UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549





FORM
10-Q





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


For
the Quarterly Period Ended: June 30, 2009





OR





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


For
the Transition Period From ____________ to _____________





000-50914


(Commission
File Number)





Bridge Capital
Holdings


(Exact
name of registrant as specified in its charter)





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





55 Almaden Boulevard, San
Jose, CA   95113


(Address
of principal executive offices, including zip code)





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





Bridge
Bank, N.A. (1) has filed all reports required to be filed by section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days.





Yes x  No
 ̈




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





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





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


Yes  ̈  No
x




The
number of shares of Common Stock outstanding as of July 21,
2009:  6,999,644








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
                    16Item
      3
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    37Item
      4
                    Controls
      and Procedures
                    39PART II - OTHER INFORMATIONItem
      1
                    Legal
      Proceedings
                    40Item
      1A
                    Risk
      Factors
                    40Item
      2
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    40Item
      3
                    Defaults
      Upon Senior Securities
                    40Item
      4
                    Submission
      of Matters to a Vote of Security Holders
                    40Item
      5
                    Other
      Information
                    42Item
      6
                    Exhibits
                    42Signatures
                    43Index
      to Exhibits
                    44


2





FORWARD-LOOKING
STATEMENTS





IN ADDITION TO THE HISTORICAL
INFORMATION, THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING INFORMATION
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND WHICH ARE
SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS. THE READER OF THIS
QUARTERLY REPORT SHOULD UNDERSTAND THAT ALL SUCH FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO VARIOUS UNCERTAINTIES AND RISKS THAT COULD AFFECT THEIR
OUTCOME.  THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHERS, (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY
INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCES
MARGIN; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,
ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A
DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT; (5)
CHANGES IN BUSINESS CONDITIONS AND INFLATION; (6) COSTS AND EXPENSES OF
COMPLYING WITH THE INTERNAL CONTROL PROVISIONS OF THE SARBANES-OXLEY ACT AND OUR
DEGREE OF SUCCESS IN ACHIEVING COMPLIANCE; (7) CHANGES IN SECURITIES MARKETS;
(8) FUTURE CREDIT LOSS EXPERIENCE; (9) CIVIL DISTURBANCES OR TERRORIST THREATS
OR ACTS, OR APPREHENSION ABOUT POSSIBLE FUTURE OCCURANCES OF ACTS OF THIS TYPE;
AND (10) THE INVOLVEMENT OF THE UNITED STATES IN WAR OR OTHER
HOSTILITIES.   THEREFORE,THE INFORMATION IN THIS QUARTERLY
REPORT SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF
THE COMPANY.





Forward-looking
statements are generally identifiable by the use of terms such as "believe",
"expect", "intend", "anticipate", "estimate", "project", "assume," "plan,"
"predict," "forecast," “in management’s opinion,” “management considers” or
similar expressions.  Wherever such phrases are used, such statements
are as of and based upon the knowledge of Management, at the time made and are
subject to change by the passage of time and/or subsequent events, and
accordingly such statements are subject to the same risks and uncertainties
noted above with respect to forward-looking statements.





The
Company’s primary operations and most of its customers are located in
California. Other events, including those of September 11, 2001, have increased
the uncertainty related to the national and California economic outlook and
could have an effect on the future operations of the Company or its customers,
including borrowers. The Company does not undertake, and specifically disclaims
any obligation, to update any forward-looking statements to reflect occurrences
or unanticipated events or circumstances after the date of such
statements.





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


3


PART
I - FINANCIAL INFORMATION





ITEM
1 – FINANCIAL STATEMENTS





BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Balance Sheets


(dollars
in thousands)





(unaudited)June 30,
                
                
                December 31,2009
                
                
                2008ASSETSCash
      and due from banks
                
                $
                18,295
                
                
                $
                18,421Federal
      funds sold
                
                
                122,500
                
                
                
                199,525Total
      cash and equivalents
                
                
                140,795
                
                
                
                217,946Interest
      bearing deposits in other banks
                
                
                24,520
                
                
                
                7,268Investment
      securities available for sale
                
                
                32,517
                
                
                
                -Loans,
      net of allowance for credit losses of $17,968 at June 30, 2009 and $18,554
      at December 31, 2008
                
                
                587,135
                
                
                
                679,451Premises
      and equipment, net
                
                
                4,169
                
                
                
                4,790Other
      Real Estate Owned
                
                
                2,268
                
                
                
                1,096Accrued
      interest receivable
                
                
                2,723
                
                
                
                3,137Other
      assets
                
                
                35,209
                
                
                
                33,908Total
      assets
                
                $
                829,336
                
                
                $
                947,596LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Demand
      noninterest-bearing
                
                $
                274,633
                
                
                $
                284,319Demand
      interest-bearing
                
                
                4,486
                
                
                
                4,267Money
      market and savings
                
                
                280,262
                
                
                
                335,200Time
                
                
                129,740
                
                
                
                153,459Total
      deposits
                
                
                689,121
                
                
                
                777,245Junior
      subordinated debt securities
                
                
                17,527
                
                
                
                17,527Other
      borrowings
                
                
                -
                
                
                
                30,000Accrued
      interest payable
                
                
                365
                
                
                
                511Other
      liabilities
                
                
                13,079
                
                
                
                9,823Total
      liabilities
                
                
                720,092
                
                
                
                835,106Commitments
      and contingencies
                
                
                -
                
                
                
                -SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; 10,000,000 shares authorized; 323,864 shares issued
      and outstanding at June 30, 2009 and December 31, 2008
                
                
                53,864
                
                
                
                53,864Common
      stock, no par value; 30,000,000 shares authorized; 6,999,644 shares issued
      and outstanding at June 30, 2009; 6,888,424 shares issued and outstanding
      at December 31, 2008;
                
                
                37,002
                
                
                
                36,833Additional
      paid in capital
                
                
                3,299
                
                
                
                2,822Retained
      earnings
                
                
                15,334
                
                
                
                17,916Accumulated
      other comprehensive income
                
                
                (255
                )
                
                
                1,055Total
      shareholders' equity
                
                
                109,244
                
                
                
                112,490Total
      liabilities and shareholders' equity
                
                $
                829,336
                
                
                $
                947,596





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


4





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Statements of Operations (unaudited)


(dollars
in thousands, except per share data)





Three months ended
                        
                        
                        Six months endedJune 30,
                        
                        
                        June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008INTEREST
      INCOME:Loans
                        
                        $
                        11,263
                        
                        
                        $
                        14,248
                        
                        
                        $
                        23,037
                        
                        
                        $
                        29,475Federal
      funds sold
                        
                        
                        82
                        
                        
                        
                        146
                        
                        
                        
                        194
                        
                        
                        
                        323Investment
      securities available for sale
                        
                        
                        29
                        
                        
                        
                        518
                        
                        
                        
                        29
                        
                        
                        
                        1,135Other
                        
                        
                        102
                        
                        
                        
                        36
                        
                        
                        
                        176
                        
                        
                        
                        36Total
      interest income
                        
                        
                        11,476
                        
                        
                        
                        14,948
                        
                        
                        
                        23,436
                        
                        
                        
                        30,969INTEREST
      EXPENSE:Deposits:Interest-bearing
      demand
                        
                        
                        1
                        
                        
                        
                        3
                        
                        
                        
                        2
                        
                        
                        
                        7Money
      market and savings
                        
                        
                        532
                        
                        
                        
                        1,997
                        
                        
                        
                        1,314
                        
                        
                        
                        4,578Certificates
      of deposit
                        
                        
                        904
                        
                        
                        
                        941
                        
                        
                        
                        1,952
                        
                        
                        
                        2,029Other
                        
                        
                        346
                        
                        
                        
                        283
                        
                        
                        
                        825
                        
                        
                        
                        599Total
      interest expense
                        
                        
                        1,783
                        
                        
                        
                        3,224
                        
                        
                        
                        4,093
                        
                        
                        
                        7,213Net
      interest income
                        
                        
                        9,693
                        
                        
                        
                        11,724
                        
                        
                        
                        19,343
                        
                        
                        
                        23,756Provision
      for credit losses
                        
                        
                        4,000
                        
                        
                        
                        6,200
                        
                        
                        
                        7,650
                        
                        
                        
                        8,570Net
      interest income after provision for credit losses
                        
                        
                        5,693
                        
                        
                        
                        5,524
                        
                        
                        
                        11,693
                        
                        
                        
                        15,186NON-INTEREST
      INCOME:Service
      charges on deposit accounts
                        
                        
                        476
                        
                        
                        
                        258
                        
                        
                        
                        896
                        
                        
                        
                        487International
      fee income
                        
                        
                        423
                        
                        
                        
                        432
                        
                        
                        
                        822
                        
                        
                        
                        809Cash
      flow hedge
                        
                        
                        161
                        
                        
                        
                        172
                        
                        
                        
                        2,920
                        
                        
                        
                        452Gain
      on sale of SBA loans
                        
                        
                        287
                        
                        
                        
                        186
                        
                        
                        
                        391
                        
                        
                        
                        469Other
      non interest income
                        
                        
                        979
                        
                        
                        
                        667
                        
                        
                        
                        1,301
                        
                        
                        
                        1,169Total
      non-interest income
                        
                        
                        2,326
                        
                        
                        
                        1,715
                        
                        
                        
                        6,330
                        
                        
                        
                        3,386OPERATING
      EXPENSES:Salaries
      and benefits
                        
                        
                        5,101
                        
                        
                        
                        5,912
                        
                        
                        
                        10,668
                        
                        
                        
                        11,562Premises
      and fixed assets
                        
                        
                        1,104
                        
                        
                        
                        1,156
                        
                        
                        
                        2,218
                        
                        
                        
                        2,261Other
                        
                        
                        3,138
                        
                        
                        
                        2,443
                        
                        
                        
                        5,920
                        
                        
                        
                        4,424Total
      operating expenses
                        
                        
                        9,343
                        
                        
                        
                        9,511
                        
                        
                        
                        18,806
                        
                        
                        
                        18,247Income
      (loss) before income taxes
                        
                        
                        (1,324
                        )
                        
                        
                        (2,272
                        )
                        
                        
                        (783
                        )
                        
                        
                        325Income
      taxes
                        
                        
                        (482
                        )
                        
                        
                        (945
                        )
                        
                        
                        (274
                        )
                        
                        
                        130Net
      income (loss)
                        
                        $
                        (842
                        )
                        
                        $
                        (1,327
                        )
                        
                        $
                        (509
                        )
                        
                        $
                        195Preferred
      dividends
                        
                        
                        1,057
                        
                        
                        
                        -
                        
                        
                        
                        2,074
                        
                        
                        
                        -Net
      income (loss) available tocommon
      shareholders
                        
                        $
                        (1,899
                        )
                        
                        $
                        (1,327
                        )
                        
                        $
                        (2,583
                        )
                        
                        $
                        195Basic
      earnings (loss) per share
                        
                        $
                        (0.29
                        )
                        
                        $
                        (0.20
                        )
                        
                        $
                        (0.39
                        )
                        
                        $
                        0.04Diluted
      earnings (loss) per share
                        
                        $
                        (0.29
                        )
                        
                        $
                        (0.20
                        )
                        
                        $
                        (0.39
                        )
                        
                        $
                        0.03Average
      common shares outstanding
                        
                        
                        6,571,479
                        
                        
                        
                        6,492,647
                        
                        
                        
                        6,571,479
                        
                        
                        
                        6,463,773Average
      common and equivalent shares outstanding
                        
                        
                        6,571,479
                        
                        
                        
                        6,492,647
                        
                        
                        
                        6,571,479
                        
                        
                        
                        6,909,913





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


5





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Interim
Consolidated Statements of Cash Flows (unaudited)


(dollars
in thousands)





Six months ended June 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                
                $
                (509
                )
                
                $
                195Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Provision
      for credit losses
                
                
                7,650
                
                
                
                8,570Depreciation
      and amortization
                
                
                854
                
                
                
                760Stock
      based compensation
                
                
                746
                
                
                
                707Loans
      originated for sale
                
                
                (2,163
                )
                
                
                (29,816
                )Proceeds
      from loan sales
                
                
                14,193
                
                
                
                16,566Increase
      (decrease) in accrued interest receivable and other assets
                
                
                (1,006
                )
                
                
                637Increase
      (decrease) in accrued interest payable and other
    liabilities
                
                
                3,465
                
                
                
                (5,690
                )Net
      cash provided by (used in) operating activities
                
                
                23,230
                
                
                
                (8,071
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of securities available for sale
                
                
                (32,517
                )
                
                
                -Proceeds
      from sale/maturity of securities available for sale
                
                
                -
                
                
                
                26,337Purchase
      of interest bearing deposits
                
                
                (17,237
                )
                
                
                (5,606
                )Net
      decrease (increase) in loans
                
                
                68,831
                
                
                
                (44,167
                )Purchase
      of fixed assets
                
                
                (176
                )
                
                
                (862
                )Net
      cash provided by (used in) investing activities
                
                
                18,901
                
                
                
                (24,298
                )CASH
      FLOW FROM FINANCING ACTIVITIES:Net
      (decrease) increase in deposits
                
                
                (88,125
                )
                
                
                45,458Decrease
      in other borrowings
                
                
                (30,000
                )
                
                
                (10,000
                )Common
      stock issued
                
                
                -
                
                
                
                299Payment
      of cash dividends
                
                
                (1,057
                )
                
                
                -Preferred
      stock issuance costs
                
                
                (100
                )
                
                
                -Net
      cash provided by (used in) financing activities
                
                
                (119,282
                )
                
                
                35,757NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
                
                
                (77,151
                )
                
                
                3,388Cash
      and equivalents at beginning of period
                
                
                217,946
                
                
                
                40,835Cash
      and equivalents at end of period
                
                $
                140,795
                
                
                $
                44,223OTHER
      CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                3,148
                
                
                $
                7,204Cash
      paid for income taxes
                
                $
                16
                
                
                $
                4,638





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


6





BRIDGE
CAPITAL HOLDINGS AND SUBSIDIARY


Notes
to Interim Consolidated Financial Statements (Unaudited)





1.           Summary
of Significant Accounting Policies





Basis
of Presentation





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





The
comparative balance sheet information as of December 31, 2008 is derived from
the audited financial statements; however, it does not include all disclosures
required by accounting principles generally accepted in the United States of
America.





Use
of Estimates





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





Earnings
Per Share





Basic net
income per share is computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net income per share is determined using the
weighted average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options and vesting of restricted
stock.  Common stock equivalents are included in the diluted net
income per share calculation to the extent these shares are
dilutive.  See Note 2 to the financial statements for additional
information on earnings per share.





Stock-Based
Compensation





On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS
No. 123R), Share-Based Payments, which addresses the accounting for
stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments.  The Company uses the Black-Scholes-Merton (“BSM”)
option-pricing model to determine the fair-value of stock-based awards under
SFAS No. 123R, consistent with that used for pro forma disclosures under
SFAS No. 123, Accounting for Stock-Based Compensation.  The
Company has recorded an incremental $379,000 ($305,000 net of tax) and $746,000
($602,000 net of tax) of stock-based compensation expense during the three and
six months ended June 30, 2009, respectively, as a result of the adoption of
SFAS No. 123R.




No
stock-based compensation costs were capitalized as part of the cost of an asset
as of June 30, 2009.   As of June 30, 2009, $3.6 million of total
unrecognized compensation cost related to stock options and restricted stock
units are expected to be recognized over a weighted-average period of 3.3
years.





