UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549





FORM
10-Q





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


For
the Quarterly Period Ended: June 30, 2010





OR





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


For
the Transition Period From ____________ to _____________





000-50914


(Commission
File Number)





Bridge Capital
Holdings


(Exact
name of registrant as specified in its charter)





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





55 Almaden Boulevard, San
Jose, CA   95113


(Address
of principal executive offices, including zip code)





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





Bridge
Bank, N.A. (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 whether registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer”, “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):





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





Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).


Yes  ̈  No
x





The number of shares of Common Stock
outstanding as of August 1, 2010:  10,942,307








TABLE
OF CONTENTS





PART I - FINANCIAL
    INFORMATIONItem
      1
                                Financial
      StatementsInterim
      Consolidated Balance Sheets
                                4Interim
      Consolidated Statements of Operations
                                5Interim
      Consolidated Statements of Cash Flows
                                6Notes
      to Interim Consolidated Financial Statements
                                7Item
      2
                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                19Item
      3
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                43Item
      4
                                Controls
      and Procedures
                                45PART II - OTHER INFORMATIONItem
      1
                                Legal
      Proceedings
                                46Item
      1A
                                Risk
      Factors
                                46Item
      2
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                46Item
      3
                                Defaults
      Upon Senior Securities
                                46Item
      4
                                Submission
      of Matters to a Vote of Security Holders
                                46Item
      5
                                Other
      Information
                                46Item
      6
                                Exhibits
                                46Signatures
                                47Index
      to Exhibits
                                48


2





FORWARD-LOOKING
STATEMENTS





IN ADDITION TO THE HISTORICAL
INFORMATION, THIS QUARTERLY 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
QUARTERLY 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
MARGIN; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,
ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A
DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT; (5)
CHANGES IN BUSINESS CONDITIONS AND INFLATION; (6) COSTS AND EXPENSES OF
COMPLYING WITH THE INTERNAL CONTROL PROVISIONS OF THE SARBANES-OXLEY ACT AND OUR
DEGREE OF SUCCESS IN ACHIEVING COMPLIANCE; (7) CHANGES IN SECURITIES MARKETS;
(8) FUTURE CREDIT LOSS EXPERIENCE; (9) CIVIL DISTURBANCES OR TERRORIST THREATS
OR ACTS, OR APPREHENSION ABOUT POSSIBLE FUTURE OCCURANCES OF ACTS OF THIS TYPE;
AND (10) THE INVOLVEMENT OF THE UNITED STATES IN WAR OR OTHER
HOSTILITIES.   THEREFORE,THE INFORMATION IN THIS QUARTERLY
REPORT SHOULD BE CAREFULLY CONSIDERED 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’s primary operations and most of its customers are located in
California. Other events, including those of September 11, 2001, have increased
the uncertainty related to the national and California economic outlook and
could have an effect on the future operations of the Company or its customers,
including borrowers. 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.





The
reader should refer to the more complete discussion of such risks in the
Company’s Annual Reports on Form 10-K.


3


PART
I - FINANCIAL INFORMATION





ITEM
1 – FINANCIAL STATEMENTS





BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Balance Sheets


(dollars
in thousands)





(unaudited)June 30,
                      
                      
                      December 31,2010
                      
                      
                      2009ASSETSCash
      and due from banks
                      
                      $
                      20,688
                      
                      
                      $
                      14,893Federal
      funds sold
                      
                      
                      131,955
                      
                      
                      
                      104,260Total
      cash and equivalents
                      
                      
                      152,643
                      
                      
                      
                      119,153Interest
      bearing deposits in other banks
                      
                      
                      5,658
                      
                      
                      
                      9,980Investment
      securities available for sale
                      
                      
                      125,591
                      
                      
                      
                      105,005Loans,
      net of allowance for credit losses of $15,137 at June 30, 2010 and $16,012
      at December 31, 2009
                      
                      
                      578,955
                      
                      
                      
                      558,977Premises
      and equipment, net
                      
                      
                      3,018
                      
                      
                      
                      3,566Other
      real estate owned
                      
                      
                      7,833
                      
                      
                      
                      6,509Accrued
      interest receivable
                      
                      
                      3,098
                      
                      
                      
                      2,829Other
      assets
                      
                      
                      38,571
                      
                      
                      
                      38,048Total
      assets
                      
                      $
                      915,367
                      
                      
                      $
                      844,067LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Demand
      noninterest-bearing
                      
                      $
                      361,980
                      
                      
                      $
                      333,171Demand
      interest-bearing
                      
                      
                      5,410
                      
                      
                      
                      4,830Savings
                      
                      
                      343,886
                      
                      
                      
                      275,850Time
                      
                      
                      63,108
                      
                      
                      
                      91,195Total
      deposits
                      
                      
                      774,384
                      
                      
                      
                      705,046Junior
      subordinated debt securities
                      
                      
                      17,527
                      
                      
                      
                      17,527Accrued
      interest payable
                      
                      
                      134
                      
                      
                      
                      121Other
      liabilities
                      
                      
                      11,541
                      
                      
                      
                      12,059Total
      liabilities
                      
                      
                      803,586
                      
                      
                      
                      734,753Commitments
      and contingencies
                      
                      
                      -
                      
                      
                      
                      -SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; 10,000,000 shares authorized;23,864
      shares issued and outstanding at June 30, 2010 and
                      
                      
                      23,864
                      
                      
                      
                      53,864323,864
      shares issued and outstanding at December 31, 2009Common
      stock, no par value; 30,000,000 shares authorized;10,931,577
      shares issued and outstanding at June 30, 2010;7,098,164
      shares issued and outstanding at December 31, 2009;
                      
                      
                      69,847
                      
                      
                      
                      37,293Additional
      paid in capital
                      
                      
                      4,006
                      
                      
                      
                      3,626Retained
      earnings
                      
                      
                      14,910
                      
                      
                      
                      15,148Accumulated
      other comprehensive (loss) income
                      
                      
                      (846
                      )
                      
                      
                      (617
                      )Total
      shareholders' equity
                      
                      
                      111,781
                      
                      
                      
                      109,314Total
      liabilities and shareholders' equity
                      
                      $
                      915,367
                      
                      
                      $
                      844,067





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


4





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Statements of Operations (unaudited)


(dollars
in thousands)





Three
      months ended
                      
                      
                      Six
      months endedJune 30,
                      
                      
                      June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009INTEREST
      INCOME:Loans
                      
                      $
                      10,298
                      
                      
                      $
                      11,263
                      
                      
                      $
                      20,404
                      
                      
                      $
                      23,037Federal
      funds sold
                      
                      
                      63
                      
                      
                      
                      82
                      
                      
                      
                      122
                      
                      
                      
                      194Investment
      securities available for sale
                      
                      
                      592
                      
                      
                      
                      29
                      
                      
                      
                      1,139
                      
                      
                      
                      29Interest
      bearing deposits in other banks
                      
                      
                      37
                      
                      
                      
                      102
                      
                      
                      
                      82
                      
                      
                      
                      176Total
      interest income
                      
                      
                      10,990
                      
                      
                      
                      11,476
                      
                      
                      
                      21,747
                      
                      
                      
                      23,436INTEREST
      EXPENSE:Deposits:Interest-bearing
      demand
                      
                      
                      2
                      
                      
                      
                      1
                      
                      
                      
                      4
                      
                      
                      
                      2Money
      market and savings
                      
                      
                      316
                      
                      
                      
                      532
                      
                      
                      
                      674
                      
                      
                      
                      1,314Certificates
      of deposit
                      
                      
                      202
                      
                      
                      
                      904
                      
                      
                      
                      483
                      
                      
                      
                      1,952Other
                      
                      
                      315
                      
                      
                      
                      346
                      
                      
                      
                      556
                      
                      
                      
                      825Total
      interest expense
                      
                      
                      835
                      
                      
                      
                      1,783
                      
                      
                      
                      1,717
                      
                      
                      
                      4,093Net
      interest income
                      
                      
                      10,155
                      
                      
                      
                      9,693
                      
                      
                      
                      20,030
                      
                      
                      
                      19,343Provision
      for credit losses
                      
                      
                      1,150
                      
                      
                      
                      4,000
                      
                      
                      
                      2,400
                      
                      
                      
                      7,650Net
      interest income after provision for credit losses
                      
                      
                      9,005
                      
                      
                      
                      5,693
                      
                      
                      
                      17,630
                      
                      
                      
                      11,693NON-INTEREST
      INCOME:Service
      charges on deposit accounts
                      
                      
                      578
                      
                      
                      
                      476
                      
                      
                      
                      1,123
                      
                      
                      
                      896International
      fee income
                      
                      
                      478
                      
                      
                      
                      423
                      
                      
                      
                      906
                      
                      
                      
                      822Gain
      on sale of SBA loans
                      
                      
                      3
                      
                      
                      
                      287
                      
                      
                      
                      3
                      
                      
                      
                      391Other
      non interest income
                      
                      
                      644
                      
                      
                      
                      1,140
                      
                      
                      
                      1,297
                      
                      
                      
                      4,221Total
      non-interest income
                      
                      
                      1,703
                      
                      
                      
                      2,326
                      
                      
                      
                      3,329
                      
                      
                      
                      6,330OPERATING
      EXPENSES:Salaries
      and benefits
                      
                      
                      5,013
                      
                      
                      
                      5,101
                      
                      
                      
                      10,297
                      
                      
                      
                      10,668Premises
      and fixed assets
                      
                      
                      1,017
                      
                      
                      
                      1,104
                      
                      
                      
                      2,069
                      
                      
                      
                      2,218Other
                      
                      
                      3,629
                      
                      
                      
                      3,138
                      
                      
                      
                      6,946
                      
                      
                      
                      5,920Total
      operating expenses
                      
                      
                      9,659
                      
                      
                      
                      9,343
                      
                      
                      
                      19,312
                      
                      
                      
                      18,806Income
      (loss) before income taxes
                      
                      
                      1,049
                      
                      
                      
                      (1,324
                      )
                      
                      
                      1,647
                      
                      
                      
                      (783
                      )Income
      taxes
                      
                      
                      294
                      
                      
                      
                      (482
                      )
                      
                      
                      527
                      
                      
                      
                      (274
                      )Net
      income (loss)
                      
                      $
                      755
                      
                      
                      $
                      (842
                      )
                      
                      $
                      1,120
                      
                      
                      $
                      (509
                      )Preferred
      dividends
                      
                      
                      298
                      
                      
                      
                      1,057
                      
                      
                      
                      1,358
                      
                      
                      
                      2,074Net
      income (loss) available to common shareholders
                      
                      
                      457
                      
                      
                      
                      (1,899
                      )
                      
                      
                      (238
                      )
                      
                      
                      (2,583
                      )Basic
      income (loss) per share
                      
                      $
                      0.04
                      
                      
                      $
                      (0.29
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.39
                      )Diluted
      income (loss) per share
                      
                      $
                      0.04
                      
                      
                      $
                      (0.29
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.39
                      )Average
      common shares outstanding
                      
                      
                      10,300,576
                      
                      
                      
                      6,571,479
                      
                      
                      
                      8,449,036
                      
                      
                      
                      6,571,479Average
      common and equivalent shares outstanding
                      
                      
                      10,790,051
                      
                      
                      
                      6,571,479
                      
                      
                      
                      8,449,036
                      
                      
                      
                      6,571,479





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


5





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Statements of Cash Flows (unaudited)


(dollars
in thousands)





Six months ended June 30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                
                $
                1,120
                
                
                $
                (509
                )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for credit losses
                
                
                2,400
                
                
                
                7,650Depreciation
      and amortization
                
                
                1,331
                
                
                
                854Stock
      based compensation
                
                
                614
                
                
                
                746Loans
      originated for sale
                
                
                (11,329
                )
                
                
                (2,163
                )Proceeds
      from loan sales
                
                
                145
                
                
                
                14,193Gain
      on sale of securities
                
                
                164
                
                
                
                -Increase
      (decrease) in accrued interest receivable and other assets
                
                
                968
                
                
                
                (1,006
                )(Decrease)
      increase in accrued interest payable and other liabilities
                
                
                (2,871
                )
                
                
                3,465Net
      cash (used in) provided by operating activities
                
                
                (7,458
                )
                
                
                23,230CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of securities available for sale
                
                
                (73,843
                )
                
                
                (32,517
                )Proceeds
      from sale of securities available for sale
                
                
                21,142
                
                
                
                -Proceeds
      from maturity of securities available for sale
                
                
                32,137
                
                
                
                -Proceeds
      from the sale of other real estate owned
                
                
                4,820
                
                
                
                -Net
      (increase) decrease in loans
                
                
                (17,929
                )
                
                
                68,831Net
      decrease (increase) in interest bearing deposits in other
      banks
                
                
                4,322
                
                
                
                (17,237
                )Purchase
      of fixed assets
                
                
                (153
                )
                
                
                (176
                )Net
      cash (used in) provided by investing activities
                
                
                (29,504
                )
                
                
                18,901CASH
      FLOW FROM FINANCING ACTIVITIES:Net
      increase (decrease) in deposits
                
                
                69,338
                
                
                
                (88,125
                )(Decrease)
      in other borrowings
                
                
                -
                
                
                
                (30,000
                )Common
      stock issued
                
                
                32,349
                
                
                
                -Conversion
      of preferred stock
                
                
                (30,000
                )
                
                
                -Payment
      of cash dividends
                
                
                (1,206
                )
                
                
                (1,057
                )Preferred
      stock issuance costs
                
                
                (29
                )
                
                
                (100
                )Net
      cash provided by (used in) financing activities
                
                
                70,452
                
                
                
                (119,282
                )NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
                
                
                33,490
                
                
                
                (77,151
                )Cash
      and equivalents at beginning of period
                
                
                119,153
                
                
                
                217,946Cash
      and equivalents at end of period
                
                $
                152,643
                
                
                $
                140,795OTHER
      CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                1,136
                
                
                $
                3,148Cash
      paid for income taxes
                
                $
                954
                
                
                $
                16NON-CASH
      INVESTING ACTIVITIES:Loans
      transferred to other real estate owned
                
                $
                6,735
                
                
                $
                2,530





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


6





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Notes
to Interim Consolidated Financial Statements (Unaudited)





1.
            Summary
      of Significant Accounting Policies





Basis
of Presentation





The
accompanying unaudited financial statements of Bridge Capital Holdings and
Bridge Bank, N.A. have been prepared in accordance with generally accepted
accounting principles and pursuant to the rules and regulations of the
SEC.  The interim financial data as of June 30, 2010 and for the three
and six months ended June 30, 2010 and 2009 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.   Certain information and note
disclosures normally included in annual financial statements have been omitted
pursuant to SEC rules and regulations; however, the Company believes the
disclosures made are adequate to ensure that the information presented is not
misleading.  Results of operations for the quarters and six months
ended June 30, 2010 and 2009 are not necessarily indicative of full year
results.





