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:  March 31, 2009
 
 OR
 
  ̈
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the Transition Period From ____________ to _____________
 
 000-50914
 (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 filerx
                      
                      Non-accelerated filer  ̈
                      
                      Smaller reporting company  ̈(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 May 7,
2009:  6,903,314
  
  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
                                  15Item
      3
                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                  32Item
      4
                                  Controls
      and Procedures
                                  34PART II - OTHER INFORMATIONItem
      1
                                  Legal
      Proceedings
                                  35Item
      1A
                                  Risk
      Factors
                                  35Item
      2
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  35Item
      3
                                  Defaults
      Upon Senior Securities
                                  35Item
      4
                                  Submission
      of Matters to a Vote of Security Holders
                                  35Item
      5
                                  Other
      Information
                                  35Item
      6
                                  Exhibits
                                  35Signatures
                                  36Index
      to Exhibits
                                  37
  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)March 31,
                      
                      
                      December31,2009
                      
                      
                      2008ASSETSCash
      and due from banks
                      
                      $
                      16,637
                      
                      
                      $
                      18,421Federal
      funds sold
                      
                      
                      169,080
                      
                      
                      
                      199,525Total
      cash and equivalents
                      
                      
                      185,717
                      
                      
                      
                      217,946Interest
      bearing deposits in other banks
                      
                      
                      16,539
                      
                      
                      
                      7,268Loans,
      net of allowance for credit losses of $18,155 at March 31, 2009 and
      $18,554 at December 31, 2008
                      
                      
                      636,601
                      
                      
                      
                      679,451Premises
      and equipment, net
                      
                      
                      4,504
                      
                      
                      
                      4,790Other
      real estate owned
                      
                      
                      3,626
                      
                      
                      
                      1,096Accrued
      interest receivable
                      
                      
                      2,672
                      
                      
                      
                      3,137Other
      assets
                      
                      
                      31,932
                      
                      
                      
                      33,908Total
      assets
                      
                      $
                      881,591
                      
                      
                      $
                      947,596LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Demand
      noninterest-bearing
                      
                      $
                      286,749
                      
                      
                      $
                      284,319Demand
      interest-bearing
                      
                      
                      4,163
                      
                      
                      
                      4,267Savings
                      
                      
                      296,828
                      
                      
                      
                      335,200Time
                      
                      
                      145,358
                      
                      
                      
                      153,459Total
      deposits
                      
                      
                      733,098
                      
                      
                      
                      777,245Junior
      subordinated debt securities
                      
                      
                      17,527
                      
                      
                      
                      17,527Other
      borrowings
                      
                      
                      10,000
                      
                      
                      
                      30,000Accrued
      interest payable
                      
                      
                      412
                      
                      
                      
                      511Other
      liabilities
                      
                      
                      10,231
                      
                      
                      
                      9,823Total
      liabilities
                      
                      
                      771,268
                      
                      
                      
                      835,106Commitments
      and contingencies
                      
                      
                      -
                      
                      
                      
                      -SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; 10,000,000 shares authorized;
                        323,864
      shares issued and outstanding at March 31, 2009 and December
      31, 2008
                      
                      
                      53,864
                      
                      
                      
                      53,864Common
      stock, no par value;
                        30,000,000
      shares authorized; 6,903,314 shares issued and outstanding at March 31,
      2009; 6,888,424 shares issued and outstanding at December 31,
      2008;
                      
                      
                      36,860
                      
                      
                      
                      36,833Additional
      paid in capital
                      
                      
                      3,061
                      
                      
                      
                      2,822Retained
      earnings
                      
                      
                      17,233
                      
                      
                      
                      17,916Accumulated
      other comprehensive (loss) income
                      
                      
                      (695
                      )
                      
                      
                      1,055Total
      shareholders' equity
                      
                      
                      110,323
                      
                      
                      
                      112,490Total
      liabilities and shareholders' equity
                      
                      $
                      881,591
                      
                      
                      $
                      947,596
 
 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 endedMarch 31,2009
                    
                    
                    2008INTEREST
      INCOME:Loans
                    
                    $
                    11,774
                    
                    
                    $
                    15,227Federal
      funds sold
                    
                    
                    112
                    
                    
                    
                    177Other
                    
                    
                    74
                    
                    
                    
                    617Total
      interest income
                    
                    
                    11,960
                    
                    
                    
                    16,021INTEREST
      EXPENSE:Deposits:Interest-bearing
      demand
                    
                    
                    1
                    
                    
                    
                    4Money
      market and savings
                    
                    
                    782
                    
                    
                    
                    2,581Certificates
      of deposit
                    
                    
                    1,048
                    
                    
                    
                    1,088Other
                    
                    
                    479
                    
                    
                    
                    315Total
      interest expense
                    
                    
                    2,310
                    
                    
                    
                    3,988Net
      interest income
                    
                    
                    9,650
                    
                    
                    
                    12,033Provision
      for credit losses
                    
                    
                    3,650
                    
                    
                    
                    2,370Net
      interest income after provision for credit losses
                    
                    
                    6,000
                    
                    
                    
                    9,663NON-INTEREST
      INCOME:Service
      charges on deposit accounts
                    
                    
                    420
                    
                    
                    
                    229International
      fee income
                    
                    
                    399
                    
                    
                    
                    377Gain
      on sale of SBA loans
                    
                    
                    104
                    
                    
                    
                    283Other
      non interest income
                    
                    
                    3,081
                    
                    
                    
                    782Total
      non-interest income
                    
                    
                    4,004
                    
                    
                    
                    1,671OPERATING
      EXPENSES:Salaries
      and benefits
                    
                    
                    5,567
                    
                    
                    
                    5,650Premises
      and fixed assets
                    
                    
                    1,114
                    
                    
                    
                    1,105Other
                    
                    
                    2,782
                    
                    
                    
                    1,981Total
      operating expenses
                    
                    
                    9,463
                    
                    
                    
                    8,736Income
      before income taxes
                    
                    
                    541
                    
                    
                    
                    2,598Income
      taxes
                    
                    
                    208
                    
                    
                    
                    1,076Net
      income
                    
                    $
                    333
                    
                    
                    $
                    1,522Preferred
      dividends
                    
                    
                    1,017
                    
                    
                    
                    -Net
      income available to common shareholders
                    
                    
                    (684
                    )
                    
                    
                    1,522Basic
      earnings per share
                    
                    $
                    (0.10
                    )
                    
                    $
                    0.24Diluted
      earnings per share
                    
                    $
                    (0.10
                    )
                    
                    $
                    0.22Average
      common shares outstanding
                    
                    
                    6,571,479
                    
                    
                    
                    6,434,900Average
      common and equivalent shares outstanding
                    
                    
                    6,571,479
                    
                    
                    
                    6,954,014
 
 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)
 
 Three months ended March 31,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  333
                  
                  
                  $
                  1,522Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for credit losses
                  
                  
                  3,650
                  
                  
                  
                  2,370Depreciation
      and amortization
                  
                  
                  411
                  
                  
                  
                  349Stock
      based compensation
                  
                  
                  367
                  
                  
                  
                  366Loans
      originated for sale
                  
                  
                  (1,928
                  )
                  
                  
                  (12,042
                  )Proceeds
      from loan sales
                  
                  
                  5,830
                  
                  
                  
                  8,612Decrease
      in accrued interest receivable and other assets
                  
                  
                  1,317
                  
                  
                  
                  342Decrease
      in accrued interest payable and other liabilities
                  
                  
                  (1,285
                  )
                  
                  
                  (1,713
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  8,695
                  
                  
                  
                  (194
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturity of securities available for sale
                  
                  
                  -
                  
                  
                  
                  10,000Net
      increase in loans
                  
                  
                  32,715
                  
                  
                  
                  (15,363
                  )Purchase
      of interest bearing deposits in other banks
                  
                  
                  (9,271
                  )
                  
                  
                  (693
                  )Purchase
      of fixed assets
                  
                  
                  (121
                  )
                  
                  
                  (430
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  23,323
                  
                  
                  
                  (6,486
                  )CASH
      FLOW FROM FINANCING ACTIVITIES:Net
      increase in deposits
                  
                  
                  (44,147
                  )
                  
                  
                  17,886(Decrease)
      in other borrowings
                  
                  
                  (20,000
                  )
                  
                  
                  (10,000
                  )Common
      stock issued
                  
                  
                  -
                  
                  
                  
                  (23
                  )Preferred
      stock issuance costs
                  
                  
                  (100
                  )
                  
                  
                  -Net
      cash (used in) provided by financing activities
                  
                  
                  (64,247
                  )
                  
                  
                  7,863NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
                  
                  
                  (32,229
                  )
                  
                  
                  1,183Cash
      and equivalents at beginning of period
                  
                  
                  217,946
                  
                  
                  
                  40,835Cash
      and equivalents at end of period
                  
                  $
                  185,717
                  
                  
                  $
                  42,018OTHER
      CASH FLOW INFORMATION:Cash
      paid for interest
                  
                  $
                  1,792
                  
                  
                  $
                  4,066Cash
      paid for income taxes
                  
                  $
                  -
                  
                  
                  $
                  356
 
 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 March 31, 2009 and for the
three  months ended March 31, 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 quarter ended March 31,
2009 are not necessarily indicative of full year results.
 
 The
comparative balance sheet information as of December 31, 2008 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.
 
 Earnings
Per Share
 
 Basic net
income per share is computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net income per share is determined using the
weighted average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options and vesting of restricted
stock.  Common stock equivalents are included in the diluted net
income per share calculation to the extent these shares are
dilutive.  See Note 2 to the financial statements for additional
information on earnings per share.
 
 Stock-Based
Compensation
 
 On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS
No. 123R), Share-Based Payments, which addresses the accounting for
stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments.  The Company uses the Black-Scholes-Merton (“BSM”)
option-pricing model to determine the fair-value of stock-based awards under
SFAS No. 123R, consistent with that used for pro forma disclosures under
SFAS No. 123, Accounting for Stock-Based Compensation.  The
Company has recorded an incremental $367,000 ($290,000 net of tax) of
stock-based compensation expense during the three months ended March 31,
2009 as a result of the adoption of SFAS No. 123R.
  No
stock-based compensation costs were capitalized as part of the cost of an asset
as of March 31, 2009.   As of March 31, 2009, $3.5
million of total unrecognized compensation cost related to stock options and
restricted stock units are expected to be recognized over a weighted-average
period of 3.2 years.
 
