UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549


FORM
10-K


(Mark
One)


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


For the
fiscal year endedDecember
31,
2008
or





oTRANSITION 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
                  incorporation or organization)
                
                (I.R.S. Employer Identification Number)





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:


Title of each
      class
                
                Name
      of each exchange
                  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.  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
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 x
                  
                  Non-accelerated filer  ̈
                  
                  Smaller reporting company x(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 $70,505,920 as of June 30, 2008.





As of
March 5, 2009, Bridge Capital Holdings had 6,888,424 shares of common stock
outstanding.





Documents
incorporated by reference: The Company’s Proxy Statement for its 2009 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.





At
December 31, 2008, the Company had total assets of approximately $947.6 million,
total gross loans of $699.6 million and total deposits of $777.2
million.  At December 31, 2008, the Company had 171 full-time
equivalent employees.





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 seven
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 and established a U.S.
Small Business Administration Lending Group that includes a regional loan
production office in Sacramento County.  Also, it launched Bridge
Capital Finance Group, a factoring and asset-based lending division with a loan
production office in Santa Clara. During the year ended December 31, 2003, the
Bank opened an office in downtown San Jose and established a U.S. Small Business
Administration regional loan production office in San Diego County.





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.  Other accounts offered by the Bank include term
certificates of deposit.


3





Other
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.





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, equipment loans, and mortgage 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
under $3 million in loan size.





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 26.





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, international banking, 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, 2008, the Bank's unsecured legal lending limit to a single borrower
and such borrower's related parties was $17.5 million based on regulatory
capital of $116.4 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”).  The general terms of this CPP are as follows:





·
            Treasury’s
      investment must be between 1% and 3% of the issuer’s risk-weighted
      assets;


·
            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;


·
            No
      redemption of Treasury preferred stock for three years except from new
      high-quality private capital;


·
            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.


5





For
private companies whose stock is not traded on an exchange, the terms are
similar to those set forth above with the following significant
differences:





·
            After
      three years and through the tenth year if Treasury is still an investor,
      increases in dividends on common stock are limited to 3% per year except
      with Treasury’s consent;


·
            Treasury
      receives warrants for additional preferred stock (with an exercise price
      of $0.01 per share) rather than common stock; this warrant preferred stock
      is equal to 5% of Treasury’s investment; this warrant preferred stock
      accrues common dividends at 9% per year from the date of issuance; and the
      issuer must redeem the standard preferred stock (accruing dividends at 5%)
      before redeeming the warrant preferred stock (accruing dividends at
      9%).





For
issuers that are Subchapter S corporations under the Internal Revenue Code, TARP
has the following additional or different terms:





·
            The
      issuer issues subordinated debt instead of preferred
  stock;


·
            The
      subordinated debt bears interest at 7.7% for the first five years and
      13.8% thereafter (assuming interest is deductible and a 35% tax rate,
      these rates are intended to be the economic equivalent of the 5% and 9%
      dividend rates for preferred
stock);


·
            A
      holding company issuer may defer interest payments for up to 20
      quarters.





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.





·
            From
      October 3, 2008, until December 31, 2009, 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 December 31, 2009, 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.





The
transaction documents for the Capital Purchase Program give Treasury the
unilateral right to change or add additional terms to the
agreements.  Congress and Treasury are currently contemplating
possible changed or additional terms, with substantial focus on executive
compensation, tracking the use of TARP funds received by financial institutions
and possible foreclosure relief.





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 new 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.  However,
both the ARRA and the existing Treasury guidelines contemplate that the
Secretary of the Treasury will adopt standards to provide additional guidance
regarding how the executive compensation restrictions under the ARRA and EESA
will 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.


6


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.





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.


7





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 and unlimited for certain non-interest bearing deposits accounts
through 2009; 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.




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.


8




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.




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.


9


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.




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.


10




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.




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.


11




At
December 31, 2008, the Company and the Bank have capital ratios that place them
in the “well capitalized” category. See Footnote 15 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.




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.




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.


12




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, 2008, 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.




Effective
January 1, 2009, banks pay from 12 basis points to 50 basis points on deposits
annually for deposit insurance.  The FDIC has proposed 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 will be 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 proposal 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.  The proposal also would
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 would improve
the way the system differentiates risk among insured institutions and help
ensure that the reserve ratio returns to at least 1.15 percent by the end of
2013.  On February 27, 2009, the FDIC announced a special emergency
assessment of 20 basis points payable September 30, 2009, with the possibility
of an additional emergency assessment.




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.


13




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.




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;


14


·
            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.




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:


15





·
            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.





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.


16




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.




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.  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.


17





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.




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.


18


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.




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.


19




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.




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.


20





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.





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.


21





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





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





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





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





Item
1B.  Unresolved Staff Comments





None





Item
2.  Properties





At
December 31, 2008, 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.





A
non-banking administrative office is located at 2120 El Camino Real, in the City
of Santa Clara, County of Santa Clara, State of California.  The
office is located in a freestanding, two-story building, consisting of 5,430
square feet, located at the intersection of El Camino Real and McCormick
Drive.  The premises include 42 parking spaces situated on a 35,719
square foot parcel.  The premises are sublet from Washington Mutual
Bank.  The sublease provides for a base rent of $13,583 per month from
the commencement date until the first anniversary of the sublease. On each
anniversary date of the commencement of the sublease, the base rent will be
increased by 4.0% of the amount of the basic rent during the prior
year.  The Bank is also responsible for real estate taxes and
insurance costs. The sublease is for a period of ten (10) years, terminating on
September 30, 2010. There is no option to extend the sublease beyond that
date.  Current lease payments are $17,874 per month through the
anniversary of the commencement date.  The foregoing description of
the office is qualified by reference to the lease agreement dated August 31,
2000 exhibit 10.3 to this Report.


22





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, Sacramento, 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.  Submission of Matters to a Vote of Security
Holders




No matter
was submitted during the fourth quarter of the fiscal year covered by this
Annual Report to a vote of security holders, through the solicitation of proxies
or otherwise.


23


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
                
                
                $
                11.46





(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 268 common shareholders of record as of December 31,
2008.





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.





The
following chart reflects the total return performance of the Company’s common
stock for the years ended December 31, 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.


24











Period
      EndingIndex
                              
                              12/31/03
                              
                              
                              12/31/04
                              
                              
                              12/31/05
                              
                              
                              12/31/06
                              
                              
                              12/31/07
                              
                              
                              12/31/08Bridge
      Capital Holdings
                              
                              
                              100.00
                              
                              
                              
                              123.02
                              
                              
                              
                              142.42
                              
                              
                              
                              157.35
                              
                              
                              
                              165.36
                              
                              
                              
                              30.79NASDAQ
      Composite
                              
                              
                              100.00
                              
                              
                              
                              108.59
                              
                              
                              
                              110.08
                              
                              
                              
                              120.56
                              
                              
                              
                              132.39
                              
                              
                              
                              78.72SNL
      Western Bank
                              
                              
                              100.00
                              
                              
                              
                              113.64
                              
                              
                              
                              118.32
                              
                              
                              
                              133.50
                              
                              
                              
                              111.51
                              
                              
                              
                              108.57


25


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
      31,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004Statement
      of Operations Data:Interest
      income
                      
                      $
                      58,692
                      
                      
                      $
                      66,745
                      
                      
                      $
                      52,962
                      
                      
                      $
                      34,118
                      
                      
                      $
                      19,457Interest
      expense
                      
                      
                      13,827
                      
                      
                      
                      19,160
                      
                      
                      
                      14,271
                      
                      
                      
                      6,615
                      
                      
                      
                      2,896Net
      interest income
                      
                      
                      44,865
                      
                      
                      
                      47,585
                      
                      
                      
                      38,691
                      
                      
                      
                      27,503
                      
                      
                      
                      16,561Provision
      for credit losses
                      
                      
                      (31,520
                      )
                      
                      
                      (2,275
                      )
                      
                      
                      (1,372
                      )
                      
                      
                      (2,162
                      )
                      
                      
                      (1,671
                      )Net
      interest income after provision for credit losses
                      
                      
                      13,345
                      
                      
                      
                      45,310
                      
                      
                      
                      37,319
                      
                      
                      
                      25,341
                      
                      
                      
                      14,890Other
      income
                      
                      
                      9,971
                      
                      
                      
                      6,713
                      
                      
                      
                      3,837
                      
                      
                      
                      4,197
                      
                      
                      
                      3,855Other
      expenses
                      
                      
                      (36,318
                      )
                      
                      
                      (33,574
                      )
                      
                      
                      (27,279
                      )
                      
                      
                      (19,981
                      )
                      
                      
                      (13,596
                      )Income
      before income taxes
                      
                      
                      (13,002
                      )
                      
                      
                      18,449
                      
                      
                      
                      13,877
                      
                      
                      
                      9,557
                      
                      
                      
                      5,149Income
      taxes
                      
                      
                      5,661
                      
                      
                      
                      (7,583
                      )
                      
                      
                      (5,243
                      )
                      
                      
                      (3,832
                      )
                      
                      
                      (2,112
                      )Net
      income (loss)
                      
                      $
                      (7,341
                      )
                      
                      $
                      10,866
                      
                      
                      $
                      8,634
                      
                      
                      $
                      5,725
                      
                      
                      $
                      3,037Per
      Share Data:Basic
      income (loss) per share
                      
                      $
                      (1.15
                      )
                      
                      $
                      1.70
                      
                      
                      $
                      1.38
                      
                      
                      $
                      0.93
                      
                      
                      $
                      0.50Diluted
      income (loss) per share
                      
                      
                      (1.15
                      )
                      
                      
                      1.57
                      
                      
                      
                      1.27
                      
                      
                      
                      0.85
                      
                      
                      
                      0.46Book
      value per common share
                      
                      
                      8.51
                      
                      
                      
                      10.04
                      
                      
                      
                      7.77
                      
                      
                      
                      6.36
                      
                      
                      
                      5.43Cash
      dividend per common share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      Sheet Data:Balance
      sheet totals:Assets
                      
                      $
                      947,596
                      
                      
                      $
                      774,832
                      
                      
                      $
                      721,979
                      
                      
                      $
                      536,520
                      
                      
                      $
                      402,037Loans,
      net
                      
                      
                      679,451
                      
                      
                      
                      642,265
                      
                      
                      
                      531,956
                      
                      
                      
                      432,667
                      
                      
                      
                      289,467Deposits
                      
                      
                      777,245
                      
                      
                      
                      671,356
                      
                      
                      
                      644,987
                      
                      
                      
                      468,158
                      
                      
                      
                      352,456Shareholders'
      equity
                      
                      
                      112,490
                      
                      
                      
                      65,084
                      
                      
                      
                      49,094
                      
                      
                      
                      39,714
                      
                      
                      
                      33,122Average
      balance sheet amounts:Assets
                      
                      $
                      831,958
                      
                      
                      $
                      750,538
                      
                      
                      $
                      606,506
                      
                      
                      $
                      465,944
                      
                      
                      $
                      341,466Loans,
      net
                      
                      
                      671,065
                      
                      
                      
                      581,253
                      
                      
                      
                      458,648
                      
                      
                      
                      348,592
                      
                      
                      
                      240,465Deposits
                      
                      
                      725,952
                      
                      
                      
                      665,925
                      
                      
                      
                      535,472
                      
                      
                      
                      411,678
                      
                      
                      
                      307,471Shareholders'
      equity
                      
                      
                      67,551
                      
                      
                      
                      56,192
                      
                      
                      
                      44,646
                      
                      
                      
                      36,017
                      
                      
                      
                      30,768Selected
      Ratios:Return
      on average equity
                      
                      
                      -10.87
                      %
                      
                      
                      19.34
                      %
                      
                      
                      19.34
                      %
                      
                      
                      15.90
                      %
                      
                      
                      9.87
                      %Return
      on average assets
                      
                      
                      -0.88
                      %
                      
                      
                      1.45
                      %
                      
                      
                      1.42
                      %
                      
                      
                      1.23
                      %
                      
                      
                      0.89
                      %Efficiency
      ratio
                      
                      
                      66.23
                      %
                      
                      
                      61.83
                      %
                      
                      
                      64.14
                      %
                      
                      
                      63.03
                      %
                      
                      
                      66.59
                      %Total
      risk based capital ratio
                      
                      
                      16.90
                      %
                      
                      
                      11.67
                      %
                      
                      
                      11.74
                      %
                      
                      
                      11.58
                      %
                      
                      
                      13.77
                      %Net
      chargeoffs (recoveries) to average gross loans
                      
                      
                      3.14
                      %
                      
                      
                      0.17
                      %
                      
                      
                      0.00
                      %
                      
                      
                      0.06
                      %
                      
                      
                      0.08
                      %Allowance
      for loan losses to total gross loans
                      
                      
                      2.65
                      %
                      
                      
                      1.32
                      %
                      
                      
                      1.36
                      %
                      
                      
                      1.35
                      %
                      
                      
                      1.41
                      %Average
      equity to average assets
                      
                      
                      8.12
                      %
                      
                      
                      7.49
                      %
                      
                      
                      7.36
                      %
                      
                      
                      7.73
                      %
                      
                      
                      9.01
                      %


26


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




Certain
matters discussed or incorporated by reference in this Annual Report on Form
10-K are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those
projected.  Please see “Forward-Looking Statements” on page
2.  Therefore, the information set forth therein should be carefully
considered when evaluating 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.




Sale of SBA
Loans




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.




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.


27




Operating
Results




For the
year ended December 31, 2008, the Company reported a net loss of $(7.3) million
or $(1.15) basic and $(1.15) diluted earnings per share, compared with net
income of $10.9 million or $1.70 basic and $1.57 diluted earnings per share for
the year ended December 31, 2007 and $8.6 million or $1.38 basic and $1.27
diluted earnings per share for the year ended December 31, 2006.  The
net loss for 2008 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
income for 2007 represented an increase of $2.3 million compared to 2006
primarily due to an increase of $8.9 million in net interest income and an
increase of $2.9 million in non-interest income, offset, in part by an increase
in provision for credit losses of $900,000 and an increase of $6.3 million in
other expense.




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, 2008, 2007 and 2006.


