UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





[X]
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
fiscal year ended December 31,
2008.





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


For the
transition period from ________ to ________.





Commission
File Number: 333-141453





BELVEDERE
SOCAL


(Exact
name of registrant as specified in its charter)




California
            20-8356735(State
      or other jurisdiction of employee incorporation or
      organization)
            (I.R.S.
      Employer Identification No.)





One
Maritime Plaza, Suite 825


San
Francisco, California 94111


(Address
of Principal Executive Offices, Including Zip Code)





(415)
434-1236


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered under Section 12(b) of the Act:  None




Securities
registered under Section 12(g) of the Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issues, as defined in
Rule 405 of the Securities Act.  Yes £  No
S




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes £  No
S




Indicate
by check mark whether the registrant (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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  £  Yes   S  No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceeding 12 months (or for such shorter period that the registrant was
required to submit and post such files).  £  Yes   £  No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   £




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




£  Large
      accelerated filer
            £  Accelerated
      filer£  Non-accelerated
      filer (Do not check if a smaller reporting company)
            S   Smaller
      reporting company







The aggregate market value of the
Registrant’s Common Stock, zero par value per share, held by nonaffiliates of
the Registrant as of May 1, 2009 was $870,057.




As of May
1, 2009, the number of shares of the Registrant’s Common Stock, zero par value
per share, outstanding was 3,332,500.




DOCUMENTS INCORPORATED BY REFERENCE:
None.









TABLE OF CONTENTS





PART
      I
                
                PageItem
      1.
                Description
      of Business
                1Item
      1A.
                Risk
      Factors
                13Item
      1B.
                Unresolved
      Staff Comments
                22Item
      2.
                Description
      of Property
                22Item
      3.
                Legal
      Proceedings
                22Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                22PART
      IIItem
      5.
                Market
      for Common Equity and Related Stockholder Matters
                23Item
      6.
                Selected
      Financial Data
                23Item
      7.
                Management’s
      Discussion and Analysis or Plan of Operations
                23Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                43Item
      8.
                Financial
      Statements and Supplementary Data
                43Item
      9.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                86Item
      9A.
                Controls
      and Procedures
                86Item
      9B.
                Other
      Information
                86PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                87Item
      11.
                Executive
      Compensation
                89Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                92Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                93Item
      14.
                Principal
      Accountant Fees and Services
                94Item
      15.
                Exhibits
                94









PART
I




ITEM
1. DESCRIPTION OF BUSINESS.





GENERAL





Belvedere
SoCal (“SoCal”) is a bank holding company formed in 2007 in the state of
California with the vision of becoming Southern California’s premier provider of
financial services for small businesses through its focus on small business
customers, experienced management and staff, disciplined credit policies, and
emphasis on the customer experience.





History.  As
part of its growth strategy, SoCal has completed two
acquisitions.  Each of these acquisitions brings a low-cost deposit
base, a footprint in markets with attractive growth potential, and a talented
employee base with a strong emphasis on customer service.





SoCal was
formed by its majority shareholder, Belvedere Capital Fund II L.P. (the “Fund”),
a Delaware limited partnership formed in 2002 by Belvedere Capital Partners
II LLC (“Belvedere Capital”).  SoCal was formed specifically to
acquire Professional Business Bank (“PBB”), which occurred on November 23, 2007,
and to be the platform for acquiring other banks in Southern
California.  SoCal completed the acquisition of Spectrum Bank
(“Spectrum”) on January 31, 2008, further expanding its market presence.
Following the acquisition of Spectrum, 72.9% of SoCal’s common stock is owned by
the Fund.





Effective
July 3, 2008, SoCal completed the merger of  Spectrum into PBB. The
existing Spectrum branches and certain customer-related activities are conducted
using the Spectrum brand.  SoCal issued an additional 1,313,432 shares
of common stock to the Fund for proceeds of $22 million to partially fund the
Spectrum acquisition. Collectively, PBB and Spectrum are referred to as the
“Subsidiary Bank”.




Prior to
November 23, 2007, SoCal had no significant operations.  The results
of operations for the period ended December 31, 2007 include the operations
of  PBB subsequent to November 23, 2007. The consolidated balance
sheet at December 31, 2008 and the results of operations for the year ended
December 31, 2008 include the operations of Spectrum subsequent to January 31,
2008.




