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, 2010





OR





o
            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 o





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





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


Yes o  No x




The
number of shares of Common Stock outstanding as of April 30,
2010:  10,823,453





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
                          
                          18Item
      3
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          36Item
      4
                          Controls
      and Procedures
                          
                          38PART II - OTHER INFORMATIONItem
      1
                          Legal
      Proceedings
                          
                          39Item
      1A
                          Risk
      Factors
                          
                          39Item
      2
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          39Item
      3
                          Defaults
      Upon Senior Securities
                          
                          39Item
      4
                          Submission
      of Matters to a Vote of Security Holders
                          
                          39Item
      5
                          Other
      Information
                          
                          39Item
      6
                          Exhibits
                          
                          39Signatures
                          
                          40Index
      to Exhibits
                          
                          41


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,
                                    
                                    
                                    December 31,2010
                                    
                                    
                                    2009ASSETSCash
      and due from banks
                                    
                                    $
                                    10,273
                                    
                                    
                                    $
                                    14,893Federal
      funds sold
                                    
                                    
                                    114,790
                                    
                                    
                                    
                                    104,260Total
      cash and equivalents
                                    
                                    
                                    125,063
                                    
                                    
                                    
                                    119,153Interest
      bearing deposits in other banks
                                    
                                    
                                    8,053
                                    
                                    
                                    
                                    9,980Investment
      securities available for sale
                                    
                                    
                                    107,317
                                    
                                    
                                    
                                    105,005Loans,
      net of allowance for credit losses of $16,155 atMarch
      31, 2010 and $16,012 at December 31, 2009
                                    
                                    
                                    568,093
                                    
                                    
                                    
                                    558,977Premises
      and equipment, net
                                    
                                    
                                    3,314
                                    
                                    
                                    
                                    3,566Other
      real estate owned
                                    
                                    
                                    6,626
                                    
                                    
                                    
                                    6,509Accrued
      interest receivable
                                    
                                    
                                    3,055
                                    
                                    
                                    
                                    2,829Other
      assets
                                    
                                    
                                    37,250
                                    
                                    
                                    
                                    38,048Total
      assets
                                    
                                    $
                                    858,771
                                    
                                    
                                    $
                                    844,067LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Demand
      noninterest-bearing
                                    
                                    $
                                    356,787
                                    
                                    
                                    $
                                    333,171Demand
      interest-bearing
                                    
                                    
                                    6,019
                                    
                                    
                                    
                                    4,830Savings
                                    
                                    
                                    289,984
                                    
                                    
                                    
                                    275,850Time
                                    
                                    
                                    65,834
                                    
                                    
                                    
                                    91,195Total
      deposits
                                    
                                    
                                    718,624
                                    
                                    
                                    
                                    705,046Junior
      subordinated debt securities
                                    
                                    
                                    17,527
                                    
                                    
                                    
                                    17,527Accrued
      interest payable
                                    
                                    
                                    112
                                    
                                    
                                    
                                    121Other
      liabilities
                                    
                                    
                                    12,015
                                    
                                    
                                    
                                    12,059Total
      liabilities
                                    
                                    
                                    748,278
                                    
                                    
                                    
                                    734,753Commitments
      and contingencies
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; 10,000,000 shares authorized;23,864
      shares issued and outstanding at March 31, 2010 and
                                    
                                    
                                    23,864
                                    
                                    
                                    
                                    53,864323,864
      shares issued and outstanding at December 31, 2009Common
      stock, no par value; 30,000,000 shares authorized;10,823,453
      shares issued and outstanding at March 31, 2010;7,098,164
      shares issued and outstanding at December 31, 2009;
                                    
                                    
                                    68,900
                                    
                                    
                                    
                                    37,293Additional
      paid in capital
                                    
                                    
                                    3,841
                                    
                                    
                                    
                                    3,626Retained
      earnings
                                    
                                    
                                    14,453
                                    
                                    
                                    
                                    15,148Accumulated
      other comprehensive (loss) income
                                    
                                    
                                    (565
                                    )
                                    
                                    
                                    (617
                                    )Total
      shareholders' equity
                                    
                                    
                                    110,493
                                    
                                    
                                    
                                    109,314Total
      liabilities and shareholders' equity
                                    
                                    $
                                    858,771
                                    
                                    
                                    $
                                    844,067





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


4





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Statements of Operations (unaudited)


(dollars
in thousands)





Three months endedMarch 31,2010
                            
                            
                            2009INTEREST
      INCOME:Loans
                            
                            $
                            10,106
                            
                            
                            $
                            11,774Federal
      funds sold
                            
                            
                            59
                            
                            
                            
                            112Investment
      securities available for sale
                            
                            
                            547
                            
                            
                            
                            -Interest
      bearing deposits in other banks
                            
                            
                            45
                            
                            
                            
                            74Total
      interest income
                            
                            
                            10,757
                            
                            
                            
                            11,960INTEREST
      EXPENSE:Deposits:Interest-bearing
      demand
                            
                            
                            2
                            
                            
                            
                            1Money
      market and savings
                            
                            
                            358
                            
                            
                            
                            782Certificates
      of deposit
                            
                            
                            281
                            
                            
                            
                            1,048Other
                            
                            
                            241
                            
                            
                            
                            479Total
      interest expense
                            
                            
                            882
                            
                            
                            
                            2,310Net
      interest income
                            
                            
                            9,875
                            
                            
                            
                            9,650Provision
      for credit losses
                            
                            
                            1,250
                            
                            
                            
                            3,650Net
      interest income after provisionfor
      credit losses
                            
                            
                            8,625
                            
                            
                            
                            6,000NON-INTEREST
      INCOME:Service
      charges on deposit accounts
                            
                            
                            545
                            
                            
                            
                            420International
      fee income
                            
                            
                            428
                            
                            
                            
                            399Gain
      on sale of SBA loans
                            
                            
                            -
                            
                            
                            
                            104Other
      non interest income
                            
                            
                            653
                            
                            
                            
                            3,081Total
      non-interest income
                            
                            
                            1,626
                            
                            
                            
                            4,004OPERATING
      EXPENSES:Salaries
      and benefits
                            
                            
                            5,284
                            
                            
                            
                            5,567Premises
      and fixed assets
                            
                            
                            1,052
                            
                            
                            
                            1,114Other
                            
                            
                            3,317
                            
                            
                            
                            2,782Total
      operating expenses
                            
                            
                            9,653
                            
                            
                            
                            9,463Income
      before income taxes
                            
                            
                            598
                            
                            
                            
                            541Income
      taxes
                            
                            
                            233
                            
                            
                            
                            208Net
      income
                            
                            $
                            365
                            
                            
                            $
                            333Preferred
      dividends
                            
                            
                            1,060
                            
                            
                            
                            1,017Net
      loss available to common shareholders
                            
                            
                            (695
                            )
                            
                            
                            (684
                            )Basic
      loss per share
                            
                            $
                            (0.11
                            )
                            
                            $
                            (0.10
                            )Diluted
      loss per share
                            
                            $
                            (0.11
                            )
                            
                            $
                            (0.10
                            )Average
      common shares outstanding
                            
                            
                            6,576,923
                            
                            
                            
                            6,571,479Average
      common and equivalentshares
      outstanding
                            
                            
                            6,576,923
                            
                            
                            
                            6,571,479





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


5


BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Statements of Cash Flows (unaudited)


(dollars
in thousands)





Three months ended March 31,2010
                                
                                
                                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                
                                $
                                365
                                
                                
                                $
                                333Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for credit losses
                                
                                
                                1,250
                                
                                
                                
                                3,650Depreciation
      and amortization
                                
                                
                                672
                                
                                
                                
                                411Stock
      based compensation
                                
                                
                                345
                                
                                
                                
                                367Loans
      originated for sale
                                
                                
                                (6,592
                                )
                                
                                
                                (1,928
                                )Proceeds
      from loan sales
                                
                                
                                -
                                
                                
                                
                                5,830Gain
      on sale of securities
                                
                                
                                164
                                
                                
                                
                                -Decrease
      in accrued interest receivableand
      other assets
                                
                                
                                902
                                
                                
                                
                                1,317Decrease
      in accrued interest payableand
      other liabilities
                                
                                
                                (1,679
                                )
                                
                                
                                (1,285
                                )Net
      cash (used in) provided by operating activities
                                
                                
                                (4,573
                                )
                                
                                
                                8,695CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of securities available for sale
                                
                                
                                (36,437
                                )
                                
                                
                                -Proceeds
      from sale of securities available for sale
                                
                                
                                21,142
                                
                                
                                
                                -Proceeds
      from maturity of securities available for sale
                                
                                
                                13,060
                                
                                
                                
                                -Proceeds
      from the sale of other real estate owned
                                
                                
                                3,697
                                
                                
                                
                                -Net
      (increase) decrease in loans
                                
                                
                                (7,588
                                )
                                
                                
                                32,715Net
      decrease (increase) in interest bearing deposits in other
      banks
                                
                                
                                1,927
                                
                                
                                
                                (9,271
                                )Purchase
      of fixed assets
                                
                                
                                (116
                                )
                                
                                
                                (121
                                )Net
      cash (used in) provided by investing activities
                                
                                
                                (4,315
                                )
                                
                                
                                23,323CASH
      FLOW FROM FINANCING ACTIVITIES:Net
      increase (decrease) in deposits
                                
                                
                                13,578
                                
                                
                                
                                (44,147
                                )(Decrease)
      in other borrowings
                                
                                
                                -
                                
                                
                                
                                (20,000
                                )Common
      stock issued
                                
                                
                                31,477
                                
                                
                                
                                -Conversion
      of preferred stock
                                
                                
                                (30,000
                                )
                                
                                
                                -Payment
      of cash dividends
                                
                                
                                (257
                                )
                                
                                
                                -Preferred
      stock issuance costs
                                
                                
                                -
                                
                                
                                
                                (100
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                14,798
                                
                                
                                
                                (64,247
                                )NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
                                
                                
                                5,910
                                
                                
                                
                                (32,229
                                )Cash
      and equivalents at beginning of period
                                
                                
                                119,153
                                
                                
                                
                                217,946Cash
      and equivalents at end of period
                                
                                $
                                125,063
                                
                                
                                $
                                185,717OTHER
      CASH FLOW INFORMATION:Cash
      paid for interest
                                
                                $
                                630
                                
                                
                                $
                                1,792Cash
      paid for income taxes
                                
                                $
                                88
                                
                                
                                $
                                -NON-CASH
      INVESTING ACTIVITIES:Loans
      transferred to other real estate owned
                                
                                $
                                3,814
                                
                                
                                $
                                2,530





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


6


BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Notes
to Interim Consolidated Financial Statements (Unaudited)





1.           Summary
of Significant Accounting Policies





Basis
of Presentation





The
accompanying unaudited financial statements of Bridge Capital Holdings and
Bridge Bank, N.A. have been prepared in accordance with generally accepted
accounting principles and pursuant to the rules and regulations of the
SEC.  The interim financial data as of March 31, 2010 and for the
three months ended March 31, 2010 and 2009 is unaudited; however, in the opinion
of the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods.   Certain information and note disclosures
normally included in annual financial statements have been omitted pursuant to
SEC rules and regulations; however, the Company believes the disclosures made
are adequate to ensure that the information presented is not
misleading.  Results of operations for the quarters ended March 31,
2010 and 2009 are not necessarily indicative of full year results.