The
comparative balance sheet information as of December 31, 2009 is derived from
the audited financial statements; however, it does not include all disclosures
required by accounting principles generally accepted in the United States of
America.





Use
of Estimates





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





Recent
Accounting Pronouncements





In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements.  The
amendments remove the requirement for an SEC registrant to disclose the date
through which subsequent events were evaluated as this requirement would have
potentially conflicted with SEC reporting requirements.  Removal of
the disclosure requirement is not expected to affect the nature or timing of
subsequent events evaluations performed by the Company.  This ASU
became effective upon issuance.





In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.  ASU 2010-06 which added disclosure requirements about
significant transfers into and out of Levels 1 and 2, clarified existing fair
value disclosure requirements about the appropriate level of disaggregation, and
clarified that a description of the valuation techniques and inputs used to
measure fair value was required for recurring and nonrecurring Level 2 and 3
fair value measurements.  The Company adopted these provisions of the
ASU in preparing the Consolidated Financial Statements for the period ended
March 31, 2010.  The adoption of these provisions of this ASU, which
was subsequently codified into Accounting Standards Codification Topic 820,
“Fair Value Measurements and Disclosures,” only affected the disclosure
requirements for fair value measurements and as a result had no impact on the
Company’s statements of income and condition.  See Note 8 to the
Consolidated Financial Statements for the disclosures required by this
ASU.





This ASU
also requires that Level 3 activity about purchases, sales, issuances, and
settlements be presented on a gross basis rather than as a net number as
currently permitted.  This provision of the ASU is effective for the
Company’s reporting period ending March 31, 2011. As this provision amends only
the disclosure requirements for fair value measurements, the adoption will have
no impact on the Company’s statements of income and condition.


7





FASB ASU
2010-18, Effect of a Loan Modification When the Loan is Part of a Pool that is
Accounted for as a Single Asset (Topic 310), was issued April 2010 and is
effective for modifications of loans accounted for within pools under Subtopic
310-30 occurring in the first interim or annual period ending after
July 15, 2010. As a result of the amendments in this Update, modification
of loans within the pool does not result in the removal of those loans from the
pool even if the modification of those loans would otherwise be considered a
trouble debt restructuring. An entity will continue to be required to consider
whether the pool of assets in which the loan is included is impaired if expected
cash flows for the pool change. However, loans within the scope of Subtopic
310-30 that are accounted for individually will continue to be subject to the
troubled debt restructuring accounting provisions.





The
provisions of this Update will be applied prospectively with early application
permitted. Upon initial adoption of the guidance in this Update, an entity may
make a one-time election to terminate accounting for loans as a pool under
Subtopic 310-30. The election may be applied on a pool-by-pool basis and does
not preclude an entity from applying pool accounting to subsequent acquisitions
of loans with credit deterioration.





The
Company does not have any pools of loans accounted for in accordance with
Subtopic 310-30, and therefore, the adoption of this Update will not have a
significant effect on the Company’s financial statements.





FASB ASU
2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses (Topic 310), was issued July 2010. The guidance
will significantly expand the disclosures that the Company must make about the
credit quality of financing receivables and the allowance for credit losses. The
objectives of the enhanced disclosures are to provide financial statement users
with additional information about the nature of credit risks inherent in the
Company’s financing receivables, how credit risk is analyzed and assessed when
determining the allowance for credit losses, and the reasons for the change in
the allowance for credit losses.





The
disclosures as of the end of the reporting period are effective for the
Company’s interim and annual periods ending on or after December 15, 2010.
The disclosures about activity that occurs during a reporting period are
effective for the Company’s interim and annual periods beginning on or after
December 15, 2010. The adoption of this Update requires enhanced
disclosures and is not expected to have a significant effect on the Company’s
financial statements.





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 or warrants and vesting of
restricted stock.  Common stock equivalents are included in the
diluted net income per share calculation to the extent these shares are
dilutive.  See Note 2 to the financial statements for additional
information on earnings per share.





Stock-Based
Compensation





The
Company has adopted guidance issued by the FASB that clarifies the accounting
for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments.  The Company uses the Black-Scholes-Merton (“BSM”)
option-pricing model to determine the fair-value of stock-based
awards.  The Company recorded an incremental $270,000 ($221,000 net of
tax) and $615,000 ($483,000 net of tax) of stock-based compensation expense
during the three and six months ended June 30, 2010, respectively, and
recorded an incremental $379,000 ($305,000 net of tax) and $746,000 ($602,000
net of tax) of stock-based compensation expense during the three and six months
ended June 30, 2009, respectively, as a result of the adoption of the guidance
issued by the FASB.




No
stock-based compensation costs were capitalized as part of the cost of an asset
as of June 30, 2010.   As of June 30, 2010, $3.0 million of total
unrecognized compensation cost related to stock options and restricted stock
units are expected to be recognized over a weighted-average period of 3.3
years.





Stock-based
compensation reduced basic earnings per share by $0.03 and $0.05 and diluted
earnings per share by $0.02 and $0.05 for the three months ended June 30, 2010
and 2009, respectively.  Stock-based compensation reduced basic
earnings per share by $0.07 and $0.09 and diluted earnings per share by $0.07
and $0.09 for the six months ended June 30, 2010 and 2009,
respectively.


8





Comprehensive
Income





The
Company has adopted accounting guidance issued by the FASB that requires all
items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. 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 an adjustment to fully recognize the liability associated with the
supplemental executive retirement plan, unrealized gains and losses, net of tax,
on cash flow hedges and unrealized gains and losses, net of tax, on marketable
securities classified as available-for-sale.  The Company had a
cumulative other comprehensive loss totaling $(846,000), net of tax, as of June
30, 2010 and a cumulative other comprehensive loss totaling $(617,000), net of
tax, as of December 31, 2009.





Three months ended
                
                
                Six months ended(dollars
      in thousands)
                
                June 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income (loss)
                
                $
                755
                
                
                $
                (842
                )
                
                $
                1,120
                
                
                $
                (509
                )Other
      comprehensive earnings (loss) -Net
      unrealized gains (losses) on securities available for sale
                
                
                163
                
                
                
                -
                
                
                
                490
                
                
                
                -Net
      unrealized gains (losses) on supplemental executive retirement
      plan
                
                
                6
                
                
                
                13
                
                
                
                13
                
                
                
                13Net
      unrealized gains (losses) on cash flow hedges
                
                
                (450
                )
                
                
                (1,763
                )
                
                
                (732
                )
                
                
                (1,763
                )Total
      comprehensive income (loss)
                
                $
                474
                
                
                $
                (2,592
                )
                
                $
                891
                
                
                $
                (2,259
                )




Segment
Information





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





Derivative
Instruments and Hedging Activities





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





As
required by the guidance, the Company records all derivatives on the balance
sheet at fair value.  The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether the Company
has elected to designate a derivative in a hedging relationship and apply hedge
accounting and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and qualified as a
hedge of the exposure to changes in the fair value of an asset, liability, or
firm commitment attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives designated and that qualify as a
hedge of the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. Hedge
accounting generally provides for the matching of the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk in a fair value hedge or the earnings effect of the hedged forecasted
transactions in a cash flow hedge.  The Company may enter into
derivative contracts that are intended to economically hedge certain of its
risks, even though hedge accounting does not apply or the Company elects not to
apply hedge accounting under current accounting guidance.  See Note 9
to the financial statements for additional information on derivative instruments
and hedging activities.


9




2.
            Earnings
      Per Share





Basic net
earnings per share is computed by dividing net earnings applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net earnings per share is determined using the
weighted average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options or warrants and vesting of
restricted stock.  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:





Three months ended
                
                
                Six months ended(dollars
      in thousands,
                
                June 30,
                
                
                June 30,except
      per share amounts)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income (loss)
                
                $
                755
                
                
                $
                (842
                )
                
                $
                1,120
                
                
                $
                (509
                )Less:Dividends
      on preferred shares
                
                
                (298
                )
                
                
                (1,057
                )
                
                
                (1,358
                )
                
                
                (2,074
                )Net
      income (loss) available for common shareholders
                
                
                457
                
                
                
                (1,899
                )
                
                
                (238
                )
                
                
                (2,583
                )Weighted
      average shares:Basic
      common shares
                
                
                10,300,576
                
                
                
                6,571,479
                
                
                
                8,449,036
                
                
                
                6,571,479Diluted
      potential common shares related to stock options, restricted stock, and
      preferred stock
                
                
                489,475
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      average common equivalent shares
                
                
                10,790,051
                
                
                
                6,571,479
                
                
                
                8,449,036
                
                
                
                6,571,479Basic
      earnings (loss) per share
                
                $
                0.04
                
                
                $
                (0.29
                )
                
                $
                (0.03
                )
                
                $
                (0.39
                )Diluted
      earnings (loss) per share
                
                $
                0.04
                
                
                $
                (0.29
                )
                
                $
                (0.03
                )
                
                $
                (0.39
                )


10




3.
            Securities




The
amortized cost and approximate fair values of securities at June 30, 2010 and
December 31, 2009 are as follows:





(dollars in thousands)
                
                As of June 30, 2010Gross Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                ValueU.S.
      government agencies
                
                $
                81,231
                
                
                $
                464
                
                
                $
                (2
                )
                
                $
                81,693Mortgage
      backed securities
                
                
                20,176
                
                
                
                203
                
                
                
                (8
                )
                
                
                20,371Collateralized
      mortgage obligations
                
                
                15,543
                
                
                
                8
                
                
                
                (37
                )
                
                
                15,514Corporate
      bonds
                
                
                8,080
                
                
                
                -
                
                
                
                (67
                )
                
                
                8,013Total
      securities available for sale
                
                
                125,030
                
                
                
                675
                
                
                
                (114
                )
                
                
                125,591Total
      investment securities
                
                $
                125,030
                
                
                $
                675
                
                
                $
                (114
                )
                
                $
                125,591





As of December 31, 2009Gross Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                ValueU.S.
      government agency notes
                
                $
                80,324
                
                
                $
                259
                
                
                $
                (306
                )
                
                $
                80,277Mortgage
      backed securities
                
                
                19,938
                
                
                
                8
                
                
                
                (86
                )
                
                
                19,860Collateralized
      mortgage obligations
                
                
                4,998
                
                
                
                -
                
                
                
                (130
                )
                
                
                4,868Corporate
      bonds
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      securities available for sale
                
                
                105,260
                
                
                
                267
                
                
                
                (522
                )
                
                
                105,005Total
      investment securities
                
                $
                105,260
                
                
                $
                267
                
                
                $
                (522
                )
                
                $
                105,005




The
scheduled maturities of securities available for sale at June 30, 2010 and
December 31, 2009 were as follows:





(dollars in thousands)
                  
                  June 30, 2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  23,671
                  
                  
                  $
                  23,724Due
      after one year through five years
                  
                  
                  84,999
                  
                  
                  
                  85,465Due
      after five years through ten years
                  
                  
                  1,081
                  
                  
                  
                  1,087Due
      after ten years
                  
                  
                  15,279
                  
                  
                  
                  15,315Total
      investment securities
                  
                  $
                  125,030
                  
                  
                  $
                  125,591





December 31, 2009Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  -
                  
                  
                  $
                  -Due
      after one year through five years
                  
                  
                  101,964
                  
                  
                  
                  101,710Due
      after five years through ten years
                  
                  
                  3,296
                  
                  
                  
                  3,295Due
      after ten years
                  
                  
                  -
                  
                  
                  
                  -Total
      investment securities
                  
                  $
                  105,260
                  
                  
                  $
                  105,005


11





As of
June 30, 2010 and December 31, 2009, no investment securities were pledged as
collateral.   As of June 30, 2010 there was $(64,000) in
unrealized losses attributable to securities maturing in greater that 12
months.  As of December 31, 2009 there were no unrealized losses
attributable to securities maturing in greater than 12
months.   As of June 20, 2010 and December 31, 2009 no securities
had been carried with an unrealized loss for over 12 months.




4.
            Loans




The
balances in the various loan categories are as follows as of June 30, 2010 and
December 31, 2009:




June 30,
                
                
                December 31,(dollars in thousands)
                
                2010
                
                
                2009Commercial
                
                $
                238,288
                
                
                $
                253,776Real
      estate construction
                
                
                37,322
                
                
                
                20,601Land
      loans
                
                
                10,202
                
                
                
                12,763Real
      estate other
                
                
                144,433
                
                
                
                149,617Factoring
      and asset based lending
                
                
                102,774
                
                
                
                66,660SBA
                
                
                58,198
                
                
                
                67,629Other
                
                
                4,456
                
                
                
                5,395Total
      gross loans
                
                
                595,673
                
                
                
                576,441Unearned
      fee income
                
                
                (1,581
                )
                
                
                (1,452
                )Total
      loan portfolio
                
                
                594,092
                
                
                
                574,989Less
      allowance for credit losses
                
                
                (15,137
                )
                
                
                (16,012
                )Loans,
      net
                
                $
                578,955
                
                
                $
                558,977




5.
            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, generally three to
fifteen years, or the estimated useful lives of the assets, generally three to
five years.





Premises
and equipment at June 30, 2010 and December 31, 2009 are comprised of the
following:





(dollars in thousands)
                
                June 30, 2010Accumulated
                
                
                Net BookCost
                
                
                Depreciation
                
                
                ValueLeasehold
      improvements
                
                $
                5,412
                
                
                $
                (3,181
                )
                
                $
                2,231Furniture
      and fixtures
                
                
                1,078
                
                
                
                (909
                )
                
                
                169Capitalized
      software
                
                
                3,105
                
                
                
                (2,767
                )
                
                
                338Equipment
                
                
                2,285
                
                
                
                (2,005
                )
                
                
                280Construction
      in process
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                $
                11,880
                
                
                $
                (8,862
                )
                
                $
                3,018





December 31, 2009Accumulated
                
                
                Net bookCost
                
                
                Depreciation
                
                
                ValueLeasehold
      improvements
                
                $
                5,398
                
                
                $
                (2,854
                )
                
                $
                2,544Furniture
      and fixtures
                
                
                1,059
                
                
                
                (863
                )
                
                
                196Capitalized
      software
                
                
                3,089
                
                
                
                (2,560
                )
                
                
                529Equipment
                
                
                2,166
                
                
                
                (1,869
                )
                
                
                297Construction
      in process
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                $
                11,712
                
                
                $
                (8,146
                )
                
                $
                3,566


12


6.
            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 California.  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 5.90% 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.





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





Other
Borrowings





There
were no other borrowings at June 30, 2010 and December 31, 2009.





As of
June 30, 2010, the Company had a total borrowing capacity with the Federal Home
Loan Bank of San Francisco of approximately $129.0 million for which the Company
had collateral in place to borrow $37.0 million.  As of June 30, 2010,
$12.0 million of this borrowing capacity was pledged to secure a letter of
credit.