 The
impact of implementing SFAS No. 123R reduced basic and diluted earnings per
share by $0.04 for the three months ended March 31, 2009.
  7
 
 Comprehensive
Income
 
 SFAS No.
130, Reporting Comprehensive Income, requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in an
annual financial statement that is displayed with the same prominence as other
annual financial statements. This Statement also requires that an entity
classify items of other comprehensive earnings by their nature in an annual
financial statement.  Other comprehensive earnings include the SFAS
No. 158 adjustment to fully recognize the liability associated with the
supplemental executive retirement plan, unrealized gains and losses, net of tax,
on cash flow hedges and unrealized gains and losses, net of tax, on marketable
securities classified as available-for-sale.  The Company had a
cumulative other comprehensive loss totaling $(695,000), net of tax, as of March
31, 2009 and cumulative other comprehensive income totaling $1.1 million, net of
tax, as of December 31, 2008.
 
 Three months ended(dollars in thousands)
                            
                            March 31,2009
                            
                            
                            2008Net
      income
                            
                            $
                            333
                            
                            
                            $
                            1,522Other
      comprehensive earnings-Net
      unrealized gains (losses) onsecurities available for
    sale
                            
                            
                            -
                            
                            
                            
                            351Net
      unrealized gains (losses) onFAS 158 adjustment -
      supplementalexecutive retirement plan
                            
                            
                            13
                            
                            
                            
                            33Net
      unrealized gains (losses) on cash flow hedges
                            
                            
                            (1,763
                            )
                            
                            
                            1,538Total
      comprehensive income
                            
                            $
                            (1,417
                            )
                            
                            $
                            3,444
  Segment
Information
 
 SFAS No.
131, Disclosure about Segments of an Enterprise and Related Information,
requires certain information about the operating segments of the
Company.  The objective of requiring disclosures about segments of an
enterprise and related information is to provide information about the different
types of business activities in which an enterprise engages and the different
economic environment in which it operates to help users of financial statements
better understand its performance, better assess its prospects for future cash
flows and make more informed judgments about the enterprise as a
whole.  The Company has determined that it has one segment, general
commercial banking, and therefore, it is appropriate to aggregate the Company’s
operations into a single operating segment.
 
 Derivative
Instruments and Hedging Activities
 
 SFAS No.
161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133 (SFAS 161), amends and expands the disclosure
requirements of SFAS 133 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 under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 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 SFAS 133, the Company records all derivatives on the balance sheet
at fair value.  The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative, 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 SFAS 133.  See Note 9 to the financial statements for additional
information on derivative instruments and hedging activities.
  8
 
 2.
              Earnings
      Per Share
 
 Basic net
earnings per share is computed by dividing net earnings applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net earnings per share is determined using the
weighted average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options.  Common stock
equivalents are included in the diluted net earnings per share calculation to
the extent these shares are dilutive.  A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net
earnings per share available to common shareholders is as follows (in thousands,
except for per share amounts):
 
 Three months endedMarch 31,2009
                  
                  
                  2008Net
      income
                  
                  $
                  333
                  
                  
                  $
                  1,522Less:Dividends
      on preferred shares
                  
                  
                  (1,017
                  )
                  
                  
                  -Net
      income available to common shareholders
                  
                  
                  (684
                  )
                  
                  
                  1,522Weighted
      average shares used in computing:Basic
      common shares
                  
                  
                  6,571,479
                  
                  
                  
                  6,434,900Diluted
      potential common shares related to stock options, restricted and preferred
      stock, using the treasury stock method
                  
                  
                  -
                  
                  
                  
                  519,114Total
      average common shares and equivalents
                  
                  
                  6,571,479
                  
                  
                  
                  6,954,014Basic
      earnings per share
                  
                  $
                  (0.10
                  )
                  
                  $
                  0.24Diluted
      earnings per share
                  
                  $
                  (0.10
                  )
                  
                  $
                  0.22
  3.
              Securities
  As of
March 31, 2009 and December 31, 2008 the Company did not own any investment
securities.
  9
  4.
                Loans
  The
balances in the various loan categories are as follows as of March 31, 2009 and
December 31, 2008:
  March 31,
                  
                  
                  December31,(dollars in thousands)
                  
                  2009
                  
                  
                  2008Commercial
                  
                  $
                  282,782
                  
                  
                  $
                  301,024SBA
                  
                  
                  70,339
                  
                  
                  
                  98,105Real
      estate construction
                  
                  
                  90,268
                  
                  
                  
                  23,535Land
      loans
                  
                  
                  19,066
                  
                  
                  
                  134,767Real
      estate other
                  
                  
                  137,960
                  
                  
                  
                  55,761Factoring
      and asset based lending
                  
                  
                  45,295
                  
                  
                  
                  77,043Other
                  
                  
                  10,407
                  
                  
                  
                  9,371Loans,
      gross
                  
                  
                  656,117
                  
                  
                  
                  699,606Unearned
      fee income
                  
                  
                  (1,361
                  )
                  
                  
                  (1,601
                  )Total
      loan portfolio
                  
                  
                  654,756
                  
                  
                  
                  698,005Less
      allowance for credit losses
                  
                  
                  (18,155
                  )
                  
                  
                  (18,554
                  )Loans,
      net
                  
                  $
                  636,601
                  
                  
                  $
                  679,451
  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 March 31, 2009 and December 31, 2008 are comprised of the
following:
 
 (dollars in thousands)
                              
                              March 31, 2009Accumulated
                              
                              
                              Net BookCost
                              
                              
                              Depreciation
                              
                              
                              ValueLeasehold
      improvements
                              
                              $
                              5,386
                              
                              
                              $
                              (2,361
                              )
                              
                              $
                              3,025Furniture
      and fixtures
                              
                              
                              1,051
                              
                              
                              
                              (792
                              )
                              
                              
                              259Capitalized
      software
                              
                              
                              3,003
                              
                              
                              
                              (2,190
                              )
                              
                              
                              813Equipment
                              
                              
                              2,047
                              
                              
                              
                              (1,640
                              )
                              
                              
                              407Construction
      in process
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Totals
                              
                              $
                              11,487
                              
                              
                              $
                              (6,983
                              )
                              
                              $
                              4,504
 
 December 31,
      2008Accumulated
                              
                              
                              Net bookCost
                              
                              
                              Depreciation
                              
                              
                              ValueLeasehold
      improvements
                              
                              $
                              5,378
                              
                              
                              $
                              (2,196
                              )
                              
                              $
                              3,182Furniture
      and fixtures
                              
                              
                              1,149
                              
                              
                              
                              (759
                              )
                              
                              
                              390Capitalized
      software
                              
                              
                              2,816
                              
                              
                              
                              (2,056
                              )
                              
                              
                              760Equipment
                              
                              
                              2,015
                              
                              
                              
                              (1,557
                              )
                              
                              
                              458Construction
      in process
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Totals
                              
                              $
                              11,358
                              
                              
                              $
                              (6,568
                              )
                              
                              $
                              4,790
  10
 
 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 5.9% for the first five years, and thereafter
interest accrues at LIBOR plus 1.98%.  The debt securities can be
redeemed at par at the Company’s option beginning in March 2010; they can also
be redeemed at par if certain events occur that impact the tax treatment or the
capital treatment of the issuance.
 
 The
Company also purchased a 3% minority interest in the Trust.  The
balance of the equity of the Trust is comprised of mandatorily redeemable
preferred securities.
 
 On March
30, 2006 the Company issued $5,155,000 of junior subordinated debt securities
(the “debt securities”) to Bridge Capital Trust II, a statutory trust created
under the laws of the State of Delaware.  These debt securities are
subordinated to effectively all borrowings of the Company and are due and
payable in March 2037.  Interest is payable quarterly on these debt
securities at a fixed rate of  6.60% for the first five years, and
thereafter interest accrues at LIBOR plus 1.38%.  The debt securities
can be redeemed at par at the Company’s option beginning in April 2011; they can
also be redeemed at par if certain events occur that impact the tax treatment or
the capital treatment of the issuance.
 
 The
Company also purchased a 3% minority interest in the Trust.  The
balance of the equity of the Trust is comprised of mandatorily redeemable
preferred securities.
 
 Under
FASB Interpretation No.46 (FIN 46), Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51, these Trusts are not consolidated into the
company’s financial statements.  Prior to the issuance of FIN 46, bank
holding companies typically consolidated these entities.  The Federal
Reserve Board has ruled that subordinated notes payable to unconsolidated
special purpose entities (“SPE’s”) such as these Trusts, net of the bank holding
company’s investment in the SPE, qualify as Tier 1 Capital, subject to certain
limits.
 
 Other
Borrowings
 
 There
were $10.0 million in other borrowings at March 31, 2009 and $30.0 million in
other borrowings at December 31, 2008.
 
 As of
March 31, 2009, the Company had a total borrowing capacity with the Federal Home
Loan Bank of San Francisco of approximately $120.0 million for which the Company
had collateral in place to borrow $44.0 million.  As of March 31,
2009, $12.0 million of this borrowing capacity was pledged to secure a letter of
credit and $10.0 million pledged to secure other borrowings.
 
 The Bank
also has unsecured borrowing lines with correspondent banks totaling $25.0
million.  At March 31, 2009, there were no balances outstanding on
these lines.
 
 7.
              Stock-Based
      Compensation
  SFAS
No. 123R requires the use of a valuation model to calculate the fair value
of stock-based awards.  The Company has elected to use the BSM
option-pricing model, which incorporates various assumptions including
volatility, expected life, and interest rates.  The expected volatility is
based on the historical volatility of the Company’s common stock over the most
recent period commensurate with the estimated expected life of
the Company’s stock options, adjusted for the impact of unusual
fluctuations not reasonably expected to recur and other relevant factors
including implied volatility in market traded options on the Company’s common
stock. The expected life of an award is based on historical experience and on
the terms and conditions of the stock awards granted to employees.
  The
weighted average assumptions used for the three month periods ended March 31,
2009 and 2008 and the resulting estimates of weighted-average fair value per
share of stock-based awards granted during those periods are as
follows:
  11
 
 Three months ended March 31,2009
                    
                    
                    2008Expected
      life
                    
                    75
      months
                    
                    
                    75
      monthsStock
      volatility
                    
                    
                    28.00
                    %
                    
                    
                    22.00
                    %Risk
      free interest rate
                    
                    
                    2.00
                    %
                    
                    
                    3.06
                    %Dividend
      yield
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %Fair
      value per share - option awards
                    
                    $
                    1.58
                    
                    
                    $
                    6.44
 
 8.
              Fair
      Values of Assets and Liabilities
 
 In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.  These levels
are:
 
 Level 1 –
Valuations for assts and liabilities traded in active exchange markets, such as
the New York Stock Exchange.  Level 1 also includes U.S. Treasury,
other U.S. government and agency mortgage-backed securities that are traded by
dealers or brokers in active markets.  Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
 
 Level 2 –
Valuations for assets and liabilities traded in less active dealer or broker
markets.  Valuations are obtained from third party pricing services
for identical or comparable assets or liabilities.
 
