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: September 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 November 1, 2010:  10,966,347










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
                  20Item
      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
                  Removed
      and Reserved
                  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)September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009ASSETSCash
      and due from banks
                  
                  $
                  17,599
                  
                  
                  $
                  14,893Federal
      funds sold
                  
                  
                  125,155
                  
                  
                  
                  104,260Total
      cash and equivalents
                  
                  
                  142,754
                  
                  
                  
                  119,153Interest
      bearing deposits in other banks
                  
                  
                  3,028
                  
                  
                  
                  9,980Investment
      securities available for sale
                  
                  
                  151,119
                  
                  
                  
                  105,005Loans,
      net of allowance for credit losses of $15,248 at September 30, 2010 and
      $16,012 at December 31, 2009
                  
                  
                  588,450
                  
                  
                  
                  558,977Premises
      and equipment, net
                  
                  
                  2,833
                  
                  
                  
                  3,566Other
      real estate owned
                  
                  
                  8,625
                  
                  
                  
                  6,509Accrued
      interest receivable
                  
                  
                  3,185
                  
                  
                  
                  2,829Other
      assets
                  
                  
                  39,981
                  
                  
                  
                  38,048Total
      assets
                  
                  $
                  939,975
                  
                  
                  $
                  844,067LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Demand
      noninterest-bearing
                  
                  $
                  432,714
                  
                  
                  $
                  333,171Demand
      interest-bearing
                  
                  
                  5,164
                  
                  
                  
                  4,830Savings
                  
                  
                  311,107
                  
                  
                  
                  275,850Time
                  
                  
                  46,460
                  
                  
                  
                  91,195Total
      deposits
                  
                  
                  795,445
                  
                  
                  
                  705,046Junior
      subordinated debt securities
                  
                  
                  17,527
                  
                  
                  
                  17,527Accrued
      interest payable
                  
                  
                  60
                  
                  
                  
                  121Other
      liabilities
                  
                  
                  13,978
                  
                  
                  
                  12,059Total
      liabilities
                  
                  
                  827,010
                  
                  
                  
                  734,753Commitments
      and contingencies
                  
                  
                  -
                  
                  
                  
                  -SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; 10,000,000 shares authorized; 23,864 shares issued
      and outstanding at September 30, 2010 and 323,864 shares issued and
      outstanding at December 31, 2009
                  
                  
                  23,864
                  
                  
                  
                  53,864Common
      stock, no par value; 30,000,000 shares authorized; 10,956,347 shares
      issued and outstanding at September 30, 2010; 7,098,164 shares issued and
      outstanding at December 31, 2009;
                  
                  
                  70,163
                  
                  
                  
                  37,293Additional
      paid in capital
                  
                  
                  4,159
                  
                  
                  
                  3,626Retained
      earnings
                  
                  
                  15,933
                  
                  
                  
                  15,148Accumulated
      other comprehensive (loss)
                  
                  
                  (1,154
                  )
                  
                  
                  (617
                  )Total
      shareholders' equity
                  
                  
                  112,965
                  
                  
                  
                  109,314Total
      liabilities and shareholders' equity
                  
                  $
                  939,975
                  
                  
                  $
                  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
                    
                    
                    Nine
      months endedSeptember 30,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009INTEREST
      INCOME:Loans
                    
                    $
                    10,649
                    
                    
                    $
                    10,181
                    
                    
                    $
                    31,053
                    
                    
                    $
                    33,218Federal
      funds sold
                    
                    
                    66
                    
                    
                    
                    106
                    
                    
                    
                    188
                    
                    
                    
                    300Investment
      securities available for sale
                    
                    
                    632
                    
                    
                    
                    117
                    
                    
                    
                    1,771
                    
                    
                    
                    146Interest
      bearing deposits in other banks
                    
                    
                    22
                    
                    
                    
                    111
                    
                    
                    
                    104
                    
                    
                    
                    287Total
      interest income
                    
                    
                    11,369
                    
                    
                    
                    10,515
                    
                    
                    
                    33,116
                    
                    
                    
                    33,951INTEREST
      EXPENSE:Deposits:Interest-bearing
      demand
                    
                    
                    1
                    
                    
                    
                    2
                    
                    
                    
                    5
                    
                    
                    
                    4Money
      market and savings
                    
                    
                    280
                    
                    
                    
                    435
                    
                    
                    
                    954
                    
                    
                    
                    1,749Certificates
      of deposit
                    
                    
                    145
                    
                    
                    
                    825
                    
                    
                    
                    628
                    
                    
                    
                    2,777Other
                    
                    
                    275
                    
                    
                    
                    261
                    
                    
                    
                    831
                    
                    
                    
                    1,086Total
      interest expense
                    
                    
                    701
                    
                    
                    
                    1,523
                    
                    
                    
                    2,418
                    
                    
                    
                    5,616Net
      interest income
                    
                    
                    10,668
                    
                    
                    
                    8,992
                    
                    
                    
                    30,698
                    
                    
                    
                    28,335Provision
      for credit losses
                    
                    
                    350
                    
                    
                    
                    650
                    
                    
                    
                    2,750
                    
                    
                    
                    8,300Net
      interest income after provision for credit losses
                    
                    
                    10,318
                    
                    
                    
                    8,342
                    
                    
                    
                    27,948
                    
                    
                    
                    20,035NON-INTEREST
      INCOME:Service
      charges on deposit accounts
                    
                    
                    638
                    
                    
                    
                    498
                    
                    
                    
                    1,761
                    
                    
                    
                    1,394International
      fee income
                    
                    
                    415
                    
                    
                    
                    315
                    
                    
                    
                    1,321
                    
                    
                    
                    1,137Gain
      (loss) on sale of SBA loans
                    
                    
                    (16
                    )
                    
                    
                    220
                    
                    
                    
                    (13
                    )
                    
                    
                    611Other
      non interest income
                    
                    
                    396
                    
                    
                    
                    656
                    
                    
                    
                    1,693
                    
                    
                    
                    4,877Total
      non-interest income
                    
                    
                    1,433
                    
                    
                    
                    1,689
                    
                    
                    
                    4,762
                    
                    
                    
                    8,019OPERATING
      EXPENSES:Salaries
      and benefits
                    
                    
                    5,103
                    
                    
                    
                    5,081
                    
                    
                    
                    15,400
                    
                    
                    
                    15,749Premises
      and fixed assets
                    
                    
                    1,012
                    
                    
                    
                    1,118
                    
                    
                    
                    3,081
                    
                    
                    
                    3,336Other
                    
                    
                    3,153
                    
                    
                    
                    3,003
                    
                    
                    
                    10,099
                    
                    
                    
                    8,923Total
      operating expenses
                    
                    
                    9,268
                    
                    
                    
                    9,202
                    
                    
                    
                    28,580
                    
                    
                    
                    28,008Income
      before income taxes
                    
                    
                    2,483
                    
                    
                    
                    829
                    
                    
                    
                    4,130
                    
                    
                    
                    46Income
      taxes
                    
                    
                    1,161
                    
                    
                    
                    290
                    
                    
                    
                    1,688
                    
                    
                    
                    16Net
      income
                    
                    $
                    1,322
                    
                    
                    $
                    539
                    
                    
                    $
                    2,442
                    
                    
                    $
                    30Preferred
      dividends
                    
                    
                    299
                    
                    
                    
                    1,064
                    
                    
                    
                    1,657
                    
                    
                    
                    3,138Net
      income (loss) available to common shareholders
                    
                    
                    1,023
                    
                    
                    
                    (525
                    )
                    
                    
                    785
                    
                    
                    
                    (3,108
                    )Basic
      income (loss) per share
                    
                    $
                    0.10
                    
                    
                    $
                    (0.08
                    )
                    
                    $
                    0.09
                    
                    
                    $
                    (0.47
                    )Diluted
      income (loss) per share
                    
                    $
                    0.09
                    
                    
                    $
                    (0.08
                    )
                    
                    $
                    0.08
                    
                    
                    $
                    (0.47
                    )Average
      common shares outstanding
                    
                    
                    10,417,094
                    
                    
                    
                    6,571,479
                    
                    
                    
                    9,112,264
                    
                    
                    
                    6,571,479Average
      common and equivalent shares outstanding
                    
                    
                    10,843,374
                    
                    
                    
                    6,571,479
                    
                    
                    
                    9,524,004
                    
                    
                    
                    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)





Nine months ended September
    30,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  2,442
                  
                  
                  $
                  30Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for credit losses
                  
                  
                  2,750
                  
                  
                  
                  8,300Depreciation
      and amortization
                  
                  
                  2,150
                  
                  
                  
                  1,330Stock
      based compensation
                  
                  
                  929
                  
                  
                  
                  1,091Loans
      originated for sale
                  
                  
                  (15,165
                  )
                  
                  
                  (7,528
                  )Proceeds
      from loan sales
                  
                  
                  145
                  
                  
                  
                  18,164Gain
      on sale of securities
                  
                  
                  164
                  
                  
                  
                  -Increase
      (decrease) in accrued interest receivable and other assets
                  
                  
                  157
                  
                  
                  
                  (1,558
                  )(Decrease)
      increase in accrued interest payable and other liabilities
                  
                  
                  (1,537
                  )
                  
                  
                  7,332Net
      cash (used in) provided by operating activities
                  
                  
                  (7,965
                  )
                  
                  
                  27,161CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of securities available for sale
                  
                  
                  (124,196
                  )
                  
                  
                  (40,654
                  )Proceeds
      from sale of securities available for sale
                  
                  
                  21,142
                  
                  
                  
                  -Proceeds
      from maturity of securities available for sale
                  
                  
                  56,491
                  
                  
                  
                  -Proceeds
      from the sale of other real estate owned
                  
                  
                  4,820
                  
                  
                  
                  -Net
      (increase) decrease in loans
                  
                  
                  (24,729
                  )
                  
                  
                  98,486Net
      decrease (increase) in interest bearing deposits in other
      banks
                  
                  
                  6,952
                  
                  
                  
                  (11,852
                  )Purchase
      of fixed assets
                  
                  
                  (282
                  )
                  
                  
                  (294
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (59,802
                  )
                  
                  
                  45,686CASH
      FLOW FROM FINANCING ACTIVITIES:Net
      increase (decrease) in deposits
                  
                  
                  90,399
                  
                  
                  
                  (85,186
                  )(Decrease)
      in other borrowings
                  
                  
                  -
                  
                  
                  
                  (30,000
                  )Common
      stock issued
                  
                  
                  32,503
                  
                  
                  
                  -Conversion
      of preferred stock
                  
                  
                  (30,000
                  )
                  
                  
                  -Payment
      of cash dividends
                  
                  
                  (1,505
                  )
                  
                  
                  (2,335
                  )Preferred
      stock issuance costs
                  
                  
                  (29
                  )
                  
                  
                  (100
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  91,368
                  
                  
                  
                  (117,621
                  )NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
                  
                  
                  23,601
                  
                  
                  
                  (44,774
                  )Cash
      and equivalents at beginning of period
                  
                  
                  119,153
                  
                  
                  
                  217,946Cash
      and equivalents at end of period
                  
                  $
                  142,754
                  
                  
                  $
                  173,172OTHER
      CASH FLOW INFORMATION:Cash
      paid for interest
                  
                  $
                  1,668
                  
                  
                  $
                  3,148Cash
      paid for income taxes
                  
                  $
                  1,603
                  
                  
                  $
                  16NON-CASH
      INVESTING ACTIVITIES:Loans
      transferred to other real estate owned
                  
                  $
                  7,526
                  
                  
                  $
                  2,874





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 September 30, 2010 and for the
three and nine months ended September 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 nine months
ended September 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 $315,000 ($222,000 net of
tax) and $929,000 ($705,000 net of tax) of stock-based compensation expense
during the three and nine months ended September 30, 2010,
respectively, and recorded an incremental $345,000 ($273,000 net of tax)
and $1.1 million ($875,000 net of tax) of stock-based compensation expense
during the three and nine months ended September 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 September 30, 2010.   As of September 30, 2010, $2.7
million of total unrecognized compensation cost related to stock options and
restricted stock units are expected to be recognized over a weighted-average
period of 3.1 years.





