the amendments in 2009 did not
have a material impact on the Company’s financial statements.





In
February 2008, the FASB issued instructions that delayed the effective date of
fair value measurement for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) for fiscal years beginning after November
15, 2008.  Adoption of the fair value measurement rules in 2009 for
non-financial assets and non-financial liabilities subject to the delay did not
have a material impact on Company’s financial statements.





·
            Other-Than-Temporary
      Impairment


In April
2009, accounting standards were amended to provide expanded guidance concerning
the recognition and measurement of other-than-temporary impairments of debt
securities classified as available for sale or held to maturity.  The
amendments require an entity to recognize the credit component of an
other-than-temporary impairment of a debt security in earnings and the noncredit
component in other comprehensive income when the entity does not intend to sell
the security and it is more likely than not that the entity will not be required
to sell the security prior to recovery.  Expanded disclosures are also
required concerning such impairments.  The amendments were effective
for annual reporting periods ended after June 15, 2009.  Adoption of
the amendments in 2009 did not have a material impact on the Bank’s financial
statements.





·
            Newly Issued Not Yet Effective
      Accounting Standards


In
June 2009, accounting standards were amended to clarify when a transferor
has surrendered control over transferred financial assets and thus is entitled
to account for the transfer as a sale.  The amendments establish
specific conditions for accounting for the transfer of a financial asset, or a
portion of a financial asset, as a sale.  The amendments could impact
when a loan participation or SBA loan sale may be accounted for as a sale and
the related transferred asset derecognized by the Bank.  This guidance
is effective for transfers occurring on or after January 1, 2010.  The
Company has not yet completed its evaluation of these amendments, but does not
expect that they will have a material impact on its balance sheet or statement
of operations.




Fair Value
Measurement - Fair value is the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Current accounting guidance
establishes a fair value hierarchy, which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.




See Note
13 to the financial statements for more information and disclosures relating to
the Company’s fair value measurements.




Earnings Per
Share - Basic net income per share is computed by dividing net income
applicable to common shareholders by the weighted average number of common
shares outstanding during the period.  Diluted net income per share is
determined using the weighted average number of common shares outstanding during
the period, adjusted for the dilutive effect of common stock equivalents,
consisting of shares that might be issued upon exercise of common stock options
and vesting of restricted stock.  Common stock equivalents are
included in the diluted net income per share calculation to the extent these
shares are dilutive.  See Note 2 to the financial statements for
additional information on earnings per share.




58




Cash
Equivalents – For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, Federal Funds sold and
highly liquid debt instruments purchased with an original maturity of three
months or less.  The Company is required to maintain non-interest
earning cash reserves against certain of the deposit accounts.  As of
December 31, 2009, aggregate reserves (in the form of deposits with the Federal
Reserve Bank) of $25,000 were maintained.




Securities- The Company classifies
its investment securities into two categories, available for sale and held to
maturity, at the time of purchase.  Securities available for sale are
reported at fair value with net unrealized holding gains or losses, net of tax,
recorded as a separate component of shareholders' equity.  Securities
held to maturity are measured at amortized cost based on the Company’s positive
intent and ability to hold the securities to maturity.  As of December
31, 2009 all of the Company’s securities were classified as available for sale
and as of December 31, 2008 the Company had no investment
securities.





Premiums
and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using the effective interest
method.   Dividend and interest income is recognized when
earned.  Gains and losses on sales of securities are computed on a
specific identification basis.





Management
evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly
basis and more frequently when economic or market conditions
warrant.




Loans -
Loans are stated at the principal amount outstanding less the allowance for
credit losses and net deferred loan fees.  Interest on loans is
credited to income as earned.  Loans are generally placed on
nonaccrual status and any accrued and unpaid interest is reversed when the
payment of principal or interest is 90 days past due unless the loan is both
well secured and in the process of collection.  Interest accruals are
resumed on such loans only when they are brought current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and
interest.





Loan
origination fees and costs are deferred and amortized to income at the
instrument level using the effective interest method based on the contractual
lives adjusted for prepayments.




Loans Held For
Sale -Small
Business Administration (“SBA”) loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate.  Net unrealized gains are recognized through a
valuation allowance by credits to income.  Gains or losses realized on
the sales of loans are recognized at the time of sale and are determined by the
difference between the net sales proceeds and the carrying value of the loans
sold, adjusted for any servicing asset or liability. Gains and losses on sales
of loans are included in non-interest income.





The
Company has adopted guidance issued by the Financial Accounting Standards Board
(“FASB”) that clarifies the accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of
liabilities.  Under this guidance, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.




Servicing Rights- Servicing
rights are recognized separately when they are acquired through sale of
loans.  The Company has adopted guidance issued by the FASB that
clarifies the accounting for servicing rights.  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 model 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 non-interest income in proportion to, and
over the period of, the estimated 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 where 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.




59





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.  The amortization of servicing rights and changes in the
valuation allowance are netted against loan servicing income.




Allowance for
Credit Losses - The allowance for credit losses is established through a
provision charged to expense.  Loans are charged off against the
allowance when management believes that the collection of principal is
unlikely.  The allowance is an amount that management believes will be
adequate to absorb known and probable losses in the loan
portfolio.  The allowance is based on a number of factors including
prevailing economic trends, industry experience, estimated collateral values,
management’s assessment of credit risk inherent in the portfolio, delinquency
trends, historical loss experience, specific problem loans, the results of
regulatory examinations, and other relevant factors.  Because the
allowance for loan losses is based on estimates, ultimate losses may vary from
current estimates.




Accounting for
Impaired Loans- A loan is considered impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement.  Any allowance on impaired loans is generally
based on three methods. 1) present value of expected future cash flows
discounted at the loan's effective interest rate or, 2) as a practical
expedient, at the loan's observable market price or 3) the fair value of the
collateral if the loan is collateral dependent.  Income recognition on
impaired loans is consistent with the policy for income recognition on
non-accrual loans described above.




Premises and
Equipment - Premises and equipment are stated at cost less accumulated
depreciation and amortization.  Depreciation and amortization are
computed on a straight-line basis over the shorter of the lease term or the
estimated useful lives of the assets, which are generally three years for
computer equipment, three to five years for furniture, fixtures and equipment
and five to ten years for leasehold improvements.




Other Real Estate
Owned - Other real estate owned (“OREO”) consist of properties acquired
through foreclosure.  The Company values these properties at fair
value less estimated costs to sell at the time it acquires them, which
establishes the new cost basis.  The Company charges against the
allowance for credit losses any losses arising at the time of acquisition of
such properties.  After it acquires them, the Company carries such
properties at the lower of cost or fair value less estimated selling
costs.  If the Company records any write-downs or losses from
disposition of such properties after acquiring them, it includes this amount in
other non-interest expense.  Development and improvement costs
relating to OREO are capitalized (assuming they are recoverable).  At
December 31, 2009 there were three construction properties valued at $5.5
million, two land development properties valued at $393,000, one other real
estate property valued at $486,000 and two commercial properties valued at
$104,000 that were categorized as “other real estate owned”.  At
December 31, 2008 there were two commercial properties valued at $552,000 and
one land development property valued at $544,000 owned by the Bank that were
acquired through the foreclosure process.




Income
Taxes- Deferred
income taxes are computed using the asset and liability method, which recognizes
a liability or asset representing the tax effects, based on current tax law, of
future deductible or taxable amounts attributable to events that have been
recognized in the financial statements.  A valuation allowance is
established to reduce the deferred tax asset to the level at which it is “more
likely than not” that the tax asset or benefits will be
realized.  Realization of tax benefits of deductible temporary
differences and operating loss carry-forwards depends on having sufficient
taxable income of an appropriate character within the carry-forward
periods.





The
Company has adopted guidance issued by the FASB that clarifies the accounting
for uncertainty in tax positions taken or expected to be taken on a tax return
and provides that the tax effects from an uncertain tax position can be
recognized in the financial statements only if, based on its merits, the
position is more likely than not to be sustained on audit by the taxing
authorities.  Interest and penalties related to uncertain tax
positions are recorded as part of income tax expense.




Stock-Based
Compensation–The
Company has adopted guidance issued by the FASB that clarifies the accounting
for stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments.  The Company uses the Black-Scholes-Merton (“BSM”)
option-pricing model to determine the fair-value of stock-based
awards.  The Company has recorded an incremental $1.4 million ($1.1
million net of tax), $1.3 million ($1.1 million net of tax), and $1.2 million
($933,000 net of tax) of stock-based compensation expense during the years ended
December 31, 2009, 2008, and 2007, respectively as a result of the adoption
of the guidance issued by the FASB.




60




No
stock-based compensation costs were capitalized as part of the cost of an asset
as of December 31, 2009.   As of December 31, 2009, $3.5 million
of total unrecognized compensation cost related to stock options and restricted
stock units are expected to be recognized over a weighted-average period of 3.5
years.





Stock-based
compensation expense reduced basic earnings per share by $0.16, $0.25, and $0.16
and diluted earnings per share by $0.16, $0.25, and $0.10 for the years ended
December 31, 2009, 2008, and 2007, respectively.




Comprehensive
Income – The Company has adopted accounting guidance issued by the FASB
that requires all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. The
guidance also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement.  Other
comprehensive earnings include an adjustment to fully recognize the liability
associated with the supplemental executive retirement plan, unrealized gains and
losses, net of tax, on cash flow hedges, and unrealized gains and losses, net of
tax, on marketable securities classified as available-for-sale.  The
Company had an accumulated other comprehensive loss totaling $(617,000), net of
tax, at December 31, 2009, an accumulated other comprehensive gain of $1.1
million, net of tax, at December 31, 2008 and an accumulated other comprehensive
gain of $2.0 million, net of tax, at December 31, 2007.