The Bank
also has unsecured borrowing lines with correspondent banks totaling $25.0
million.  At June 30, 2010, there were no balances outstanding on
these lines.




7.
            Stock-Based
      Compensation





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 the three month periods ended June 30,
2010 and 2009 and the resulting estimates of weighted-average fair value per
share of stock options granted during those periods are as
follows:


13





Three months ended June 30,
                
                
                Six months ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Expected
      life
                
                75
      months
                
                
                75
      months
                
                
                75
      months
                
                
                75
      monthsStock
      volatility
                
                
                45.00
                %
                
                
                28.00
                %
                
                
                45.00
                %
                
                
                28.00
                %Risk
      free interest rate
                
                
                2.33
                %
                
                
                2.00
                %
                
                
                2.61
                %
                
                
                2.00
                %Dividend
      yield
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %Fair
      value per share - option awards
                
                $
                4.43
                
                
                $
                -
                
                
                $
                3.58
                
                
                $
                1.58




8.
            Fair
      Value of Financial Instruments





In
accordance with accounting guidance, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.  These levels
are:





Level 1 –
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange.  Level 1 also includes U.S. Treasury,
other U.S. government and agency mortgage-backed securities that are traded by
dealers or brokers in active markets.  Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.





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 June 30, 2010Total
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Securities
      available for sale
                
                
                125,591
                
                
                $
                -
                
                
                $
                125,591
                
                
                $
                -Cash
      flow hedge
                
                
                (1,801
                )
                
                
                -
                
                
                
                (1,801
                )
                
                
                -Warrant
      portfolio
                
                
                747
                
                
                
                -
                
                
                
                -
                
                
                
                747Total
                
                $
                124,537
                
                
                $
                -
                
                
                $
                123,790
                
                
                $
                747





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


14





The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis were not material for the quarter ended June 30, 2010.





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 as
of June 30, 2010 and December 31, 2009 included impaired loans of $21.9 million
and $17.0 million, respectively and other real estate owned of $7.8 million and
$6.5 million, respectively.  The Company charged-off $2.5 million and
$4.6 million during the quarter and six months ended June 30, 2010,
respectively, as a result of impaired loans.





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





The
following table presents the carrying amount and estimated fair value of certain
assets and liabilities of the Company at June 30, 2010 and December 31,
2009.  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)
                
                June 30, 2010
                
                
                December 31, 2009Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairValue
                
                
                Value
                
                
                Value
                
                
                ValueFinancial
      assets:Cash
      and due from banks
                
                $
                20,688
                
                
                $
                20,688
                
                
                $
                14,893
                
                
                $
                14,893Federal
      funds sold
                
                
                131,955
                
                
                
                131,955
                
                
                
                104,260
                
                
                
                104,260Interest
      bearing deposits in other banks
                
                
                5,658
                
                
                
                5,671
                
                
                
                9,980
                
                
                
                9,954Investments
      securities
                
                
                125,591
                
                
                
                125,591
                
                
                
                105,005
                
                
                
                105,005Loans
      and leases, gross
                
                
                594,092
                
                
                
                602,118
                
                
                
                574,989
                
                
                
                589,748Bank
      owned life insurance
                
                
                10,199
                
                
                
                10,199
                
                
                
                10,001
                
                
                
                10,001Cash
      flow hedge
                
                
                (1,801
                )
                
                
                (1,801
                )
                
                
                (776
                )
                
                
                (776
                )Financial
      liabilities:Deposits
                
                
                774,384
                
                
                
                772,708
                
                
                
                705,046
                
                
                
                703,362Trust
      preferred securities
                
                
                17,527
                
                
                
                17,909
                
                
                
                17,527
                
                
                
                8,058Other
      borrowings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -





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.





9.
            Derivatives
      and Hedging Activities





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


15


Fair
Values of Derivative Instruments on the Balance Sheet





The table
below presents the fair value of the Company’s derivative instruments that were
liabilities, as well as their classification on the balance sheet, as of June
30, 2010 and December 31, 2009.  The Company did not have any
derivative instruments that were assets as of June 30, 2010 and December 31,
2009.





(dollars in thousands)Fair ValueDerivatives Designated as Hedging
                      
                      Balance Sheet
                      
                      June 30,
                      
                      
                      December 31,Instruments Under SFAS 133
                      
                      Location
                      
                      2010
                      
                      
                      2009Interest
      rate contracts
                      
                      Other
      liabilities
                      
                      $
                      1,801
                      
                      
                      $
                      776Total
      hedged derivatives
                      
                      
                      
                      $
                      1,801
                      
                      
                      $
                      776





Cash
Flow Hedges of Interest Rate Risk





The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate swaps as part of its interest rate risk management strategy.  For
hedges of the Company’s variable-rate loan assets, interest rate swaps
designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for the Company making variable-rate payments over the
life of the agreements without exchange of the underlying notional
amount.  For hedges of the Company’s variable-rate borrowings,
interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for the Company making
fixed-rate payments. As of June 30, 2010, the Company had two interest rate
swaps with an aggregate notional amount of $17.5 million that were designated as
cash flow hedges of interest rate risk associated with the Company’s
variable-rate borrowings.





The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive
Income (“AOCI”) and is subsequently reclassified into earnings in the period
that the hedged forecasted transaction affects earnings. During the three and
six months ended June 30, 2010 such derivatives were used to hedge the
forecasted variable cash outflows associated with subordinated debt related to
trust preferred securities.  During the three months ended June 30,
2010 and 2009, the amount of pre-tax gain/(loss) recorded in AOCI due to the
effective portion of changes in fair value of derivatives designated as cash
flow hedges was $(778,000) and $759,000, respectively.  During the six
months ended June 30, 2010 and 2009, the amount of pre-tax gain/(loss) recorded
in AOCI due to the effective portion of changes in fair value of derivatives
designated as cash flow hedges was $(1.1) million and $858,000,
respectively.  During the three months ended June 30, 2010 and 2009,
$(48,000) and $172,000, respectively was reclassified into earnings related to
the effective portion of cash flow hedges.  During the six months
ended June 30, 2010 and 2009, $8,000 and $352,000, respectively was reclassified
into earnings related to the effective portion of cash flow hedges.





The
ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. No hedge ineffectiveness was recognized during the three
and six months ended June 30, 2010 and 2009.





Amounts
reported in AOCI related to derivatives will be reclassified to interest income
or expense, as applicable, as interest payments are received / made on the
Company’s variable-rate assets/liabilities. During the next twelve months, the
Company estimates that $128,000 will be reclassified as an increase to interest
income and $427,000 will be reclassified as an increase to interest
expense.  During the three and six months ended June 30, 2010 and
2009, the Company accelerated the reclassification of amounts in other
comprehensive income to earnings as a result of the hedged forecasted
transactions related to certain terminated interest rate swaps becoming probable
not to occur.  The accelerated amounts for the three and six months
ended June 30, 2010 were gains of $22,000 and $43,000,
respectively.  The accelerated amounts for the three and six months
ended June 30, 2009 were gains of $161,000 and $2.9 million,
respectively.


16


The
tables below presents the effect of the Company’s derivative financial
instruments, interest rate contracts, on the income statement for the three and
months ended June 30, 2010 and 2009.





(dollars in thousands)
                    
                    Interest Income
                    
                    
                    Non-Interest Income
                    
                    
                    Total IncomeThree months
                      ended June 30,
                    
                    
                    Three months
                      ended June 30,
                    
                    
                    Three months
                      ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Amount
      of gain reclassified from AOCI into income - effective
    portion
                    
                    $
                    (48
                    )
                    
                    $
                    172
                    
                    
                    $
                    22
                    
                    
                    $
                    161
                    
                    
                    $
                    (26
                    )
                    
                    $
                    333Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from effectiveness testing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      derivative income
                    
                    $
                    (48
                    )
                    
                    $
                    172
                    
                    
                    $
                    22
                    
                    
                    $
                    161
                    
                    
                    $
                    (26
                    )
                    
                    $
                    333





Interest Income
                        
                        
                        Non-Interest Income
                        
                        
                        Total IncomeSix months ended
                          June 30,
                        
                        
                        Six months ended
                          June 30,
                        
                        
                        Six months ended
                          June 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Amount
      of gain reclassified from AOCI into income - effective
    portion
                        
                        $
                        8
                        
                        
                        $
                        352
                        
                        
                        $
                        43
                        
                        
                        $
                        2,920
                        
                        
                        $
                        51
                        
                        
                        $
                        3,272Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from effectiveness testing
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      derivative income
                        
                        $
                        8
                        
                        
                        $
                        352
                        
                        
                        $
                        43
                        
                        
                        $
                        2,920
                        
                        
                        $
                        51
                        
                        
                        $
                        3,272





Credit
Risk Related Contingent Features





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





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





As of
June 30, 2010 the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $1.8 million. As of June 30, 2010, the Company
has minimum collateral posting thresholds with certain of its derivative
counterparties and has posted collateral of $1.6 million against its obligations
under these agreements. If the Company had breached any of these provisions at
June 30, 2010, it would have been required to settle its obligations under the
agreements at the termination value.


17




10.
            Preferred
      Stock




On
November 13, 2008, the United States Treasury Department (the Treasury) approved
the Company’s participation in the TARP Capital Purchase Program, subject to the
Company raising additional equity in an amount satisfactory to
Treasury.  On December 4, 2008, investors agreed to purchase $30
million of the Company’s Series B and B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock in a private placement, subject to the Treasury
approving the Company’s participation in the TARP Capital Purchase Program and
its ability to satisfy all legal requirements for selling equity securities to
the Treasury under the program.  Based on discussions with the
Treasury representatives, the Company understood that raising $30 million would
satisfy the requirement that we raise additional equity.  The Company
sold $30 million of our Series B and B-1 Preferred Stock in a private placement
on December 17, 2008 and subsequently sold $23.9 million in TARP securities to
the Treasury on December 23, 2008.  In addition the Company issued a
warrant to the Treasury to purchase up to 396,412 shares of the Company’s common
stock.  On March, 2010, the $30 million of Series B and B-1 Preferred
Stock was converted to common stock.  See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Capital Resources”
for additional preferred and common stock discussion.




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




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




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




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


18


ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





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





Critical
Accounting Policies





Our
accounting policies are integral to understanding the results
reported.  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 control procedures that
are intended to ensure that 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, in economic conditions, in
historical loss experience and in the condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan losses and the associated provision for loan losses.





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





The
Company has the ability and the intent to sell all or a portion of certain SBA
loans in the loan portfolio and, as such, carries the saleable portion of these
loans at the lower of aggregate cost or fair value.  At June 30, 2010
and December 31, 2009, the fair value of SBA loans exceeded aggregate cost and
therefore, SBA loans were carried at aggregate cost.





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


19


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





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


20


Selected
Financial Data





The
following table reflects selected financial data and ratios as of and for the
quarters and six months ended June 30, 2010 and 2009.





(dollars in thousands, except per share data)Three months ended
                            
                            
                            Six months endedJune 30,
                            
                            
                            June 30,Statement
      of Operations Data:
                            
                            2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Interest
      income
                            
                            $
                            10,990
                            
                            
                            $
                            11,476
                            
                            
                            $
                            21,747
                            
                            
                            $
                            23,436Interest
      expense
                            
                            
                            835
                            
                            
                            
                            1,783
                            
                            
                            
                            1,717
                            
                            
                            
                            4,093Net
      interest income
                            
                            
                            10,155
                            
                            
                            
                            9,693
                            
                            
                            
                            20,030
                            
                            
                            
                            19,343Provision
      for credit losses
                            
                            
                            1,150
                            
                            
                            
                            4,000
                            
                            
                            
                            2,400
                            
                            
                            
                            7,650Net
      interest income after provisionfor
      credit losses
                            
                            
                            9,005
                            
                            
                            
                            5,693
                            
                            
                            
                            17,630
                            
                            
                            
                            11,693Other
      income
                            
                            
                            1,703
                            
                            
                            
                            2,326
                            
                            
                            
                            3,329
                            
                            
                            
                            6,330Other
      expenses
                            
                            
                            9,659
                            
                            
                            
                            9,343
                            
                            
                            
                            19,312
                            
                            
                            
                            18,806Income
      (loss) before income taxes
                            
                            
                            1,049
                            
                            
                            
                            (1,324
                            )
                            
                            
                            1,647
                            
                            
                            
                            (783
                            )Income
      taxes
                            
                            
                            294
                            
                            
                            
                            (482
                            )
                            
                            
                            527
                            
                            
                            
                            (274
                            )Net
      income (loss)
                            
                            $
                            755
                            
                            
                            $
                            (842
                            )
                            
                            $
                            1,120
                            
                            
                            $
                            (509
                            )Preferred
      dividends
                            
                            
                            298
                            
                            
                            
                            1,057
                            
                            
                            
                            1,358
                            
                            
                            
                            2,074Net
      Income (loss) available tocommon
      shareholders
                            
                            $
                            457
                            
                            
                            $
                            (1,899
                            )
                            
                            $
                            (238
                            )
                            
                            $
                            (2,583
                            )Per
      Share Data:Basic
      earnings (loss) per share
                            
                            $
                            0.04
                            
                            
                            $
                            (0.29
                            )
                            
                            $
                            (0.03
                            )
                            
                            $
                            (0.39
                            )Diluted
      earnings (loss) per share
                            
                            
                            0.04
                            
                            
                            
                            (0.29
                            )
                            
                            
                            (0.03
                            )
                            
                            
                            (0.39
                            )Shareholders'
      equity per share
                            
                            
                            8.04
                            
                            
                            
                            7.91
                            
                            
                            
                            8.04
                            
                            
                            
                            7.91Cash
      dividend per common share
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Balance
      Sheet Data:Balance
      sheet totals (period-end):Assets
                            
                            $
                            915,367
                            
                            
                            $
                            829,336Loans,
      net
                            
                            
                            578,955
                            
                            
                            
                            587,135Deposits
                            
                            
                            774,384
                            
                            
                            
                            689,121Shareholders'
      equity
                            
                            
                            111,781
                            
                            
                            
                            109,244Average
      balance sheet amounts:Assets
                            
                            $
                            867,267
                            
                            
                            $
                            863,314
                            
                            
                            $
                            855,583
                            
                            
                            $
                            884,540Loans,
      net
                            
                            
                            561,457
                            
                            
                            
                            604,494
                            
                            
                            
                            557,444
                            
                            
                            
                            651,200Deposits
                            
                            
                            725,645
                            
                            
                            
                            713,311
                            
                            
                            
                            714,196
                            
                            
                            
                            726,228Shareholders'
      equity
                            
                            
                            111,272
                            
                            
                            
                            111,008
                            
                            
                            
                            110,517
                            
                            
                            
                            111,835Selected
      Ratios:Return
      on average assets
                            
                            
                            0.35
                            %
                            
                            
                            -0.39
                            %
                            
                            
                            0.26
                            %
                            
                            
                            -0.12
                            %Return
      on average equity
                            
                            
                            2.72
                            %
                            
                            
                            -3.04
                            %
                            
                            
                            2.04
                            %
                            
                            
                            -0.92
                            %Efficiency
      ratio
                            
                            
                            81.46
                            %
                            
                            
                            77.74
                            %
                            
                            
                            82.67
                            %
                            
                            
                            73.25
                            %Risk
      based capital ratio
                            
                            
                            18.68
                            %
                            
                            
                            19.27
                            %Net
      chargeoffs to average gross loans
                            
                            
                            0.37
                            %
                            
                            
                            0.69
                            %
                            
                            
                            0.57
                            %
                            
                            
                            1.26
                            %Allowance
      for loan losses to total loans
                            
                            
                            2.54
                            %
                            
                            
                            2.96
                            %Average
      equity to average assets
                            
                            
                            12.83
                            %
                            
                            
                            12.86
                            %
                            
                            
                            12.92
                            %
                            
                            
                            12.64
                            %




21




Summary
of Financial Results – Quarter ended June 30, 2010





The
Company reported net operating income of $755,000 for the three months ended
June 30, 2010 representing an increase of $1.6 million, compared to a net
operating loss of $(842,000) for the same period one year ago. Net income
available to common shareholders was reduced by preferred dividends of $298,000
and $1.0 million during the second quarter of 2010 and 2009, respectively,
resulting in earnings per diluted share of $0.04 and a loss per diluted share of
$(0.29), respectively.