Stock-based
compensation reduced basic earnings per share by $0.03 and $0.04 and diluted
earnings per share by $0.02 and $0.03 for the three months ended September 30,
2010 and 2009, respectively.  Stock-based compensation reduced basic
earnings per share by $0.10 and $0.13 and diluted earnings per share by $0.08
and $0.12 for the nine months ended September 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 $(1.2 million), net of tax, as of
September 30, 2010 and a cumulative other comprehensive loss totaling
$(617,000), net of tax, as of December 31, 2009.




Three
      months ended
                
                
                Nine
      months ended(dollars
      in thousands)
                
                September 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income
                
                $
                1,322
                
                
                $
                539
                
                
                $
                2,442
                
                
                $
                30Other
      comprehensive earnings (loss) -Net
      unrealized gains on securities available for sale
                
                
                56
                
                
                
                116
                
                
                
                546
                
                
                
                158Net
      unrealized gains (losses) on supplemental executive retirement
      plan
                
                
                (42
                )
                
                
                13
                
                
                
                (29
                )
                
                
                37Net
      unrealized (losses) on cash flow hedges
                
                
                (322
                )
                
                
                (490
                )
                
                
                (1,054
                )
                
                
                (1,866
                )Total
      comprehensive income (loss)
                
                $
                1,014
                
                
                $
                178
                
                
                $
                1,905
                
                
                $
                (1,641
                )




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
                
                
                Nine
      months ended(dollars
      in thousands,
                
                September 30,
                
                
                September 30,except
      per share amounts)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income
                
                $
                1,322
                
                
                $
                539
                
                
                $
                2,442
                
                
                $
                30Less:Dividends
      on preferred shares
                
                
                (299
                )
                
                
                (1,064
                )
                
                
                (1,657
                )
                
                
                (3,138
                )Net
      income (loss) available for common shareholders
                
                
                1,023
                
                
                
                (525
                )
                
                
                785
                
                
                
                (3,108
                )Weighted
      average shares:Basic
      common shares
                
                
                10,417,094
                
                
                
                6,571,479
                
                
                
                9,112,264
                
                
                
                6,571,479Diluted
      potential common shares related to stock options, restricted stock, and
      preferred stock
                
                
                426,280
                
                
                
                -
                
                
                
                411,740
                
                
                
                -Total
      average common equivalent shares
                
                
                10,843,374
                
                
                
                6,571,479
                
                
                
                9,524,004
                
                
                
                6,571,479Basic
      earnings (loss) per share
                
                $
                0.10
                
                
                $
                (0.08
                )
                
                $
                0.09
                
                
                $
                (0.47
                )Diluted
      earnings (loss) per share
                
                $
                0.09
                
                
                $
                (0.08
                )
                
                $
                0.08
                
                
                $
                (0.47
                )




10




3.           Securities




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







(dollars
      in thousands)
                
                As of September 30, 2010Gross Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                ValueU.S.
      government agency securities
                
                $
                76,566
                
                
                $
                385
                
                
                $
                -
                
                
                $
                76,951Mortgage
      backed securities
                
                
                53,782
                
                
                
                342
                
                
                
                (253
                )
                
                
                53,871Collateralized
      mortgage obligations
                
                
                12,182
                
                
                
                64
                
                
                
                (4
                )
                
                
                12,242Corporate
      bonds
                
                
                7,994
                
                
                
                61
                
                
                
                -
                
                
                
                8,055Total
      securities available for sale
                
                
                150,524
                
                
                
                852
                
                
                
                (257
                )
                
                
                151,119Total
      investment securities
                
                $
                150,524
                
                
                $
                852
                
                
                $
                (257
                )
                
                $
                151,119





As of December 31, 2009Gross Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                ValueU.S.
      government agency securities
                
                $
                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 September 30, 2010 and
December 31, 2009 were as follows:




(dollars
      in thousands)
                  
                  September 30, 2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  27,924
                  
                  
                  $
                  28,065Due
      after one year through five years
                  
                  
                  98,032
                  
                  
                  
                  98,625Due
      after five years through ten years
                  
                  
                  5,218
                  
                  
                  
                  5,213Due
      after ten years
                  
                  
                  19,350
                  
                  
                  
                  19,216Total
      investment securities
                  
                  $
                  150,524
                  
                  
                  $
                  151,119





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
September 30, 2010 and December 31, 2009, no investment securities were pledged
as collateral.   As of September 30, 2010, $257,000 in unrealized
losses was attributable to securities that had been in an unrealized loss
position for greater than 12 months.  These unrealized losses (on
investments in U.S. Government agency securities) which have been in an
unrealized loss position for one year or longer as of September 30, 2010, were
caused by market interest rate increases subsequent to the purchase of the
securities.  Because the Bank has the ability to hold these
investments until a recovery in fair value, which may be maturity, these
investments are not considered to be other-than-temporarily impaired as of
September 30, 2010.





4.           Loans




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




September
      30,
                
                
                December
      31,(dollars
      in thousands)
                
                2010
                
                
                2009Commercial
                
                $
                245,894
                
                
                $
                253,776Real
      estate construction
                
                
                39,416
                
                
                
                20,601Land
      loans
                
                
                9,558
                
                
                
                12,763Real
      estate other
                
                
                141,245
                
                
                
                149,617Factoring
      and asset based lending
                
                
                105,172
                
                
                
                66,660SBA
                
                
                60,005
                
                
                
                67,629Other
                
                
                3,917
                
                
                
                5,395Total
      gross loans
                
                
                605,207
                
                
                
                576,441Unearned
      fee income
                
                
                (1,509
                )
                
                
                (1,452
                )Total
      loan portfolio
                
                
                603,698
                
                
                
                574,989Less
      allowance for credit losses
                
                
                (15,248
                )
                
                
                (16,012
                )Loans,
      net
                
                $
                588,450
                
                
                $
                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 September 30, 2010 and December 31, 2009 are comprised of the
following:


12





(dollars
      in thousands)
                
                September 30, 2010Accumulated
                
                
                Net
      BookCost
                
                
                Depreciation
                
                
                ValueLeasehold
      improvements
                
                $
                5,594
                
                
                $
                (3,518
                )
                
                $
                2,076Furniture
      and fixtures
                
                
                1,099
                
                
                
                (930
                )
                
                
                169Capitalized
      software
                
                
                3,178
                
                
                
                (2,855
                )
                
                
                323Equipment
                
                
                2,319
                
                
                
                (2,054
                )
                
                
                265Construction
      in process
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                $
                12,190
                
                
                $
                (9,357
                )
                
                $
                2,833





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





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 September 30, 2010 and December 31,
2009.


13





As of
September 30, 2010, the Company had a total borrowing capacity with the Federal
Home Loan Bank of San Francisco of approximately $217.0 million for which the
Company had collateral in place to borrow $34.0 million.  As of
September 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 September 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 September
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:





Three months ended September
      30,
                
                
                Nine months ended September
    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
                
                
                2.01
                %
                
                
                2.74
                %
                
                
                2.57
                %
                
                
                2.21
                %Dividend
      yield
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %Fair
      value per share - option awards
                
                $
                4.24
                
                
                $
                1.94
                
                
                $
                3.62
                
                
                $
                1.68




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:


14





(dollars
      in thousands)
                  
                  As of September 30, 2010Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Securities
      available for sale
                  
                  
                  151,119
                  
                  
                  $
                  -
                  
                  
                  $
                  151,119
                  
                  
                  $
                  -Cash
      flow hedge
                  
                  
                  (2,273
                  )
                  
                  
                  -
                  
                  
                  
                  (2,273
                  )
                  
                  
                  -Warrant
      portfolio
                  
                  
                  717
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  717Total
                  
                  $
                  149,563
                  
                  
                  $
                  -
                  
                  
                  $
                  148,846
                  
                  
                  $
                  717





(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





The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis were not material for the quarter ended September 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 September 30, 2010 and December 31, 2009 included impaired loans of $19.6
million and $17.0 million, respectively and other real estate owned of $8.6
million and $6.5 million, respectively.  The Company charged-off $1.3
million and $5.8 million during the quarter and nine months ended September 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 September 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, BOLI and cash flow hedge. (see Note 3 for information regarding
securities).




15





(dollars
      in thousands)
                
                September 30, 2010
                
                
                December 31, 2009Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairValue
                
                
                Value
                
                
                Value
                
                
                ValueFinancial
      assets:Cash
      and due from banks
                
                $
                17,599
                
                
                $
                17,599
                
                
                $
                14,893
                
                
                $
                14,893Federal
      funds sold
                
                
                125,155
                
                
                
                125,155
                
                
                
                104,260
                
                
                
                104,260Interest
      bearing deposits in other banks
                
                
                3,028
                
                
                
                3,032
                
                
                
                9,980
                
                
                
                9,954Investments
      securities
                
                
                151,119
                
                
                
                151,119
                
                
                
                105,005
                
                
                
                105,005Loans
      and leases, gross
                
                
                603,698
                
                
                
                610,290
                
                
                
                574,989
                
                
                
                589,748Bank
      owned life insurance
                
                
                10,296
                
                
                
                10,296
                
                
                
                10,001
                
                
                
                10,001Financial
      liabilities:Deposits
                
                
                795,445
                
                
                
                793,601
                
                
                
                705,046
                
                
                
                703,362Trust
      preferred securities
                
                
                17,527
                
                
                
                17,751
                
                
                
                17,527
                
                
                
                8,058Cash
      flow hedge
                
                
                2,273
                
                
                
                2,273
                
                
                
                776
                
                
                
                776




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.