28





AVERAGE BALANCES, RATES AND
YIELDS





(dollars
      in thousands)
                                                        
                                                        Year
      Ended December 31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006Interest
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Interest
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        InterestAverage
                                                        
                                                        
                                                        Income/
                                                        
                                                        
                                                        Yields/
                                                        
                                                        
                                                        Average
                                                        
                                                        
                                                        Income/
                                                        
                                                        
                                                        Yields/
                                                        
                                                        
                                                        Average
                                                        
                                                        
                                                        Income/
                                                        
                                                        
                                                        Yields/Balance
                                                        
                                                        
                                                        Expense
                                                        
                                                        
                                                        Rates
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        Expense
                                                        
                                                        
                                                        Rates
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        Expense
                                                        
                                                        
                                                        RatesAssetsInterest
      earning assets (2):Loans
      (1)
                                                        
                                                        $
                                                        686,107
                                                        
                                                        
                                                        $
                                                        56,302
                                                        
                                                        
                                                        
                                                        8.2
                                                        %
                                                        
                                                        $
                                                        590,443
                                                        
                                                        
                                                        $
                                                        61,008
                                                        
                                                        
                                                        
                                                        10.3
                                                        %
                                                        
                                                        $
                                                        466,529
                                                        
                                                        
                                                        $
                                                        48,248
                                                        
                                                        
                                                        
                                                        10.3
                                                        %Federal
      funds sold
                                                        
                                                        
                                                        74,635
                                                        
                                                        
                                                        
                                                        1,066
                                                        
                                                        
                                                        
                                                        1.4
                                                        %
                                                        
                                                        
                                                        52,166
                                                        
                                                        
                                                        
                                                        2,648
                                                        
                                                        
                                                        
                                                        5.1
                                                        %
                                                        
                                                        
                                                        78,946
                                                        
                                                        
                                                        
                                                        3,990
                                                        
                                                        
                                                        
                                                        5.1
                                                        %Interest
      bearing deposits
                                                        
                                                        
                                                        3,757
                                                        
                                                        
                                                        
                                                        119
                                                        
                                                        
                                                        
                                                        3.2
                                                        %
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Investment
      securities
                                                        
                                                        
                                                        24,218
                                                        
                                                        
                                                        
                                                        1,205
                                                        
                                                        
                                                        
                                                        5.0
                                                        %
                                                        
                                                        
                                                        60,901
                                                        
                                                        
                                                        
                                                        3,089
                                                        
                                                        
                                                        
                                                        5.1
                                                        %
                                                        
                                                        
                                                        17,523
                                                        
                                                        
                                                        
                                                        724
                                                        
                                                        
                                                        
                                                        4.1
                                                        %Total
      earning assets
                                                        
                                                        
                                                        788,717
                                                        
                                                        
                                                        
                                                        58,692
                                                        
                                                        
                                                        
                                                        7.4
                                                        %
                                                        
                                                        
                                                        703,510
                                                        
                                                        
                                                        
                                                        66,745
                                                        
                                                        
                                                        
                                                        9.5
                                                        %
                                                        
                                                        
                                                        562,998
                                                        
                                                        
                                                        
                                                        52,962
                                                        
                                                        
                                                        
                                                        9.4
                                                        %Noninterest
      earning assets:Cash
      and due from banks
                                                        
                                                        
                                                        18,638
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        25,284
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        27,748All
      other assets (3)
                                                        
                                                        
                                                        24,603
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        21,744
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        15,760TOTAL
                                                        
                                                        $
                                                        831,958
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        750,538
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        606,506Liabilities
      andshareholders'
      equityInterest-bearing
      liabilities:Deposits:Demand
                                                        
                                                        $
                                                        5,139
                                                        
                                                        
                                                        
                                                        12
                                                        
                                                        
                                                        
                                                        0.2
                                                        %
                                                        
                                                        $
                                                        5,382
                                                        
                                                        
                                                        
                                                        40
                                                        
                                                        
                                                        
                                                        0.7
                                                        %
                                                        
                                                        $
                                                        3,902
                                                        
                                                        
                                                        
                                                        34
                                                        
                                                        
                                                        
                                                        0.9
                                                        %Savings
                                                        
                                                        
                                                        380,460
                                                        
                                                        
                                                        
                                                        8,155
                                                        
                                                        
                                                        
                                                        2.1
                                                        %
                                                        
                                                        
                                                        371,371
                                                        
                                                        
                                                        
                                                        13,783
                                                        
                                                        
                                                        
                                                        3.7
                                                        %
                                                        
                                                        
                                                        261,251
                                                        
                                                        
                                                        
                                                        8,858
                                                        
                                                        
                                                        
                                                        3.4
                                                        %Time
                                                        
                                                        
                                                        111,834
                                                        
                                                        
                                                        
                                                        4,259
                                                        
                                                        
                                                        
                                                        3.8
                                                        %
                                                        
                                                        
                                                        88,542
                                                        
                                                        
                                                        
                                                        4,281
                                                        
                                                        
                                                        
                                                        4.8
                                                        %
                                                        
                                                        
                                                        99,924
                                                        
                                                        
                                                        
                                                        4,290
                                                        
                                                        
                                                        
                                                        4.3
                                                        %Other
                                                        
                                                        
                                                        28,554
                                                        
                                                        
                                                        
                                                        1,401
                                                        
                                                        
                                                        
                                                        4.9
                                                        %
                                                        
                                                        
                                                        17,802
                                                        
                                                        
                                                        
                                                        1,056
                                                        
                                                        
                                                        
                                                        5.9
                                                        %
                                                        
                                                        
                                                        19,106
                                                        
                                                        
                                                        
                                                        1,089
                                                        
                                                        
                                                        
                                                        5.7
                                                        %Total
      interest-bearingLiabilities
                                                        
                                                        
                                                        525,987
                                                        
                                                        
                                                        
                                                        13,827
                                                        
                                                        
                                                        
                                                        2.6
                                                        %
                                                        
                                                        
                                                        483,097
                                                        
                                                        
                                                        
                                                        19,160
                                                        
                                                        
                                                        
                                                        4.0
                                                        %
                                                        
                                                        
                                                        384,183
                                                        
                                                        
                                                        
                                                        14,271
                                                        
                                                        
                                                        
                                                        3.7
                                                        %Noninterest-bearing
      liabilities:Demand
      deposits
                                                        
                                                        
                                                        228,519
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        200,630
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        170,395Accrued
      expenses and other liabilities
                                                        
                                                        
                                                        9,901
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        10,619
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        7,282Shareholders'
      equity
                                                        
                                                        
                                                        67,551
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        56,192
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        44,646TOTAL
                                                        
                                                        $
                                                        831,958
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        750,538
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        606,506Net
      interest income and margin
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        44,865
                                                        
                                                        
                                                        
                                                        5.7
                                                        %
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        47,585
                                                        
                                                        
                                                        
                                                        6.8
                                                        %
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        38,691
                                                        
                                                        
                                                        
                                                        6.9
                                                        %





1)
            Includes
      amortization of loan fees of $5.5 million for 2008, $5.9 million for 2007
      and $4.2 million for 2006.  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 $13.3 million and average
      deferred loan fees of $1.8 million for 2008, average allowance for credit
      losses of $7.7 million and deferred loan fees of $1.5 million for 2007 and
      average allowance for credit losses of $6.5 million and deferred loan fees
      of $1.4 million for 2006.





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.


29





The
following table shows the effect on the interest differential of volume and rate
changes for the years ended December 31, 2008, 2007 and 2006:





VOLUME/RATE
ANALYSIS





(dollars
      in thousands)
                        
                        Year Ended December 31,2008 vs. 2007
                        
                        
                        2007 vs. 2006Increase (decrease)
                          due to change in
                        
                        
                        Increase (decrease)
                          due to change inAverage
                        
                        
                        Average
                        
                        
                        Total
                        
                        
                        Average
                        
                        
                        Average
                        
                        
                        TotalVolume
                        
                        
                        Rate
                        
                        
                        Change
                        
                        
                        Volume
                        
                        
                        Rate
                        
                        
                        ChangeInterest
      income:Loans
                        
                        $
                        7,851
                        
                        
                        $
                        (12,557
                        )
                        
                        $
                        (4,706
                        )
                        
                        $
                        12,804
                        
                        
                        $
                        (44
                        )
                        
                        $
                        12,760Federal
      funds sold
                        
                        
                        321
                        
                        
                        
                        (1,903
                        )
                        
                        
                        (1,582
                        )
                        
                        
                        (1,359
                        )
                        
                        
                        17
                        
                        
                        
                        (1,342
                        )Other
                        
                        
                        119
                        
                        
                        
                        -
                        
                        
                        
                        119
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Investment
      securities
                        
                        
                        (1,825
                        )
                        
                        
                        (59
                        )
                        
                        
                        (1,884
                        )
                        
                        
                        2,200
                        
                        
                        
                        165
                        
                        
                        
                        2,365Total
      interest income
                        
                        
                        6,465
                        
                        
                        
                        (14,518
                        )
                        
                        
                        (8,053
                        )
                        
                        
                        13,645
                        
                        
                        
                        138
                        
                        
                        
                        13,783Interest
      expense:Demand
                        
                        
                        (1
                        )
                        
                        
                        (27
                        )
                        
                        
                        (28
                        )
                        
                        
                        11
                        
                        
                        
                        (5
                        )
                        
                        
                        6Savings
                        
                        
                        195
                        
                        
                        
                        (5,823
                        )
                        
                        
                        (5,628
                        )
                        
                        
                        4,087
                        
                        
                        
                        838
                        
                        
                        
                        4,925Time
                        
                        
                        887
                        
                        
                        
                        (909
                        )
                        
                        
                        (22
                        )
                        
                        
                        (550
                        )
                        
                        
                        541
                        
                        
                        
                        (9
                        )Other
                        
                        
                        528
                        
                        
                        
                        (183
                        )
                        
                        
                        345
                        
                        
                        
                        (77
                        )
                        
                        
                        44
                        
                        
                        
                        (33
                        )Total
      interest expense
                        
                        
                        1,610
                        
                        
                        
                        (6,942
                        )
                        
                        
                        (5,333
                        )
                        
                        
                        3,471
                        
                        
                        
                        1,418
                        
                        
                        
                        4,889Change
      in net interest income
                        
                        $
                        4,856
                        
                        
                        $
                        (7,576
                        )
                        
                        $
                        (2,720
                        )
                        
                        $
                        10,174
                        
                        
                        $
                        (1,280
                        )
                        
                        $
                        8,894





Net
interest income was $44.9 million in 2008, comprised of $58.7 million in
interest income and $13.8 million in interest expense.  Net interest
income in 2007 was $47.6 million, comprised of $66.7 million in interest income
and $19.2 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.





Net
interest income for the year ended December 31, 2007 represented an increase of
$8.9 million over $38.7 million for the year ended December 31,
2006.  The increase in net interest income was primarily a result of
an increase of $13.8 million in interest income offset, in part, by an increase
of $4.9 million in interest expense.





The net
interest margin (net interest income divided by average earning assets) was 5.7%
for the year ended December 31, 2008, as compared to 6.8% for the year ended
December 31, 2007 and 6.9% for 2006.  The decline in net interest
margin in 2008 was primarily the result of a decrease in short term interest
rates, an increase in nonperforming loans, and decreased balance sheet leverage
offset, in part, by an increase in income from interest rate
swaps.  During the year ended December 31, 2008, the net settlement
from interest rate swaps contributed $2.0 million to support net interest income
compared to a loss of $204,000 for the year ended December 31,
2007.  Nonperforming loans had a negative impact on net interest
margin of approximately 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 87.0% of average earning assets in 2008 compared to 83.9% in
2007 and 82.9% in 2006.  In addition, in 2008 the Bank’s ratio of
average loans to average deposits was 94.5%, up from 88.7% in 2007 and 87.1% in
2006 reflecting slightly faster loan growth relative to deposit
funding.





Significant
factors affecting net interest income include the 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 5.09%, 8.05%, and 7.96% for the years ended 2008, 2007, and
2006, respectively.


30




Interest
Income




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 nonperforming 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.





For the
year ended December 31, 2007, the Company reported interest income of $66.8
million, an increase of $13.8 million or 26.0% over $53.0 million reported in
2006.  The increase in interest income primarily reflects an increase
in the volume of average earning assets in 2007 compared to
2006.  Average earning assets were $703.5 million for the year ended
December 31, 2007 an increase of $140.5 million or 25.0% over $563.0 million for
the year ended December 31, 2006.




Interest
Expense




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, 2006.





Interest
expense was $19.2 million for the year ended December 31, 2007, which
represented an increase of $4.9 million or 34.3% compared to $14.3 million for
the year ended December 31, 2006.  The increase in interest expense
reflects an increase in the rate on and volume of average interest-bearing
liabilities in 2007 compared to 2006.  Average interest-bearing
liabilities were $483.1 million for the year ended December 31, 2007, an
increase of $98.9 million or 25.7% from $384.2 million for the year ended
December 31, 2006.




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 $31.5 million, $2.3 million and $1.4
million were made to the allowance for credit losses in 2008, 2007 and 2006,
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 2008,
the Bank had $21.7 million in charge offs, primarily due to the significant
decrease in value of collateral securing real estate loans, and had recoveries
of $120,000 as compared to $1.3 million in charge offs and $259,000 in
recoveries in 2007 and no charge offs and $21,000 in recoveries in
2006.  The allowance for credit losses was $18.6 million representing
2.65% of total loans at December 31, 2008 as compared to $8.6 million
representing 1.32% of total loans at December 31, 2007 and $7.3 million
representing 1.36% of total loans at December 31, 2006.





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 $256.4 million in real
estate loans, representing approximately 36.7% 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.


31




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, 2008, 2007 and
2006:





(dollars
      in thousands)
                
                Year
      Ended December 31,2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentOther
      income-cash flow hedge
                
                $
                3,870
                
                
                
                38.8
                %
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -International
      fee income
                
                
                1,830
                
                
                
                18.4
                %
                
                
                658
                
                
                
                9.8
                %
                
                
                234
                
                
                
                6.1
                %Service
      charges on deposit accounts
                
                
                1,166
                
                
                
                11.7
                %
                
                
                672
                
                
                
                10.0
                %
                
                
                498
                
                
                
                13.0
                %Gain
      on sale of securities
                
                
                711
                
                
                
                7.1
                %
                
                
                -
                
                
                
                0.0
                %
                
                
                -
                
                
                
                0.0
                %Gain
      on sale of SBA loans
                
                
                603
                
                
                
                6.0
                %
                
                
                3,564
                
                
                
                53.1
                %
                
                
                1,734
                
                
                
                45.2
                %SBA
      loan servicing fee income
                
                
                445
                
                
                
                4.5
                %
                
                
                442
                
                
                
                6.5
                %
                
                
                548
                
                
                
                14.3
                %Increase
      in value-bank owned life insurance
                
                
                400
                
                
                
                4.0
                %
                
                
                402
                
                
                
                6.0
                %
                
                
                320
                
                
                
                8.3
                %Off-balance
      sheet management fee
                
                
                351
                
                
                
                3.5
                %
                
                
                79
                
                
                
                1.2
                %
                
                
                21
                
                
                
                0.5
                %Warrant
      income
                
                
                3
                
                
                
                0.0
                %
                
                
                441
                
                
                
                6.6
                %
                
                
                29
                
                
                
                0.8
                %Other
      non-interest income
                
                
                592
                
                
                
                6.0
                %
                
                
                455
                
                
                
                6.8
                %
                
                
                453
                
                
                
                11.8
                %$
                9,971
                
                
                
                100.0
                %
                
                $
                6,713
                
                
                
                100.0
                %
                
                $
                3,837
                
                
                
                100.0
                %





Non-interest
income totaled $10.0 million in 2008, an increase of $3.3 million or 48.5% over
$6.7 million in 2007.  Non-interest income of $6.7 million in 2007
represented an increase of $2.9 million or 75.0% over $3.8 million in
2006.  Non-interest income 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, 2008 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.  The increase in non-interest income in 2007 compared to
2006 was primarily due to increased SBA loan sales, international fee income,
and warrant income.





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) adjustment of programs by the SBA; (4)
changes in activities of secondary market participants and; (5) other
factors.  Gains recognized on sales of SBA loans were $603,000 in 2008
which represented a decrease of $3.0 million or 83.1% compared to $3.6 million
the same period one year earlier. The decrease was attributed to a lower volume
of loans sold during the year.  During 2008 the Company’s SBA group
funded $45.3 million in new loans and sold $20.8 million which compared to $86.4
million funded and $90.3 million sold in 2007 and $66.3 million funded and $51.4
million sold in 2006.  The SBA loans sold during 2007 included $11.3
million of un-guaranteed loans which resulted in an additional $1.2 million on
non-interest income from the gain on sale for that period.


32




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, 2008, 2007 and
2006.





Year
      Ended December 31,(dollars
      in thousands)
                
                2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                21,399
                
                
                
                2.6
                %
                
                $
                20,990
                
                
                
                2.8
                %
                
                $
                17,417
                
                
                
                2.9
                %Occupancy
                
                
                3,608
                
                
                
                0.4
                %
                
                
                3,390
                
                
                
                0.5
                %
                
                
                2,132
                
                
                
                0.4
                %Data
      services
                
                
                2,439
                
                
                
                0.3
                %
                
                
                1,917
                
                
                
                0.3
                %
                
                
                1,528
                
                
                
                0.3
                %Marketing
                
                
                1,312
                
                
                
                0.2
                %
                
                
                1,350
                
                
                
                0.2
                %
                
                
                1,081
                
                
                
                0.2
                %Professional
      services
                
                
                1,174
                
                
                
                0.1
                %
                
                
                1,150
                
                
                
                0.2
                %
                
                
                825
                
                
                
                0.1
                %Furniture
      and equipment
                
                
                982
                
                
                
                0.1
                %
                
                
                947
                
                
                
                0.1
                %
                
                
                701
                
                
                
                0.1
                %Director/Shareholder
      expenses
                
                
                1,078
                
                
                
                0.1
                %
                
                
                837
                
                
                
                0.1
                %
                
                
                530
                
                
                
                0.1
                %Deposit
      services/supplies
                
                
                695
                
                
                
                0.1
                %
                
                
                605
                
                
                
                0.1
                %
                
                
                525
                
                
                
                0.1
                %Third
      party services
                
                
                30
                
                
                
                0.0
                %
                
                
                350
                
                
                
                0.0
                %
                
                
                925
                
                
                
                0.2
                %Assessments
                
                
                665
                
                
                
                0.1
                %
                
                
                377
                
                
                
                0.1
                %
                
                
                208
                
                
                
                0.0
                %Other
                
                
                2,936
                
                
                
                0.4
                %
                
                
                1,661
                
                
                
                0.2
                %
                
                
                1,407
                
                
                
                0.2
                %$
                36,318
                
                
                
                4.4
                %
                
                $
                33,574
                
                
                
                4.5
                %
                
                $
                27,279
                
                
                
                4.5
                %




Non-interest
expenses were $36.3 million in 2008 as compared to $33.6 million in 2007 and
$27.3 million in 2006.  Non-interest expense increased approximately
$2.7 million in 2008 compared to 2007.  This increase was primarily
attributable to increased salaries and benefits cost, occupancy cost, data
services, marketing, professional services, director and shareholder cost, and
loan related charges.  Non-interest expense increased approximately
$6.3 million in 2007compared to 2006.  This increase was primarily
attributable to increased salaries and benefits cost, occupancy cost, data
services, marketing, professional services, director and shareholder cost, and
loan related charges.  Non-interest expenses measured as a percentage
of average assets were 4.4% in 2008, as compared to 4.5% in 2007 and 4.5% in
2006.