(dollars
      in thousands)
                
                Year
      ended December 31,2009
                
                
                2008
                
                
                2007Net
      income (loss)
                
                $
                1,435
                
                
                $
                (7,341
                )
                
                $
                10,866Other
      comprehensive earnings-Net
      unrealized gains (losses) on FAS 158 adjustment-supplemental executive
      retirement plan
                
                
                335
                
                
                
                (667
                )
                
                
                44Net
      unrealized gains (losses) on cash flow hedges
                
                
                (1,854
                )
                
                
                2,156
                
                
                
                2,270Net
      unrealized gains (losses) on securities available for sale
                
                
                (153
                )
                
                
                489
                
                
                
                540Total
      comprehensive income (loss)
                
                $
                (237
                )
                
                $
                (5,363
                )
                
                $
                13,720





Segments of an
Enterprise and Related Information –The Company has adopted guidance
issued by the FASB that requires certain information about the operating
segments of the Company. The objective of requiring disclosures about segments
of an enterprise and related information is to provide information about the
different types of business activities in which an enterprise engages and the
different economic environment in which it operates to help users of financial
statements better understand its performance, better assess its prospects for
future cash flows and make more informed judgments about the enterprise as a
whole.  The Company has determined that it has one segment, general
commercial banking, and therefore it is appropriate to aggregate the Company’s
operations into a single operating segment.





Derivative
Instruments and Hedging Activities– The Company has adopted guidance
issued by the FASB that clarifies the disclosure requirements for derivative
instruments and hedging activities with the intent to provide users of financial
statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
The guidance requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about the fair value of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative instruments.





As
required by the guidance, the Company records all derivatives on the balance
sheet at fair value.  The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether the Company
has elected to designate a derivative in a hedging relationship and apply hedge
accounting and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and qualified as a
hedge of the exposure to changes in the fair value of an asset, liability, or
firm commitment attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives designated and that qualify as a
hedge of the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. Hedge
accounting generally provides for the matching of the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk in a fair value hedge or the earnings effect of the hedged forecasted
transactions in a cash flow hedge.  The Company may enter into
derivative contracts that are intended to economically hedge certain of its
risks, even though hedge accounting does not apply or the Company elects not to
apply hedge accounting under current accounting guidance.  See Note 14
to the financial statements for additional information on derivative instruments
and hedging activities.




61





2.           EARNINGS
PER SHARE





Basic net
earnings per share is computed by dividing net earnings applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net earnings per share is determined using the
weighted average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options or vesting of restricted
shares.  Common stock equivalents are included in the diluted net
earnings per share calculation to the extent these shares are
dilutive.  A reconciliation of the numerator and denominator used in
the calculation of basic and diluted net earnings per share available to common
shareholders is as follows (in thousands, except for per share
amounts):





(dollars
      in thousands, except share data)
                  
                  Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Net
      income
                  
                  $
                  1,435
                  
                  
                  $
                  (7,341
                  )
                  
                  $
                  10,866Less:Dividends
      on preferred shares
                  
                  
                  (4,203
                  )
                  
                  
                  (152
                  )
                  
                  
                  -Net
      income available to common shareholders
                  
                  $
                  (2,768
                  )
                  
                  $
                  (7,493
                  )
                  
                  $
                  10,866Weighted
      average shares used in computing:Basic
      common  shares
                  
                  
                  6,571,479
                  
                  
                  
                  6,502,376
                  
                  
                  
                  6,380,100Dilutive
      potential common shares related to stock options,  restricted
      stock, warrants, and preferred shares using the  treasury stock
      method
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  545,762Total
      average common shares and equivalents
                  
                  
                  6,571,479
                  
                  
                  
                  6,502,376
                  
                  
                  
                  6,925,862Basic
      earnings  per share
                  
                  $
                  (0.42
                  )
                  
                  $
                  (1.15
                  )
                  
                  $
                  1.70Diluted
      earnings per share
                  
                  $
                  (0.42
                  )
                  
                  $
                  (1.15
                  )
                  
                  $
                  1.57





There
were 1,336,029 options to acquire common stock (including those issuable
pursuant to contingent stock agreements), 526,095 shares of issued and
outstanding restricted common stock, and preferred stock mandatorily convertible
to 3,396,412 shares of common stock that could potentially dilute basic earnings
per share in the future that were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for year ended
December 31, 2009.




3.
            SECURITIES





The
amortized cost and estimated fair values of securities as of December 31, 2009
are reflected in the following table.  As of December 31, 2008, the
Company did not own any investment securities.




62




(dollars in thousands)
                      
                      As of December 31, 2009Amortized
                      
                      
                      Gross Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueU.S.
      government treasury securities
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -U.S.
      government agency securities
                      
                      
                      80,324
                      
                      
                      
                      259
                      
                      
                      
                      (306
                      )
                      
                      
                      80,277Mortgage
      backed securities
                      
                      
                      24,936
                      
                      
                      
                      8
                      
                      
                      
                      (216
                      )
                      
                      
                      24,728Total
      securities available for sale
                      
                      
                      105,260
                      
                      
                      
                      267
                      
                      
                      
                      (522
                      )
                      
                      
                      105,005Total
      investment securities
                      
                      $
                      105,260
                      
                      
                      $
                      267
                      
                      
                      $
                      (522
                      )
                      
                      $
                      105,005





The
scheduled maturities of securities available for sale at December 31, 2009 were
as follows:





(dollars
      in thousands)
                
                December
      31, 2009Amortized
                
                
                FairCost
                
                
                ValueDue
      in one year or less
                
                $
                -
                
                
                $
                -Due
      after one year through five years
                
                
                101,964
                
                
                
                101,709Due
      after five years through ten years
                
                
                -
                
                
                
                -Due
      after ten years
                
                
                3,296
                
                
                
                3,296Total
      securities available for sale
                
                
                105,260
                
                
                
                105,005Total
      Investment securities
                
                $
                105,260
                
                
                $
                105,005





As of
December 31, 2009, no investment securities were pledged as
collateral.  As of December 31, 2009, there were no unrealized losses
attributable to securities positioned for the period greater than 12
months.





4.           LOANS
AND ALLOWANCES FOR CREDIT LOSSES





The
following summarizes loans and activity in the allowance for loan losses for the
years ended December 31, 2009, 2008 and 2007.





A
      summary of loans is as follows:(dollars
      in thousands)
                
                As
      of December 31,2009
                
                
                2008
                
                
                2007Commercial
                
                $
                253,776
                
                
                $
                301,024
                
                
                $
                272,660Real
      estate construction
                
                
                20,601
                
                
                
                98,105
                
                
                
                85,378Land
      loans
                
                
                12,763
                
                
                
                23,535
                
                
                
                61,987Real
      estate other
                
                
                149,617
                
                
                
                134,767
                
                
                
                109,055Factoring
      and asset based lending
                
                
                66,660
                
                
                
                55,761
                
                
                
                57,662SBA
                
                
                67,629
                
                
                
                77,043
                
                
                
                56,945Other
                
                
                5,395
                
                
                
                9,371
                
                
                
                9,042Total
      gross loans
                
                
                576,441
                
                
                
                699,606
                
                
                
                652,729Unearned
      fee income
                
                
                (1,452
                )
                
                
                (1,601
                )
                
                
                (1,856
                )Total
      loan portfolio
                
                
                574,989
                
                
                
                698,005
                
                
                
                650,873Less
      allowance for credit losses
                
                
                (16,012
                )
                
                
                (18,554
                )
                
                
                (8,608
                )Total
      loan portfolio, net
                
                $
                558,977
                
                
                $
                679,451
                
                
                $
                642,265





63





Analysis
      of the allowance for credit losses:(dollars
      in thousands)
                  
                  As
      of December 31,2009
                  
                  
                  2008
                  
                  
                  2007Balance,
      beginning of period
                  
                  $
                  18,554
                  
                  
                  $
                  8,608
                  
                  
                  $
                  7,329Provision
      for credit losses
                  
                  
                  9,200
                  
                  
                  
                  31,520
                  
                  
                  
                  2,275Charge-offs
                  
                  
                  (12,795
                  )
                  
                  
                  (21,694
                  )
                  
                  
                  (1,255
                  )Recoveries
                  
                  
                  1,053
                  
                  
                  
                  120
                  
                  
                  
                  259Balance,
      end of period
                  
                  $
                  16,012
                  
                  
                  $
                  18,554
                  
                  
                  $
                  8,608





There
were twenty-four loans (representing twenty-two relationships), totaling $17.0
million, on non-accrual and deemed impaired at December 31,
2009.  There were sixteen loans (representing fourteen relationships),
totaling $15.8 million, on non-accrual and deemed impaired at December 31, 2008
and four loans, totaling $4.9 million on non-accrual and deemed impaired at
December 31, 2007.





Average
impaired loans for the years ended December 31, 2009, 2008, and 2007 were $23.8
million, $19.6 million, and $2.6 million, respectively.





Income on
such loans is only recognized to the extent that cash is received and where the
future collection of principal is probable.  Accrual of interest is
resumed only when principal and interest are brought fully current and when such
loans are considered to be collectible as to both principal and
interest.





At
December 31, 2009, 2008, and 2007, there were no loans past due 90 days or more
as to principal or interest and still accruing interest.




5.           PREMISES
AND EQUIPMENT




Premises
and equipment are comprised of the following:





(dollars
      in thousands)
                    
                    As
      of December 31,2009
                    
                    
                    2008
                    
                    
                    2007Leasehold
      improvements
                    
                    $
                    5,399
                    
                    
                    $
                    5,378
                    
                    
                    $
                    4,855Furniture
      and equipment
                    
                    
                    3,225
                    
                    
                    
                    3,164
                    
                    
                    
                    2,825Capitalized
      software
                    
                    
                    3,089
                    
                    
                    
                    2,816
                    
                    
                    
                    2,285Premises
      and equipment
                    
                    
                    11,713
                    
                    
                    
                    11,358
                    
                    
                    
                    9,965Less
      accumulated depreciation and amortization
                    
                    
                    (8,147
                    )
                    
                    
                    (6,568
                    )
                    
                    
                    (4,960
                    )Premises
      and equipment, net
                    
                    $
                    3,566
                    
                    
                    $
                    4,790
                    
                    
                    $
                    5,005





Depreciation
and amortization amounted to $1.6 million, $1.6 million, and $1.3 million for
the years ended December 31, 2009, 2008 and 2007, respectively, and has been
included in occupancy and/or furniture and equipment expense, depending on the
nature of the expense, in the accompanying statements of
operations.