 Level 3 –
Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer, or broker traded
transactions.  Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets or
liabilities.
 
 The
balances of assets and liabilities measured at fair value on a recurring basis
are as follows:
 
 
 (dollars
      in thousands)
                  
                  As of March 31, 2009Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Impaired
      loans
                  
                  $
                  24,642
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  24,642Cash
      flow hedge
                  
                  
                  (1,346
                  )
                  
                  
                  -
                  
                  
                  
                  (1,346
                  )
                  
                  
                  -Warrant
      portfolio
                  
                  
                  730
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  730Total
                  
                  $
                  24,026
                  
                  
                  $
                  -
                  
                  
                  $
                  (1,346
                  )
                  
                  $
                  25,372
 
 The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis were not material for the quarter ended March 31, 2009.
 
 The
Company may be required, from time to time, to measure certain other financial
assets at fair value on a non-recurring basis in accordance with
GAAP.  These adjustments to fair value usually result from application
of lower-of-cost-or-market accounting or write-downs of individual
assets.  The assets measured at fair value on a non-recurring basis
were not material for the quarter ended March 31, 2009.
  12
 
 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 March
31, 2009 and December 31, 2008.  The Company did not have any
derivative instruments that were assets as of March 31, 2009 and December 31,
2008.
 
 (dollars in thousands)Fair ValueDerivatives Designated as Hedging
                          
                          Balance Sheet
                          
                          March 31,
                          
                          
                          December 31,Instruments Under SFAS 133
                          
                          Location
                          
                          2009
                          
                          
                          2008Interest
      rate contracts
                          
                          Other
      assets
                          
                          $
                          (1,346
                          )
                          
                          $
                          (1,445
                          )Total
      hedged derivatives
                          
                          
                          
                          $
                          (1,346
                          )
                          
                          $
                          (1,445
                          )
 
 Cash
Flow Hedges of Interest Rate Risk
 
 The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate swaps as part of its interest rate risk management strategy.  For
hedges of the Company’s variable-rate loan assets, interest rate swaps
designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for the Company making variable-rate payments over the
life of the agreements without exchange of the underlying notional
amount.  For hedges of the Company’s variable-rate borrowings,
interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for the Company making
fixed-rate payments. As of March 31, 2009, the Company had two interest rate
swaps with an aggregate notional amount of $17,527,000 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 first
quarter of 2009 and 2008, the amount of pre-tax gain recorded in AOCI due to the
effective portion of changes in fair value of derivatives designated as cash
flow hedges was $99,000 and $3.2 million, respectively.  During the
three months ended March 31, 2009, $180,000 was reclassified into earnings
related to derivatives that were used to hedge the forecasted variable cash
outflows associated with subordinated debt related to trust preferred
securities.  During the three months ended March 31, 2008 $332,000 was
reclassified into earnings related to derivatives, which were terminated during
the fourth quarter of 2008, that were used to hedge the cash inflows associated
with existing pools of Prime-based loan assets.
 
 The
ineffective portion of the change in fair value of derivatives is recognized
directly in earnings. During the three months ended March 31, 2009, there was no
ineffectiveness related to the derivatives that were used to hedge variable-rate
borrowings.  However, the Company reclassified $2.8 million related to
the acceleration of the deferred gain on the terminated interest rate swaps as a
result of the hedged forecasted transactions becoming probable not to
occur.  The Company recognized a gain of $279,000 during the three
months ended March 31, 2008 for hedge ineffectiveness attributable to a mismatch
between the swap notional and the aggregate principal amount of the designated
loan pools.   The Company estimates that approximately $725,000
will be reclassified as an increase to interest income during the next twelve
months.
  13
  The
tables below presents the effect of the Company’s derivative financial
instruments, interest rate contracts, on the income statement for the three
months ended March 31, 2009 and 2008.
 
 Interest Income
                            
                            
                            Non-Interest IncomeThree months ended
      March 31,
                            
                            
                            Three months ended
      March 31,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Amount
      of gain reclassified from AOCI into income - effective
    portion
                            
                            $
                            180
                            
                            
                            $
                            332
                            
                            
                            $
                            2,759
                            
                            
                            $
                            158Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from effectiveness testing
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            121Total
      derivative income
                            
                            $
                            180
                            
                            
                            $
                            332
                            
                            
                            $
                            2,759
                            
                            
                            $
                            279
 
 Credit
Risk Related Contingent Features
 
 The
Company has an agreement with one of its derivative counterparties that contains
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
March 31, 2009 the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $1.3 million. As of March 31, 2009, the Company
has minimum collateral posting thresholds with certain of its derivative
counterparties and has posted collateral of $1.4 million against its obligations
under these agreements. If the Company had breached any of these provisions at
March 31, 2009, it would have been required to settle its obligations under the
agreements at the termination value.
  14
 
 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 collectibility 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 March 31, 2009
and December 31, 2008, 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.
 
  15
 
 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.
  16
 
 Selected
Financial Data
 
 The
following table reflects selected financial data and ratios as of and for the
quarters ended March 31, 2009 and 2008.
 
 
 (dollars in thousands, except per share data)
                          
                          Three months endedMarch 31,2009
                          
                          
                          2008Statement
      of Operations Data:Interest
      income
                          
                          $
                          11,960
                          
                          
                          $
                          16,021Interest
      expense
                          
                          
                          2,310
                          
                          
                          
                          3,988Net
      interest income
                          
                          
                          9,650
                          
                          
                          
                          12,033Provision
      for credit losses
                          
                          
                          3,650
                          
                          
                          
                          2,370Net
      interest income after provision for credit losses
                          
                          
                          6,000
                          
                          
                          
                          9,663Other
      income
                          
                          
                          4,004
                          
                          
                          
                          1,671Other
      expenses
                          
                          
                          9,463
                          
                          
                          
                          8,736Income
      before income taxes
                          
                          
                          541
                          
                          
                          
                          2,598Income
      taxes
                          
                          
                          208
                          
                          
                          
                          1,076Net
      income
                          
                          $
                          333
                          
                          
                          $
                          1,522Preferred
      dividends
                          
                          
                          1,017
                          
                          
                          
                          -Net
      income available to common shareholders
                          
                          $
                          (684
                          )
                          
                          $
                          1,522Per
      Share Data:Basic
      earnings per share
                          
                          $
                          (0.10
                          )
                          
                          $
                          0.24Diluted
      earnings per share
                          
                          
                          (0.10
                          )
                          
                          
                          0.22Shareholders'
      equity per share
                          
                          
                          8.18
                          
                          
                          
                          10.58Cash
      dividend per common share
                          
                          
                          -
                          
                          
                          
                          -Balance
      Sheet Data:Balance
      sheet totals:Assets
                          
                          $
                          881,591
                          
                          
                          $
                          785,006Loans,
      net
                          
                          
                          636,601
                          
                          
                          
                          658,665Deposits
                          
                          
                          733,098
                          
                          
                          
                          689,242Shareholders'
      equity
                          
                          
                          110,323
                          
                          
                          
                          68,871Average
      balance sheet amounts:Assets
                          
                          $
                          905,993
                          
                          
                          $
                          778,320Loans,
      net
                          
                          
                          659,469
                          
                          
                          
                          649,492Deposits
                          
                          
                          739,289
                          
                          
                          
                          676,083Shareholders'
      equity
                          
                          
                          112,670
                          
                          
                          
                          67,468Selected
      Ratios:Return
      on average assets
                          
                          
                          0.15
                          %
                          
                          
                          0.79
                          %Return
      on average equity
                          
                          
                          1.20
                          %
                          
                          
                          9.07
                          %Efficiency
      ratio
                          
                          
                          69.31
                          %
                          
                          
                          63.75
                          %Risk
      based capital ratio
                          
                          
                          18.15
                          %
                          
                          
                          11.72
                          %Net
      chargeoffs to average gross loans
                          
                          
                          0.62
                          %
                          
                          
                          0.00
                          %Allowance
      for loan losses to total loans
                          
                          
                          2.77
                          %
                          
                          
                          1.64
                          %Average
      equity to average assets
                          
                          
                          12.44
                          %
                          
                          
                          8.67
                          %
  17
 
 Summary
of Financial Results – Quarter ended March 31, 2009
 
 The
Company reported net income of $333,000 for the three months ended March 31,
2009 representing a decrease of $1.2 million, or 78%, compared to net income of
$1.5 million for the same period one year ago.  As a result of funds
received  from  the private placement of mandatorily
convertible preferred stock and the TARP Capital Purchase Program in December
2008, net income available to common shareholders was reduced by preferred
dividends of $1.0 million during the first quarter of 2009 resulting in a loss
per diluted share of $(0.10).  Earnings per diluted share were $0.22
for the three months for the same period one year ago. The decrease in net
income resulted primarily from a decrease in net interest income, an increase in
provision for credit losses and increased operating expenses offset, in part, by
an increase in other income and a decrease in income taxes.
 
 The table
below highlights the changes in the nature and sources of income and
expense.
 