The
increases in non-interest expenses reflect the impact of expansion of the
business during 2008, 2007 and 2006.  During 2007, the Bank expanded
its headquarters location to accommodate the expansion of the business and
opened a loan production office in Sacramento, California.  During
2006, the Bank opened loan production offices in Dallas, Texas and Reston,
Virginia.





Salaries
and related benefits is the largest component of the Bank’s non-interest
expense.  Salaries and benefits were $21.4 million for the year ended
December 31, 2008 as compared to $21.0 million and $17.4 million for the years
ended December 31, 2007 and 2006, respectively.  The Bank had 171 FTE
at December 31, 2008 as compared to 170 FTE at December 31, 2007 and 134 FTE at
December 31, 2006.  The increase in salaries and related benefits in
2007 compared to 2006 was primarily attributable to the increase in full time
equivalent employees (FTE) related to expansion of the business and to higher
incentive compensation related to performance of the Bank.





Occupancy
expense for the year ended December 31, 2008 was $3.6 million and represented an
increase of approximately $200,000 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.  Occupancy expense
for the year ended December 31, 2007 was $3.4 million and represented an
increase of approximately $1.3 million over $2.1 million for the prior
year.  The increase was primarily due to additional rent expense
related to the facility at 55 Almaden Boulevard, San Jose, California and the
addition of a loan production office in the commercial lending
group.





The
Company contracts with third-party vendors for most data processing needs and to
support technical infrastructure.  Data processing expense in 2008 was
$2.4 million which represented an increase of approximately $500,000 over $1.9
million one year earlier.  Data processing expense in 2007 was $1.9
million which represented an increase of approximately $400,000 over $1.5
million one year earlier.  The increases in data processing in both
years are primarily due to increases in deposit transaction
volumes.





Legal and
professional expenses were $1.2 million for the years ended December 31, 2008
and 2007, respectively.   Legal and professional expenses were
$1.2 million for the year ended December 31, 2007 represented an increase of
$325,000 over $825,000 in 2006.  The increase in 2007 was primarily
due to legal costs relating to general corporate matters and increases in
ongoing accounting and auditing services.


33





Furniture
and equipment expense of $982,000 for the year ended December 31, 2008
represented an increase of $35,000 compared to $947,000 in the same period one
year earlier.  The increase in 2008 was primarily related to the
expansion of the business.  Furniture and equipment expense of
$947,000 for the year ended December 31, 2007 represented an increase of
$246,000 compared to $701,000 in the same period one year
earlier.  The increase in 2007 was primarily related to the increase
in FTE.





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 43.5% for the year ended December 31, 2008,
41.1% for the year ended December 31, 2007 and 37.8% for the year ended December
31, 2006.  See Note 8 to the financial statements for additional
information on income taxes.


34




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 2008, 2007, and 2006.





(dollars
      in thousands, except share amounts)
                      
                      Three Months EndedMarch 31
                      
                      
                      June 30
                      
                      
                      September 30
                      
                      
                      December 31Year
      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
                      )
                      
                      $
                      1,669Earnings
      (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
                      
                      
                      $
                      2,687Earnings
      per share - basic
                      
                      $
                      0.38
                      
                      
                      $
                      0.47
                      
                      
                      $
                      0.43
                      
                      
                      $
                      0.42Earnings
      per share - diluted
                      
                      $
                      0.35
                      
                      
                      $
                      0.43
                      
                      
                      $
                      0.40
                      
                      
                      $
                      0.39Year
      Ended December 31, 2006:Interest
      income
                      
                      $
                      10,928
                      
                      
                      $
                      12,479
                      
                      
                      $
                      14,329
                      
                      
                      $
                      15,226Interest
      expense
                      
                      
                      2,386
                      
                      
                      
                      3,221
                      
                      
                      
                      4,239
                      
                      
                      
                      4,425Net
      interest income
                      
                      
                      8,542
                      
                      
                      
                      9,258
                      
                      
                      
                      10,090
                      
                      
                      
                      10,801Provision
      for credit losses
                      
                      
                      222
                      
                      
                      
                      450
                      
                      
                      
                      100
                      
                      
                      
                      600Other
      income
                      
                      
                      1,083
                      
                      
                      
                      1,078
                      
                      
                      
                      799
                      
                      
                      
                      877Other
      expense
                      
                      
                      6,338
                      
                      
                      
                      6,630
                      
                      
                      
                      7,066
                      
                      
                      
                      7,245Income
      before income taxes
                      
                      
                      3,065
                      
                      
                      
                      3,256
                      
                      
                      
                      3,723
                      
                      
                      
                      3,833Income
      taxes
                      
                      
                      1,134
                      
                      
                      
                      1,237
                      
                      
                      
                      1,415
                      
                      
                      
                      1,457Net
      income
                      
                      $
                      1,931
                      
                      
                      $
                      2,019
                      
                      
                      $
                      2,308
                      
                      
                      $
                      2,376Earnings
      per share - basic
                      
                      $
                      0.31
                      
                      
                      $
                      0.32
                      
                      
                      $
                      0.37
                      
                      
                      $
                      0.38Earnings
      per share - diluted
                      
                      $
                      0.29
                      
                      
                      $
                      0.29
                      
                      
                      $
                      0.34
                      
                      
                      $
                      0.35


35




FINANCIAL CONDITION AND
EARNING ASSETS





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 $774.80 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, 2006.





As of
December 31, 2007, total assets were $774.8 million, gross loans were $652.7
million and deposits were $671.4 million. Assets increased $52.9 million, a 7.3%
increase from $722.0 million at December 31, 2006.  Gross loans
increased $111.9 million, or 20.7% from $540.8 million at December 31,
2006.  Deposits increased $26.4 million, a 4.1% increase from $645.0
million at December 31, 2006.




Federal Funds
Sold




Federal
funds sold were $199.5 million at December 31, 2008 as compared to $13.4 million
at December 31, 2007.  This increase is primarily due to the Company’s
desire to hold significant liquidity on balance sheet as the credit crisis began
to adversely impact the availability of borrowings and liquidity of
assets.  The average balance of federal funds sold was $74.6 million
in 2008 and $52.2 million in 2007.  These balances represented 10.3%
and 7.8% of average deposits for 2008 and 2007, 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, 2008, 2007 and 2006.





(dollars
      in thousands)
                      
                      As
      of December 31,2008
                      
                      
                      2007
                      
                      
                      2006Amortized
                      
                      
                      Fair
                      
                      
                      Amortized
                      
                      
                      Fair
                      
                      
                      Amortized
                      
                      
                      FairCost
                      
                      
                      Value
                      
                      
                      Cost
                      
                      
                      Value
                      
                      
                      Cost
                      
                      
                      ValueU.S.
      treasury
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      201
                      
                      
                      $
                      202
                      
                      
                      $
                      200
                      
                      
                      $
                      200U.S.
      government agencies
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,450
                      
                      
                      
                      55,280
                      
                      
                      
                      43,815
                      
                      
                      
                      43,733Total
      securities available for sale
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,651
                      
                      
                      
                      55,482
                      
                      
                      
                      44,015
                      
                      
                      
                      43,933Total
      investment securities
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      54,651
                      
                      
                      $
                      55,482
                      
                      
                      $
                      44,015
                      
                      
                      $
                      43,933





The
maturities and yields of the investment portfolio are shown below:





Due in one
                    
                    
                    Due after one year(dollars in thousands)
                    
                    
                    
                    
                    year or less
                    
                    
                    through five yearsWeighted
                    
                    
                    
                    
                    
                    WeightedAmortized
                    
                    
                    
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageCost
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    Amount
                    
                    
                    YieldAs
      of December 31, 2008:U.S.
      treasury
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -U.S.
      government agencies
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      investment securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -As
      of December 31, 2007:U.S.
      treasury
                    
                    $
                    201
                    
                    
                    $
                    201
                    
                    
                    
                    4.5
                    %
                    
                    $
                    -
                    
                    
                    
                    0.0
                    %U.S.
      government agencies
                    
                    
                    54,450
                    
                    
                    
                    23,942
                    
                    
                    
                    4.5
                    %
                    
                    
                    30,508
                    
                    
                    
                    4.8
                    %Total
      investment securities
                    
                    $
                    54,651
                    
                    
                    $
                    24,143
                    
                    
                    
                    4.5
                    %
                    
                    $
                    30,508
                    
                    
                    
                    4.8
                    %





36




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.  There was no pre-tax unrealized gain on securities
available for sale at December 31, 2008.  The pre-tax unrealized gain
on securities available for sale at December 31, 2007 was $831,000 as compared
to a loss of ($82,000) at December 31, 2006.




Loan
Portfolio




The
following table shows the Bank’s loans by type and their percentage distribution
for the five years ended December 31, 2008, 2007, 2006, 2005 and
2004.





(dollars
      in thousands)
                    
                    As
      of December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Commercial
                    
                    $
                    301,024
                    
                    
                    $
                    272,660
                    
                    
                    $
                    197,174
                    
                    
                    $
                    182,396
                    
                    
                    $
                    100,681Real
      estate construction
                    
                    
                    98,105
                    
                    
                    
                    85,378
                    
                    
                    
                    103,710
                    
                    
                    
                    84,792
                    
                    
                    
                    42,323Land
      loans
                    
                    
                    23,535
                    
                    
                    
                    61,987
                    
                    
                    
                    41,811
                    
                    
                    
                    26,983
                    
                    
                    
                    32,339Real
      estate other
                    
                    
                    134,767
                    
                    
                    
                    109,055
                    
                    
                    
                    73,502
                    
                    
                    
                    56,765
                    
                    
                    
                    47,705Factoring
      and asset based lending
                    
                    
                    55,761
                    
                    
                    
                    57,662
                    
                    
                    
                    56,924
                    
                    
                    
                    38,184
                    
                    
                    
                    22,342SBA
                    
                    
                    77,043
                    
                    
                    
                    56,945
                    
                    
                    
                    59,888
                    
                    
                    
                    46,867
                    
                    
                    
                    45,251Other
                    
                    
                    9,371
                    
                    
                    
                    9,042
                    
                    
                    
                    7,771
                    
                    
                    
                    4,011
                    
                    
                    
                    3,945Total
      gross loans
                    
                    
                    699,606
                    
                    
                    
                    652,729
                    
                    
                    
                    540,780
                    
                    
                    
                    439,998
                    
                    
                    
                    294,586Unearned
      fee income
                    
                    
                    (1,601
                    )
                    
                    
                    (1,856
                    )
                    
                    
                    (1,495
                    )
                    
                    
                    (1,395
                    )
                    
                    
                    (973
                    )Total
      loan portfolio
                    
                    $
                    698,005
                    
                    
                    $
                    650,873
                    
                    
                    $
                    539,285
                    
                    
                    $
                    438,603
                    
                    
                    $
                    293,613Commercial
                    
                    
                    43.0
                    %
                    
                    
                    41.8
                    %
                    
                    
                    36.5
                    %
                    
                    
                    41.5
                    %
                    
                    
                    34.2
                    %Real
      estate construction
                    
                    
                    14.0
                    %
                    
                    
                    13.1
                    %
                    
                    
                    19.2
                    %
                    
                    
                    19.3
                    %
                    
                    
                    14.3
                    %Land
      loans
                    
                    
                    3.4
                    %
                    
                    
                    9.5
                    %
                    
                    
                    7.6
                    %
                    
                    
                    6.1
                    %
                    
                    
                    11.0
                    %Real
      estate other
                    
                    
                    19.3
                    %
                    
                    
                    16.7
                    %
                    
                    
                    13.6
                    %
                    
                    
                    12.8
                    %
                    
                    
                    16.2
                    %Factoring
      and asset based lending
                    
                    
                    8.0
                    %
                    
                    
                    8.8
                    %
                    
                    
                    10.5
                    %
                    
                    
                    8.7
                    %
                    
                    
                    7.5
                    %SBA
                    
                    
                    11.0
                    %
                    
                    
                    8.7
                    %
                    
                    
                    11.1
                    %
                    
                    
                    10.7
                    %
                    
                    
                    15.4
                    %Other
                    
                    
                    1.3
                    %
                    
                    
                    1.4
                    %
                    
                    
                    1.5
                    %
                    
                    
                    0.9
                    %
                    
                    
                    1.4
                    %Total
      gross loans
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %





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.  Gross loan
balances increased to $652.7 million at December 31, 2007, which represented an
increase of $111.9 million or 20.7% as compared to $540.8 million at December
31, 2006. The increase in loans was primarily in commercial and real estate term
(includes longer term real estate loans, land 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
$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.   Commercial loans
were $272.7 million at December 31, 2007, which represented an increase of $75.5
million or 38.3% over $197.2 million at December 31, 2006.  At
December 31, 2007, commercial loans comprised 41.8% of total loans outstanding
as compared to 36.5% at December 31, 2006.




37




Other
real estate loans consist of commercial real estate and home equity lines of
credit.  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.  Other
real estate loans increased $35.6 million or 48.4% to $109.1 million at December
31, 2007 as compared to $73.5 million at December 31, 2006.  The
increase was primarily attributable to other real estate term
loans.  At December 31, 2008, other real estate loans represented
19.3% of total loans as compared to 16.7% at December 31, 2007 and 13.6% at
December 31, 2006.





The
Bank’s land loan portfolio consists of land and land development loans related
to future construction credits.  Land loans decreased $38.5 million or
62.0% to $23.5 million at December 31, 2008 as 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.  In
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 increased $20.2 million to $62.0 million at December 31, 2007 compared to
$41.8 million at December 31, 2006.  Land loan balances at December
31, 2007 comprised 9.5% of total loans as compared to 7.6% at December 31,
2006.





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
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. Construction loans decreased $18.3 million, or
17.7%, to $85.4 million at December 31, 2007 as compared to $103.7 million at
December 31, 2006.  Construction loan balances at December 31, 2007
comprised 13.1% of total loans as compared to 19.2% at December 31,
2006.





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, 2008, factoring and asset based loans
totaled $55.8 million or 8.0% of total loans as compared to $57.7 million or
8.8% of total loans at December 31, 2007.





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, 2008, SBA loans comprised $77.0 million or 11.0% of total loans as
compared to $57.0 million or 8.7% of total loans at December 31,
2007.  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, 2008 and 2007, 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, 2008, other loans totaled $9.4
million as compared to $9.0 million at December 31, 2007.




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:





38




-
            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.