6.           DEPOSITS




The
Bank’s deposit base consists of non-interest and interest-bearing demand
deposits, savings and money market accounts and certificates of
deposit.  The following table summarizes the composition of deposits
as of December 31, 2009, 2008 and 2007.




64




(dollars
      in thousands)
                      
                      As
      of December 31,2009
                      
                      
                      2008
                      
                      
                      2007Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      PercentNoninterest-bearing  demand
                      
                      $
                      333,171
                      
                      
                      
                      47.26
                      %
                      
                      $
                      284,319
                      
                      
                      
                      36.58
                      %
                      
                      $
                      198,641
                      
                      
                      
                      29.59
                      %Interest-bearing
      demand
                      
                      
                      4,830
                      
                      
                      
                      0.69
                      %
                      
                      
                      4,267
                      
                      
                      
                      0.55
                      %
                      
                      
                      5,350
                      
                      
                      
                      0.80
                      %Money
      market and savings
                      
                      
                      275,850
                      
                      
                      
                      39.13
                      %
                      
                      
                      335,200
                      
                      
                      
                      43.13
                      %
                      
                      
                      372,923
                      
                      
                      
                      55.55
                      %Certificates
      of deposit:Less
      than $100
                      
                      
                      29,782
                      
                      
                      
                      4.22
                      %
                      
                      
                      92,997
                      
                      
                      
                      11.96
                      %
                      
                      
                      22,896
                      
                      
                      
                      3.41
                      %$100
      and more
                      
                      
                      61,413
                      
                      
                      
                      8.70
                      %
                      
                      
                      60,462
                      
                      
                      
                      7.78
                      %
                      
                      
                      71,546
                      
                      
                      
                      10.66
                      %Total
      deposit portfolio
                      
                      $
                      705,046
                      
                      
                      
                      100.00
                      %
                      
                      $
                      777,245
                      
                      
                      
                      100.00
                      %
                      
                      $
                      671,356
                      
                      
                      
                      100.00
                      %





At
December 31, 2009, time deposits of $100,000 or more have remaining maturities
as follows:





(in
      thousands)3
      months or less
                  
                  $
                  30,755Over
      3 months to 6 months
                  
                  
                  15,913Over
      6 months to 12 months
                  
                  
                  12,996Over
      1 year to 5 years
                  
                  
                  1,749TOTAL
                  
                  $
                  61,413





At
December 31, 2009, the scheduled maturities of all time deposits are as
follows:





(in
      thousands)2010
                    
                    $
                    80,5522011
                    
                    
                    10,2432012
                    
                    
                    2972013
                    
                    
                    1032014
                    
                    
                    -$
                    91,195




7.
            JUNIOR
      SUBORDINATED DEBT SECURITIES AND OTHER
  BORROWINGS




Junior
Subordinated Debt Securities





On
December 21, 2004, the Company issued $12,372,000 of junior subordinated debt
securities (the “debt securities”) to Bridge Capital Trust I, a statutory trust
created under the laws of the State of Delaware.  These debt
securities are subordinated to effectively all borrowings of the Company and are
due and payable in March 2035.  Interest is payable quarterly on these
debt securities at a fixed rate of 5.9% for the first five years, and thereafter
interest accrues at LIBOR plus 1.98%.  The debt securities can be
redeemed at par at the Company’s option beginning in March 2010; they can also
be redeemed at par if certain events occur that impact the tax treatment or the
capital treatment of the issuance.





The
Company also purchased a 3% minority interest in the Trust.  The
balance of the equity of the Trust is comprised of mandatorily redeemable
preferred securities.





On March
30, 2006 the Company issued $5,155,000 of junior subordinated debt securities
(the “debt securities”) to Bridge Capital Trust II, a statutory trust created
under the laws of the State of Delaware.  These debt securities are
subordinated to effectively all borrowings of the Company and are due and
payable in March 2037.  Interest is payable quarterly on these debt
securities at a fixed rate of  6.60% for the first five years, and
thereafter interest accrues at LIBOR plus 1.38%.  The debt securities
can be redeemed at par at the Company’s option beginning in April 2011; they can
also be redeemed at par if certain events occur that impact the tax treatment or
the capital treatment of the issuance.




65





The
Company also purchased a 3% minority interest in the Trust.  The
balance of the equity of the Trust is comprised of mandatorily redeemable
preferred securities.





Based
upon accounting guidance, these Trusts are not consolidated into the company’s
financial statements.  The Federal Reserve Board has ruled that
subordinated notes payable to unconsolidated special purpose entities (“SPE’s”)
such as these Trusts, net of the bank holding company’s investment in the SPE,
qualify as Tier 1 Capital, subject to certain limits.





Other
Borrowings





The
Company had no other borrowings at December 31, 2009.  Other
borrowings at December 31, 2008 totaled $30.0 million and were comprised of the
following:





(dollars
      in thousands)
                                
                                Year
      ended December 31, 2008Amount
                                
                                Date
                                
                                Maturity
                                
                                RateFederal
      Home Loan Bank
                                
                                $
                                10,000
                                
                                08/29/08
                                
                                02/27/09
                                
                                
                                3.09
                                %Federal
      Home Loan Bank
                                
                                
                                10,000
                                
                                09/30/08
                                
                                03/30/09
                                
                                
                                3.55
                                %Federal
      Home Loan Bank
                                
                                
                                10,000
                                
                                09/30/08
                                
                                06/30/09
                                
                                
                                3.41
                                %Total
      other borrowings
                                
                                $
                                30,000





As of
December 31, 2009, the Bank had a total borrowing capacity of approximately
$202.0 million.   The Bank also has unsecured borrowing lines
with correspondent banks totaling $25.0 million.  At December 31,
2009, there were no balances outstanding on these lines.




8.           INCOME
TAXES




Income
tax expense (benefit) consists of the following for the years ended December 31,
2009, 2008 and 2007:





(dollars
      in thousands)
                
                Year
      ended December 31,2009
                
                
                2008
                
                
                2007Current:Federal
                
                $
                (172
                )
                
                $
                (980
                )
                
                $
                7,357State
                
                
                20
                
                
                
                154
                
                
                
                2,080Total
      current
                
                
                (152
                )
                
                
                (826
                )
                
                
                9,437Deferred:Federal
                
                
                (146
                )
                
                
                (2,994
                )
                
                
                (1,458
                )State
                
                
                (287
                )
                
                
                (1,841
                )
                
                
                (396
                )Total
      deferred
                
                
                (433
                )
                
                
                (4,835
                )
                
                
                (1,854
                )Income
      tax provision
                
                $
                (585
                )
                
                $
                (5,661
                )
                
                $
                7,583





Deferred
income taxes reflect the net tax effect of temporary differences between
carrying amount of assets and liabilities for financial reporting purposes and
the amount used for income tax purposes.  The tax effects of temporary
differences that gave rise to significant portions of deferred tax assets at
December 31, 2009, 2008 and 2007 are as follows:





66





(dollars
      in thousands)
                  
                  As
      of ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Deferred
      tax assets (liability):Deferred
      loan fee
                  
                  $
                  508
                  
                  
                  $
                  560
                  
                  
                  $
                  650Allowance
      for credit losses
                  
                  
                  5,604
                  
                  
                  
                  6,365
                  
                  
                  
                  2,788Deferred
      pre-opening expenses
                  
                  
                  -
                  
                  
                  
                  4
                  
                  
                  
                  10State
      income taxes
                  
                  
                  2,566
                  
                  
                  
                  2,278
                  
                  
                  
                  1,775Fixed
      assets
                  
                  
                  485
                  
                  
                  
                  298
                  
                  
                  
                  300Other
                  
                  
                  2,250
                  
                  
                  
                  1,415
                  
                  
                  
                  602Accrued
      expenses
                  
                  
                  634
                  
                  
                  
                  694
                  
                  
                  
                  655Net
      Deferred Tax Asset
                  
                  $
                  12,047
                  
                  
                  $
                  11,614
                  
                  
                  $
                  6,780





In
addition to the above net deferred tax asset, the Company has additional
deferred tax assets / (liabilities) arising from adjustments to other
comprehensive income aggregating $433,000 as of December 31, 2009 and $(795,000)
as of December 31, 2008.





Income
tax returns for the years ended December 31, 2008, 2007 and 2006 are open to
audit by the federal authorities and income tax returns for the years ended
December 31, 2008, 2007, 2006 and 2005 are open to audit by California
authorities.  Unrecognized tax benefits are not expected to
significantly increase or decrease within the next twelve months.





The
effective tax rate differs from the federal statutory rate as
follows:





Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Federal
      statutory rate
                  
                  
                  35.00
                  %
                  
                  
                  -35.00
                  %
                  
                  
                  35.00
                  %State
      income tax, net of federal effect
                  
                  
                  -20.39
                  %
                  
                  
                  -7.05
                  %
                  
                  
                  5.93
                  %BOLI
      income
                  
                  
                  -17.35
                  %
                  
                  
                  -1.08
                  %
                  
                  
                  0.76
                  %Low
      income housing credits
                  
                  
                  -98.98
                  %
                  
                  
                  -2.14
                  %
                  
                  
                  0.87
                  %Stock-based
      compensation
                  
                  
                  25.22
                  %
                  
                  
                  2.11
                  %
                  
                  
                  -1.45
                  %Other,
      net
                  
                  
                  7.69
                  %
                  
                  
                  -0.38
                  %
                  
                  
                  -0.01
                  %Income
      taxes
                  
                  
                  -68.81
                  %
                  
                  
                  -43.54
                  %
                  
                  
                  41.10
                  %




9.           STOCK
BASED COMPENSATION




On May
18, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan
(the “Plan”) which supersedes the Stock Option Plan that was established in
2001.  The total authorized shares that are available for issuance
under the Plan is 1,090,338 shares.  The Plan provides for the
following types of stock-based awards:  incentive stock options;
nonqualified stock options; stock appreciation rights; restricted stock awards;
restricted stock units; performance units; and stock grants.  As of
December 31, 2009, the Company has issued incentive stock options, nonqualified
stock options, and restricted stock awards under the Plan.