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





Use
of Estimates





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





Recent
Accounting Pronouncements





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





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





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


7


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





The
Company has adopted guidance issued by the FASB that clarifies the accounting
for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments.  The Company uses the Black-Scholes-Merton (“BSM”)
option-pricing model to determine the fair-value of stock-based
awards.  The Company has recorded an incremental $345,000 ($262,000
net of tax) of stock-based compensation expense during the three months ended
March 31, 2010 as a result of the adoption of the guidance issued by the
FASB.




No
stock-based compensation costs were capitalized as part of the cost of an asset
as of March 31, 2010.   As of March 31, 2010, $3.3 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 3.4
years.





Stock-based
compensation reduced basic earnings per share by $0.04 and $0.04 and diluted
earnings per share by $0.05 and $0.04 for the three months ended March 31, 2010
and 2009, respectively.




Comprehensive
Income





The
Company has adopted accounting guidance issued by the FASB that requires all
items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement.  Other comprehensive earnings
include an adjustment to fully recognize the liability associated with the
supplemental executive retirement plan, unrealized gains and losses, net of tax,
on cash flow hedges and unrealized gains and losses, net of tax, on marketable
securities classified as available-for-sale.  The Company had a
cumulative other comprehensive loss totaling $(565,000), net of tax, as of March
31, 2010 and a cumulative other comprehensive loss totaling $(617,000), net of
tax, as of December 31, 2009.





Three months ended(dollars in thousands)
                            
                            March 31,2010
                            
                            
                            2009Net
      income
                            
                            $
                            365
                            
                            
                            $
                            333Other
      comprehensive earnings-Net
      unrealized gains (losses) on securities available for sale
                            
                            
                            327
                            
                            
                            
                            -Net
      unrealized gains (losses) on supplemental executive retirement
      plan
                            
                            
                            7
                            
                            
                            
                            13Net
      unrealized gains (losses) on cash flow hedges
                            
                            
                            (282
                            )
                            
                            
                            (1,763
                            )Total
      comprehensive income (loss)
                            
                            $
                            417
                            
                            
                            $
                            (1,417
                            )




Segment
Information





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


8


Derivative
Instruments and Hedging Activities





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





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




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 and vesting of restricted
stock.  Common stock equivalents are included in the diluted net
earnings per share calculation to the extent these shares are
dilutive.  A reconciliation of the numerator and denominator used in
the calculation of basic and diluted net earnings per share available to common
shareholders is as follows:





Three months ended(dollars in thousands, except per share amounts)
                
                March 31,2010
                
                
                2009Net
      income
                
                $
                365
                
                
                $
                333Less:  dividends
      on preferred shares
                
                
                (1,060
                )
                
                
                (1,017
                )Net
      income (loss) available to common shareholders
                
                
                (695
                )
                
                
                (684
                )Weighted
      average shares used in computing basic earnings (loss) per
      share
                
                
                6,576,923
                
                
                
                6,571,479Diluted
      potential common shares related to stock options, restricted stock, and
      preferred stock
                
                
                -
                
                
                
                -Total
      average common shares and equivalents
                
                
                6,576,923
                
                
                
                6,571,479Basic
      earnings (loss) per share
                
                $
                (0.11
                )
                
                $
                (0.10
                )Diluted
      earnings (loss) per share
                
                $
                (0.11
                )
                
                $
                (0.10
                )


9




3.           Securities




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





(dollars in thousands)
                  
                  As of March 31, 2010Gross Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueU.S.
      government agencies
                  
                  $
                  76,684
                  
                  
                  $
                  201
                  
                  
                  $
                  (69
                  )
                  
                  $
                  76,816Mortgage
      backed securities
                  
                  
                  15,423
                  
                  
                  
                  108
                  
                  
                  
                  (9
                  )
                  
                  
                  15,522Collateralized
      mortgage obligations
                  
                  
                  11,979
                  
                  
                  
                  74
                  
                  
                  
                  (16
                  )
                  
                  
                  12,037Corporate
      bonds
                  
                  
                  2,942
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,942Total
      securities available for sale
                  
                  
                  107,028
                  
                  
                  
                  383
                  
                  
                  
                  (94
                  )
                  
                  
                  107,317Total
      investment securities
                  
                  $
                  107,028
                  
                  
                  $
                  383
                  
                  
                  $
                  (94
                  )
                  
                  $
                  107,317





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







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







(dollars in thousands)
                  
                  March 31, 2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  12,301
                  
                  
                  $
                  12,353Due
      after one year through five years
                  
                  
                  82,223
                  
                  
                  
                  82,344Due
      after five years through ten years
                  
                  
                  -
                  
                  
                  
                  -Due
      after ten years
                  
                  
                  12,504
                  
                  
                  
                  12,620Total
      securities available for sale
                  
                  
                  107,028
                  
                  
                  
                  107,317Total
      investment securities
                  
                  $
                  107,028
                  
                  
                  $
                  107,317





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


10


As of
March 31, 2010 and December 31, 2009, no investment securities were pledged as
collateral.   As of March 31, 2010 there was $(94,000) in
unrealized losses attributable to securities maturing in greater that 12
months.  As of December 31, 2009 there were no unrealized losses
attributable to securities maturing in greater than 12 months.




4.           Loans




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




March 31,
                
                
                December 31,(dollars in thousands)
                
                2010
                
                
                2009Commercial
                
                $
                243,672
                
                
                $
                253,776Real
      estate construction
                
                
                34,330
                
                
                
                20,601Land
      loans
                
                
                12,245
                
                
                
                12,763Real
      estate other
                
                
                145,959
                
                
                
                149,617Factoring
      and asset based lending
                
                
                88,127
                
                
                
                66,660SBA
                
                
                56,037
                
                
                
                67,629Other
                
                
                5,396
                
                
                
                5,395Total
      gross loans
                
                
                585,766
                
                
                
                576,441Unearned
      fee income
                
                
                (1,518
                )
                
                
                (1,452
                )Total
      loan portfolio
                
                
                584,248
                
                
                
                574,989Less
      allowance for credit losses
                
                
                (16,155
                )
                
                
                (16,012
                )Loans,
      net
                
                $
                568,093
                
                
                $
                558,977




5. Premises and
Equipment




Premises
and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation and amortization are computed on a
straight-line basis over the shorter of the lease term, generally three to
fifteen years, or the estimated useful lives of the assets, generally three to
five years.





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





(dollars
      in thousands)
                  
                  March
      31, 2010Accumulated
                  
                  
                  Net
      BookCost
                  
                  
                  Depreciation
                  
                  
                  ValueLeasehold
      improvements
                  
                  $
                  5,406
                  
                  
                  $
                  (3,018
                  )
                  
                  $
                  2,388Furniture
      and fixtures
                  
                  
                  1,067
                  
                  
                  
                  (885
                  )
                  
                  
                  182Capitalized
      software
                  
                  
                  3,101
                  
                  
                  
                  (2,673
                  )
                  
                  
                  428Equipment
                  
                  
                  2,261
                  
                  
                  
                  (1,945
                  )
                  
                  
                  316Construction
      in process
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Totals
                  
                  $
                  11,835
                  
                  
                  $
                  (8,521
                  )
                  
                  $
                  3,314





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


11


6.           Junior
Subordinated Debt Securities and Other Borrowings





Junior
Subordinated Debt Securities





On
December 21, 2004, the Company issued $12,372,000 of junior subordinated debt
securities (the “debt securities”) to Bridge Capital Trust I, a statutory trust
created under the laws of the State of California.  These debt
securities are subordinated to effectively all borrowings of the Company and are
due and payable in March 2035.  Interest is payable quarterly on these
debt securities at a fixed rate of 5.90% for the first five years, and
thereafter interest accrues at LIBOR plus 1.98%.  The debt securities
can be redeemed at par at the Company’s option beginning in March 2010; they can
also be redeemed at par if certain events occur that impact the tax treatment or
the capital treatment of the issuance.





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





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





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





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





Other
Borrowings





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





As of
March 31, 2010, the Company had a total borrowing capacity with the Federal Home
Loan Bank of San Francisco of approximately $127.0 million for which the Company
had collateral in place to borrow $45.0 million.  As of March 31,
2010, $12.0 million of this borrowing capacity was pledged to secure a letter of
credit.





The Bank
also has unsecured borrowing lines with correspondent banks totaling $25.0
million.  At March 31, 2010, there were no balances outstanding on
these lines.




7.           Stock-Based
Compensation




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




12




The
weighted average assumptions used for the three month periods ended March 31,
2010 and 2009 and the resulting estimates of weighted-average fair value per
share of stock options granted during those periods are as follows:




Three months ended March 31,2010
                    
                    
                    2009Expected
      life
                    
                    75
      months
                    
                    
                    75
      monthsStock
      volatility
                    
                    
                    45.00
                    %
                    
                    
                    28.00
                    %Risk
      free interest rate
                    
                    
                    2.69
                    %
                    
                    
                    2.00
                    %Dividend
      yield
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %Fair
      value per share
                    
                    $
                    3.35
                    
                    
                    $
                    1.58




8.           Fair
Value of Financial Instruments





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





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





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





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





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





(dollars
      in thousands)
                            
                            As of March 31, 2010Total
                            
                            
                            Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3Securities
      available for sale
                            
                            $
                            107,317
                            
                            
                            $
                            -
                            
                            
                            $
                            107,317
                            
                            
                            $
                            -Cash
      flow hedge
                            
                            
                            (1,145
                            )
                            
                            
                            -
                            
                            
                            
                            (1,145
                            )
                            
                            
                            -Warrant
      portfolio
                            
                            
                            742
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            742Total
                            
                            $
                            106,914
                            
                            
                            $
                            -
                            
                            
                            $
                            106,172
                            
                            
                            $
                            742(dollars
      in thousands)
                            
                            As of December 31, 2009Total
                            
                            
                            Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3Securities
      available for sale
                            
                            $
                            105,005
                            
                            
                            $
                            -
                            
                            
                            $
                            105,005
                            
                            
                            $
                            -Cash
      flow hedge
                            
                            
                            (776
                            )
                            
                            
                            -
                            
                            
                            
                            (776
                            )
                            
                            
                            -Warrant
      portfolio
                            
                            
                            729
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            729Total
                            
                            $
                            104,958
                            
                            
                            $
                            -
                            
                            
                            $
                            104,229
                            
                            
                            $
                            729




13




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, 2010.