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
September 30, 2010 and December 31, 2009.  The Company did not have
any derivative instruments that were assets as of September 30, 2010 and
December 31, 2009.


16





Fair ValueDerivatives
      Designated as Hedging
                        
                        Balance
      Sheet
                        
                        September
      30,
                        
                        
                        December
      31,Instruments Under ASC
815-10
                        
                        Location
                        
                        2010
                        
                        
                        2009Interest
      rate contracts
                        
                        Other
      liabilities
                        
                        $
                        2,273
                        
                        
                        $
                        776Total
      hedged derivatives
                        
                        
                        
                        $
                        2,273
                        
                        
                        $
                        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 September 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
nine months ended September 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 September
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 $(586,000) and $(398,000), respectively.  During the
nine months ended September 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 $(1.7) million and $460,000,
respectively.  During the three months ended September 30, 2010 and
2009, $(50,000) and $135,000, respectively was reclassified into earnings
related to the effective portion of cash flow hedges.  During the nine
months ended September 30, 2010 and 2009, $(42,000) and $487,000, 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 nine months ended September 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 $63,000 will be reclassified as an increase to interest
income and $523,000 will be reclassified as an increase to interest
expense.  During the three and nine months ended September 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 nine months ended
September 30, 2010 were gains of $43,000.  No amounts were accelerated
during the third quarter of 2010.  The accelerated amounts for the
three and nine months ended September 30, 2009 were gains of $301,000 and $3.2
million, respectively.





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 September 30, 2010 and 2009.




17




(dollars
      in thousands)
                      
                      Interest
      Income
                      
                      
                      Non-Interest
      Income
                      
                      
                      Total
      IncomeThree
      months
                      
                      
                      Three
      months
                      
                      
                      Three
      monthsended
                      
                      
                      ended
                      
                      
                      endedSeptember
      30,
                      
                      
                      September
      30,
                      
                      
                      September
      30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Amount
      of gain reclassified from AOCI into income - effective
    portion
                      
                      $
                      (50
                      )
                      
                      $
                      135
                      
                      
                      $
                      -
                      
                      
                      $
                      301
                      
                      
                      $
                      (50
                      )
                      
                      $
                      436Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from effectiveness testing
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      derivative income
                      
                      $
                      (50
                      )
                      
                      $
                      135
                      
                      
                      $
                      -
                      
                      
                      $
                      301
                      
                      
                      $
                      (50
                      )
                      
                      $
                      436
 
 Interest
      Income
                          
                          
                          Non-Interest
      Income
                          
                          
                          Total
      IncomeNine
      months ended
                          
                          
                          Nine
      months ended
                          
                          
                          Nine
      months endedSeptember
      30,
                          
                          
                          September
      30,
                          
                          
                          September
      30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Amount
      of gain reclassified from AOCI    into income -
      effective portion
                          
                          $
                          (42
                          )
                          
                          $
                          487
                          
                          
                          $
                          43
                          
                          
                          $
                          3,221
                          
                          
                          $
                          1
                          
                          
                          $
                          3,708Amount
      of gain recognized in income on derivative - ineffective portion
      and amount excluded from effectiveness testing
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      derivative income
                          
                          $
                          (42
                          )
                          
                          $
                          487
                          
                          
                          $
                          43
                          
                          
                          $
                          3,221
                          
                          
                          $
                          1
                          
                          
                          $
                          3,708
 
 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
September 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 $2.3 million. As of September 30, 2010,
the Company has minimum collateral posting thresholds with certain of its
derivative counterparties and has posted collateral of $2.1 million against its
obligations under these agreements. If the Company had breached any of these
provisions at September 30, 2010, it would have been required to settle its
obligations under the agreements at the termination value.
  18
  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 in accordance with
accounting guidance.  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.
  19
  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 September 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.
  20
 
 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.
  21
  Selected
Financial Data
 
 The
following table reflects selected financial data and ratios as of and for the
quarters and nine months ended September 30, 2010 and 2009.
 
 (dollars
in thousands, except per share data)
 Three
      months ended
                    
                    
                    Nine
      months endedSeptember 30,
                    
                    
                    September 30,Statement
      of Operations Data:
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Interest
      income
                    
                    $
                    11,369
                    
                    
                    $
                    10,515
                    
                    
                    $
                    33,116
                    
                    
                    $
                    33,951Interest
      expense
                    
                    
                    701
                    
                    
                    
                    1,523
                    
                    
                    
                    2,418
                    
                    
                    
                    5,616Net
      interest income
                    
                    
                    10,668
                    
                    
                    
                    8,992
                    
                    
                    
                    30,698
                    
                    
                    
                    28,335Provision
      for credit losses
                    
                    
                    350
                    
                    
                    
                    650
                    
                    
                    
                    2,750
                    
                    
                    
                    8,300Net
      interest income after provision for credit losses
                    
                    
                    10,318
                    
                    
                    
                    8,342
                    
                    
                    
                    27,948
                    
                    
                    
                    20,035Other
      income
                    
                    
                    1,433
                    
                    
                    
                    1,689
                    
                    
                    
                    4,762
                    
                    
                    
                    8,019Other
      expenses
                    
                    
                    9,268
                    
                    
                    
                    9,202
                    
                    
                    
                    28,580
                    
                    
                    
                    28,008Income
      before income taxes
                    
                    
                    2,483
                    
                    
                    
                    829
                    
                    
                    
                    4,130
                    
                    
                    
                    46Income
      taxes
                    
                    
                    1,161
                    
                    
                    
                    290
                    
                    
                    
                    1,688
                    
                    
                    
                    16Net
      income
                    
                    $
                    1,322
                    
                    
                    $
                    539
                    
                    
                    $
                    2,442
                    
                    
                    $
                    30Preferred
      dividends
                    
                    
                    299
                    
                    
                    
                    1,064
                    
                    
                    
                    1,657
                    
                    
                    
                    3,138Net
      Income (loss) available to common shareholders
                    
                    $
                    1,023
                    
                    
                    $
                    (525
                    )
                    
                    $
                    785
                    
                    
                    $
                    (3,108
                    )Per
      Share Data:Basic
      earnings (loss) per share
                    
                    $
                    0.10
                    
                    
                    $
                    (0.08
                    )
                    
                    $
                    0.09
                    
                    
                    $
                    (0.47
                    )Diluted
      earnings (loss) per share
                    
                    
                    0.09
                    
                    
                    
                    (0.08
                    )
                    
                    
                    0.08
                    
                    
                    
                    (0.47
                    )Shareholders'
      equity per share
                    
                    
                    8.13
                    
                    
                    
                    7.83
                    
                    
                    
                    8.13
                    
                    
                    
                    7.83Cash
      dividend per common share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      Sheet Data:Balance
      sheet totals (period-end):Assets
                    
                    $
                    939,975
                    
                    
                    $
                    834,828Loans,
      net
                    
                    
                    588,450
                    
                    
                    
                    555,254Deposits
                    
                    
                    795,445
                    
                    
                    
                    692,059Shareholders'
      equity
                    
                    
                    112,965
                    
                    
                    
                    108,701Average
      balance sheet amounts:Assets
                    
                    $
                    907,466
                    
                    
                    $
                    854,247
                    
                    
                    $
                    873,068
                    
                    
                    $
                    874,329Loans,
      net
                    
                    
                    599,566
                    
                    
                    
                    589,343
                    
                    
                    
                    583,235
                    
                    
                    
                    630,354Deposits
                    
                    
                    763,874
                    
                    
                    
                    714,497
                    
                    
                    
                    730,937
                    
                    
                    
                    722,275Shareholders'
      equity
                    
                    
                    112,856
                    
                    
                    
                    109,160
                    
                    
                    
                    111,305
                    
                    
                    
                    110,933Selected
      Ratios:Return
      on average assets
                    
                    
                    0.58
                    %
                    
                    
                    0.25
                    %
                    
                    
                    0.37
                    %
                    
                    
                    0.00
                    %Return
      on average equity
                    
                    
                    4.65
                    %
                    
                    
                    1.96
                    %
                    
                    
                    2.93
                    %
                    
                    
                    0.04
                    %Efficiency
      ratio
                    
                    
                    76.59
                    %
                    
                    
                    86.15
                    %
                    
                    
                    80.60
                    %
                    
                    
                    77.04
                    %Risk
      based capital ratio
                    
                    
                    18.45
                    %
                    
                    
                    19.57
                    %Net
      chargeoffs to average gross loans
                    
                    
                    0.04
                    %
                    
                    
                    0.30
                    %
                    
                    
                    0.57
                    %
                    
                    
                    1.58
                    %Allowance
      for loan losses to total loans
                    
                    
                    2.52
                    %
                    
                    
                    2.95
                    %Average
      equity to average assets
                    
                    
                    12.44
                    %
                    
                    
                    12.78
                    %
                    
                    
                    12.75
                    %
                    
                    
                    12.69
                    %
  22
 
 Summary
of Financial Results – Quarter ended September 30, 2010
 
 The
Company reported net operating income of $1.3 million for the three months ended
September 30, 2010 representing an increase of $783,000, compared to net
operating income of $539,000 for the same period one year ago. Net income
available to common shareholders was reduced by preferred dividends of $299,000
and $1.1 million during the third quarter of 2010 and 2009, respectively,
resulting in earnings per diluted share of $0.09 and a loss per diluted share of
$(0.08), respectively.  Preferred dividends decreased $765,000
compared to the same period one year earlier, resulting in quarter to date
preferred dividends of $299,000 due to the early conversion of Series B and B-1
preferred shares in March 2010 (see discussion in Capital Resources section
under Private
Placement).
 
 The table
below highlights the changes in the nature and sources of income and
expense.
 