Options
issued under the Plan may be granted to employees and non-employee directors and
may be either incentive or nonqualified stock options as defined under current
tax laws.   The exercise price of each option must equal the
market price of the Company’s stock on the date of the grant.  The
term of the option may not exceed 10 years and generally vests over a 4 year
period.




Restricted
stock awards issued under the Plan may be granted to employees and non-employee
directors.  The grant price of each award generally equals the market
price of the Company’s stock on the date of the grant.  The awards
generally vest after a 5 year period.  During the period of
restriction, participants holding restricted stock awards have full voting and
dividend rights on the shares.




67




The
vesting of any award granted under the plan may be accelerated in the event of a
merger or sale of the Company if the acquiring entity does not assume or replace
the awards with comparable awards.




At the
time the 2006 Equity Incentive Plan was adopted, the total authorized shares
available for issuance under the 2001 Stock Option Plan was 1,813,225 shares and
the number of shares available for future grant was 253,577
shares.  As the 2006 Equity Incentive Plan supersedes the 2001 Stock
Option Plan, no further grants may be made under the 2001 plan and as such, the
253,577 shares that were available for future grant under the 2001 plan may no
longer be awarded.




As of
December 31, 2009, there were 1,862,714 shares underlying outstanding awards
under the Company’s stock-based compensation plans and 156,099 shares available
for future grants under the 2006 Equity Incentive Plan.





A summary
of the Company’s non-vested shares of restricted stock awards as of December 31,
2009 and changes during the period ended on that date is presented
below:




Non-Vested Restricted Stock AwardsWeightedNumber
                  
                  
                  Average Grantof Shares
                  
                  
                  Date Fair ValueBalances,
      December 31, 2008
                  
                  
                  316,355
                  
                  
                  $
                  7.60Granted
                  
                  
                  240,660
                  
                  
                  
                  5.94Vested
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (30,920
                  )
                  
                  
                  5.03Balances,
      December 31, 2009
                  
                  
                  526,095
                  
                  
                  $
                  6.99





A summary
of the Company’s stock option awards as of December 31, 2009 and changes during
the period ended on that date are presented below:





Stock Option Awards OutstandingWeightedNumber
                  
                  
                  Averageof Shares
                  
                  
                  Exercise PriceBalances,
      December 31, 2008
                  
                  
                  1,290,347
                  
                  
                  $
                  12.28Granted
                  
                  
                  104,200
                  
                  
                  
                  5.40Exercised
      (no aggregate intrinsic value)
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  (45,189
                  )
                  
                  
                  19.98Expired
                  
                  
                  (13,329
                  )
                  
                  
                  18.38Balances,
      December 31, 2009
                  
                  
                  1,336,029
                  
                  
                  $
                  11.42





The
following table summarizes information about stock options outstanding at
December 31, 2009.




68





Stock Option Awards Outstanding
                                
                                
                                Stock Option Awards ExercisableWeighted
                                
                                
                                Weighted
                                
                                
                                
                                
                                
                                Weighted
                                
                                
                                WeightedRemaining
                                
                                
                                Exercise
                                
                                
                                
                                
                                
                                Remaining
                                
                                
                                ExerciseExercise Price range
                                
                                
                                Shares
                                
                                
                                Life (Years)
                                
                                
                                Price
                                
                                
                                Shares
                                
                                
                                Life (Years)
                                
                                
                                Price$
                                4.00
                                -
                                
                                $
                                6.49
                                
                                
                                
                                643,425
                                
                                
                                
                                2.6
                                
                                
                                $
                                5.00
                                
                                
                                
                                554,675
                                
                                
                                
                                2.6
                                
                                
                                $
                                5.34$
                                6.50
                                -
                                
                                $
                                9.49
                                
                                
                                
                                43,350
                                
                                
                                
                                6.3
                                
                                
                                
                                9.19
                                
                                
                                
                                24,224
                                
                                
                                
                                6.3
                                
                                
                                
                                7.21$
                                9.50
                                -
                                
                                $
                                14.99
                                
                                
                                
                                290,450
                                
                                
                                
                                5.2
                                
                                
                                
                                14.75
                                
                                
                                
                                273,499
                                
                                
                                
                                5.2
                                
                                
                                
                                13.91$
                                15.00
                                -
                                
                                $
                                22.75
                                
                                
                                
                                358,804
                                
                                
                                
                                6.9
                                
                                
                                
                                19.42
                                
                                
                                
                                251,839
                                
                                
                                
                                6.9
                                
                                
                                
                                20.771,336,029
                                
                                
                                
                                4.4
                                
                                
                                $
                                11.42
                                
                                
                                
                                1,104,237
                                
                                
                                
                                3.6
                                
                                
                                $
                                10.14





The
aggregate intrinsic value of stock option awards outstanding and stock option
awards exercisable at December 31, 2009 was $1.3 million and $1.1 million,
respectively.





The
Company has elected to use the BSM option-pricing model, which incorporates
various assumptions including volatility, expected life, and interest
rates.  The expected volatility is based on the historical volatility of
the Company’s common stock over the most recent period commensurate with the
estimated expected life of the Company’s stock options, adjusted for the impact
of unusual fluctuations not reasonably expected to recur and other relevant
factors including implied volatility in market traded options on the Company’s
common stock. The expected life of an award is based on historical experience
and on the terms and conditions of the stock awards granted to
employees.




The
weighted average assumptions used for 2009, 2008, and 2007 and the resulting
estimates of weighted-average fair value per share of stock options granted
during those periods are as follows:





Year
      ended December 31,2009
                
                
                2008
                
                
                2007Expected
      life
                
                75
      months
                
                
                75
      months
                
                
                60
      monthsStock
      volatility
                
                
                28.0
                %
                
                
                22.0
                %
                
                
                28.4
                %Risk
      free interest rate
                
                
                2.3
                %
                
                
                3.2
                %
                
                
                4.2
                %Dividend
      yield
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %Fair
      value per share
                
                $
                1.77
                
                
                $
                4.59
                
                
                $
                7.39




10.        PENSION
BENEFIT PLANS




Effective
August 1, 2004, the Bank established the Supplemental Executive Retirement Plan
(SERP), an unfunded noncontributory defined benefit pension plan.  The
SERP provides retirement benefits to a select group of key executives and senior
officers based on years of service and final average salary.  The Bank
uses a December 31 measurement date for this plan.





The
following table reflects the accumulated benefit obligation and funded status of
the SERP for the years ended December 31, 2009, 2008 and 2007:


69




The
following table reflects the accumulated benefit obligation and funded status of
the SERP for the years ended December 31, 2009, 2008 and 2007:





(dollars in thousands)
                
                Year ended December 31,2009
                
                
                2008
                
                
                2007Change
      in benefit obligationBenefit
      obligation at beginning of year
                
                $
                3,492
                
                
                $
                2,897
                
                
                $
                2,351Service
      cost
                
                
                346
                
                
                
                563
                
                
                
                345Interest
      cost
                
                
                167
                
                
                
                159
                
                
                
                133Amendments
                
                
                -
                
                
                
                -
                
                
                
                -Actuarial
      (gains)/losses
                
                
                (477
                )
                
                
                (127
                )
                
                
                68Acquisitions/(divestitures)
                
                
                -
                
                
                
                -
                
                
                
                -Expected
      benefits paid
                
                
                (59
                )
                
                
                -
                
                
                
                -Projected
      benefit obligation at end of year
                
                $
                3,469
                
                
                $
                3,492
                
                
                $
                2,897Unfunded
      projected/accumulated benefit obligation
                
                
                (3,469
                )
                
                
                (3,492
                )
                
                
                (2,897
                )Additional
      liability
                
                $
                -
                
                
                $
                -
                
                
                $
                -





The
components of net periodic benefit cost recognized for the years ended December
31, 2009 and 2008 and the amounts in accumulated other comprehensive income
expected to be recognized as components of net periodic benefit cost during the
year ended December 31, 2010 are as follows:





(dollars in thousands)
                
                Year ended December 31,2010
                
                
                2009
                
                
                2008Components
      of net periodic benefit costService
      cost
                
                $
                392
                
                
                $
                346
                
                
                $
                563Interest
      cost
                
                
                197
                
                
                
                167
                
                
                
                159Expected
      return on plan assets
                
                
                -
                
                
                
                -
                
                
                
                -Amortization
      of transition obligation (asset)
                
                
                -
                
                
                
                -
                
                
                
                -Amortization
      of prior service cost
                
                
                85
                
                
                
                85
                
                
                
                85Amortization
      of actuarial (gains)/losses
                
                
                (45
                )
                
                
                (6
                )
                
                
                4Net
      periodic benefit cost
                
                $
                629
                
                
                $
                592
                
                
                $
                811Other
      comprehensive income (cost)
                
                $
                (40
                )
                
                $
                (556
                )
                
                $
                (215
                )




11.           RELATED
PARTY TRANSACTIONS




There are
no existing or proposed material interests or transactions between the Bank
and/or any of its officers or directors outside the ordinary course of the
Bank's business.




12.           COMMITMENTS
AND CONTINGENT LIABILITIES




Lease
Commitments





The
Bank's San Jose and Palo Alto locations are leased under non-cancelable
operating leases that expire in 2016 and 2014, respectively.  The Bank
has renewal options with adjustments to the lease payments based on changes in
the consumer price index.