The
Company may be required, from time to time, to measure certain other financial
assets at fair value on a non-recurring basis in accordance with
GAAP.  These adjustments to fair value usually result from application
of lower-of-cost-or-market accounting or write-downs of individual
assets.  The assets measured at fair value on a non-recurring basis as
of March 31, 2010 and December 31, 2009 included impaired loans of $13.2 million
and $17.0 million, respectively and other real estate owned of $6.6 million and
$6.5 million, respectively.  The Company charged-off $2.1 million
during the quarter ended March 31, 2010 as a result of impaired
loans.





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





The
following table presents the carrying amount and estimated fair value of certain
assets and liabilities of the Company at March 31, 2010 and December 31,
2009.  The carrying amounts reported in the balance sheets approximate
fair value for the following financial instruments: cash and due from banks,
federal funds sold, interest-bearing deposits in other banks, demand and savings
deposits (see Note 3 for information regarding securities).





(dollars
      in thousands)
                
                March 31, 2010
                
                
                December 31, 2009Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairValue
                
                
                Value
                
                
                Value
                
                
                ValueFinancial
      assets:Cash
      and due from banks
                
                $
                10,273
                
                
                $
                10,723
                
                
                $
                14,893
                
                
                $
                14,893Federal
      funds sold
                
                
                114,790
                
                
                
                114,790
                
                
                
                104,260
                
                
                
                104,260Interest
      bearing deposits in other banks
                
                
                8,053
                
                
                
                8,036
                
                
                
                9,980
                
                
                
                9,954Investments
      securities
                
                
                107,317
                
                
                
                107,317
                
                
                
                105,005
                
                
                
                105,005Loans
      and leases, gross
                
                
                584,248
                
                
                
                598,606
                
                
                
                574,989
                
                
                
                589,748Bank
      owned life insurance
                
                
                10,098
                
                
                
                10,098
                
                
                
                10,001
                
                
                
                10,001Cash
      flow hedge
                
                
                (1,145
                )
                
                
                (1,145
                )
                
                
                (776
                )
                
                
                (776
                )Financial
      liabilities:Deposits
                
                
                718,624
                
                
                
                716,802
                
                
                
                705,046
                
                
                
                703,362Trust
      preferred securities
                
                
                17,527
                
                
                
                18,166
                
                
                
                17,527
                
                
                
                8,058Other
      borrowings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -




Loans




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





Time
deposits




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





9.           Derivatives
and Hedging Activities





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




14




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





(dollars
      in thousands)Fair
      ValueDerivatives Designated as Hedging
                                  
                                  Balance Sheet
                                  
                                  March 31,
                                  
                                  
                                  December 31,Instruments Under SFAS 133
                                  
                                  Location
                                  
                                  2010
                                  
                                  
                                  2009Interest
      rate contracts
                                  
                                  Other
      liabilities
                                  
                                  $
                                  1,145
                                  
                                  
                                  $
                                  776Total
      hedged derivatives
                                  
                                  
                                  
                                  $
                                  1,145
                                  
                                  
                                  $
                                  776




Cash
Flow Hedges of Interest Rate Risk





The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate swaps as part of its interest rate risk management strategy.  For
hedges of the Company’s variable-rate loan assets, interest rate swaps
designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for the Company making variable-rate payments over the
life of the agreements without exchange of the underlying notional
amount.  For hedges of the Company’s variable-rate borrowings,
interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for the Company making
fixed-rate payments. As of March 31, 2010, the Company had two interest rate
swaps with an aggregate notional amount of $17.5 million that were designated as
cash flow hedges of interest rate risk associated with the Company’s
variable-rate borrowings.





The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive
Income (“AOCI”) and is subsequently reclassified into earnings in the period
that the hedged forecasted transaction affects earnings. During the three months
ended March 31, 2010 such derivatives were used to hedge the forecasted variable
cash outflows associated with subordinated debt related to trust preferred
securities.  During the three months ended March 31, 2010 and March
31, 2009, the amount of pre-tax gain/(loss) recorded in AOCI due to the
effective portion of changes in fair value of derivatives designated as cash
flow hedges was $(368,000) and $99,000, respectively.  During the
three months ended March 31, 2010 and March 31, 2009, $57,000 and $180,000,
respectively was reclassified into earnings related to the effective portion of
cash flow hedges.





The
ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. No hedge ineffectiveness was recognized during the three
months ended March 31, 2010 and 2009.





Amounts
reported in AOCI related to derivatives will be reclassified to interest income
or expense, as applicable, as interest payments are received / made on the
Company’s variable-rate assets/liabilities. During the next twelve months, the
Company estimates that $222,000 will be reclassified as an increase to interest
income and $450,000 will be reclassified as an increase to interest
expense.  During the three months ended March 31, 2010 and 2009, the
Company accelerated the reclassification of amounts in other comprehensive
income to earnings as a result of the hedged forecasted transactions related to
certain terminated interest rate swaps becoming probable not to
occur.  The accelerated amounts for the three months ended March 31,
2010 and 2009 were a gain of $21,000 and $2.8 million,
respectively.




15




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, 2010 and 2009.





Interest Income
                                            
                                            
                                            Non-Interest Income
                                            
                                            
                                            Total IncomeThree monthsended March 31,
                                            
                                            
                                            Three monthsended March 31,
                                            
                                            
                                            Three monthsended March 31,2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009Amount
      of gain reclassified from AOCIinto income - effective
      portion
                                            
                                            $
                                            57
                                            
                                            
                                            $
                                            180
                                            
                                            
                                            $
                                            21
                                            
                                            
                                            $
                                            2,759
                                            
                                            
                                            $
                                            78
                                            
                                            
                                            $
                                            2,939Amount
      of gain recognized in incomeon derivative - ineffective portion
      andamount excluded from
      effectivenesstesting
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Total
      derivative income
                                            
                                            $
                                            57
                                            
                                            
                                            $
                                            180
                                            
                                            
                                            $
                                            21
                                            
                                            
                                            $
                                            2,759
                                            
                                            
                                            $
                                            78
                                            
                                            
                                            $
                                            2,939




Credit
Risk Related Contingent Features





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




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





As of
March 31, 2010 the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $1.1 million. As of March 31, 2010, the Company
has minimum collateral posting thresholds with certain of its derivative
counterparties and has posted collateral of $1.0 million against its obligations
under these agreements. If the Company had breached any of these provisions at
March 31, 2010, it would have been required to settle its obligations under the
agreements at the termination value.




10.         Preferred
Stock




On
November 13, 2008, the United States Treasury Department (the Treasury) approved
the Company’s participation in the TARP Capital Purchase Program, subject to the
Company raising additional equity in an amount satisfactory to
Treasury.  On December 4, 2008, investors agreed to purchase $30
million of the Company’s Series B and B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock in a private placement, subject to the Treasury
approving the Company’s participation in the TARP Capital Purchase Program and
its ability to satisfy all legal requirements for selling equity securities to
the Treasury under the program.  Based on discussions with the
Treasury representatives, the Company understood that raising $30 million would
satisfy the requirement that we raise additional equity.  The Company
sold $30 million of our Series B and B-1 Preferred Stock in a private placement
on December 17, 2008 and subsequently sold $23.9 million in TARP securities to
the Treasury on December 23, 2008.  In addition the Company issued a
warrant to the Treasury to purchase up to 396,412 shares of the Company’s common
stock.  On March 31, 2010, the $30 million of Series B and B-1
Preferred Stock was converted to common stock.  See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Capital Resources” for additional preferred and common stock
discussion.




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




16




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




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




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




17




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





In
addition to the historical information, this quarterly report contains certain
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,
as amended, and which are subject to the “Safe Harbor” created by those
sections.   The reader of this quarterly report should understand
that all such forward-looking statements are subject to various uncertainties
and risks that could affect their outcome.  The Company’s actual
results could differ materially from those suggested by such forward-looking
statements.     Such risks and uncertainties include,
among others, (1) competitive pressure in the banking industry increases
significantly; (2) changes in interest rate environment reduces margin; (3)
general economic conditions, either nationally or regionally are less favorable
than expected, resulting in, among other things, a deterioration in credit
quality; (4) changes in the regulatory environment; (5) changes in business
conditions and inflation; (6) costs and expenses of complying with the internal
control provisions of the Sarbanes-Oxley Act and our degree of success in
achieving compliance; (7) changes in securities markets; (8) future credit loss
experience; (9) civil disturbances of terrorist threats or acts, or apprehension
about possible future occurrences of acts of this type; and (10) the involvement
of the United States in war or other hostilities.  Therefore, the
information in this quarterly report should be carefully considered when
evaluating the business prospects of the Company.





Critical
Accounting Policies





Our
accounting policies are integral to understanding the results
reported.  Our most complex accounting policies require management’s
judgment to ascertain the valuation of assets, liabilities, commitments and
contingencies. We have established detailed policies and control procedures that
are intended to ensure that valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are
intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current
accounting policies involving significant management valuation
judgments.





Allowance
for Loan Losses: The allowance for loan losses represents management’s best
estimate of losses inherent in the existing loan portfolio. The allowance for
loan losses is increased by the provision for loan losses charged to expense and
reduced by loans charged off, net of recoveries. The provision for loan losses
is determined based on management’s assessment of several factors: reviews and
evaluation of specific loans, changes in the nature and volume of the loan
portfolio, current economic conditions and the related impact on specific
borrowers and industry groups, historical loan loss experiences, the level of
classified and nonperforming loans and the results of regulatory
examinations.





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





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





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





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





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




18




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.





19




Selected
Financial Data





The
following table reflects selected financial data and ratios as of and for the
quarters ended March 31, 2010 and 2009.