The
impact of implementing SFAS No. 123R reduced basic earnings per share by $0.05
and $0.09 and diluted earnings per share by $0.05 and $0.09 for the three and
six months ended June 30, 2009, respectively.


7





Comprehensive
Income





SFAS No.
130, Reporting Comprehensive Income, requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in an
annual financial statement that is displayed with the same prominence as other
annual financial statements. This Statement also requires that an entity
classify items of other comprehensive earnings by their nature in an annual
financial statement.  Other comprehensive earnings include the SFAS
No. 158 adjustment to fully recognize the liability associated with the
supplemental executive retirement plan, unrealized gains and losses, net of tax,
on cash flow hedges and unrealized gains and losses, net of tax, on marketable
securities classified as available-for-sale.  The Company had a
cumulative other comprehensive loss totaling $(255,000), net of tax, as of June
30, 2009 and cumulative other comprehensive income of $1.1 million, net of tax,
as of December 31, 2008.





Three months ended
                
                
                Six months ended(dollars in thousands)
                
                June 30,
                
                
                June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                (842
                )
                
                $
                (1,327
                )
                
                $
                (509
                )
                
                $
                195Other
      comprehensive earnings-Net
      unrealized gains (losses) on securities available for sale
                
                
                42
                
                
                
                (564
                )
                
                
                42
                
                
                
                (213
                )Net
      unrealized gains (losses) on FAS 158 adjustment - supplemental executive
      retirement plan
                
                
                12
                
                
                
                69
                
                
                
                24
                
                
                
                102Net
      unrealized gains (losses) on cash flow hedges
                
                
                386
                
                
                
                (1,530
                )
                
                
                (1,376
                )
                
                
                8Total
      comprehensive income (loss)
                
                $
                (402
                )
                
                $
                (3,352
                )
                
                $
                (1,819
                )
                
                $
                92





Segment
Information





SFAS No.
131, Disclosure about Segments of an Enterprise and Related Information,
requires certain information about the operating segments of the
Company.  The objective of requiring disclosures about segments of an
enterprise and related information is to provide information about the different
types of business activities in which an enterprise engages and the different
economic environment in which it operates to help users of financial statements
better understand its performance, better assess its prospects for future cash
flows and make more informed judgments about the enterprise as a
whole.  The Company has determined that it has one segment, general
commercial banking, and therefore, it is appropriate to aggregate the Company’s
operations into a single operating segment.





Derivative
Instruments and Hedging Activities





SFAS No.
161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133 (SFAS 161), amends and expands the disclosure
requirements of SFAS 133 with the intent to provide users of financial
statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about the fair value of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative instruments.





As
required by SFAS 133, the Company records all derivatives on the balance sheet
at fair value.  The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative, whether the Company has elected
to designate a derivative in a hedging relationship and apply hedge accounting
and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualified as a hedge of the
exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered
fair value hedges. Derivatives designated and that qualify as a hedge of the
exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. Hedge accounting
generally provides for the matching of the timing of gain or loss recognition on
the hedging instrument with the recognition of the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk in a fair
value hedge or the earnings effect of the hedged forecasted transactions in a
cash flow hedge.  The Company may enter into derivative contracts that
are intended to economically hedge certain of its risks, even though hedge
accounting does not apply or the Company elects not to apply hedge accounting
under SFAS 133.  See Note 9 to the financial statements for additional
information on derivative instruments and hedging activities.


8





2.           Earnings
Per Share





Basic net
earnings per share is computed by dividing net earnings applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net earnings per share is determined using the
weighted average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options.  Common stock
equivalents are included in the diluted net earnings per share calculation to
the extent these shares are dilutive.  A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net
earnings per share available to common shareholders is as follows (in thousands,
except for per share amounts):





Three months ended
                
                
                Six months ended(dollars in thousands)
                
                June 30,
                
                
                June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                (842
                )
                
                $
                (1,327
                )
                
                $
                (509
                )
                
                $
                195Less:Dividends
      on preferred shares
                
                
                (1,057
                )
                
                
                -
                
                
                
                (2,074
                )
                
                
                -Net
      income (loss) available for common shareholders
                
                $
                (1,899
                )
                
                $
                (1,327
                )
                
                $
                (2,583
                )
                
                $
                195Weighted
      average shares:Basic
      common shares
                
                
                6,571,479
                
                
                
                6,492,647
                
                
                
                6,571,479
                
                
                
                6,463,773Diluted
      potential common shares related to stock based awards, using the treasury
      stock method
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                446,140Total
      average common equivalent shares
                
                
                6,571,479
                
                
                
                6,492,647
                
                
                
                6,571,479
                
                
                
                6,909,913Basic
      earnings (loss) per share
                
                $
                (0.29
                )
                
                $
                (0.20
                )
                
                $
                (0.39
                )
                
                $
                0.04Diluted
      earnings (loss) per share
                
                $
                (0.29
                )
                
                $
                (0.20
                )
                
                $
                (0.39
                )
                
                $
                0.03


9




3.           Securities




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




(dollars in thousands)
                
                As of June 30, 2009Gross Unrealized
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                ValueU.S.
      government treasury notes
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -U.S.
      government agency notes
                
                
                32,445
                
                
                
                88
                
                
                
                (16
                )
                
                
                32,517Total
      securities available for sale
                
                
                32,445
                
                
                
                88
                
                
                
                (16
                )
                
                
                32,517Total
      investment securities
                
                $
                32,445
                
                
                $
                88
                
                
                $
                (16
                )
                
                $
                32,517




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





(dollars in thousands)
                
                June 30, 2009Amortized
                
                
                FairCost
                
                
                ValueDue
      in one year or less
                
                $
                -
                
                
                $
                -Due
      after one year through five years
                
                
                32,517
                
                
                
                32,445Due
      after five years through ten years
                
                
                -
                
                
                
                -Due
      after ten years
                
                
                -
                
                
                
                -Total
      securities available for sale
                
                
                32,517
                
                
                
                32,445Total
      investment securities
                
                $
                32,517
                
                
                $
                32,445





As of
June 30, 2009, no investment securities were pledged as
collateral.   As of June 30, 2009, there were $16,000 in
unrealized losses attributable to securities maturing in greater than 12
months.





As of
December 31, 2008 the Company did not own any securities.




4.           Loans




The
balances in the various loan categories are as follows as of June 30, 2009 and
December 31, 2008:




June
      30,
                
                
                December
      31,(dollars
      in thousands)
                
                2009
                
                
                2008Commercial
                
                $
                261,927
                
                
                $
                301,024SBA
                
                
                60,885
                
                
                
                77,043Real
      estate construction
                
                
                79,738
                
                
                
                98,105Land
      development
                
                
                14,224
                
                
                
                23,535Real
      estate other
                
                
                136,016
                
                
                
                134,767Factoring
      and asset based lending
                
                
                47,790
                
                
                
                55,761Other
                
                
                5,960
                
                
                
                9,371Loans,
      gross
                
                
                606,540
                
                
                
                699,606Unearned
      fee income
                
                
                (1,437
                )
                
                
                (1,601
                )Total
      loan portfolio
                
                
                605,103
                
                
                
                698,005Less
      allowance for credit losses
                
                
                (17,968
                )
                
                
                (18,554
                )Loans,
      net
                
                $
                587,135
                
                
                $
                679,451


10





5. Premises and
Equipment





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





Premises
and equipment at June 30, 2009 and December 31, 2008 are comprised of the
following:





(dollars in thousands)
                        
                        
                        
                        
                        June 30, 2009Accumulated
                        
                        
                        Net BookCost
                        
                        
                        Depreciation
                        
                        
                        ValueLeasehold
      improvements
                        
                        $
                        5,393
                        
                        
                        $
                        (2,527
                        )
                        
                        $
                        2,866Furniture
      and fixtures
                        
                        
                        1,056
                        
                        
                        
                        (816
                        )
                        
                        
                        240Capitalized
      software
                        
                        
                        3,030
                        
                        
                        
                        (2,320
                        )
                        
                        
                        710Equipment
                        
                        
                        2,060
                        
                        
                        
                        (1,718
                        )
                        
                        
                        343Construction
      in process
                        
                        
                        10
                        
                        
                        
                        -
                        
                        
                        
                        10Totals
                        
                        $
                        11,549
                        
                        
                        $
                        (7,381
                        )
                        
                        $
                        4,169





December 31, 2008Accumulated
                        
                        
                        Net bookCost
                        
                        
                        Depreciation
                        
                        
                        ValueLeasehold
      improvements
                        
                        $
                        5,378
                        
                        
                        $
                        (2,196
                        )
                        
                        $
                        3,182Furniture
      and fixtures
                        
                        
                        1,149
                        
                        
                        
                        (759
                        )
                        
                        
                        390Capitalized
      software
                        
                        
                        2,816
                        
                        
                        
                        (2,056
                        )
                        
                        
                        760Equipment
                        
                        
                        2,015
                        
                        
                        
                        (1,557
                        )
                        
                        
                        458Construction
      in process
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Totals
                        
                        $
                        11,358
                        
                        
                        $
                        (6,568
                        )
                        
                        $
                        4,790





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.


11





Under
FASB Interpretation No.46 (FIN 46), Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51, these Trusts are not consolidated into the
company’s financial statements.  Prior to the issuance of FIN 46, bank
holding companies typically consolidated these entities.  The Federal
Reserve Board has ruled that subordinated notes payable to unconsolidated
special purpose entities (“SPE’s”) such as these Trusts, net of the bank holding
company’s investment in the SPE, qualify as Tier 1 Capital, subject to certain
limits.





Other
Borrowings





There
were no other borrowings at June 30, 2009 and $30.0 million in other borrowings
at December 31, 2008.





As of
June 30, 2009, the Company had a total borrowing capacity with the Federal Home
Loan Bank of San Francisco of approximately $132.0 million for which the Company
had collateral in place to borrow $42.0 million.  As of June 30, 2008,
$10.0 million of this borrowing capacity was pledged to secure a letter of
credit.





The Bank
also has unsecured borrowing lines with correspondent banks totaling $25.0
million.  At June 30, 2009, there were no balances outstanding on
these lines.





7.           Stock-Based
Compensation




SFAS
No. 123R requires the use of a valuation model to calculate the fair value
of stock-based awards.  The Company has elected to use the BSM
option-pricing model, which incorporates various assumptions including
volatility, expected life, and interest rates.  The expected volatility is
based on the historical volatility of the Company’s common stock over the most
recent period commensurate with the estimated expected life of
the Company’s stock options, adjusted for the impact of unusual
fluctuations not reasonably expected to recur and other relevant factors
including implied volatility in market traded options on the Company’s common
stock. The expected life of an award is based on historical experience and on
the terms and conditions of the stock awards granted to employees.




The
weighted average assumptions used for the three and six month periods ended June
30, 2009 and 2008 and the resulting estimates of weighted-average fair value per
share of stock-based awards granted during those periods are as
follows:





Three months ended
                
                
                Six months endedJune 30,
                
                
                June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Expected
      life
                
                75
      months
                
                
                75
      months
                
                
                75
      months
                
                
                75
      monthsStock
      volatility
                
                
                28.00
                %
                
                
                22.00
                %
                
                
                28.00
                %
                
                
                22.00
                %Risk
      free interest rate
                
                
                2.00
                %
                
                
                3.50
                %
                
                
                2.00
                %
                
                
                3.27
                %Dividend
      yield
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %Fair
      value per share
                
                $
                -
                
                
                $
                4.53
                
                
                $
                1.58
                
                
                $
                5.51





8.           Fair
Values of Assets and Liabilities





In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.  These levels
are:





Level 1 –
Valuations for 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.


12




Level 2 –
Valuations for assets and liabilities traded in less active dealer or broker
markets.  Valuations are obtained from third party pricing services
for identical or comparable assets or liabilities.
 
 Level 3 –
Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer, or broker traded
transactions.  Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets or
liabilities.
 
 The
balances of assets and liabilities measured at fair value on a recurring basis
are as follows:
 
 (dollars in thousands)
                  
                  As of June 30, 2009Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Securities
      available for sale
                  
                  $
                  32,517
                  
                  
                  $
                  32,517
                  
                  
                  $
                  -
                  
                  
                  $
                  -Impaired
      loans
                  
                  $
                  27,136
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  27,136Cash
      flow hedge
                  
                  
                  (555
                  )
                  
                  
                  -
                  
                  
                  
                  (555
                  )
                  
                  
                  -Warrant
      portfolio
                  
                  
                  738
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  738Mortgage
      servicing rights
                  
                  
                  726
                  
                  
                  
                  -
                  
                  
                  
                  726
                  
                  
                  
                  -Total
                  
                  $
                  60,562
                  
                  
                  $
                  32,517
                  
                  
                  $
                  171
                  
                  
                  $
                  27,874
 
 The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis were not material for the quarter ended June 30, 2009.
 
 The
Company may be required, from time to time, to measure certain other financial
assets at fair value on a non-recurring basis in accordance with
GAAP.  These adjustments to fair value usually result from application
of lower-of-cost-or-market accounting or write-downs of individual
assets.  The assets measured at fair value on a non-recurring basis
were not material for the quarter ended June 30, 2009.
 
 9.           Derivatives
and Hedging Activities
 
 The
Company is exposed to certain risks arising from both its business operations
and economic conditions.  The Company principally manages its
exposures to a wide variety of business and operational risks through management
of its core business activities. The Company manages economic risks, including
interest rate, liquidity, and credit risk, primarily by managing the amount,
sources, and duration of its assets and liabilities and through the use of
derivative financial instruments.  Specifically, the Company enters
into derivative financial instruments to manage exposures that arise from
business activities that result in the receipt or payment of future known and
uncertain cash amounts, the value of which are determined by interest
rates.  The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash payments principally
related to certain variable rate loan assets and variable rate
borrowings.  The Company does not use derivatives for trading or
speculative purposes and currently does not have any derivatives that are not
designated in qualifying hedging relationships.
 
 Fair
Values of Derivative Instruments on the Balance Sheet
 
 The table
below presents the fair value of the Company’s derivative instruments that were
liabilities, as well as their classification on the balance sheet, as of June
30, 2009 and December 31, 2008.  The Company did not have any
derivative instruments that were assets as of June 30, 2009 and December 31,
2008.
  13
 
 (dollars
in thousands)
 
 Fair ValueDerivatives Designated as Hedging
                        
                        Balance Sheet
                        
                        June 30,
                        
                        
                        December 31,Instruments
      Under SFAS 133
                        
                        Location
                        
                        2009
                        
                        
                        2008Interest
      rate contracts
                        
                        Other assets
                        
                        $
                        -
                        
                        
                        $
                        (1,445
                        )Interest
      rate contracts
                        
                        Other liabilities
                        
                        $
                        (555
                        )
                        
                        $
                        -Total
      hedged derivatives
                        
                        
                        
                        $
                        (555
                        )
                        
                        $
                        (1,445
                        )
 
 Cash
Flow Hedges of Interest Rate Risk
 
 The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate swaps as part of its interest rate risk management strategy.  For
hedges of the Company’s variable-rate loan assets, interest rate swaps
designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for the Company making variable-rate payments over the
life of the agreements without exchange of the underlying notional
amount.  For hedges of the Company’s variable-rate borrowings,
interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for the Company making
fixed-rate payments. As of June 30, 2009, the Company had two interest rate
swaps with an aggregate notional amount of $17.5 million that were designated as
cash flow hedges of interest rate risk associated with the Company’s
variable-rate borrowings.
 