Future
minimum annual lease payments are as follows (dollars in
thousands):


70





Future
      lease paymentsFor
      years ended December 31,2010
                  
                  $
                  1,6202011
                  
                  
                  1,6592012
                  
                  
                  1,6982013
                  
                  
                  1,7382014
                  
                  
                  1,457Thereafter
                  
                  
                  2,989$
                  11,161





Rental
expense under operating leases was $2.0 million in 2009, $2.3 million in 2008
and $2.1 million in 2007.





Other
Commitments





In the
normal course of business, there are outstanding commitments to extend credit,
which are not reflected in the consolidated financial
statements.  These commitments involve, to varying degrees, credit
risk in excess of the amount recognized as either an asset or a liability in the
balance sheet.  The Bank controls the credit risk through its credit
approval process.  The same credit policies are used when entering
into such commitments.





The Bank
is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments include loan commitments of
$222.3 million, $263.2 million and $299.8 million at December 31, 2009, 2008 and
2007, respectively.  The Bank's exposure to credit loss is limited to
amounts funded or drawn; however, at December 31, 2009, no losses are
anticipated as a result of these commitments.





Loan
commitments are typically contingent upon the borrowers meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee.  As many of these
commitments are expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash
requirements.  The Bank evaluates each potential borrower and the
necessary collateral on an individual basis.  Collateral varies, and
may include real property, bank deposits, or business or personal
assets.





Undisbursed
loan commitments were comprised of the following at December 31, 2009 (dollars
in thousands):





Loan Category
                  
                  AmountCommercial
                  
                  $
                  178,171SBA
                  
                  
                  137Real
      estate construction
                  
                  
                  3,463Land
      loans
                  
                  
                  370Real
      estate term
                  
                  
                  13,863Factoring/ABL
                  
                  
                  19,064Other
                  
                  
                  7,256Total
                  
                  $
                  222,325





13.           DISCLOSURE
OF FAIR VALUE OF FINANCIAL INSTRUMENTS




In
accordance with accounting guidance, the Company groups its financial assets and
financial 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:





Level 1 –
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange.  Level 1 also includes U.S. Treasury,
other U.S. government and agency mortgage-backed securities that 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.


71





Level 2 –
Valuations for assets and liabilities traded in less active dealer or broker
markets.  Valuations are obtained from third party pricing services
for identical or comparable assets or liabilities.





Level 3 –
Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer, or broker traded
transactions.  Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets or
liabilities.





The
balances of assets and liabilities measured at fair value on a recurring basis
are as follows:





(dollars in thousands)
                    
                    As of December 31, 2009Total
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Securities
      available for sale
                    
                    $
                    105,005
                    
                    
                    $
                    -
                    
                    
                    $
                    105,005
                    
                    
                    $
                    -Cash
      flow hedge
                    
                    
                    (776
                    )
                    
                    
                    -
                    
                    
                    
                    (776
                    )
                    
                    
                    -Warrant
      portfolio
                    
                    
                    729
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    729Total
                    
                    $
                    104,958
                    
                    
                    $
                    -
                    
                    
                    $
                    104,229
                    
                    
                    $
                    729





As of December 31, 2008Total
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Securities
      available for sale
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Cash
      flow hedge
                    
                    
                    (1,445
                    )
                    
                    
                    -
                    
                    
                    
                    (1,445
                    )
                    
                    
                    -Warrant
      portfolio
                    
                    
                    718
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    718Total
                    
                    $
                    (727
                    )
                    
                    $
                    -
                    
                    
                    $
                    (1,445
                    )
                    
                    $
                    718





The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis were not material for the year ended December 31, 2009.





The
Company may be required, from time to time, to measure certain other financial
assets at fair value on a non-recurring basis in accordance with
GAAP.  These adjustments to fair value usually result from application
of lower-of-cost-or-market accounting or write-downs of individual
assets.  The assets measured at fair value on a non-recurring basis
for the years ended December 31, 2009 and 2008 included impaired loans of $17.0
million and $15.8 million, respectively.  The fair value of impaired
loans was determined using Level 3 assumptions.  The Company
charged-off $12.8 million and $21.7 million during the years ended December 31,
2009 and 2008, respectively, as a result of impaired loans.





The
following estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies.  However,
considerable judgment is required to interpret market data to develop the
estimates of fair value.  Accordingly, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current market
exchange.  The use of different market assumptions and/or estimation
techniques may have a material effect on the estimated fair value
amounts.





The
following table presents the carrying amount and estimated fair value of certain
assets and liabilities of the Company at December 31, 2009 and
2008.  The carrying amounts reported in the balance sheets approximate
fair value for the following financial instruments: cash and due from banks,
federal funds sold, interest-bearing deposits in other banks, demand and savings
deposits (see Note 3 for information regarding securities).


72





(dollars in thousands)
                
                Year ended December 31,2009
                
                
                2008Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairValue
                
                
                Value
                
                
                Value
                
                
                ValueFinancial
      assets:Cash
      and due from banks
                
                $
                14,893
                
                
                $
                14,893
                
                
                $
                18,421
                
                
                $
                18,421Federal
      funds sold
                
                
                104,260
                
                
                
                104,260
                
                
                
                199,525
                
                
                
                199,525Interest
      bearing Deposits in other Banks
                
                
                9,980
                
                
                
                9,954
                
                
                
                7,268
                
                
                
                7,256Investments
      securities
                
                
                105,005
                
                
                
                105,005
                
                
                
                -
                
                
                
                -Loans
      and leases, gross
                
                
                574,989
                
                
                
                589,748
                
                
                
                699,780
                
                
                
                721,856Bank
      owned life insurance
                
                
                10,001
                
                
                
                10,001
                
                
                
                9,580
                
                
                
                9,580Cash
      flow hedge
                
                
                (776
                )
                
                
                (776
                )
                
                
                (1,445
                )
                
                
                (1,445
                )Financial
      liabilities:Deposits
                
                
                705,046
                
                
                
                703,362
                
                
                
                777,246
                
                
                
                775,922Trust
      preferred securities
                
                
                17,527
                
                
                
                8,058
                
                
                
                17,527
                
                
                
                17,595Other
      borrowings
                
                
                -
                
                
                
                -
                
                
                
                30,000
                
                
                
                29,959





Loans




The fair
value of loans with fixed rates is estimated by discounting the future cash
flows using current rates at which similar loans would be made to borrowers with
similar credit ratings.  For loans with variable rates that adjust
with changes in market rates of interest, the carrying amount is a reasonable
estimate of fair value.





Time
deposits




The fair
value of fixed maturity certificates of deposit is estimated using rates
currently offered for deposits of similar remaining maturities.





Commitments
to extend credit and standby letters of credit




Commitments
to extend credit and standby letters of credit are issued in the normal course
of business by the Bank.  Commitments to extend credit are issued with
variable interest rates tied to market interest rates at the time the
commitments are funded and the amount of the commitments equals their fair
value.  Standby letters of credit are supported by commitments to
extend credit with variable interest rates tied to market interest rates at the
time the commitments are funded.




14.           DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES




The
Company is exposed to certain risks arising from both its business operations
and economic conditions.  The Company principally manages its
exposures to a wide variety of business and operational risks through management
of its core business activities. The Company manages economic risks, including
interest rate, liquidity, and credit risk, primarily by managing the amount,
sources, and duration of its assets and liabilities and through the use of
derivative financial instruments.  Specifically, the Company enters
into derivative financial instruments to manage exposures that arise from
business activities that result in the receipt or payment of future known and
uncertain cash amounts, the value of which are determined by interest
rates.  The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash payments principally
related to certain variable rate loan assets and variable rate
borrowings.  The Company does not use derivatives for trading or
speculative purposes and currently does not have any derivatives that are not
designated in qualifying hedging relationships.





Fair
Values of Derivative Instruments on the Balance Sheet





The table
below presents the fair value of the Company’s derivative instruments that were
liabilities, as well as their classification on the balance sheet, as of
December 31, 2009 and December 31, 2008.  The Company did not have any
derivative instruments that were assets as of December 31, 2009 and December 31,
2008.


73






Fair ValueDerivatives Designated as Hedging
                          
                          Balance Sheet
                          
                          December 31,
                          
                          December 31,Instruments Under SFAS 133
                          
                          Location
                          
                          2009
                          
                          2008Interest
      rate contracts
                          
                          Other assets
                          
                          $
                          
                          -
                          
                          $
                          
                          (1,445
                          )Interest
      rate contracts
                          
                          Other liabilities
                          
                          
                          
                          776
                          
                          
                          
                          -Total
      hedged derivatives
                          
                          
                          
                          $
                          
                          776
                          
                          $
                          
                          (1,445
                          )





Cash
Flow Hedges of Interest Rate Risk





The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate swaps as part of its interest rate risk management strategy.  For
hedges of the Company’s variable-rate loan assets, interest rate swaps
designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for the Company making variable-rate payments over the
life of the agreements without exchange of the underlying notional
amount.  For hedges of the Company’s variable-rate borrowings,
interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for the Company making
fixed-rate payments. As of December 31, 2009, the Company had two interest rate
swaps with an aggregate notional amount of $17.5 million that were designated as
cash flow hedges of interest rate risk associated with the Company’s
variable-rate borrowings.





The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive
Income (“AOCI”) and is subsequently reclassified into earnings in the period
that the hedged forecasted transaction affects earnings. During the years ended
December 31, 2009 and 2008, such derivatives were used to hedge the forecasted
variable cash outflows associated with subordinated debt related to trust
preferred securities.  During the year ended December 31, 2008,
interest rate derivatives, which have since been terminated, were also used to
hedge the cash inflows associated with existing pools of Prime-based loan
assets.  During the year ended December 31, 2009, the amount of
pre-tax gain/(loss) recorded in AOCI due to the effective portion of changes in
fair value of derivatives designated as cash flow hedges was
$636,000.  During the year ended December 31, 2008, the amount of
pre-tax gain recorded in AOCI due to the effective portion of changes in fair
value of derivatives designated as cash flow hedges was $1.6
million.  During the year ended December 31, 2009, $579,000 was
reclassified into earnings related to the effective portion of cash flow
hedges.  During the year ended December 31, 2008, $2.0 million was
reclassified into earnings related to the effective portion of cash flow
hedges.