 Three
      months endedSeptember 30,
                        
                        
                        Increase(dollars
      in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        (Decrease)Interest
      income
                        
                        $
                        11,369
                        
                        
                        $
                        10,515
                        
                        
                        $
                        854Interest
      expense
                        
                        
                        701
                        
                        
                        
                        1,523
                        
                        
                        
                        (822
                        )Net
      interest income
                        
                        
                        10,668
                        
                        
                        
                        8,992
                        
                        
                        
                        1,676Provision
      for credit losses
                        
                        
                        350
                        
                        
                        
                        650
                        
                        
                        
                        (300
                        )Net
      interest income after provision for credit losses
                        
                        
                        10,318
                        
                        
                        
                        8,342
                        
                        
                        
                        1,976Other
      income
                        
                        
                        1,433
                        
                        
                        
                        1,689
                        
                        
                        
                        (256
                        )Other
      expenses
                        
                        
                        9,268
                        
                        
                        
                        9,202
                        
                        
                        
                        66Income
      before income taxes
                        
                        
                        2,483
                        
                        
                        
                        829
                        
                        
                        
                        1,654Income
      taxes
                        
                        
                        1,161
                        
                        
                        
                        290
                        
                        
                        
                        871Net
      income
                        
                        $
                        1,322
                        
                        
                        $
                        539
                        
                        
                        $
                        783Preferred
      dividends
                        
                        
                        299
                        
                        
                        
                        1,064
                        
                        
                        
                        (765
                        )Net
      income (loss) available to common shareholders
                        
                        $
                        1,023
                        
                        
                        $
                        (525
                        )
                        
                        $
                        1,548
 
 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 September 30, 2010 was $10.7 million,
which was comprised of $11.4 million in interest income and $701,000 in interest
expense. Net interest income for the quarter ended September 30, 2009 was $9.0
million, which was comprised of $10.5 million in interest income and $1.5
million in interest expense.  Net interest income for the quarter
ended September 30, 2010 represented an increase of $1.7 million or 18.6% from
the same period one year earlier.
 
 The
composition of the average balance sheet impacts growth in net interest
income.  For the quarter ended September 30, 2010 average earning
assets of $852.0 million represented an increase of $38.4 million, or 4.72%,
compared to $813.6 million for the same period in 2009.  The Company’s
loan-to-deposit ratio, a measure of leverage, averaged 78.49% during the quarter
ended September 30, 2010, which represented a decrease compared to an average of
82.48% for the same quarter of 2009 as a result of slower loan growth relative
to deposit funding.
  23
 
 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 September 30, 2010 and September
30, 2009.
 
 The
Company’s net interest margin (net interest income divided by average earning
assets) for the quarter ended September 30, 2010 was 4.97% compared to 4.38% 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 only 9 basis points
in the third quarter of 2010 compared to 29 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 September 30, 2010 and 2009.
 
 Three months ended September
      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)
                          
                          $
                          599,566
                          
                          
                          
                          7.0
                          %
                          
                          $
                          10,649
                          
                          
                          $
                          589,343
                          
                          
                          
                          6.9
                          %
                          
                          $
                          10,181Federal
      funds sold
                          
                          
                          112,348
                          
                          
                          
                          0.2
                          %
                          
                          
                          66
                          
                          
                          
                          167,480
                          
                          
                          
                          0.3
                          %
                          
                          
                          106Investment
      securities
                          
                          
                          136,014
                          
                          
                          
                          1.8
                          %
                          
                          
                          632
                          
                          
                          
                          35,161
                          
                          
                          
                          1.3
                          %
                          
                          
                          117Other
                          
                          
                          4,071
                          
                          
                          
                          2.1
                          %
                          
                          
                          22
                          
                          
                          
                          21,591
                          
                          
                          
                          2.0
                          %
                          
                          
                          111Total
      interest earning assets
                          
                          
                          851,999
                          
                          
                          
                          5.3
                          %
                          
                          
                          11,369
                          
                          
                          
                          813,575
                          
                          
                          
                          5.1
                          %
                          
                          
                          10,515Noninterest-earning
      assets:Cash
      and due from banks
                          
                          
                          18,811
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          15,185All
      other assets (3)
                          
                          
                          36,656
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          25,487TOTAL
                          
                          $
                          907,466
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          854,247LIABILITIES
      AND SHAREHOLDERS' EQUITYInterest
      bearing liabilities:Deposits:Demand
                          
                          $
                          6,227
                          
                          
                          
                          0.1
                          %
                          
                          $
                          1
                          
                          
                          $
                          4,349
                          
                          
                          
                          0.1
                          %
                          
                          $
                          1Savings
                          
                          
                          323,358
                          
                          
                          
                          0.3
                          %
                          
                          
                          280
                          
                          
                          
                          280,640
                          
                          
                          
                          0.6
                          %
                          
                          
                          435Time
                          
                          
                          50,253
                          
                          
                          
                          1.1
                          %
                          
                          
                          145
                          
                          
                          
                          137,139
                          
                          
                          
                          2.4
                          %
                          
                          
                          826Other
                          
                          
                          17,527
                          
                          
                          
                          6.2
                          %
                          
                          
                          275
                          
                          
                          
                          17,527
                          
                          
                          
                          5.9
                          %
                          
                          
                          261Total
      interest bearing liabilities
                          
                          
                          397,365
                          
                          
                          
                          0.7
                          %
                          
                          
                          701
                          
                          
                          
                          439,655
                          
                          
                          
                          1.4
                          %
                          
                          
                          1,523Noninterest-bearing
      liabilities:Demand
      deposits
                          
                          
                          384,035
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          292,370Accrued
      expenses and other liabilities
                          
                          
                          13,210
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          13,062Shareholders'
      equity
                          
                          
                          112,856
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          109,160TOTAL
                          
                          $
                          907,466
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          854,247Net
      interest income and margin
                          
                          
                          
                          
                          
                          
                          5.0
                          %
                          
                          $
                          10,668
                          
                          
                          
                          
                          
                          
                          
                          4.4
                          %
                          
                          $
                          8,992
  (1)
                Loan
      fee amortization of $1.0 million and $833,000, 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.
  24
 
 (3)
                Net
      of average allowance for credit losses of $15.0 million and $17.7 million,
      respectively.
 The
following table shows the effect of the interest differential of volume and rate
changes for the quarters ended September 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)
                                            
                                            Three
      months ended September 30,2010
      vs. 2009Increase
      (decrease)due
      to change inAverage
                                            
                                            
                                            Average
                                            
                                            
                                            TotalVolume
                                            
                                            
                                            Rate
                                            
                                            
                                            ChangeInterest
      income:Loans
                                            
                                            $
                                            182
                                            
                                            
                                            $
                                            286
                                            
                                            
                                            $
                                            468Federal
      funds sold
                                            
                                            
                                            (32
                                            )
                                            
                                            
                                            (8
                                            )
                                            
                                            
                                            (40
                                            )Investment
      securities
                                            
                                            
                                            469
                                            
                                            
                                            
                                            46
                                            
                                            
                                            
                                            515Other
                                            
                                            
                                            (95
                                            )
                                            
                                            
                                            6
                                            
                                            
                                            
                                            (89
                                            )Total
      interest income
                                            
                                            
                                            523
                                            
                                            
                                            
                                            331
                                            
                                            
                                            
                                            854Interest
      expense:Demand
                                            
                                            
                                            0
                                            
                                            
                                            
                                            (0
                                            )
                                            
                                            
                                            -Savings
                                            
                                            
                                            37
                                            
                                            
                                            
                                            (192
                                            )
                                            
                                            
                                            (155
                                            )Time
                                            
                                            
                                            (251
                                            )
                                            
                                            
                                            (430
                                            )
                                            
                                            
                                            (681
                                            )Other
                                            
                                            
                                            -
                                            
                                            
                                            
                                            14
                                            
                                            
                                            
                                            14Total
      interest expense
                                            
                                            
                                            (213
                                            )
                                            
                                            
                                            (609
                                            )
                                            
                                            
                                            (822
                                            )Change
      in net interest income
                                            
                                            $
                                            737
                                            
                                            
                                            $
                                            940
                                            
                                            
                                            $
                                            1,676
 
 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 $11.4 million in the quarter ended September 30, 2010 represented an
increase of $854,000, or 8.1%, from $10.5 million in the same quarter one year
earlier.  The average yield on earning assets was 5.29% for the
quarter ended September 30, 2010 and 5.13% for the quarter ended September 30,
2009.  The increase in interest income was primarily due to an
increase in investment securities and loan balances in addition to higher rates
earned on those instruments.
 
 Average
gross loans were $599.6 million for three months ended September 30, 2010, an
increase of $10.2 million or 1.7% from $589.3 million for the same period one
year earlier.  Average loans comprised 70.4% of average earning assets
in the three months ended September 30, 2010 compared to 72.4% in the third
quarter of 2009.
 
 Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $252.4 million for the quarter ended
September 30, 2010, an increase of $28.2 million or 12.6% from $224.2 million
for the three months ended September 30, 2009.
  Interest
Expense
  Interest
expense was $701,000 for the quarter ended September 30, 2010, which represented
a decrease of $822,000, or 54.0% from $1.5 million for the comparable period of
2009.  The decrease in interest expense primarily reflects lower
interest rates paid on liabilities as well as a lower balance of
interest-bearing liabilities in the third quarter of 2010 compared to the same
period in 2009.  Average interest-bearing liabilities were $397.4
million for the three months ended September 30, 2010, a decrease of $42.3
million, or 9.6%, from $439.7 million for the same period one year
earlier.
  25
 
 Average
interest bearing deposits were $379.8 million for the quarter ended September
30, 2010, which represented 49.7% of total average deposits and was a decrease
of $42.3 million, or 10.0%, from $422.1 million representing 59.1% of total
average deposits in the third 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 in
the three months ended September 30, 2010 and 2009.
 
 The
average rate paid on interest-bearing liabilities of 0.70% in the quarter ended
September 30, 2010 compared to 1.37% in the third 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 $350,000 to the allowance for credit losses for the three
months ended September 30, 2010, compared to $650,000 for the same period in
2009.
 
 The
Company’s loan charge-offs totaled $1.3 million during the third quarter ended
September 30, 2010, compared to $1.7 million for the same period one year
earlier.  The Company recognized $1.0 million and $11,000 in loan
recoveries for the three months ended September 30, 2010 and 2009,
respectively.
 