The
December 31, 2008 consolidated financial statements include SoCal and the
Subsidiary Bank.  SoCal has one other wholly-owned subsidiary,
Belvedere SoCal Statutory Trust I (the “Trust”), which was formed in 2008, to
issue trust preferred securities. FIN 46R does not allow the consolidation of
the Trust into SoCal’s consolidated financial statements. As a result, the
accompanying consolidated balance sheets include the investment in the Trust of
$464,000 in other assets.




Relationship
with Belvedere
Capital. The Fund, which is
controlled by Belvedere Capital, is our majority shareholder. The Fund is a
private investment fund with 32 limited partners and one general partner,
Belvedere Capital.  Based in San Francisco, CA,  Belvedere
Capital, established itself as one of the leading private equity investors in
community banks and related financial services in the U.S.  Since
1994, Belvedere Capital, and its affiliates, have purchased or invested in
18 financial services companies. Both the Fund and Belvedere Capital
are registered bank holding companies.





Trading and
Disclosure.  SoCal’s common stock is not listed on any national
securities exchange or quoted on the OTC Bulletin Board.  Any trades
are currently reported on the Pink Sheets under the symbol
“BLVE.PK.”  Since the shares of SoCal common stock issued in the
merger with PBB were initially registered under the Securities Act of 1933, as
amended, SoCal has filed periodic reports and makes other required filings with
the Securities and Exchange Commission (the “SEC”) pursuant to the Securities
Exchange Act of 1934 (the “Exchange Act”).  Subsequent to filing this
Form 10-K, SoCal plans on filing a Form 15 Notice of Termination of Registration
under Section 12h-3 of the Exchange Act, which would suspend our filing
obligations under the Exchange Act.





BUSINESS
PLAN




The
Subsidiary Bank provides responsive, personalized financial products and
services to small- and medium-sized businesses, professionals, and high net
worth individuals in Southern California.  To accomplish its goal of
becoming Southern California’s premier business banking franchise, SoCal intends
to deepen and expand its relationships with business customers, diligently
assume and manage credit risk, and within the limits of safety and soundness,
pursue both organic growth and growth through opportunistic business
combinations.





Business Banking
Strategy.  Due to the high number of small- and medium-sized
businesses in Southern California, SoCal believes that there is an excellent
opportunity to build a business-focused community bank throughout Southern
California.  The Subsidiary Bank will focus intensely on these
business customers, their employees, and associated high net worth individuals
by serving them with a full suite of community banking products that are
tailored to each customer’s individual need.





1


Management
recognizes that customer relationships are often founded on the basis of a
strong and enduring deposit relationship.  To this end, the Subsidiary
Bank has built a competitive set of deposit products and associated service
capabilities to accommodate customer business needs and preferences. The
Subsidiary Bank also offers commercial loans, lines of credit, certain consumer
and installment loans, commercial and residential construction loans, commercial
real estate loans, as well as certain specialized products such as Small
Business Administration (“SBA”) and California Pollution Control Financing
Authority’s California Capital Access Program (“CalCAP”) loans.





During
2008, the Subsidiary Bank incurred $7.5 million of net charge-offs and in
response recorded $10.8 million of loan loss provision expense to offset
incurred charge-offs and bolster its loan loss reserve.  The worsening
economic climate has adversely affected the loan portfolio’s credit quality as
borrowers’ operating cash flows have contracted and the real estate collateral
values have eroded.  Management is devoting increased resources to
loan collection and workout activities as well as strengthening the credit
administration process to improve the integrity and timeliness of loan credit
quality reporting.  The relationship manager compensation program has
been modified to provide greater incentive to proactively manage loan customers’
credit issues.  Underwriting standards for new loan originations have
been adjusted in recognition of the potential for heightened and prolonged
economic stress.





The
Subsidiary Bank has $6.9 million of gross home equity lines at year-end, $4.4
million of which were drawn, and in 2008 purchased $24.5 million of senior
private label collateralized mortgage obligations (“CMOs”) supported by “Alt-A”
and prime residential mortgage loan collateral, which were purchased at a
discount to par.  Aside from these positions, the Subsidiary Bank has
no direct exposure to the residential mortgage market and does not directly own
any subprime residential mortgages.