(dollars
      in thousands, except per share data)
                                    
                                    Three months endedMarch 31,Statement of Operations Data:
                                    
                                    2010
                                    
                                    
                                    2009Interest
      income
                                    
                                    $
                                    10,757
                                    
                                    
                                    $
                                    11,960Interest
      expense
                                    
                                    
                                    882
                                    
                                    
                                    
                                    2,310Net
      interest income
                                    
                                    
                                    9,875
                                    
                                    
                                    
                                    9,650Provision
      for credit losses
                                    
                                    
                                    1,250
                                    
                                    
                                    
                                    3,650Net
      interest income after provisionfor
      credit losses
                                    
                                    
                                    8,625
                                    
                                    
                                    
                                    6,000Other
      income
                                    
                                    
                                    1,626
                                    
                                    
                                    
                                    4,004Other
      expenses
                                    
                                    
                                    9,653
                                    
                                    
                                    
                                    9,463Income
      before income taxes
                                    
                                    
                                    598
                                    
                                    
                                    
                                    541Income
      taxes
                                    
                                    
                                    233
                                    
                                    
                                    
                                    208Net
      income
                                    
                                    $
                                    365
                                    
                                    
                                    $
                                    333Preferred
      dividends
                                    
                                    
                                    1,060
                                    
                                    
                                    
                                    1,017Net
      income (loss) available to common shareholders
                                    
                                    $
                                    (695
                                    )
                                    
                                    $
                                    (684
                                    )Per
      Share Data:Basic
      earnings (loss) per share
                                    
                                    $
                                    (0.11
                                    )
                                    
                                    $
                                    (0.10
                                    )Diluted
      earnings (loss) per share
                                    
                                    
                                    (0.11
                                    )
                                    
                                    
                                    (0.10
                                    )Shareholders'
      equity per share
                                    
                                    
                                    8.00
                                    
                                    
                                    
                                    8.18Cash
      dividend per common share
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Balance
      Sheet Data:Balance
      sheet totals:Assets
                                    
                                    $
                                    858,771
                                    
                                    
                                    $
                                    881,591Loans,
      net
                                    
                                    
                                    568,093
                                    
                                    
                                    
                                    636,601Deposits
                                    
                                    
                                    718,625
                                    
                                    
                                    
                                    733,098Shareholders'
      equity
                                    
                                    
                                    110,493
                                    
                                    
                                    
                                    110,323Average
      balance sheet amounts:Assets
                                    
                                    $
                                    843,770
                                    
                                    
                                    $
                                    905,993Loans,
      net
                                    
                                    
                                    553,386
                                    
                                    
                                    
                                    659,469Deposits
                                    
                                    
                                    702,621
                                    
                                    
                                    
                                    739,289Shareholders'
      equity
                                    
                                    
                                    109,754
                                    
                                    
                                    
                                    112,670Selected
      Ratios:Return
      on average assets
                                    
                                    
                                    0.18
                                    %
                                    
                                    
                                    0.15
                                    %Return
      on average equity
                                    
                                    
                                    1.35
                                    %
                                    
                                    
                                    1.20
                                    %Efficiency
      ratio
                                    
                                    
                                    83.93
                                    %
                                    
                                    
                                    69.31
                                    %Risk
      based capital ratio
                                    
                                    
                                    19.23
                                    %
                                    
                                    
                                    18.15
                                    %Net
      chargeoffs to average gross loans
                                    
                                    
                                    0.19
                                    %
                                    
                                    
                                    0.62
                                    %Allowance
      for loan losses to total loans
                                    
                                    
                                    2.76
                                    %
                                    
                                    
                                    2.77
                                    %Average
      equity to average assets
                                    
                                    
                                    13.01
                                    %
                                    
                                    
                                    12.44
                                    %





20




Summary
of Financial Results – Quarter ended March 31, 2010





The
Company reported net operating income of $365,000 for the three months ended
March 31, 2010 representing an increase of $32,000, or 9.6%, compared to net
operating income of $333,000 for the same period one year ago. Net income
available to common shareholders was reduced by preferred dividends of $1.1
million and $1.0 million during the first quarter of 2010 and 2009,
respectively, resulting in a loss per diluted share of $(0.11) and $(0.10),
respectively.





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




Three months endedMarch 31,
                  
                  
                  Increase(dollars in thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  (Decrease)Interest
      income
                  
                  $
                  10,757
                  
                  
                  $
                  11,960
                  
                  
                  $
                  (1,203
                  )Interest
      expense
                  
                  
                  882
                  
                  
                  
                  2,310
                  
                  
                  
                  (1,428
                  )Net
      interest income
                  
                  
                  9,875
                  
                  
                  
                  9,650
                  
                  
                  
                  225Provision
      for credit losses
                  
                  
                  1,250
                  
                  
                  
                  3,650
                  
                  
                  
                  (2,400
                  )Net
      interest income after provisionfor
      credit losses
                  
                  
                  8,625
                  
                  
                  
                  6,000
                  
                  
                  
                  2,625Other
      income
                  
                  
                  1,626
                  
                  
                  
                  4,004
                  
                  
                  
                  (2,378
                  )Other
      expenses
                  
                  
                  9,653
                  
                  
                  
                  9,463
                  
                  
                  
                  190Income
      before income taxes
                  
                  
                  598
                  
                  
                  
                  541
                  
                  
                  
                  57Income
      taxes
                  
                  
                  233
                  
                  
                  
                  208
                  
                  
                  
                  25Net
      income
                  
                  $
                  365
                  
                  
                  $
                  333
                  
                  
                  $
                  32




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, 2010 was $9.9 million, which was
comprised of $10.8 million in interest income and $882,000 in interest expense.
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, 2010
represented an increase of $225,000 or 2.3% 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, 2010 average earning assets
of $793.3 million represented a decrease of $73,000, or 8.4%, compared to $866.0
million for the same period in 2009.  The Company’s loan-to-deposit
ratio, a measure of leverage, averaged 81.27% during the quarter ended March 31,
2010, which represented a decrease compared to an average of 91.89% for the same
quarter of 2009 as a result of slower loan growth relative to deposit
funding.





Changes
in short-term interest rates also impact growth in net interest income as the
interest rate earned on a majority of the Company’s assets, specifically the
loan portfolio, adjust with changes in short-term market rates.  As
such, the nature of the Company’s balance sheet is that, over time as short-term
interest rates change, income on interest earning assets has a greater impact on
net interest income than interest paid on liabilities.  The Company’s
prime rate averaged 3.25% in the quarter ended March 31, 2010 and March 31,
2009.





The
Company’s net interest margin (net interest income divided by average earning
assets) for the quarter ended March 31, 2010 was 5.05% compared to 4.52% in the
same period one year earlier.  The increase in net interest margin
from 2009 to 2010 was primarily a result of the decrease in short term interest
rates resulting in decreased cost of funds, decreased levels of nonperforming
assets, and increased balance sheet leverage.  The negative impact on
the Company’s net interest margin from the reversal of foregone interest on
nonperforming loans was 13 basis points in the first quarter of 2010 compared to
25 basis points for the same period in 2009.




21




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, 2010 and 2009.





Three months ended March 31,(dollars in thousands)
                                                                
                                                                2010
                                                                
                                                                
                                                                2009Yields
                                                                
                                                                
                                                                Interest
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Yields
                                                                
                                                                
                                                                InterestAverage
                                                                
                                                                
                                                                or
                                                                
                                                                
                                                                Income/
                                                                
                                                                
                                                                Average
                                                                
                                                                
                                                                or
                                                                
                                                                
                                                                Income/Balance
                                                                
                                                                
                                                                Rates
                                                                
                                                                
                                                                Expense
                                                                
                                                                
                                                                Balance
                                                                
                                                                
                                                                Rates
                                                                
                                                                
                                                                ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                                                                
                                                                $
                                                                571,049
                                                                
                                                                
                                                                
                                                                7.2
                                                                %
                                                                
                                                                $
                                                                10,106
                                                                
                                                                
                                                                $
                                                                679,356
                                                                
                                                                
                                                                
                                                                7.0
                                                                %
                                                                
                                                                $
                                                                11,774Federal
      funds sold
                                                                
                                                                
                                                                101,928
                                                                
                                                                
                                                                
                                                                0.2
                                                                %
                                                                
                                                                
                                                                59
                                                                
                                                                
                                                                
                                                                174,482
                                                                
                                                                
                                                                
                                                                0.3
                                                                %
                                                                
                                                                
                                                                112Investment
      securities
                                                                
                                                                
                                                                111,235
                                                                
                                                                
                                                                
                                                                2.0
                                                                %
                                                                
                                                                
                                                                547
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                0.0
                                                                %
                                                                
                                                                
                                                                -Other
                                                                
                                                                
                                                                9,056
                                                                
                                                                
                                                                
                                                                2.0
                                                                %
                                                                
                                                                
                                                                45
                                                                
                                                                
                                                                
                                                                12,117
                                                                
                                                                
                                                                
                                                                2.5
                                                                %
                                                                
                                                                
                                                                74Total
      interest earning assets
                                                                
                                                                
                                                                793,268
                                                                
                                                                
                                                                
                                                                5.5
                                                                %
                                                                
                                                                
                                                                10,757
                                                                
                                                                
                                                                
                                                                865,955
                                                                
                                                                
                                                                
                                                                5.6
                                                                %
                                                                
                                                                
                                                                11,960Noninterest-earning
      assets:Cash
      and due from banks
                                                                
                                                                
                                                                16,495
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                16,776All
      other assets (3)
                                                                
                                                                
                                                                34,007
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                23,262TOTAL
                                                                
                                                                $
                                                                843,770
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                905,993LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYInterest
      bearing liabilities:Deposits:Demand
                                                                
                                                                $
                                                                6,058
                                                                
                                                                
                                                                
                                                                0.1
                                                                %
                                                                
                                                                $
                                                                2
                                                                
                                                                
                                                                $
                                                                4,326
                                                                
                                                                
                                                                
                                                                0.1
                                                                %
                                                                
                                                                $
                                                                1Savings
                                                                
                                                                
                                                                274,861
                                                                
                                                                
                                                                
                                                                0.5
                                                                %
                                                                
                                                                
                                                                358
                                                                
                                                                
                                                                
                                                                315,636
                                                                
                                                                
                                                                
                                                                1.0
                                                                %
                                                                
                                                                
                                                                782Time
                                                                
                                                                
                                                                75,335
                                                                
                                                                
                                                                