The table
below highlights the changes in the nature and sources of income and
expense.




Three
      months ended
                                June
      30,
                              
                              
                              Increase(dollars
      in thousands)
                              
                              2010
                              
                              
                              2009
                              
                              
                              (Decrease)Interest
      income
                              
                              $
                              10,990
                              
                              
                              $
                              11,476
                              
                              
                              $
                              (486
                              )Interest
      expense
                              
                              
                              835
                              
                              
                              
                              1,783
                              
                              
                              
                              (948
                              )Net
      interest income
                              
                              
                              10,155
                              
                              
                              
                              9,693
                              
                              
                              
                              462Provision
      for credit losses
                              
                              
                              1,150
                              
                              
                              
                              4,000
                              
                              
                              
                              (2,850
                              )Net
      interest income after provisionfor
      credit losses
                              
                              
                              9,005
                              
                              
                              
                              5,693
                              
                              
                              
                              3,312Other
      income
                              
                              
                              1,703
                              
                              
                              
                              2,326
                              
                              
                              
                              (623
                              )Other
      expenses
                              
                              
                              9,659
                              
                              
                              
                              9,343
                              
                              
                              
                              316Income
      (loss) before income taxes
                              
                              
                              1,049
                              
                              
                              
                              (1,324
                              )
                              
                              
                              2,373Income
      taxes
                              
                              
                              294
                              
                              
                              
                              (482
                              )
                              
                              
                              776Net
      income (loss)
                              
                              $
                              755
                              
                              
                              $
                              (842
                              )
                              
                              $
                              1,597Preferred
      dividends
                              
                              
                              298
                              
                              
                              
                              1,057
                              
                              
                              
                              (759
                              )Net
      income (loss) available tocommon
      shareholders
                              
                              $
                              457
                              
                              
                              $
                              (1,899
                              )
                              
                              $
                              2,356




Net
Interest Income and Margin





Net
interest income, the difference between interest earned on loans and investments
and interest paid on deposits is the principal component of the Company's
earnings.  Net interest income is affected by changes in the nature
and volume of earning assets held during the quarter, the rates earned on such
assets and the rates paid on interest bearing liabilities.





Net
interest income for the quarter ended June 30, 2010 was $10.2 million, which was
comprised of $11.0 million in interest income and $835,000 in interest expense.
Net interest income for the quarter ended June 30, 2009 was $9.7 million, which
was comprised of $11.5 million in interest income and $1.8 million in interest
expense.  Net interest income for the quarter ended June 30, 2010
represented an increase of $462,000 or 4.8% from the same period one year
earlier.





The
composition of the average balance sheet impacts growth in net interest
income.  For the quarter ended June 30, 2010 average earning assets of
$815.3 million represented a decrease of $2.0 million, or 0.02%, compared to
$817.3 million for the same period in 2009.  The Company’s
loan-to-deposit ratio, a measure of leverage, averaged 79.76% during the quarter
ended June 30, 2010, which represented a decrease compared to an average of
87.39% for the same quarter of 2009 as a result of slower loan growth relative
to deposit funding.





Changes
in short-term interest rates also impact growth in net interest income as the
interest rate earned on a majority of the Company’s assets, specifically the
loan portfolio, adjust with changes in short-term market rates.  As
such, the nature of the Company’s balance sheet is that, over time as short-term
interest rates change, income on interest earning assets has a greater impact on
net interest income than interest paid on liabilities.  The Company’s
prime rate averaged 3.25% in the quarters ended June 30, 2010 and June 30,
2009.





22


The
Company’s net interest margin (net interest income divided by average earning
assets) for the quarter ended June 30, 2010 was 5.00% compared to 4.76% in the
same period one year earlier.  The increase in net interest margin
from 2009 to 2010 was primarily a result of a decreased cost of
funds.  The negative impact on the Company’s net interest margin from
the reversal of foregone interest on nonperforming loans was 21 basis points in
the second quarter of 2010 compared to 23 basis points for the same period in
2009.





The
following table details the average balances, interest income and expense and
the effective yields/rates for earning assets and interest-bearing liabilities
for the quarters ended June 30, 2010 and 2009.




Three months ended June 30,(dollars in thousands)
                                  
                                  2010
                                  
                                  
                                  2009Yields
                                  
                                  
                                  Interest
                                  
                                  
                                  
                                  
                                  
                                  Yields
                                  
                                  
                                  InterestAverage
                                  
                                  
                                  or
                                  
                                  
                                  Income/
                                  
                                  
                                  Average
                                  
                                  
                                  or
                                  
                                  
                                  Income/Balance
                                  
                                  
                                  Rates
                                  
                                  
                                  Expense
                                  
                                  
                                  Balance
                                  
                                  
                                  Rates
                                  
                                  
                                  ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                                  
                                  $
                                  578,776
                                  
                                  
                                  
                                  7.1
                                  %
                                  
                                  $
                                  10,298
                                  
                                  
                                  $
                                  623,354
                                  
                                  
                                  
                                  7.2
                                  %
                                  
                                  $
                                  11,263Federal
      funds sold
                                  
                                  
                                  108,423
                                  
                                  
                                  
                                  0.2
                                  %
                                  
                                  
                                  63
                                  
                                  
                                  
                                  165,453
                                  
                                  
                                  
                                  0.2
                                  %
                                  
                                  
                                  82Investment
      securities
                                  
                                  
                                  121,009
                                  
                                  
                                  
                                  2.0
                                  %
                                  
                                  
                                  591
                                  
                                  
                                  
                                  9,161
                                  
                                  
                                  
                                  1.3
                                  %
                                  
                                  
                                  29Other
                                  
                                  
                                  7,120
                                  
                                  
                                  
                                  2.1
                                  %
                                  
                                  
                                  38
                                  
                                  
                                  
                                  19,372
                                  
                                  
                                  
                                  2.1
                                  %
                                  
                                  
                                  102Total
      interest earning assets
                                  
                                  
                                  815,328
                                  
                                  
                                  
                                  5.4
                                  %
                                  
                                  
                                  10,990
                                  
                                  
                                  
                                  817,340
                                  
                                  
                                  
                                  5.6
                                  %
                                  
                                  
                                  11,476Noninterest-earning
      assets:Cash
      and due from banks
                                  
                                  
                                  18,372
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  22,058All
      other assets (3)
                                  
                                  
                                  33,567
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  23,916TOTAL
                                  
                                  $
                                  867,267
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  863,314LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYInterest
      bearing liabilities:Deposits:Demand
                                  
                                  $
                                  5,996
                                  
                                  
                                  
                                  0.1
                                  %
                                  
                                  $
                                  2
                                  
                                  
                                  $
                                  5,221
                                  
                                  
                                  
                                  0.1
                                  %
                                  
                                  $
                                  1Savings
                                  
                                  
                                  306,543
                                  
                                  
                                  
                                  0.4
                                  %
                                  
                                  
                                  316
                                  
                                  
                                  
                                  300,713
                                  
                                  
                                  
                                  0.7
                                  %
                                  
                                  
                                  532Time
                                  
                                  
                                  62,826
                                  
                                  
                                  
                                  1.3
                                  %
                                  
                                  
                                  203
                                  
                                  
                                  
                                  140,902
                                  
                                  
                                  
                                  2.6
                                  %
                                  
                                  
                                  904Other
                                  
                                  
                                  17,527
                                  
                                  
                                  
                                  7.2
                                  %
                                  
                                  
                                  314
                                  
                                  
                                  
                                  27,417
                                  
                                  
                                  
                                  5.1
                                  %
                                  
                                  
                                  346Total
      interest bearing liabilities
                                  
                                  
                                  392,892
                                  
                                  
                                  
                                  0.9
                                  %
                                  
                                  
                                  835
                                  
                                  
                                  
                                  474,253
                                  
                                  
                                  
                                  1.5
                                  %
                                  
                                  
                                  1,783Noninterest-bearing
      liabilities:Demand
      deposits
                                  
                                  
                                  350,280
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  266,474Accrued
      expenses andother
      liabilities
                                  
                                  
                                  12,823
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  11,579Shareholders'
      equity
                                  
                                  
                                  111,272
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  111,008TOTAL
                                  
                                  $
                                  867,267
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  863,314Net
      interest income and margin
                                  
                                  
                                  
                                  
                                  
                                  
                                  5.0
                                  %
                                  
                                  $
                                  10,155
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  4.8
                                  %
                                  
                                  $
                                  9,693




(1)
            Loan
      fee amortization of $874,000 and $1.2 million, respectively, is included
      in interest income.  Nonperforming loans have been included in
      average loan balances.


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


(3)
            Net
      of average allowance for credit losses of $15.8 million and $17.6 million,
      respectively.




23




The
following table shows the effect of the interest differential of volume and rate
changes for the quarters ended June 30, 2010 and 2009.  The change in
interest due to both rate and volume has been allocated in proportion to the
relationship of absolute dollar amounts of change in each.





VOLUME/RATE ANALYSIS(dollars in thousands)
                                                
                                                Three months ended June 30,2010 vs. 2009Increase (decrease)due to change inAverage
                                                
                                                
                                                Average
                                                
                                                
                                                TotalVolume
                                                
                                                
                                                Rate
                                                
                                                
                                                ChangeInterest
      income:Loans
                                                
                                                $
                                                (793
                                                )
                                                
                                                $
                                                (172
                                                )
                                                
                                                $
                                                (965
                                                )Federal
      funds sold
                                                
                                                
                                                (33
                                                )
                                                
                                                
                                                14
                                                
                                                
                                                
                                                (19
                                                )Investment
      securities
                                                
                                                
                                                546
                                                
                                                
                                                
                                                16
                                                
                                                
                                                
                                                562Other
                                                
                                                
                                                (65
                                                )
                                                
                                                
                                                1
                                                
                                                
                                                
                                                (64
                                                )Total
      interest income
                                                
                                                
                                                (345
                                                )
                                                
                                                
                                                (141
                                                )
                                                
                                                
                                                (486
                                                )Interest
      expense:Demand
                                                
                                                
                                                0
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                1Savings
                                                
                                                
                                                6
                                                
                                                
                                                
                                                (222
                                                )
                                                
                                                
                                                (216
                                                )Time
                                                
                                                
                                                (252
                                                )
                                                
                                                
                                                (449
                                                )
                                                
                                                
                                                (701
                                                )Other
                                                
                                                
                                                (177
                                                )
                                                
                                                
                                                145
                                                
                                                
                                                
                                                (32
                                                )Total
      interest expense
                                                
                                                
                                                (423
                                                )
                                                
                                                
                                                (525
                                                )
                                                
                                                
                                                (948
                                                )Change
      in net interest income
                                                
                                                $
                                                78
                                                
                                                
                                                $
                                                385
                                                
                                                
                                                $
                                                462




Net
interest income is the principal source of the Company’s operating
earnings.   Significant factors affecting net interest income
are: rates, volumes and mix of the loan, investment and deposit
portfolios.   Due to the nature of the Company’s lending markets,
in which the majority of loans are generally tied to prime rate, it is believed
that an increase in interest rates should positively affect the Company’s future
earnings, while a decline should have a negative impact.  However, it
is not feasible to provide an accurate measure of such a change because of the
many factors (many of them uncontrollable) influencing the result.





Interest Income





Interest
income of $11.0 million in the quarter ended June 30, 2010 represented a
decrease of $486,000, or 4.2%, from $11.5 million in the same quarter one year
earlier.  The average yield on earning assets was 5.41% for the
quarter ended June 30, 2010 and 5.63% for the quarter ended June 30,
2009.  The decrease in interest income was primarily due to a decrease
in loan balances.





Average
gross loans were $578.8 million for three months ended June 30, 2010, a decrease
of $44.6 million or 7.2% from $623.4 million for the same period one year
earlier.  Average loans comprised 70.9% of average earning assets in
the three months ended June 30, 2010 compared to 76.3% in the second quarter of
2009.





Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $236.6 million for the quarter ended June
30, 2010, an increase of $42.6 million or 21.9% from $194.0 million for the
three months ended June 30, 2009.




Interest
Expense




Interest
expense was $835,000 for the quarter ended June 30, 2010, which represented a
decrease of $948,000, or 53.2% from $1.8 million for the comparable period of
2009.  The decrease in interest expense reflects lower interest rates
paid on liabilities as well as a lower balance of interest-bearing liabilities
in the second quarter of 2010 compared to the same period in
2009.  Average interest-bearing liabilities were $392.9 million for
the three months ended June 30, 2010, a decrease of $81.4 million, or 17.2%,
from $474.3 million for the same period one year earlier.





24


Average
interest bearing deposits were $375.4 million for the quarter ended June 30,
2010, which represented 51.7% of total average deposits and was a decrease of
$71.5 million, or 21.9%, from $446.8 million representing 62.6% of total average
deposits in the second quarter of 2009.





Other
(non-deposit) interest bearing liabilities are primarily comprised of junior
subordinated debt securities issued by the Company and other
borrowings.  The junior subordinated debt is intended to supplement
capital requirements of the Company at a rate of interest that is fixed for five
years.  Other interest bearing liabilities averaged $17.5 million and
$27.4 million in the three months ended June 30, 2010 and 2009,
respectively.





The
average rate paid on interest-bearing liabilities of 0.85% in the quarter ended
June 30, 2010 compared to 1.51% in the second quarter of 2009.