NearTerm
StabilizationStrategy.  In response to credit deterioration of the
Subsidiary Bank’s loan portfolio and price decline of the investment security
portfolio, together with an associated reduction of both SoCal’s and the
Subsidiary Bank’s capital bases, management has shifted its immediate strategic
focus away from growth and towards stabilizing both SoCal and the Subsidiary
Bank.  Initiatives being pursued include diminishing the Subsidiary
Bank’s credit risk exposure through accelerated recognition and disposition of
problem loans, adoption of more conservative loan underwriting standards,
rebuilding both SoCal and the Subsidiary Bank’s capital bases and augmenting
SoCal’s liquidity position.





Management
has embarked on a plan to restructure SoCal’s balance sheet to reduce the use of
debt and preferred equity.  A key aspect of this plan requires
investors in SoCal debt and preferred equity securities to agree to convert
their holdings into SoCal common stock and for SoCal common shareholders to
approve an accommodative increase in the number of authorized common
shares.  Management believes accomplishment of this restructuring
would significantly improve SoCal’s potential for attracting new
investors.   This restructuring plan would result in the issuance
of new common equity that would dilute current common shareholders’ percentage
ownership of SoCal, but would at the same time eliminate senior
claims.  Funding from new investors would be used to augment SoCal’s
asset liquidity, reduce debt and provide it with capacity to act as a source of
strength for the Subsidiary Bank.





Belvedere
Capital, on behalf of SoCal, is currently soliciting potential new investors in
SoCal.  At this time it is uncertain what amount or form of investment
would be made, if any, and what the terms and conditions of such investment
would be.  After providing $9.0 million of funding in first quarter
2009, the Fund advised SoCal that it no longer has the capacity to extend SoCal
further financial support. Due to the difficult environment for financial
institutions, SoCal may not be able to secure necessary financing on acceptable
terms, if at all.





Long Term
Expansion Strategy.   SoCal
believes that significant economies of scale benefits could be realized through
an expansion of its business franchise in Southern California, achieved through
organic growth and/or synergistic business combinations.  The
increasing fixed cost of business operations, corporate governance and
regulatory compliance provide a strong financial incentive to expand the
Subsidiary Bank’s scale.  At the same time, in an expanded scale
operation, the Subsidiary Bank’s competitive advantage achieved through
personalized customer service and product customization would need to be
preserved.





SoCal
believes that resolution of the current banking industry turmoil will accelerate
consolidation in the number of community banks operating in Southern
California and in the process, attract new capital
investment.  By continually strengthening the Subsidiary Bank’s core
franchise, management is positioning the Subsidiary Bank to be a scalable
platform organically as well as be an attractive business combination
partner.





Capitalization
Strategy.Belvedere
Capital has provided funding and capital support to SoCal through direct
investment by the Fund as well as soliciting third party investments on SoCal’s
behalf.  SoCal in turn has provided financial support to the
Subsidiary Bank through capital contributions.  Within its capacity to
do so, it is SoCal’s intention to augment the Subsidiary Bank’s capital as
needed to satisfy regulatory “well-capitalized” status requirements,
counterbalance risks inherent in its business operations and balance sheet, and
when prudent, support organic and acquisition growth opportunities.





2


The
Subsidiary Bank will not be in a position to provide dividend income to SoCal
for the foreseeable future due to its capital position and limitations on
payment of dividends by the California General Corporation Law, and a recently
executed regulatory agreement with bank regulators.  The Subsidiary
Bank’s current focus is to conserve its existing capital resources, improve its
operating performance and reduce risk.





Loan Services of
the Subsidiary Bank.The Subsidiary
Bank offers commercial loans, lines of credit, certain consumer and installment
loans, commercial and residential construction loans, commercial real estate
loans, as well as certain specialized products such as SBA and CalCAP loans.
Through outsourcing or referring loans to other lenders in return for fee
income, we are able to assist our customers to procure certain loans not
maintained in our portfolio, such as long term real estate loans.