                                                                1.5
                                                                %
                                                                
                                                                
                                                                281
                                                                
                                                                
                                                                
                                                                135,779
                                                                
                                                                
                                                                
                                                                3.1
                                                                %
                                                                
                                                                
                                                                1,048Other
                                                                
                                                                
                                                                17,749
                                                                
                                                                
                                                                
                                                                5.5
                                                                %
                                                                
                                                                
                                                                241
                                                                
                                                                
                                                                
                                                                43,638
                                                                
                                                                
                                                                
                                                                4.5
                                                                %
                                                                
                                                                
                                                                479Total
      interest bearing liabilities
                                                                
                                                                
                                                                374,003
                                                                
                                                                
                                                                
                                                                1.0
                                                                %
                                                                
                                                                
                                                                882
                                                                
                                                                
                                                                
                                                                499,379
                                                                
                                                                
                                                                
                                                                1.9
                                                                %
                                                                
                                                                
                                                                2,310Noninterest-bearing
      liabilities:Demand
      deposits
                                                                
                                                                
                                                                346,367
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                283,549Accrued
      expenses andother
      liabilities
                                                                
                                                                
                                                                13,646
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                10,395Shareholders'
      equity
                                                                
                                                                
                                                                109,754
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                112,670TOTAL
                                                                
                                                                $
                                                                843,770
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                905,993Net
      interest income and margin
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                5.0
                                                                %
                                                                
                                                                $
                                                                9,875
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                4.5
                                                                %
                                                                
                                                                $
                                                                9,650




(1)
            Loan
      fee amortization of $897,000 and $1.2 million, respectively, is included
      in interest income.  Nonperforming loans have been included in
      average loan balances.


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


(3)
            Net
      of average allowance for credit losses of $16.2 million and $18.4 million,
      respectively.




22





The
following table shows the effect of the interest differential of volume and rate
changes for the quarters ended March 31, 2010 and 2009.  The change in
interest due to both rate and volume has been allocated in proportion to the
relationship of absolute dollar amounts of change in each.





(dollars in thousands)
                                          
                                          Three months ended March 31,2010 vs. 2009Increase (decrease)due to change inAverage
                                          
                                          
                                          Average
                                          
                                          
                                          TotalVolume
                                          
                                          
                                          Rate
                                          
                                          
                                          ChangeInterest
      income:Loans
                                          
                                          $
                                          (1,917
                                          )
                                          
                                          $
                                          249
                                          
                                          
                                          $
                                          (1,668
                                          )Federal
      funds sold
                                          
                                          
                                          (42
                                          )
                                          
                                          
                                          (11
                                          )
                                          
                                          
                                          (53
                                          )Investment
      securities
                                          
                                          
                                          547
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          547Other
                                          
                                          
                                          (15
                                          )
                                          
                                          
                                          (14
                                          )
                                          
                                          
                                          (29
                                          )Total
      interest income
                                          
                                          
                                          (1,427
                                          )
                                          
                                          
                                          224
                                          
                                          
                                          
                                          (1,203
                                          )Interest
      expense:Demand
                                          
                                          
                                          1
                                          
                                          
                                          
                                          0
                                          
                                          
                                          
                                          1Savings
                                          
                                          
                                          (53
                                          )
                                          
                                          
                                          (371
                                          )
                                          
                                          
                                          (424
                                          )Time
                                          
                                          
                                          (225
                                          )
                                          
                                          
                                          (542
                                          )
                                          
                                          
                                          (767
                                          )Other
                                          
                                          
                                          (352
                                          )
                                          
                                          
                                          114
                                          
                                          
                                          
                                          (238
                                          )Total
      interest expense
                                          
                                          
                                          (630
                                          )
                                          
                                          
                                          (798
                                          )
                                          
                                          
                                          (1,428
                                          )Change
      in net interest income
                                          
                                          $
                                          (797
                                          )
                                          
                                          $
                                          1,023
                                          
                                          
                                          $
                                          225





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 $10.8 million in the quarter ended March 31, 2010 represented a
decrease of $1.2 million, or 10.1%, from $12.0 million in the same quarter one
year earlier.  The average yield on earning assets was 5.50% for the
quarter ended March 31, 2010 and 5.60% for the quarter ended March 31,
2009.  The decrease in interest income was primarily due to a decrease in
loan balances.





Average
gross loans were $571.0 million for three months ended March 31, 2010, a
decrease of $108.3 million or 15.9% from $679.4 million for the same period one
year earlier.  Average loans comprised 72.0% of average earning assets in
the three months ended March 31, 2010 compared to 78.5% in the first quarter of
2009.





Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $222.2 million for the quarter ended March
31, 2010, an increase of $35.6 million or 19.1% from $186.6 million for the
three months ended March 31, 2009.




Interest
Expense




Interest
expense was $882,000 for the quarter ended March 31, 2010, which represented a
decrease of $1.4 million, or 61.8% from $2.3 million for the comparable period
of 2009.  The decrease in interest expense reflects lower interest rates
paid on liabilities as well as a lower balance of interest-bearing liabilities
in the first quarter of 2010 compared to the same period in 2009.  Average
interest-bearing liabilities were $374.0 million for the three months ended
March 31, 2010, a decrease of $125.4 million, or 25.1%, from $499.4 million for
the same period one year earlier.


23




Average
interest bearing deposits were $356.3 million for the quarter ended March 31,
2010, which represented 50.7% of total average deposits and was a decrease of
$99.5 million, or 21.8%, from $455.7 million representing 61.7% of total average
deposits in the first quarter of 2009.





Other
(non-deposit) interest bearing liabilities are primarily comprised of junior
subordinated debt securities issued by the Company and other borrowings. 
The junior subordinated debt is intended to supplement capital requirements of
the Company at a rate of interest that is fixed for five years.  Other
interest bearing liabilities averaged $17.7 million and $43.6 million in the
three months ended March 31, 2010 and 2009, respectively.





The
average rate paid on interest-bearing liabilities of 0.96% in the quarter ended
March 31, 2010 compared to 1.88% in the first quarter of 2009.





Credit
Risk and Provision for Credit Losses





The
Company maintains an allowance for credit losses which is based, in part, on the
Company's and industry loss experience, the impact of economic conditions within
the Company's market area and, as applicable, the State of California and/or
national macroeconomic conditions, the value of underlying collateral, loan
performance, and inherent risks in the loan portfolio. The allowance is reduced
by charge-offs and increased by provisions for credit losses charged to
operating expense and recoveries of previously charged-off loans.





The
Company provided $1.3 million to the allowance for credit losses for the three
months ended March 31, 2010, compared to $3.7 million for the same period in
2009.





The
Company’s loan charge-offs totaled $2.1 million during the first quarter ended
March 31, 2010, compared to $4.3 million for the same period one year
earlier.  The Company recognized $944,000 and $285,000 in loan recoveries
for the three months ended March 31, 2010 and 2009, respectively.





The
following schedule provides an analysis of the allowance for credit losses for
the quarter ended March 31, 2010 and 2009, respectively:





Three months ended(dollars in thousands)
                
                March 31,2010
                
                
                2009Balance,
      beginning of period
                
                $
                16,012
                
                
                $
                18,554Provision
      for credit losses
                
                
                1,250
                
                
                
                3,650Charge-offs
                
                
                (2,051
                )
                
                
                (4,334
                )Recoveries
                
                
                944
                
                
                
                285Balance,
      end of period
                
                $
                16,155
                
                
                $
                18,155





The
decrease in the allowance for loan losses of $2.0 million from $18.2 million at
March 31, 2009 to $16.2 million at March 31, 2010 is primarily attributable to
(1) a decrease in nonperforming loans; (2) a decrease in total gross loans; and
(3) a decrease in unidentified probable, estimable losses due to proactive loss
recognition in the earlier periods of the fiscal year.





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


24




(dollars in thousands)
                
                March 31, 2010
                
                
                December 31, 2009Percent of
                
                
                
                
                
                Percent ofALLL in each
                
                
                
                
                
                ALLL in eachcategory to
                
                
                
                
                
                category toAmount
                
                
                gross loans
                
                
                Amount
                
                
                gross loansCommercial
                
                $
                5,994
                
                
                
                1.1
                %
                
                $
                6,313
                
                
                
                1.1
                %Real
      estate construction
                
                
                1,541
                
                
                
                0.3
                %
                
                
                1,376
                
                
                
                0.2
                %Land
      loans
                
                
                753
                
                
                
                0.1
                %
                
                
                764
                
                
                
                0.1
                %Real
      estate other
                
                
                5,244
                
                
                
                0.9
                %
                
                
                5,173
                
                
                
                0.9
                %SBA
                
                
                1,229
                
                
                
                0.2
                %
                
                
                1,175
                
                
                
                0.2
                %Factoring/ABL
                
                
                1,242
                
                
                
                0.2
                %
                
                
                1,061
                
                
                
                0.2
                %Other
                
                
                152
                
                
                
                0.0
                %
                
                
                150
                
                
                
                0.0
                %$
                16,155
                
                
                
                2.8
                %
                
                $
                16,012
                
                
                
                2.8
                %





Beginning
in the second quarter of 2009, deterioration in economic conditions within the
Company's market area and, as applicable, the State of California and/or
national macroeconomic conditions resulted in increased stress to the loan
portfolio, specifically construction and land development loans outside of the
Company’s primary market of Santa Clara County and contiguous portions of San
Mateo and Alameda counties.





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





At March
31, 2010, the Company’s land development portfolio was reduced to $12.2 million
with just $6.4 million remaining exposure outside of the primary market
area.  Further, over 50% of the remaining loans in this category are
underwritten to amortizing term structures supported by cash flow from liquidity
of the borrowers.





Construction
loans at March 31, 2010 were $34.3 million with $6.3 million remaining on
projects outside of the primary market area.  In addition, at that date
$20.7 million, or 60.4%, were loans to finance commercial projects and $13.6
million, or 19.9% were loans to finance residential projects of five or more
units.





The
aggressive management of credits in this category has resulted in elevated
levels of nonperforming assets as loans are placed on nonaccrual through the
marketing phase of the underlying project.  In addition, loans placed on
nonaccrual have been reduced to the level of indicated impairments.  This
has resulted in an elevated level of charge-offs.  Management believes that
this practice results in a recorded level of nonperforming assets that generally
has been reduced to a net liquidation value, and as these assets are liquidated
do not expect to incur additional significant losses.  Non performing loans
at March 31, 2010, on average, have been reduced by approximately 32% of the
remaining contractual balance, which was taken as a charge-off against the
allowance for loan losses.