Credit
Risk and Provision for Credit Losses





The
Company maintains an allowance for credit losses which is based, in part, on the
Company's and industry loss experience, the impact of economic conditions within
the Company's market area and, as applicable, the State of California and/or
national macroeconomic conditions, 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.





The
Company provided $1.2 million to the allowance for credit losses for the three
months ended June 30, 2010, compared to $4.0 million for the same period in
2009.





The
Company’s loan charge-offs totaled $2.5 million during the second quarter ended
June 30, 2010, compared to $4.2 million for the same period one year
earlier.  The Company recognized $352,000 and $23,000 in loan
recoveries for the three months ended June 30, 2010 and 2009,
respectively.





The
following schedule provides an analysis of the allowance for credit losses for
the quarter ended June 30, 2010 and 2009, respectively:





Three months ended(dollars in thousands)
                  
                  June 30,2010
                  
                  
                  2009Balance,
      beginning of period
                  
                  $
                  16,155
                  
                  
                  $
                  18,155Provision
      for credit losses
                  
                  
                  1,150
                  
                  
                  
                  4,000Charge-offs
                  
                  
                  (2,520
                  )
                  
                  
                  (4,210
                  )Recoveries
                  
                  
                  352
                  
                  
                  
                  23Balance,
      end of period
                  
                  $
                  15,137
                  
                  
                  $
                  17,968




The
decrease in the allowance for loan losses of $2.8 million from $17.9 million at
June 30, 2009 to $15.1 million at June 30, 2010 is primarily attributable to (1)
a decrease in total gross loans; and (2) a decrease in unidentified probable,
estimable losses due to proactive loss recognition in the earlier periods of the
fiscal year.





Based on
an evaluation of the individual credits, historical credit loss experience by
loan type, economic conditions, and the Company’s reassessment of risks noted
above, management has allocated the allowance for loan losses as follows for the
periods ending June 30, 2010 and December 31, 2009:





25





(dollars in thousands)
                  
                  June 30, 2010
                  
                  
                  December 31, 2009Percent of
                  
                  
                  
                  
                  
                  Percent ofALLL in each
                  
                  
                  
                  
                  
                  ALLL in eachcategory to
                  
                  
                  
                  
                  
                  category toAmount
                  
                  
                  gross loans
                  
                  
                  Amount
                  
                  
                  gross loansCommercial
                  
                  $
                  4,847
                  
                  
                  
                  0.9
                  %
                  
                  $
                  6,313
                  
                  
                  
                  1.1
                  %Real
      estate construction
                  
                  
                  1,503
                  
                  
                  
                  0.3
                  %
                  
                  
                  1,376
                  
                  
                  
                  0.2
                  %Land
      loans
                  
                  
                  608
                  
                  
                  
                  0.1
                  %
                  
                  
                  764
                  
                  
                  
                  0.1
                  %Real
      estate other
                  
                  
                  5,241
                  
                  
                  
                  0.9
                  %
                  
                  
                  5,173
                  
                  
                  
                  0.9
                  %SBA
                  
                  
                  1,319
                  
                  
                  
                  0.2
                  %
                  
                  
                  1,175
                  
                  
                  
                  0.2
                  %Factoring/ABL
                  
                  
                  1,483
                  
                  
                  
                  0.2
                  %
                  
                  
                  1,061
                  
                  
                  
                  0.2
                  %Other
                  
                  
                  136
                  
                  
                  
                  0.0
                  %
                  
                  
                  150
                  
                  
                  
                  0.0
                  %$
                  15,137
                  
                  
                  
                  2.5
                  %
                  
                  $
                  16,012
                  
                  
                  
                  2.8
                  %




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





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





At June
30, 2010, the Company’s land development portfolio was reduced to $10.2 million
with just $2.0 million remaining exposure outside of the primary market
area.  Further, over 90% of the remaining loans in this category are
underwritten to amortizing term structures supported by cash flow from liquidity
of the borrowers.





Construction
loans at June 30, 2010 were $37.3 million with $3.5 million remaining on
projects outside of the primary market area.  In addition, at that
date $22.4 million, or 59.9%, were loans to finance commercial projects and $6.1
million, or 16.4% were loans to finance residential projects of five or more
units.





The
aggressive management of credits in this category has resulted in elevated
levels of nonperforming assets as loans are placed on nonaccrual through the
marketing phase of the underlying project.  In addition, loans placed
on nonaccrual have been reduced to the level of indicated
impairments.  This has resulted in an elevated level of
charge-offs.  Management believes that this practice results in a
recorded level of nonperforming assets that generally has been reduced to a net
liquidation value, and as these assets are liquidated do not expect to incur
additional significant losses.  Non performing loans at June 30, 2010,
on average, have been reduced by approximately 22% of the remaining contractual
balance, which was taken as a charge-off against the allowance for loan
losses.





In
response to the elevated level of charge-offs, migration of construction and
land portfolios, and general deterioration in economic conditions the Company
also increased provisions for potential loans losses and built the reserve to
its highest historical level of approximately 2.96% of total loans at June 30,
2009.  Due to recent positive trends in overall loan classifications,
reflecting the improving condition of the loan portfolio, combined with new loan
production, the Company was able to modestly lower the level of reserves to
2.54% of total loans at June 30, 2010.  Additionally, the Company’s
coverage ratio, the ratio of allowance for loan losses to nonperforming loans
was 69.16% at June 30, 2010.  Management believes that the coverage
ratio reflects the conservative charge-off practice and that the allowance is
adequate for losses not specifically identified in impairment analysis.





At June
30, 2010 nonperforming assets represented 3.25% of total assets, compared to
2.79% of total assets on December 31, 2009.  The increase in
non-performing assets from year-end 2009 is primarily attributable to one legacy
construction loan totaling $6.9 million that was transferred from a Troubled
Debt Restructuring (TDR) into non-performing loans as a result of a liquidity
covenant violation.  Despite being current on interest payments, as a
result of a covenant violation the Company deemed the loan to be collateral
dependent and therefore recognized an impairment charge of $800,000 related to
this loan in the second quarter of 2010.  The following summarizes
nonperforming assets at June 30, 2010 and December 31, 2009.




26




June 30,
                        
                        
                        December 31,(dollars in thousands)
                        
                        2010
                        
                        
                        2009Loans
      accounted for on a non-accrual basis
                        
                        $
                        21,886
                        
                        
                        $
                        17,009Other
      loans with principal or interest contracturally past due90
      days or more
                        
                        
                        -
                        
                        
                        
                        -Nonperforming
      loans
                        
                        
                        21,886
                        
                        
                        
                        17,009Other
      real estate owned
                        
                        
                        7,833
                        
                        
                        
                        6,509Nonperforming
      assets
                        
                        $
                        29,719
                        
                        
                        $
                        23,518Loans
      restructured and in compliance with modified terms
                        
                        
                        4,380
                        
                        
                        
                        16,834Nonperforming
      assets and restructured loans
                        
                        $
                        34,099
                        
                        
                        $
                        40,352




The
nonperforming assets at June 30, 2010 consisted of loans on nonaccrual or 90
days or more past due totaling $21.9 million, and other real estate owned valued
at $7.8 million.  Nonperforming loans at June 30, 2010 were comprised
of loans with legal contractual balances totaling approximately $27.9 million
reduced by impairment charges of $6.0 million which have been charged against
the allowance for credit losses.   As a result, there no longer
was an indicated potential loss exposure pertaining to nonperforming loans and
no impairment reserves were required to be included in the allowance for credit
losses.





The
following table sets forth the components of nonperforming loans as of June 30,
2010 (dollars in thousands).




(dollars in thousands)





June 30, 2010Classification
                      
                      Amount
                      
                      CollateralLand
                      
                      
                      2,397
                      
                      Lots
      for retail development in Sacramento CountyLand
                      
                      
                      1,023
                      
                      Lots
      for residential development in Santa Clara CountyLand
                      
                      
                      492
                      
                      Lots
      for single family homes in IdahoLand
                      
                      
                      223
                      
                      Lots
      for residential development in Alameda CountyLand
                      
                      
                      45
                      
                      Lot
      for retail development in Sacramento CountyLand
                      
                      
                      40
                      
                      Lots
      for single family homes in Calaveras County4,220Construction
                      
                      
                      3,169
                      
                      Residential
      Condos in Santa Clara CountyConstruction
                      
                      
                      3,419
                      
                      Medical
      office condos in Santa Clara CountyConstruction
                      
                      
                      300
                      
                      Single
      family residence in San Mateo County6,888Real
      estate other
                      
                      
                      6,875
                      
                      Mini
      storage facility in Santa Cruz CountyReal
      estate other
                      
                      
                      1,091
                      
                      Commercial
      office space in Calaveras CountyReal
      estate other
                      
                      
                      727
                      
                      Industrial
      warehouse space in Santa Clara CountyReal
      estate other
                      
                      
                      439
                      
                      Single
      family residence in Calaveras CountyReal
      estate other
                      
                      
                      308
                      
                      19
      multi-family lots in Calaveras CountyReal
      estate other
                      
                      
                      250
                      
                      Medical
      office condos in Santa Clara CountyReal
      estate other
                      
                      
                      191
                      
                      Single
      family residence in San Francisco CountyReal
      estate other
                      
                      
                      32
                      
                      Commercial
      - Restaurant in Stanislaus County9,913Commercial
                      
                      
                      865
                      
                      Business
      assetsTotal
      nonperforming loans
                      
                      $
                      21,886





27




Included
in nonperforming loans at June 30, 2010 are loans totaling $13.7 million that
have been modified in trouble debt restructurings, where concessions have been
granted to borrowers experiencing financial difficulties.  These
concessions could include a reduction in the interest rate on a loan, payment
extensions, forgiveness of principal, or other actions intended to maximize
collection.  In order for these loans to return to accrual status, the
borrower must demonstrate a sustained period of timely payments.  As
of June 30, 2010, previously modified loans totaling $4.4 million were
considered performing due to a sustained period of timely payments and therefore
were accounted for on an accrual basis.




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




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




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




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




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




Management
is of the opinion that the allowance for credit losses is maintained at a level
adequate for known and unidentified losses inherent in the loan
portfolio.  However, the Company's construction, land, and other real
estate loan portfolios, representing approximately 32.0% of the total loan
portfolio, could be adversely affected if California economic conditions and the
real estate market in the Company's market area were to weaken.  The
effect of such events, although uncertain at this time, could result in an
increase in the level of non-performing loans and other real estate owned and
the level of the allowance for loan losses, which could adversely affect the
Company's future growth and profitability.




28




Non-interest
Income





The
following table sets forth the components of other income and the percentage
distribution of such income for the three months ended June 30, 2010 and
2009:





Three months ended June 30,(dollars
      in thousands)
                    
                    2010
                    
                    
                    2009Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentDepositor
      service charges
                    
                    $
                    578
                    
                    
                    
                    33.9
                    %
                    
                    $
                    476
                    
                    
                    
                    20.5
                    %International
      fee income
                    
                    
                    478
                    
                    
                    
                    28.1
                    %
                    
                    
                    423
                    
                    
                    
                    18.2
                    %Gain
      on sale of OREO
                    
                    
                    240
                    
                    
                    
                    14.1
                    %
                    
                    
                    675
                    
                    
                    
                    29.0
                    %SBA
      loan servicing income
                    
                    
                    101
                    
                    
                    
                    5.9
                    %
                    
                    
                    110
                    
                    
                    
                    4.7
                    %Increase
      in value of life insurance
                    
                    
                    101
                    
                    
                    
                    5.9
                    %
                    
                    
                    97
                    
                    
                    
                    4.2
                    %Other
      income-cash flow hedge
                    
                    
                    22
                    
                    
                    
                    1.3
                    %
                    
                    
                    161
                    
                    
                    
                    6.9
                    %Gain
      on sale of SBA loans
                    
                    
                    4
                    
                    
                    
                    0.2
                    %
                    
                    
                    287
                    
                    
                    
                    12.3
                    %Other
      operating income
                    
                    
                    179
                    
                    
                    
                    10.5
                    %
                    
                    
                    97
                    
                    
                    
                    4.2
                    %$
                    1,703
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,326
                    
                    
                    
                    100.0
                    %




Non-interest
income totaled $1.7 million in the second quarter of 2010, a decrease of
$623,000 or 26.8% from $2.3 million in the second quarter of
2009.  Non-interest income generally consists primarily of service
charge income on deposit accounts, international fee income, gains recognized on
sales of SBA loans, and SBA loan servicing income.  The decrease in
non-interest income during the quarter ending June 30, 2010 was primarily
attributable to a decrease in gains related to the sale of OREO of $435,000, a
decrease in gains related to the sale of SBA loans of $283,000, and a decrease
in income generated from cash flow hedges of $139,000.  The decreases
in non-interest income were offset in part by an increase in depositor service
charges of $102,000.





For the
quarter ended June 30, 2010 service charge income on deposit accounts was
$578,000, representing an increase of $102,000, or 21.4%, compared to $476,000
for the same period one year ago.  The increase is attributable to an
increase in deposit related analysis charges resulting from an increase in
deposit balances.





The
Company generates international fee income on spot contracts (binding agreements
for the purchase or sale of currency for immediate delivery and settlement) and
forward contracts (a contractual commitment for a fixed amount of foreign
currency on a future date at an agreed upon exchange rate) in connection with
client’s cross-border activities. The transactions incurred are during the
ordinary course of business and are not speculative in nature.  The
Company recognizes income on a cash basis at the time of contract settlement in
an amount equal to the spread created by the exchange rate charged to the client
versus the actual exchange rate negotiated by the Company in the open
market.  During the second quarter of 2010, the Company recognized
$478,000 in international fee income, representing an increase of $55,000, or
13.0%, compared to $423,000 for the same period one year ago. The increase was
primarily caused by an increase in client demand for international services as a
result of the current economic environment.




Revenue
from sales of SBA loans is dependant on the Company’s decision to sell versus
retain loans as well as consistent origination and funding of new loan volumes,
the timing of which may be impacted by (1) increased competition from other
lenders; (2) the relative attractiveness of SBA borrowing to other financing
options; (3) adjustments to programs by the SBA; (4) changes in activities of
secondary market participants and; (5) other factors.  There was
$4,000 in gains recognized on sales of SBA loans during the quarter ended June
30, 2010 which represented a decrease of $283,000 or 98.6% compared to the same
period one year earlier.





Non-interest
Expense





The
components of other expense as a percentage of average earnings assets are set
forth in the following table for the three months ended June 30, 2010 and
2009.