The
ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. During the year ended December 31, 2008, the Company
recognized a loss of $(198,000) for hedge ineffectiveness attributable to a
mismatch between the swap notional and the aggregate principal amount of the
designated loan pools. No hedge ineffectiveness was recognized during the year
ended December 31, 2009.





Amounts
reported in AOCI related to derivatives will be reclassified to interest income
or expense, as applicable, as interest payments are received / made on the
Company’s variable-rate assets/liabilities. During the next twelve months, the
Company estimates that $316,000 will be reclassified as an increase to interest
income and $340,000 will be reclassified as an increase to interest
expense.  During the years ended December 31, 2009 and 2008, the
Company accelerated the reclassification of amounts in other comprehensive
income to earnings as a result of the hedged forecasted transactions related to
certain terminated interest rate swaps becoming probable not to
occur.  The accelerated amounts for the years ended December 31, 2009
and 2008 were gains of $3.3 million and $486,000, respectively.





The table
below presents the effect of the Company’s derivative financial instruments,
interest rate contracts, on the income statement for the years ended December
31, 2009 and 2008.


74





(dollars in thousands)
                  
                  Interest Income
                  
                  
                  Non-InterestIncome
                  
                  
                  Total IncomeTwelve monthsended
                  
                  
                  Twelve monthsended
                  
                  
                  Twelve monthsendedDecember 31,
                  
                  
                  December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Amount
      of gain reclassified from AOCI into income - effective
    portion
                  
                  $
                  579
                  
                  
                  $
                  2,018
                  
                  
                  $
                  3,286
                  
                  
                  $
                  486
                  
                  
                  $
                  3,865
                  
                  
                  $
                  2,504Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from
      effectiveness    testing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (198
                  )
                  
                  
                  -
                  
                  
                  
                  (198
                  )Total
      derivative income
                  
                  $
                  579
                  
                  
                  $
                  2,018
                  
                  
                  $
                  3,286
                  
                  
                  $
                  288
                  
                  
                  $
                  3,865
                  
                  
                  $
                  2,306





Credit
Risk Related Contingent Features





The
Company has an agreement with one of its derivative counterparties that contain
a provision where if the Company defaults on any of its indebtedness,
including default where repayment of the indebtedness has not been
accelerated by the lender, then the Company could also be declared in
default on its derivative obligations.




The
Company also has agreements with certain of its derivative counterparties that
contain a provision where if the Company fails to maintain its status as a well
/ adequate capitalized institution, then the counterparty could terminate the
derivative positions and the Company would be required to settle its obligations
under the agreements.





As of
December 31, 2009 the fair value of derivatives in a net liability position,
which includes accrued interest but excludes any adjustment for nonperformance
risk, related to these agreements was $758,000. As of December 31, 2009, the
Company has minimum collateral posting thresholds with certain of its derivative
counterparties and has posted collateral of $1.0 million against its obligations
under these agreements. If the Company had breached any of these provisions at
December 31, 2009, it would have been required to settle its obligations under
the agreements at the termination value.




15.           BRIDGE
CAPITAL HOLDINGS




The
following are the financial statements of Bridge Capital Holdings (parent
company only):


75




BALANCE
SHEETS





(dollars in thousands)
                    
                    As of December 31,2009
                    
                    
                    2008Assets:Cash
      and due from banks
                    
                    $
                    17,228
                    
                    
                    $
                    21,309Investment
      in bank & subsidiaries
                    
                    
                    110,957
                    
                    
                    
                    108,654Other
      assets
                    
                    
                    1,054
                    
                    
                    
                    237Total
      Assets
                    
                    $
                    129,239
                    
                    
                    $
                    130,200Liabilities:Junior
      Subordinated Debt
                    
                    $
                    17,527
                    
                    
                    $
                    17,527Other
      liabilities
                    
                    
                    2,398
                    
                    
                    
                    183Total
      Liabilities
                    
                    
                    19,925
                    
                    
                    
                    17,710Capital:Common
      stock
                    
                    
                    40,919
                    
                    
                    
                    39,655Preferred
      stock
                    
                    
                    53,864
                    
                    
                    
                    53,864Retained
      earnings
                    
                    
                    13,713
                    
                    
                    
                    25,257Current
      year net income
                    
                    
                    1,435
                    
                    
                    
                    (7,341
                    )Other
      Comprehensive income
                    
                    
                    (617
                    )
                    
                    
                    1,055Total
      Capital
                    
                    
                    109,314
                    
                    
                    
                    112,490Total
      Liabilities and Capital
                    
                    $
                    129,239
                    
                    
                    $
                    130,200





STATEMENTS
OF OPERATIONS





(dollars in thousands)
                  
                  Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Interest
      income
                  
                  $
                  76
                  
                  
                  $
                  42
                  
                  
                  $
                  78Interest
      expense
                  
                  
                  1,042
                  
                  
                  
                  1,044
                  
                  
                  
                  1,044Noninterest
      expense
                  
                  
                  591
                  
                  
                  
                  679
                  
                  
                  
                  466Income
      (loss) before income taxes
                  
                  
                  (1,557
                  )
                  
                  
                  (1,681
                  )
                  
                  
                  (1,432
                  )Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Income
      before undistributed incomeof
      the bank
                  
                  
                  (1,557
                  )
                  
                  
                  (1,681
                  )
                  
                  
                  (1,432
                  )Equity
      in undistributed income of the bank
                  
                  
                  2,992
                  
                  
                  
                  (5,660
                  )
                  
                  
                  12,298Net
      income (loss)
                  
                  $
                  1,435
                  
                  
                  $
                  (7,341
                  )
                  
                  $
                  10,866




76





STATEMENTS
OF CASH FLOWS





(dollars in thousands)
                    
                    Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Cash
      Flow From Operating Activities:Net
      income (loss)
                    
                    $
                    1,435
                    
                    
                    $
                    (7,341
                    )
                    
                    $
                    10,866Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Equity
      in undistributed loss (earnings) of subsidiaries
                    
                    
                    (3,011
                    )
                    
                    
                    5,660
                    
                    
                    
                    (12,298
                    )Net
      change in other assets
                    
                    
                    (522
                    )
                    
                    
                    810
                    
                    
                    
                    4Net
      change in other liabilities
                    
                    
                    651
                    
                    
                    
                    153
                    
                    
                    
                    (29
                    )Net
      cash (used in) provided by operating activities
                    
                    
                    (1,447
                    )
                    
                    
                    (718
                    )
                    
                    
                    (1,457
                    )Cash
      Flow From Investing Activities:Investment
      in subsidiary
                    
                    
                    -
                    
                    
                    
                    (34,543
                    )
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    -
                    
                    
                    
                    (34,543
                    )
                    
                    
                    -Cash
      Flow From Financing Activities:Proceeds
      from sale of Common stock
                    
                    
                    -
                    
                    
                    
                    572
                    
                    
                    
                    801Proceeds
      from sale of Preferred stock
                    
                    
                    -
                    
                    
                    
                    53,864
                    
                    
                    
                    -Payment
      of cash dividends
                    
                    
                    (2,634
                    )Net
      cash provided by financing activities
                    
                    
                    (2,634
                    )
                    
                    
                    54,436
                    
                    
                    
                    801Net
      increase (decrease) in cash and equivalents
                    
                    
                    (4,081
                    )
                    
                    
                    19,175
                    
                    
                    
                    (656
                    )Cash
      and equivalents at beginning of period
                    
                    
                    21,309
                    
                    
                    
                    2,134
                    
                    
                    
                    2,790Cash
      and equivalents at end of period
                    
                    $
                    17,228
                    
                    
                    $
                    21,309
                    
                    
                    $
                    2,134




16.           REGULATORY
MATTERS




The Bank
and the Holding Company are subject to various regulatory capital requirements
administered by federal banking agencies.  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 the Company’s financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company’s assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices.  The
Company’s capital amounts and classification 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 require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined in the regulations), and of Tier I capital (as defined in the
regulations) to average assets (as defined in the
regulations).  Management believes, as of December 31, 2009, that the
Company meets all capital adequacy requirements to which they are
subject.





The
following table shows the Company’s capital ratios at December 31, 2009 and 2008
as well as the minimum capital ratios required to be deemed “well capitalized”
under the regulatory framework.