 Three months endedMarch 31,
                    
                    
                    Increase(dollars in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    (Decrease)Interest
      income
                    
                    $
                    11,960
                    
                    
                    $
                    16,021
                    
                    
                    $
                    (4,061
                    )Interest
      expense
                    
                    
                    2,310
                    
                    
                    
                    3,988
                    
                    
                    
                    (1,678
                    )Net
      interest income
                    
                    
                    9,650
                    
                    
                    
                    12,033
                    
                    
                    
                    (2,383
                    )Provision
      for credit losses
                    
                    
                    3,650
                    
                    
                    
                    2,370
                    
                    
                    
                    1,280Net
      interest income after provisionfor
      credit losses
                    
                    
                    6,000
                    
                    
                    
                    9,663
                    
                    
                    
                    (3,663
                    )Other
      income
                    
                    
                    4,004
                    
                    
                    
                    1,671
                    
                    
                    
                    2,333Other
      expenses
                    
                    
                    9,463
                    
                    
                    
                    8,736
                    
                    
                    
                    727Income
      before income taxes
                    
                    
                    541
                    
                    
                    
                    2,598
                    
                    
                    
                    (2,057
                    )Income
      taxes
                    
                    
                    208
                    
                    
                    
                    1,076
                    
                    
                    
                    (868
                    )Net
      income
                    
                    $
                    333
                    
                    
                    $
                    1,522
                    
                    
                    $
                    (1,189
                    )
 
 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 March 31, 2009 was $9.7 million, which was
comprised of $12.0 million in interest income and $2.3 million in interest
expense. Net interest income for the quarter ended March 31, 2008 was $12.0
million, which was comprised of $16.0 million in interest income and $4.0
million in interest expense.  Net interest income for the quarter
ended March 31, 2009 represented a decrease of $2.4 million or 19.8% from the
same period one year earlier.
 
 The
composition of the average balance sheet impacts growth in net interest
income.  For the quarter ended March 31, 2009 average earning assets
of $866.0 million represented an increase of $131.8 million, or 17.9%, compared
to $734.2 million for the same period in 2008.  The Company’s
loan-to-deposit ratio, a measure of leverage, averaged 91.89% during the quarter
ended March 31, 2009, which represented a decrease compared to an average of
97.63% for the same quarter of 2008 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 quarter ended March 31, 2009 compared to 6.23%
in the same period one year earlier.
  18
 
 The
Company’s net interest margin (net interest income divided by average earning
assets) for the quarter ended March 31, 2009 was 4.52% compared to 6.59% in the
same period one year earlier primarily as a result of the decrease in short term
interest rates, a decrease in income from interest rate swaps, and an increased
level of nonperforming assets.  In addition, during the first quarter
of 2008 the Company recognized $400,000 as a success fee resulting from the
completion of a capital raising event of a loan client.  During the
quarter ended March 31, 2009, the net settlement from interest rate swaps
contributed $180,000 to support net interest income compared to $332,000 for the
quarter ended March 31, 2008.  As a result of the increased level of
nonperforming assets during the first quarter of 2009, the Company had $534,000
in reversed or foregone interest.
 
 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 March 31, 2009 and 2008.
 
 Three months ended March 31,(dollars in thousands)
                                          
                                          2009
                                          
                                          
                                          2008Yields
                                          
                                          
                                          Interest
                                          
                                          
                                          
                                          
                                          
                                          Yields
                                          
                                          
                                          InterestAverage
                                          
                                          
                                          or
                                          
                                          
                                          Income/
                                          
                                          
                                          Average
                                          
                                          
                                          or
                                          
                                          
                                          Income/Balance
                                          
                                          
                                          Rates
                                          
                                          
                                          Expense
                                          
                                          
                                          Balance
                                          
                                          
                                          Rates
                                          
                                          
                                          ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                                          
                                          $
                                          679,356
                                          
                                          
                                          
                                          7.0
                                          %
                                          
                                          $
                                          11,774
                                          
                                          
                                          $
                                          660,083
                                          
                                          
                                          
                                          9.4
                                          %
                                          
                                          $
                                          15,227Federal
      funds sold
                                          
                                          
                                          174,482
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          
                                          112
                                          
                                          
                                          
                                          24,181
                                          
                                          
                                          
                                          3.0
                                          %
                                          
                                          
                                          177Investment
      securities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          0.0
                                          %
                                          
                                          
                                          -
                                          
                                          
                                          
                                          49,908
                                          
                                          
                                          
                                          5.0
                                          %
                                          
                                          
                                          617Other
                                          
                                          
                                          12,117
                                          
                                          
                                          
                                          2.5
                                          %
                                          
                                          
                                          74
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          0.0
                                          %
                                          
                                          
                                          -Total
      interest earning assets
                                          
                                          
                                          865,955
                                          
                                          
                                          
                                          5.6
                                          %
                                          
                                          
                                          11,960
                                          
                                          
                                          
                                          734,172
                                          
                                          
                                          
                                          8.8
                                          %
                                          
                                          
                                          16,021Noninterest-earning
      assets:Cash
      and due from banks
                                          
                                          
                                          16,776
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          18,496All
      other assets (3)
                                          
                                          
                                          23,262
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          25,652TOTAL
                                          
                                          $
                                          905,993
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          778,320LIABILITIES
      AND SHAREHOLDERS' EQUITYInterest
      bearing liabilities:Deposits:Demand
                                          
                                          $
                                          4,326
                                          
                                          
                                          
                                          0.1
                                          %
                                          
                                          $
                                          1
                                          
                                          
                                          $
                                          4,954
                                          
                                          
                                          
                                          0.3
                                          %
                                          
                                          $
                                          4Savings
                                          
                                          
                                          315,636
                                          
                                          
                                          
                                          1.0
                                          %
                                          
                                          
                                          782
                                          
                                          
                                          
                                          367,923
                                          
                                          
                                          
                                          2.8
                                          %
                                          
                                          
                                          2,581Time
                                          
                                          
                                          135,779
                                          
                                          
                                          
                                          3.1
                                          %
                                          
                                          
                                          1,048
                                          
                                          
                                          
                                          98,019
                                          
                                          
                                          
                                          4.5
                                          %
                                          
                                          
                                          1,088Other
                                          
                                          
                                          43,638
                                          
                                          
                                          
                                          4.5
                                          %
                                          
                                          
                                          479
                                          
                                          
                                          
                                          23,341
                                          
                                          
                                          
                                          5.5
                                          %
                                          
                                          
                                          315Total
      interest bearing liabilities
                                          
                                          
                                          499,379
                                          
                                          
                                          
                                          1.9
                                          %
                                          
                                          
                                          2,310
                                          
                                          
                                          
                                          494,237
                                          
                                          
                                          
                                          3.3
                                          %
                                          
                                          
                                          3,988Noninterest-bearing
      liabilities:Demand
      deposits
                                          
                                          
                                          283,549
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          205,187Accrued
      expenses andother liabilities
                                          
                                          
                                          10,395
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          11,428Shareholders'
      equity
                                          
                                          
                                          112,670
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          67,468TOTAL
                                          
                                          $
                                          905,993
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          778,320Net
      interest income and margin
                                          
                                          
                                          
                                          
                                          
                                          
                                          4.5
                                          %
                                          
                                          $
                                          9,650
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          6.6
                                          %
                                          
                                          $
                                          12,033
  (1)
              Loan
      fee amortization of $1.2 million and $1.7 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 $18.4 million and $8.9 million,
      respectively.
  19
  The
following table shows the effect of the interest differential of volume and rate
changes for the quarters ended March 31, 2009 and 2008.  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 March 31,2009 vs. 2008Increase
      (decrease)due to change inAverage
                                  
                                  
                                  Average
                                  
                                  
                                  TotalVolume
                                  
                                  
                                  Rate
                                  
                                  
                                  ChangeInterest
      income:Loans
                                  
                                  $
                                  334
                                  
                                  
                                  $
                                  (3,787
                                  )
                                  
                                  $
                                  (3,453
                                  )Federal
      funds sold
                                  
                                  
                                  96
                                  
                                  
                                  
                                  (161
                                  )
                                  
                                  
                                  (65
                                  )Investment
      securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (617
                                  )
                                  
                                  
                                  (617
                                  )Other
                                  
                                  
                                  74
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  74Total
      interest income
                                  
                                  
                                  505
                                  
                                  
                                  
                                  (4,566
                                  )
                                  
                                  
                                  (4,061
                                  )Interest
      expense:Demand
                                  
                                  
                                  (0
                                  )
                                  
                                  
                                  (3
                                  )
                                  
                                  
                                  (3
                                  )Savings
                                  
                                  
                                  (130
                                  )
                                  
                                  
                                  (1,669
                                  )
                                  
                                  
                                  (1,799
                                  )Time
                                  
                                  
                                  291
                                  
                                  
                                  
                                  (331
                                  )
                                  
                                  
                                  (40
                                  )Other
                                  
                                  
                                  223
                                  
                                  
                                  
                                  (59
                                  )
                                  
                                  
                                  164Total
      interest expense
                                  
                                  
                                  385
                                  
                                  
                                  
                                  (2,063
                                  )
                                  
                                  
                                  (1,678
                                  )Change
      in net interest income
                                  
                                  $
                                  120
                                  
                                  
                                  $
                                  (2,502
                                  )
                                  
                                  $
                                  (2,383
                                  )
  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 $12.0 million in the quarter ended March 31, 2009 represented a
decrease of $4.0 million, or 25.3%, from $16.0 million in the same quarter one
year earlier.  The decrease in interest income was primarily due to a
decrease in interest rates, a decrease in income from interest rate swaps, and
an increased level of nonperforming assets, offset in part by growth in average
earning assets.
 
 Average
gross loans were $679.4 million for three months ended March 31, 2009, an
increase of $19.3 million or 2.9% over $660.1 million for the same period one
year earlier.  Average loans comprised 78.5% of average earning assets
in the three months ended March 31, 2009 compared to 89.9% in the first quarter
of 2008.
 
 The
average yield on earning assets was 5.6% for the quarter ended March 31, 2009
and 8.8% for the quarter ended March 31, 2008.  As noted above, the
majority of the Company’s earning assets, including a majority of loans, are
priced to adjust with movements in short-term interest rates, particularly the
prime rate, and the decrease in yield was primarily due to decreases in the
prime rate during 2008 and interest reversed or foregone on nonperforming assets
offset, in part, by income from interest rate swaps.
 
 Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $186.6 million for the quarter ended March
31, 2009, an increase of $112.5 million or 151.9% from $74.1 million for the
three months ended March 31, 2008.
  20


Interest
Expense
  Interest
expense was $2.3 million for the quarter ended March 31, 2009, which represented
a decrease of $1.7 million, or 42.1% over $4.0 million for the comparable period
of 2008.  The decrease in interest expense reflects lower interest
rates paid on liabilities in 2009 compared to 2008.  Average
interest-bearing liabilities were $499.3 million for the three months ended
March 31, 2009, an increase of $5.1 million, or 1.0%, over $494.2 million for
the same period one year earlier.
 