29




Three
      months ended June 30,(dollars
      in thousands)
                
                2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                5,013
                
                
                
                2.5
                %
                
                $
                5,101
                
                
                
                2.5
                %Occupancy
                
                
                840
                
                
                
                0.4
                %
                
                
                872
                
                
                
                0.4
                %OREO/Loan
      expense
                
                
                819
                
                
                
                0.4
                %
                
                
                447
                
                
                
                0.2
                %Data
      processing
                
                
                677
                
                
                
                0.3
                %
                
                
                569
                
                
                
                0.3
                %FDIC/OCC
      assessments
                
                
                578
                
                
                
                0.3
                %
                
                
                636
                
                
                
                0.3
                %Legal
      and professional
                
                
                555
                
                
                
                0.3
                %
                
                
                428
                
                
                
                0.2
                %Director
      expense
                
                
                235
                
                
                
                0.1
                %
                
                
                221
                
                
                
                0.1
                %Marketing/Advertising
                
                
                222
                
                
                
                0.1
                %
                
                
                192
                
                
                
                0.1
                %Deposit
      services
                
                
                189
                
                
                
                0.1
                %
                
                
                324
                
                
                
                0.2
                %Furniture
      and equipment
                
                
                177
                
                
                
                0.1
                %
                
                
                232
                
                
                
                0.1
                %Other
                
                
                354
                
                
                
                0.2
                %
                
                
                321
                
                
                
                0.2
                %$
                9,659
                
                
                
                4.8
                %
                
                $
                9,343
                
                
                
                4.6
                %




Operating
expenses were $9.7 million for the three months ended June 30, 2010, an increase
of $316,000 or 3.4% from $9.3 million at June 30, 2009.   As a
percentage of average earning assets, other expenses for the three months ended
June 30, 2010 and 2009 were 4.8% and 4.6%, respectively, on an annualized basis.
In 2010, operating expenses were comprised primarily of salaries and benefits of
$5.0 million, which compared to $5.1 million in 2009.  At June 30,
2010, the Company employed 157 full-time equivalents (FTE) compared to 162 FTE
on the same date one year earlier.  In addition, salaries and benefits
included a charge of $270,000 and $379,000 to recognize compensation related to
stock-based awards in the second quarter of 2010 and 2009,
respectively.





In 2008,
the FDIC proposed changes to the deposit insurance assessment system that went
into effect in the second quarter of 2009.  These changes were
intended to apportion a larger percentage of the increase in deposit assessment
to institutions categorized as “riskier” based on the four risk categories
defined by the FDIC.  Based upon the Company’s risk profile, it is
anticipated that the FDIC assessment for 2010 will be approximately $2.4 million
compared to approximately $2.6 million (which included a one-time special
assessment of $360,000) for the same period one year earlier.  During
the second quarter of 2010, the Company recognized $578,000 in regulatory
assessments compared to $636,000 for the same period one year
earlier.  The decrease in regulatory assessments was attributed to the
one-time special assessment of $360,000 in 2009 offset, in part, by increase
assessments in 2010 due to participation in the Transaction Guarantee Program as
well as FDIC insurance related to increased deposit balances.




30




Summary
of Financial Results – Six months ended June 30, 2010





The
Company reported net operating income of $1.1 million for the six months ended
June 30, 2010 representing an increase of $1.6 million, compared to a net
operating loss of $(509,000) for the same period one year ago. Net income
available to common shareholders was reduced by preferred dividends of $1.4
million and $2.1 million during the first six months of 2010 and 2009,
respectively, resulting in a loss per diluted share of $(0.03) and $(0.39),
respectively.





The table
below highlights the changes in the nature and sources of income and
expense.





Six
      months ended
                              June
      30,
                            
                            
                            Increase(dollars
      in thousands)
                            
                            2010
                            
                            
                            2009
                            
                            
                            (Decrease)Interest
      income
                            
                            $
                            21,747
                            
                            
                            $
                            23,436
                            
                            
                            $
                            (1,689
                            )Interest
      expense
                            
                            
                            1,717
                            
                            
                            
                            4,093
                            
                            
                            
                            (2,376
                            )Net
      interest income
                            
                            
                            20,030
                            
                            
                            
                            19,343
                            
                            
                            
                            687Provision
      for credit losses
                            
                            
                            2,400
                            
                            
                            
                            7,650
                            
                            
                            
                            (5,250
                            )Net
      interest income after provisionfor
      credit losses
                            
                            
                            17,630
                            
                            
                            
                            11,693
                            
                            
                            
                            5,937Other
      income
                            
                            
                            3,329
                            
                            
                            
                            6,330
                            
                            
                            
                            (3,001
                            )Other
      expenses
                            
                            
                            19,312
                            
                            
                            
                            18,806
                            
                            
                            
                            506Income
      (loss) before income taxes
                            
                            
                            1,647
                            
                            
                            
                            (783
                            )
                            
                            
                            2,430Income
      taxes
                            
                            
                            527
                            
                            
                            
                            (274
                            )
                            
                            
                            801Net
      income (loss)
                            
                            $
                            1,120
                            
                            
                            $
                            (509
                            )
                            
                            $
                            1,629Preferred
      dividends
                            
                            
                            1,358
                            
                            
                            
                            2,074
                            
                            
                            
                            (716
                            )Net
      income (loss) available tocommon
      shareholders
                            
                            $
                            (238
                            )
                            
                            $
                            (2,583
                            )
                            
                            $
                            2,345





Net
Interest Income and Margin





Net
interest income, the difference between interest earned on loans and investments
and interest paid on deposits is the principal component of the Company's
earnings.  Net interest income is affected by changes in the nature
and volume of earning assets held during the six months, the rates earned on
such assets and the rates paid on interest bearing liabilities.





Net
interest income for the six months ended June 30, 2010 was $20.0 million, which
was comprised of $21.7 million in interest income and $1.7 million in interest
expense. Net interest income for the six months ended June 30, 2009 was $19.3
million, which was comprised of $23.4 million in interest income and $4.1
million in interest expense.  Net interest income for the six months
ended June 30, 2010 represented an increase of $687,000 or 3.6% from the same
period one year earlier.





The
composition of the average balance sheet impacts growth in net interest
income.  For the six months ended June 30, 2010 average earning assets
of $804.4 million represented a decrease of $37.2 million, or 4.4%, compared to
$841.5 million for the same period in 2009.  The Company’s
loan-to-deposit ratio, a measure of leverage, averaged 80.50% during the six
months ended June 30, 2010, which represented a decrease compared to an average
of 89.67% for the same period of 2009 as a result of slower loan growth relative
to deposit funding.





Changes
in short-term interest rates also impact growth in net interest income as the
interest rate earned on a majority of the Company’s assets, specifically the
loan portfolio, adjust with changes in short-term market rates.  As
such, the nature of the Company’s balance sheet is that, over time as short-term
interest rates change, income on interest earning assets has a greater impact on
net interest income than interest paid on liabilities.  The Company’s
prime rate averaged 3.25% in the six months ended June 30, 2010 and
2009.





31


The
Company’s net interest margin (net interest income divided by average earning
assets) for the six months ended June 30, 2010 was 5.02% compared to 4.64% for
the same period one year earlier.  The increase in net interest margin
from 2009 to 2010 was primarily a result of a decreased cost of funds. The
negative impact on the Company’s net interest margin from the reversal of
foregone interest on nonperforming loans was 17 basis points in the first six
months of 2010 compared to 21 basis points for the same period in
2009.





The
following table details the average balances, interest income and expense and
the effective yields/rates for earning assets and interest-bearing liabilities
for the six months ended June 30, 2010 and 2009.




Six
      months ended June 30,2010
                                
                                
                                2009Yields
                                
                                
                                Interest
                                
                                
                                
                                
                                
                                Yields
                                
                                
                                InterestAverage
                                
                                
                                or
                                
                                
                                Income/
                                
                                
                                Average
                                
                                
                                or
                                
                                
                                Income/Balance
                                
                                
                                Rates
                                
                                
                                Expense
                                
                                
                                Balance
                                
                                
                                Rates
                                
                                
                                ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                                
                                $
                                574,934
                                
                                
                                
                                7.2
                                %
                                
                                $
                                20,404
                                
                                
                                $
                                651,200
                                
                                
                                
                                7.1
                                %
                                
                                $
                                23,037Federal
      funds sold
                                
                                
                                105,193
                                
                                
                                
                                0.2
                                %
                                
                                
                                122
                                
                                
                                
                                169,943
                                
                                
                                
                                0.2
                                %
                                
                                
                                194Investment
      securities
                                
                                
                                116,149
                                
                                
                                
                                2.0
                                %
                                
                                
                                1,139
                                
                                
                                
                                4,613
                                
                                
                                
                                1.3
                                %
                                
                                
                                29Other
                                
                                
                                8,083
                                
                                
                                
                                2.0
                                %
                                
                                
                                82
                                
                                
                                
                                15,757
                                
                                
                                
                                2.3
                                %
                                
                                
                                176Total
      interest earning assets
                                
                                
                                804,359
                                
                                
                                
                                5.5
                                %
                                
                                
                                21,747
                                
                                
                                
                                841,513
                                
                                
                                
                                5.6
                                %
                                
                                
                                23,436Noninterest-earning
      assets:Cash
      and due from banks
                                
                                
                                17,438
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                19,432All
      other assets (3)
                                
                                
                                33,786
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                23,591TOTAL
                                
                                $
                                855,583
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                884,536LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYInterest
      bearing liabilities:Deposits:Demand
                                
                                $
                                6,027
                                
                                
                                
                                0.1
                                %
                                
                                $
                                4
                                
                                
                                $
                                4,776
                                
                                
                                
                                0.1
                                %
                                
                                $
                                2Savings
                                
                                
                                290,789
                                
                                
                                
                                0.5
                                %
                                
                                
                                674
                                
                                
                                
                                308,133
                                
                                
                                
                                0.9
                                %
                                
                                
                                1,315Time
                                
                                
                                69,046
                                
                                
                                
                                1.4
                                %
                                
                                
                                483
                                
                                
                                
                                138,355
                                
                                
                                
                                2.8
                                %
                                
                                
                                1,952Other
                                
                                
                                17,637
                                
                                
                                
                                6.4
                                %
                                
                                
                                556
                                
                                
                                
                                35,483
                                
                                
                                
                                4.7
                                %
                                
                                
                                824Total
      interest bearing liabilities
                                
                                
                                383,499
                                
                                
                                
                                0.9
                                %
                                
                                
                                1,717
                                
                                
                                
                                486,747
                                
                                
                                
                                1.7
                                %
                                
                                
                                4,093Noninterest-bearing
      liabilities:Demand
      deposits
                                
                                
                                348,334
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                274,964Accrued
      expenses andother
      liabilities
                                
                                
                                13,233
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                10,990Shareholders'
      equity
                                
                                
                                110,517
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                111,835TOTAL
                                
                                $
                                855,583
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                884,536Net
      interest income and margin
                                
                                
                                
                                
                                
                                
                                5.0
                                %
                                
                                $
                                20,030
                                
                                
                                
                                
                                
                                
                                
                                4.6
                                %
                                
                                $
                                19,343




(1)
            Loan
      fee amortization of $1.8 million and $2.4 million, respectively, is
      included in interest income.  Nonperforming loans have been
      included in average loan balances.


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


(3)
            Net
      of average allowance for credit losses of $16.0 million and $18.0 million,
      respectively.





32




The
following table shows the effect of the interest differential of volume and rate
changes for the six months ended June 30, 2010 and 2009.  The change
in interest due to both rate and volume has been allocated in proportion to the
relationship of absolute dollar amounts of change in each.




(dollars
      in thousands)
                                                
                                                Six
      months ended June 30,2010
      vs. 2009Increase
      (decrease)due
      to change inAverage
                                                
                                                
                                                Average
                                                
                                                
                                                TotalVolume
                                                
                                                
                                                Rate
                                                
                                                
                                                ChangeInterest
      income:Loans
                                                
                                                $
                                                (2,707
                                                )
                                                
                                                $
                                                74
                                                
                                                
                                                $
                                                (2,633
                                                )Federal
      funds sold
                                                
                                                
                                                (75
                                                )
                                                
                                                
                                                3
                                                
                                                
                                                
                                                (72
                                                )Investment
      securities
                                                
                                                
                                                1,094
                                                
                                                
                                                
                                                16
                                                
                                                
                                                
                                                1,110Other
                                                
                                                
                                                (78
                                                )
                                                
                                                
                                                (16
                                                )
                                                
                                                
                                                (94
                                                )Total
      interest income
                                                
                                                
                                                (1,766
                                                )
                                                
                                                
                                                77
                                                
                                                
                                                
                                                (1,689
                                                )Interest
      expense:Demand
                                                
                                                
                                                1
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                2Savings
                                                
                                                
                                                (40
                                                )
                                                
                                                
                                                (601
                                                )
                                                
                                                
                                                (641
                                                )Time
                                                
                                                
                                                (485
                                                )
                                                
                                                
                                                (984
                                                )
                                                
                                                
                                                (1,469
                                                )Other
                                                
                                                
                                                (563
                                                )
                                                
                                                
                                                295
                                                
                                                
                                                
                                                (268
                                                )Total
      interest expense
                                                
                                                
                                                (1,087
                                                )
                                                
                                                
                                                (1,289
                                                )
                                                
                                                
                                                (2,376
                                                )Change
      in net interest income
                                                
                                                $
                                                (679
                                                )
                                                
                                                $
                                                1,366
                                                
                                                
                                                $
                                                687




Net
interest income is the principal source of the Company’s operating
earnings.   Significant factors affecting net interest income
are: rates, volumes and mix of the loan, investment and deposit
portfolios.   Due to the nature of the Company’s lending markets,
in which the majority of loans are generally tied to prime rate, it is believed
that an increase in interest rates should positively affect the Company’s future
earnings, while a decline should have a negative impact.  However, it
is not feasible to provide an accurate measure of such a change because of the
many factors (many of them uncontrollable) influencing the result.





Interest Income





Interest
income of $21.7 million in the six months ended June 30, 2010 represented a
decrease of $1.7 million, or 7.2%, from $23.4 million in the same period one
year earlier. The average yield on earning assets was 5.45% for the six months
ended June 30, 2010 and 5.62% for the six months ended June 30,
2009.  The decrease in interest income was primarily due to a decrease
in loan balances.





Average
gross loans were $574.9 million for the six months ended June 30, 2010, a
decrease of $76.3 million or 11.7% from $651.2 million for the same period one
year earlier.  Average loans comprised 71.5% of average earning assets
in the six months ended June 30, 2010 compared to 77.4% in the first six months
of 2009.





Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $229.4 million for the six months ended June
30, 2010, an increase of $39.1 million or 20.6% from $190.3 million for the six
months ended June 30, 2009.




Interest
Expense





Interest
expense was $1.7 million for the six months ended June 30, 2010, which
represented a decrease of $2.4 million or 58.1% from $4.1 million for the
comparable period of 2009.  The decrease in interest expense reflects
lower interest rates paid on liabilities in 2010 compared to 2009 as well as a
lower balance of interest-bearing deposits.  Average interest-bearing
liabilities were $383.5 million for the six months ended June 30, 2010, a
decrease of $103.2 million, or 21.2%, from $486.7 million for the same period
one year earlier.