 The
following schedule provides an analysis of the allowance for credit losses for
the quarter ended September 30, 2010 and 2009, respectively:
 
 Three
      months ended(dollars
      in thousands)
                  
                  September 30,2010
                  
                  
                  2009Balance,
      beginning of period
                  
                  $
                  15,137
                  
                  
                  $
                  17,968Provision
      for credit losses
                  
                  
                  350
                  
                  
                  
                  650Charge-offs
                  
                  
                  (1,268
                  )
                  
                  
                  (1,707
                  )Recoveries
                  
                  
                  1,029
                  
                  
                  
                  11Balance,
      end of period
                  
                  $
                  15,248
                  
                  
                  $
                  16,922
 
 The
decrease in the allowance for loan losses of $1.7 million from $16.9 million at
September 30, 2009 to $15.2 million at September 30, 2010 is primarily
attributable to 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 September 30, 2010 and December 31, 2009:
  26
 
 (dollars
      in thousands)
                    
                    September 30, 2010
                    
                    
                    December 31, 2009Percent
      of
                    
                    
                    
                    
                    
                    Percent
      ofALLL
      in each
                    
                    
                    
                    
                    
                    ALLL
      in eachcategory
      to
                    
                    
                    
                    
                    
                    category
      toAmount
                    
                    
                    gross loans
                    
                    
                    Amount
                    
                    
                    gross loansCommercial
                    
                    $
                    4,363
                    
                    
                    
                    0.8
                    %
                    
                    $
                    6,313
                    
                    
                    
                    1.1
                    %Real
      estate construction
                    
                    
                    1,500
                    
                    
                    
                    0.2
                    %
                    
                    
                    1,376
                    
                    
                    
                    0.2
                    %Land
      loans
                    
                    
                    585
                    
                    
                    
                    0.1
                    %
                    
                    
                    764
                    
                    
                    
                    0.1
                    %Real
      estate other
                    
                    
                    5,450
                    
                    
                    
                    0.9
                    %
                    
                    
                    5,173
                    
                    
                    
                    0.9
                    %SBA
                    
                    
                    1,566
                    
                    
                    
                    0.3
                    %
                    
                    
                    1,175
                    
                    
                    
                    0.2
                    %Factoring/ABL
                    
                    
                    1,702
                    
                    
                    
                    0.3
                    %
                    
                    
                    1,061
                    
                    
                    
                    0.2
                    %Other
                    
                    
                    82
                    
                    
                    
                    0.0
                    %
                    
                    
                    150
                    
                    
                    
                    0.0
                    %$
                    15,248
                    
                    
                    
                    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
September 30, 2010, the Company’s land development portfolio was reduced to $9.6
million with just $2.6 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 September 30, 2010 were $39.4 million with $3.5 million remaining on
projects outside of the primary market area.  In addition, at that
date $23.7 million, or 60.7%, were loans to finance commercial projects and $5.0
million, or 12.8% 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.  Nonperforming loans at September 30,
2010, on average, have been reduced by approximately 19% 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
2.52% of total loans at September 30, 2010.  Additionally, the
Company’s coverage ratio, the ratio of allowance for loan losses to
nonperforming loans was 77.63% at September 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
September 30, 2010 nonperforming assets represented 3.01% 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 loan
continued to remain current as of September 30, 2010 and no additional
impairment charges have been taken.  The following summarizes
nonperforming assets at September 30, 2010 and December 31,
2009.
  27
 
 September
      30,
                  
                  
                  December
      31,(dollars
      in thousands)
                  
                  2010
                  
                  
                  2009Loans
      accounted for on a non-accrual basis
                  
                  $
                  19,641
                  
                  
                  $
                  17,009Other
      loans with principal or interest contracturally past due 90 days or
      more
                  
                  
                  -
                  
                  
                  
                  -Nonperforming
      loans
                  
                  
                  19,641
                  
                  
                  
                  17,009Other
      real estate owned
                  
                  
                  8,625
                  
                  
                  
                  6,509Nonperforming
      assets
                  
                  $
                  28,266
                  
                  
                  $
                  23,518Loans
      restructured and in compliance with modified terms
                  
                  
                  4,474
                  
                  
                  
                  16,834Nonperforming
      assets and restructured loans
                  
                  $
                  32,740
                  
                  
                  $
                  40,352
  The
nonperforming assets at September 30, 2010 consisted of loans on nonaccrual or
90 days or more past due totaling $19.6 million, and other real estate owned
valued at $8.6 million.  Nonperforming loans at September 30, 2010
were comprised of loans with legal contractual balances totaling approximately
$24.4 million reduced by impairment charges of $4.7 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 September
30, 2010 (dollars in thousands).
 
 September 30, 2010Classification
                                        
                                        Amount
                                        
                                        CollateralLand
                                        
                                        
                                        2,379
                                        
                                        Lots
      for retail development in Sacramento CountyLand
                                        
                                        
                                        878
                                        
                                        Lots
      for residential development in Santa Clara CountyLand
                                        
                                        
                                        483
                                        
                                        Lots
      for single family homes in IdahoLand
                                        
                                        
                                        208
                                        
                                        Lots
      for residential development in Alameda CountyLand
                                        
                                        
                                        44
                                        
                                        Lot
      for retail development in Sacramento CountyLand
                                        
                                        
                                        33
                                        
                                        Lots
      for single family homes in Calaveras County4,025Construction
                                        
                                        
                                        3,373
                                        
                                        Medical
      office condos in Santa Clara CountyConstruction
                                        
                                        
                                        3,107
                                        
                                        Residential
      Condos in Santa Clara County6,480Real
      estate other
                                        
                                        
                                        6,761
                                        
                                        Mini
      storage facility in Santa Cruz CountyReal
      estate other
                                        
                                        
                                        999
                                        
                                        Commercial
      building-retail - Santa Clara CountyReal
      estate other
                                        
                                        
                                        436
                                        
                                        Single
      family residence in Calaveras CountyReal
      estate other
                                        
                                        
                                        308
                                        
                                        19
      multi-family lots in Calaveras CountyReal
      estate other
                                        
                                        
                                        189
                                        
                                        Single
      family residence in San Francisco CountyReal
      estate other
                                        
                                        
                                        135
                                        
                                        Industrial
      warehouse space in Santa Clara CountyReal
      estate other
                                        
                                        
                                        99
                                        
                                        Industrial
      warehouse space in Santa Clara CountyReal
      estate other
                                        
                                        
                                        82
                                        
                                        Single
      family residence in Santa Cruz CountyReal
      estate other
                                        
                                        
                                        18
                                        
                                        Commercial
      - Restaurant in Stanislaus County9,027Commercial
                                        
                                        
                                        109
                                        
                                        Business
      assetsTotal
      nonperforming loans
                                        
                                        $
                                        19,641
  28
  Included
in nonperforming loans at September 30, 2010 are loans totaling $13.4 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 September 30, 2010, previously modified loans totaling $4.5 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 31.4% 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.
  29
 
 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 September 30, 2010 and
2009:
  Three months ended September
      30,(dollars
      in thousands)
                          
                          2010
                          
                          
                          2009Amount
                          
                          
                          Percent
                          
                          
                          Amount
                          
                          
                          PercentDepositor
      service charges
                          
                          $
                          638
                          
                          
                          
                          44.5
                          %
                          
                          $
                          498
                          
                          
                          
                          29.5
                          %International
      fee income
                          
                          
                          415
                          
                          
                          
                          29.0
                          %
                          
                          
                          316
                          
                          
                          
                          18.7
                          %Rental
      income - OREO
                          
                          
                          109
                          
                          
                          
                          7.6
                          %
                          
                          
                          -
                          
                          
                          
                          0.0
                          %SBA
      loan servicing income
                          
                          
                          104
                          
                          
                          
                          7.3
                          %
                          
                          
                          108
                          
                          
                          
                          6.4
                          %Increase
      in value of life insurance
                          
                          
                          
                          
                          
                          
                          97
                          
                          
                          
                          6.8
                          %
                          
                          
                          97Gain
      on sale of OREO
                          
                          
                          -
                          
                          
                          
                          0.0
                          %
                          
                          
                          23
                          
                          
                          
                          1.4
                          %Other
      income-cash flow hedge
                          
                          
                          -
                          
                          
                          
                          0.0
                          %
                          
                          
                          301
                          
                          
                          
                          17.8
                          %Gain
      (loss) on sale of SBA loans
                          
                          
                          (16
                          )
                          
                          
                          -1.1
                          %
                          
                          
                          220
                          
                          
                          
                          13.0
                          %Other
      operating income
                          
                          
                          86
                          
                          
                          
                          6.0
                          %
                          
                          
                          126
                          
                          
                          
                          7.5
                          %$
                          1,433
                          
                          
                          
                          100.0
                          %
                          
                          $
                          1,689
                          
                          
                          
                          100.0
                          %
 
 Non-interest
income totaled $1.4 million in the third quarter of 2010, a decrease of $256,000
or 15.2% from $1.7 million in the third 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 September 30, 2010 was primarily attributable to a decrease
in income generated from cash flow hedges of $301,000 and a decrease in gains
related to the sale of SBA loans of $229,000.  The decreases in
non-interest income were offset in part by an increase in depositor service
charges of $140,000 and an increase in rental income related to OREO properties
of $109,000.
 
 For the
quarter ended September 30, 2010 service charge income on deposit accounts was
$638,000, representing an increase of $140,000, or 28.1%, compared to $498,000
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 third quarter of 2010, the Company recognized
$415,000 in international fee income, representing an increase of $99,000, or
31.3%, compared to $316,000 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.
  During
the third quarter of 2010 the Company received $109,000 in rental income on an
OREO property it acquired in the second quarter.  As this property was
taken into OREO during the current calendar year there was no rental income
received in the same period one year earlier.
  Revenue
from sales of SBA loans is dependent 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.  The Company
recognized $(9,000) during the third quarter of 2010 for deferred costs on
previous sales of SBA loans which compared to actual gains of $220,000
recognized during the same period one year earlier.
  30




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 September 30, 2010 and
2009.





Three
      months ended September 30,(dollars
      in thousands)
                
                2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                5,103
                
                
                
                2.4
                %
                
                $
                5,080
                
                
                
                2.4
                %Occupancy
                
                
                854
                
                
                
                0.4
                %
                
                
                897
                
                
                
                0.4
                %Data
      processing
                
                
                719
                
                
                
                0.3
                %
                
                
                692
                
                
                
                0.3
                %FDIC/OCC
      assessments
                
                
                654
                
                
                
                0.3
                %
                
                
                468
                
                
                
                0.2
                %Legal
      and professional
                
                
                429
                
                
                
                0.2
                %
                
                
                431
                
                
                
                0.2
                %OREO/Loan
      expense
                
                
                259
                
                
                
                0.1
                %
                
                
                248
                
                
                
                0.1
                %Deposit
      services
                
                
                243
                
                
                
                0.1
                %
                
                
                220
                
                
                
                0.1
                %Director/shareholder
      expense
                
                
                301
                
                
                
                0.1
                %
                
                
                198
                
                
                
                0.1
                %Marketing/Advertising
                
                
                239
                
                
                
                0.1
                %
                
                
                216
                
                
                
                0.1
                %Furniture
      and equipment
                
                
                158
                
                
                
                0.1
                %
                
                
                221
                
                
                
                0.1
                %Other
                
                
                309
                
                
                
                0.1
                %
                
                
                531
                
                
                
                0.2
                %$
                9,268
                
                
                
                4.4
                %
                
                $
                9,202
                
                
                
                4.3
                %





Operating
expenses were $9.3 million for the three months ended September 30, 2010, an
increase of $66,000 or 0.7% from $9.2 million at September 30,
2009.   As a percentage of average earning assets, other expenses
for the three months ended September 30, 2010 and 2009 were 4.4% and 4.3%,
respectively, on an annualized basis. In 2010, operating expenses were comprised
primarily of salaries and benefits of $5.1 million, which compared to $5.1
million in 2009.  At September 30, 2010, the Company employed 164
full-time equivalents (FTE) compared to 163 FTE on the same date one year
earlier.  In addition, salaries and benefits included a charge of
$315,000 and $345,000 to recognize compensation related to stock-based awards in
the third 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 $2.7 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 third quarter of 2010, the Company recognized $654,000 in regulatory
assessments compared to $468,000 for the same period one year
earlier.  The increase in regulatory assessments is attributed to
participation in the Transaction Guarantee Program as well as FDIC insurance
related to increased deposit balances.