The
Subsidiary Bank offers loans to eligible small businesses that are guaranteed by
the SBA, as well as loans primarily for real estate-related projects under
Section 504 of the Small Business Administration Act of 1953, such as for
purchasing land and improvements, construction, modernizing or converting
existing facilities and purchasing certain machinery and equipment. SBA loans
are written at variable rates of interest which generally are limited by SBA
guidelines. Additionally, the Subsidiary Bank offers loans to small- and
medium-sized businesses under the CalCAP program. Under the CalCAP program, the
borrower, CalCAP and the Subsidiary Bank contribute funds to a loss reserve
account, or CalCAP reserve, that is held in an interest-bearing demand deposit
account at the Subsidiary Bank. Losses on loans originated under the CalCAP
program will be charged to the CalCAP reserve account after notification to
CalCAP. Although there is no plan to leave the CalCAP program, if that event
were to occur, any excess funds in the CalCAP reserve account, after all loans
have been repaid and there are no pending claims for reimbursement, will be
distributed to CalCAP and the Subsidiary Bank based on contributions to the
CalCAP reserve account. The allowance for loan losses allocated to the CalCAP
loans takes into consideration the credit support provided by the CalCAP reserve
account. At December 31, 2008, the balance of loans outstanding under the CalCAP
program totaled $17.8 million on commitments of $22.7 million.





The
Subsidiary Bank also offers a variety of consumer loans, including home equity
loans, home improvement loans and auto loans. Although consumer loans comprise a
small portion of our overall loan portfolio, such loans are important in terms
of servicing customer needs in the Subsidiary Bank’s target market, as well as
to assist us in meeting our Community Reinvestment Act
responsibilities.





Deposit Services
of the Subsidiary Bank. Through the Subsidiary Bank
we offer personal and business checking, money market, savings account,
certificates of deposit, and IRA accounts. Depositors have the option of
subscribing for a wide range of electronic services, including online banking,
ATM and debit cards, remote capture and telebanking. The types and terms of
deposit accounts are on competitive terms. The interest rates payable by banks
on the various types of deposit instruments (except for commercial demand
deposits) are a function of a number of factors, including rates paid by
competitors and the Subsidiary Bank’s need for liquidity.





In
addition to more traditional deposit services, the Subsidiary Bank offers
specialized deposit services for title and escrow company clients that move
substantial amounts of funds in and out of deposit accounts as escrows for the
purchase of real estate and other types of transactions.




Online Banking
Services of the Subsidiary Bank.The Subsidiary
Bank’s websites (www.probizbank.com
and www.spectrumbank.com)
offer a complete on-line banking solution for our customers. On these websites,
customers are able to check their balances, transfer funds, review past
transactions, and contact us online. In addition, we recently added online bill
payment.  The content of these websites are not part of this
report.





Management by the
Fund. SoCal and
Belvedere Capital entered into a management agreement under which the Fund will
provide to SoCal certain management support services for a fee set at 5% of the
Subsidiary Bank’s pretax profit, with a $200,000 annual minimum and $750,000
annual maximum.   The fee is paid in quarterly
installments.  In 2008, SoCal paid $191,997 to the
Fund.  The total paid in 2008 was below the $200,000 minimum due to
the proration of Spectrum’s management fee from the acquisition
date.  Beginning in January 2009, payment of this fee has been
deferred. In addition, Belvedere Capital will work with SoCal in
identifying, structuring, and negotiating third party investment and business
combinations.  See “Risk Factors” beginning on page 13 for a more
complete discussion of the risks involved with SoCal’s growth strategy and
Belvedere Capital’s continuing role in the management of SoCal.


3


EMPLOYEES





At
December 31, 2008, the Subsidiary Bank had 76 full time and 3 part-time
employees, and SoCal had 3 employees who were also employees of the
Subsidiary Bank.  Our employees are not represented by a union or
other collective bargaining agreement and we consider our relations with our
employees to be satisfactory.





COMPETITION





The
banking and financial services industry in California generally, and in our
market areas specifically, is highly competitive. The increasingly competitive
environment is a result primarily of changes in laws and regulation, changes in
technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Subsidiary Bank’s primary
market area is dominated by a relatively small number of major banks that have
many offices operating over a wide geographical area. The Subsidiary Bank
competes for loans, deposits, and customers with other commercial banks, savings
and loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other non-bank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services. Nondepository
institutions can be expected to increase the extent to which they act as
financial intermediaries. Furthermore, the geographic constraints on portions of
the financial services industry can be expected to erode. In addition, many of
the major commercial banks operating in the Subsidiary Bank’s primary market
area offer services, such as trust and securities brokerage services, which are
not offered directly by the Subsidiary Bank and, by virtue of their greater
total capitalization, such banks have substantially higher lending
limits.