(dollars
      in thousands)
                
                Year
      ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Balance,
      beginning of period
                
                $
                8,608
                
                
                $
                7,329
                
                
                $
                5,936
                
                
                $
                4,146
                
                
                $
                2,683Loans
      charged off by category:Commercial
      and other
                
                
                1,995
                
                
                
                562
                
                
                
                -
                
                
                
                384
                
                
                
                240Real
      estate construction
                
                
                5,536
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Real
      estate land
                
                
                13,518
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Real
      estate other
                
                
                645
                
                
                
                16
                
                
                
                -
                
                
                
                -
                
                
                
                -Factoring
      and asset-based lending
                
                
                -
                
                
                
                677
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      charge-offs
                
                
                21,694
                
                
                
                1,255
                
                
                
                -
                
                
                
                384
                
                
                
                240Recoveries
      by category:Commercial
      and other
                
                
                83
                
                
                
                259
                
                
                
                21
                
                
                
                12
                
                
                
                32Real
      estate construction
                
                
                37
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Real
      estate land
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Real
      estate other
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Factoring
      and asset-based lending
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      recoveries
                
                
                120
                
                
                
                259
                
                
                
                21
                
                
                
                12
                
                
                
                32Net
      (recoveries) charge-offs
                
                
                21,574
                
                
                
                996
                
                
                
                (21
                )
                
                
                372
                
                
                
                208Provision
      charged to expense
                
                
                31,520
                
                
                
                2,275
                
                
                
                1,372
                
                
                
                2,162
                
                
                
                1,671Balance,
      end of year
                
                $
                18,554
                
                
                $
                8,608
                
                
                $
                7,329
                
                
                $
                5,936
                
                
                $
                4,146





The
increase in the allowance for loan losses is attributable to (1) an increase in
nonperforming loans; (2) an increase in gross loan balances; and (3) an increase
in unidentified probable, estimable losses due to stress from the credit crisis
and general deterioration in economic conditions.  More specifically,
the Company took significant charges against land development loan portfolios in
response to deterioration in real estate values.  As a result of this
experience the Company determined that higher reserves against these categories
of loans were appropriate.  In addition, as the stresses that began in
the credit markets became more widespread causing a severe downturn in the
broader economy, the Company increased its estimates of unidentified probable
losses in other categories of loans.




39




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:





(dollars
      in thousands)
                        
                        As
      of December 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Commercial
      and other
                        
                        $
                        6,179
                        
                        
                        $
                        3,124
                        
                        
                        $
                        1,831
                        
                        
                        $
                        2,029
                        
                        
                        $
                        998Real
      estate other
                        
                        
                        2,495
                        
                        
                        
                        2,356
                        
                        
                        
                        1,152
                        
                        
                        
                        721
                        
                        
                        
                        1,132Real
      estate construction
                        
                        
                        5,197
                        
                        
                        
                        783
                        
                        
                        
                        1,082
                        
                        
                        
                        742
                        
                        
                        
                        444Land
      loans
                        
                        
                        1,592
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Factoring
      / asset based lending
                        
                        
                        1,222
                        
                        
                        
                        1,239
                        
                        
                        
                        1,415
                        
                        
                        
                        443
                        
                        
                        
                        312SBA
                        
                        
                        1,673
                        
                        
                        
                        1,053
                        
                        
                        
                        1,803
                        
                        
                        
                        1,975
                        
                        
                        
                        1,231Other
                        
                        
                        196
                        
                        
                        
                        53
                        
                        
                        
                        46
                        
                        
                        
                        26
                        
                        
                        
                        29$
                        18,554
                        
                        
                        $
                        8,608
                        
                        
                        $
                        7,329
                        
                        
                        $
                        5,936
                        
                        
                        $
                        4,146Commercial
      and other
                        
                        
                        0.9
                        %
                        
                        
                        0.5
                        %
                        
                        
                        0.3
                        %
                        
                        
                        0.5
                        %
                        
                        
                        0.3
                        %Real
      estate other
                        
                        
                        0.4
                        %
                        
                        
                        0.4
                        %
                        
                        
                        0.2
                        %
                        
                        
                        0.2
                        %
                        
                        
                        0.4
                        %Real
      estate construction
                        
                        
                        0.7
                        %
                        
                        
                        0.1
                        %
                        
                        
                        0.2
                        %
                        
                        
                        0.2
                        %
                        
                        
                        0.2
                        %Land
      loans
                        
                        
                        0.2
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %Factoring
      / asset based lending
                        
                        
                        0.2
                        %
                        
                        
                        0.2
                        %
                        
                        
                        0.3
                        %
                        
                        
                        0.1
                        %
                        
                        
                        0.1
                        %SBA
                        
                        
                        0.2
                        %
                        
                        
                        0.2
                        %
                        
                        
                        0.3
                        %
                        
                        
                        0.4
                        %
                        
                        
                        0.4
                        %Other
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %2.7
                        %
                        
                        
                        1.3
                        %
                        
                        
                        1.4
                        %
                        
                        
                        1.3
                        %
                        
                        
                        1.4
                        %




Loans for
which the accrual of interest has been suspended, restructured loans, and other
loans with principal or interest contractually past due 90 days or more as set
forth in the following table as of December 31 of each year:





As
      of December 31,(dollars
      in thousands)
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Loans
      accounted for on a non-accrual basis
                
                $
                15,772
                
                
                $
                4,914
                
                
                $
                437
                
                
                $
                2,320
                
                
                $
                1,026Loans
      restructured and in compliance with modified terms
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      loans with principal or interest contracturally past due 90 days or
      more
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                15,772
                
                
                $
                4,914
                
                
                $
                437
                
                
                $
                2,320
                
                
                $
                1,026





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 sixteen non-accrual loans,
representing fourteen relationships at December 31, 2008 totaling $15.8 million
as compared to four non-accrual loans at December 31, 2007 totaling $4.9 million
and two non-accrual loans at December 31, 2006 totaling
$437,000.  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,
2008:


40


(dollars
in thousands)





December
      31, 2008Classification
                                        
                                        Amount
                                        
                                        CollateralLand
                                        
                                        
                                        2,616
                                        
                                        Lots
      for retail development in Sacramento CountyLand
                                        
                                        
                                        2,503
                                        
                                        Lots
      for single family homes in IdahoLand
                                        
                                        
                                        109
                                        
                                        Lots
      for single family homes in Amador CountyLand
                                        
                                        
                                        382
                                        
                                        Lots
      for single family homes in Alameda County5,610Construction
                                        
                                        
                                        900
                                        
                                        Completed
      luxury single family home in Alameda CountyConstruction
                                        
                                        
                                        775
                                        
                                        Lots
      for single family homes in Santa Clara CountyConstruction
                                        
                                        
                                        700
                                        
                                        Lots
      for single family homes and commercial office space in Alameda
      CountyConstruction
                                        
                                        
                                        489
                                        
                                        Partially
      completed home in Santa Cruz CountyConstruction
                                        
                                        
                                        5,526
                                        
                                        Commercial
      condominiums in Sacramento County8,390Commercial
                                        
                                        
                                        453
                                        
                                        Business
      assetsReal
      estate other
                                        
                                        
                                        1,319
                                        
                                        Single
      family residencesTotal
      nonperforming loans
                                        
                                        $
                                        15,772





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, 2008, 2007, and 2006, there were no loans past due 90 days or more
as to principal or interest and still accruing interest.





At
December 31, 2008 and 2007, there were three properties valued at $1.1 million
and one commercial property valued at $425,000, respectively that were
categorized as “other real estate owned”.  At December 31, 2006 there
were no properties owned by the Bank acquired through the foreclosure
process.




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, 2008, 2007 and
2006.


41





(dollars
      in thousands)
                
                As
      of December 31,2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentNoninterest-bearing  demand
                
                $
                284,319
                
                
                
                36.58
                %
                
                $
                198,641
                
                
                
                29.59
                %
                
                $
                198,639
                
                
                
                30.80
                %Interest-bearing
      demand
                
                
                4,267
                
                
                
                0.55
                %
                
                
                5,350
                
                
                
                0.80
                %
                
                
                3,901
                
                
                
                0.60
                %Money
      market and savings
                
                
                335,200
                
                
                
                43.13
                %
                
                
                372,923
                
                
                
                55.55
                %
                
                
                333,838
                
                
                
                51.76
                %Certificates
      of deposit:Less
      than $100
                
                
                92,997
                
                
                
                11.96
                %
                
                
                22,896
                
                
                
                3.41
                %
                
                
                28,918
                
                
                
                4.48
                %$100
      and more
                
                
                60,462
                
                
                
                7.78
                %
                
                
                71,546
                
                
                
                10.66
                %
                
                
                79,691
                
                
                
                12.36
                %Total
      deposit portfolio
                
                $
                777,245
                
                
                
                100.00
                %
                
                $
                671,356
                
                
                
                100.00
                %
                
                $
                644,987
                
                
                
                100.00
                %





Deposits
increased $105.9 million or 15.8% from $671.4million at December 31, 2007 to
$777.2 million at December 31, 2008. The increase in deposits was primarily in
non-interest bearing demand and certificates of deposit raised from the Bank’s
primary market in Santa Clara County.  The increase can be attributed
to marketing efforts from the Bank’s main office in San Jose and branch office
in Palo Alto and certificates of deposit raised from institutions in order to
manage balance sheet liquidity.




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, 2008, the Company’s
capital resources increased $50.1 million to $138.7 million from $88.6 million
at December 31, 2007.  Tier 1 capital increased $29.2 million to
$109.2 million and Tier 2 capital increased $20.9 million primarily due to the
issuance of $53.9 million in preferred stock.  During 2008, 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 mandatorily convertible
preferred stock of $30.0 million and issued $23.9 million of preferred stock
under the U.S. Government’s TARP.




The
following is a summary of the Company’s two issuances of Preferred Stock for the
year ended December 31, 2008:





Private
Placement





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.





Initially
the holders of the Series B shares shall have voting rights at a rate of 10
votes per share and to 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.  The holders of
the Series B-1 shares initially will have no such rights.  The Company
is required to hold a special meeting of its shareholders to approve the
conversion and voting rights of the preferred shares.  If the
conversion and voting rights are approved, the Series B-1 preferred shares will
then have conversion and voting rights similar to the Preferred B shares. If the
conversion and voting rights are not approved, only the Series B shares will
have voting and conversion rights.





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 June 30, 2010, if (a) the Company fully pays the accrued
dividends and prepays the dividends that would have accrued up through June 30,
2010, (b) the Company’s shareholders have approved the conversion and (c) the
Current Market Price condition is met. Subsequent to June 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.


42


Troubled
Assets Relief Program (TARP)





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 United States Department of the Treasury (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 $468,000 incurred in connection with the issuance of both the private
placement and TARP securities have been charged against Additional Paid in
Capital.





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, 2008, the Company's and the Bank’s
total risk-based capital ratios were 16.9% and 14.2%, respectively (11.7% for
the Company and 11.3% for the Bank at December 31, 2007).





The
following table reflects the Company's capital ratios for the period ended
December 31, 2008 and 2007 as well as the minimum capital ratios required to be
deemed “well capitalized” under the regulatory framework.




43


(dollars
      in thousands)
                    
                    As
      of December 31,2008
                    
                    
                    2007Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioCompany
      Capital RatiosTier
      1 Capital
                    
                    $
                    109,221
                    
                    
                    
                    13.31
                    %
                    
                    $
                    80,024
                    
                    
                    
                    10.54
                    %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                    
                    $
                    49,252
                    
                    
                    
                    6.00
                    %
                    
                    $
                    45,564
                    
                    
                    
                    6.00
                    %Total
      Capital
                    
                    $
                    138,725
                    
                    
                    
                    16.90
                    %
                    
                    $
                    88,632
                    
                    
                    
                    11.67
                    %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                    
                    $
                    82,086
                    
                    
                    
                    10.00
                    %
                    
                    $
                    75,940
                    
                    
                    
                    10.00
                    %Company
      leverageTier
      1 Capital
                    
                    $
                    109,221
                    
                    
                    
                    12.36
                    %
                    
                    $
                    80,024
                    
                    
                    
                    10.66
                    %(to
      Average Assets)Total
      capital minimum requirement
                    
                    $
                    44,170
                    
                    
                    
                    5.00
                    %
                    
                    $
                    37,527
                    
                    
                    
                    5.00
                    %Bank
      Risk Based Capital RatiosTier
      1 Capital
                    
                    $
                    106,137
                    
                    
                    
                    12.94
                    %
                    
                    $
                    77,096
                    
                    
                    
                    10.17
                    %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                    
                    $
                    49,206
                    
                    
                    
                    6.00
                    %
                    
                    $
                    45,491
                    
                    
                    
                    6.00
                    %Total
      Capital
                    
                    $
                    116,388
                    
                    
                    
                    14.19
                    %
                    
                    $
                    85,704
                    
                    
                    
                    11.30
                    %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                    
                    $
                    82,010
                    
                    
                    
                    10.00
                    %
                    
                    $
                    75,819
                    
                    
                    
                    10.00
                    %Bank
      leverageTier
      1 Capital
                    
                    $
                    106,137
                    
                    
                    
                    12.03
                    %
                    
                    $
                    77,096
                    
                    
                    
                    10.27
                    %(to
      Average Assets)Total
      capital minimum requirement
                    
                    $
                    44,125
                    
                    
                    
                    5.00
                    %
                    
                    $
                    37,523
                    
                    
                    
                    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%.





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.


44


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, 2008, liquid assets as a percentage of deposits were 29.0% as
compared to 14.4% in 2007.  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, 2008, 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.





Based on
the contractual terms of its assets and liabilities, the Bank’s balance sheet at
December 31, 2008 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at December 31, 2008 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.


45





DISTRIBUTION
OF REPRICING OPPORTUNITIES





(dollars in thousands)
                          
                          As of December 31, 2008After 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
                          
                          $
                          199,525
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          199,525Interest
      bearing deposits in other banks
                          
                          
                          686
                          
                          
                          
                          2,554
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,240U.S.
      treasury and agency securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Loans
                          
                          
                          280,324
                          
                          
                          
                          79,239
                          
                          
                          
                          88,901
                          
                          
                          
                          110,967
                          
                          
                          
                          140,175
                          
                          
                          
                          699,606Total
      earning assets
                          
                          
                          480,535
                          
                          
                          
                          81,793
                          
                          
                          
                          88,901
                          
                          
                          
                          110,967
                          
                          
                          
                          140,175
                          
                          
                          
                          902,371Interest
      checking, money market and savings deposits
                          
                          
                          339,467
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          339,467Certificates
      of deposit:Less
      than $100,000
                          
                          
                          34,646
                          
                          
                          
                          7,475
                          
                          
                          
                          44,798
                          
                          
                          
                          5,278
                          
                          
                          
                          -
                          
                          
                          
                          92,197$100,000
      or more
                          
                          
                          33,610
                          
                          
                          
                          8,106
                          
                          
                          
                          14,762
                          
                          
                          
                          4,784
                          
                          
                          
                          -
                          
                          
                          
                          61,262Total
      interest-bearing liabilities
                          
                          
                          407,723
                          
                          
                          
                          15,581
                          
                          
                          
                          59,560
                          
                          
                          
                          10,062
                          
                          
                          
                          0
                          
                          
                          
                          492,926Interest
      rate gap
                          
                          $
                          72,812
                          
                          
                          $
                          66,212
                          
                          
                          $
                          29,341
                          
                          
                          $
                          100,905
                          
                          
                          $
                          140,175
                          
                          
                          $
                          409,445Cumulative
      interest rate gap
                          
                          $
                          72,812
                          
                          
                          $
                          139,024
                          
                          
                          $
                          168,365
                          
                          
                          $
                          269,270
                          
                          
                          $
                          409,445Interest
      rate gap ratio
                          
                          
                          0.15
                          
                          
                          
                          0.81
                          
                          
                          
                          0.33
                          
                          
                          
                          0.91
                          
                          
                          
                          1.00Cumulative
      interest rate gap ratio
                          
                          
                          0.15
                          
                          
                          
                          0.25
                          
                          
                          
                          0.26
                          
                          
                          
                          0.35
                          
                          
                          
                          0.45





The
following table shows maturity and interest rate sensitivity of the loan
portfolio at December 31, 2008 and 2007.  At December 31, 2008,
approximately 79.0% of the loan portfolio is priced with floating interest rates
which limit the exposure to interest rate risk on long-term
loans.