77




(dollars in thousands)
                                        
                                        As of December 31,2009
                                        
                                        
                                        2008Amount
                                        
                                        
                                        Ratio
                                        
                                        
                                        Amount
                                        
                                        
                                        RatioCompany
      Capital RatiosTier
      1 Capital
                                        
                                        $
                                        106,489
                                        
                                        
                                        
                                        15.26
                                        %
                                        
                                        $
                                        109,221
                                        
                                        
                                        
                                        13.31
                                        %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                        
                                        $
                                        41,861
                                        
                                        
                                        
                                        6.00
                                        %
                                        
                                        $
                                        49,252
                                        
                                        
                                        
                                        6.00
                                        %Total
      Capital
                                        
                                        $
                                        135,678
                                        
                                        
                                        
                                        19.45
                                        %
                                        
                                        $
                                        138,725
                                        
                                        
                                        
                                        16.90
                                        %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                        
                                        $
                                        69,768
                                        
                                        
                                        
                                        10.00
                                        %
                                        
                                        $
                                        82,086
                                        
                                        
                                        
                                        10.00
                                        %Company
      leverageTier
      1 Capital
                                        
                                        $
                                        106,489
                                        
                                        
                                        
                                        12.53
                                        %
                                        
                                        $
                                        109,221
                                        
                                        
                                        
                                        12.36
                                        %(to
      Average Assets)Total
      capital minimum requirement
                                        
                                        $
                                        42,494
                                        
                                        
                                        
                                        5.00
                                        %
                                        
                                        $
                                        44,170
                                        
                                        
                                        
                                        5.00
                                        %Bank
      Risk Based Capital RatiosTier
      1 Capital
                                        
                                        $
                                        110,517
                                        
                                        
                                        
                                        15.85
                                        %
                                        
                                        $
                                        106,137
                                        
                                        
                                        
                                        12.94
                                        %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                        
                                        $
                                        41,837
                                        
                                        
                                        
                                        6.00
                                        %
                                        
                                        $
                                        49,206
                                        
                                        
                                        
                                        6.00
                                        %Total
      Capital
                                        
                                        $
                                        119,323
                                        
                                        
                                        
                                        17.11
                                        %
                                        
                                        $
                                        116,388
                                        
                                        
                                        
                                        14.19
                                        %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                        
                                        $
                                        69,728
                                        
                                        
                                        
                                        10.00
                                        %
                                        
                                        $
                                        82,010
                                        
                                        
                                        
                                        10.00
                                        %Bank
      leverageTier
      1 Capital
                                        
                                        $
                                        110,517
                                        
                                        
                                        
                                        13.01
                                        %
                                        
                                        $
                                        106,137
                                        
                                        
                                        
                                        12.03
                                        %(to
      Average Assets)Total
      capital minimum requirement
                                        
                                        $
                                        42,459
                                        
                                        
                                        
                                        5.00
                                        %
                                        
                                        $
                                        44,125
                                        
                                        
                                        
                                        5.00
                                        %




17.           Preferred
Stock




On
November 13, 2008, the United States Treasury Department (the Treasury) approved
the Company’s participation in the TARP Capital Purchase Program, subject to the
Company raising additional equity in an amount satisfactory to
Treasury.  On December 4, 2008, investors agreed to purchase $30
million of the Company’s Series B and B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock in a private placement, subject to the Treasury
approving the Company’s participation in the TARP Capital Purchase Program and
its ability to satisfy all legal requirements for selling equity securities to
the Treasury under the program.  Based on discussions with the
Treasury representatives, the Company understood that raising $30 million would
satisfy the requirement that we raise additional equity.  The Company
sold $30 million of our Series B and B-1 Preferred Stock in a private placement
on December 17, 2008 and subsequently sold $23.9 million in TARP securities to
the Treasury on December 23, 2008.  In addition the Company issued a
warrant to the Treasury to purchase up to 396,412 shares of the Company’s common
stock.  See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Capital Resources” for additional
preferred stock discussion.




The
Company performed a net present value calculation to determine a relative fair
value of $17.7 million for the preferred stock issued to the U.S. Treasury
Department.  The calculation assumed that the preferred stock would be
repurchased by the Company in five years and utilized a twelve percent discount
rate.




The
Company performed a Black-Scholes calculation to determine a relative fair value
of $52,000 for the warrants issued to the U.S. Treasury
Department.  The calculation assumed the following:


78




Company
      Stock Price
                  
                  $
                  4.40Warrant
      Conversion Price
                  
                  $
                  9.03Expected
      Life (Years)
                  
                  
                  5.00Annualized
      Volatility
                  
                  
                  22.00
                  %Annual
      Dividend Rate
                  
                  
                  0.00
                  %Discount
      Rate (Bond Equivalent Rate)
                  
                  
                  1.53
                  %




In order
to determine the amount of TARP capital that should be allocated to the
warrants, the Company calculated a warrant allocation ratio.  This
ratio is equal to the value of the fair value of the warrants divided by the sum
of the fair value of the warrants plus the fair value of the straight preferred
stock.  This ratio was then multiplied by the total amount of TARP
capital issued resulting in a value of approximately $70,000 being allocated to
the warrants (i.e. the discount on the TARP related preferred
stock).  The assumed life of the warrants is five years and therefore
the discount is being amortized over that time period.  Due to
immateriality, the discount is being amortized utilizing the straight-line
method.  Additionally, the amortization of the discount has been
immaterial to net income available to common shareholders and has had no impact
on earnings per common share.




79




Item 9.    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure




There are
no current or anticipated changes in, or disagreements with, accountants on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.




Item 9a. Controls and
Procedures




Disclosure
Controls and Procedures





As
required by SEC rules, the Company’s management evaluated the effectiveness, as
of December 31, 2009, of the Company’s disclosure controls and
procedures.  The Company’s chief executive officer and chief financial
officer participated in the evaluation.  Based on this evaluation, the
Company’s chief executive officer and chief financial officer concluded that the
Company’s disclosure controls and procedures were effective as of December 31,
2009.





Internal
Control over Financial Reporting





Internal
control over financial reporting is defined in Rule 13a-15(f) promulgated under
the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:




·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of assets of the
      company;




·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and




·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.  No change occurred
during the fourth quarter of 2009 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.  Management’s report on internal control over financial
reporting is set forth below, and should be read with these limitations in
mind.





Management’s
Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company.  Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009, using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control – Integrated Framework.  Based on this assessment, management
concluded that as of December 31, 2009, the Company’s internal control over
financial reporting was effective.





Vavrinek,
Trine, Day & Co., LLP, the independent registered public accounting firm
that audited the Company’s financial statements included in the Annual Report,
issued an audit report on the Company’s internal control over financial
reporting as of, and for the year ended December 31, 2009.  Vavrinek,
Trine, Day & Co., LLP’s audit report appears on Page 52.




Item 9b.  Other
Information




Not
applicable


80





PART III




Item
10.  Directors, Executive Officers and Corporate
Governance




The
information required hereunder is incorporated by reference from the Company’s
definitive proxy statement for the Company’s 2010 Annual Meeting of Shareholders
(to be filed pursuant to Regulation 14A).




Item
11.  ExecutiveCompensation




The
information required hereunder is incorporated by reference from the Company’s
definitive proxy statement for the Company’s 2010 Annual Meeting of Shareholders
(to be filed pursuant to Regulation 14A).




Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters




The
following chart provides information as of December 31, 2009 concerning the
Company’s equity compensation plans:





(A)
                  
                  
                  (B)
                  
                  
                  (C)Number of SecuritiesNumber of Securities
                  
                  
                  
                  
                  
                  Remaining AvailableTo Be Issued Upon
                  
                  
                  Weighted Average
                  
                  
                  For Future IssuanceExercise of
                  
                  
                  Grant Price of
                  
                  
                  Under EquityOutstanding Options,
                  
                  
                  Outstanding Options,
                  
                  
                  Compensation PlansRestricted Stock,
                  
                  
                  Restricted Stock,
                  
                  
                  (Excluding SecuritiesWarrants, and Rights
                  
                  
                  Warrants, and Rights
                  
                  
                  Reflected in Column (A)Equity
      compensation plans approved by security holders
                  
                  
                  1,862,714
                  
                  
                  $
                  10.17
                  
                  
                  
                  156,099Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  1,862,714
                  
                  
                  $
                  10.17
                  
                  
                  
                  156,099





The
additional information required hereunder is incorporated by reference from the
Company’s definitive proxy statement for the Company’s 2010 Annual Meeting of
Shareholders (to be filed pursuant to Regulation 14A).




Item 13.  Certain
Relationships and Related Transactions, and Director
Independence




The
information required hereunder is incorporated by reference from the Company’s
definitive proxy statement for the Company’s 2010 Annual Meeting of Shareholders
(to be filed pursuant to Regulation 14A).




Item
14.  Principal Accounting Fees and Services




The
information required hereunder is incorporated by reference from the Company’s
definitive proxy statement for the Company’s 2010 Annual Meeting of Shareholders
(to be filed pursuant to Regulation 14A).


81





PART IV




Item
15.  Exhibits, Financial Statement Schedules




(a)
      (1)
              Financial
      Statements.  This information is included in Part II, Item
      8.(a)
      (2)
              Financial
      Statement Schedules.  All schedules have been omitted since the
      required information is not present or is not present in amounts
      sufficient to require submission of the schedule or because the
      information required is included in Consolidated Financial Statements or
      notes thereto.(a)
      (3)
              Exhibits.
      The exhibit list required by this item is incorporated by reference to the
      accompanying Exhibit Index filed as part of this
report.(b)
              See
      (a) (3).(c)
              See
      (a) (2).


82





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





BRIDGE CAPITAL
HOLDINGS




Date:
                          March
      16, 2010
                          
                          By:
                          /s/
      Daniel P. MyersDaniel
      P. Myers, President(Principal
      Executive
Officer)




83


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.





Name
                  
                  Title
                  
                  Date/s/Richard
      M. Brenner
                  
                  Director
                  
                  March
      16, 2010Richard
      M. Brenner/s/Owen
      Brown
                  
                  Director
                  
                  March
      16, 2010Owen
      Brown/s/David
      V. Campbell
                  
                  Director
                  
                  March
      16, 2010David
      V. Campbell/s/Howard
      N. Gould
                  
                  Director
                  
                  March
      16, 2010Howard
      GouldChairman/s/Allan
      C. Kramer, M.D.
                  