Summary
of Financial Results – Nine months ended September 30, 2010





The
Company reported net operating income of $2.4 million for the nine months ended
September 30, 2010 representing an increase of $2.4 million, compared to net
operating income of $30,000 for the same period one year ago. Net income
available to common shareholders was reduced by preferred dividends of $1.7
million and $3.1 million during the first nine months of 2010 and 2009,
respectively, resulting in earnings per diluted share of $0.08 and net loss per
diluted share of $(0.47), respectively. Preferred dividends decreased $1.5
million compared to the same period one year earlier, resulting in year to date
preferred dividends of $1.7 million due to the early conversion of Series B and
B-1 preferred shares in March 2010 (see discussion in Capital Resources section
under Private
Placement).





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





31


Nine
      months endedSeptember
      30,
                        
                        
                        Increase(dollars
      in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        (Decrease)Interest
      income
                        
                        $
                        33,116
                        
                        
                        $
                        33,951
                        
                        
                        $
                        (835
                        )Interest
      expense
                        
                        
                        2,418
                        
                        
                        
                        5,616
                        
                        
                        
                        (3,198
                        )Net
      interest income
                        
                        
                        30,698
                        
                        
                        
                        28,335
                        
                        
                        
                        2,363Provision
      for credit losses
                        
                        
                        2,750
                        
                        
                        
                        8,300
                        
                        
                        
                        (5,550
                        )Net
      interest income after provisionfor
      credit losses
                        
                        
                        27,948
                        
                        
                        
                        20,035
                        
                        
                        
                        7,913Other
      income
                        
                        
                        4,762
                        
                        
                        
                        8,019
                        
                        
                        
                        (3,257
                        )Other
      expenses
                        
                        
                        28,580
                        
                        
                        
                        28,008
                        
                        
                        
                        572Income
      before income taxes
                        
                        
                        4,130
                        
                        
                        
                        46
                        
                        
                        
                        4,084Income
      taxes
                        
                        
                        1,688
                        
                        
                        
                        16
                        
                        
                        
                        1,672Net
      income
                        
                        $
                        2,442
                        
                        
                        $
                        30
                        
                        
                        $
                        2,412Preferred
      dividends
                        
                        
                        1,657
                        
                        
                        
                        3,138
                        
                        
                        
                        (1,481
                        )Net
      income (loss) available tocommon
      shareholders
                        
                        $
                        785
                        
                        
                        $
                        (3,108
                        )
                        
                        $
                        3,893





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 nine months, the rates earned on
such assets and the rates paid on interest bearing liabilities.





Net
interest income for the nine months ended September 30, 2010 was $30.7 million,
which was comprised of $33.1 million in interest income and $2.4 million in
interest expense. Net interest income for the nine months ended September 30,
2009 was $28.3 million, which was comprised of $34.0 million in interest income
and $5.6 million in interest expense.  Net interest income for the
nine months ended September 30, 2010 represented an increase of $2.4 million or
8.3% from the same period one year earlier.





The
composition of the average balance sheet impacts growth in net interest
income.  For the nine months ended September 30, 2010 average earning
assets of $820.4 million represented a decrease of $11.7 million, or 1.4%,
compared to $832.1 million for the same period in 2009.  The Company’s
loan-to-deposit ratio, a measure of leverage, averaged 79.79% during the nine
months ended September 30, 2010, which represented a decrease compared to an
average of 87.27% 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 nine months ended September 30, 2010 and
2009.





The
Company’s net interest margin (net interest income divided by average earning
assets) for the nine months ended September 30, 2010 was 5.00% compared to 4.55%
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 only 14 basis points in the first
nine months of 2010 compared to 24 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 nine months ended September 30, 2010 and 2009.




32




Nine
      months ended September 30,2010
                                
                                
                                2009Yields
                                
                                
                                Interest
                                
                                
                                
                                
                                
                                Yields
                                
                                
                                InterestAverage
                                
                                
                                or
                                
                                
                                Income/
                                
                                
                                Average
                                
                                
                                or
                                
                                
                                Income/Balance
                                
                                
                                Rates
                                
                                
                                Expense
                                
                                
                                Balance
                                
                                
                                Rates
                                
                                
                                ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                                
                                $
                                583,235
                                
                                
                                
                                7.1
                                %
                                
                                $
                                31,053
                                
                                
                                $
                                630,354
                                
                                
                                
                                7.0
                                %
                                
                                $
                                33,218Federal
      funds sold
                                
                                
                                107,604
                                
                                
                                
                                0.2
                                %
                                
                                
                                188
                                
                                
                                
                                169,113
                                
                                
                                
                                0.2
                                %
                                
                                
                                300Investment
      securities
                                
                                
                                122,843
                                
                                
                                
                                1.9
                                %
                                
                                
                                1,771
                                
                                
                                
                                14,908
                                
                                
                                
                                1.3
                                %
                                
                                
                                146Other
                                
                                
                                6,731
                                
                                
                                
                                2.1
                                %
                                
                                
                                104
                                
                                
                                
                                17,723
                                
                                
                                
                                2.2
                                %
                                
                                
                                287Total
      interest earning assets
                                
                                
                                820,413
                                
                                
                                
                                5.4
                                %
                                
                                
                                33,116
                                
                                
                                
                                832,098
                                
                                
                                
                                5.5
                                %
                                
                                
                                33,951Noninterest-earning
      assets:Cash
      and due from banks
                                
                                
                                17,901
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                18,001All
      other assets (3)
                                
                                
                                34,754
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                24,230TOTAL
                                
                                $
                                873,068
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                874,329LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYInterest
      bearing liabilities:Deposits:Demand
                                
                                $
                                6,094
                                
                                
                                
                                0.1
                                %
                                
                                $
                                5
                                
                                
                                $
                                4,632
                                
                                
                                
                                0.1
                                %
                                
                                $
                                4Savings
                                
                                
                                301,765
                                
                                
                                
                                0.4
                                %
                                
                                
                                954
                                
                                
                                
                                298,868
                                
                                
                                
                                0.8
                                %
                                
                                
                                1,749Time
                                
                                
                                62,713
                                
                                
                                
                                1.3
                                %
                                
                                
                                628
                                
                                
                                
                                137,945
                                
                                
                                
                                2.7
                                %
                                
                                
                                2,777Other
                                
                                
                                17,600
                                
                                
                                
                                6.3
                                %
                                
                                
                                831
                                
                                
                                
                                29,432
                                
                                
                                
                                4.9
                                %
                                
                                
                                1,086Total
      interest bearing liabilities
                                
                                
                                388,172
                                
                                
                                
                                0.8
                                %
                                
                                
                                2,418
                                
                                
                                
                                470,877
                                
                                
                                
                                1.6
                                %
                                
                                
                                5,616Noninterest-bearing
      liabilities:Demand
      deposits
                                
                                
                                360,365
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                280,830Accrued
      expenses andother
      liabilities
                                
                                
                                13,226
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                11,689Shareholders'
      equity
                                
                                
                                111,305
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                110,933TOTAL
                                
                                $
                                873,068
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                874,329Net
      interest income and margin
                                
                                
                                
                                
                                
                                
                                5.0
                                %
                                
                                $
                                30,698
                                
                                
                                
                                
                                
                                
                                
                                4.6
                                %
                                
                                $
                                28,335





(1)
            Loan
      fee amortization of $2.8 million and $3.2 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 $15.6 million and $17.9 million,
      respectively.





The
following table shows the effect of the interest differential of volume and rate
changes for the nine months ended September 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.




33




(dollars
      in thousands)
                        
                        Nine
      months ended September 30,2010
      vs. 2009Increase
      (decrease)due
      to change inAverage
                        
                        
                        Average
                        
                        
                        TotalVolume
                        
                        
                        Rate
                        
                        
                        ChangeInterest
      income:Loans
                        
                        $
                        (2,509
                        )
                        
                        $
                        344
                        
                        
                        $
                        (2,165
                        )Federal
      funds sold
                        
                        
                        (107
                        )
                        
                        
                        (5
                        )
                        
                        
                        (112
                        )Investment
      securities
                        
                        
                        1,556
                        
                        
                        
                        69
                        
                        
                        
                        1,625Other
                        
                        
                        (170
                        )
                        
                        
                        (13
                        )
                        
                        
                        (183
                        )Total
      interest income
                        
                        
                        (1,230
                        )
                        
                        
                        395
                        
                        
                        
                        (835
                        )Interest
      expense:Demand
                        
                        
                        1
                        
                        
                        
                        (0
                        )
                        
                        
                        1Savings
                        
                        
                        9
                        
                        
                        
                        (804
                        )
                        
                        
                        (795
                        )Time
                        
                        
                        (753
                        )
                        
                        
                        (1,396
                        )
                        
                        
                        (2,149
                        )Other
                        
                        
                        (559
                        )
                        
                        
                        304
                        
                        
                        
                        (255
                        )Total
      interest expense
                        
                        
                        (1,302
                        )
                        
                        
                        (1,896
                        )
                        
                        
                        (3,198
                        )Change
      in net interest income
                        
                        $
                        72
                        
                        
                        $
                        2,291
                        
                        
                        $
                        2,363





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 $33.1 million in the nine months ended September 30, 2010 represented
a decrease of $835,000, or 2.5%, from $34.0 million in the same period one year
earlier. The average yield on earning assets was 5.40% for the nine months ended
September 30, 2010 and 5.46% for the nine months ended September 30,
2009.  The decrease in interest income was primarily due to a decrease
in loan balances.





Average
gross loans were $583.2 million for the nine months ended September 30, 2010, a
decrease of $47.1 million or 7.5% from $630.4 million for the same period one
year earlier.  Average loans comprised 71.1% of average earning assets
in the nine months ended September 30, 2010 compared to 75.8% in the first nine
months of 2009.





Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $237.2 million for the nine months ended
September 30, 2010, an increase of $35.4 million or 17.6% from $201.7 million
for the nine months ended September 30, 2009.




Interest
Expense





Interest
expense was $2.4 million for the nine months ended September 30, 2010, which
represented a decrease of $3.2 million or 56.9% from $5.6 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 $388.2 million for the nine months ended September 30, 2010, a
decrease of $82.7 million, or 17.6%, from $470.9 million for the same period one
year earlier.