To
compete with other financial institutions in the Subsidiary Bank’s primary
market area, the Subsidiary Bank relies principally upon personal contact by our
officers, directors and employees. For clients whose loan demands exceed the
Subsidiary Bank’s internal concentration limit, arrangements may be made for
portions of such loans to be participated to other financial institutions and
intermediaries. The Subsidiary Bank also assists clients requiring other
services not offered by the Subsidiary Bank to obtain such services from other
providers. Additional services offered by the Subsidiary Bank include a night
depository, courier service, bank-by-mail services, merchant windows, direct
deposit, and notary services.




EFFECT
OF GOVERNMENT POLICIES AND RECENT LEGISLATION





Banking
is a business that largely depends on rate differentials. In general, the
difference between the interest rate paid on deposits and other borrowings and
the interest rate received on loans extended to customers and securities held in
the Subsidiary Bank’s portfolio comprise the major portion of earnings. Rates
are highly sensitive to many factors that are beyond the control of the
Subsidiary Bank. Accordingly, earnings and growth are subject to the influence
of domestic and foreign economic conditions, including inflation, recession and
unemployment.




The
commercial banking business is not only affected by general economic conditions
but is also influenced by the monetary and fiscal policies of the federal
government and the policies of regulatory agencies, particularly the Federal
Reserve.  The Federal Reserve implements national monetary policies
(with objectives such as price stability and moderate long-term interest rates)
by its open-market operations in United States government securities, by
adjusting the required level of reserves for financial institutions subject to
its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve in
these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits.




From time
to time, legislation is enacted which has the effect of increasing the cost of
doing business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial institutions. Proposals to
change the laws and regulations governing the operations and taxation of banks,
bank holding companies and other financial institutions are frequently made in
Congress, in the California legislature and before various bank regulatory and
other agencies.




SUPERVISION
AND REGULATION




The
Subsidiary Bank is extensively regulated under federal and state law. These laws
and regulations are primarily intended to protect depositors rather than
shareholders. The discussion below describes and summarizes certain statutes and
regulations and are qualified in their entirety by reference to the particular
statute or regulation. Changes in applicable laws or regulations, and in the
policies of regulators, may have a material effect on the Subsidiary Bank’s
business and prospects. Operations may also be affected by changes in the
policies of banking and other government regulators. The Subsidiary Bank cannot
accurately predict the nature or extent of the effects on the Subsidiary Bank’s
business and earnings that fiscal or monetary policies, or new federal or state
laws, may have in the future.




Oversight.SoCal
is regularly reviewed to assess safety and soundness and compliance with
applicable laws and regulations by the Federal Reserve, and the Subsidiary Bank
is reviewed by its state regulatory agency, the California Department of
Financial Institutions (“DFI”) and its primary federal regulator, the Federal
Deposit Insurance Corporation (“FDIC”).




4


Recent
Regulatory Actions





The Board
of Directors of the Subsidiary Bank entered into a Memorandum of Understanding
(the “Regulatory Agreement”) with the FDIC and the Commissioner of the DFI. The
Regulatory Agreement sets forth certain actions required to be taken by
management of the Subsidiary Bank.   The Regulatory Agreement,
relates primarily to the Subsidiary Bank’s asset quality, loan loss reserves,
capital, management, and earnings, and requires the Subsidiary Bank to submit
plans and report to the DFI and the FDIC regarding its loan portfolio and profit
plans, among other matters. Under the terms of the Regulatory Agreement, the
Subsidiary Bank must achieve and maintain a Tier 1 leverage capital ratio
and tangible shareholders’ equity to total tangible assets ratio of not
less than 9% and a total risk based capital ratio at a minimum of 12% by
December 31, 2009. Further, classified assets present at October 31, 2008 are
required to be reduced relative to the sum of prevailing Tier 1 capital plus
loan loss reserves to no more than 60% within 120 days and no more than 40%
within 210 days.  As of March 31, 2009, these classified assets were
78% of prevailing Tier 1 capital plus loan loss
reserves.  Additionally, the Regulatory Agreement requires that, prior
to declaring or paying any cash dividends, the Subsidiary Bank must obtain the
prior written consent of the FDIC and the DFI.





Federal Bank
Holding Company Regulation.SoCal is a registered bank holding
company as defined in the Bank Holding Company Act of 1956 (the “Bank Holding
Company Act”), as amended, and is therefore subject to regulation, supervision
and examination by the Federal Reserve. In general, the Bank Holding Company Act
limits the business of bank holding companies that are not financial holding
companies to owning or controlling banks and engaging in other activities
closely related to banking. SoCal must file reports with the Federal Reserve and
must provide any additional information as required.