 Average
interest bearing deposits were $455.7 million for the quarter ended March 31,
2009, which represented 61.6% of total average deposits and was a decrease of
$15.2 million, or 3.2%, from $470.9 million representing 69.7% of total average
deposits in the first quarter of 2008.
 
 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 $43.6 million and
$23.3 million in the three months ended March 31, 2009 and 2008,
respectively.
 
 The
average rate paid on interest-bearing liabilities of 1.9% in the quarter ended
March 31, 2009 compared to 3.3% in the first quarter of 2008.
 
 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 $3.7 million to the allowance for credit losses for the three
months ended March 31, 2009, compared to $2.4 million for the same period in
2008.
 
 The
Company’s loan charge-offs totaled $4.3 million during the quarter ended March
31, 2009, compared to no charge-offs for the same period one year
earlier.  The Company recognized $285,000 in loan recoveries for the
three months ended March 31, 2009 and no recoveries during the same period one
year earlier.
 
 The
following schedule provides an analysis of the allowance for credit losses for
the quarter ended March 31, 2009 and 2008, respectively:
 
 Three
      months ended(dollars
      in thousands)
                        
                        March
      31,2009
                        
                        
                        2008Balance,
      beginning of period
                        
                        $
                        18,554
                        
                        
                        $
                        8,608Provision
      for credit losses
                        
                        
                        3,650
                        
                        
                        
                        2,370Charge-offs
                        
                        
                        (4,334
                        )
                        
                        
                        -Recoveries
                        
                        
                        285
                        
                        
                        
                        -Balance,
      end of period
                        
                        $
                        18,155
                        
                        
                        $
                        10,978
 
 The
increase in the allowance for loan losses of $7.2 million from $11.0 million at
March 31, 2008 to $18.2 million at March 31, 2009 is attributable to (1) an
increase in nonperforming loans; (2) an increase in gross loan balances; and (3)
an increase in unidentified probable, estimable losses due to stress from the
credit crisis and general deterioration in economic conditions.  More
specifically, the Company took significant charges against land development loan
portfolios in response to deterioration in real estate values.  As a
result of this experience the Company determined that higher reserves against
these categories of loans were appropriate.  In addition, as the
stresses that began in the credit markets became more widespread causing a
severe downturn in the broader economy, the Company increased its estimates of
unidentified probable losses in other categories of loans.
 
 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 March 31, 2009 and December 31, 2008:
  22
 
 (dollars
      in thousands)
                        
                        March
      31, 2009
                        
                        
                        December
      31, 2008Percent
      of
                        
                        
                        
                        
                        
                        Percent
      ofALLL
      in each
                        
                        
                        
                        
                        
                        ALLL
      in eachcategory
      to
                        
                        
                        
                        
                        
                        category
      toAmount
                        
                        
                        gross
      loans
                        
                        
                        Amount
                        
                        
                        gross
      loansCommercial
                        
                        $
                        6,454
                        
                        
                        
                        1.0
                        %
                        
                        $
                        6,179
                        
                        
                        
                        0.9
                        %SBA
                        
                        
                        1,432
                        
                        
                        
                        0.2
                        %
                        
                        
                        1,673
                        
                        
                        
                        0.2
                        %Real
      estate construction
                        
                        
                        4,887
                        
                        
                        
                        0.7
                        %
                        
                        
                        5,197
                        
                        
                        
                        0.7
                        %Land
      loans
                        
                        
                        1,433
                        
                        
                        
                        0.2
                        %
                        
                        
                        1,592
                        
                        
                        
                        0.2
                        %Real
      estate other
                        
                        
                        2,967
                        
                        
                        
                        0.5
                        %
                        
                        
                        2,495
                        
                        
                        
                        0.4
                        %Factoring/ABL
                        
                        
                        776
                        
                        
                        
                        0.1
                        %
                        
                        
                        1,222
                        
                        
                        
                        0.2
                        %Other
                        
                        
                        206
                        
                        
                        
                        0.0
                        %
                        
                        
                        196
                        
                        
                        
                        0.0
                        %$
                        18,155
                        
                        
                        
                        2.8
                        %
                        
                        $
                        18,554
                        
                        
                        
                        2.7
                        %
 
 At March
31, 2009 nonperforming assets represented 3.21% of total assets, compared to
1.78% of total assets on December 31, 2008.  Nonperforming assets have
increased primarily as a result of substantial deterioration in the real estate
market and the Company’s commitment to aggressively manage credit
exposure.  The following summarizes nonperforming assets at March 31,
2009 and December 31, 2008:
 
 March
      31,
                            
                            
                            December
      31,(dollars
      in thousands)
                            
                            2009
                            
                            
                            2008Loans
      accounted for on a non-accrual basis
                            
                            $
                            23,205
                            
                            
                            $
                            15,772Other
      loans with principal or interest contracturally past due 90 days or
      more
                            
                            
                            1,437
                            
                            
                            
                            -Nonperforming
      loans
                            
                            
                            24,642
                            
                            
                            
                            15,772Other
      real estate owned
                            
                            
                            3,626
                            
                            
                            
                            1,096Nonperforming
      assets
                            
                            $
                            28,268
                            
                            
                            $
                            16,868
 
 The
nonperforming assets at March 31, 2009 consisted of loans on nonaccrual or 90
days or more past due totaling $24.6 million, and other real estate owned valued
at $3.6 million.  Nonperforming loans at March 31, 2009 were comprised
of loans with legal contractual balances totaling approximately $35.1 million
reduced by impairment charges of $10.5 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.
  23
  The
following table sets forth the components of nonperforming loans as of March 31,
2009:
 
 (dollars
in thousands)
 
 March
      31, 2009Classification
                      
                      Amount
                      
                      CollateralLand
                      
                      
                      2,582
                      
                      Lots
      for retail development in Sacramento CountyLand
                      
                      
                      1,290
                      
                      Lots
      for commercial development in Southern CaliforniaLand
                      
                      
                      938
                      
                      Lots
      for single family homes in IdahoLand
                      
                      
                      428
                      
                      Lots
      for single family homes in Placer CountyLand
                      
                      
                      109
                      
                      Lots
      for single family homes in Amador County5,347Construction
                      
                      
                      8,821
                      
                      Commercial
      condominiums in Sacramento CountyConstruction
                      
                      
                      3,670
                      
                      Condominiums/townhomes
      in Santa Clara CountyConstruction
                      
                      
                      1,437
                      
                      Single
      family residences in Santa Clara CountyConstruction
                      
                      
                      650
                      
                      Partially
      completed home in San Mateo CountyConstruction
                      
                      
                      559
                      
                      Lots
      for single family homes and commercial office space in Alameda
      CountyConstruction
                      
                      
                      538
                      
                      Single
      family residence in Central California15,675Commercial
                      
                      
                      1,730
                      
                      Retail
      development in Southern CaliforniaCommercial
                      
                      
                      371
                      
                      Business
      assets2,101Real
      estate other
                      
                      
                      1,519
                      
                      Single
      family residencesTotal
      nonperforming loans
                      
                      $
                      24,642
 
 Management
is of the opinion that the allowance for credit losses is maintained at a level
adequate for known and unidentified losses inherent in the loan
portfolio.  However, the Company's construction and land loan
portfolios, representing approximately 34.8% of the total loan portfolio, could
be adversely affected if California economic conditions and the real estate
market in the Company's market area were to further weaken.  The
effect of such events, although uncertain at this time, could result in an
increase in the level of non-performing loans and other real estate owned and
the level of the allowance for loan losses, which could adversely affect the
Company's future growth and profitability.
 
 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 March 31, 2009 and
2008:
  24
 
 Three months ended March 31,(dollars in thousands)
                    
                    2009
                    
                    
                    2008Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentOther
      income-cash flow hedge
                    
                    $
                    2,759
                    
                    
                    
                    68.9
                    %
                    
                    $
                    279
                    
                    
                    
                    16.7
                    %Depositor
      service charges
                    
                    
                    420
                    
                    
                    
                    10.5
                    %
                    
                    
                    229
                    
                    
                    
                    13.7
                    %Foreign
      exchange upcharge
                    
                    
                    399
                    
                    
                    
                    10.0
                    %
                    
                    
                    378
                    
                    
                    
                    22.6
                    %Increase
      in value of life insurance
                    
                    
                    109
                    
                    
                    
                    2.7
                    %
                    
                    
                    109
                    
                    
                    
                    6.5
                    %Gain
      on sale of SBA loans
                    
                    
                    104
                    
                    
                    
                    2.6
                    %
                    
                    
                    283
                    
                    
                    
                    16.9
                    %SBA
      loan servicing income
                    
                    
                    98
                    
                    
                    
                    2.4
                    %
                    
                    
                    118
                    
                    
                    
                    7.1
                    %Other
      operating income
                    
                    
                    115
                    
                    
                    
                    2.9
                    %
                    
                    
                    275
                    
                    
                    
                    16.5
                    %$
                    4,004
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,671
                    
                    
                    
                    40.5
                    %
 
 Non-interest
income totaled $4.0 million in the first quarter of 2009, an increase of $2.3
million or 139.6% from $1.7 million in the first quarter of
2008.  Non-interest income generally consists primarily of service
charge income on deposit accounts, foreign exchange income, gains recognized on
sales of SBA loans, and SBA loan servicing income.  However, the
increase in non-interest income during the quarter ending March 31, 2009 was
primarily attributable to the acceleration of a deferred gain of $2.8 million on
interest rate swaps terminated during the fourth quarter of 2008.  The
acceleration of the deferred gain during the first quarter of 2009 was a result
of further reductions in the loan pools that were originally designated as
hedged against interest rate swaps.
 
 For the
quarter ended March 31, 2009 service charge income on deposit accounts was
$420,000, representing an increase of $191,000, or 83.4%, compared to $229,000
for the same period one year ago.  The increase is attributable to an
increase in deposit accounts and deposit related analysis charges.
 