 The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive
Income (“AOCI”) and is subsequently reclassified into earnings in the period
that the hedged forecasted transaction affects earnings. During the three and
six months ended June 30, 2009 and 2008, such derivatives were used to hedge the
forecasted variable cash outflows associated with subordinated debt related to
trust preferred securities.  During the three and six months ended
June 30, 2008, interest rate derivatives, which have since been terminated, were
also used to hedge the cash inflows associated with existing pools of
Prime-based loan assets.  During the three and six months ended June
30, 2009, the amount of pre-tax gain recorded in AOCI due to the effective
portion of changes in fair value of derivatives designated as cash flow hedges
was $759,000 and $858,000, respectively.  During the three and six
months ended June 30, 2008, the amount of pre-tax gain/(loss) recorded in AOCI
due to the effective portion of changes in fair value of derivatives designated
as cash flow hedges was $(1.8) million and $1.4 million,
respectively.  During the three and six months ended June 30, 2009,
$172,000 and $352,000, respectively was reclassified into earnings related to
the effective portion of cash flow hedges.  During the three and six
months ended June 30, 2008, $582,000 and $944,000, 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. During the three and six months ended June 30, 2008, the
Company recognized a loss of $186,000 and $65,000, respectively, for hedge
ineffectiveness attributable to a mismatch between the swap notional and the
aggregate principal amount of the designated loan pools. No hedge
ineffectiveness was recognized during the three and six months ended June 30,
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 $617,000 will be reclassified as an increase to interest
income and $108,000 will be reclassified as an increase to interest
expense.  During the three and six months ended June 30, 2009 and
2008, the Company accelerated the reclassification of amounts in other
comprehensive income to earnings as a result of the hedged forecasted
transactions related to certain terminated interest rate swaps becoming probable
not to occur.  The accelerated amounts for the three and six months
ended June 30, 2009 were a gain of $161,000 and $2.9 million, respectively. The
accelerated amounts for the three and six months ended June 30, 2008 were a gain
of $260,000 and $373,000, respectively.
 
 The
tables below presents the effect of the Company’s derivative financial
instruments, interest rate contracts, on the income statement for the three and
six months ended June 30, 2009 and 2008.
  14
 Interest Income
                        
                        
                        Non-Interest Income
                        
                        
                        Total IncomeThree months ended
                        
                        
                        Three months ended
                        
                        
                        Three months endedJune 30,
                        
                        
                        June 30,
                        
                        
                        June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Amount
      of gain reclassified from AOCI into income - effective
    portion
                        
                        $
                        172
                        
                        
                        $
                        694
                        
                        
                        $
                        161
                        
                        
                        $
                        260
                        
                        
                        $
                        333
                        
                        
                        $
                        954Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from effectiveness testing
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (186
                        )
                        
                        
                        -
                        
                        
                        
                        (186
                        )Total
      derivative income
                        
                        $
                        172
                        
                        
                        $
                        694
                        
                        
                        $
                        161
                        
                        
                        $
                        74
                        
                        
                        $
                        333
                        
                        
                        $
                        768
 
 Interest Income
                        
                        
                        Non-Interest Income
                        
                        
                        Total IncomeSix months ended
                        
                        
                        Six months ended
                        
                        
                        Six months endedJune 30,
                        
                        
                        June 30,
                        
                        
                        June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Amount
      of gain reclassified from AOCI into income - effective
    portion
                        
                        $
                        352
                        
                        
                        $
                        1,100
                        
                        
                        $
                        2,920
                        
                        
                        $
                        373
                        
                        
                        $
                        3,272
                        
                        
                        $
                        1,473Amount
      of gain recognized in income on derivative - ineffective portion and
      amount excluded from effectiveness testing
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (65
                        )
                        
                        
                        -
                        
                        
                        
                        (65
                        )Total
      derivative income
                        
                        $
                        352
                        
                        
                        $
                        1,100
                        
                        
                        $
                        2,920
                        
                        
                        $
                        308
                        
                        
                        $
                        3,272
                        
                        
                        $
                        1,408
 Credit
Risk Related Contingent Features
 
 The
Company has an agreement with one of its derivative counterparties that contains
a provision where if the Company defaults on any of its indebtedness,
including default where repayment of the indebtedness has not been
accelerated by the lender, then the Company could also be declared in
default on its derivative obligations.
  The
Company also has agreements with certain of its derivative counterparties that
contain a provision where if the Company fails to maintain its status as a well
/ adequate capitalized institution, then the counterparty could terminate the
derivative positions and the Company would be required to settle its obligations
under the agreements.
 
 As of
June 30, 2009 the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $521,000. As of June 30, 2009, the Company has
minimum collateral posting thresholds with certain of its derivative
counterparties and has posted collateral of $1.4 million against its obligations
under these agreements. If the Company had breached any of these provisions at
June 30, 2009, it would have been required to settle its obligations under the
agreements at the termination value.
  15
  ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 In
addition to the historical information, this quarterly report contains certain
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,
as amended, and which are subject to the “Safe Harbor” created by those
sections.   The reader of this quarterly report should understand
that all such forward-looking statements are subject to various uncertainties
and risks that could affect their outcome.  The Company’s actual
results could differ materially from those suggested by such forward-looking
statements.     Such risks and uncertainties include,
among others, (1) competitive pressure in the banking industry increases
significantly; (2) changes in interest rate environment reduces margin; (3)
general economic conditions, either nationally or regionally are less favorable
than expected, resulting in, among other things, a deterioration in credit
quality; (4) changes in the regulatory environment; (5) changes in business
conditions and inflation; (6) costs and expenses of complying with the internal
control provisions of the Sarbanes-Oxley Act and our degree of success in
achieving compliance; (7) changes in securities markets; (8) future credit loss
experience; (9) civil disturbances of terrorist threats or acts, or apprehension
about possible future occurrences of acts of this type; and (10) the involvement
of the United States in war or other hostilities.  Therefore, the
information in this quarterly report should be carefully considered when
evaluating the business prospects of the Company.
 
 Critical
Accounting Policies
 
 Our
accounting policies are integral to understanding the results
reported.  Our most complex accounting policies require management’s
judgment to ascertain the valuation of assets, liabilities, commitments and
contingencies. We have established detailed policies and control procedures that
are intended to ensure that valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are
intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current
accounting policies involving significant management valuation
judgments.
 
 Allowance
for Loan Losses: The allowance for loan losses represents management’s best
estimate of losses inherent in the existing loan portfolio. The allowance for
loan losses is increased by the provision for loan losses charged to expense and
reduced by loans charged off, net of recoveries. The provision for loan losses
is determined based on management’s assessment of several factors: reviews and
evaluation of specific loans, changes in the nature and volume of the loan
portfolio, current economic conditions and the related impact on specific
borrowers and industry groups, historical loan loss experiences, the level of
classified and nonperforming loans and the results of regulatory
examinations.
 
 Loans are
considered impaired if, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. The
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate
stipulated in the loan agreement, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. In measuring
the fair value of the collateral, management uses assumptions and methodologies
consistent with those that would be utilized by unrelated third
parties.
 
 Changes
in the financial condition of individual borrowers, in economic conditions, in
historical loss experience and in the condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan losses and the associated provision for loan losses.
 
 The
accrual of interest on loans is discontinued and any accrued and unpaid interest
is reversed when, in the opinion of management, there is significant doubt as to
the collectibility of interest or principal or when the payment of principal or
interest is ninety days past due, unless the amount is well-secured and in the
process of collection.
 
 The
Company has the ability and the intent to sell all or a portion of certain SBA
loans in the loan portfolio and, as such, carries the saleable portion of these
loans at the lower of aggregate cost or fair value.  At June 30, 2009
and December 31, 2008, the fair value of SBA loans exceeded aggregate cost and
therefore, SBA loans were carried at aggregate cost.
 
 In
calculating gain on the sale of SBA loans, the Company performs an allocation
based on the relative fair values of the sold portion and retained portion of
the loan.  The Company’s assumptions are validated by reference to external
market information.
  16
 
 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.
  17
  Selected
Financial Data
 
 The
following table reflects selected financial data and ratios as of and for the
quarters and six months ended June 30, 2009 and 2008.
 
 (dollars
in thousands, except per share data)
 
 Three months ended
                            
                            
                            Six months endedJune 30,
                            
                            
                            June 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Statement
      of Operations Data:Interest
      income
                            
                            $
                            11,476
                            
                            
                            $
                            14,948
                            
                            
                            $
                            23,436
                            
                            
                            $
                            30,969Interest
      expense
                            
                            
                            1,783
                            
                            
                            
                            3,224
                            
                            
                            
                            4,093
                            
                            
                            
                            7,213Net
      interest income
                            
                            
                            9,693
                            
                            
                            
                            11,724
                            
                            
                            
                            19,343
                            
                            
                            
                            23,756Provision
      for credit losses
                            
                            
                            4,000
                            
                            
                            
                            6,200
                            
                            
                            
                            7,650
                            
                            
                            
                            8,570Net
      interest income after provision for credit losses
                            
                            
                            5,693
                            
                            
                            
                            5,524
                            
                            
                            
                            11,693
                            
                            
                            
                            15,186Other
      income
                            
                            
                            2,326
                            
                            
                            
                            1,715
                            
                            
                            
                            6,330
                            
                            
                            
                            3,386Other
      expenses
                            
                            
                            9,343
                            
                            
                            
                            9,511
                            
                            
                            
                            18,806
                            
                            
                            
                            18,247Income
      (loss) before income taxes
                            
                            
                            (1,324
                            )
                            
                            
                            (2,272
                            )
                            
                            
                            (783
                            )
                            
                            
                            325Income
      taxes
                            
                            
                            (482
                            )
                            
                            
                            (945
                            )
                            
                            
                            (274
                            )
                            
                            
                            130Net
      income (loss)
                            
                            $
                            (842
                            )
                            
                            $
                            (1,327
                            )
                            
                            $
                            (509
                            )
                            
                            $
                            195Preferred
      dividends
                            
                            
                            1,057
                            
                            
                            
                            -
                            
                            
                            
                            2,074
                            
                            
                            
                            -Net
      income available to common shareholders
                            
                            $
                            (1,899
                            )
                            
                            $
                            (1,327
                            )
                            
                            $
                            (2,583
                            )
                            
                            $
                            195Per
      Share Data:Basic
      earnings (loss) per share
                            
                            $
                            (0.29
                            )
                            
                            $
                            (0.20
                            )
                            
                            $
                            (0.39
                            )
                            
                            $
                            0.04Diluted
      earnings (loss) per share
                            
                            $
                            (0.29
                            )
                            
                            
                            (0.20
                            )
                            
                            
                            (0.39
                            )
                            
                            
                            0.03Book
      value per common share
                            
                            
                            7.91
                            
                            
                            
                            10.06
                            
                            
                            
                            7.91
                            
                            
                            
                            10.06Cash
      dividend per common share
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Balance
      Sheet Data:Balance
      sheet totals:Assets
                            
                            $
                            829,336
                            
                            
                            $
                            805,352Loans,
      net
                            
                            
                            587,135
                            
                            
                            
                            690,431Deposits
                            
                            
                            689,121
                            
                            
                            
                            716,814Shareholders'
      equity
                            
                            
                            109,244
                            
                            
                            
                            66,182Average
      balance sheet amounts:Assets
                            
                            $
                            863,314
                            
                            
                            $
                            806,637
                            
                            
                            $
                            884,540
                            
                            
                            $
                            792,479Gross
      loans
                            
                            
                            623,354
                            
                            
                            
                            688,339
                            
                            
                            
                            651,200
                            
                            
                            
                            674,211Deposits
                            
                            
                            713,311
                            
                            
                            
                            705,699
                            
                            
                            
                            726,228
                            
                            
                            
                            690,890Shareholders'
      equity
                            
                            
                            111,008
                            
                            
                            
                            69,337
                            
                            
                            
                            111,835
                            
                            
                            
                            68,403Selected
      Ratios:Return
      on average assets
                            
                            
                            -0.39
                            %
                            
                            
                            -0.66
                            %
                            
                            
                            -0.12
                            %
                            
                            
                            0.05
                            %Return
      on average equity
                            
                            
                            -3.04
                            %
                            
                            
                            -7.70
                            %
                            
                            
                            -0.92
                            %
                            
                            
                            0.57
                            %Efficiency
      ratio
                            
                            
                            77.74
                            %
                            
                            
                            70.77
                            %
                            
                            
                            73.25
                            %
                            
                            
                            67.23
                            %Total
      risk based capital ratio
                            
                            
                            19.27
                            %
                            
                            
                            11.37
                            %Net
      chargeoffs to average gross loans
                            
                            
                            0.69
                            %
                            
                            
                            0.36
                            %
                            
                            
                            1.26
                            %
                            
                            
                            0.38
                            %Allowance
      for loan losses to total loans
                            
                            
                            2.96
                            %
                            
                            
                            2.07
                            %Average
      equity to average assets
                            
                            
                            12.86
                            %
                            
                            
                            8.60
                            %
                            
                            
                            12.64
                            %
                            
                            
                            8.63
                            %
  18
 
 Summary
of Financial Results – Quarter ended June 30, 2009
 
 The
Company reported a net loss available to common shareholders of $(1.9) million,
or $(0.29) per diluted common share, for the three months ended June 30, 2009
representing an increase in net loss of $572,000, or 43.1%, compared to a net
loss of $(1.3) million, or $(0.20) per diluted common share, for the same period
one year ago.  The net loss available to common shareholders was
impacted by preferred dividends of $1.1 million during the second quarter of
2009.  There were no preferred dividends during the second quarter of
2008.  The decrease in earnings resulted primarily from a decrease in
net interest income and an increase in preferred dividends, offset in part by a
decrease in the provision for credit losses.
 
 The table
below highlights the changes in the nature and sources of income and
expense.
 
 Three months endedJune 30,
                          
                          
                          Increase(dollars
      in thousands)
                          
                          2009
                          
                          
                          2008
                          
                          
                          (Decrease)Interest
      income
                          
                          $
                          11,476
                          
                          
                          $
                          14,948
                          
                          
                          $
                          (3,472
                          )Interest
      expense
                          
                          
                          1,783
                          
                          
                          
                          3,224
                          
                          
                          
                          (1,441
                          )Net
      interest income
                          
                          
                          9,693
                          
                          
                          
                          11,724
                          
                          
                          
                          (2,031
                          )Provision
      for credit losses
                          
                          
                          4,000
                          
                          
                          
                          6,200
                          
                          
                          
                          (2,200
                          )Net
      interest income after provision for credit losses
                          
                          
                          5,693
                          
                          
                          
                          5,524
                          
                          
                          
                          169Other
      income
                          
                          
                          2,326
                          
                          
                          
                          1,715
                          
                          
                          
                          611Other
      expenses
                          
                          
                          9,343
                          
                          
                          
                          9,511
                          
                          
                          
                          (168
                          )Income
      (loss) before income taxes
                          
                          
                          (1,324
                          )
                          
                          
                          (2,272
                          )
                          
                          
                          948Income
      taxes
                          
                          
                          (482
                          )
                          
                          
                          (945
                          )
                          
                          
                          463Net
      income (loss)
                          
                          $
                          (842
                          )
                          
                          $
                          (1,327
                          )
                          
                          $
                          485Preferred
      dividends
                          
                          
                          1,057
                          
                          
                          
                          0
                          
                          
                          
                          1,057Net
      income (loss) available to common shareholders
                          
                          $
                          (1,899
                          )
                          
                          $
                          (1,327
                          )
                          
                          $
                          (572
                          )
 
 Net
Interest Income and Margin
 
 Net
interest income, the difference between interest earned on loans and investments
and interest paid on deposits is the principal component of the Company's
earnings.  Net interest income is affected by changes in the nature
and volume of earning assets held during the quarter, the rates earned on such
assets and the rates paid on interest bearing liabilities.
 