The
Federal Reserve may require SoCal to terminate an activity or terminate control
or liquidate or divest certain subsidiaries, affiliates or investments when the
Federal Reserve believes the activity or the control of the subsidiary or
affiliates constitutes a significant risk to the financial safety, soundness or
stability of any of its banking subsidiaries.




The
Federal Reserve also has the authority to regulate provisions of certain bank
holding company debt, including the authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, SoCal must file
written notice and obtain Federal Reserve approval prior to purchasing or
redeeming its equity securities. Additionally, SoCal is required by the Federal
Reserve to maintain certain levels of capital. See “Capital Adequacy” below in
this section for a discussion of the applicable federal capital
requirements.




Holding Company
Bank Ownership.The Bank Holding Company Act requires every bank holding company to
obtain the prior approval of the Federal Reserve before:




●
            acquiring,
      directly or indirectly, ownership or control of any voting shares of
      another bank or bank holding company if, after such acquisition, it would
      own or control more than 5% of such
shares;




●
            acquiring
      all or substantially all of the assets of another bank or bank holding
      company; or




●
            merging
      or consolidating with another bank holding
  company.





Holding Company
Control of Nonbanks.With some exceptions, the Bank Holding Company Act also prohibits a bank
holding company that is not a financial holding company from acquiring or
retaining direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or of
managing or controlling banks.





Transactions with
Affiliates.All
FDIC-insured banks are subject to restrictions imposed by the Federal Reserve
Act on extensions of credit to a bank’s affiliates, including a holding company
or a holding company’s other subsidiaries, on investments in their securities,
and on the use of their securities as collateral for loans to any borrower.
These regulations and restrictions limit SoCal’s ability to obtain funds from
the Subsidiary Bank for its cash needs, including funds for payment of
dividends, interest and operational expenses.




Tying
Arrangements.SoCal is prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property or furnishing
of services. For example, with certain exceptions, neither SoCal nor the
Subsidiary Bank may condition an extension of credit to a customer on either (1)
a requirement that the customer obtain additional services provided by us; or
(2) an agreement by the customer to refrain from obtaining other services from a
competitor.


Support of the
Subsidiary Bank.Under Federal Reserve policy, SoCal is expected to act as a source of
financial and managerial strength to the Subsidiary Bank. This means that SoCal
is required to commit, as necessary, resources to support the Subsidiary Bank.
Any loans that a bank holding company makes to its subsidiary banks are
subordinate to deposits and to certain other indebtedness of those subsidiary
banks.




5


StateLaw
Restrictions.As
a California corporation, SoCal is subject to certain limitations and
restrictions under applicable California corporate law. For example, state law
restrictions in California include limitations and restrictions relating to
indemnification of directors, payment of dividends, maintenance of books,
records and minutes, and observance of certain corporate
formalities.


Federal and State
Regulation.The
Subsidiary Bank is an FDIC-insured, state-chartered banking corporation and is
subject to various statutory requirements and rules and regulations promulgated
and enforced primarily by the DFI and the FDIC. These statutes, rules, and
regulations relate to insurance of deposits, required reserves, allowable
investments, loans, mergers, consolidations, issuance of securities, payment of
dividends, establishment of branches and other aspects of the business of the
Subsidiary Bank. The FDIC has broad authority in prohibiting unsafe or unsound
banking practices. In addition, federal law imposes a number of restrictions on
state-chartered, FDIC-insured banks, and their subsidiaries. These restrictions
include prohibitions against engaging as a principal in certain activities to
the requirement of prior notification of branch closings.




Lending
Limits.California state banking
law generally limits the amount of funds that a bank may lend to a single
borrower to 15% of shareholders’ equity, allowance for loan and lease losses,
capital notes, and debentures of the bank for unsecured loans and 25% of such
amounts for secured loans.


Liability of
Commonly Controlled Institutions.Under federal law,
institutions insured by the FDIC may be liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with the default
of commonly controlled FDIC-insured depository institutions or any assistance
provided by the FDIC to commonly controlled FDIC-insured depository institutions
in danger of default.  For purposes of these provisions of federal
law, Presidio Bank and Green Bank, National Association are recognized as being
commonly controlled with the Subsidiary Bank by the Fund.