Average
interest bearing deposits were $370.6 million for the nine months ended
September 30, 2010, which represented 50.7% of total average deposits and was a
decrease of $70.8 million, or 16.1%, from $441.4 million representing 61.1% of
total average deposits in the first nine 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 nine months ended September 30, 2010 compared to $29.4 million for the same
period one year earlier.




34




The
average rate paid on interest-bearing liabilities of 0.83% in the nine months
ended September 30, 2010 compared to 1.59% in the first nine 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 $2.8 million to the allowance for credit losses for the nine
months ended September 30, 2010, compared to $8.3 million for the same period in
2009.





The
Company’s loan charge-offs totaled $5.8 million during the nine months ended
September 30, 2010, compared to $10.3 million for the same period one year
earlier.  The Company recognized $2.3 million and $319,000 in loan
recoveries for the nine months ended September 30, 2010 and 2009,
respectively.





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





Nine
      months ended(dollars
      in thousands)
                  
                  September
      30,2010
                  
                  
                  2009Balance,
      beginning of period
                  
                  $
                  16,012
                  
                  
                  $
                  18,554Provision
      for credit losses
                  
                  
                  2,750
                  
                  
                  
                  8,300Charge-offs
                  
                  
                  (5,839
                  )
                  
                  
                  (10,251
                  )Recoveries
                  
                  
                  2,325
                  
                  
                  
                  319Balance,
      end of period
                  
                  $
                  15,248
                  
                  
                  $
                  16,922





See
“Summary of Financial Results – Quarter ended September 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 nine months ended September 30, 2010 and
2009:




35




Nine
      months ended September 30,(dollars
      in thousands)
                    
                    2010
                    
                    
                    2009Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentDepositor
      service charges
                    
                    $
                    1,762
                    
                    
                    
                    37.0
                    %
                    
                    $
                    1,394
                    
                    
                    
                    17.4
                    %International
      fee income
                    
                    
                    1,321
                    
                    
                    
                    27.7
                    %
                    
                    
                    1,137
                    
                    
                    
                    14.2
                    %Gain
      on sale of OREO
                    
                    
                    439
                    
                    
                    
                    9.2
                    %
                    
                    
                    700
                    
                    
                    
                    8.7
                    %SBA
      loan servicing income
                    
                    
                    312
                    
                    
                    
                    6.6
                    %
                    
                    
                    316
                    
                    
                    
                    3.9
                    %Increase
      in value of life insurance
                    
                    
                    295
                    
                    
                    
                    6.2
                    %
                    
                    
                    303
                    
                    
                    
                    3.8
                    %Rental
      income - OREO
                    
                    
                    194
                    
                    
                    
                    4.1
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Gain
      on sale of securities
                    
                    
                    164
                    
                    
                    
                    3.4
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Other
      income - cash flow hedge
                    
                    
                    43
                    
                    
                    
                    0.9
                    %
                    
                    
                    3,221
                    
                    
                    
                    40.2
                    %Gain
      (loss) on sale of SBA loans
                    
                    
                    (13
                    )
                    
                    
                    -0.3
                    %
                    
                    
                    611
                    
                    
                    
                    7.6
                    %Other
      operating income
                    
                    
                    245
                    
                    
                    
                    5.1
                    %
                    
                    
                    337
                    
                    
                    
                    4.2
                    %$
                    4,762
                    
                    
                    
                    100.0
                    %
                    
                    $
                    8,019
                    
                    
                    
                    100.0
                    %





Non-interest
income totaled $4.8 million and $8.0 million in the first nine 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 nine
months ending September 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 nine months of 2010 was $43,000 compared to $3.2
million for the same period one year earlier.





For the
nine months ended September 30, 2010 service charge income on deposit accounts
was $1.8 million, representing an increase of $368,000, or 26.4%, compared to
$1.4 million 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 nine months of 2010, the Company recognized
$1.3 million in international fee income, representing an increase of $184,000,
or 16.2%, compared to $1.1 million 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 dependent 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.  The Company
recognized $(6,000) during the first nine months of 2010 for deferred costs on
previous sales of SBA loans which compared to actual gains of $611,000
recognized during 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 nine months ended September 30, 2010 and
2009.




36




Nine
      months ended September 30,(dollars
      in thousands)
                
                2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                15,400
                
                
                
                2.5
                %
                
                $
                15,749
                
                
                
                2.5
                %Occupancy
                
                
                2,534
                
                
                
                0.4
                %
                
                
                2,634
                
                
                
                0.4
                %OREO/Loan
      expense
                
                
                1,418
                
                
                
                0.2
                %
                
                
                1,004
                
                
                
                0.2
                %Data
      processing
                
                
                2,113
                
                
                
                0.3
                %
                
                
                1,840
                
                
                
                0.3
                %FDIC/OCC
      assessments
                
                
                1,840
                
                
                
                0.3
                %
                
                
                1,306
                
                
                
                0.2
                %Legal
      and professional
                
                
                1,625
                
                
                
                0.3
                %
                
                
                1,485
                
                
                
                0.2
                %Director/shareholder
      expense
                
                
                825
                
                
                
                0.1
                %
                
                
                660
                
                
                
                0.1
                %Marketing/Advertising
                
                
                697
                
                
                
                0.1
                %
                
                
                691
                
                
                
                0.1
                %Deposit
      services
                
                
                636
                
                
                
                0.1
                %
                
                
                814
                
                
                
                0.1
                %Furniture
      and equipment
                
                
                547
                
                
                
                0.1
                %
                
                
                702
                
                
                
                0.1
                %Other
                
                
                945
                
                
                
                0.2
                %
                
                
                1,123
                
                
                
                0.2
                %$
                28,580
                
                
                
                4.7
                %
                
                $
                28,008
                
                
                
                4.5
                %





Operating
expenses were $28.6 million for the nine months ended September 30, 2010, an
increase of $573,000 or 2.0% over $28.0 million for the nine months ended
September 30, 2009.   As a percentage of average earning assets,
other expenses for the nine months ended September 30, 2010 and 2009 were 7.0%
and 6.8%, respectively, on an annualized basis.  In 2010, operating
expenses were comprised primarily of salaries and benefits of $15.4 million,
which compared to $15.7 million in 2009.  At September 30, 2010, the
Company employed 164 FTE compared to 163 FTE on the same date one year
earlier.  In addition, salaries and benefits included a charge of
$929,000 and $1.0 million to recognize compensation related to stock based
awards in the first nine 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 is anticipated
that the FDIC assessment for 2010 will be approximately $2.7 million compared to
approximately $2.6 million for the same period one year
earlier.  During the first nine months of 2010, the Company recognized
$1.8 million in regulatory assessments compared to $1.3 million 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 $1.4 million for the first nine months of 2010 compared to $1.0
million for the same period one year earlier.  The increase of
$414,000, or 41.2%, was primarily attributable to loan related legal fees and
sales related expenses for “other real estate owned”.




Balance Sheet





Total
assets of the Company at September 30, 2010 were $940.0 million, an increase of
$95.9 million, or 11.4%, 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 September 30, 2010 and December 31, 2009.




37




(dollars
      in thousands)
                  
                  September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009Commercial
                  
                  $
                  245,894
                  
                  
                  $
                  253,776Real
      estate construction
                  
                  
                  39,416
                  
                  
                  
                  20,601Land
      loans
                  
                  
                  9,558
                  
                  
                  
                  12,763Real
      estate other
                  
                  
                  141,245
                  
                  
                  
                  149,617Factoring
      and asset based lending
                  
                  
                  105,172
                  
                  
                  
                  66,660SBA
                  
                  
                  60,005
                  
                  
                  
                  67,629Other
                  
                  
                  3,917
                  
                  
                  
                  5,395Total
      gross loans
                  
                  
                  605,207
                  
                  
                  
                  576,441Unearned
      fee income
                  
                  
                  (1,509
                  )
                  
                  
                  (1,452
                  )Total  loans
                  
                  
                  603,698
                  
                  
                  
                  574,989Less
      allowance for credit losses
                  
                  
                  (15,248
                  )
                  
                  
                  (16,012
                  )Total
      loans, net
                  
                  $
                  588,450
                  
                  
                  $
                  558,977Commercial
                  
                  
                  40.6
                  %
                  
                  
                  44.0
                  %Real
      estate construction
                  
                  
                  6.5
                  %
                  
                  
                  3.6
                  %Land
      loans
                  
                  
                  1.6
                  %
                  
                  
                  2.2
                  %Real
      estate other
                  
                  
                  23.3
                  %
                  
                  
                  26.0
                  %Factoring
      and asset based lending
                  
                  
                  17.4
                  %
                  
                  
                  11.6
                  %SBA
                  
                  
                  9.9
                  %
                  
                  
                  11.7
                  %Other
                  
                  
                  0.6
                  %
                  
                  
                  0.9
                  %Total
      gross loans
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %





Gross
loan balances were $605.2 million at September 30, 2010, which represented an
increase of $28.8 million, or 5.0%, 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
$245.9 million at September 30, 2010, which represented a decrease of $7.9
million, or 3.1%, compared to $253.8 million at December 31, 2009.  At
September 30, 2010, commercial loans comprised 40.6% of total loans outstanding
compared to 44.0% at December 31, 2009.





The
Company’s construction and land development loan portfolio together totaled
approximately $49.0 million as of September 30, 2010 compared to $33.4 million
as of December 31, 2009, representing an increase of $15.6 million or
46.8%.  Construction and land development loan balances at September
30, 2010 and December 31, 2009 comprised 8.1% and 5.8%, respectively, of total
loans.





Other
real estate loans decreased $8.4 million or 5.6% to $141.2 million at September
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 3.3% of total loans at
September 30, 2010 compared to 26.0% at December 31, 2009.





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 September 30, 2010, factoring/asset- based
loans totaled $105.2 million or 17.4% of total loans, representing an increase
of $38.5 million or 57.8%, as compared to $66.7 million or 11.6% of total loans
at December 31, 2009.




38




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 September 30, 2010, SBA loans comprised $60.0 million, or
9.9%, of total loans, a decrease of $7.6 million, or 11.3%, 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
September 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 September 30, 2010, other loans totaled $3.9
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 September 30, 2010 and December 31, 2009.