 Net
interest income for the quarter ended June 30, 2009 was $9.7 million, which was
comprised of $11.5 million in interest income and $1.8 million in interest
expense. Net interest income for the quarter ended June 30, 2008 was $11.7
million, which was comprised of $14.9 million in interest income and $3.2
million in interest expense.  Net interest income for the quarter
ended June 30, 2009 represented a decrease of $2.0 million or 17.3% from the
same period one year earlier.
 
 The
composition of the average balance sheet impacts growth in net interest
income.  For the quarter ended June 30, 2009 average earning assets of
$817.3 million represented an increase of $54.8 million, or 7.2%, compared to
$762.6 million for the same period in 2008.  The Company’s
loan-to-deposit ratio, a measure of leverage, averaged 87.39% during the quarter
ended June 30, 2009, which represented a decrease compared to an average of
97.54% for the same quarter of 2008 as a result of slower loan growth relative
to deposit funding.
 
 Changes
in short-term interest rates also impact growth in net interest income as the
interest rate earned on a majority of the Company’s assets, specifically the
loan portfolio, adjust with changes in short-term market rates.  As
such, the nature of the Company’s balance sheet is that, over time as short-term
interest rates change, income on interest earning assets has a greater impact on
net interest income than interest paid on liabilities.  The Company’s
prime rate averaged 3.25% in the quarter ended June 30, 2009 compared to 5.08%
in the same period one year earlier.
  19
 
 The
Company’s net interest margin (net interest income divided by average earning
assets) for the quarter ended June 30, 2009 was 4.76% compared to 6.18% in the
same period one year earlier.  The decrease in net interest margin
from 2008 to 2009 was primarily a result of the decrease in short term interest
rates, a decrease in income from interest rate swaps, and an increased level of
nonperforming assets.  During the quarter ended June 30, 2009, the net
settlement from interest rate swaps contributed $172,000 to support net interest
income compared to $602,000 for the quarter ended June 30, 2008.  The
increased level of nonperforming assets resulted in a negative impact on the
Company’s net interest margin of 23 basis points in the second quarter of 2009
from reversed or foregone interest.
 
 The
following table details the average balances, interest income and expense and
the effective yields/rates for earning assets and interest-bearing liabilities
for the quarters ended June 30, 2009 and 2008.
 
 Three months ended June 30,(dollars
      in thousands)
                                
                                2009
                                
                                
                                2008Yields
                                
                                
                                Interest
                                
                                
                                
                                
                                
                                Yields
                                
                                
                                InterestAverage
                                
                                
                                or
                                
                                
                                Income/
                                
                                
                                Average
                                
                                
                                or
                                
                                
                                Income/Balance
                                
                                
                                Rates
                                
                                
                                Expense
                                
                                
                                Balance
                                
                                
                                Rates
                                
                                
                                ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                                
                                $
                                623,354
                                
                                
                                
                                7.2
                                %
                                
                                $
                                11,263
                                
                                
                                $
                                688,339
                                
                                
                                
                                8.3
                                %
                                
                                $
                                14,248Federal
      funds sold
                                
                                
                                165,453
                                
                                
                                
                                0.2
                                %
                                
                                
                                82
                                
                                
                                
                                27,876
                                
                                
                                
                                2.1
                                %
                                
                                
                                146Investment
      securities
                                
                                
                                9,161
                                
                                
                                
                                1.3
                                %
                                
                                
                                29
                                
                                
                                
                                41,973
                                
                                
                                
                                5.0
                                %
                                
                                
                                518Other
                                
                                
                                19,372
                                
                                
                                
                                2.1
                                %
                                
                                
                                102
                                
                                
                                
                                4,369
                                
                                
                                
                                3.3
                                %
                                
                                
                                36Total
      interest earning assets
                                
                                
                                817,340
                                
                                
                                
                                5.6
                                %
                                
                                
                                11,476
                                
                                
                                
                                762,557
                                
                                
                                
                                7.9
                                %
                                
                                
                                14,948Noninterest-earning
      assets:Cash
      and due from banks
                                
                                
                                22,058
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                20,546All
      other assets (3)
                                
                                
                                23,916
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                23,534TOTAL
                                
                                $
                                863,314
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                806,637LIABILITIES
      AND SHAREHOLDERS' EQUITYInterest
      bearing liabilities:Deposits:Demand
                                
                                $
                                5,221
                                
                                
                                
                                0.1
                                %
                                
                                $
                                1
                                
                                
                                $
                                5,519
                                
                                
                                
                                0.2
                                %
                                
                                $
                                3Savings
                                
                                
                                300,713
                                
                                
                                
                                0.7
                                %
                                
                                
                                532
                                
                                
                                
                                381,882
                                
                                
                                
                                2.1
                                %
                                
                                
                                1,997Time
                                
                                
                                140,902
                                
                                
                                
                                2.6
                                %
                                
                                
                                904
                                
                                
                                
                                97,726
                                
                                
                                
                                3.9
                                %
                                
                                
                                941Other
                                
                                
                                27,417
                                
                                
                                
                                5.1
                                %
                                
                                
                                346
                                
                                
                                
                                21,834
                                
                                
                                
                                5.2
                                %
                                
                                
                                283Total
      interest bearing liabilities
                                
                                
                                474,253
                                
                                
                                
                                1.5
                                %
                                
                                
                                1,783
                                
                                
                                
                                506,961
                                
                                
                                
                                2.6
                                %
                                
                                
                                3,224Noninterest-bearing
      liabilities:Demand
      deposits
                                
                                
                                266,474
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                220,572Accrued
      expenses and other liabilities
                                
                                
                                11,579
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                9,767Shareholders'
      equity
                                
                                
                                111,008
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                69,337TOTAL
                                
                                $
                                863,314
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                806,637Net
      interest income and margin
                                
                                
                                
                                
                                
                                
                                4.8
                                %
                                
                                $
                                9,693
                                
                                
                                
                                
                                
                                
                                
                                6.2
                                %
                                
                                $
                                11,724
 
 (1)
                Loan
      fee amortization of $1.2 million and $1.4 million, respectively, is
      included in interest income.  Nonperforming loans have been
      included in average loan
balances.
 (2)
                Interest
      income is reflected on an actual basis, not a fully taxable equivalent
      basis.  Yields are based on amortized
  cost.
  20
  (3)
                Net
      of average allowance for credit losses of $17.6 million and $11.0 million,
      respectively.
 The
following table shows the effect of the interest differential of volume and rate
changes for the quarters ended June 30, 2009 and 2008.  The change in
interest due to both rate and volume has been allocated in proportion to the
relationship of absolute dollar amounts of change in each.
 (dollars in thousands)
                                                    
                                                    Three months ended June 30,2009 vs. 2008Increase (decrease)due to change inAverage
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    TotalVolume
                                                    
                                                    
                                                    Rate
                                                    
                                                    
                                                    ChangeInterest
      income:Loans
                                                    
                                                    $
                                                    (1,174
                                                    )
                                                    
                                                    $
                                                    (1,811
                                                    )
                                                    
                                                    $
                                                    (2,985
                                                    )Federal
      funds sold
                                                    
                                                    
                                                    68
                                                    
                                                    
                                                    
                                                    (132
                                                    )
                                                    
                                                    
                                                    (64
                                                    )Investment
      securities
                                                    
                                                    
                                                    (104
                                                    )
                                                    
                                                    
                                                    (385
                                                    )
                                                    
                                                    
                                                    (489
                                                    )Other
                                                    
                                                    
                                                    79
                                                    
                                                    
                                                    
                                                    (13
                                                    )
                                                    
                                                    
                                                    66Total
      interest income
                                                    
                                                    
                                                    (1,130
                                                    )
                                                    
                                                    
                                                    (2,342
                                                    )
                                                    
                                                    
                                                    (3,472
                                                    )Interest
      expense:Demand
                                                    
                                                    
                                                    (0
                                                    )
                                                    
                                                    
                                                    (2
                                                    )
                                                    
                                                    
                                                    (2
                                                    )Savings
                                                    
                                                    
                                                    (144
                                                    )
                                                    
                                                    
                                                    (1,321
                                                    )
                                                    
                                                    
                                                    (1,465
                                                    )Time
                                                    
                                                    
                                                    277
                                                    
                                                    
                                                    
                                                    (314
                                                    )
                                                    
                                                    
                                                    (37
                                                    )Other
                                                    
                                                    
                                                    70
                                                    
                                                    
                                                    
                                                    (7
                                                    )
                                                    
                                                    
                                                    63Total
      interest expense
                                                    
                                                    
                                                    204
                                                    
                                                    
                                                    
                                                    (1,645
                                                    )
                                                    
                                                    
                                                    (1,441
                                                    )Change
      in net interest income
                                                    
                                                    $
                                                    (1,334
                                                    )
                                                    
                                                    $
                                                    (697
                                                    )
                                                    
                                                    $
                                                    (2,031
                                                    )
  Net
interest income is the principal source of the Company’s operating
earnings.   Significant factors affecting net interest income
are: rates, volumes and mix of the loan, investment and deposit
portfolios.   Due to the nature of the Company’s lending markets,
in which the majority of loans are generally tied to prime rate, it is believed
that an increase in interest rates should positively affect the Company’s future
earnings, while a decline should have a negative impact.  However, it
is not feasible to provide an accurate measure of such a change because of the
many factors (many of them uncontrollable) influencing the result.
 
 Interest Income
 
 Interest
income of $11.5 million in the quarter ended June 30, 2009 represented a
decrease of $3.5 million, or 23.2%, from $14.9 million in the same quarter one
year earlier.  The decrease in interest income was primarily due to a
decrease in interest rates, a decrease in income from interest rate swaps, and
an increased level of nonperforming assets, offset in part by growth in average
earning assets.
 
 Average
gross loans were $623.4 million for three months ended June 30, 2009, a decrease
of $64.9 million or 9.4% from $688.3 million for the same period one year
earlier.  Average loans comprised 76.2% of average earning assets in
the three months ended June 30, 2009 compared to 90.3% in the second quarter of
2008.
 
 The
average yield on earning assets was 5.63% for the quarter ended June 30, 2009
and 7.88% for the quarter ended June 30, 2008.  As noted above, the
majority of the Company’s earning assets, including a majority of loans, are
priced to adjust with movements in short-term interest rates, particularly the
prime rate, and the decrease in yield was primarily due to decreases in the
prime rate during 2009 and the later part of 2008 and interest reversed or
foregone on nonperforming assets offset, in part, by income from interest rate
swaps.
 
 Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $194.0 million for the quarter ended June
30, 2009, an increase of $119.8 million or 161.4% from $74.2 million for the
three months ended June 30, 2008.
  21
  Interest
Expense
  Interest
expense was $1.8 million for the quarter ended June 30, 2009, which represented
a decrease of $1.4 million, or 44.7% from $3.2 million for the comparable period
of 2008.  The decrease in interest expense reflects lower interest
rates paid on liabilities in 2009 compared to 2008.  Average
interest-bearing liabilities were $474.3 million for the three months ended June
30, 2009, a decrease of $32.7 million, or 6.5%, from $507.0 million for the same
period one year earlier.
 
 Average
interest bearing deposits were $4446.8 million for the quarter ended June 30,
2009, which represented 62.6% of total average deposits and was a decrease of
$38.3 million, or 7.9%, from $485.1 million representing 68.7% of total average
deposits in the second quarter of 2008.
 
 Other
(non-deposit) interest bearing liabilities are primarily comprised of junior
subordinated debt securities issued by the Company and other
borrowings.  The junior subordinated debt is intended to supplement
capital requirements of the Company at a rate of interest that is fixed for five
years.  Other interest bearing liabilities averaged $27.4 million and
$21.8 million in the three months ended June 30, 2009 and 2008,
respectively.
 
 The
average rate paid on interest-bearing liabilities of 1.51% in the quarter ended
June 30, 2009 compared to 2.56% in the second quarter of 2008.
 
 Credit
Risk and Provision for Credit Losses
 
 The
Company maintains an allowance for credit losses which is based, in part, on the
Company's and industry loss experience, the impact of economic conditions within
the Company's market area and, as applicable, the State of California and/or
national macroeconomic conditions, the value of underlying collateral, loan
performance, and inherent risks in the loan portfolio. The allowance is reduced
by charge-offs and increased by provisions for credit losses charged to
operating expense and recoveries of previously charged-off loans.
 
 The
Company provided $4.0 million to the allowance for credit losses for the three
months ended June 30, 2009, compared to $6.2 million for the same period in
2008.
 
 The
Company’s loan charge-offs totaled $4.2 million during the second quarter ended
June 30, 2009, compared to $2.6 million for the same period one year
earlier.  The Company recognized $23,000 and $1,000 in loan recoveries
for the three months ended June 30, 2009 and 2008, respectively.
 
 The
following schedule provides an analysis of the allowance for credit losses for
the quarter ended June 30, 2009 and 2008, respectively:
 
 Three months ended(dollars in thousands)
                    
                    June 30,2009
                    
                    
                    2008Balance,
      beginning of period
                    
                    $
                    18,155
                    
                    
                    $
                    10,978Provision
      for credit losses
                    
                    
                    4,000
                    
                    
                    
                    6,200Charge-offs
                    
                    
                    (4,210
                    )
                    
                    
                    (2,571
                    )Recoveries
                    
                    
                    23
                    
                    
                    
                    1Balance,
      end of period
                    
                    $
                    17,968
                    
                    
                    $
                    14,608
 
 The
increase in the allowance for loan losses of $3.4 million from $14.6 million at
June 30, 2008 to $18.0 million at June 30, 2009 is attributable to (1) the
continued elevated level of nonperforming loans; and (2) an increase in
unidentified probable, estimable losses due to stress from the credit crisis and
general deterioration in economic conditions.  More specifically, the
Company took significant charges against land development loan portfolios in
response to deterioration in real estate values.  As a result of this
experience the Company determined that higher reserves against these categories
of loans were appropriate.  In addition, as the stresses that began in
the credit markets became more widespread causing a severe downturn in the
broader economy, the Company increased its estimates of unidentified probable
losses in other categories of loans.
  22
 
 Based on
an evaluation of the individual credits, historical credit loss experience by
loan type, economic conditions, and the Company’s reassessment of risks noted
above, management has allocated the allowance for loan losses as follows for the
periods ending June 30, 2009 and December 31, 2008:
 
 (dollars in thousands)
                    
                    June 30, 2009
                    
                    
                    December 31, 2008Percent of
                    
                    
                    
                    
                    
                    Percent ofloans in each
                    
                    
                    
                    
                    
                    loans in eachcategory to
                    
                    
                    
                    
                    
                    category toAmount
                    
                    
                    gross loans
                    
                    
                    Amount
                    
                    
                    gross loansCommercial
                    
                    $
                    7,660
                    
                    
                    
                    1.26
                    %
                    
                    $
                    6,179
                    
                    
                    
                    0.88
                    %SBA
                    
                    
                    1,054
                    
                    
                    
                    0.17
                    %
                    
                    
                    1,673
                    
                    
                    
                    0.24
                    %Real
      estate construction
                    
                    
                    4,161
                    
                    
                    
                    0.69
                    %
                    
                    
                    5,197
                    
                    
                    
                    0.74
                    %Land
      loans
                    
                    
                    915
                    
                    
                    
                    0.15
                    %
                    
                    
                    1,592
                    
                    
                    
                    0.23
                    %Real
      estate other
                    
                    
                    3,333
                    
                    
                    
                    0.55
                    %
                    
                    
                    2,495
                    
                    
                    
                    0.36
                    %Factoring/ABL
                    
                    
                    732
                    
                    
                    
                    0.12
                    %
                    
                    
                    1,222
                    
                    
                    
                    0.17
                    %Other
                    
                    
                    113
                    
                    
                    
                    0.02
                    %
                    
                    
                    196
                    
                    
                    
                    0.03
                    %$
                    17,968
                    
                    
                    
                    2.96
                    %
                    
                    $
                    18,554
                    
                    
                    
                    2.65
                    %
 
 At June
30, 2009 nonperforming assets represented 3.55% of total assets, compared to
1.78% of total assets on December 31, 2008.  Nonperforming assets have
increased primarily as a result of substantial deterioration in the real estate
market and the Company’s commitment to aggressively manage credit
exposure.  The following summarizes nonperforming assets at June 30,
2009 and December 31, 2008.
 