33


Average
interest bearing deposits were $365.9 million for the six months ended June 30,
2010, which represented 51.2% of total average deposits and was a decrease of
$85.4 million, or 18.9%, from $451.3 million representing 62.1% of total average
deposits in the first six months of 2009.





Other
(non-deposit) interest bearing liabilities are primarily comprised of junior
subordinated debt securities issued by the Company and other
borrowings.  The junior subordinated debt is intended to supplement
capital requirements of the Company at a rate of interest that is fixed for five
years.  Other interest bearing liabilities averaged $17.6 million in
the six months ended June 30, 2010 compared to $35.5 million for the same period
one year earlier.





The
average rate paid on interest-bearing liabilities of 0.90% in the six months
ended June 30, 2010 compared to 1.70% in the first six months of
2009.





Credit
Risk and Provision for Credit Losses





The
Company maintains an allowance for credit losses which is based, in part, on the
Company's and industry loss experience, the impact of economic conditions within
the Company's market area and, as applicable, the State of California and/or
national macroeconomic conditions, 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.





The
Company provided $2.4 million to the allowance for credit losses for the six
months ended June 30, 2010, compared to $7.7 million for the same period in
2009.





The
Company’s loan charge-offs totaled $4.6 million during the six months ended June
30, 2010, compared to $8.5 million for the same period one year
earlier.  The Company recognized $1.3 million and $308,000 in loan
recoveries for the six months ended June 30, 2010 and 2009,
respectively.





The
following schedule provides an analysis of the allowance for credit losses for
the six months ended June 30, 2010 and 2009, respectively:





Six
      months ended(dollars
      in thousands)
                  
                  June
      30,2010
                  
                  
                  2009Balance,
      beginning of period
                  
                  $
                  16,012
                  
                  
                  $
                  18,554Provision
      for credit losses
                  
                  
                  2,400
                  
                  
                  
                  7,650Charge-offs
                  
                  
                  (4,571
                  )
                  
                  
                  (8,544
                  )Recoveries
                  
                  
                  1,296
                  
                  
                  
                  308Balance,
      end of period
                  
                  $
                  15,137
                  
                  
                  $
                  17,968





See
“Summary of Financial Results – Quarter ended June 30, 2010 – Provision for
Credit Losses” for a discussion of the allowance for credit losses and
nonperforming assets.





Non-interest
Income





The
following table sets forth the components of other income and the percentage
distribution of such income for the six months ended June 30, 2010 and
2009:





34





Six
      months ended June 30,(dollars
      in thousands)
                  
                  2010
                  
                  
                  2009Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentDepositor
      service charges
                  
                  $
                  1,123
                  
                  
                  
                  33.7
                  %
                  
                  $
                  896
                  
                  
                  
                  14.2
                  %International
      fee income
                  
                  
                  906
                  
                  
                  
                  27.2
                  %
                  
                  
                  822
                  
                  
                  
                  13.0
                  %Gain
      on sale of OREO
                  
                  
                  439
                  
                  
                  
                  13.2
                  %
                  
                  
                  677
                  
                  
                  
                  10.7
                  %SBA
      loan servicing income
                  
                  
                  208
                  
                  
                  
                  6.2
                  %
                  
                  
                  208
                  
                  
                  
                  3.3
                  %Increase
      in value of life insurance
                  
                  
                  198
                  
                  
                  
                  6.0
                  %
                  
                  
                  206
                  
                  
                  
                  3.3
                  %Other
      income - cash flow hedge
                  
                  
                  43
                  
                  
                  
                  1.3
                  %
                  
                  
                  2,920
                  
                  
                  
                  46.1
                  %Gain
      on sale of SBA loans
                  
                  
                  3
                  
                  
                  
                  0.1
                  %
                  
                  
                  390
                  
                  
                  
                  6.2
                  %Other
      operating income
                  
                  
                  409
                  
                  
                  
                  12.3
                  %
                  
                  
                  211
                  
                  
                  
                  3.3
                  %$
                  3,329
                  
                  
                  
                  100.0
                  %
                  
                  $
                  6,330
                  
                  
                  
                  100.0
                  %




Non-interest
income totaled $3.3 million and $6.3 million in the first six months of 2010 and
2009, respectively.  Non-interest income generally consists primarily
of service charge income on deposit accounts, international income, gains
recognized on sales of SBA loans, and SBA loan servicing
income.  However, the decrease in non-interest income during the six
months ending June 30, 2010 was primarily attributable to the acceleration of a
deferred gain during 2009 on interest rate swaps that had been previously
terminated during the fourth quarter of 2008.  The acceleration of the
deferred gain during the first six months of 2010 was $43,000 compared to $2.9
million for the same period one year earlier.





For the
six months ended June 30, 2010 service charge income on deposit accounts was
$1.1 million, representing an increase of $227,000, or 25.3%, compared to
$896,000 for the same period one year ago.  The increase is
attributable to an increase in deposit accounts and deposit related analysis
charges.





The
Company generates international fee income on spot contracts (binding agreements
for the purchase or sale of currency for immediate delivery and settlement) and
forward contracts (a contractual commitment for a fixed amount of foreign
currency on a future date at an agreed upon exchange rate) in connection with
client’s cross-border activities. The transactions incurred are during the
ordinary course of business and are not speculative in nature.  The
Company recognizes income on a cash basis at the time of contract settlement in
an amount equal to the spread created by the exchange rate charged to the client
versus the actual exchange rate negotiated by the Company in the open
market.  During the first six months of 2010, the Company recognized
$906,000 in international fee income, representing an increase of $84,000, or
10.2%, compared to $822,000 for the same period one year ago.  The
increase was primarily caused by an increase in client demand for international
services as a result of the current economic environment.




Revenue
from sales of SBA loans is dependant on the Company’s decision to sell versus
retain loans as well as consistent origination and funding of new loan volumes,
the timing of which may be impacted by (1) increased competition from other
lenders; (2) the relative attractiveness of SBA borrowing to other financing
options; (3) adjustments to programs by the SBA; (4) changes in activities of
secondary market participants and; (5) other factors.  Gains
recognized on sales of SBA loans were $3,000 in the six months ended June 30,
2010 which represented a decrease of $387,000 or 99.2% compared to $390,000 for
the same period one year earlier.





Non-interest
Expense





The
components of other expense as a percentage of average earning assets are set
forth in the following table for the six months ended June 30, 2010 and
2009.




35




Six
      months ended June 30,(dollars
      in thousands)
                
                2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                10,297
                
                
                
                2.6
                %
                
                $
                10,668
                
                
                
                2.6
                %Occupancy
                
                
                1,680
                
                
                
                0.4
                %
                
                
                1,737
                
                
                
                0.4
                %OREO/Loan
      expense
                
                
                1,159
                
                
                
                0.3
                %
                
                
                755
                
                
                
                0.2
                %Data
      processing
                
                
                1,394
                
                
                
                0.3
                %
                
                
                1,148
                
                
                
                0.3
                %FDIC/OCC
      assessments
                
                
                1,186
                
                
                
                0.3
                %
                
                
                838
                
                
                
                0.2
                %Legal
      and professional
                
                
                1,196
                
                
                
                0.3
                %
                
                
                891
                
                
                
                0.2
                %Director
      expense
                
                
                524
                
                
                
                0.1
                %
                
                
                463
                
                
                
                0.1
                %Marketing/Advertising
                
                
                458
                
                
                
                0.1
                %
                
                
                475
                
                
                
                0.1
                %Deposit
      services
                
                
                393
                
                
                
                0.1
                %
                
                
                575
                
                
                
                0.1
                %Furniture
      and equipment
                
                
                389
                
                
                
                0.1
                %
                
                
                481
                
                
                
                0.1
                %Other
                
                
                636
                
                
                
                0.2
                %
                
                
                775
                
                
                
                0.2
                %$
                19,312
                
                
                
                4.8
                %
                
                $
                18,806
                
                
                
                4.5
                %





Operating
expenses were $19.3 million for the six months ended June 30, 2010, an increase
of $506,000 or 2.7% over $18.8 million for the six months ended June 30,
2009.   As a percentage of average earning assets, other expenses
for the six months ended June 30, 2010 and 2009 were 4.8% and 4.5%,
respectively, on an annualized basis.  In 2010, operating expenses
were comprised primarily of salaries and benefits of $10.3 million, which
compared to $10.7 million in 2009.  At June 30, 2010, the Company
employed 157 FTE compared to 162 FTE on the same date one year
earlier.  In addition, salaries and benefits included a charge of
$615,000 and $746,000 to recognize compensation related to stock based awards in
the first six months of 2010 and 2009, respectively.





As of the
filing date of the Company’s Form 10-K for December 31, 2008, the FDIC had
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 (based upon four risk
categories).  Based upon the Company’s risk profile, it was
anticipated that the FDIC assessment for 2010 would be approximately $2.4
million compared to approximately $2.6 million for the same period one year
earlier.  During the first six months of 2010, the Company recognized
$1.2 million in regulatory assessments compared to $838,000 for the same period
one year earlier.  The increase in regulatory assessments was
primarily attributed to participation in the Transaction Guarantee Program as
well as FDIC insurance related to deposit balances.




Loan/OREO
expense was $1.2 million for the first six months of 2010 compared to $755,000
for the same period one year earlier.  The increase of $404,000, or
53.5%, was primarily attributable to loan related legal fees and sales related
expenses for “other real estate owned”.




36


Balance Sheet





Total
assets of the Company at June 30, 2010 were $915.4 million, an increase of $71.3
million, or 8.4%, as compared to $844.1 million at December 31,
2009.  The increase in total assets was primarily due to a higher
balance of investment securities available for sale as a result of liquidity
from lower loan balances and increased low cost deposits.





The
following table shows the Company’s loans by type and their percentage
distribution as of June 30, 2010 and December 31, 2009.





(dollars in thousands)
                
                June 30,
                
                
                December 31,2010
                
                
                2009Commercial
                
                $
                238,288
                
                
                $
                253,776Real
      estate construction
                
                
                37,322
                
                
                
                20,601Land
      loans
                
                
                10,202
                
                
                
                12,763Real
      estate other
                
                
                144,433
                
                
                
                149,617Factoring
      and asset based lending
                
                
                102,774
                
                
                
                66,660SBA
                
                
                58,198
                
                
                
                67,629Other
                
                
                4,456
                
                
                
                5,395Total
      gross loans
                
                
                595,673
                
                
                
                576,441Unearned
      fee income
                
                
                (1,581
                )
                
                
                (1,452
                )Total  loans
                
                
                594,092
                
                
                
                574,989Less
      allowance for credit losses
                
                
                (15,137
                )
                
                
                (16,012
                )Total
      loans, net
                
                $
                578,955
                
                
                $
                558,977Commercial
                
                
                40.0
                %
                
                
                44.0
                %Real
      estate construction
                
                
                6.3
                %
                
                
                3.6
                %Land
      loans
                
                
                1.7
                %
                
                
                2.2
                %Real
      estate other
                
                
                24.2
                %
                
                
                26.0
                %Factoring
      and asset based lending
                
                
                17.3
                %
                
                
                11.6
                %SBA
                
                
                9.8
                %
                
                
                11.7
                %Other
                
                
                0.7
                %
                
                
                0.9
                %Total
      gross loans
                
                
                100.0
                %
                
                
                100.0
                %





Gross
loan balances were $595.7 million at June 30, 2010, which represented an
increase of $19.2 million, or 3.3%, as compared to $576.4 million at December
31, 2009. The increase in loans was primarily attributable to growth in the
factoring and asset based lending portfolio.





The
Company’s commercial loan portfolio represents loans to small and middle-market
businesses in the Santa Clara County region.  Commercial loans were
$238.3 million at June 30, 2010, which represented a decrease of $15.5 million,
or 6.1%, compared to $253.8 million at December 31, 2009.  At June 30,
2010, commercial loans comprised 40.0% of total loans outstanding compared to
44.0% at December 31, 2009.





The
Company’s construction and land development loan portfolio together totaled
approximately $47.5 million as of June 30, 2010 compared to $33.4 million as of
December 31, 2009, representing an increase of $14.2 million or
42.4%.  Construction and land development loan balances at June 30,
2010 and December 31, 2009 comprised 8.0% and 5.8%, respectively, of total
loans.





Other
real estate loans decreased $5.2 million or 3.5% to $144.4 million at June 30,
2010 over $150.0 million at December 31, 2009.  The decrease in other
real estate loans was comprised entirely of other real estate term
loans.  Other real estate loans represented 24.2% of total loans at
June 30, 2010 compared to 26.0% at December 31, 2009.


37





Factoring
and asset-based lending represents purchased accounts receivable (factoring) and
a structured accounts receivable lending program where the Company receives
client specific payment for client invoices.  Under the factoring
program, the Company purchases accounts receivable invoices from its clients and
then receives payment directly from the party obligated for the
receivable.   In most cases the Company purchases the receivables
subject to recourse from the Company’s factoring client.  The
asset-based lending program requires a security interest in all of a client’s
accounts receivable.  At June 30, 2010, factoring/asset- based loans
totaled $102.8 million or 17.3% of total loans, representing an increase of
$36.1 million or 54.2%, as compared to $66.7 million or 11.6% of total loans at
December 31, 2009.





The
Company, 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 75% to 85% of the total loan. In
addition, the loan could be collateralized by a deed of trust on real
estate.  Under the 504 program, the Company lends directly to the
borrower and takes a first deed of trust to the subject property.  In
addition the SBA, through a Certified Development Corporation, makes an
additional loan to the borrower and takes a deed of trust subject to the
Company’s position. At June 30, 2010, SBA loans comprised $58.2 million, or
9.8%, of total loans, a decrease of $9.4 million, or 17.4%, from $67.6 million
at December 31, 2009. The Company has the ability and 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 June 30,
2010 and December 31, 2009, 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 June 30, 2010, other loans totaled $4.5 million
as compared to $5.4 million at December 31, 2009.





Deposits
represent the Company’s principal source of funds.  Most of the
Company’s deposits are obtained from professionals, small-to-medium sized
businesses, and individuals within the Company’s market area.  The
Company’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 June 30, 2010 and December 31, 2009.





(dollars in thousands)
                
                June 30,
                
                
                December 31,2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentNoninterest-bearing  demand
                
                $
                361,981
                
                
                
                46.74
                %
                
                $
                333,171
                
                
                
                47.26
                %Interest-bearing
      demand
                
                
                5,410
                
                
                
                0.70
                %
                
                
                4,830
                
                
                
                0.69
                %Money
      market and savings
                
                
                343,886
                
                
                
                44.41
                %
                
                
                275,850
                
                
                
                39.13
                %Certificates
      of deposit:Less
      than $100
                
                
                14,488
                
                
                
                1.87
                %
                
                
                29,782
                
                
                
                4.22
                %$100
      and more
                
                
                48,619
                
                
                
                6.28
                %
                
                
                61,413
                
                
                
                8.71
                %Total
      deposits
                
                $
                774,384
                
                
                
                100.00
                %
                
                $
                705,046
                
                
                
                100.00
                %





Deposits
increased $69.3 million or 9.8% from $705.0 million at December 31, 2009 to
$774.4 million at June 30, 2010. The increase in deposits was primarily in money
market and savings accounts.  As of June 30, 2010, demand deposits and
core deposits continued to represent 47.4% and 91.9% of total deposits,
respectively.