(dollars
      in thousands)
                
                September
      30,
                
                
                December
      31,2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentNoninterest-bearing  demand
                
                $
                432,714
                
                
                
                54.39
                %
                
                $
                333,171
                
                
                
                47.26
                %Interest-bearing
      demand
                
                
                5,164
                
                
                
                0.65
                %
                
                
                4,830
                
                
                
                0.69
                %Money
      market and savings
                
                
                311,107
                
                
                
                39.12
                %
                
                
                275,850
                
                
                
                39.13
                %Certificates
      of deposit:Less
      than $100
                
                
                14,288
                
                
                
                1.80
                %
                
                
                29,782
                
                
                
                4.22
                %$100
      and more
                
                
                32,172
                
                
                
                4.04
                %
                
                
                61,413
                
                
                
                8.71
                %Total
      deposits
                
                $
                795,445
                
                
                
                100.00
                %
                
                $
                705,046
                
                
                
                100.00
                %





Deposits
increased $90.4 million or 12.8% from $705.0 million at December 31, 2009 to
$795.4 million at September 30, 2010. The increase in deposits was primarily in
demand and money market and savings accounts.  As of September 30,
2010, demand deposits and core deposits represented 55.1% and 94.2% of total
deposits, respectively.





Leverage





Total gross loan balances at September
30, 2010 were $605.2 million.  The resulting loan to deposit ratio was
76.08%.  Other earning assets at September 30, 2010 were primarily
comprised of investment securities, federal funds sold and interest-bearing
deposits of $279.3 million. To date, the Company has deployed other earning
assets primarily in federal funds sold to address the potential volatility of
deposit balances and to accommodate projected loan funding, and in short term
fixed rate investments to mitigate interest rate risk associated with the
Company’s asset-sensitive balance sheet.   When deploying other
earning assets, the Company implements strategic decisions that may have
a beneficial or adverse impact on net interest income and on the net interest
margin to manage the business through a variety of economic cycles.




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




Capital
Resources




The
Company 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.




39




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.




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.




40




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.




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 Preferred Stock and as
payment of all accrued but unpaid dividends thereon through September 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.  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.


41


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 September 30, 2010 was $131.1 million, which was
comprised of preferred equity up to the allowable limit of $23.9 million, $74.3
million of capital stock and surplus, $15.9 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 September 30, 2010 and
December 31, 2009 as well as the minimum capital ratios required to be deemed
“well capitalized” under the regulatory framework.





As
      of September 30,
                                      
                                      
                                      As
      of December 31,(dollars
      in thousands)
                                      
                                      2010
                                      
                                      
                                      2009Amount
                                      
                                      
                                      Ratio
                                      
                                      
                                      Amount
                                      
                                      
                                      RatioCompany
      Capital RatiosTier
      1 Capital
                                      
                                      $
                                      131,070
                                      
                                      
                                      
                                      17.18
                                      %
                                      
                                      $
                                      106,489
                                      
                                      
                                      
                                      15.26
                                      %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                      
                                      $
                                      45,772
                                      
                                      
                                      
                                      6.00
                                      %
                                      
                                      $
                                      41,861
                                      
                                      
                                      
                                      6.00
                                      %Total
      Capital
                                      
                                      $
                                      140,676
                                      
                                      
                                      
                                      18.45
                                      %
                                      
                                      $
                                      135,678
                                      
                                      
                                      
                                      19.45
                                      %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                      
                                      $
                                      76,286
                                      
                                      
                                      
                                      10.00
                                      %
                                      
                                      $
                                      69,768
                                      
                                      
                                      
                                      10.00
                                      %Company
      LeverageTier
      1 Capital
                                      
                                      $
                                      131,070
                                      
                                      
                                      
                                      14.44
                                      %
                                      
                                      $
                                      106,489
                                      
                                      
                                      
                                      12.53
                                      %(to
      Average Assets)Tier
      1 capital minimum requirement
                                      
                                      $
                                      45,373
                                      
                                      
                                      
                                      5.00
                                      %
                                      
                                      $
                                      42,494
                                      
                                      
                                      
                                      5.00
                                      %Bank
      Capital RatiosTier
      1 Capital
                                      
                                      $
                                      114,797
                                      
                                      
                                      
                                      14.98
                                      %
                                      
                                      $
                                      110,517
                                      
                                      
                                      
                                      15.85
                                      %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                                      
                                      $
                                      45,978
                                      
                                      
                                      
                                      6.00
                                      %
                                      
                                      $
                                      41,837
                                      
                                      
                                      
                                      6.00
                                      %Total
      Capital
                                      
                                      $
                                      124,440
                                      
                                      
                                      
                                      16.24
                                      %
                                      
                                      $
                                      119,323
                                      
                                      
                                      
                                      17.11
                                      %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                                      
                                      $
                                      76,630
                                      
                                      
                                      
                                      10.00
                                      %
                                      
                                      $
                                      69,728
                                      
                                      
                                      
                                      10.00
                                      %Bank
      LeverageTier
      1 Capital
                                      
                                      $
                                      114,797
                                      
                                      
                                      
                                      12.65
                                      %
                                      
                                      $
                                      110,517
                                      
                                      
                                      
                                      13.01
                                      %(to
      Average Assets)Tier
      1 capital minimum requirement
                                      
                                      $
                                      45,363
                                      
                                      
                                      
                                      5.00
                                      %
                                      
                                      $
                                      42,459
                                      
                                      
                                      
                                      5.00
                                      %





The
Company and the Bank were considered well capitalized at September 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 September 30, 2010 and December 31, 2009, liquid
assets as a percentage of deposits were 37.3% 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 September 30, 2010, there were no balances
outstanding on these lines.  Additionally, as of September 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 September 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 September 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 September 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
                              
                              $
                              125,155
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              125,155Interest
      bearing deposits inother
      banks
                              
                              
                              490
                              
                              
                              
                              768
                              
                              
                              
                              1,770
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,028Investment
      securities
                              
                              
                              6,430
                              
                              
                              
                              11,184
                              
                              
                              
                              10,835
                              
                              
                              
                              74,155
                              
                              
                              
                              48,515
                              
                              
                              
                              151,119Loans
                              
                              
                              168,717
                              
                              
                              
                              59,722
                              
                              
                              
                              76,460
                              
                              
                              
                              159,654
                              
                              
                              
                              140,654
                              
                              
                              
                              605,207Total
      earning assets
                              
                              $
                              300,792
                              
                              
                              $
                              71,674
                              
                              
                              $
                              89,065
                              
                              
                              $
                              233,809
                              
                              
                              $
                              189,169
                              
                              
                              $
                              884,509Interest
      checking, moneymarket
      and savings
                              
                              
                              316,271
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              316,271Certificates
      of deposit:Less
      than $100,000
                              
                              
                              7,655
                              
                              
                              
                              7,897
                              
                              
                              
                              5,997
                              
                              
                              
                              389
                              
                              
                              
                              -
                              
                              
                              
                              21,938$100,000
      or more
                              
                              
                              12,578
                              
                              
                              
                              8,327
                              
                              
                              
                              3,365
                              
                              
                              
                              252
                              
                              
                              
                              -
                              
                              
                              
                              24,522Total
      interest-bearing liabilities
                              
                              $
                              336,504
                              
                              
                              $
                              16,224
                              
                              
                              $
                              9,362
                              
                              
                              $
                              641
                              
                              
                              $
                              -
                              
                              
                              $
                              362,731Interest
      rate gap
                              
                              $
                              (35,712
                              )
                              
                              $
                              55,450
                              
                              
                              $
                              79,703
                              
                              
                              $
                              233,168
                              
                              
                              $
                              189,169
                              
                              
                              $
                              521,778Cumulative
      interest rate gap
                              
                              $
                              (35,712
                              )
                              
                              $
                              19,738
                              
                              
                              $
                              99,441
                              
                              
                              $
                              332,609
                              
                              
                              $
                              521,778Interest
      rate gap ratio
                              
                              
                              (0.12
                              )
                              
                              
                              0.77
                              
                              
                              
                              0.89
                              
                              
                              
                              1.00
                              
                              
                              
                              1.00Cumulative
      interest rategap
      ratio
                              
                              
                              (0.12
                              )
                              
                              
                              0.05
                              
                              
                              
                              0.22
                              
                              
                              
                              0.48
                              
                              
                              
                              0.59





Based on
the contractual terms of its assets and liabilities, the Company’s balance sheet
at September 30, 2010 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at September 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
September 30, 2010 and December 31, 2009. At September 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 September 30, 2010Due
      after oneDue
      one year
                            
                            
                            year
      through
                            
                            
                            Due
      afterAmount
                            
                            
                            or
      less
                            
                            
                            five
      years
                            
                            
                            five
      yearsCommercial
      and other
                            
                            $
                            245,894
                            
                            
                            $
                            124,284
                            
                            
                            $
                            101,845
                            
                            
                            $
                            19,765SBA
                            
                            
                            60,005
                            
                            
                            
                            1,151
                            
                            
                            
                            1,133
                            
                            
                            
                            57,721Real
      estate construction
                            
                            
                            39,416
                            
                            
                            
                            18,219
                            
                            
                            
                            15,182
                            
                            
                            
                            6,015Land
      loans
                            
                            
                            9,558
                            
                            
                            
                            4,655
                            
                            
                            
                            1,649
                            
                            
                            
                            3,254Real
      estate-other
                            
                            
                            141,245
                            
                            
                            
                            21,123
                            
                            
                            
                            41,437
                            
                            
                            
                            78,685Factoring
      / Asset-Based Lending
                            
                            
                            105,172
                            
                            
                            
                            91,698
                            
                            
                            
                            13,474Other
                            
                            
                            3,917
                            
                            
                            
                            2,316
                            
                            
                            
                            1,601Total
      loans
                            
                            $
                            605,207
                            
                            
                            $
                            263,446
                            
                            
                            $
                            176,321
                            
                            
                            $
                            165,440





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 September 30, 2010 those guarantees
include the following:





·
            Standby
      Letters of Credit in the amount of $16.9
  million.





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





(dollars
      in thousands)
                      
                      As
      of September 30, 2010Payments
      due by periodLess
      than
                      
                      
                      1 -
      3
                      
                      
                      3 -
      5
                      
                      
                      More
      thanTotal
                      
                      
                      1
      year
                      
                      
                      years
                      
                      
                      years
                      
                      
                      5
      yearsLong-term
      contracts
                      
                      $
                      711
                      
                      
                      $
                      711
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Operating
      leases
                      
                      
                      9,948
                      
                      
                      
                      1,474
                      
                      
                      
                      3,416
                      
                      
                      
                      3,171
                      
                      
                      
                      1,887Total
                      
                      $
                      10,659
                      
                      
                      $
                      2,185
                      
                      
                      $
                      3,416
                      
                      
                      $
                      3,171
                      
                      
                      $
                      1,887




ITEM
4 – CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





As
required by SEC rules, the Company’s management evaluated the effectiveness, as
of September 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 September 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
third 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 – REMOVED AND RESERVED




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:
      November 4, 2010
              By:
              /s/ Daniel P. MyersDaniel
      P. MyersPresident
      and Chief Executive Officer(Principal
      Executive Officer)Dated:
      November 4, 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(3.6)
              
              Bylaws
      as amended through May 21, 2009(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