 June 30,
                    
                    
                    December 31,(dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Loans
      accounted for on a non-accrual basis
                    
                    $
                    27,136
                    
                    
                    $
                    15,772Other
      loans with principal or interest contracturally past due 90 days or
      more
                    
                    
                    -
                    
                    
                    
                    -Total
      nonperforming loans
                    
                    
                    27,136
                    
                    
                    
                    15,772Other
      real estate owned
                    
                    
                    2,268
                    
                    
                    
                    1,096Total
      nonperforming assets
                    
                    $
                    29,404
                    
                    
                    $
                    16,868
 
 The
nonperforming assets at June 30, 2009 consisted of loans on nonaccrual or 90
days or more past due totaling $27.1 million, and other real estate owned valued
at $2.3 million.  Nonperforming loans at June 30, 2009 were comprised
of loans with legal contractual balances totaling approximately $39.8 million
reduced by impairment charges of $12.7 million which have been charged against
the allowance for credit losses.   As a result, there no longer
was an indicated potential loss exposure pertaining to nonperforming loans and
no impairment reserves were required to be included in the allowance for credit
losses.
 
 The
following table sets forth the components of nonperforming loans as of June 30,
2009.
  23
 
 (dollars in thousands)June 30, 2009Classification
                                      
                                      Amount
                                      
                                      CollateralLand
                                      
                                      
                                      2,532
                                      
                                      Lots
      for retail development in Sacramento CountyLand
                                      
                                      
                                      1,290
                                      
                                      Commercial
      property in Riverside CountyLand
                                      
                                      
                                      922
                                      
                                      Lots
      for single family homes in IdahoLand
                                      
                                      $
                                      497
                                      
                                      Lots
      for single family homes and commercial office space in Alameda
      CountyLand
                                      
                                      
                                      40
                                      
                                      1
      SFR lot in Calaveras County5,281Construction
                                      
                                      
                                      7,255
                                      
                                      Commercial
      condominiums in Sacramento CountyConstruction
                                      
                                      
                                      3,504
                                      
                                      Condominiums/townhomes
      in Santa Clara CountyConstruction
                                      
                                      
                                      2,849
                                      
                                      2
      completed SFRs in Santa Clara CountyConstruction
                                      
                                      
                                      1,949
                                      
                                      Residential
      property in San Mateo CountyConstruction
                                      
                                      
                                      1,535
                                      
                                      1
      completed SFR in Santa Clara CountyConstruction
                                      
                                      
                                      750
                                      
                                      7
      unit commercial center in Alameda CountyConstruction
                                      
                                      
                                      640
                                      
                                      Partially
      completed home in San Mateo County18,483Real
      estate (SBA)
                                      
                                      
                                      1,699
                                      
                                      Retail
      development in Southern CaliforniaReal
      estate other
                                      
                                      
                                      826
                                      
                                      Single
      family residencesReal
      estate other
                                      
                                      
                                      526
                                      
                                      Single
      family residence in Central CaliforniaReal
      estate (SBA)
                                      
                                      
                                      58
                                      
                                      RE
      commercial/industrialReal
      estate (SBA)
                                      
                                      
                                      50
                                      
                                      RE
      commercial/retailReal
      estate (SBA)
                                      
                                      
                                      30
                                      
                                      RE
      commercial/warehouse3,189Commercial
                                      
                                      
                                      184
                                      
                                      Business
      assetsTotal
      nonperforming loans
                                      
                                      $
                                      27,136
 
 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 15.5% 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.
 
 Non-interest
Income
 
 The
following table sets forth the components of other income and the percentage
distribution of such income for the three months ended June 30, 2009 and
2008:
  24





Three months ended June 30,(dollars
      in thousands)
                
                2009
                
                
                2008Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentGain
      on sale-OREO
                
                $
                675
                
                
                
                29.0
                %
                
                $
                -
                
                
                
                0.0
                %Depositor
      service charges
                
                
                477
                
                
                
                20.5
                %
                
                
                258
                
                
                
                15.0
                %International
      fee income
                
                
                423
                
                
                
                18.2
                %
                
                
                432
                
                
                
                25.2
                %Gain
      on sale of SBA loans
                
                
                287
                
                
                
                12.3
                %
                
                
                186
                
                
                
                10.8
                %Other
      income - cash flow hedge
                
                
                161
                
                
                
                6.9
                %
                
                
                172
                
                
                
                10.0
                %SBA
      loan servicing income
                
                
                110
                
                
                
                4.7
                %
                
                
                97
                
                
                
                5.7
                %Increase
      in value of life insurance
                
                
                97
                
                
                
                4.2
                %
                
                
                97
                
                
                
                5.7
                %Gain
      on sale of securities
                
                
                -
                
                
                
                0.0
                %
                
                
                298
                
                
                
                17.4
                %Other
      operating income
                
                
                95
                
                
                
                4.1
                %
                
                
                175
                
                
                
                10.2
                %$
                2,325
                
                
                
                100.0
                %
                
                $
                1,715
                
                
                
                100.0
                %





Non-interest
income totaled $2.3 million in the second quarter of 2009, an increase of
$611,000 or 35.6% from $1.7 million in the second quarter of
2008.  Non-interest income generally consists primarily of service
charge income on deposit accounts, foreign exchange income, gains recognized on
sales of SBA loans, and SBA loan servicing income.  However, the
increase in non-interest income during the quarter ending June 30, 2009 was
primarily attributable to a gain of $675,000 recognized on the sale of “other
real estate owned”.





For the
quarter ended June 30, 2009 service charge income on deposit accounts was
$477,000, representing an increase of $219,000, or 84.9%, compared to $258,000
for the same period one year ago.  The increase is attributable to an
increase in deposit accounts and deposit related analysis charges.





Revenue
from sales of SBA loans is 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.  Gains recognized on sales of SBA loans were $287,000 in the
quarter ended June 30, 2009 which represented an increase of $104,000 or 56.8%
compared to $186,000 the same period one year earlier.





Non-interest
Expense





The
components of other expense as a percentage of average earnings assets are set
forth in the following table for the three months ended June 20, 2009 and
2008.





Three months ended June 30,(dollars
      in thousands)
                
                2009
                
                
                2008Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentSalaries
      and benefits
                
                $
                5,102
                
                
                
                2.5
                %
                
                $
                5,912
                
                
                
                3.1
                %Occupancy
                
                
                872
                
                
                
                0.4
                %
                
                
                906
                
                
                
                0.5
                %FDIC/OCC
      assessments
                
                
                636
                
                
                
                0.3
                %
                
                
                147
                
                
                
                0.1
                %Data
      processing
                
                
                569
                
                
                
                0.3
                %
                
                
                578
                
                
                
                0.3
                %Loan/OREO
      expense
                
                
                447
                
                
                
                0.2
                %
                
                
                82
                
                
                
                0.0
                %Legal
      and professional
                
                
                428
                
                
                
                0.2
                %
                
                
                338
                
                
                
                0.2
                %Deposit
      services
                
                
                324
                
                
                
                0.2
                %
                
                
                211
                
                
                
                0.1
                %Furniture
      and equipment
                
                
                232
                
                
                
                0.1
                %
                
                
                250
                
                
                
                0.1
                %Director/shareholder
      expense
                
                
                221
                
                
                
                0.1
                %
                
                
                248
                
                
                
                0.1
                %Marketing
      and advertising
                
                
                192
                
                
                
                0.1
                %
                
                
                365
                
                
                
                0.2
                %Other
                
                
                320
                
                
                
                0.2
                %
                
                
                474
                
                
                
                0.3
                %$
                9,343
                
                
                
                4.6
                %
                
                $
                9,511
                
                
                
                5.0
                %





Operating
expenses were $9.3 million for the three months ended June 30, 2009, a decrease
of $168,000 or 1.8% from $9.5 million at June 30, 2008.   As a
percentage of average earning assets, other expenses for the three months ended
June 30, 2009 and 2008 were 4.6% and 5.0%, respectively, on an annualized basis.
In 2009, operating expenses were comprised primarily of salaries and benefits of
$5.1 million, which compared to $5.9 million in 2008.  At June 30,
2009, the Company employed 162 full-time equivalents (FTE) compared to 178 FTE
on the same date one year earlier.  In addition, salaries and benefits
included a charge of $379,000 and $341,000 to recognize compensation related to
stock option grants as a result of the implementation of FAS No. 123R in the
second quarter of 2009 and 2008, respectively.  Included in FDIC/OCC
assessments for the second quarter of 2009 was $365,000 for the FDIC special
assessment levied on all banks that hold insured
deposits.    Loan/OREO expense was $447,000 for the second
quarter of 2009 compared to $82,000 for the same period one year
earlier.  The increase of $365,000, or 445.1%, was primarily
attributable to loan related legal fees and sales related expenses for “other
real estate owned”.


25


Summary
of Financial Results – Six months ended June 30, 2009





The
Company reported a net loss available to common shareholders of $(2.6) million,
or $(0.39) per diluted common share, for the six months ended June 30, 2009
representing a decrease of $2.8 million, or 1,425%, compared to net income of
$195,000, or $0.03 per diluted common share, for the same period one year
ago.  The net loss available to common shareholders was impacted by
preferred dividends of $2.1 million during the first six months of
2009.  There were no preferred dividends during the first six months
of 2008. The decrease in earnings was primarily the result of a decrease in net
interest income and an increase in preferred dividends, offset in part by an
increase in other income.





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





Six
      months endedJune 30,
                    
                    
                    Increase(dollars
      in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    (Decrease)Interest
      income
                    
                    $
                    23,436
                    
                    
                    $
                    30,969
                    
                    
                    $
                    (7,533
                    )Interest
      expense
                    
                    
                    4,093
                    
                    
                    
                    7,213
                    
                    
                    
                    (3,120
                    )Net
      interest income
                    
                    
                    19,343
                    
                    
                    
                    23,756
                    
                    
                    
                    (4,413
                    )Provision
      for credit losses
                    
                    
                    7,650
                    
                    
                    
                    8,570
                    
                    
                    
                    (920
                    )Net
      interest income after provisionfor
      credit losses
                    
                    
                    11,693
                    
                    
                    
                    15,186
                    
                    
                    
                    (3,493
                    )Other
      income
                    
                    
                    6,330
                    
                    
                    
                    3,386
                    
                    
                    
                    2,944Other
      expenses
                    
                    
                    18,806
                    
                    
                    
                    18,247
                    
                    
                    
                    559Income
      (loss) before income taxes
                    
                    
                    (783
                    )
                    
                    
                    325
                    
                    
                    
                    (1,108
                    )Income
      taxes
                    
                    
                    (274
                    )
                    
                    
                    130
                    
                    
                    
                    (404
                    )Net
      income
                    
                    $
                    (509
                    )
                    
                    $
                    195
                    
                    
                    $
                    (704
                    )Preferred
      dividends
                    
                    
                    2,074
                    
                    
                    
                    0
                    
                    
                    
                    2,074Net
      income (loss) available to common shareholders
                    
                    $
                    (2,583
                    )
                    
                    $
                    195
                    
                    
                    $
                    (2,778
                    )





Net
Interest Income and Margin





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





Net
interest income for the six months ended June 30, 2009 was $19.3 million, which
was comprised of $23.4 million in interest income and $4.1 million in interest
expense. Net interest income for the six months ended June 30, 2008 was $23.8
million, which was comprised of $31.0 million in interest income and $7.2
million in interest expense.  Net interest income for the six months
ended June 30, 2009 represented a decrease of $4.4 million or 18.6% from the
same period one year earlier.  The average balance sheet and the
general interest rate environment drive net interest income.





Changes
in short-term interest rates also impact growth in net interest income as the
interest rate earned on a majority of the Company’s assets, specifically the
loan portfolio, adjust with changes in short-term market rates.  As
such, the nature of the Company’s balance sheet is that, over time as short-term
interest rates change, income on interest earning assets has a greater impact on
net interest income than interest paid on liabilities.  The Company’s
prime rate averaged 3.25% in the six months ended June 30, 2009 compared to
5.65% in the same period one year earlier.


26


The
Company’s net interest margin (net interest income divided by average earning
assets) for the six months ended June 30, 2009 was 4.64% compared to 6.38% for
the same period one year earlier.  The decrease in net interest margin
from 2008 to 2009 was primarily a result of the decrease in short term interest
rates, a decrease in income from interest rate swaps, and an increased level of
nonperforming assets.  During the six months ended June 30, 2009, the
net settlement from interest rate swaps contributed $352,000 to support net
interest income compared to $941,000 for the same period in 2008.  The
increased level of nonperforming assets resulted in a negative impact on the
Company’s net interest margin of 21 basis points in the first six months of 2009
from reversed or foregone interest.





The
following table details the average balances, interest income and expense and
the effective yields/rates for earning assets and interest-bearing liabilities
for the six months ended June 30, 2009 and 2008.