 Revenue
from sales of SBA loans is dependent on consistent origination and funding of
new loan volumes, the timing of which may be impacted, from time to time, by (1)
increased competition from other lenders; (2) the relative attractiveness of SBA
borrowing to other financing options; (3) adjustments to programs by the SBA;
(4) changes in activities of secondary market participants and; (5) other
factors.  Gains recognized on sales of SBA loans were $104,000 in the
quarter ended March 31, 2009 which represented a decrease of $179,000 or 63.3%
compared to $283,000 the same period one year earlier.
 
 Non-interest
Expense
 
 The
components of other expense as a percentage of average earnings assets are set
forth in the following table for the three months ended March 31, 2009 and
2008.
 
 Three
      months ended March 31,(dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentSalaries
      and benefits
                    
                    $
                    5,567
                    
                    
                    
                    2.6
                    %
                    
                    $
                    5,650
                    
                    
                    
                    3.1
                    %Occupancy
                    
                    
                    865
                    
                    
                    
                    0.4
                    %
                    
                    
                    876
                    
                    
                    
                    0.5
                    %Data
      processing
                    
                    
                    580
                    
                    
                    
                    0.3
                    %
                    
                    
                    582
                    
                    
                    
                    0.3
                    %Marketing/Advertising
                    
                    
                    283
                    
                    
                    
                    0.1
                    %
                    
                    
                    319
                    
                    
                    
                    0.2
                    %Deposit
      services
                    
                    
                    250
                    
                    
                    
                    0.1
                    %
                    
                    
                    178
                    
                    
                    
                    0.1
                    %Legal
      and professional
                    
                    
                    301
                    
                    
                    
                    0.1
                    %
                    
                    
                    (34
                    )
                    
                    
                    0.0
                    %Furniture
      and equipment
                    
                    
                    249
                    
                    
                    
                    0.1
                    %
                    
                    
                    229
                    
                    
                    
                    0.1
                    %Other
                    
                    
                    1,368
                    
                    
                    
                    0.6
                    %
                    
                    
                    936
                    
                    
                    
                    0.5
                    %$
                    9,463
                    
                    
                    
                    4.4
                    %
                    
                    $
                    8,736
                    
                    
                    
                    4.8
                    %
  25
  Operating
expenses were $9.5 million for the three months ended March 31, 2009, an
increase of $727,000 or 8.3% from $8.7 million at March 31,
2008.   As a percentage of average earning assets, other expenses
for the three months ended March 31, 2009 and 2008 were 4.4% and 4.8%,
respectively, on an annualized basis. In the first quarter of 2009, operating
expenses were comprised primarily of salaries and benefits of $5.6 million,
which compared to $5.7 million for the period in 2008.  At March 31,
2009, the Company employed 168 full-time equivalents (FTE) compared to 172 FTE
on the same date one year earlier.  In addition, salaries and benefits
included a charge of $367,000 and $366,000 to recognize compensation related to
stock option grants as a result of FAS No. 123R in the first quarter of 2009 and
2008, respectively.  Legal and professional expense for the quarter
ended March 31, 2009 was $301,000 compared to $(34,000) for the same period in
2008.  The increase was primarily attributable to loan related legal
fees in the first quarter of 2009 offset, in part, by a recovery of legal
expense that was recognized in the first quarter of 2008.
 
 Balance
Sheet
 
 Total
assets of the Company at March 31, 2009 were $881.6 million, a decrease of $66.0
million, or 7.0%, as compared to $948.0 million at December 31,
2008.  The reduction in total assets was principally due to a decrease
in loan balances.
 
 The
following table shows the Company’s loans by type and their percentage
distribution for the periods ended March 31, 2009 and December 31,
2008.
 
 (dollars
      in thousands)
                        
                        March
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008Commercial
                        
                        $
                        282,782
                        
                        
                        $
                        301,024Real
      estate construction
                        
                        
                        90,268
                        
                        
                        
                        98,105Land
      loans
                        
                        
                        19,066
                        
                        
                        
                        23,535Real
      estate other
                        
                        
                        137,960
                        
                        
                        
                        134,767Factoring
      and asset based lending
                        
                        
                        45,295
                        
                        
                        
                        55,761SBA
                        
                        
                        70,339
                        
                        
                        
                        77,043Other
                        
                        
                        10,407
                        
                        
                        
                        9,371Total
      gross loans
                        
                        
                        656,117
                        
                        
                        
                        699,606Unearned
      fee income
                        
                        
                        (1,361
                        )
                        
                        
                        (1,601
                        )Total
      gross loans
                        
                        
                        654,756
                        
                        
                        
                        698,005Less
      allowance for credit losses
                        
                        
                        (18,155
                        )
                        
                        
                        (18,554
                        )Total
      loans, net
                        
                        $
                        636,601
                        
                        
                        $
                        679,451Commercial
                        
                        
                        43.1
                        %
                        
                        
                        43.0
                        %Real
      estate construction
                        
                        
                        13.8
                        %
                        
                        
                        14.0
                        %Land
      loans
                        
                        
                        2.9
                        %
                        
                        
                        3.4
                        %Real
      estate other
                        
                        
                        21.0
                        %
                        
                        
                        19.3
                        %Factoring
      and asset based lending
                        
                        
                        6.9
                        %
                        
                        
                        8.0
                        %SBA
                        
                        
                        10.7
                        %
                        
                        
                        11.0
                        %Other
                        
                        
                        1.6
                        %
                        
                        
                        1.3
                        %Total
      gross loans
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
 
 Gross
loan balances were $656.1 million at March 31, 2009, which represented a
decrease of $43.5 million, or 6.2%, as compared to $699.6 million at December
31, 2008. The decrease in loans was primarily in commercial and industrial loans
and commercial real estate loans without a concentration in any one specific
category of loans.
 
 The
Company’s commercial loan portfolio represents loans to small and middle-market
businesses in the Santa Clara County region.  Commercial loans were
$282.8 million at March 31, 2009, which represented a decrease of $18.2 million,
or 6.1%, compared to $301.0 million at December 31, 2008.  At March
31, 2009, commercial loans comprised 43.1% of total loans outstanding compared
to 43.0% at December 31, 2008.
  26
  The
Company’s construction and land development loan portfolio together totaled
approximately $109.3 million as of March 31, 2009 compared to $121.6 million as
of December 31, 2008, representing a decrease of $12.3 million or
10.1%.  Construction and land development loan balances at March 31,
2009 and December 31, 2008 comprised 16.7% and 17.4%, respectively, of total
loans.
 
 Other
real estate loans increased $3.0 million or 2.4% to $138.0 million at March 31,
2009 over $135.0 million at December 31, 2008.  The increase in other
real estate loans was approximately equally split between home equity lines of
credit and other real estate term loans.  Other real estate loans
represented 21.0% of total loans at March 31, 2009 compared to 19.3% at December
31, 2008.
 
 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 March 31, 2009, factoring/asset- based loans
totaled $45.3 million or 6.9% of total loans, a slight decrease as compared to
$55.8 million or 8.0% of total loans at December 31, 2008.
 
 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 March 31, 2009, SBA loans comprised $70.3 million, or
10.7%, of total loans, a decrease of $6.7 million, or 8.7%, from $77.0 million
at December 31, 2008. 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 March
31, 2009 and December 31, 2008, the fair value of SBA loans exceeded aggregate
cost and therefore, SBA loans were carried at aggregate cost.
 
 Other
loans consist primarily of loans to individuals for personal uses, such as
installment purchases, overdraft protection loans and a variety of other
consumer purposes.  At March 31, 2009, other loans totaled $10.4
million as compared to $9.4 million at December 31, 2008.
 
 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 March 31, 2009 and December 31, 2008.
 
 (dollars
      in thousands)
                    
                    March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentNoninterest-bearing  demand
                    
                    $
                    286,749
                    
                    
                    
                    39.11
                    %
                    
                    $
                    284,319
                    
                    
                    
                    36.58
                    %Interest-bearing
      demand
                    
                    
                    4,163
                    
                    
                    
                    0.57
                    %
                    
                    
                    4,267
                    
                    
                    
                    0.55
                    %Money
      market and savings
                    
                    
                    296,828
                    
                    
                    
                    40.50
                    %
                    
                    
                    335,200
                    
                    
                    
                    43.13
                    %Certificates
      of deposit:Less
      than $100
                    
                    
                    92,026
                    
                    
                    
                    12.55
                    %
                    
                    
                    92,997
                    
                    
                    
                    11.96
                    %$100
      and more
                    
                    
                    53,332
                    
                    
                    
                    7.27
                    %
                    
                    
                    60,462
                    
                    
                    
                    7.78
                    %Total
      deposits
                    
                    $
                    733,098
                    
                    
                    
                    100.00
                    %
                    
                    $
                    777,245
                    
                    
                    
                    100.00
                    %
 
 Deposits
decreased $44.1 million or 5.7% from $777.2 million at December 31, 2008 to
$733.1 million at March 31, 2009. The decrease in deposits was primarily in
money market and savings accounts.  As of March 31, 2009, demand
deposits and core deposits continued to represent 39.7% and 80.2% of total
deposits, respectively.
  27
  Leverage
 
 Total
gross loan balances at March 31, 2009 were $656.1million.  The
resulting loan to deposit ratio was 89.5%.  Other earning assets at
March 31, 2009 totaled $185.6 million and were primarily comprised of federal
funds sold and interest-bearing deposits in other banks. To date, the Company
has deployed 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.
 
 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 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.
  28
  In
connection with the recent regulatory attention to market risk and interest rate
risk, the federal banking agencies will evaluate an institution in its periodic
examination on the degree to which changes in interest rates, foreign exchange
rates, commodity prices or equity prices can affect a financial institution’s
earnings or capital.  In addition, the agencies focus in the
examination on an institution’s ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
  Under
certain circumstances, the Comptroller may determine that the capital ratios for
a national bank shall be maintained at levels, which are higher than the minimum
levels required by the guidelines.  A national bank which does not
achieve and maintain adequate capital levels as required may be subject to
supervisory action by the Comptroller through the issuance of a capital
directive to ensure the maintenance of required capital levels.  In
addition, the Company is required to meet certain guidelines of the Comptroller
concerning the maintenance of an adequate allowance for loan and lease
losses.
  In
response to increasing risk perceived in the economic environment, during the
fourth quarter of 2008 the Company raised $53.9 million of additional
capital.  The following is a summary of these issuances:
  Private
Placement
  On
December 17, 2008, the Company completed the private placement sale of 131,901
shares of its Series B Mandatorily Convertible Cumulative Perpetual Preferred
Stock and 168,099 shares of its Series B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock, for aggregate consideration of $30 million, which is
$100 per share for both series of shares, to a private fund.  The
Series B and Series B-1 shares (collectively the “shares”) accrue dividends at a
rate of 10% per annum, payable quarterly.
 