46





(dollars in thousands)
                
                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
                
                
                $
                26,968Real
      estate construction
                
                
                98,105
                
                
                
                98,105
                
                
                
                -
                
                
                
                -Real
      estate land
                
                
                23,535
                
                
                
                16,442
                
                
                
                4,834
                
                
                
                2,259Real
      estate other
                
                
                134,767
                
                
                
                19,673
                
                
                
                36,475
                
                
                
                78,619Factoring
      and asset based lending
                
                
                55,761
                
                
                
                54,761
                
                
                
                1,000
                
                
                
                -SBA
                
                
                77,043
                
                
                
                6,874
                
                
                
                4,318
                
                
                
                65,851Other
                
                
                9,371
                
                
                
                9,100
                
                
                
                271
                
                
                
                -Total
      loans
                
                $
                699,606
                
                
                $
                372,065
                
                
                $
                153,844
                
                
                $
                173,697





As
      of December 31, 2007Due
      after oneDue
      one year
                
                
                year
      through
                
                
                Due
      afterAmount
                
                
                or
      less
                
                
                five
      years
                
                
                five
      yearsCommercial
                
                $
                272,660
                
                
                $
                161,013
                
                
                $
                84,173
                
                
                $
                27,474SBA
                
                
                56,945
                
                
                
                12,059
                
                
                
                3,174
                
                
                
                41,712Real
      estate construction
                
                
                85,378
                
                
                
                74,457
                
                
                
                10,921
                
                
                
                -Real
      estateother
                
                
                171,042
                
                
                
                58,670
                
                
                
                42,561
                
                
                
                69,811Factoring
      and asset based lending
                
                
                57,662
                
                
                
                55,834
                
                
                
                1,828
                
                
                
                -Other
                
                
                9,042
                
                
                
                8,272
                
                
                
                770
                
                
                
                -Total
      loans
                
                $
                652,729
                
                
                $
                370,305
                
                
                $
                143,427
                
                
                $
                138,997




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, 2008 those
guarantees include the following:





Financial Letters of Credit in the
amount of $15.4 million


47


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





(dollars
      in thousands)
                    
                    As
      of December 31, 2008Payments
      due by periodLess
      Than
                    
                    
                    1 -
      3
                    
                    
                    3 -
      5
                    
                    
                    More
      thanContractural
      Obligations
                    
                    Total
                    
                    
                    1
      year
                    
                    
                    years
                    
                    
                    years
                    
                    
                    5
      yearsLong-term
      contracts
                    
                    $
                    2,166
                    
                    
                    $
                    242
                    
                    
                    $
                    1,924
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      leases
                    
                    
                    13,254
                    
                    
                    
                    1,859
                    
                    
                    
                    3,513
                    
                    
                    
                    3,435
                    
                    
                    
                    4,447Total
                    
                    $
                    15,420
                    
                    
                    $
                    2,101
                    
                    
                    $
                    5,437
                    
                    
                    $
                    3,435
                    
                    
                    $
                    4,447


48





Item 8.  Financial
Statements and Supplementary Data





INDEX TO
FINANCIAL STATEMENTS





PageReports
      of Independent Registered Public Accounting Firm
                  
                  50-51Balance
      Sheets, December 31, 2008 and 2007
                  
                  52Statements
      of Operations for the years ended December 31, 2008, 2007
      and  2006
                  
                  53Statement
      of Shareholders' Equity and Comprehensive Income for the years
      endedDecember
      31, 2008, 2007 and 2006
                  
                  54Statements
      of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                  
                  55Notes
      to Financial Statements
                  
                  56-77





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.





* * * *
*


49


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, 2008 and 2007, 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, 2008.  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, 2008, 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 5,
2009, 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, 2008 and 2007 and the consolidated
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.











Palo
Alto, California


March 5,
2009


50





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, 2008, 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, 2008, based on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO).  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, 2008 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 5, 2009 expressed an unqualified opinion on those financial
statements.











Palo
Alto, California


March 5,
2009


51




Bridge
Capital Holdings and Subsidiary
 Consolidated
Balance Sheets
 (dollars
in thousands)




As
      of December 31,2008
                            
                            
                            2007Assets:Cash
      and due from banks
                            
                            $
                            18,421
                            
                            
                            $
                            27,440Federal
      funds sold
                            
                            
                            199,525
                            
                            
                            
                            13,395Total
      cash and equivalents
                            
                            
                            217,946
                            
                            
                            
                            40,835Interest
      bearing deposits in other banks
                            
                            
                            7,268
                            
                            
                            
                            -Investment
      securities available for sale
                            
                            
                            -
                            
                            
                            
                            55,482Loans,
      net of allowance for credit losses of $18,554 at December 31, 2008 and
      $8,608 at December 31, 2007
                            
                            
                            679,451
                            
                            
                            
                            642,265Premises
      and equipment, net
                            
                            
                            4,790
                            
                            
                            
                            5,005Other
      real estate owned
                            
                            
                            1,096
                            
                            
                            
                            425Accrued
      interest receivable
                            
                            
                            3,137
                            
                            
                            
                            4,400Other
      assets
                            
                            
                            33,908
                            
                            
                            
                            26,420Total
      assets
                            
                            $
                            947,596
                            
                            
                            $
                            774,832Liabilities
      and Shareholders' Equity:Deposits:Demand
      noninterest-bearing
                            
                            $
                            284,319
                            
                            
                            $
                            198,641Demand
      interest-bearing
                            
                            
                            4,267
                            
                            
                            
                            5,350Savings
                            
                            
                            335,200
                            
                            
                            
                            372,923Time
                            
                            
                            153,459
                            
                            
                            
                            94,442Total
      deposits
                            
                            
                            777,245
                            
                            
                            
                            671,356Junior
      subordinated debt securities
                            
                            
                            17,527
                            
                            
                            
                            17,527Other
      borrowings
                            
                            
                            30,000
                            
                            
                            
                            10,000Accrued
      interest payable
                            
                            
                            511
                            
                            
                            
                            210Other
      liabilities
                            
                            
                            9,823
                            
                            
                            
                            10,655Total
      liabilities
                            
                            
                            835,106
                            
                            
                            
                            709,748Commitments
      and contingencies
                            
                            
                            -
                            
                            
                            
                            -Shareholders'
      Equity:Preferred
      stock, no par value; 10,000,000 shares authorized; 323,864 shares issued
      and outstanding at December 31, 2008;
                            
                            
                            53,864
                            
                            
                            
                            -Common
      stock, no par value; 30,000,000 shares authorized; 6,888,424 shares issued
      and outstanding at December 31, 2008; 6,485,630 shares issued and
      outstanding at December 31, 2007;
                            
                            
                            36,833
                            
                            
                            
                            35,974Additional
      paid in capital
                            
                            
                            2,822
                            
                            
                            
                            1,723Retained
      earnings
                            
                            
                            17,916
                            
                            
                            
                            25,409Accumulated
      other comprehensive income
                            
                            
                            1,055
                            
                            
                            
                            1,978Total
      shareholders' equity
                            
                            
                            112,490
                            
                            
                            
                            65,084Total
      liabilities and shareholders' equity
                            
                            $
                            947,596
                            
                            
                            $
                            774,832




The
accompanying notes are an integral part of the financial
statements.
  52


Bridge Capital Holdings and Subsidiary


Consolidated
Statements of Operations


(dollars
in thousands, except share data)





Year
      Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006Interest
      Income:Loans
                              
                              $
                              56,302
                              
                              
                              $
                              61,008
                              
                              
                              $
                              48,248Federal
      funds sold
                              
                              
                              1,066
                              
                              
                              
                              2,648
                              
                              
                              
                              3,990Interest
      bearing deposits in other banks
                              
                              
                              119
                              
                              
                              
                              -
                              
                              
                              
                              -Investment
      securities available for sale
                              
                              
                              1,205
                              
                              
                              
                              3,089
                              
                              
                              
                              724Total
      interest income
                              
                              
                              58,692
                              
                              
                              
                              66,745
                              
                              
                              
                              52,962Interest
      Expense:Deposits
                              
                              
                              12,426
                              
                              
                              
                              18,104
                              
                              
                              
                              13,182Other
                              
                              
                              1,401
                              
                              
                              
                              1,056
                              
                              
                              
                              1,089Total
      interest expense
                              
                              
                              13,827
                              
                              
                              
                              19,160
                              
                              
                              
                              14,271Net
      interest income
                              
                              
                              44,865
                              
                              
                              
                              47,585
                              
                              
                              
                              38,691Provision
      for credit losses
                              
                              
                              31,520
                              
                              
                              
                              2,275
                              
                              
                              
                              1,372Net
      interest income after provision for credit losses
                              
                              
                              13,345
                              
                              
                              
                              45,310
                              
                              
                              
                              37,319Non-Interest
      Income:International
      fee income
                              
                              
                              1,830
                              
                              
                              
                              658
                              
                              
                              
                              234Service
      charges on deposit accounts
                              
                              
                              1,166
                              
                              
                              
                              672
                              
                              
                              
                              498Gain
      on sale of securities
                              
                              
                              711
                              
                              
                              
                              -
                              
                              
                              
                              -Gain
      on sale of SBA loans
                              
                              
                              603
                              
                              
                              
                              3,564
                              
                              
                              
                              1,734SBA
      loan servicing fee income
                              
                              
                              445
                              
                              
                              
                              442
                              
                              
                              
                              548Increase
      in value-bank owned life insurance
                              
                              
                              400
                              
                              
                              
                              402
                              
                              
                              
                              320Off-balance
      sheet management fee
                              
                              
                              351
                              
                              
                              
                              79
                              
                              
                              
                              21Other
      non-interest income
                              
                              
                              4,465
                              
                              
                              
                              896
                              
                              
                              
                              482Total
      non-interest income
                              
                              
                              9,971
                              
                              
                              
                              6,713
                              
                              
                              
                              3,837Operating
      Expenses:Salaries
      and benefits
                              
                              
                              21,399
                              
                              
                              
                              20,990
                              
                              
                              
                              17,417Occupancy
                              
                              
                              3,608
                              
                              
                              
                              3,390
                              
                              
                              
                              2,132Data
      services
                              
                              
                              2,439
                              
                              
                              
                              1,917
                              
                              
                              
                              1,528Marketing
                              
                              
                              1,312
                              
                              
                              
                              1,350
                              
                              
                              
                              1,081Professional
      services
                              
                              
                              1,174
                              
                              
                              
                              1,150
                              
                              
                              
                              825Furniture
      and equipment
                              
                              
                              982
                              
                              
                              
                              947
                              
                              
                              
                              701Director/Shareholder
      expenses
                              
                              
                              1,078
                              
                              
                              
                              837
                              
                              
                              
                              530Deposit
      services/supplies
                              
                              
                              725
                              
                              
                              
                              605
                              
                              
                              
                              525Other
                              
                              
                              3,601
                              
                              
                              
                              2,388
                              
                              
                              
                              2,540Total
      operating expenses
                              
                              
                              36,318
                              
                              
                              
                              33,574
                              
                              
                              
                              27,279Income
      (loss) before income taxes
                              
                              
                              (13,002
                              )
                              
                              
                              18,449
                              
                              
                              
                              13,877Income
      taxes
                              
                              
                              (5,661
                              )
                              
                              
                              7,583
                              
                              
                              
                              5,243Net
      income (loss)
                              
                              $
                              (7,341
                              )
                              
                              $
                              10,866
                              
                              
                              $
                              8,634Basic
      earnings per share
                              
                              $
                              (1.15
                              )
                              
                              $
                              1.70
                              
                              
                              $
                              1.38Diluted
      earnings per share
                              
                              $
                              (1.15
                              )
                              
                              $
                              1.57
                              
                              
                              $
                              1.27Average
      common shares outstanding
                              
                              
                              6,502,376
                              
                              
                              
                              6,380,100
                              
                              
                              
                              6,274,051Average
      common and equivalent shares outstanding
                              
                              
                              6,502,376
                              
                              
                              
                              6,925,904
                              
                              
                              
                              6,816,700





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


53





Bridge Capital Holdings and Subsidiary


Consolidated
Statements of Shareholders' Equity and Comprehensive Income


(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, 2005
                        
                        
                        6,227,596
                        
                        
                        $
                        33,907
                        
                        
                        
                        
                        
                        $
                        5,909
                        
                        
                        $
                        (102
                        )
                        
                        $
                        39,714Stock
      options exercised
                        
                        
                        91,098
                        
                        
                        
                        619
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        619Tax
      benefit from exercise of non qualified stock options
                        
                        
                        -
                        
                        
                        
                        141
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        141Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        760
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        760Other
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (774
                        )
                        
                        
                        (774
                        )Net
      income for the year
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        8,634
                        
                        
                        
                        -
                        
                        
                        
                        8,634Balance
      at December 31, 2006
                        
                        
                        6,318,694
                        
                        
                        $
                        35,427
                        
                        
                        $
                        -
                        
                        
                        $
                        14,543
                        
                        
                        $
                        (876
                        )
                        
                        $
                        49,094Stock
      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
                        
                        
                        6,423,925
                        
                        
                        $
                        37,697
                        
                        
                        $
                        -
                        
                        
                        $
                        25,409
                        
                        
                        $
                        1,978
                        
                        
                        $
                        65,084Stock
      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
                        
                        
                        6,571,479
                        
                        
                        $
                        39,655
                        
                        
                        $
                        53,864
                        
                        
                        $
                        17,916
                        
                        
                        $
                        1,055
                        
                        
                        $
                        112,490





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


54





Bridge
Capital Holdings and Subsidiary


Consolidated
Statements of Cash Flows


(dollars
in thousands)





Year
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Cash
      Flows From Operating Activities:Net
      (loss) income
                        
                        $
                        (7,341
                        )
                        
                        $
                        10,866
                        
                        
                        $
                        8,634Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Provision
      for credit losses
                        
                        
                        31,520
                        
                        
                        
                        2,275
                        
                        
                        
                        1,372Depreciation
      and amortization
                        
                        
                        1,565
                        
                        
                        
                        1,041
                        
                        
                        
                        840Deferred
      income tax (credit)
                        
                        
                        (4,835
                        )
                        
                        
                        (1,854
                        )
                        
                        
                        (1,340
                        )Stock
      based compensation
                        
                        
                        1,347
                        
                        
                        
                        1,153
                        
                        
                        
                        760Proceeds
      from loan sales
                        
                        
                        20,774
                        
                        
                        
                        90,334
                        
                        
                        
                        51,359Loans
      originated for sale
                        
                        
                        (45,267
                        )
                        
                        
                        (86,427
                        )
                        
                        
                        (66,268
                        )Increase
      in accrued interest receivable and other assets
                        
                        
                        (5,290
                        )
                        
                        
                        (2,421
                        )
                        
                        
                        (2,950
                        )Increase
      in accrued interest payable and other liabilities
                        
                        
                        3,557
                        
                        
                        
                        722
                        
                        
                        
                        2,478Net
      cash provided (used in) by operating activities
                        
                        
                        (3,970
                        )
                        
                        
                        15,689
                        
                        
                        
                        (5,115
                        )Cash
      Flows From Investing Activities:Purchase
      of securities available for sale
                        
                        
                        -
                        
                        
                        
                        (38,462
                        )
                        
                        
                        (41,984
                        )Proceeds
      from maturities of securities available for sale
                        
                        
                        54,750
                        
                        
                        
                        28,100
                        
                        
                        
                        10,625Purchase
      of interest bearing deposits
                        
                        
                        (7,268
                        )
                        
                        
                        -
                        
                        
                        
                        -Net
      increase in loans
                        
                        
                        (44,884
                        )
                        
                        
                        (117,341
                        )
                        
                        
                        (85,752
                        )Purchase
      of fixed assets
                        
                        
                        (1,373
                        )
                        
                        
                        (2,841
                        )
                        
                        
                        (2,085
                        )Net
      cash used in investing activities
                        
                        
                        1,225
                        
                        
                        
                        (130,544
                        )
                        
                        
                        (119,196
                        )Cash
      Flows From Financing Activities:Net
      increase in deposits
                        
                        
                        105,889
                        
                        
                        
                        26,368
                        
                        
                        
                        176,830Proceeds
      from sale of preferred stock
                        
                        
                        53,864
                        
                        
                        
                        -
                        
                        
                        
                        -Proceeds
      from sale of common stock
                        
                        
                        572
                        
                        
                        
                        1,117
                        
                        
                        
                        619Preferred
      stock issuance cost
                        
                        
                        (469
                        )Increase
      in other borrowings
                        
                        
                        20,000
                        
                        
                        
                        10,000
                        
                        
                        
                        (4,473
                        )Net
      cash provided by financing activities
                        
                        
                        179,856
                        
                        
                        
                        37,485
                        
                        
                        
                        172,976Net
      (Decrease) Increase in Cash and Equivalents:
                        
                        
                        177,111
                        
                        
                        
                        (77,370
                        )
                        
                        
                        48,665Cash
      and equivalents at beginning of period
                        
                        
                        40,835
                        
                        
                        
                        118,205
                        
                        
                        
                        69,540Cash
      and equivalents at end of period
                        
                        $
                        217,946
                        
                        
                        $
                        40,835
                        
                        
                        $
                        118,205Other
      Cash Flow Information:Cash
      paid for interest
                        
                        $
                        13,386
                        
                        
                        $
                        18,389
                        
                        
                        $
                        14,082Cash
      paid for income taxes
                        
                        $
                        4,647
                        
                        
                        $
                        9,450
                        
                        
                        $
                        6,895





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


55


BRIDGE
CAPITAL HOLDINGS





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





1.
            SIGNIFICANT ACCOUNTING
      POLICIES




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”.