Six months ended June 30,(dollars
      in thousands)
                      
                      2009
                      
                      
                      2008Yields
                      
                      
                      Interest
                      
                      
                      
                      
                      
                      Yields
                      
                      
                      InterestAverage
                      
                      
                      or
                      
                      
                      Income/
                      
                      
                      Average
                      
                      
                      or
                      
                      
                      Income/Balance
                      
                      
                      Rates
                      
                      
                      Expense
                      
                      
                      Balance
                      
                      
                      Rates
                      
                      
                      ExpenseASSETSInterest
      earning assets (2):Loans
      (1)
                      
                      $
                      651,200
                      
                      
                      
                      7.1
                      %
                      
                      $
                      23,037
                      
                      
                      $
                      674,211
                      
                      
                      
                      8.8
                      %
                      
                      $
                      29,475Federal
      funds sold
                      
                      
                      169,943
                      
                      
                      
                      0.2
                      %
                      
                      
                      194
                      
                      
                      
                      26,028
                      
                      
                      
                      2.5
                      %
                      
                      
                      323Investment
      securities
                      
                      
                      4,613
                      
                      
                      
                      1.3
                      %
                      
                      
                      29
                      
                      
                      
                      45,937
                      
                      
                      
                      5.0
                      %
                      
                      
                      1,135Other
                      
                      
                      15,757
                      
                      
                      
                      2.3
                      %
                      
                      
                      176
                      
                      
                      
                      2,188
                      
                      
                      
                      3.3
                      %
                      
                      
                      36Total
      interest earning assets
                      
                      
                      841,513
                      
                      
                      
                      5.6
                      %
                      
                      
                      23,436
                      
                      
                      
                      748,364
                      
                      
                      
                      8.3
                      %
                      
                      
                      30,969Noninterest-earning
      assets:Cash
      and due from banks
                      
                      
                      19,432
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      19,521All
      other assets (3)
                      
                      
                      23,591
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      24,594TOTAL
                      
                      $
                      884,536
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      792,479LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYInterest
      bearing liabilities:Deposits:Demand
                      
                      $
                      4,776
                      
                      
                      
                      0.1
                      %
                      
                      $
                      2
                      
                      
                      $
                      5,236
                      
                      
                      
                      0.3
                      %
                      
                      $
                      7Savings
                      
                      
                      308,133
                      
                      
                      
                      0.9
                      %
                      
                      
                      1,315
                      
                      
                      
                      374,902
                      
                      
                      
                      2.5
                      %
                      
                      
                      4,578Time
                      
                      
                      138,355
                      
                      
                      
                      2.8
                      %
                      
                      
                      1,952
                      
                      
                      
                      97,872
                      
                      
                      
                      4.2
                      %
                      
                      
                      2,029Other
                      
                      
                      35,483
                      
                      
                      
                      4.7
                      %
                      
                      
                      824
                      
                      
                      
                      22,588
                      
                      
                      
                      5.3
                      %
                      
                      
                      599Total
      interest bearing liabilities
                      
                      
                      486,747
                      
                      
                      
                      1.7
                      %
                      
                      
                      4,093
                      
                      
                      
                      500,598
                      
                      
                      
                      2.9
                      %
                      
                      
                      7,213Noninterest-bearing
      liabilities:Demand
      deposits
                      
                      
                      274,964
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      212,880Accrued
      expenses andother
      liabilities
                      
                      
                      10,990
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,598Shareholders'
      equity
                      
                      
                      111,835
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      68,403TOTAL
                      
                      $
                      884,536
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      792,479Net
      interest income and margin
                      
                      
                      
                      
                      
                      
                      4.6
                      %
                      
                      $
                      19,343
                      
                      
                      
                      
                      
                      
                      
                      6.4
                      %
                      
                      $
                      23,756





(1)
            Loan
      fee amortization of $2.4 million and $3.1 million, respectively, is
      included in interest income.  Nonperforming loans have been
      included in average loan balances.


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


(3)
            Net
      of average allowance for credit losses of $18.0 million and $9.9 million,
      respectively.


27


The
following table shows the effect of the interest differential of volume and rate
changes for the six months ended June 30, 2009 and 2008.  The change
in interest due to both rate and volume has been allocated in proportion to the
relationship of absolute dollar amounts of change in each.





(dollars
      in thousands)
                                                    
                                                    Six
      months ended June 30,2009 vs. 2008Increase (decrease)due to change inAverage
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    TotalVolume
                                                    
                                                    
                                                    Rate
                                                    
                                                    
                                                    ChangeInterest
      income:Loans
                                                    
                                                    $
                                                    (814
                                                    )
                                                    
                                                    
                                                    (5,624
                                                    )
                                                    
                                                    $
                                                    (6,438
                                                    )Federal
      funds sold
                                                    
                                                    
                                                    164
                                                    
                                                    
                                                    
                                                    (293
                                                    )
                                                    
                                                    
                                                    (129
                                                    )Investment
      securities
                                                    
                                                    
                                                    (260
                                                    )
                                                    
                                                    
                                                    (846
                                                    )
                                                    
                                                    
                                                    (1,106
                                                    )Other
                                                    
                                                    
                                                    152
                                                    
                                                    
                                                    
                                                    (12
                                                    )
                                                    
                                                    
                                                    140Total
      interest income
                                                    
                                                    
                                                    (758
                                                    )
                                                    
                                                    
                                                    (6,775
                                                    )
                                                    
                                                    
                                                    (7,533
                                                    )Interest
      expense:Demand
                                                    
                                                    
                                                    (0
                                                    )
                                                    
                                                    
                                                    (5
                                                    )
                                                    
                                                    
                                                    (5
                                                    )Savings
                                                    
                                                    
                                                    (285
                                                    )
                                                    
                                                    
                                                    (2,978
                                                    )
                                                    
                                                    
                                                    (3,263
                                                    )Time
                                                    
                                                    
                                                    571
                                                    
                                                    
                                                    
                                                    (648
                                                    )
                                                    
                                                    
                                                    (77
                                                    )Other
                                                    
                                                    
                                                    299
                                                    
                                                    
                                                    
                                                    (74
                                                    )
                                                    
                                                    
                                                    225Total
      interest expense
                                                    
                                                    
                                                    585
                                                    
                                                    
                                                    
                                                    (3,705
                                                    )
                                                    
                                                    
                                                    (3,120
                                                    )Change
      in net interest income
                                                    
                                                    $
                                                    (1,343
                                                    )
                                                    
                                                    $
                                                    (3,070
                                                    )
                                                    
                                                    $
                                                    (4,413
                                                    )





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 $23.4 million in the six months ended June 30, 2009 represented a
decrease of $7.5 million, or 24.3%, from $31.0 million in the same period one
year earlier.  The decrease in interest income was primarily due to a
decrease in interest rates a decrease in income from interest rate swaps, and an
increased level of nonperforming assets, offset in part by growth in average
earning assets.  Average earning assets for the six months ended June
30, 2009 were $841.5 million and represented growth of $93.1 million or 12.4%
over $748.4 million for the same period in 2008.





Average
gross loans were $651.2 million for the six months ended June 30, 2009, a
decrease of $23.0 million or 3.4% from $674.2 million for the same period one
year earlier.  Average loans comprised 77.4% of average earning assets
in the six months ended June 30, 2009 compared to 90.1% in the first six months
of 2008.  During the six months ended June 30, 2009, the ratio of
average gross loans to average deposits (one measure of leverage) was 89.7%,
compared to 97.6% in the comparable period of 2008.





The
average yield on earning assets was 5.62% for the six months ended June 30, 2009
and 8.32% for the six months ended June 30, 2008.  The majority of the
Company’s earning assets, including a majority of loans, are priced to adjust
with movements in short-term interest rates, particularly the prime rate, and
the decrease in yield was primarily due to decreases in the prime rate during
2009 and the later part of 2008 and interest reversed or foregone on
nonperforming assets offset, in part, by income from interest rate
swaps.


28


Other
earning assets, consisting of investment securities, federal funds sold and
interest-bearing deposits, averaged $190.3 million for the six months ended June
30, 2009, a decrease of $116.2 million or 156.6% from $74.2 million for the six
months ended June 30, 2008.




Interest
Expense




Interest
expense was $4.1 million for the six months ended June 30, 2009, which
represented a decrease of $3.1 million or 43.3% from $7.2 million for the
comparable period of 2008.  The decrease in interest expense reflects
and lower interest rates paid on liabilities in 2009 compared to
2008.  Average interest-bearing liabilities were $486.7 million for
the six months ended June 30, 2009, a decrease of $13.9 million, or 2.8%, from
$500.6 million for the same period one year earlier.





Average
interest bearing deposits were $451.3 million for the six months ended June 30,
2009, which represented 62.1% of total average deposits and was a decrease of
$26.7 million, or 5.6%, from $478.0 million representing 69.2% of total average
deposits in the first six months of 2008.





Other
(non-deposit) interest bearing liabilities are primarily comprised of junior
subordinated debt securities issued by the Company and other
borrowings.  The junior subordinated debt is intended to supplement
capital requirements of the Company at a rate of interest that is fixed for five
years.  Other interest bearing liabilities averaged $35.5 million in
the six months ended June 30, 2009 compared to $22.6 million for the same period
one year earlier.





The
average rate paid on interest-bearing liabilities of 1.70% in the six months
ended June 30, 2009 compared to 2.90% in the first six months of
2008.





Credit
Risk and Provision for Credit Losses





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





The
Company provided $7.7 million to the allowance for credit losses for the six
months ended June 30, 2009, compared to $8.6 million for the same period in
2008.





The
Company’s loan charge-offs totaled $8.5 million during the six months ended June
30, 2009, compared to $2.6 million for the same period one year
earlier.  The Company recognized $308,000 and $1,000 in loan
recoveries for the six months ended June 30, 2009 and 2008,
respectively.





The
following schedule provides an analysis of the allowance for credit losses for
the six months ended June 30, 2009 and 2008, respectively:





Six
      months ended(dollars
      in thousands)
                
                June 30,2009
                
                
                2008Balance,
      beginning of period
                
                $
                18,554
                
                
                $
                8,608Provision
      for credit losses
                
                
                7,650
                
                
                
                8,570Charge-offs
                
                
                (8,544
                )
                
                
                (2,571
                )Recoveries
                
                
                308
                
                
                
                1Balance,
      end of period
                
                $
                17,968
                
                
                $
                14,608





See
“Summary of Financial Results – Quarter ended June 30, 2009 – Provision for
Credit Losses” for a discussion of the allowance for credit losses and
nonperforming assets.


29


Non-interest
Income





The
following table sets forth the components of other income and the percentage
distribution of such income for the nine months ended June 30, 2009 and
2008:





Six months ended June 30,(dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentOther
      income - cash flow hedge
                  
                  $
                  2,920
                  
                  
                  
                  46.1
                  %
                  
                  $
                  452
                  
                  
                  
                  13.3
                  %Depositor
      service charges
                  
                  
                  896
                  
                  
                  
                  14.2
                  %
                  
                  
                  487
                  
                  
                  
                  14.4
                  %International
      fee income
                  
                  
                  822
                  
                  
                  
                  13.0
                  %
                  
                  
                  809
                  
                  
                  
                  23.9
                  %Gain
      on sale-OREO
                  
                  
                  677
                  
                  
                  
                  10.7
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Gain
      on sale of SBA loans
                  
                  
                  390
                  
                  
                  
                  6.2
                  %
                  
                  
                  469
                  
                  
                  
                  13.9
                  %Other
      operating income
                  
                  
                  211
                  
                  
                  
                  3.3
                  %
                  
                  
                  469
                  
                  
                  
                  13.9
                  %SBA
      loan servicing income
                  
                  
                  208
                  
                  
                  
                  3.3
                  %
                  
                  
                  196
                  
                  
                  
                  5.8
                  %Increase
      in value of life insurance
                  
                  
                  206
                  
                  
                  
                  3.2
                  %
                  
                  
                  206
                  
                  
                  
                  6.1
                  %Gain
      on sale of securities
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  298
                  
                  
                  
                  8.7
                  %$
                  6,330
                  
                  
                  
                  100.0
                  %
                  
                  $
                  3,386
                  
                  
                  
                  100.0
                  %





Non-interest
income totaled $6.3 million and $3.4 million in the first six months of 2009 and
2008, respectively.  Non-interest income generally consists primarily
of service charge income on deposit accounts, foreign exchange income, gains
recognized on sales of SBA loans, and SBA loan servicing
income.  However, the increase in non-interest income during the six
months ending June 30, 2009 was primarily attributable to a gain of $677,000
recognized on the sale of “other real estate owned” and the acceleration of a
deferred gain of $2.9 million on interest rate swaps terminated during the
fourth quarter of 2008.  The acceleration of the deferred gain during
the first six months of 2009 was a result of further reductions in the loan
pools that were originally designated as hedged against interest rate
swaps.





For the
six months ended June 30, 2009 service charge income on deposit accounts was
$896,000, representing an increase of $409,000, or 84.0%, compared to $487,000
for the same period one year ago.  The increase is attributable to an
increase in deposit accounts and deposit related analysis charges.





Revenue
from sales of SBA loans is 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.  Gains recognized on sales of SBA loans were $390,000 in the
six months ended June 30, 2009 which represented a decrease of $79,000 or 16.8%
compared to $469,000 for the same period one year earlier.




Non-interest
Expense





The
components of other expense as a percentage of average earning assets are set
forth in the following table for the six months ended June 30, 2009 and
2008.


30


Six months ended June 30,(dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentSalaries
      and benefits
                  
                  $
                  10,668
                  
                  
                  
                  2.6
                  %
                  
                  $
                  11,562
                  
                  
                  
                  3.1
                  %Occupancy
                  
                  
                  1,737
                  
                  
                  
                  0.4
                  %
                  
                  
                  1,783
                  
                  
                  
                  0.5
                  %Data
      processing
                  
                  
                  1,148
                  
                  
                  
                  0.3
                  %
                  
                  
                  1,159
                  
                  
                  
                  0.3
                  %Legal
      and professional
                  
                  
                  891
                  
                  
                  
                  0.2
                  %
                  
                  
                  305
                  
                  
                  
                  0.1
                  %FDIC/OCC
      assessments
                  
                  
                  838
                  
                  
                  
                  0.2
                  %
                  
                  
                  301
                  
                  
                  
                  0.1
                  %Loan/OREO
      expense
                  
                  
                  755
                  
                  
                  
                  0.2
                  %
                  
                  
                  224
                  
                  
                  
                  0.1
                  %Furniture
      and equipment
                  
                  
                  481
                  
                  
                  
                  0.1
                  %
                  
                  
                  478
                  
                  
                  
                  0.1
                  %Marketing
      and advertising
                  
                  
                  475
                  
                  
                  
                  0.1
                  %
                  
                  
                  684
                  
                  
                  
                  0.2
                  %Director/shareholder
      expense
                  
                  
                  463
                  
                  
                  
                  0.1
                  %
                  
                  
                  496
                  
                  
                  
                  0.1
                  %Deposit
      services
                  
                  
                  575
                  
                  
                  
                  0.1
                  %
                  
                  
                  388
                  
                  
                  
                  0.1
                  %Other
                  
                  
                  775
                  
                  
                  
                  0.2
                  %
                  
                  
                  867
                  
                  
                  
                  0.2
                  %$
                  18,806
                  
                  
                  
                  4.5
                  %
                  
                  $
                  18,247
                  
                  
                  
                  4.9
                  %
 
 Operating
expenses were $18.8 million for the six months ended June 30, 2009, an increase
of $559,000 or 3.1% over $18.2 million for the six months ended June 30,
2008.   As a percentage of average earning assets, other expenses
for the six months ended June 30, 2009 and 2008 were 4.5% and 4.9%,
respectively, on an annualized basis.  In 2009, operating expenses
were comprised primarily of salaries and benefits of $10.7 million, which
compared to $11.6 million in 2008.  At June 30, 2009, the Company
employed 162 FTE compared to 178 FTE on the same date one year
earlier.  In addition, salaries and benefits included a charge of
$746,000 and $707,000 to recognize compensation related to stock option grants
as a result of the implementation of FAS No. 123R in 2009 and 2008,
respectively.  Included in FDIC/OCC assessments for the first six
months of 2009 was $365,000 for the FDIC special assessment levied on all banks
that hold insured deposits.    Loan/OREO expense was
$755,000 for the first six months of 2009 compared to $224,000 for the same
period one year earlier.  The increase of $531,000, or 237.1%, was
primarily attributable to loan related legal fees and sales related expenses for
“other real estate owned”.
 