In
response to the elevated level of charge-offs, migration of construction and
land portfolios, and general deterioration in economic conditions the Company
also increased provisions for potential loans losses and built the reserve to
approximately 2.76% of total loans.  The coverage ratio, the ratio of
allowance for loan losses to nonperforming loans was 122.23% at March 31,
2010.  Management believes that the coverage ratio reflects the
conservative charge-off practice and that the allowance is adequate for losses
not specifically identified in impairment analysis.





At March
31, 2010 nonperforming assets represented 2.31% of total assets, compared to
2.79% of total assets on December 31, 2009.  Nonperforming assets have
decreased primarily as a result of the sale of OREO properties and the Company’s
commitment to aggressively manage credit exposure.  The following
summarizes nonperforming assets at March 31, 2010 and December 31,
2009.


25





March 31,
                
                
                December 31,(dollars in thousands)
                
                2010
                
                
                2009Loans
      accounted for on a non-accrual basis
                
                $
                13,217
                
                
                $
                17,009Other
      loans with principal or interest contracturally past due 90 days or
      more
                
                
                -
                
                
                
                -Nonperforming
      loans
                
                
                13,217
                
                
                
                17,009Other
      real estate owned
                
                
                6,626
                
                
                
                6,509Nonperforming
      assets
                
                $
                19,843
                
                
                $
                23,518




The
nonperforming assets at March 31, 2010 consisted of loans on nonaccrual or 90
days or more past due totaling $13.2 million, and other real estate owned valued
at $6.6 million.  Nonperforming loans at March 31, 2010 were comprised of
loans with legal contractual balances totaling approximately $19.4 million
reduced by impairment charges of $6.2 million which have been charged against
the allowance for credit losses.   As a result, there no longer was an
indicated potential loss exposure pertaining to nonperforming loans and no
impairment reserves were required to be included in the allowance for credit
losses.





The
following table sets forth the components of nonperforming loans as of March 31,
2010 (dollars in thousands).





March 31, 2010Classification
                  
                  Amount
                  
                  CollateralLand
                  
                  
                  2,413
                  
                  Lots
      for retail development in Sacramento CountyLand
                  
                  
                  940
                  
                  Lots
      for commercial development in Ventura CountyLand
                  
                  
                  501
                  
                  Lots
      for single family homes in IdahoLand
                  
                  
                  402
                  
                  Lots
      for single family homes in Calaveras CountyLand
                  
                  
                  233
                  
                  Raw
      land for recreational use in Calaveras County4,489Construction
                  
                  
                  3,221
                  
                  Residential
      Condos in Santa Clara CountyConstruction
                  
                  
                  346
                  
                  Single
      family residence in San Mateo County3,567Real
      estate other
                  
                  
                  3,051
                  
                  Commercial
      office space in San Mateo CountyReal
      estate other
                  
                  
                  478
                  
                  Single
      family residence in Central CaliforniaReal
      estate other
                  
                  
                  238
                  
                  Light
      industrial warehouse space in Santa Clara CountyReal
      estate other
                  
                  
                  192
                  
                  Single
      family residence in San Francisco County3,959Commercial
                  
                  
                  1,202
                  
                  Business
      assetsTotal
      nonperforming loans
                  
                  $
                  13,217




Included
in nonperforming loans at March 31, 2010 are loans totaling $6.9 million that
have been modified in trouble debt restructurings, where concessions have been
granted to borrowers experiencing financial difficulties.  These
concessions could include a reduction in the interest rate on a loan, payment
extensions, forgiveness of principal, or other actions intended to maximize
collection.  In order for these loans to return to accrual status, the
borrower must demonstrate a sustained period of timely payments.  As of
Mach 31, 2010, previously modified loans totaling $12.1 million were considered
performing due to a sustained period of timely payments and therefore were
accounted for on an accrual basis.


26




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




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




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




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




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




Management
is of the opinion that the allowance for credit losses is maintained at a level
adequate for known and unidentified losses inherent in the loan portfolio. 
However, the Company's construction and land loan portfolios, representing
approximately 8.0% of the total loan portfolio, could be adversely affected if
California economic conditions and the real estate market in the Company's
market area were to weaken.  The effect of such events, although uncertain
at this time, could result in an increase in the level of non-performing loans
and other real estate owned and the level of the allowance for loan losses,
which could adversely affect the Company's future growth and
profitability.


27


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, 2010 and
2009:





Three months ended March 31,(dollars in thousands)
                
                2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentDepositor
      service charges
                
                $
                545
                
                
                
                33.5
                %
                
                $
                420
                
                
                
                10.5
                %Foreign
      exchange upcharge
                
                
                428
                
                
                
                26.3
                %
                
                
                399
                
                
                
                10.0
                %Gain
      on sale of securities
                
                
                164
                
                
                
                10.1
                %
                
                
                -
                
                
                
                0.0
                %SBA
      loan servicing income
                
                
                107
                
                
                
                6.6
                %
                
                
                98
                
                
                
                2.4
                %Increase
      in value of life insurance
                
                
                97
                
                
                
                6.0
                %
                
                
                109
                
                
                
                2.7
                %Other
      income-cash flow hedge
                
                
                21
                
                
                
                1.3
                %
                
                
                2,759
                
                
                
                68.9
                %Gain
      on sale of SBA loans
                
                
                -
                
                
                
                0.0
                %
                
                
                104
                
                
                
                2.6
                %Other
      operating income
                
                
                264
                
                
                
                16.2
                %
                
                
                115
                
                
                
                2.9
                %$
                1,626
                
                
                
                100.0
                %
                
                $
                4,004
                
                
                
                100.0
                %





Non-interest
income totaled $1.6 million in the first quarter of 2010, a decrease of $2.4
million or 59.4% from $4.0 million in the first quarter of 2009. 
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 decrease in
non-interest income during the quarter ending March 31, 2010 was primarily
attributable to a decrease in cash flow hedge of $2.8 million.





For the
quarter ended March 31, 2010 service charge income on deposit accounts was
$545,000, representing an increase of $125,000, or 29.8%, compared to $420,000
for the same period one year ago.  The increase is attributable to an
increase in deposit related analysis charges.





The
Company generates international fee income on spot contracts (binding agreements
for the purchase or sale of currency for immediate delivery and settlement) and
forward contracts (a contractual commitment for a fixed amount of foreign
currency on a future date at an agreed upon exchange rate) in connection with
client’s cross-border activities. The transactions incurred are during the
ordinary course of business and are not speculative in nature.  The Company
recognizes income on a cash basis at the time of contract settlement in an
amount equal to the spread created by the exchange rate charged to the client
versus the actual exchange rate negotiated by the Company in the open
market.  During the first quarter of 2010, the Company recognized $428,000
in international fee income, representing an increase of $29,000, or 7.3%,
compared to $399,000 for the same period one year ago. The increase was
primarily caused by an increase in client demand for international services as a
result of the current economic environment.




Revenue
from sales of SBA loans is dependant on 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.  There were no gains recognized on sales of SBA loans during the
quarter ended March 31, 2010 which represented a decrease of $104,000 or 100.0%
compared to the same period one year earlier.


28


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, 2010 and
2009.





Three months ended March 31,(dollars in thousands)
                
                2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                5,284
                
                
                
                2.7
                %
                
                $
                5,567
                
                
                
                2.8
                %Occupancy
                
                
                841
                
                
                
                0.4
                %
                
                
                865
                
                
                
                0.4
                %Data
      processing
                
                
                718
                
                
                
                0.4
                %
                
                
                580
                
                
                
                0.3
                %Marketing/Advertising
                
                
                236
                
                
                
                0.1
                %
                
                
                283
                
                
                
                0.1
                %Deposit
      services
                
                
                203
                
                
                
                0.1
                %
                
                
                250
                
                
                
                0.1
                %Legal
      and professional
                
                
                642
                
                
                
                0.3
                %
                
                
                301
                
                
                
                0.2
                %Furniture
      and equipment
                
                
                211
                
                
                
                0.1
                %
                
                
                249
                
                
                
                0.1
                %Other
                
                
                1,518
                
                
                
                0.8
                %
                
                
                1,368
                
                
                
                0.7
                %$
                9,653
                
                
                
                4.9
                %
                
                $
                9,463
                
                
                
                4.8
                %





Operating
expenses were $9.7 million for the three months ended March 31, 2010, an
increase of $190,000 or 2.0% from $9.5 million at March 31, 2009.   As
a percentage of average earning assets, other expenses for the three months
ended March 31, 2010 and 2009 were 4.9% and 4.8%, respectively, on an annualized
basis. In 2010, operating expenses were comprised primarily of salaries and
benefits of $5.3 million, which compared to $5.6 million in 2009.  At March
31, 2010, the Company employed 162 full-time equivalents (FTE) compared to 168
FTE on the same date one year earlier.  In addition, salaries and benefits
included a charge of $345,000 and $367,000 to recognize compensation related to
stock-based awards in the first quarter of 2010 and 2009,
respectively.





In 2008,
the FDIC proposed changes to the deposit insurance assessment system that went
into effect in the second quarter of 2009.  These changes were intended to
apportion a larger percentage of the increase in deposit assessment to
institutions categorized as “riskier” based on the four risk categories defined
by the FDIC.  Based upon the Company’s risk profile, it is anticipated that
the FDIC assessment for 2010 will be approximately $1.8 million compared to
approximately $2.6 million (which included a one-time special assessment of
$360,000) for the same period one year earlier.  During the first quarter
of 2010, the Company recognized $462,000 of this assessment compared to $156,000
for the same period one year earlier.




Balance
Sheet





Total
assets of the Company at March 31, 2010 were $858.8 million, an increase of
$14.7 million, or 1.7%, as compared to $844.1 million at December 31,
2009.  The increase in total assets was principally due to an increase in
federal funds sold and loan balances.