Leverage





Total gross loan balances at June 30,
2010 were $595.7 million.  The resulting loan to deposit ratio was
76.92%.  Other earning assets at June 30, 2010 were primarily
comprised of investment securities, federal funds sold and interest-bearing
deposits of $263.2 million. To date, the Company has deployed other earning
assets primarily in federal funds sold to address the potential volatility of
deposit balances and to accommodate projected loan funding, and in short term
fixed rate investments to mitigate interest rate risk associated with the
Company’s asset-sensitive balance sheet.   When deploying other
earning assets, the Company implements strategic decisions that may have
a beneficial or adverse impact on net interest income and on the net interest
margin to manage the business through a variety of economic
cycles.


38




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




Capital
Resources




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




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




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




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




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




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




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


39




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




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




Private
Placement




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




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




The
holders of the Series B  and B-1 preferred shares had voting rights at
a rate of 10 votes per share and the ability 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, unless the holders otherwise agreed.





Each
Series B and B-1 preferred share was scheduled to 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 did 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 would be extended for successive
six-month periods until the Current Market Price Condition is met.





The
Company had the ability to force conversion of the shares into common stock on
or after January 15, 2010 through September 30, 2010, if (a) the Company fully
paid the accrued dividends and prepaid the dividends that would have accrued up
through September 30, 2010, (b) the Company’s shareholders had approved the
conversion and (c) the Current Market Price condition was
met.  Subsequent to September 30, 2010, the Company could 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.




On March
31, 2010, the Company strengthened its capital position with the completion of
an early conversion of the Series B and B-1 preferred shares.  As a
result of the conversion, the Company issued a total of 3,710,289 shares of its
common stock and convertible promissory notes in the aggregate principal amount
of $789,860.75 (the “Notes”) upon conversion of the 131,901 shares of the
Company’s Series B Mandatorily Convertible Cumulative Perpetual Preferred
Stock and 168,099 Series B-1 Mandatorily Convertible Cumulative Perpetual
Preferred Stock and as payment of all accrued but unpaid dividends thereon
through June 30, 2010 pursuant to an agreement dated as of March 23,
2010.  The effective conversion price of the Series B and B-1
Preferred was $8.46 per share, which was the closing price of the common stock
reported on the Nasdaq Global Select Market on the date of the
agreement.





The
principal amount of the Notes accrued interest at the rate of 10% per annum and
was convertible to common stock at the price of $8.46 per
share.  Unless converted earlier, the Notes became due on the earlier
of March 31, 2011 or a change of control of the Company.  The Company
had the ability to prepay the Notes on or after August 31,
2010.


40





On June
17, 2010, the Notes were converted into 93,364 shares of common
stock.  As result of the conversion, there are no shares of Series B
and B-1 Preferred outstanding, no shares of common stock issuable upon
conversion of Notes, and 10,931,577 shares of common stock
outstanding.




Troubled
Assets Relief Program (TARP)




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




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





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





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





Issuance
costs of $600,000 incurred in connection with the issuance of both the private
placement and TARP securities have been charged against Additional Paid in
Capital.





The
Company’s Tier 1 capital at June 30, 2010 was $129.6 million, which was
comprised of preferred equity up to the allowable limit of $23.9 million, $73.9
million of capital stock and surplus, $14.8 million in retained earnings and
trust preferred securities up to the allowable limit of $17.0
million.





The
following table shows the Company’s capital ratios at June 30, 2010 and December
31, 2009 as well as the minimum capital ratios required to be deemed “well
capitalized” under the regulatory framework.


41





As of June 30,
                    
                    
                    As of December 31,(dollars in thousands)
                    
                    2010
                    
                    
                    2009Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioCompany
      Capital RatiosTier
      1 Capital
                    
                    $
                    129,573
                    
                    
                    
                    17.41
                    %
                    
                    $
                    106,489
                    
                    
                    
                    15.26
                    %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                    
                    $
                    44,649
                    
                    
                    
                    6.00
                    %
                    
                    $
                    41,861
                    
                    
                    
                    6.00
                    %Total
      Capital
                    
                    $
                    138,947
                    
                    
                    
                    18.68
                    %
                    
                    $
                    135,678
                    
                    
                    
                    19.45
                    %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                    
                    $
                    74,415
                    
                    
                    
                    10.00
                    %
                    
                    $
                    69,768
                    
                    
                    
                    10.00
                    %Company
      LeverageTier
      1 Capital
                    
                    $
                    129,573
                    
                    
                    
                    14.94
                    %
                    
                    $
                    106,489
                    
                    
                    
                    12.53
                    %(to
      Average Assets)Tier
      1 capital minimum requirement
                    
                    $
                    43,363
                    
                    
                    
                    5.00
                    %
                    
                    $
                    42,494
                    
                    
                    
                    5.00
                    %Bank
      Capital RatiosTier
      1 Capital
                    
                    $
                    112,905
                    
                    
                    
                    15.18
                    %
                    
                    $
                    110,517
                    
                    
                    
                    15.85
                    %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                    
                    $
                    44,627
                    
                    
                    
                    6.00
                    %
                    
                    $
                    41,837
                    
                    
                    
                    6.00
                    %Total
      Capital
                    
                    $
                    122,274
                    
                    
                    
                    16.44
                    %
                    
                    $
                    119,323
                    
                    
                    
                    17.11
                    %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                    
                    $
                    74,378
                    
                    
                    
                    10.00
                    %
                    
                    $
                    69,728
                    
                    
                    
                    10.00
                    %Bank
      LeverageTier
      1 Capital
                    
                    $
                    112,905
                    
                    
                    
                    13.03
                    %
                    
                    $
                    110,517
                    
                    
                    
                    13.01
                    %(to
      Average Assets)Tier
      1 capital minimum requirement
                    
                    $
                    43,333
                    
                    
                    
                    5.00
                    %
                    
                    $
                    42,459
                    
                    
                    
                    5.00
                    %





The
Company and the Bank were considered well capitalized at June 30,
2010.


42


ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Liquidity/Interest
Rate Sensitivity




The
Company manages its liquidity to provide adequate funds at an acceptable cost to
support borrowing requirements and deposit flows of its
customers.   At June 30, 2010 and December 31, 2009, liquid
assets as a percentage of deposits were 33.7% and 33.2%,
respectively.  In addition to cash and due from banks, liquid assets
include interest-bearing deposits in other banks, Federal funds sold and
securities available for sale.  The Company has $25.0 million in
Federal funds lines of credit available with correspondent banks to meet
liquidity needs.  At June 30, 2010, there were no balances outstanding
on these lines.  Additionally, as of June 30, 2010, the Company had a
total borrowing capacity with the Federal Home Loan Bank of San Francisco of
approximately $129.0 million for which the Company had collateral in place to
borrow $37.0 million.  As of June 30, 2010, $12.0 million of this
borrowing capacity was pledged to secure a letter of credit.





The
Company’s balance sheet position is asset-sensitive (based upon the significant
amount of variable rate loans and the repricing characteristics of its deposit
accounts).   This balance sheet position generally provides a
hedge against rising interest rates, but has a detrimental effect during times
of interest rate decreases.  Net interest income is generally
negatively impacted in the short term by a decline in interest
rates.  Conversely, an increase in interest rates should have a
short-term positive impact on net interest income.





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 June 30, 2010, 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 sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.





(dollars in thousands)
                    
                    As of June 30, 2010After 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
                    
                    $
                    131,955
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    131,955Interest
      bearing deposits in other banks
                    
                    
                    2,385
                    
                    
                    
                    490
                    
                    
                    
                    2,783
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,658Investment
      securities
                    
                    
                    4,702
                    
                    
                    
                    6,121
                    
                    
                    
                    17,603
                    
                    
                    
                    85,466
                    
                    
                    
                    11,699
                    
                    
                    
                    125,591Loans
                    
                    
                    164,009
                    
                    
                    
                    59,576
                    
                    
                    
                    98,004
                    
                    
                    
                    132,410
                    
                    
                    
                    141,674
                    
                    
                    
                    595,673Total
      earning assets
                    
                    $
                    303,051
                    
                    
                    $
                    66,187
                    
                    
                    $
                    118,390
                    
                    
                    $
                    217,876
                    
                    
                    $
                    153,373
                    
                    
                    $
                    858,877Interest
      checking, money market and savings
                    
                    
                    349,296
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    349,296Certificates
      of deposit:Less
      than $100,000
                    
                    
                    5,139
                    
                    
                    
                    2,679
                    
                    
                    
                    5,682
                    
                    
                    
                    989
                    
                    
                    
                    -
                    
                    
                    
                    14,489$100,000
      or more
                    
                    
                    33,473
                    
                    
                    
                    4,280
                    
                    
                    
                    10,221
                    
                    
                    
                    645
                    
                    
                    
                    -
                    
                    
                    
                    48,619Total
      interest-bearing liabilities
                    
                    $
                    387,908
                    
                    
                    $
                    6,959
                    
                    
                    $
                    15,903
                    
                    
                    $
                    1,634
                    
                    
                    $
                    -
                    
                    
                    $
                    412,404Interest
      rate gap
                    
                    $
                    (84,857
                    )
                    
                    $
                    59,228
                    
                    
                    $
                    102,487
                    
                    
                    $
                    216,242
                    
                    
                    $
                    153,373
                    
                    
                    $
                    446,473Cumulative
      interest rate gap
                    
                    $
                    (84,857
                    )
                    
                    $
                    (25,629
                    )
                    
                    $
                    76,858
                    
                    
                    $
                    293,100
                    
                    
                    $
                    446,473Interest
      rate gap ratio
                    
                    
                    (0.28
                    )
                    
                    
                    0.89
                    
                    
                    
                    0.87
                    
                    
                    
                    0.99
                    
                    
                    
                    1.00Cumulative
      interest rate gap ratio
                    
                    
                    (0.28
                    )
                    
                    
                    (0.07
                    )
                    
                    
                    0.16
                    
                    
                    
                    0.42
                    
                    
                    
                    0.52





Based on
the contractual terms of its assets and liabilities, the Company’s balance sheet
at June 30, 2010 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at June 30, 2010 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, a significant portion of variable rate loans
made by the Company have been written with a minimum “floor”
rate.


43





The
following table shows the scheduled maturities of the loan portfolio at June 30,
2010 and December 31, 2009. At June 30, 2010, approximately 76.7% of the loan
portfolio is priced with floating interest rates which limit the exposure to
interest rate risk on long-term loans.





(dollars in thousands)
                
                As of June 30, 2010Due after oneDue one year
                
                
                year through
                
                
                Due afterAmount
                
                
                or less
                
                
                five years
                
                
                five yearsCommercial
      and other
                
                $
                238,288
                
                
                $
                133,008
                
                
                $
                84,567
                
                
                $
                20,713SBA
                
                
                58,198
                
                
                
                436
                
                
                
                389
                
                
                
                57,373Real
      estate construction
                
                
                37,322
                
                
                
                16,803
                
                
                
                15,757
                
                
                
                4,762Land
      loans
                
                
                10,202
                
                
                
                5,672
                
                
                
                1,257
                
                
                
                3,273Real
      estate-other
                
                
                144,433
                
                
                
                20,538
                
                
                
                41,496
                
                
                
                82,399Factoring
      / Asset-Based Lending
                
                
                102,774
                
                
                
                96,213
                
                
                
                6,561Other
                
                
                4,456
                
                
                
                3,194
                
                
                
                1,262Total
      loans
                
                $
                595,673
                
                
                $
                275,864
                
                
                $
                151,289
                
                
                $
                168,520





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





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 accounting guidance related to Guarantor’s Accounting and
      Disclosure Requirements for Guarantee including Indirect Guarantees of
      Indebtedness to Others;


·
            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 accounting guidance, 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.


44




In the
ordinary course of business, we have issued certain guarantees which qualify as
off-balance sheet arrangements, as of June 30, 2010 those guarantees include the
following:





·
            Standby
      Letters of Credit in the amount of $17.8
  million.





The table
below summarizes the Company’s off-balance sheet contractual
obligations:





(dollars in thousands)
                    
                    As of June 30, 2010Payments due by periodLess than
                    
                    
                    1 - 3
                    
                    
                    3 - 5
                    
                    
                    More thanTotal
                    
                    
                    1 year
                    
                    
                    years
                    
                    
                    years
                    
                    
                    5 yearsLong-term
      contracts
                    
                    $
                    10,469
                    
                    
                    $
                    1,756
                    
                    
                    $
                    3,396
                    
                    
                    $
                    3,062
                    
                    
                    $
                    2,255Operating
      leases
                    
                    
                    872
                    
                    
                    
                    771
                    
                    
                    
                    101
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    11,341
                    
                    
                    $
                    2,527
                    
                    
                    $
                    3,497
                    
                    
                    $
                    3,062
                    
                    
                    $
                    2,255





ITEM
4 – CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures





As
required by SEC rules, the Company’s management evaluated the effectiveness, as
of June 30, 2010, 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 June 30,
2010.





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 of 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
first quarter of 2010 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


45




PART
II – OTHER INFORMATION




ITEM
1 – LEGAL PROCEEDINGS




The
Company is not a defendant in any pending material legal proceedings and no such
proceedings are known to be contemplated. No director, officer, affiliate, more
than 5% 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
1A – RISK FACTORS




There
were no material changes in the risk factors that were disclosed in Item 1A,
under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for
our fiscal year ended December 31, 2009.




ITEM
2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Not
applicable




ITEM
3 – DEFAULTS UPON SENIOR SECURITIES




Not
applicable




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




Not
applicable




ITEM
5 – OTHER INFORMATION




Not
applicable




ITEM
6 – EXHIBITS




(a)
Exhibits




See Index
to Exhibits at page 48 of this Quarterly Report on Form 10-Q.


46




SIGNATURES




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




BRIDGE
      CAPITAL HOLDINGSDated:
      August 5, 2010
                          By:
                          /s/ Daniel P. MyersDaniel
      P. MyersPresident
      and Chief Executive Officer(Principal
      Executive Officer)Dated:
      August 5, 2010
                          By:
                          /s/ Thomas A. SaThomas
      A. SaExecutive
      Vice PresidentChief
      Financial Officer(Principal
      Financial and Accounting
Officer)




47


INDEX
TO EXHIBITS




ExhibitNumber
              
              Description
      of Exhibit(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




48