 Balance
Sheet
 
 Total
assets of the Company at June 30, 2009 were $829.3 million, a decrease of $118.3
million, or 12.5%, as compared to $948.0 million at December 31,
2008.  The reduction in total assets was principally due to a decrease
in loan balances and federal funds sold.
 
 The
following table shows the Company’s loans by type and their percentage
distribution for the periods ended June 30, 2009 and December 31,
2008.
  31
 
 (dollars
      in thousands)
                  
                  June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Commercial
                  
                  $
                  261,927
                  
                  
                  $
                  301,024Real
      estate construction
                  
                  
                  79,738
                  
                  
                  
                  98,105Land
      loans
                  
                  
                  14,224
                  
                  
                  
                  23,535Real
      estate other
                  
                  
                  136,016
                  
                  
                  
                  134,767Factoring
      and asset based lending
                  
                  
                  47,790
                  
                  
                  
                  55,761SBA
                  
                  
                  60,885
                  
                  
                  
                  77,043Other
                  
                  
                  5,960
                  
                  
                  
                  9,371Total
      gross loans
                  
                  
                  606,540
                  
                  
                  
                  699,606Unearned
      fee income
                  
                  
                  (1,437
                  )
                  
                  
                  (1,601
                  )Total
      gross loans
                  
                  
                  605,103
                  
                  
                  
                  698,005Less
      allowance for credit losses
                  
                  
                  (17,968
                  )
                  
                  
                  (18,554
                  )Total
      loans, net
                  
                  $
                  587,135
                  
                  
                  $
                  679,451Commercial
                  
                  
                  43.2
                  %
                  
                  
                  43.0
                  %Real
      estate construction
                  
                  
                  13.1
                  %
                  
                  
                  14.0
                  %Land
      loans
                  
                  
                  2.3
                  %
                  
                  
                  3.4
                  %Real
      estate other
                  
                  
                  22.4
                  %
                  
                  
                  19.3
                  %Factoring
      and asset based lending
                  
                  
                  7.9
                  %
                  
                  
                  8.0
                  %SBA
                  
                  
                  10.0
                  %
                  
                  
                  11.0
                  %Other
                  
                  
                  1.0
                  %
                  
                  
                  1.3
                  %Total
      gross loans
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
 
 Gross
loan balances were $606.5 million at June 30, 2009, which represented a decrease
of $93.1 million, or 13.3%, as compared to $699.6 million at December 31, 2008.
The decrease in loans was primarily in commercial and industrial loans and
commercial, construction, and land loans without a concentration in any one
specific category of loans.
 
 The
Company’s commercial loan portfolio represents loans to small and middle-market
businesses in the Santa Clara County region.  Commercial loans were
$261.9 million at June 30, 2009, which represented a decrease of $39.1 million,
or 13.0%, compared to $301.0 million at December 31, 2008.  At June
30, 2009, commercial loans comprised 43.2% of total loans outstanding compared
to 43.0% at December 31, 2008.
 
 The
Company’s construction and land development loan portfolio together totaled
approximately $94.0 million as of June 30, 2009 compared to $121.6 million as of
December 31, 2008, representing a decrease of $27.7 million or
22.8%.  Construction and land development loan balances at June 30,
2009 and December 31, 2008 comprised 15.4% and 17.4%, respectively, of total
loans.
 
 Other
real estate loans increased $1.2 million or 0.9% to $136.0 million at June 30,
2009 over $135.0 million at December 31, 2008.  The increase in other
real estate loans was approximately equally split between home equity lines of
credit and other real estate term loans.  Other real estate loans
represented 22.4% of total loans at June 30, 2009 compared to 19.3% at December
31, 2008.
 
 Factoring
and asset-based lending represents purchased accounts receivable (factoring) and
a structured accounts receivable lending program where the Company receives
client specific payment for client invoices.  Under the factoring
program, the Company purchases accounts receivable invoices from its clients and
then receives payment directly from the party obligated for the
receivable.   In most cases the Company purchases the receivables
subject to recourse from the Company’s factoring client.  The
asset-based lending program requires a security interest in all of a client’s
accounts receivable.  At June 30, 2009, factoring/asset- based loans
totaled $47.8 million or 7.9% of total loans, as compared to $55.8 million or
8.0% of total loans at December 31, 2008.
 
 The
Company, as a Preferred Lender, originates SBA loans and participates in the SBA
7A and 504 SBA lending programs.  Under the 7A program, a loan is made
for commercial or real estate purposes.  The SBA guarantees these
loans and the guarantee may range from 75% to 85% of the total loan. In
addition, the loan could be collateralized by a deed of trust on real
estate.  Under the 504 program, the Company lends directly to the
borrower and takes a first deed of trust to the subject property.  In
addition the SBA, through a Certified Development Corporation, makes an
additional loan to the borrower and takes a deed of trust subject to the
Company’s position. At June 30, 2009, SBA loans comprised $60.9 million, or
10.0%, of total loans, a decrease of $16.2 million, or 21.0%, from $77.0 million
at December 31, 2008. The Company has the ability and the intent to sell all or
a portion of the SBA loans and, as such, carries the saleable portion of SBA
loans at the lower of aggregate cost or fair value.   At June 30,
2009 and December 31, 2008, the fair value of SBA loans exceeded aggregate cost
and therefore, SBA loans were carried at aggregate cost.
  32
 
 Other
loans consist primarily of loans to individuals for personal uses, such as
installment purchases, overdraft protection loans and a variety of other
consumer purposes.  At June 30, 2009, other loans totaled $6.0 million
as compared to $9.4 million at December 31, 2008.
 
 Deposits
represent the Company’s principal source of funds.  Most of the
Company’s deposits are obtained from professionals, small- to medium sized
businesses and individuals within the Company’s market area.  The
Company’s deposit base consists of non-interest and interest-bearing demand
deposits, savings and money market accounts and certificates of
deposit.  The following table summarizes the composition of deposits
as of June 30, 2009 and December 31, 2008.
 
 (dollars
      in thousands)
                  
                  June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentNoninterest-bearing  demand
                  
                  $
                  274,633
                  
                  
                  
                  39.9
                  %
                  
                  $
                  284,319
                  
                  
                  
                  36.6
                  %Interest-bearing
      demand
                  
                  
                  4,486
                  
                  
                  
                  0.7
                  %
                  
                  
                  4,267
                  
                  
                  
                  0.5
                  %Money
      market and savings
                  
                  
                  280,262
                  
                  
                  
                  40.7
                  %
                  
                  
                  335,200
                  
                  
                  
                  43.1
                  %Certificates
      of deposit:Less
      than $100
                  
                  
                  79,643
                  
                  
                  
                  11.6
                  %
                  
                  
                  92,997
                  
                  
                  
                  12.0
                  %$100
      and more
                  
                  
                  50,096
                  
                  
                  
                  7.3
                  %
                  
                  
                  60,462
                  
                  
                  
                  7.8
                  %Total
      deposits
                  
                  $
                  689,120
                  
                  
                  
                  100.0
                  %
                  
                  $
                  777,245
                  
                  
                  
                  100.0
                  %
 
 Deposits
decreased $88.1 million or 11.3% from $777.2 million at December 31, 2008 to
$689.1 million at June 30, 2009. The decrease in deposits was primarily in money
market and savings accounts.  As of June 30, 2009, demand deposits and
core deposits continued to represent 40.5% and 81.2% of total deposits,
respectively.
 
 Leverage
 
 Total
gross loan balances at June 30, 2009 were $606.5million.  The
resulting loan to deposit ratio was 88.0%.  Other earning assets at
June 30, 2009 were primarily comprised of investment securities, federal funds
sold and interest-bearing deposits of $179.5 million. To date, the Company has
deployed earning assets primarily in federal funds sold to address the potential
volatility of deposit balances and to accommodate projected loan funding, and in
short term fixed rate investments to mitigate interest rate risk associated with
the Company’s asset-sensitive balance sheet.
 
 Capital
Resources
  The
Company and the Bank are subject to the capital guidelines and regulations
governing capital adequacy for bank holding companies and national
banks.  Additional capital requirements may be imposed on banks based
on market risk. The FDIC requires a leverage ratio of 8.00% for new banks during
the first three years of operation.
  After the
first three years of operations, the Comptroller requires a minimum leverage
ratio of 3.00% for national banks that have received the highest composite
regulatory rating (a regulatory measurement of capital, assets, management,
earnings and liquidity) and that are not anticipating or experiencing any
significant growth.  All other institutions are required to maintain a
leverage ratio of at least 100 to 200 basis points above the 3.00%
minimum.
  The
Comptroller's regulations also require national banks to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of
8.00%.  Risk-based capital ratios are calculated with reference to
risk-weighted assets, including both on and off-balance sheet exposures, which
are multiplied by certain risk weights assigned by the Comptroller to those
assets.  At least one-half of the qualifying capital must be in the
form of Tier 1 capital.
  33
  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.
  In
response to increasing risk perceived in the economic environment, during the
fourth quarter of 2008 the Company raised $53.9 million of additional
capital.  The following is a summary of these issuances:
  Private
Placement
  On
December 17, 2008, the Company completed the private placement sale of 131,901
shares of its Series B Mandatorily Convertible Cumulative Perpetual Preferred
Stock and 168,099 shares of its Series B-1 Mandatorily Convertible Cumulative
Perpetual Preferred Stock, for aggregate consideration of $30 million, which is
$100 per share for both series of shares, to a private fund.  The
Series B and Series B-1 shares (collectively the “shares”) accrue dividends at a
rate of 10% per annum, payable quarterly.
  34
  The
holders of the Series B  and B-1 preferred shares have voting rights
at a rate of 10 votes per share and may 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.
 
 Each
Series B and B-1 preferred share shall automatically convert to common stock
after the later of 18 months or such time that shareholder and regulatory
approvals, to the extent required for conversion, are received (“Mandatory
Conversion Date”).  If the average closing price of the Company’s
common stock does not equal or exceed $10 per share over the 20 consecutive
trading days immediately prior to the Mandatory Conversion Date (the Current
Market Price Condition), such date will be extended for successive six-month
periods until the Current Market Price Condition is met.
 
 The
Company can force conversion of the shares into common stock on or after January
15, 2010 through June 30, 2010, if (a) the Company fully pays the accrued
dividends and prepays the dividends that would have accrued up through June 30,
2010, (b) the Company’s shareholders have approved the conversion and (c) the
Current Market Price condition is met.  Subsequent to June 30, 2010,
the Company can force conversion of the shares into common stock if the above
three conditions are met, with the only exception being the necessity to pay all
dividends accrued through the date of conversion as opposed to prepaying any
such amount.
 
 Troubled
Assets Relief Program (TARP)
 
 On
December 23, 2008, the Company issued 23,864 shares of its Fixed Rate Cumulative
Perpetual Series C Preferred Stock, having a liquidation value of $23,864,000,
to the United States Department of the Treasury (the Treasury). Dividends accrue
at the rate of 5% per annum for the first five years and then 9% per annum
thereafter.  The dividends will be paid only as declared by the Board
of Directors of the Company.  However, in the event such dividends
have not been paid for six or more quarters, whether or not consecutive, the
Holders of the Series C Preferred shares will have the right to elect two
members to the Company’s Board of Directors.
 
 In
addition the Company issued a warrant to purchase up to 396,412 shares of the
Company’s common stock at a purchase price of $9.03 per share, subject to
certain adjustment provisions such as stock splits, issuances of Common Stock at
or below a specified price relative to the then current market price of the
stock, and other provisions.  The Warrant expires ten years from the
issuance date.  The Warrant is exercisable in whole or in part at any
time except that the Treasury may not exercise more than one-half of the shares
underlying the Warrant prior to the earlier of i) December 31, 2009 or ii) the
date on which the Company receives gross proceeds of not less than $23,864,000
in one or more Qualified Equity Offerings.  In addition, the Treasury
has agreed not to exercise voting power with respect to any shares of Common
Stock issued upon exercise of the Warrant.
 
 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 $569,000 incurred in connection with the issuance of both the private
placement and TARP securities have been charged against Additional Paid in
Capital.
 
 The
Company’s Tier 1 capital at June 30, 2009 was $105.9 million, which was
comprised of preferred equity up to the allowable limit of $33.3 million, $40.3
million of capital stock and surplus, $15.3 million in retained earnings and
trust preferred securities up to the allowable limit of $17.0
million.
 
 The
following table shows the Company’s capital ratios at June 30, 2009 and December
31, 2008 as well as the minimum capital ratios required to be deemed “well
capitalized” under the regulatory framework.
  35







As of June 30,
                    
                    
                    As of December 31,(dollars in thousands)
                    
                    2009
                    
                    
                    2008Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioCompany
      Capital RatiosTier
      1 Capital
                    
                    $
                    105,974
                    
                    
                    
                    15.08
                    %
                    
                    $
                    109,221
                    
                    
                    
                    13.31
                    %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                    
                    $
                    42,167
                    
                    
                    
                    6.00
                    %
                    
                    $
                    49,252
                    
                    
                    
                    6.00
                    %Total
      Capital
                    
                    $
                    135,397
                    
                    
                    
                    19.27
                    %
                    
                    $
                    138,725
                    
                    
                    
                    11.67
                    %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                    
                    $
                    70,279
                    
                    
                    
                    10.00
                    %
                    
                    $
                    82,086
                    
                    
                    
                    10.00
                    %Company
      LeverageTier
      1 Capital
                    
                    $
                    105,974
                    
                    
                    
                    12.28
                    %
                    
                    $
                    109,221
                    
                    
                    
                    10.66
                    %(to
      Average Assets)Tier
      1 capital minimum requirement
                    
                    $
                    43,166
                    
                    
                    
                    5.00
                    %
                    
                    $
                    44,170
                    
                    
                    
                    5.00
                    %Bank
      Capital RatiosTier
      1 Capital
                    
                    $
                    107,220
                    
                    
                    
                    15.27
                    %
                    
                    $
                    106,137
                    
                    
                    
                    12.94
                    %(to
      Risk Weighted Assets)Tier
      1 capital minimum requirement
                    
                    $
                    42,126
                    
                    
                    
                    6.00
                    %
                    
                    $
                    49,206
                    
                    
                    
                    6.00
                    %Total
      Capital
                    
                    $
                    116,110
                    
                    
                    
                    16.54
                    %
                    
                    $
                    116,388
                    
                    
                    
                    14.19
                    %(to
      Risk Weighted Assets)Total
      capital minimum requirement
                    
                    $
                    70,210
                    
                    
                    
                    10.00
                    %
                    
                    $
                    82,010
                    
                    
                    
                    10.00
                    %Bank
      LeverageTier
      1 Capital
                    
                    $
                    107,220
                    
                    
                    
                    12.42
                    %
                    
                    $
                    106,137
                    
                    
                    
                    12.03
                    %(to
      Average Assets)Tier
      1 capital minimum requirement
                    
                    $
                    43,153
                    
                    
                    
                    5.00
                    %
                    
                    $
                    44,125
                    
                    
                    
                    5.00
                    %





The
Company and the Bank were considered well capitalized at June 30,
2009.