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.




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.




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.




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.  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.




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, 2008, aggregate reserves (in the form of deposits with the Federal
Reserve Bank) of $711,000 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, 2008 the Company had no investment securities and as of December 31, 2007
all of the Company’s securities were classified as available for
sale.


56


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.




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 Statement of Financial Accounting Standard (“SFAS”) No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”.  The Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities.  Under this Statement, 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.  For sales of SBA loans prior to January 1, 2007, a portion of
the cost of the loan was allocated to the servicing right based on relative fair
values.  The Company adopted SFAS No. 156, Accounting for Servicing of
Financial Assets, on January 1, 2007, for sales of SBA loans beginning in
2007.  Servicing rights are initially recorded at fair value with the
income statement effect recorded in gain on sale of loans.  Fair value
is based on a valuation 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.





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.


57




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, 2008 there were two commercial properties valued at $552,000 and
one land development property valued at $544,000 that was categorized as “other
real estate owned”.  At December 31, 2007 there was one commercial
property valued at $425,000 owned by the Bank that was acquired through the
foreclosure process.





Income
Taxes- Deferred
tax assets and liabilities are recognized at currently enacted rates applicable
to the period in which the deferred tax assets and liabilities are expected to
be realized and settled.  Deferred income taxes are provided on income
and expense items recognized in different periods for financial statement and
tax reporting purposes.




On
January 1, 2007, the Bank adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN
48”).  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes.  FIN 48 prescribes a
recognition threshold and measurement standard for the financial statement
recognition and measurement of an income tax position taken or expected to be
taken in a tax return.  In addition, FIN 48 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.





The
provisions of FIN 48 have been applied to all tax positions of the Bank as of
January 1, 2007.   Only tax positions that met the
more-likely-than-not recognition threshold on January 1, 2007 were recognized or
continue to be recognized upon adoption.  The Bank previously
recognized income tax positions based on management’s estimate of whether it was
reasonably possible that a liability has been incurred for unrecognized income
tax benefits by applying FASB Statement No. 5, Accounting for
Contingencies.  The adoption of FIN 48 did not have a material impact
on the Bank’s financial position, results of operations or cash
flows.  The adoption of FIN 48 made no impact on the balance of
retained earnings as of January 1, 2007.





Interest
expense associated with unrecognized tax benefits is classified as income tax
expense in the statement of income.  Penalties associated with
unrecognized tax benefits are classified as income tax expense in the statement
of income.





Stock-Based
Compensation–On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS
No. 123R), Share-Based Payments, which addresses 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 under
SFAS No. 123R, consistent with that used for pro forma disclosures under
SFAS No. 123, Accounting for Stock-Based Compensation.  The
Company has recorded an incremental $1.3 million ($1.1 million net of tax) and
$1.2 million ($993,000 net of tax) of stock-based compensation expense during
the years ended December 31, 2008 and 2007, respectively as a result of the
adoption of SFAS No. 123R.




No
stock-based compensation costs were capitalized as part of the cost of an asset
as of December 31, 2008.   As of December 31, 2008, $2.7 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 4
years.


58


The
impact of implementing SFAS No. 123R reduced basic earnings per share by $0.25
and $0.16 and diluted earnings per share by $0.25 and $0.10 for the year ended
December 31, 2008 and 2007, respectively.





Recent Accounting
Pronouncements –In September 2006, the Financial Accounting Standards
Board issued SFAS No. 157, “Fair Value Measurement”, a standard that provides
enhanced guidance for using fair value to measure assets and liabilities. The
standard also responds to investors’ requests for expanded information about the
extent to which a company measures assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings. The standard applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value. Under the
standard, fair value refers to the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard
clarifies that fair value should be based on the assumptions market participants
would use when pricing the asset or liability. In support of this principle, the
standard establishes a fair value hierarchy that prioritizes the information
used to develop those assumptions. The fair value hierarchy gives the highest
priority to quoted prices in active markets and the lowest priority to
unobservable data, for example, the reporting entity’s own
data.  Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy.  We adopted SFAS
No. 157 on January 1, 2008, and the adoption of SFAS No. 157 did not have a
material impact on our financial condition or operating results.




In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Liabilities” – Including an
amendment of FASB No. 115.  This Standard permits, but does not
require, entities to chose to measure many financial instruments and certain
other times at fair value.  The Statement was intended to expand the
use of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments.  The
Statement was effective for fiscal years beginning after November 15,
2007.  We did adopt any of the fair value measurement options afforded
by this Statement.





On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (“SAB
109”).  Previously, SAB 105, Application of Accounting Principles to
Loan Commitments, stated that in measuring the fair value of a derivative loan
commitment, a company should not incorporate the expected net future cash flows
related to the associated servicing of the loan.  SAB 109 supersedes
SAB 105 and indicates that the expected net future cash flows related to the
associated servicing of the loan should be included in measuring fair value for
all written loan commitments that are accounted for at fair value through
earnings.  SAB 10 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view.  SAB 109 was effective for
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007.  The impact of adoption was not
material.





In
December 2007, the SEC issued SAB No. 110, which expresses the views of the SEC
regarding the use of a “simplified” method, as discussed in AB No. 107, in
developing an estimate of expected term of “plain vanilla” share options in
accordance with SFAS No. 123(R), Share-Based Payment.  The SEC
concluded that a company could, under certain circumstances, continue to use the
simplified method for share option grants after December 31,
2007.  The Company does not use the simplified method for share
options and therefore SAB No. 110 has no impact on the Company’s consolidated
financial statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)), which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination.  SFAS No. 141(R) is effective for
fiscal years beginning on or after December 15, 2008.  Earlier
adoption is prohibited.  The adoption of this standard is not expected
to have a material effect on the Company’s results of operations or financial
position.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements, and Amendment of ARB No. 51, which will
change the accounting and reporting for minority interests to be recharacterized
as noncontrolling interests and classified as a component of equity within the
consolidated balance sheets.  SFAS No. 160 is effective as of the
beginning of the first fiscal year beginning on or after December 15,
2008.  Earlier adoption is prohibited. The adoption of this standard
is not expected to have a material effect on the Company’s results of operations
or financial position.





In March
2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and
Hedging Activities, an Amendment of SFAS No. 133.  SFAS No. 161 amends
and expands the disclosure requirements of SFAS No. 133 for derivative
instruments and hedging activities.  SFAS No. 161 requires qualitative
disclosure about objectives and strategies for using derivative and hedging
instruments, quantitative disclosures about fair value amounts of the
instruments and gains and losses on such instruments, as well as disclosures
about credit-risk features in derivative agreements.  SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged.  The adoption of this standard is not expected to have a
material effect on the Company’s results of operations or financial
position.


59




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.




Comprehensive
Income - SFAS No. 130, “Reporting Comprehensive Income” requires that 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. This Statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement.  Other comprehensive earnings
include the SFAS No. 158 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 gain totaling $1.1 million, net of tax,
at December 31, 2008, an accumulated other comprehensive gain of $2.0 million,
net of tax, at December 31, 2007 and an accumulated comprehensive loss of
($876,000), net of tax, at December 31, 2006.





(dollars
      in thousands)
                  
                  Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Net
      income (loss)
                  
                  $
                  (7,341
                  )
                  
                  $
                  10,866
                  
                  
                  $
                  8,634Other
      comprehensive earnings-Net
      unrealized gains (losses) on FAS 158 adjustment-supplemental executive
      retirement plan
                  
                  
                  130
                  
                  
                  
                  44
                  
                  
                  
                  (711
                  )Net
      unrealized gains (losses) on cash flow hedges
                  
                  
                  (564
                  )
                  
                  
                  2,270
                  
                  
                  
                  (114
                  )Net
      unrealized gains (losses) on securities available for sale
                  
                  
                  (489
                  )
                  
                  
                  540
                  
                  
                  
                  51Total
      comprehensive income (loss)
                  
                  $
                  (8,264
                  )
                  
                  $
                  13,720
                  
                  
                  $
                  7,860





Segments of an
Enterprise and Related Information –SFAS No. 131, “Disclosure about
Segments of an Enterprise and Related Information”, 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– SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.  As required by SFAS 133, the Company records all
derivatives on the balance sheet at fair value.  The accounting for changes
in the fair value of derivatives depends on the intended use of the derivative
and the resulting designation. Derivatives used to hedge the exposure to changes
in the fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value
hedges.  Derivatives used to hedge the exposure to variability in
expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges.





For
derivatives designated as cash flow hedges, the effective portion of changes in
the fair value of the derivative is initially reported in other comprehensive
income (outside of earnings) and subsequently reclassified to earnings when the
hedged transaction affects earnings, and the ineffective portion of changes in
the fair value of the derivative is recognized directly in
earnings.  The Company assesses the effectiveness of each hedging
relationship by comparing the changes in cash flows of the derivative hedging
instrument with the changes in cash flows of the designated hedged item or
transaction.


60


The
Company’s objective in using derivatives is to add stability to interest income
and to manage its exposure to interest rate movements or other identified
risks.  To accomplish this objective, the Company primarily uses interest
rate swaps as part of its cash flow hedging strategy.  Interest rate
swaps designated as cash flow hedges involve the receipt of fixed-rate amounts
in exchange for variable-rate payments over the life of the agreements without
exchange of the underlying principal amount.  During 2008 and 2007, this
derivative was used to hedge the variable cash flows associated with $100.0
million of existing variable-rate assets.





Due to
the significant decline in short-term interest rates during 2008, the loan pools
designated to hedge the variable cash flows had decreased to a level during the
first nine months of 2008 that caused some hedge ineffectiveness. As such,
$600,000, representing the change in fair value for that period, was recorded as
non-interest income instead of being recorded as other comprehensive
income.  During the fourth quarter of 2008 the loan pools designated
as hedged further declined 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 an additional $3.3 million in non-interest
income and amortize a deferred gain of $4.2 million over the remaining two year
term of the designated hedging relationship.  At December 31, 2007,
derivatives designated as cash flow hedges with a fair value of $3.7 million
were included in other assets.  The change in net unrealized losses of
$3.8 million (net of deferred income tax provision of $1.5 million) in 2007 for
derivatives designated as cash flow hedges is separately disclosed in the
statement of changes in comprehensive income.  No hedge ineffectiveness on
cash flow hedges was recognized during 2007.





During
the year ended December 31, 2008, the Company entered into two forward
LIBOR-based interest rate swaps for which the future fixed-rate cash flows will
be hedged against the variable-rate cash flows of the Company’s junior
subordinated debt securities.  Effective March 15, 2010 the Company
will pay a fixed-rate of 6.11% and receive a variable-rate payment equivalent to
three month LIBOR plus 198 basis points on the $12.4 million of junior
subordinated debt securities issued by Bridge Capital Trust
I.  Effective June 30, 2011 the Company will pay a fixed-rate of 6.10%
and receive a variable-rate payment equivalent to three month LIBOR plus 138
basis points on the $5.2 million of junior subordinated debt securities issued
by Bridge Capital Trust II.  The fair market value of these forward
swaps included in other assets as of December 31, 2008 was $(1.4)
million.





As of
December 31, 2008 and 2007, no derivatives were designated as fair value hedges
or hedges of net investments in foreign operations.  Additionally, the
Company does not use derivatives for trading or speculative purposes and
currently does not have any derivatives that are not designated as hedges.





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.  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):


61





(dollars
      in thousands, except share data)
                  
                  Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Net
      income
                  
                  $
                  (7,341
                  )
                  
                  $
                  10,866
                  
                  
                  $
                  8,634Less:Dividends
      on preferred shares
                  
                  
                  (152
                  )
                  
                  
                  -
                  
                  
                  
                  -Net
      income available to common shareholders
                  
                  $
                  (7,493
                  )
                  
                  $
                  10,866
                  
                  
                  $
                  8,634Weighted
      average shares used in computing:Basic
      common  shares
                  
                  
                  6,502,376
                  
                  
                  
                  6,380,100
                  
                  
                  
                  6,274,051Dilutive
      potential common shares related to stock options, restricted stock,
      warrants, and preferred shares using the treasury stock
    method
                  
                  
                  0
                  
                  
                  
                  545,762
                  
                  
                  
                  542,649Total
      average common shares and equivalents
                  
                  
                  6,502,376
                  
                  
                  
                  6,925,862
                  
                  
                  
                  6,816,700Basic
      earnings  per share
                  
                  $
                  (1.15
                  )
                  
                  $
                  1.70
                  
                  
                  $
                  1.38Diluted
      earnings per share
                  
                  $
                  (1.15
                  )
                  
                  $
                  1.57
                  
                  
                  $
                  1.27





There
were 1,636,702 options to acquire common stock (including those issuable
pursuant to contingent stock agreements) 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 antidilutive for
year ended December 31, 2008.





3.
            SECURITIES





As of
December 31, 2008, the Company did not own any investment
securities.  The amortized cost and estimated fair values of
securities as of December 31, 2007 are as follows:





(dollars
      in thousands)
                        
                        As
      of December 31, 2007Amortized
                        
                        
                        Gross
      Unrealized
                        
                        
                        FairCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        ValueU.S.
      government treasury securities
                        
                        $
                        201
                        
                        
                        $
                        1
                        
                        
                        $
                        -
                        
                        
                        $
                        202U.S.
      government agency securities
                        
                        
                        54,450
                        
                        
                        
                        831
                        
                        
                        
                        (1
                        )
                        
                        
                        55,280Total
      securities available for sale
                        
                        
                        54,651
                        
                        
                        
                        832
                        
                        
                        
                        (1
                        )
                        
                        
                        55,482Total
      investment securities
                        
                        $
                        54,651
                        
                        
                        $
                        832
                        
                        
                        $
                        (1
                        )
                        
                        $
                        55,482





As of
December 31, 2007, investment securities with carrying values of approximately
$200,000 were pledged as collateral.  As of December 31, 2007, 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, 2008, 2007 and 2006.


62




A
summary of loans is as follows:


(dollars
      in thousands)
                  
                  As
      of December 31,2008
                  
                  
                  2007
                  
                  
                  2006Commercial
                  
                  $
                  301,024
                  
                  
                  $
                  272,660
                  
                  
                  $
                  197,174Real
      estate construction
                  
                  
                  98,105
                  
                  
                  
                  85,378
                  
                  
                  
                  103,710Land
      loans
                  
                  
                  23,535
                  
                  
                  
                  61,987
                  
                  
                  
                  41,811Real
      estate other
                  
                  
                  134,767
                  
                  
                  
                  109,055
                  
                  
                  
                  73,502Factoring
      and asset based lending
                  
                  
                  55,761
                  
                  
                  
                  57,662
                  
                  
                  
                  56,924SBA
                  
                  
                  77,043
                  
                  
                  
                  56,945
                  
                  
                  
                  59,888Other
                  
                  
                  9,371
                  
                  
                  
                  9,042
                  
                  
                  
                  7,771Total
      gross loans
                  
                  
                  699,606
                  
                  
                  
                  652,729
                  
                  
                  
                  540,780Unearned
      fee income
                  
                  
                  (1,601
                  )
                  
                  
                  (1,856
                  )
                  
                  
                  (1,495
                  )Total
      loan portfolio
                  
                  
                  698,005
                  
                  
                  
                  650,873
                  
                  
                  
                  539,285Less
      allowance for credit losses
                  
                  
                  (18,554
                  )
                  
                  
                  (8,608
                  )
                  
                  
                  (7,329
                  )Total
      loan portfolio, net
                  
                  $
                  679,451
                  
                  
                  $
                  642,265
                  
                  
                  $
                  531,956





Analysis
      of the allowance for credit losses:(dollars
      in thousands)
                  
                  As
      of December 31,2008
                  
                  
                  2007
                  
                  
                  2006Balance,
      beginning of period
                  
                  $
                  8,608
                  
                  
                  $
                  7,329
                  
                  
                  $
                  5,936Provision
      for credit losses
                  
                  
                  31,520
                  
                  
                  
                  2,275
                  
                  
                  
                  1,372Charge-offs
                  
                  
                  (21,694
                  )
                  
                  
                  (1,255
                  )
                  
                  
                  -Recoveries
                  
                  
                  120
                  
                  
                  
                  259
                  
                  
                  
                  21Balance,
      end of period
                  
                  $
                  18,554
                  
                  
                  $
                  8,608
                  
                  
                  $
                  7,329





There
were sixteen loans (representing fourteen relationships), totaling $15.8
million, on non-accrual and deemed impaired at December 31,
2008.  There were four loans, totaling $4.9 million, and two loans,
totaling $437,000, on non-accrual and deemed impaired at December 31, 2007 and
2006, 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, 2008, 2007, and 2006, there were no loans past due 90 days or more
as to principal or interest and still accruing interest.