                  Director
                  
                  March
      16, 2010Allan
      C. Kramer, M.D./s/Robert
      P. Latta
                  
                  Director
                  
                  March
      16, 2010Robert
      LattaVice
      Chairman/s/Thomas
      M. Quigg
                  
                  Director
                  
                  March
      16, 2010Thomas
      M. QuiggPresidentChief
      Executive Officer/s/Daniel
      P. Myers
                  
                  Director
                  
                  March
      16, 2010Daniel
      P. Myers
                  
                  (Principal
      Executive Officer)/s/Barry
      A. Turkus
                  
                  Director
                  
                  March
      16, 2010Barry
      A. TurkusExecutive
      Vice President/s/Thomas
      A. Sa
                  
                  Chief
      Financial Officer
                  
                  March
      16, 2010Thomas
      A. Sa
                  
                  (Principal
      Financialand
      Accounting Officer)


84


INDEX TO
EXHIBITS





ExhibitNumber
                                
                                Description of Exhibit(3.1)
                                
                                Articles
      of Incorporation of the registrant [incorporated by reference to Exhibit
      3(i)(a) to the registrant’s Current Report on Form 8-K dated
      10/1/04](3.2)
                                
                                Amendment
      to the registrant’s Articles of Incorporation dated August 27, 2004
      [incorporated by reference to Exhibit 3(i)(b) to the registrant’s Current
      Report on Form 8-K dated 10/1/04](3.3)
                                
                                The
      Company’s Certificate of Determination of Preferences and Rights of Series
      B Mandatorily Convertible Cumulative Perpetual Preferred Stock and Series
      B-1 Mandatorily Convertible Cumulative Perpetual Preferred Stock
      [incorporated by reference to Exhibit 3.1 of the registrant’s Current
      Report on Form 8-K dated 12/19/08](3.4)
                                
                                Certificates
      of Amendment of Certificates of Determination filed with the California
      Secretary of State on December 18, 2008 [incorporated by reference to
      Exhibits 3.2 and 3.3 of the registrant’s Current Report on Form 8-K dated
      12/24/08](3.5)
                                
                                The
      Company’s Certificate of Determination of Preferences and Rights of Fixed
      Rate Cumulative Perpetual Preferred Stock, Series C, [incorporated by
      reference to Exhibit 3.2 of the registrant’s Current Report on Form 8-K
      dated 12/19/08](3.6)
                                
                                Bylaws
      as amended through December 18, 2008 [incorporated by reference to Exhibit
      3.4 of the registrant’s Amendment No. 1 to Form S-3 dated February 19,
      2009](3.7)
                                
                                Certificate
      of Determination specifying the terms of the Series A Junior Participating
      Preferred Stock [incorporated herein by reference to Exhibit 3.1 of the
      registrant’s Current Report on Form 8-K, filed with the Securities and
      Exchange Commission on August 22, 2008](4.1)
                                
                                Indenture
      dated as of December 21, 2004 between Bridge Capital Holdings and JP
      Morgan Chase Bank as Trustee [incorporated by reference to Exhibit 4.1 to
      the registrant’s Annual Report on Form 10-K dated
  12/31/04](4.2)
                                
                                Amended
      and Restated Declaration of trust of Bridge Capital Holdings Trust I dated
      December 21, 2004 Trustee [incorporated by reference to Exhibit 4.2 to the
      registrant’s Annual Report on Form 10-K dated 12/31/04](4.3)
                                
                                Warrant
      to Purchase Common Stock dated December 23, 2008 [incorporated by
      reference to Exhibit 4.2 of the registrant’s Current Report on Form 8-K
      dated 12/24/08](4.4)
                                
                                Rights
      Agreement between the Company and American Stock Transfer & Trust
      Company, LLC dated as of August 21, 2008, which includes as Exhibit A the
      form of Certificate of Determination for the Series A Junior Participating
      Preferred Stock, as Exhibit B the Form of Rights Certificate and as
      Exhibit C a Summary of Rights to Purchase Shares of Preferred Stock
      [incorporated herein by reference to Exhibit 4.1 of the registrant’s
      Current Report on Form 8-K, filed with the Securities and Exchange
      Commission on August 22, 2008](10.1)
                                
                                Bridge
      Bank Amended and Restated 2001 Stock Option Plan [Incorporated by
      reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K
      dated 12/31/04]**(10.2)
                                
                                Bridge
      Bank, National Association Supplemental Executive Retirement Plan
      [Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual
      Report on Form 10-K dated 12/31/04]**(10.3)
                                
                                Bridge
      Capital Holdings 2006 Equity Incentive Plan [Incorporated by reference to
      Annex A to the Registrant’s Proxy Statement dated
  04/07/06]


85





(10.4)
                      
                      Lease
      for banking office located at 6601 Koll Center Parkway, City of
      Pleasanton, County of Alameda, State of California [incorporated by
      reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2006](10.5)
                      
                      Lease
      for banking office located at 525 University Avenue, City of Palo Alto,
      County of Santa Clara, State of California [Incorporated by reference to
      Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K dated
      12/31/04](10.6)
                      
                      Wire
      Transfer Service Agreement with BankServ, Inc dated 6/25/02 California
      [Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual
      Report on Form 10-K dated 12/31/04](10.7)
                      
                      Performance
      Incentive Compensation Plan California [Incorporated by reference to
      Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K dated
      12/31/04]**(10.8)
                      
                      Information
      Technology Services Agreement between Fidelity National Information
      Services and Bridge Bank, N.A. dated November 17, 2006 and the schedules
      thereto [incorporated by reference to Exhibit 10 to the Registrant’s
      Current Report on Form 8-K, Amendment No. 1, filed
    02/16/07](10.9)
                      
                      Employment
      Agreements between Bridge Capital Holdings and Daniel P. Myers, Thomas A.
      Sa, and Timothy W. Boothe [incorporated by reference to Exhibits 10.1,
      10.2, 10.3, 10.4, and 10.5, respectfully, to the Registrant’s Current
      Report on Form 8-K filed 02/16/07]**(10.10)
                      
                      Form
      of Restricted Stock Purchase Award Agreement under the Bridge Capital
      Holdings 2006 Equity Incentive Plan [incorporated by reference to Exhibit
      10.1 to the Registrant’s Current Report on Form 8-K dated
      11/16/06]**(10.11)
                      
                      Form
      of Stock Option Award Agreement under the Bridge Capital Holdings 2006
      Equity Incentive Plan [incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K dated
  11/16/06]**(10.12)
                      
                      Amendment
      to the Company’s 2001 Stock Option Plan to permit the net exercise of
      nonstatutory options [incorporated by reference to Exhibit 10.3 to the
      Registrant’s Current Report on Form 8-K dated
  11/16/06]**(10.13)
                      
                      Lease
      for Principal Executive Office and full service banking office located at
      55 Almaden Boulevard, Suite 200, City of San Jose, County of Santa Clara,
      State of California [incorporated by reference to Exhibit 10.16 to the
      Registrant’s Annual Report on Form 10-K dated 12/31/03](10.14)
                      
                      Lease
      for additional space (fourth floor) at the Principal Executive Office
      located at 55 Almaden Boulevard, Suite 200, City of San Jose, County of
      Santa Clara, State of California [incorporated by reference to Exhibit
      10.16 to the Registrant’s Annual Report on Form 10-K dated
      12/31/06](10.15)
                      
                      Amendment
      to lease for banking office located at 525 University Avenue, City of Palo
      Alto, County of Santa Clara, State of California [incorporated by
      reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K
      dated 12/31/07](10.16)
                      
                      Stock
      Purchase Agreement dated December 4, 2008 between the Company and
      Carpenter Fund Manager GP, LLC on behalf of Carpenter Community BancFund,
      L.P., Carpenter Community BancFund-A, L.P. and Carpenter Community
      BancFund-CA, L.P. [incorporated by reference to Exhibit 10.1 of the
      Company’s Current Report on Form 8-K dated 12/05/08](10.17)
                      
                      Amendment
      No. 1 to Stock Purchase Agreement dated December 17, 2008 between the
      Company and Carpenter Fund Manager GP, LLC on behalf of Carpenter
      Community BancFund, L.P., Carpenter Community BancFund-A, L.P. and
      Carpenter Community BancFund-CA, L.P. [incorporated by reference to
      Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated
      12/19/08](10.18)
                      
                      Management
      Rights Letter dated as of December 17, 2008 by and between the Company and
      Carpenter Fund Manager GP, LLC. [incorporated by reference to Exhibit 10.3
      of the registrant’s Current Report on Form 8-K dated
    12/19/08](10.19)
                      
                      Registration
      Rights Agreement dated as of December 17, 2008 by and between the Company
      and Carpenter Fund Manager GP, LLC on behalf of Carpenter Community
      BancFund, L.P., Carpenter Community BancFund-A, L.P. and Carpenter
      Community BancFund-CA, L.P. [incorporated by reference to Exhibit 10.4 of
      the registrant’s Current Report on Form 8-K dated
  12/19/08]


86





(10.20)
              
              Form
      of Voting Agreement by and between each of the Company’s directors and
      Carpenter Fund Manager GP, LLC. [incorporated by reference to Exhibit 10.5
      of the registrant’s Current Report on Form 8-K dated
    12/19/08](10.21)
              
              Letter
      Agreement, dated as of December 23, 2008, including the Securities
      Purchase Agreement – Standard Terms incorporated by reference therein,
      between the Company and the United States Department of the Treasury
      [incorporated by reference to Exhibit 10.1 of the registrant’s Current
      Report on Form 8-K dated 12/24/08](10.22)
              
              Additional
      Letter Agreement, dated as of December 23, 2008, between the Company and
      the United States Department of the Treasury [incorporated by reference to
      Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated
      12/24/08](10.23)
              
              Form
      of Consent, executed by each of Daniel P. Myers, Thomas A. Sa, and Timothy
      W. Boothe [incorporated by reference to Exhibit 10.3 of the registrant’s
      Current Report on Form 8-K dated 12/24/08] **(10.24)
              
              Form
      of Waiver, executed by each of Daniel P. Myers, Thomas A. Sa, and Timothy
      W. Boothe [incorporated by reference to Exhibit 10.4 of the registrant’s
      Current Report on Form 8-K dated 12/24/08] **(21)
              
              Subsidiaries(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)
              
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section
      1350(32.2)
              
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section
      1350(99.1)
              
              Fiscal
      Year Certification under Troubled Assets Relief Program executed by Daniel
      P. Myers(99.2)
              
              Fiscal
      Year Certification under Troubled Assets Relief Program executed by Thomas
      A. Sa





**Management
contract or compensatory plan or arrangement


87