 Following
the 2009 meeting of shareholders, the holders of the Series B shares shall have
voting rights at a rate of 10 votes per share and to convert their shares in to
shares of the Company’s common stock at a conversion rate of $10 per share,
subject to customary adjustments for splits, dividends and other similar
transactions.  The holders of the Series B-1 shares will have such
rights only upon receipt of shareholder approval.  The Company is
required to hold a meeting of its shareholders to approve the conversion and
voting rights of the preferred shares.  If the conversion and voting
rights are approved, the Series B-1 preferred shares will then have conversion
and voting rights similar to the Preferred B shares. If the conversion and
voting rights are not approved, only the Series B shares will have voting and
conversion rights.
 
 Each
Series B and B-1 preferred share shall automatically convert to common stock
after the later of 18 months or such time that shareholder and regulatory
approvals, to the extent required for conversion, are received (“Mandatory
Conversion Date”).  If the average closing price of the Company’s
common stock does not equal or exceed $10 per share over the 20 consecutive
trading days immediately prior to the Mandatory Conversion Date (the Current
Market Price Condition), such date will be extended for successive six-month
periods until the Current Market Price Condition is met.
 
 The
Company can force conversion of the shares into common stock on or after January
15, 2010 through June 30, 2010, if (a) the Company fully pays the accrued
dividends and prepays the dividends that would have accrued up through June 30,
2010, (b) the Company’s shareholders have approved the conversion and (c) the
Current Market Price condition is met.  Subsequent to June 30, 2010,
the Company can force conversion of the shares into common stock if the above
three conditions are met, with the only exception being the necessity to pay all
dividends accrued through the date of conversion as opposed to prepaying any
such amount.
 
 Troubled
Assets Relief Program (TARP)
 
 On
December 23, 2008, the Company issued 23,864 shares of its Fixed Rate Cumulative
Perpetual Series C Preferred Stock, having a liquidation value of $23,864,000,
to the United States Department of the Treasury (the Treasury). Dividends accrue
at the rate of 5% per annum for the first five years and then 9% per annum
thereafter.  The dividends will be paid only as declared by the Board
of Directors of the Company.  However, in the event such dividends
have not been paid for six or more quarters, whether or not consecutive, the
Holders of the Series C Preferred shares will have the right to elect two
members to the Company’s Board of Directors.
 
 In
addition the Company issued a warrant to purchase up to 396,412 shares of the
Company’s common stock at a purchase price of $9.03 per share, subject to
certain adjustment provisions such as stock splits, issuances of Common Stock at
or below a specified price relative to the then current market price of the
stock, and other provisions.  The Warrant expires ten years from the
issuance date.  The Warrant is exercisable in whole or in part at any
time except that the Treasury may not exercise more than one-half of the shares
underlying the Warrant prior to the earlier of i) December 31, 2009 or ii) the
date on which the Company receives gross proceeds of not less than $23,864,000
in one or more Qualified Equity Offerings.  In addition, the Treasury
has agreed not to exercise voting power with respect to any shares of Common
Stock issued upon exercise of the Warrant.
  29
  Prior to
December 31, 2011, unless the Company has redeemed the Series C Preferred shares
or the Treasury has transferred the Series C Preferred Shares to a third party,
consent of the Treasury will be required for the Company to 1) pay any dividend
or other distribution to the holders of the Common Stock or 2) redeem, purchase
or acquire any shares of Common Stock or other equity securities other than in
connection with benefit plans consistent with past practices.  In
addition, the Company’s ability to declare common dividends or repurchase Common
Stock or other equity securities will be subject to restrictions in the event
the Company fails to declare and pay, or set aside for payment, the full amount
of dividends on the Series C Preferred Shares.  Finally, the Company
has agreed, so long as the Treasury holds any securities of the Company, to
ensure that its benefit plans with respect to its senior executive officers
comply with the applicable provisions of the Emergency Economic Stabilization
Act of 2008 and the American Recovery and Reinvestment Act of 2009.
 
 Issuance
costs of $468,000 incurred in connection with the issuance of both the private
placement and TARP securities have been charged against Additional Paid in
Capital.
 
 The
Company’s Tier 1 capital at March 31, 2009 was $107.1 million, which was
comprised of preferred equity up to the allowable limit of $33.0 million, $39.9
million of common equity and surplus, $17.2 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 March 31, 2009 and
December 31, 2008 as well as the minimum capital ratios required to be deemed
“well capitalized” under the regulatory framework.
 
 As
      of March 31,
                  
                  
                  As
      of December 31,(dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioCompany
      Capital RatiosTier
      1 Capital
                  
                  $
                  107,074
                  
                  
                  
                  14.20
                  %
                  
                  $
                  109,221
                  
                  
                  
                  13.31
                  %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                  
                  $
                  45,248
                  
                  
                  
                  6.00
                  %
                  
                  $
                  49,252
                  
                  
                  
                  6.00
                  %Total
      Capital
                  
                  $
                  136,858
                  
                  
                  
                  18.15
                  %
                  
                  $
                  138,725
                  
                  
                  
                  16.90
                  %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                  
                  $
                  75,414
                  
                  
                  
                  10.00
                  %
                  
                  $
                  82,086
                  
                  
                  
                  10.00
                  %Company
      LeverageTier
      1 Capital
                  
                  $
                  107,074
                  
                  
                  
                  11.82
                  %
                  
                  $
                  109,221
                  
                  
                  
                  12.36
                  %(to
      Average Assets)Tier
      1 capital minimum requirement
                  
                  $
                  45,296
                  
                  
                  
                  5.00
                  %
                  
                  $
                  44,170
                  
                  
                  
                  5.00
                  %Bank
      Capital RatiosTier
      1 Capital
                  
                  $
                  107,240
                  
                  
                  
                  14.23
                  %
                  
                  $
                  106,137
                  
                  
                  
                  12.94
                  %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                  
                  $
                  45,219
                  
                  
                  
                  6.00
                  %
                  
                  $
                  49,206
                  
                  
                  
                  6.00
                  %Total
      Capital
                  
                  $
                  116,769
                  
                  
                  
                  15.49
                  %
                  
                  $
                  116,388
                  
                  
                  
                  14.19
                  %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                  
                  $
                  75,366
                  
                  
                  
                  10.00
                  %
                  
                  $
                  82,010
                  
                  
                  
                  10.00
                  %Bank
      LeverageTier
      1 Capital
                  
                  $
                  107,240
                  
                  
                  
                  11.84
                  %
                  
                  $
                  106,137
                  
                  
                  
                  12.03
                  %(to
      Average Assets)Tier
      1 capital minimum requirement
                  
                  $
                  45,269
                  
                  
                  
                  5.00
                  %
                  
                  $
                  44,125
                  
                  
                  
                  5.00
                  %
 
 The
Company and the Bank were considered well capitalized at March 31,
2009.
  30
  Stock
Repurchase Program
 
 Effective
May 5 2008, the Company announced a stock repurchase program to repurchase up to
$5.0 million in shares of the Company for a nineteen month period extending to
December 31, 2009.  Buying under the program will be at management’s
discretion taking into consideration such factors as the market price of the
stock, available cash flow, general economic conditions and other
factors.  As of March 31, 2009, no share repurchases have
occurred.
  31
  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.  The increased level of nonperforming assets at March 31,
2009 may have the potential to impact the Company’s ability to raise deposits
and could result in higher deposit costs and/or lower liquidity.  At
March 31, 2009 and December 31, 2008, liquid assets as a percentage of deposits
were 27.6% and 29.0%, 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 March 31, 2009, there were no balances
outstanding on these lines.  Additionally, as of March 31, 2009, the
Company had a total borrowing capacity with the Federal Home Loan Bank of San
Francisco of approximately $120.0 million for which the Company had collateral
in place to borrow $44.0 million.  As of March 31, 2009, $12.0 million
of this borrowing capacity was pledged to secure a letter of credit and $10.0
million pledged to secure other borrowings.
 
 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 March 31, 2009, the interest rate sensitivity gap (i.e. interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.
 
 (dollars
      in thousands)
                                                  
                                                  As
      of March 31, 2009After
      three
                                                  
                                                  
                                                  After
      six
                                                  
                                                  
                                                  After
      oneWithin
                                                  
                                                  
                                                  months
      but
                                                  
                                                  
                                                  months
      but
                                                  
                                                  
                                                  year
      but
                                                  
                                                  
                                                  Afterthree
                                                  
                                                  
                                                  within
      six
                                                  
                                                  
                                                  within
      one
                                                  
                                                  
                                                  within
                                                  
                                                  
                                                  fivemonths
                                                  
                                                  
                                                  months
                                                  
                                                  
                                                  year
                                                  
                                                  
                                                  five
      years
                                                  
                                                  
                                                  years
                                                  
                                                  
                                                  TotalFederal
      funds sold
                                                  
                                                  $
                                                  169,080
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  169,080Interest
      bearing deposits inother
      banks
                                                  
                                                  
                                                  2,378
                                                  
                                                  
                                                  
                                                  9,016
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,145
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  16,539Loans
                                                  
                                                  
                                                  303,268
                                                  
                                                  
                                                  
                                                  46,588
                                                  
                                                  
                                                  
                                                  56,908
                                                  
                                                  
                                                  
                                                  114,793
                                                  
                                                  
                                                  
                                                  134,560
                                                  
                                                  
                                                  
                                                  656,117Total
      earning assets
                                                  
                                                  $
                                                  474,726
                                                  
                                                  
                                                  $
                                                  55,604
                                                  
                                                  
                                                  $
                                                  56,908
                                                  
                                                  
                                                  $
                                                  119,938
                                                  
                                                  
                                                  $
                                                  134,560
                                                  
                                                  
                                                  $
                                                  841,736Interest
      checking, moneymarket
      and savings
                                                  
                                                  
                                                  300,991
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  300,991Certificates
      of deposit:Less
      than $100,000
                                                  