At
December 31, 2008 there were two commercial properties valued at $552,000 and
one land development property valued at $544,000 that were categorized as “other
real estate owned”.  At December 31, 2007 there was one commercial
property valued at $425,000 that was categorized as “other real estate owned”
and at December 31, 2006 there were no properties owned by the Bank acquired
through the foreclosure process.




63




5.
            PREMISES
      AND EQUIPMENT




Premises
and equipment are comprised of the following:





(dollars
      in thousands)
                    
                    As
      of December 31,2008
                    
                    
                    2007
                    
                    
                    2006Leasehold
      improvements
                    
                    $
                    5,378
                    
                    
                    $
                    4,855
                    
                    
                    $
                    3,374Furniture
      and equipment
                    
                    
                    3,164
                    
                    
                    
                    2,825
                    
                    
                    
                    2,047Capitalized
      software
                    
                    
                    2,816
                    
                    
                    
                    2,285
                    
                    
                    
                    1,691Premises
      and equipment
                    
                    
                    11,358
                    
                    
                    
                    9,965
                    
                    
                    
                    7,112Less
      accumulated depreciation and amortization
                    
                    
                    (6,568
                    )
                    
                    
                    (4,960
                    )
                    
                    
                    (3,633
                    )Premises
      and equipment, net
                    
                    $
                    4,790
                    
                    
                    $
                    5,005
                    
                    
                    $
                    3,479





Depreciation
and amortization amounted to $1.6 million, $1.3 million, and $943,000 for the
years ended December 31, 2008, 2007 and 2006, 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, 2008, 2007 and 2006.





(dollars
      in thousands)
                
                As
      of December 31,2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentNoninterest-bearing  demand
                
                $
                284,319
                
                
                
                36.58
                %
                
                $
                198,641
                
                
                
                29.59
                %
                
                $
                198,639
                
                
                
                30.80
                %Interest-bearing
      demand
                
                
                4,267
                
                
                
                0.55
                %
                
                
                5,350
                
                
                
                0.80
                %
                
                
                3,901
                
                
                
                0.60
                %Money
      market and savings
                
                
                335,200
                
                
                
                43.13
                %
                
                
                372,923
                
                
                
                55.55
                %
                
                
                333,838
                
                
                
                51.76
                %Certificates
      of deposit:Less
      than $100
                
                
                92,997
                
                
                
                11.96
                %
                
                
                22,896
                
                
                
                3.41
                %
                
                
                28,918
                
                
                
                4.48
                %$100
      and more
                
                
                60,462
                
                
                
                7.78
                %
                
                
                71,546
                
                
                
                10.66
                %
                
                
                79,691
                
                
                
                12.36
                %Total
      deposit portfolio
                
                $
                777,245
                
                
                
                100.00
                %
                
                $
                671,356
                
                
                
                100.00
                %
                
                $
                644,987
                
                
                
                100.00
                %





At
December 31, 2008, time deposits of $100,000 or more have remaining maturities
as follows:





(in
      thousands)3
      months or less
                        
                        $
                        33,610Over
      3 months to 6 months
                        
                        
                        8,106Over
      6 months to 12 months
                        
                        
                        14,762Over
      1 year to 5 years
                        
                        
                        4,784TOTAL
                        
                        $
                        61,262


64


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





(in
      thousands)2009
                          
                          $
                          143,3982010
                          
                          
                          9,9612011
                          
                          
                          -2012
                          
                          
                          -2013
                          
                          
                          -2014
                          
                          
                          101$
                          153,460




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.





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.





Under
FASB Interpretation No.46 (FIN 46), Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51, these Trusts are not consolidated into the
company’s financial statements.  Prior to the issuance of FIN 46, bank
holding companies typically consolidated these entities.  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





Other
borrowings at December 31, 2008 totaled $30.0 million and were comprised of the
following:


65





(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





Other
borrowings at December 31, 2007 were comprised of one advance from the Federal
Home Loan Bank of San Francisco for $10,000,000 with a fixed rate of 3.30% and a
maturity date of January 2, 2008.  The advance was secured by a
blanket lien totaling approximately $134.0 million.





As of
December 31, 2008, the Bank had a total borrowing capacity of approximately
$128.0 million.   The Bank also has unsecured borrowing lines
with correspondent banks totaling $25.0 million.  At December 31,
2008, 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,
2008, 2007 and 2006:





(dollars
      in thousands)
                
                Year
      ended December 31,2008
                
                
                2007
                
                
                2006Current:Federal
                
                $
                (980
                )
                
                $
                7,357
                
                
                $
                5,058State
                
                
                154
                
                
                
                2,080
                
                
                
                1,525Total
      current
                
                
                (826
                )
                
                
                9,437
                
                
                
                6,583Deferred:Federal
                
                
                (2,994
                )
                
                
                (1,458
                )
                
                
                (982
                )State
                
                
                (1,841
                )
                
                
                (396
                )
                
                
                (358
                )Total
      deferred
                
                
                (4,835
                )
                
                
                (1,854
                )
                
                
                (1,340
                )Income
      tax provision
                
                $
                (5,661
                )
                
                $
                7,583
                
                
                $
                5,243





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, 2008, 2007 and 2006 are as follows:





(dollars
      in thousands)
                  
                  As
      of ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Deferred
      tax assets (liability):Deferred
      loan fee
                  
                  $
                  560
                  
                  
                  $
                  650
                  
                  
                  $
                  523Allowance
      for credit losses
                  
                  
                  6,365
                  
                  
                  
                  2,788
                  
                  
                  
                  2,276Deferred
      pre-opening expenses
                  
                  
                  4
                  
                  
                  
                  10
                  
                  
                  
                  15State
      income taxes
                  
                  
                  2,278
                  
                  
                  
                  1,775
                  
                  
                  
                  1,343Fixed
      assets
                  
                  
                  298
                  
                  
                  
                  300
                  
                  
                  
                  115Other
                  
                  
                  1,415
                  
                  
                  
                  602
                  
                  
                  
                  (3
                  )Accrued
      expenses
                  
                  
                  694
                  
                  
                  
                  655
                  
                  
                  
                  656Net
      Deferred Tax Asset
                  
                  $
                  11,614
                  
                  
                  $
                  6,780
                  
                  
                  $
                  4,925


66


In
addition to the above net deferred tax asset, the Company has additional
deferred tax liabilities arising from adjustments to other comprehensive income
aggregating $(795,000) as of December 31, 2008 and $1.4 million as of December
31, 2007.





Income
tax returns for the years ended December 31, 2007, 2006 and 2005 are open to
audit by the federal authorities and income tax returns for the years ended
December 31, 2007, 2006, 2005 and 2004 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 31,2008
                  
                  
                  2007
                  
                  
                  2006Federal
      statutory rate
                  
                  
                  35.00
                  %
                  
                  
                  35.00
                  %
                  
                  
                  35.00
                  %State
      income tax, net of federal effect
                  
                  
                  7.05
                  %
                  
                  
                  5.93
                  %
                  
                  
                  5.47
                  %Other,
      net
                  
                  
                  1.49
                  %
                  
                  
                  0.17
                  %
                  
                  
                  -2.69
                  %Income
      taxes
                  
                  
                  43.54
                  %
                  
                  
                  41.10
                  %
                  
                  
                  37.78
                  %




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 500,000 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,
2008, 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.




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, 2008, there were 1,636,702 shares underlying outstanding awards
under the Company’s stock-based compensation plans and 181,556 shares available
for future grants under the 2006 Equity Incentive Plan.





A summary
of the Company’s stock option awards as of December 31, 2008 and changes during
the period ended on that date are presented below:


67





Stock
      Option Awards OutstandingWeightedNumber
                
                
                Averageof
      Shares
                
                
                Exercise
      PriceBalances,
      December 31, 2007
                
                
                1,487,808
                
                
                $
                11.91Granted
                
                
                63,050
                
                
                $
                15.31Exercised
      (aggregate intrinsic value of $1.8 million)
                
                
                (166,913
                )
                
                $
                5.59Cancelled
                
                
                (42,715
                )
                
                $
                20.52Expired
                
                
                (20,883
                )
                
                $
                17.97Balances,
      December 31, 2008
                
                
                1,320,347
                
                
                $
                12.50





The
following table summarizes information about stock options outstanding at
December 31, 2008.





Stock Option Awards Outstanding
                    
                    
                    Stock Option Awards ExercisableWeighted
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    Weighted
                    
                    
                    WeightedRemaining
                    
                    
                    Exercise
                    
                    
                    
                    
                    
                    Remaining
                    
                    
                    ExerciseExercise Price range
                    
                    Shares
                    
                    
                    Life (Years)
                    
                    
                    Price
                    
                    
                    Shares
                    
                    
                    Life (Years)
                    
                    
                    Price$     5.00  -  $      5.99
                    
                    
                    421,300
                    
                    
                    
                    2.3
                    
                    
                    $
                    5.00
                    
                    
                    
                    417,300
                    
                    
                    
                    2.2
                    
                    
                    $
                    5.01$     6.00  -  $    12.99
                    
                    
                    292,975
                    
                    
                    
                    4.6
                    
                    
                    $
                    9.19
                    
                    
                    
                    275,125
                    
                    
                    
                    4.2
                    
                    
                    $
                    9.06$   13.00  -  $    15.99
                    
                    
                    189,750
                    
                    
                    
                    6.6
                    
                    
                    $
                    14.75
                    
                    
                    
                    135,523
                    
                    
                    
                    6.3
                    
                    
                    $
                    14.84$   16.00  -  $    20.99
                    
                    
                    130,627
                    
                    
                    
                    7.5
                    
                    
                    $
                    19.42
                    
                    
                    
                    59,876
                    
                    
                    
                    7.3
                    
                    
                    $
                    19.34$   21.00  -  $    22.99
                    
                    
                    285,695
                    
                    
                    
                    8.4
                    
                    
                    $
                    22.29
                    
                    
                    
                    102,444
                    
                    
                    
                    8.2
                    
                    
                    $
                    22.341,320,347
                    
                    
                    
                    5.2
                    
                    
                    $
                    12.50
                    
                    
                    
                    990,268
                    
                    
                    
                    4.3
                    
                    
                    $
                    10.14





There was
no aggregate intrinsic value of stock option awards outstanding and stock option
awards exercisable at December 31, 2008.





A summary
of the Company’s non-vested shares of restricted stock awards as of December 31,
2008 and changes during the period ended on that dates is presented
below:





Non-Vested
      Restricted Stock AwardsWeightedNumber
                
                
                Average
      Grantof
      Shares
                
                
                Date
      Fair ValueBalances,
      December 31, 2007
                
                
                61,705
                
                
                $
                22.24Granted
                
                
                260,300
                
                
                $
                4.45Vested
                
                
                (590
                )
                
                $
                22.49Forfeited
                
                
                (5,060
                )
                
                $
                22.30Balances,
      December 31, 2008
                
                
                316,355
                
                
                $
                7.60


68


SFAS
No. 123R requires the use of a valuation model to calculate the fair value
of stock-based awards.  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 2008, 2007, and 2006 and the resulting
estimates of weighted-average fair value per share of stock-based awards granted
during those periods are as follows:





Year
      ended December 31,2008
                
                
                2007
                
                
                2006Expected
      life
                
                75
      months
                
                
                60
      months
                
                
                60
      monthsStock
      volatility
                
                
                22.0
                %
                
                
                28.4
                %
                
                
                32.9
                %Risk
      free interest rate
                
                
                3.2
                %
                
                
                4.2
                %
                
                
                4.7
                %Dividend
      yield
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %Fair
      value per share
                
                $
                4.59
                
                
                $
                9.73
                
                
                $
                9.36




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, 2008, 2007 and 2006:




69





(dollars
      in thousands)
                          
                          Year
      ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Change
      in benefit obligationBenefit
      obligation at beginning of year
                          
                          $
                          2,897
                          
                          
                          $
                          2,351
                          
                          
                          $
                          1,680Service
      cost
                          
                          
                          563
                          
                          
                          
                          345
                          
                          
                          
                          387Interest
      cost
                          
                          
                          159
                          
                          
                          
                          133
                          
                          
                          
                          117Amendments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Actuarial
      (gains)/losses
                          
                          
                          (127
                          )
                          
                          
                          68
                          
                          
                          
                          167Acquisitions/(divestitures)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Expected
      benefits paid
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Projected
      benefit obligation at end of year
                          
                          $
                          3,492
                          
                          
                          $
                          2,897
                          
                          
                          $
                          2,351Change
      in plan assetsFair
      value of plan assets at beginning of year
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Actual
      return on plan assets
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Acquisitions/(divestitures)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Employer
      contributions
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Expected
      benefits paid
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Fair
      value of plan assets at end of year
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Funded
      status
                          
                          $
                          (3,492
                          )
                          
                          $
                          (2,897
                          )
                          
                          $
                          (2,351
                          )Unrecognized
      net actuarial (gain) loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          230Unrecognized
      prior service cost
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          852Unrecognized
      net transition obligation (asset)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -(Accrued)/prepaid
      benefit cost
                          
                          $
                          (3,492
                          )
                          
                          $
                          (2,897
                          )
                          
                          $
                          (1,269
                          )Unfunded
      projected/accumulated benefit obligation
                          
                          $
                          (3,492
                          )
                          
                          $
                          (2,897
                          )
                          
                          $
                          (2,351
                          )Additional
      liability
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          (1,082
                          )Intangible
      asset
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Impact
      on retained earnings
                          
                          $
                          (3,492
                          )
                          
                          $
                          (2,897
                          )
                          
                          $
                          (2,351
                          )Weighted
      average assumptions to determine benefit  obligation as of
      December 31:Discount
      rate
                          
                          
                          5.75
                          %
                          
                          
                          5.75
                          %
                          
                          
                          5.75
                          %Rate
      of compensation increase
                          
                          
                          5.00
                          %
                          
                          
                          5.00
                          %
                          
                          
                          5.00
                          %





The
components of net periodic benefit cost recognized for the years ended December
31, 2008 and 2007 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, 2009 are as follows:




70





(dollars
      in thousands)
                            
                            Year
      ended December 31,2009
                            
                            
                            2008
                            
                            
                            2007Components
      of net periodic benefit costService
      cost
                            
                            $
                            589
                            
                            
                            $
                            563
                            
                            
                            $
                            345Interest
      cost
                            
                            
                            167
                            
                            
                            
                            159
                            
                            
                            
                            133Expected
      return on plan assets
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Amortization
      of transition obligation (asset)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Amortization
      of prior service cost
                            
                            
                            88
                            
                            
                            
                            88
                            
                            
                            
                            143Amortization
      of actuarial (gains)/losses
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      periodic benefit cost
                            
                            $
                            844
                            
                            
                            $
                            810
                            
                            
                            $
                            621Other
      comprehensive income (cost)
                            
                            $
                            83
                            
                            
                            $
                            219
                            
                            
                            $
                            70




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 Santa Clara, San Jose and Palo Alto locations are leased under
non-cancelable operating leases that expire in 2010, 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):





Future
      lease paymentsFor
      years ended December 31,2009
                    
                    $
                    1,8532010
                    
                    
                    1,8542011
                    
                    
                    1,6592012
                    
                    
                    1,6982013
                    
                    
                    1,738Thereafter
                    
                    
                    4,446$
                    13,248





Rental
expense under operating leases was $2.3 million in 2008, $2.1 million in 2007
and $1.3 million in 2006.





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
$263.2 million, $299.8 million and $267.6 million at December 31, 2008, 2007 and
2006, respectively.  The Bank's exposure to credit loss is limited to
amounts funded or drawn; however, at December 31, 2008, no losses are
anticipated as a result of these commitments.