29


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





(dollars in thousands)
                
                March 31,
                
                
                December 31,2010
                
                
                2009Commercial
                
                $
                243,672
                
                
                $
                253,776Real
      estate construction
                
                
                34,330
                
                
                
                20,601Land
      loans
                
                
                12,245
                
                
                
                12,763Real
      estate other
                
                
                145,959
                
                
                
                149,617Factoring
      and asset based lending
                
                
                88,127
                
                
                
                66,660SBA
                
                
                56,037
                
                
                
                67,629Other
                
                
                5,396
                
                
                
                5,395Total
      gross loans
                
                
                585,766
                
                
                
                576,441Unearned
      fee income
                
                
                (1,518
                )
                
                
                (1,452
                )Total 
      loans
                
                
                584,248
                
                
                
                574,989Less
      allowance for credit losses
                
                
                (16,155
                )
                
                
                (16,012
                )Total
      loans, net
                
                $
                568,093
                
                
                $
                558,977Commercial
                
                
                41.6
                %
                
                
                44.0
                %Real
      estate construction
                
                
                5.9
                %
                
                
                3.6
                %Land
      loans
                
                
                2.1
                %
                
                
                2.2
                %Real
      estate other
                
                
                24.9
                %
                
                
                26.0
                %Factoring
      and asset based lending
                
                
                15.0
                %
                
                
                11.6
                %SBA
                
                
                9.6
                %
                
                
                11.7
                %Other
                
                
                0.9
                %
                
                
                0.9
                %Total
      gross loans
                
                
                100.0
                %
                
                
                100.0
                %





Gross
loan balances were $585.8 million at March 31, 2010, which represented an
increase of $9.3 million, or 1.6%, as compared to $576.4 million at December 31,
2009. The increase in loans was primarily in factoring and asset based lending,
and real estate construction loans.





The
Company’s commercial loan portfolio represents loans to small and middle-market
businesses in the Santa Clara County region.  Commercial loans were $243.7
million at March 31, 2010, which represented a decrease of $10.1 million, or
4.0%, compared to $253.8 million at December 31, 2009.  At March 31, 2010,
commercial loans comprised 41.6% of total loans outstanding compared to 44.0% at
December 31, 2009.





The
Company’s construction and land development loan portfolio together totaled
approximately $46.6 million as of March 31, 2010 compared to $33.4 million as of
December 31, 2009, representing an increase of $13.2 million or 39.6%. 
Construction and land development loan balances at March 31, 2010 and December
31, 2009 comprised 8.0% and 5.8%, respectively, of total loans.





Other
real estate loans decreased $3.7 million or 2.4% to $146.0 million at March 31,
2010 over $150.0 million at December 31, 2009.  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
24.9% of total loans at March 31, 2010 compared to 26.0% at December 31,
2009.





Factoring
and asset-based lending represents purchased accounts receivable (factoring) and
a structured accounts receivable lending program where the Company receives
client specific payment for client invoices.  Under the factoring program,
the Company purchases accounts receivable invoices from its clients and then
receives payment directly from the party obligated for the receivable. 
 In most cases the Company purchases the receivables subject to recourse
from the Company’s factoring client.  The asset-based lending program
requires a security interest in all of a client’s accounts receivable.  At
March 31, 2010, factoring/asset- based loans totaled $88.1 million or 15.0% of
total loans, representing an increase of $21.5 million or 32.2%, as compared to
$66.7 million or 11.6% of total loans at December 31, 2009.


30





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, 2010, SBA loans
comprised $56.0 million, or 9.6%, of total loans, a decrease of $11.6 million,
or 17.1%, from $67.6 million at December 31, 2009. The Company has the ability
and the intent to sell all or a portion of the SBA loans and, as such, carries
the saleable portion of SBA loans at the lower of aggregate cost or fair
value.   At March 31, 2010 and December 31, 2009, the fair value of
SBA loans exceeded aggregate cost and therefore, SBA loans were carried at
aggregate cost.





Other
loans consist primarily of loans to individuals for personal uses, such as
installment purchases, overdraft protection loans and a variety of other
consumer purposes.  At March 31, 2010, other loans totaled $5.4 million as
compared to $5.4 million at December 31, 2009.





Deposits
represent the Company’s principal source of funds.  Most of the Company’s
deposits are obtained from professionals, small-to-medium sized businesses, and
individuals within the Company’s market area.  The Company’s deposit base
consists of non-interest and interest-bearing demand deposits, savings and money
market accounts and certificates of deposit.  The following table
summarizes the composition of deposits as of March 31, 2010 and December 31,
2009.





(dollars in thousands)
                
                March 31,
                
                
                December 31,2010
                
                
                2009Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentNoninterest-bearing 
      demand
                
                $
                356,787
                
                
                
                49.64
                %
                
                $
                333,171
                
                
                
                47.26
                %Interest-bearing
      demand
                
                
                6,019
                
                
                
                0.84
                %
                
                
                4,830
                
                
                
                0.69
                %Money
      market and savings
                
                
                289,984
                
                
                
                40.36
                %
                
                
                275,850
                
                
                
                39.13
                %Certificates
      of deposit:Less
      than $100
                
                
                32,437
                
                
                
                4.51
                %
                
                
                29,782
                
                
                
                4.22
                %$100
      and more
                
                
                33,397
                
                
                
                4.65
                %
                
                
                61,413
                
                
                
                8.71
                %Total
      deposits
                
                $
                718,624
                
                
                
                100.00
                %
                
                $
                705,046
                
                
                
                100.00
                %





Deposits
increased $13.6 million or 1.9% from $705.0 million at December 31, 2009 to
$718.6 million at March 31, 2010. The increase in deposits was primarily in
money market and savings accounts.  As of March 31, 2010, demand deposits
and core deposits continued to represent 50.5% and 90.8% of total deposits,
respectively.





Leverage




Total gross loan balances at March 31,
2010 were $585.8 million.  The resulting loan to deposit ratio was
81.27%.  Other earning assets at March 31, 2010 were primarily comprised of
investment securities, federal funds sold and interest-bearing deposits of
$230.2 million. To date, the Company has deployed other earning assets primarily
in federal funds sold to address the potential volatility of deposit balances
and to accommodate projected loan funding, and in short term fixed rate
investments to mitigate interest rate risk associated with the Company’s
asset-sensitive balance sheet.   When deploying other earning assets,
the Company implements strategic decisions that may have a beneficial or
adverse impact on net interest income and on the net interest margin to manage
the business through a variety of economic cycles.




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





Capital
Resources




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


31




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




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




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




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




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




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




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


32




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




Private
Placement


On
December 4, 2008, investors agreed to purchase $30 million of the Company’s
Series B and B-1 Mandatorily Convertible Cumulative Perpetual Preferred Stock in
a private placement, subject to the United States Department of the Treasury
approving our participation in the TARP Capital Purchase Program (see discussion
below) and the Company satisfying all legal requirements for selling equity
securities to the Treasury under the program.
  On
December 17, 2008, the Company completed the private placement sale of 131,901
shares of its Series B Mandatorily Convertible Cumulative Perpetual Preferred
Stock and 168,099 shares of its Series B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock, for aggregate consideration of $30 million, which is
$100 per share for both series of shares, to a private fund.  The
Series B and Series B-1 shares (collectively the “shares”) accrued dividends at
a rate of 10% per annum, payable quarterly.
  The
holders of the Series B  and B-1 preferred shares had voting rights at
a rate of 10 votes per share and the ability to convert their shares in to
shares of the Company’s common stock at a conversion rate of $10 per share,
subject to customary adjustments for splits, dividends and other similar
transactions, unless the holders otherwise agreed.
 
 Each
Series B and B-1 preferred share was scheduled to automatically convert to
common stock after the later of 18 months or such time that shareholder and
regulatory approvals, to the extent required for conversion, are received
(“Mandatory Conversion Date”).  If the average closing price of the
Company’s common stock did not equal or exceed $10 per share over the 20
consecutive trading days immediately prior to the Mandatory Conversion Date (the
Current Market Price Condition), such date would be extended for successive
six-month periods until the Current Market Price Condition is met.
 
 The
Company had the ability to force conversion of the shares into common stock on
or after January 15, 2010 through September 30, 2010, if (a) the Company fully
paid the accrued dividends and prepaid the dividends that would have accrued up
through September 30, 2010, (b) the Company’s shareholders had approved the
conversion and (c) the Current Market Price condition was
met.  Subsequent to September 30, 2010, the Company could force
conversion of the shares into common stock if the above three conditions are
met, with the only exception being the necessity to pay all dividends accrued
through the date of conversion as opposed to prepaying any such
amount.
  On March
31, 2010, the Company strengthened its capital position with the completion of
an early conversion of the Series B and B-1 preferred shares.  As a
result of the conversion, the Company issued a total of 3,710,289 shares of its
common stock and convertible promissory notes in the aggregate principal amount
of $789,860.75 (the “Notes”) upon conversion of the 131,901 shares of the
Company’s Series B Mandatorily Convertible Cumulative Perpetual Preferred
Stock and 168,099 Series B-1 Mandatorily Convertible Cumulative Perpetual
Preferred Stock and as payment of all accrued but unpaid dividends thereon
through March 31, 2010 pursuant to an agreement dated as of March 23,
2010.  The effective conversion price of the Series B and B-1
Preferred was $8.46 per share, which was the closing price of the common stock
reported on the Nasdaq Global Select Market on the date of the
agreement.
 
 As result
of the conversion, there are no shares of Series B and B-1 Preferred
outstanding, 10,823,453 shares of common stock outstanding and 93,364 shares of
common stock issuable upon conversion of the Notes.
 
 The
principal amount of the Notes accrues interest at the rate of 10% per annum and
is convertible to common stock at the price of $8.46 per
share.  Unless converted earlier, the Notes become due on the earlier
of March 31, 2011 or a change of control of the Company.  The Company
may prepay the Notes on or after August 31, 2010.


Troubled
Assets Relief Program (TARP)




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




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


33


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





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





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





The
Company’s Tier 1 capital at March 31, 2010 was $128.0 million, which was
comprised of preferred equity up to the allowable limit of $23.9 million, $72.7
million of capital stock and surplus, $14.4 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, 2010 and
December 31, 2009 as well as the minimum capital ratios required to be deemed
“well capitalized” under the regulatory framework.