Stock
Repurchase Program





Effective
May 5 2008, the Company announced a stock repurchase program to repurchase up to
$5.0 million in shares of the Company for a nineteen month period extending to
December 31, 2009.  Buying under the program will be at management’s
discretion taking into consideration such factors as the market price of the
stock, available cash flow, general economic conditions and other
factors.  As of June 30, 2009, no share repurchases have
occurred.


36


ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Liquidity/Interest
Rate Sensitivity




The
Company manages its liquidity to provide adequate funds at an acceptable cost to
support borrowing requirements and deposit flows of its
customers.  The increased level of nonperforming assets at June 30,
2009 may have the potential to impact the Company’s ability to raise deposits
and could result in higher deposit costs and/or lower liquidity.  At
June 30, 2009 and December 31, 2008, liquid assets as a percentage of deposits
were 28.7% and 29.0%, respectively.  In addition to cash and due from
banks, liquid assets include interest-bearing deposits in other banks, Federal
funds sold and securities available for sale.  The Company has $25.0
million in Federal funds lines of credit available with correspondent banks to
meet liquidity needs.  At June 30, 2009, there were no balances
outstanding on these lines.  Additionally, as of June 30, 2009, the
Company had a total borrowing capacity with the Federal Home Loan Bank of San
Francisco of approximately $132.0 million for which the Company had collateral
in place to borrow $42.0 million.  As of June 30, 2009, $10.0 million
of this borrowing capacity was pledged to secure a letter of
credit.





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





The
following table sets forth the distribution of repricing opportunities, based on
contractual terms of the Company’s earning assets and interest-bearing
liabilities at June 30, 2009, the interest rate sensitivity gap (i.e. interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.





(dollars in thousands)
                                  
                                  As of June 30, 2009After three
                                  
                                  
                                  After six
                                  
                                  
                                  After oneWithin
                                  
                                  
                                  months but
                                  
                                  
                                  months but
                                  
                                  
                                  year but
                                  
                                  
                                  Afterthree
                                  
                                  
                                  within six
                                  
                                  
                                  within one
                                  
                                  
                                  within
                                  
                                  
                                  fivemonths
                                  
                                  
                                  months
                                  
                                  
                                  year
                                  
                                  
                                  five years
                                  
                                  
                                  years
                                  
                                  
                                  TotalFederal
      funds sold
                                  
                                  $
                                  122,500
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  122,500Interest
      bearing deposits inother
      banks
                                  
                                  
                                  9,330
                                  
                                  
                                  
                                  9,555
                                  
                                  
                                  
                                  1,470
                                  
                                  
                                  
                                  4,165
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  24,520Agency
      securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  32,517
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  32,517Loans
                                  
                                  
                                  231,369
                                  
                                  
                                  
                                  42,216
                                  
                                  
                                  
                                  89,752
                                  
                                  
                                  
                                  116,944
                                  
                                  
                                  
                                  126,259
                                  
                                  
                                  
                                  606,540Total
      earning assets
                                  
                                  $
                                  363,199
                                  
                                  
                                  $
                                  51,771
                                  
                                  
                                  $
                                  91,222
                                  
                                  
                                  $
                                  153,626
                                  
                                  
                                  $
                                  126,259
                                  
                                  
                                  $
                                  786,077Interest
      checking, moneymarket
      and savings
                                  
                                  
                                  284,748
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  284,748Certificates
      of deposit:Less
      than $100,000
                                  
                                  
                                  22,624
                                  
                                  
                                  
                                  18,944
                                  
                                  
                                  
                                  16,974
                                  
                                  
                                  
                                  7,097
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  65,639$100,000
      or more
                                  
                                  
                                  37,459
                                  
                                  
                                  
                                  10,788
                                  
                                  
                                  
                                  14,407
                                  
                                  
                                  
                                  1,446
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  64,100Other
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  17,527
                                  
                                  
                                  
                                  17,527Total
      interest-bearing liabilities
                                  
                                  $
                                  344,831
                                  
                                  
                                  $
                                  29,732
                                  
                                  
                                  $
                                  31,381
                                  
                                  
                                  $
                                  8,543
                                  
                                  
                                  $
                                  17,527
                                  
                                  
                                  $
                                  432,014Interest
      rate gap
                                  
                                  $
                                  18,368
                                  
                                  
                                  $
                                  22,039
                                  
                                  
                                  $
                                  59,841
                                  
                                  
                                  $
                                  145,083
                                  
                                  
                                  $
                                  108,732
                                  
                                  
                                  $
                                  354,063Cumulative
      interest rate gap
                                  
                                  $
                                  18,368
                                  
                                  
                                  $
                                  40,407
                                  
                                  
                                  $
                                  100,248
                                  
                                  
                                  $
                                  245,331
                                  
                                  
                                  $
                                  354,063Interest
      rate gap ratio
                                  
                                  
                                  0.05
                                  
                                  
                                  
                                  0.43
                                  
                                  
                                  
                                  0.66
                                  
                                  
                                  
                                  0.94
                                  
                                  
                                  
                                  0.86Cumulative
      interest rategap
      ratio
                                  
                                  
                                  0.05
                                  
                                  
                                  
                                  0.10
                                  
                                  
                                  
                                  0.20
                                  
                                  
                                  
                                  0.37
                                  
                                  
                                  
                                  0.45


37





Based on
the contractual terms of its assets and liabilities, the Company’s balance sheet
at June 30, 2009 was asset sensitive in terms of its short-term exposure to
interest rates.  That is, at June 30, 2009 the volume of assets that
might reprice within the next year exceeded the volume of liabilities that might
reprice.  This position provides a hedge against rising interest
rates, but has a detrimental effect during times of rate decreases. Net interest
income is negatively impacted by a decline in interest rates and positively
impacted by an increase in interest rates.  To partially mitigate the
adverse impact of declining rates, a significant portion of variable rate loans
made by the Company have been written with a minimum “floor” rate.





The
following table shows maturity and interest rate sensitivity of the loan
portfolio at June 30, 2009 and December 31, 2008.  At June 30, 2009,
approximately 80.8% of the loan portfolio is priced with floating interest rates
which limit the exposure to interest rate risk on long-term loans.





(dollars in thousands)
                
                As of June 30, 2009Due after oneDue one year
                
                
                year through
                
                
                Due afterAmount
                
                
                or less
                
                
                five years
                
                
                five yearsCommercial
      and other
                
                $
                261,927
                
                
                $
                156,096
                
                
                $
                79,804
                
                
                $
                26,027Real
      estate construction
                
                
                79,738
                
                
                
                76,473
                
                
                
                2,762
                
                
                
                503Land
      loans
                
                
                14,224
                
                
                
                7,193
                
                
                
                4,798
                
                
                
                2,233Real
      estate-other
                
                
                136,016
                
                
                
                18,943
                
                
                
                43,052
                
                
                
                74,021Factoring
      / Asset-Based Lending
                
                
                47,790
                
                
                
                43,537
                
                
                
                4,253
                
                
                
                -SBA
                
                
                60,885
                
                
                
                4,000
                
                
                
                2,401
                
                
                
                54,484Other
                
                
                5,960
                
                
                
                5,649
                
                
                
                311
                
                
                
                -Total
      loans
                
                $
                606,540
                
                
                $
                311,891
                
                
                $
                137,381
                
                
                $
                157,268





As of December 31, 2008Due after oneDue one year
                                    
                                    
                                    
                                    year through
                                    
                                    
                                    Due afterAmount
                                    
                                    
                                    or less
                                    
                                    
                                    
                                    five years
                                    
                                    
                                    five yearsCommercial
      and other
                                    
                                    $
                                    301,024
                                    
                                    
                                    $
                                    167,110
                                    
                                    
                                    
                                    $
                                    106,946
                                    
                                    
                                    $
                                    26,968Real
      estate construction
                                    
                                    
                                    98,105
                                    
                                    
                                    
                                    98,105
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Land
      loans
                                    
                                    
                                    23,535
                                    
                                    
                                    
                                    16,442
                                    
                                    
                                    
                                    
                                    4,834
                                    
                                    
                                    
                                    2,259Real
      estate-other
                                    
                                    
                                    134,767
                                    
                                    
                                    
                                    19,673
                                    
                                    
                                    
                                    
                                    36,475
                                    
                                    
                                    
                                    78,619Factoring
      / Asset-Based Lending
                                    
                                    
                                    55,761
                                    
                                    
                                    
                                    54,761
                                    
                                    
                                    
                                    
                                    1,000
                                    
                                    
                                    
                                    -SBA
                                    
                                    
                                    77,043
                                    
                                    
                                    
                                    6,874
                                    
                                    
                                    
                                    
                                    4,318
                                    
                                    
                                    
                                    65,851Other
                                    
                                    
                                    9,371
                                    
                                    
                                    
                                    9,100
                                    
                                    
                                    
                                    
                                    271
                                    
                                    
                                    
                                    -Total
      loans
                                    
                                    $
                                    699,606
                                    
                                    
                                    $
                                    372,065
                                    
                                    
                                    
                                    $
                                    153,844
                                    
                                    
                                    $
                                    173,697





Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations





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





·
            Any
      obligation under a guarantee contract that has the characteristics as
      defined in paragraph 3 of FASB Interpretation No. 45, “Guarantor’s
      Accounting and Disclosure Requirements for Guarantee including Indirect
      Guarantees of Indebtedness to Others” (“FIN
  45”);


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


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


·
            Any
      obligation, including contingent obligations, arising out of a material
      variable interest, as defined in FASB Interpretation No. 46,
      “Consolidation of Variable Interest Entities” (“FIN 46”), in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to the registrant, or engages in leasing, hedging or
      research and development services with the
  registrant.


38


In the
ordinary course of business, we have issued certain guarantees which qualify as
off-balance sheet arrangements, as of June 30, 2009 those guarantees include the
following:





·
            Standby
      Letters of Credit in the amount of $14.7
  million.





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





(dollars
      in thousands)
                
                As
      of Juner 30, 2009Payments
      due by periodLess
      than
                
                
                
                1 -
      3
                
                
                
                3 -
      5
                
                
                More
      thanTotal
                
                
                1
      year
                
                
                years
                
                
                years
                
                
                5
      yearsLong-term
      contracts
                
                
                1,924
                
                
                $
                1,416
                
                
                $
                508
                
                
                $
                -
                
                
                $
                -Operating
      leases
                
                
                12,325
                
                
                
                1,856
                
                
                
                3,434
                
                
                
                3,330
                
                
                
                3,705Total
                
                $
                14,249
                
                
                $
                3,272
                
                
                $
                3,942
                
                
                $
                3,330
                
                
                $
                3,705




ITEM
4 – CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





As
required by SEC rules, the Company’s management evaluated the effectiveness, as
of June 30, 2009, of the Company’s disclosure controls and
procedures.  The Company’s chief executive officer and chief financial
officer participated in the evaluation.  Based on this evaluation, the
Company’s chief executive officer and chief financial officer concluded that the
Company’s disclosure controls and procedures were effective as of June 30,
2009.





Internal
Control over Financial Reporting





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





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





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.  No change occurred during the
second quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


39


PART
II – OTHER INFORMATION




ITEM
1 – LEGAL PROCEEDINGS





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




ITEM
1A – RISK FACTORS




There
were no material changes in the risk factors that were disclosed in Item 1A,
under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for
our fiscal year ended December 31, 2008.




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




Not
applicable




ITEM
3 – DEFAULTS UPON SENIOR SECURITIES




Not
applicable




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





The 2009
Annual Meeting of Stockholders was held on May 21, 2009.  There were
6,888,424 shares of common stock outstanding and entitled to vote at the
meeting.  A total of 5,711,181 shares of common stock were represented
at the meeting in person or by proxy, representing 82.9% of the shares
outstanding and entitled to vote at the meeting.





At the
meeting, stockholders:





1)
            re-elected
      all 10 of the Company’s incumbent directors to serve for the ensuing
      year;


2)
            approved
      the conversion and voting features of the Company’s Series B and B-1
      preferred stock issued to Carpenter Community BancFund, L.P., Carpenter
      Community BancFund-A, L.P. and Carpenter Community BancFund-CA,
      L.P.;


3)
            approved
      an amendment of the Company’s bylaws to increase the minimum number of
      directors from six to seven and to increase the maximum number of
      directors from eleven to thirteen;


4)
            approved
      an advisory proposal on the compensation of the Company’s executives;
      and


5)
            ratified
      the selection of Vavrinek, Trine, Day & Co. LLP as the Company’s
      independent public accounting firm for its fiscal year ending December 31,
      2009.





The
voting results of the above matters were as follows:


40





1)
            Election
      of directors:





Shares VotedIn Favor
                
                
                WithheldRichard
      M. Brenner
                
                
                4,345,200
                
                
                
                1,365,981Lawrence
      Owen Brown
                
                
                4,459,756
                
                
                
                1,251,425David
      V. Campbell
                
                
                4,337,981
                
                
                
                1,373,200Robert
      P. Gionfriddo
                
                
                4,420,841
                
                
                
                1,290,340Howard
      N. Gould
                
                
                5,529,824
                
                
                
                181,357Allan
      C. Kramer, M.D.
                
                
                4,310,836
                
                
                
                1,400,345Robert
      P. Latta
                
                
                4,382,192
                
                
                
                1,328,989Daniel
      P. Myers
                
                
                4,507,307
                
                
                
                1,203,874Thomas
      M. Quigg
                
                
                4,383,492
                
                
                
                1,327,689Barry
      A. Turkus
                
                
                4,458,456
                
                
                
                1,252,725





2)
            Approval
      of the conversion and voting features of the Company’s Series B and B-1
      preferred stock issued to Carpenter Community BancFund, L.P., Carpenter
      Community BancFund-A, L.P. and Carpenter Community BancFund-CA,
      L.P.:





Shares VotedFor
                
                
                3,707,722Against
                
                
                143,784Abstain
                
                
                22,825Broker
      non-vote
                
                
                1,836,850





3)
            Approval
      of an amendment of the Company’s bylaws to increase the minimum number of
      directors from six to seven and to increase the maximum number of
      directors from eleven to thirteen:





Shares VotedFor
                
                
                3,744,100Against
                
                
                129,469Abstain
                
                
                762Broker
      non-vote
                
                
                1,836,850





4)
              Approval
      of an advisory proposal on the compensation of the Company’s
      executives:





Shares VotedFor
                
                
                5,134,064Against
                
                
                323,168Abstain
                
                
                253,949Broker
      non-vote
                
                
                0





5)
            Ratification
      of the selection of Vavrinek, Trine, Day & Co. LLP as the Company’s
      independent public accounting firm for its fiscal year ending December 31,
      2009:





Shares VotedFor
                
                
                5,688,290Against
                
                
                18,344Abstain
                
                
                4,547Broker
      non-vote
                
                
                0


41




ITEM
5 – OTHER INFORMATION




Not
applicable




ITEM
6 – EXHIBITS




(a)
Exhibits




See Index
to Exhibits at page 46 of this Quarterly Report on Form 10-Q.


42




SIGNATURES




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




BRIDGE
      CAPITAL HOLDINGSDated:
      August 6, 2009
                By:
                /s/ Daniel P. MyersDaniel
      P. MyersPresident
      and Chief Executive Officer(Principal
      Executive Officer)Dated:
      August 6, 2009
                By:
                /s/ Thomas A. SaThomas
      A. SaExecutive
      Vice PresidentChief
      Financial Officer(Principal
      Financial and Accounting
Officer)


43


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


44