                                                  
                                                  12,697
                                                  
                                                  
                                                  
                                                  22,059
                                                  
                                                  
                                                  
                                                  30,106
                                                  
                                                  
                                                  
                                                  7,092
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  71,954$100,000
      or more
                                                  
                                                  
                                                  32,443
                                                  
                                                  
                                                  
                                                  20,637
                                                  
                                                  
                                                  
                                                  19,023
                                                  
                                                  
                                                  
                                                  1,301
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  73,404Other
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  17,527
                                                  
                                                  
                                                  
                                                  17,527Total
      interest-bearing liabilities
                                                  
                                                  $
                                                  346,131
                                                  
                                                  
                                                  $
                                                  42,696
                                                  
                                                  
                                                  $
                                                  49,129
                                                  
                                                  
                                                  $
                                                  8,393
                                                  
                                                  
                                                  $
                                                  17,527
                                                  
                                                  
                                                  $
                                                  463,876Interest
      rate gap
                                                  
                                                  $
                                                  128,595
                                                  
                                                  
                                                  $
                                                  12,908
                                                  
                                                  
                                                  $
                                                  7,779
                                                  
                                                  
                                                  $
                                                  111,545
                                                  
                                                  
                                                  $
                                                  117,033
                                                  
                                                  
                                                  $
                                                  377,860Cumulative
      interest rate gap
                                                  
                                                  $
                                                  128,595
                                                  
                                                  
                                                  $
                                                  141,503
                                                  
                                                  
                                                  $
                                                  149,282
                                                  
                                                  
                                                  $
                                                  260,827
                                                  
                                                  
                                                  $
                                                  377,860Interest
      rate gap ratio
                                                  
                                                  
                                                  0.27
                                                  
                                                  
                                                  
                                                  0.23
                                                  
                                                  
                                                  
                                                  0.14
                                                  
                                                  
                                                  
                                                  0.93
                                                  
                                                  
                                                  
                                                  0.87Cumulative
      interest rategap ratio
                                                  
                                                  
                                                  0.27
                                                  
                                                  
                                                  
                                                  0.27
                                                  
                                                  
                                                  
                                                  0.25
                                                  
                                                  
                                                  
                                                  0.37
                                                  
                                                  
                                                  
                                                  0.45
  32
  Based on
the contractual terms of its assets and liabilities, the Company’s balance sheet
at March 31, 2009 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at March 31, 2009 the volume of assets that
might reprice within the next year exceeded the volume of liabilities that might
reprice.  This position provides a hedge against rising interest
rates, but has a detrimental effect during times of rate decreases. Net interest
income is negatively impacted by a decline in interest rates and positively
impacted by an increase in interest rates.  To partially mitigate the
adverse impact of declining rates, a significant portion of variable rate loans
made by the Company have been written with a minimum “floor” rate.
 
 The
following table shows maturity and interest rate sensitivity of the loan
portfolio at March 31, 2009 and December 31, 2008.  At March 31, 2009,
approximately 80.8% 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 March 31, 2009Due
      after oneDue
      one year
                                
                                
                                year
      through
                                
                                
                                Due
      afterAmount
                                
                                
                                or
      less
                                
                                
                                five
      years
                                
                                
                                five
      yearsCommercial
      and other
                                
                                $
                                282,782
                                
                                
                                $
                                158,098
                                
                                
                                $
                                98,940
                                
                                
                                $
                                25,744SBA
                                
                                
                                70,339
                                
                                
                                
                                4,462
                                
                                
                                
                                4,389
                                
                                
                                
                                61,488Real
      estate construction
                                
                                
                                90,268
                                
                                
                                
                                90,227
                                
                                
                                
                                41
                                
                                
                                
                                -Land
      loans
                                
                                
                                19,066
                                
                                
                                
                                12,057
                                
                                
                                
                                4,763
                                
                                
                                
                                2,246Real
      estate-other
                                
                                
                                137,960
                                
                                
                                
                                25,359
                                
                                
                                
                                34,747
                                
                                
                                
                                77,854Factoring
      / Asset-Based Lending
                                
                                
                                45,295
                                
                                
                                
                                45,295
                                
                                
                                
                                -
                                
                                
                                
                                -Other
                                
                                
                                10,407
                                
                                
                                
                                10,354
                                
                                
                                
                                53
                                
                                
                                
                                -Total
      loans
                                
                                $
                                656,117
                                
                                
                                $
                                345,852
                                
                                
                                $
                                142,933
                                
                                
                                $
                                167,332As
      of December 31, 2008Due
      after oneDue
      one year
                                
                                
                                year
      through
                                
                                
                                Due
      afterAmount
                                
                                
                                or
      less
                                
                                
                                five
      years
                                
                                
                                five
      yearsCommercial
      and other
                                
                                $
                                272,660
                                
                                
                                $
                                161,013
                                
                                
                                $
                                84,173
                                
                                
                                $
                                27,474SBA
                                
                                
                                56,945
                                
                                
                                
                                12,059
                                
                                
                                
                                3,174
                                
                                
                                
                                41,712Real
      estate construction
                                
                                
                                85,378
                                
                                
                                
                                74,457
                                
                                
                                
                                10,921
                                
                                
                                
                                -Real
      estate-other
                                
                                
                                171,042
                                
                                
                                
                                58,670
                                
                                
                                
                                42,561
                                
                                
                                
                                69,811Factoring
      / Asset-Based Lending
                                
                                
                                57,662
                                
                                
                                
                                55,834
                                
                                
                                
                                1,828
                                
                                
                                
                                -Other
                                
                                
                                9,042
                                
                                
                                
                                8,272
                                
                                
                                
                                770
                                
                                
                                
                                -Total
      loans
                                
                                $
                                652,729
                                
                                
                                $
                                370,305
                                
                                
                                $
                                143,427
                                
                                
                                $
                                138,997
 
 Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
 
 The
definition of “off-balance sheet arrangements” includes any transaction,
agreement or other contractual arrangement to which an entity is a party under
which we have:
 
 ·
              Any
      obligation under a guarantee contract that has the characteristics as
      defined in paragraph 3 of FASB Interpretation No. 45, “Guarantor’s
      Accounting and Disclosure Requirements for Guarantee including Indirect
      Guarantees of Indebtedness to Others” (“FIN
  45”);
 ·
              A
      retained or contingent interest in assets transferred to an unconsolidated
      entity or similar arrangement that serves as credit, liquidity or market
      risk support to that entity for such assets, such as a subordinated
      retained interest in a pool of receivables transferred to an
      unconsolidated entity;
 ·
              Any
      obligation, including a contingent obligation, under a contract that would
      be accounted for as a derivative instrument, except that it is both
      indexed to the registrant’s own stock and classified in stockholders’
      equity; or
 ·
              Any
      obligation, including contingent obligations, arising out of a material
      variable interest, as defined in FASB Interpretation No. 46,
      “Consolidation of Variable Interest Entities” (“FIN 46”), in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to the registrant, or engages in leasing, hedging or
      research and development services with the
  registrant.
  33
 
 In the
ordinary course of business, we have issued certain guarantees which qualify as
off-balance sheet arrangements, as of March 31, 2009 those guarantees include
the following:
 
 ·
              Standby
      Letters of Credit in the amount of $17.1
  million.
 
 The table
below summarizes the Company’s off-balance sheet contractual
obligations:
 
 (dollars
      in thousands)
                                                  
                                                  As
      of March 31, 2009Payments
      due by periodLess
      than
                                                  
                                                  
                                                  1 -
      3
                                                  
                                                  
                                                  3 -
      5
                                                  
                                                  
                                                  More
      thanTotal
                                                  
                                                  
                                                  1
      year
                                                  
                                                  
                                                  years
                                                  
                                                  
                                                  years
                                                  
                                                  
                                                  5
      yearsLong-term
      contracts
                                                  
                                                  $
                                                  13,254
                                                  
                                                  
                                                  $
                                                  2,005
                                                  
                                                  
                                                  $
                                                  3,791
                                                  
                                                  
                                                  $
                                                  3,397
                                                  
                                                  
                                                  $
                                                  4,061Operating
      leases
                                                  
                                                  
                                                  1,924
                                                  
                                                  
                                                  
                                                  1,315
                                                  
                                                  
                                                  
                                                  609
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Total
                                                  
                                                  $
                                                  15,178
                                                  
                                                  
                                                  $
                                                  3,320
                                                  
                                                  
                                                  $
                                                  4,400
                                                  
                                                  
                                                  $
                                                  3,397
                                                  
                                                  
                                                  $
                                                  4,061
  ITEM
4 – CONTROLS AND PROCEDURES
 
 Disclosure
Controls and Procedures
 
 As
required by SEC rules, the Company’s management evaluated the effectiveness, as
of March 31, 2009, of the Company’s disclosure controls and
procedures.  The Company’s chief executive officer and chief financial
officer participated in the evaluation.  Based on this evaluation, the
Company’s chief executive officer and chief financial officer concluded that the
Company’s disclosure controls and procedures were effective as of March 31,
2009.
 
 Internal
Control over Financial Reporting
 
 Internal
control over financial reporting is defined in Rule 13a-15(f) promulgated under
the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
 
 Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of assets of the company; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use of disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.  No change occurred during the
first quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
  34
 
 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, 2008.
  ITEM
2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Not
applicable
  ITEM
3 – DEFAULTS UPON SENIOR SECURITIES
  Not
applicable
  ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 Not
applicable
  ITEM
5 – OTHER INFORMATION
  Not
applicable
  ITEM
6 – EXHIBITS
  (a)
Exhibits
  See Index
to Exhibits at page 36 of this Quarterly Report on Form 10-Q.
  35
  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:
      May 7, 2009
                By:
                /s/ Daniel P. MyersDaniel
      P. MyersPresident
      and Chief Executive Officer(Principal
      Executive Officer)Dated:
      May 7, 2009
                By:
                /s/ Thomas A. SaThomas
      A. SaExecutive
      Vice PresidentChief
      Administrative Officer and Chief Financial Officer(Principal
      Financial and Accounting
Officer)
  36
  INDEX
TO EXHIBITS
  ExhibitNumber
              
              Description
      of Exhibit(31.1)
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002(31.2)
              
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002(32.1)
              
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section
      1350(32.2)
              
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section
      1350
  37