34




As of March 31,
                
                
                As of December 31,(dollars
      in thousands)
                
                2010
                
                
                2009Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioCompany
      Capital RatiosTier
      1 Capital
                
                $
                127,998
                
                
                
                17.96
                %
                
                $
                106,489
                
                
                
                15.26
                %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                
                $
                42,754
                
                
                
                6.00
                %
                
                $
                41,861
                
                
                
                6.00
                %Total
      Capital
                
                $
                136,985
                
                
                
                19.23
                %
                
                $
                135,678
                
                
                
                19.45
                %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                
                $
                71,256
                
                
                
                10.00
                %
                
                $
                69,768
                
                
                
                10.00
                %Company
      LeverageTier
      1 Capital
                
                $
                127,998
                
                
                
                15.17
                %
                
                $
                106,489
                
                
                
                12.53
                %(to
      Average Assets)Tier
      1 capital minimum requirement
                
                $
                42,189
                
                
                
                5.00
                %
                
                $
                42,494
                
                
                
                5.00
                %Bank
      Capital RatiosTier
      1 Capital
                
                $
                111,566
                
                
                
                15.69
                %
                
                $
                110,517
                
                
                
                15.85
                %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                
                $
                42,669
                
                
                
                6.00
                %
                
                $
                41,837
                
                
                
                6.00
                %Total
      Capital
                
                $
                120,545
                
                
                
                16.95
                %
                
                $
                119,323
                
                
                
                17.11
                %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                
                $
                71,116
                
                
                
                10.00
                %
                
                $
                69,728
                
                
                
                10.00
                %Bank
      LeverageTier
      1 Capital
                
                $
                111,566
                
                
                
                13.23
                %
                
                $
                110,517
                
                
                
                13.01
                %(to
      Average Assets)Tier
      1 capital minimum requirement
                
                $
                42,149
                
                
                
                5.00
                %
                
                $
                42,459
                
                
                
                5.00
                %





The
Company and the Bank were considered well capitalized at March 31,
2010.


35


ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Liquidity/Interest
Rate Sensitivity




The
Company manages its liquidity to provide adequate funds at an acceptable cost to
support borrowing requirements and deposit flows of its
customers.   At March 31, 2010 and December 31, 2009, liquid
assets as a percentage of deposits were 33.5% and 33.2%,
respectively.  In addition to cash and due from banks, liquid assets
include interest-bearing deposits in other banks, Federal funds sold and
securities available for sale.  The Company has $25.0 million in
Federal funds lines of credit available with correspondent banks to meet
liquidity needs.  At March 31, 2010, there were no balances
outstanding on these lines.  Additionally, as of March 31, 2010, the
Company had a total borrowing capacity with the Federal Home Loan Bank of San
Francisco of approximately $127.0 million for which the Company had collateral
in place to borrow $45.0 million.  As of March 31, 2010, $12.0 million
of this borrowing capacity was pledged to secure a letter of
credit.





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





The
following table sets forth the distribution of repricing opportunities, based on
contractual terms of the Company’s earning assets and interest-bearing
liabilities at March 31, 2010, the interest rate sensitivity gap (i.e. interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.





(dollars
      in thousands)
                      
                      As of March 31, 2010After
      three
                      
                      
                      After
      six
                      
                      
                      After
      oneWithin
                      
                      
                      months
      but
                      
                      
                      months
      but
                      
                      
                      year
      but
                      
                      
                      Afterthree
                      
                      
                      within
      six
                      
                      
                      within
      one
                      
                      
                      within
                      
                      
                      fivemonths
                      
                      
                      months
                      
                      
                      year
                      
                      
                      five years
                      
                      
                      years
                      
                      
                      TotalFederal
      funds sold
                      
                      $
                      114,790
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      114,790Interest
      bearing deposits inother
      banks
                      
                      
                      2,695
                      
                      
                      
                      1,895
                      
                      
                      
                      1,503
                      
                      
                      
                      1,960
                      
                      
                      
                      -
                      
                      
                      
                      8,053Investment
      securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,353
                      
                      
                      
                      82,344
                      
                      
                      
                      12,620
                      
                      
                      
                      107,317Loans
                      
                      
                      169,994
                      
                      
                      
                      43,681
                      
                      
                      
                      95,161
                      
                      
                      
                      131,686
                      
                      
                      
                      145,244
                      
                      
                      
                      585,766Total
      earning assets
                      
                      $
                      287,479
                      
                      
                      $
                      45,576
                      
                      
                      $
                      109,017
                      
                      
                      $
                      215,990
                      
                      
                      $
                      157,864
                      
                      
                      $
                      815,926Interest
      checking, moneymarket
      and savings
                      
                      
                      312,623
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      312,623Certificates
      of deposit:Less
      than $100,000
                      
                      
                      6,586
                      
                      
                      
                      4,144
                      
                      
                      
                      6,907
                      
                      
                      
                      1,819
                      
                      
                      
                      -
                      
                      
                      
                      19,456$100,000
      or more
                      
                      
                      24,010
                      
                      
                      
                      9,714
                      
                      
                      
                      9,607
                      
                      
                      
                      3,048
                      
                      
                      
                      -
                      
                      
                      
                      46,379Total
      interest-bearing liabilities
                      
                      $
                      343,219
                      
                      
                      $
                      13,858
                      
                      
                      $
                      16,514
                      
                      
                      $
                      4,867
                      
                      
                      $
                      -
                      
                      
                      $
                      378,458Interest
      rate gap
                      
                      $
                      (55,740
                      )
                      
                      $
                      31,718
                      
                      
                      $
                      92,503
                      
                      
                      $
                      211,123
                      
                      
                      $
                      157,864
                      
                      
                      $
                      437,468Cumulative
      interest rate gap
                      
                      $
                      (55,740
                      )
                      
                      $
                      (24,022
                      )
                      
                      $
                      68,481
                      
                      
                      $
                      279,604
                      
                      
                      $
                      437,468Interest
      rate gap ratio
                      
                      
                      (0.19
                      )
                      
                      
                      0.70
                      
                      
                      
                      0.85
                      
                      
                      
                      0.98
                      
                      
                      
                      1.00Cumulative
      interest rate gap ratio
                      
                      
                      (0.19
                      )
                      
                      
                      (0.07
                      )
                      
                      
                      0.15
                      
                      
                      
                      0.42
                      
                      
                      
                      0.54





Based on
the contractual terms of its assets and liabilities, the Company’s balance sheet
at March 31, 2010 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at March 31, 2010 the volume of assets that
might reprice within the next year exceeded the volume of liabilities that might
reprice.  This position provides a hedge against rising interest
rates, but has a detrimental effect during times of rate decreases. Net interest
income is negatively impacted by a decline in interest rates and positively
impacted by an increase in interest rates.  To partially mitigate the
adverse impact of declining rates, a significant portion of variable rate loans
made by the Company have been written with a minimum “floor”
rate.


36


The
following table shows the scheduled maturities of the loan portfolio at March
31, 2010 and December 31, 2009. At March 31, 2010, approximately 76.3% 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, 2010Due after oneDue one year
                
                
                year through
                
                
                Due afterAmount
                
                
                or less
                
                
                five years
                
                
                five yearsCommercial
      and other
                
                $
                243,672
                
                
                $
                133,900
                
                
                $
                86,343
                
                
                $
                23,429SBA
                
                
                56,037
                
                
                
                2,503
                
                
                
                394
                
                
                
                53,140Real
      estate construction
                
                
                34,330
                
                
                
                16,615
                
                
                
                13,656
                
                
                
                4,059Land
      loans
                
                
                12,245
                
                
                
                9,033
                
                
                
                1,020
                
                
                
                2,192Real
      estate-other
                
                
                145,959
                
                
                
                29,451
                
                
                
                36,608
                
                
                
                79,900Factoring
      / Asset-Based Lending
                
                
                88,127
                
                
                
                81,861
                
                
                
                6,266
                
                
                
                -Other
                
                
                5,396
                
                
                
                4,473
                
                
                
                923
                
                
                
                -Total
      loans
                
                $
                585,766
                
                
                $
                277,836
                
                
                $
                145,210
                
                
                $
                162,720





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





Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations





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





·
            Any
      obligation under a guarantee contract that has the characteristics as
      defined in accounting guidance related to Guarantor’s Accounting and
      Disclosure Requirements for Guarantee including Indirect Guarantees of
      Indebtedness to Others;


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


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


·
            Any
      obligation, including contingent obligations, arising out of a material
      variable interest, as defined in accounting guidance, in an unconsolidated
      entity that provides financing, liquidity, market risk or credit risk
      support to the registrant, or engages in leasing, hedging or research and
      development services with the
registrant.


37


In the
ordinary course of business, we have issued certain guarantees which qualify as
off-balance sheet arrangements, as of March 31, 2010 those guarantees include
the following:





·
            Standby
      Letters of Credit in the amount of $15.3
  million.





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





(dollars in thousands)
                    
                    As of March 31, 2010Payments due by periodLess than
                    
                    
                    1 - 3
                    
                    
                    3 - 5
                    
                    
                    More thanTotal
                    
                    
                    1 year
                    
                    
                    years
                    
                    
                    years
                    
                    
                    5 yearsLong-term
      contracts
                    
                    $
                    10,757
                    
                    
                    $
                    1,630
                    
                    
                    $
                    3,376
                    
                    
                    $
                    3,129
                    
                    
                    $
                    2,622Operating
      leases
                    
                    
                    872
                    
                    
                    
                    669
                    
                    
                    
                    203
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    11,629
                    
                    
                    $
                    2,299
                    
                    
                    $
                    3,579
                    
                    
                    $
                    3,129
                    
                    
                    $
                    2,622




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, 2010, of the Company’s disclosure controls and
procedures.  The Company’s chief executive officer and chief financial
officer participated in the evaluation.  Based on this evaluation, the
Company’s chief executive officer and chief financial officer concluded that the
Company’s disclosure controls and procedures were effective as of March 31,
2010.





Internal
Control over Financial Reporting





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





Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of assets of the company; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use of disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.  No change occurred during the
first quarter of 2010 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


38


PART
II – OTHER INFORMATION




ITEM
1 – LEGAL PROCEEDINGS





The
Company is not a defendant in any pending material legal proceedings and no such
proceedings are known to be contemplated. No director, officer, affiliate, more
than 5% shareholder of the Company, or any associate of these persons is a party
adverse to the Company or has a material interest adverse to the Company in any
material legal proceeding.




ITEM
1A – RISK FACTORS




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




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




Not
applicable




ITEM
3 – DEFAULTS UPON SENIOR SECURITIES




Not
applicable




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




Not
applicable




ITEM
5 – OTHER INFORMATION




Not
applicable




ITEM
6 – EXHIBITS




(a)
Exhibits




See Index
to Exhibits at page 41 of this Quarterly Report on Form 10-Q.


39




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 12, 2010
                  By:
                  /s/ Daniel P. MyersDaniel
      P. MyersPresident
      and Chief Executive Officer(Principal
      Executive Officer)Dated:
      May 12, 2010
                  By:
                  /s/ Thomas A. SaThomas
      A. SaExecutive
      Vice PresidentChief
      Financial Officer(Principal
      Financial and Accounting
Officer)


40


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


41