71


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, 2008 (dollars
in thousands):





Loan
      Category
                  
                  AmountCommercial
                  
                  $
                  185,814SBA
                  
                  
                  5,090Real
      estate construction
                  
                  
                  30,256Land
      loans
                  
                  
                  358Real
      estate term
                  
                  
                  14,156Factoring/ABL
                  
                  
                  12,849Other
                  
                  
                  14,660Total
                  
                  $
                  263,183





13.           DISCLOSURE
OF FAIR VALUE OF FINANCIAL INSTRUMENTS




In
accordance with SFAS No. 157, 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.





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, 2008Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Cash
      flow hedge
                  
                  
                  (1,445
                  )
                  
                  
                  -
                  
                  
                  
                  (1,445
                  )
                  
                  
                  -Warrant
      portfolio
                  
                  
                  718
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  718Impaired
      loans
                  
                  
                  15,772
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,772Total
                  
                  $
                  15,045
                  
                  
                  $
                  -
                  
                  
                  $
                  (1,445
                  )
                  
                  $
                  16,490




72


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, 2008.





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
were not material for the year ended December 31, 2008.





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, 2008 and
2007.  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).





(dollars
      in thousands)
                
                Year
      ended December 31,2008
                
                
                2007Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairValue
                
                
                Value
                
                
                Value
                
                
                ValueFinancial
      assets:Cash
      and due from banks
                
                $
                18,421
                
                
                $
                18,421
                
                
                $
                27,440
                
                
                $
                27,440Federal
      funds sold
                
                
                199,525
                
                
                
                199,525
                
                
                
                13,395
                
                
                
                13,395Interest
      bearing Deposits in other Banks
                
                
                7,268
                
                
                
                7,256
                
                
                
                -
                
                
                
                -Investments
      securities
                
                
                -
                
                
                
                -
                
                
                
                55,482
                
                
                
                55,482Loans
      and leases, gross
                
                
                699,780
                
                
                
                721,856
                
                
                
                652,729
                
                
                
                662,314Bank
      owned life insurance
                
                
                9,580
                
                
                
                9,580
                
                
                
                9,179
                
                
                
                9,179Cash
      flow hedge
                
                
                (1,445
                )
                
                
                (1,445
                )
                
                
                3,660
                
                
                
                3,660Financial
      liabilities:Deposits
                
                
                777,246
                
                
                
                775,922
                
                
                
                671,356
                
                
                
                666,329Trust
      preferred securities
                
                
                17,527
                
                
                
                17,595
                
                
                
                17,527
                
                
                
                17,610Other
      borrowings
                
                
                30,000
                
                
                
                29,959
                
                
                
                10,000
                
                
                
                10,000





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.


73




14.           BRIDGE
CAPITAL HOLDINGS




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





BALANCE
SHEETS





(dollars
      in thousands)
                  
                  As
      of December 31,2008
                  
                  
                  2007Assets:Cash
      and due from banks
                  
                  $
                  21,309
                  
                  
                  $
                  2,134Investment
      in bank & subsidiaries
                  
                  
                  108,654
                  
                  
                  
                  79,740Other
      assets
                  
                  
                  237
                  
                  
                  
                  744Total
      Assets
                  
                  $
                  130,200
                  
                  
                  $
                  82,618Liabilities:Junior
      Subordinated Debt
                  
                  $
                  17,527
                  
                  
                  $
                  17,527Other
      liabilities
                  
                  
                  183
                  
                  
                  
                  7Total
      Liabilities
                  
                  
                  17,710
                  
                  
                  
                  17,534Capital:Common
      stock
                  
                  
                  39,655
                  
                  
                  
                  37,697Preferred
      stock
                  
                  
                  53,864
                  
                  
                  
                  -Retained
      earnings
                  
                  
                  25,257
                  
                  
                  
                  14,543Current
      year net income
                  
                  
                  (7,341
                  )
                  
                  
                  10,866Other
      Comprehensive income
                  
                  
                  1,055
                  
                  
                  
                  1,978Total
      Capital
                  
                  
                  112,490
                  
                  
                  
                  65,084Total
      Liabilities and Capital
                  
                  $
                  130,200
                  
                  
                  $
                  82,618





STATEMENTS
OF OPERATIONS





(dollars
      in thousands)
                
                Year
      ended December 31,2008
                
                
                2007
                
                
                2006Interest
      income
                
                $
                42
                
                
                $
                78
                
                
                $
                87Interest
      expense
                
                
                1,044
                
                
                
                1,044
                
                
                
                960Noninterest
      expense
                
                
                679
                
                
                
                466
                
                
                
                200Income
      (loss) before income taxes
                
                
                (1,681
                )
                
                
                (1,432
                )
                
                
                (1,073
                )Income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                432Income
      before undistributed income of the bank
                
                
                (1,681
                )
                
                
                (1,432
                )
                
                
                (641
                )Equity
      in undistributed income of the bank
                
                
                (5,660
                )
                
                
                12,298
                
                
                
                9,275Net
      income (loss)
                
                $
                (7,341
                )
                
                $
                10,866
                
                
                $
                8,634




74


STATEMENTS
OF CASH FLOWS





(dollars
      in thousands)
                
                Year
      ended December 31,2008
                
                
                2007
                
                
                2006Cash
      Flow From Operating Activities:Net
      income (loss)
                
                $
                (7,341
                )
                
                $
                10,866
                
                
                $
                8,634Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in undistributed loss (earnings) of subsidiaries
                
                
                5,660
                
                
                
                (12,298
                )
                
                
                (9,275
                )Net
      change in other assets
                
                
                810
                
                
                
                4
                
                
                
                (161
                )Net
      change in other liabilities
                
                
                153
                
                
                
                (29
                )
                
                
                (6
                )Net
      cash (used in) provided by operating activities
                
                
                (718
                )
                
                
                (1,457
                )
                
                
                (808
                )Cash
      Flow From Investing Activities:Investment
      in subsidiary
                
                
                (34,543
                )
                
                
                -
                
                
                
                (4,155
                )Net
      cash provided by financing activities
                
                
                (34,543
                )
                
                
                -
                
                
                
                (4,155
                )Cash
      Flow From Financing Activities:Proceeds
      from sale of Common stock
                
                
                572
                
                
                
                801
                
                
                
                619Proceeds
      from sale of Preferred stock
                
                
                53,864
                
                
                
                -
                
                
                
                -Proceeds
      from issuance of junior subordinated debentures
                
                
                -
                
                
                
                -
                
                
                
                5,155Net
      cash provided by financing activities
                
                
                54,436
                
                
                
                801
                
                
                
                5,774Net
      increase (decrease) in cash and equivalents
                
                
                19,175
                
                
                
                (656
                )
                
                
                811Cash
      and equivalents at beginning of period
                
                
                2,134
                
                
                
                2,790
                
                
                
                1,979Cash
      and equivalents at end of period
                
                $
                21,309
                
                
                $
                2,134
                
                
                $
                2,790




15.           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, 2008, 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, 2008 and 2007
as well as the minimum capital ratios required to be deemed “well capitalized”
under the regulatory framework.


75





(dollars
      in thousands)
                                  
                                  As
      of December 31,2008
                                  
                                  
                                  2007Amount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  RatioCompany
      Capital RatiosTier
      1 Capital
                                  
                                  $
                                  109,221
                                  
                                  
                                  
                                  13.31
                                  %
                                  
                                  $
                                  80,024
                                  
                                  
                                  
                                  10.54
                                  %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                  
                                  $
                                  49,252
                                  
                                  
                                  
                                  6.00
                                  %
                                  
                                  $
                                  45,564
                                  
                                  
                                  
                                  6.00
                                  %Total
      Capital
                                  
                                  $
                                  138,725
                                  
                                  
                                  
                                  16.90
                                  %
                                  
                                  $
                                  88,632
                                  
                                  
                                  
                                  11.67
                                  %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                  
                                  $
                                  82,086
                                  
                                  
                                  
                                  10.00
                                  %
                                  
                                  $
                                  75,940
                                  
                                  
                                  
                                  10.00
                                  %Company
      leverageTier
      1 Capital
                                  
                                  $
                                  109,221
                                  
                                  
                                  
                                  12.36
                                  %
                                  
                                  $
                                  80,024
                                  
                                  
                                  
                                  10.66
                                  %(to
      Average Assets)Total
      capital minimum requirement
                                  
                                  $
                                  44,170
                                  
                                  
                                  
                                  5.00
                                  %
                                  
                                  $
                                  37,527
                                  
                                  
                                  
                                  5.00
                                  %Bank
      Risk Based Capital RatiosTier
      1 Capital
                                  
                                  $
                                  106,137
                                  
                                  
                                  
                                  12.94
                                  %
                                  
                                  $
                                  77,096
                                  
                                  
                                  
                                  10.17
                                  %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                  
                                  $
                                  49,206
                                  
                                  
                                  
                                  6.00
                                  %
                                  
                                  $
                                  45,491
                                  
                                  
                                  
                                  6.00
                                  %Total
      Capital
                                  
                                  $
                                  116,388
                                  
                                  
                                  
                                  14.19
                                  %
                                  
                                  $
                                  85,704
                                  
                                  
                                  
                                  11.30
                                  %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                  
                                  $
                                  82,010
                                  
                                  
                                  
                                  10.00
                                  %
                                  
                                  $
                                  75,819
                                  
                                  
                                  
                                  10.00
                                  %Bank
      leverageTier
      1 Capital
                                  
                                  $
                                  106,137
                                  
                                  
                                  
                                  12.03
                                  %
                                  
                                  $
                                  77,096
                                  
                                  
                                  
                                  10.27
                                  %(to
      Average Assets)Total
      capital minimum requirement
                                  
                                  $
                                  44,125
                                  
                                  
                                  
                                  5.00
                                  %
                                  
                                  $
                                  37,523
                                  
                                  
                                  
                                  5.00
                                  %




16.           Preferred
Stock




The
following is a summary of the Company’s two issuances of Preferred Stock for the
year ended December 31, 2008:





Private
Placement





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.





Initially
the holders of the Series B shares shall have voting rights at a rate of 10
votes per share and to 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.  The holders of
the Series B-1 shares initially will have no such rights.  The Company
is required to hold a special meeting of its shareholders to approve the
conversion and voting rights of the preferred shares.  If the
conversion and voting rights are approved, the Series B-1 preferred shares will
then have conversion and voting rights similar to the Preferred B shares. If the
conversion and voting rights are not approved, only the Series B shares will
have voting and conversion rights.





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.


76


The
Company can force conversion of the shares into common stock on or after January
15, 2010 through June 30, 2010, if (a) the Company fully pays the accrued
dividends and prepays the dividends that would have accrued up through June 30,
2010, (b) the Company’s shareholders have approved the conversion and (c) the
Current Market Price condition is met.  Subsequent to June 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
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 United States Department of the Treasury (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 $468,000 incurred in connection with the issuance of both the private
placement and TARP securities have been charged against Additional Paid in
Capital.


77




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, 2008, 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,
2008.





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 2007 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, 2008, 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, 2008, 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, 2008.  Vavrinek,
Trine, Day & Co., LLP’s audit report appears on Page 51.




Item 9b.  Other
Information




Not
applicable




78


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 2009 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 2009 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, 2008 concerning the
Company’s equity compensation plans:





(A)
                
                
                (B)
                
                
                (C)Number
      of SecuritiesNumber
      ofSecurities
                
                
                
                
                
                Remaining
      AvailableTo
      Be Issued Upon
                
                
                Weighted
      Average
                
                
                For
      Future IssuanceExercise
      of
                
                
                Grant
      Price of
                
                
                Under
      EquityOutstandingOptions,
                
                
                OutstandingOptions,
                
                
                Compensation
      PlansRestricted
      Stock,
                
                
                Restricted
      Stock,
                
                
                (Excluding
      SecuritiesWarrants,
      andRights
                
                
                Warrants,
      andRights
                
                
                Reflected
      in Column(A)Equity
      compensation plans approved by security holders
                
                
                1,636,702
                
                
                $
                11.55
                
                
                
                181,556Equity
      compensation plans not approved by security holders
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                1,636,702
                
                
                $
                11.55
                
                
                
                181,556





The
additional information required hereunder is incorporated by reference from the
Company’s definitive proxy statement for the Company’s 2009 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 2009 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 2009 Annual Meeting of Shareholders
(to be filed pursuant to Regulation 14A).


79


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).


80


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 HOLDINGSDate:March 10,
      2009
                    
                    By:
                    /s/ Daniel P. MyersDaniel
      P. Myers, President(Principal
      Executive
Officer)




81


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
      10, 2009Richard
      M. Brenner/s/Owen
      Brown
              
              Director
              
              March
      10, 2009Owen
      Brown/s/David
      V. Campbell
              
              Director
              
              March
      10, 2009David
      V. Campbell/s/Robert
      P. Gionfriddo
              
              Director
              
              March
      10, 2009Robert
      P. Gionfriddo/s/Howard
      Gould
              
              Director
              
              March
      10, 2009Howard
      GouldChairman/s/Allan
      C. Kramer, M.D.
              
              Director
              
              March
      10, 2009Allan
      C. Kramer, M.D./s/Robert
      Latta
              
              Director
              
              March
      10, 2009Robert
      Latta/s/Thomas
      M. Quigg
              
              Director
              
              March
      10, 2009Thomas
      M. QuiggPresidentChief
      Executive Officer/s/Daniel
      P. Myers
              
              Director
              
              March
      10, 2009Daniel
      P. Myers
              
              (Principal
      Executive Officer)/s/Barry
      A. Turkus
              
              Director
              
              March
      10, 2009Barry
      A. TurkusExecutive
      Vice PresidentChief
      Administrative Officer/s/Thomas
      A. Sa
              
              Chief
      Financial Officer
              
              March
      10, 2009Thomas
      A. Sa
              
              (Principal
      Financialand
      Accounting Officer)




82


INDEX TO
EXHIBITS





ExhibitNumber
                                  
                                  Description of Exhibit(2.1)
                                  
                                  Agreement
      and Plan of Reorganization among Bridge Capital Holdings and Bridge Bank
      dated as of October 1, 2004 [incorporated by reference to Exhibit 2.1 to
      the registrant’s Current Report on Form 8-K dated
  10/1/04](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](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](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)
                                  
                                  Sublease
      for premises at 2120 El Camino Real, Santa Clara, California [Incorporated
      by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form
      10-K dated 12/31/04](10.4)
                                  
                                  Bridge
      Capital Holdings 2006 Equity Incentive Plan [Incorporated by reference to
      Annex A to the Registrant’s Proxy Statement dated
  04/07/06](10.5)
                                  
                                  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](10.6)
                                  
                                  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]




83





(10.7)
                
                Lease
      for banking office located at 3035 Prospect Park Drive, Suite 100, Rancho
      Cordova, County of Sacramento, State of California [Incorporated by
      reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K
      dated 12/31/04](10.8)
                
                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](10.9)
                
                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]**(10.10)
                
                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](10.11)
                
                Employment
      Agreements between Bridge Capital Holdings and Daniel P. Myers, Thomas A.
      Sa, Timothy W. Boothe, Robert P. Gionfriddo, and Kenneth B. Silveira
      [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]**(10.12)
                
                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]**(10.13)
                
                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]**(10.14)
                
                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]**(10.15)
                
                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](10.16)
                
                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](10.17)
                
                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](10.18)
                
                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](10.19)
                
                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](10.20)
                
                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](10.21)
                
                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]




84





(10.22)
              
              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](10.23)
              
              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](10.24)
              
              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](10.25)
              
              Form
      of Consent, executed by each of Daniel P. Myers, Thomas A. Sa, Timothy W.
      Boothe, Robert P. Gionfriddo, and Kenneth B. Silveira [incorporated by
      reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K
      dated 12/24/08] **(10.26)
              
              Form
      of Waiver, executed by each of Daniel P. Myers, Thomas A. Sa, Timothy W.
      Boothe, Robert P. Gionfriddo, and Kenneth B. Silveira [incorporated by
      reference to Exhibit 10.4 of the registrant’s Current Report on Form 8-K
      dated 12/24/08] **(21)
              
              Subsidiaries(23.1)
              
              Consent
      of Independent Registered Public Accounting Firm – Vavrinek, Trine, Day
      & Co., LLP(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





**Management
contract or compensatory plan or arrangement


85