Control of
Financial Institutions.California
banking law provides that no person may acquire direct or indirect control of a
California bank without the prior approval of the Commissioner of the DFI. A
person who has the power to vote 10% or more of the voting stock of a California
bank is presumed to control the bank.  The federal Change in Bank
Control Act of 1978 generally imposes similar restrictions and prior notice
requirements on the direct or indirect acquisition by a person of more than 10%
of any class of voting stock of a bank or bank holding company.




Community
Reinvestment.The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, a bank’s
primary federal regulator evaluate the record of the financial institution in
meeting the credit needs of its local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
the institution. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.


Insider Credit
Transactions.Banks are also subject to certain Federal Reserve restrictions on
extensions of credit to executive officers, directors, principal shareholders,
or any related interests of such persons (commonly referred to as insiders).
Extensions of credit must (1) be made on substantially the same terms and
pursuant to the same credit underwriting procedures as those for comparable
transactions with persons who are neither insiders nor employees; and (2) not
involve more than the normal risk of repayment or present other unfavorable
features. Banks are also subject to certain lending limits and restrictions on
overdrafts to insiders. A violation of these restrictions may result in
regulatory sanctions on the bank or its insiders.




Regulation of
Management.Federal law sets forth circumstances under which officers or directors of
a bank may be removed by the institution’s federal supervisory agency. Federal
law also prohibits management personnel of a bank from serving as a director or
in a management position of another financial institution whose assets exceed a
specified amount or which has an office within a specified geographic
area.




Safety and
Soundness Standards.Federal law imposes upon banks certain non-capital safety and soundness
standards. These standards cover internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation and benefits. Additional standards apply
to asset quality, earnings and stock valuation. An institution that fails
to meet these standards must develop a plan acceptable to its regulators,
specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Under California state law, the DFI Commissioner is
authorized to take possession and control of a bank if the Commissioner finds
that the bank is in such an unsafe or unsound condition that it is or will
become unable to meet the anticipated demands of the depositors.





6


Dividends.SoCal as a non-banking
California corporation is subject to the restrictions under Section 500 of the
California General Corporation Law on its ability to pay dividends to
shareholders. Generally, a California corporation may not pay dividends
unless:




●
            the
      retained earnings of the corporation immediately prior to the distribution
      exceeds the amount of the
distribution;




●
            the
      assets of the corporation exceed 1.25 times its liabilities;
      or




●
            the
      current assets of the corporation exceed its current liabilities, but if
      the average pre-tax earnings of the corporation before interest expenses
      for the two years preceding the distribution was less than the average
      interest expenses of the corporation for those years, the current assets
      of the corporation must exceed 1.25 times its current
      liabilities.





A primary
source of a bank holding company’s cash receipts are dividends received
from its subsidiary bank(s). Under California law, the directors of California
state-licensed banks may declare distributions to shareholders (which include
cash dividends), subject to the restriction that the amount available for the
payment of cash dividends shall be the lesser of retained earnings of
the bank or the bank’s net income for its last three fiscal years (less the
amount of any distributions to shareholders made during such period). If the
above test is not met, distributions to shareholders may be made only with the
prior approval of the DFI Commissioner in an amount not exceeding the greater of
a bank’s retained earnings, a bank’s net income for its last fiscal year, or a
bank’s net income for its current fiscal year. If the Commissioner finds that
the shareholders’ equity of a bank is not adequate, or that the making by a bank
of a distribution to shareholders would be unsafe or unsound for the bank, the
Commissioner can order a bank not to make any distribution to
shareholders. At March 31, 2009, the Subsidiary Bank has an
accumulated deficit of $46.4 million.   The Subsidiary
Bank has entered into a Regulatory Agreement with its regulators that,
among other things, requires the prior written consent of the FDIC and DFI
before the Subsidiary Bank may declare or pay dividends.  See “Recent
Regulatory Actions” above in this section for the discussion of
the Regulatory Agreement.





In
addition, a bank may not pay cash dividends if doing so would reduce its capital
below minimum applicable federal capital requirements. See “Capital Adequacy”
below in this section for a discussion of the applicable federal capital
requirements.




Predatory
Lending.The term “predatory lending,” much like the terms
“safety and soundness” and “unfair and deceptive practices,” is far-reaching and
covers a potentially broad range of behavior. As such, it does not lend itself
to a concise or a comprehensive definition. But predatory lending typically
involves at least one, and perhaps all three, of the following
elements:




●
            making
      unaffordable loans based on the assets of the borrower rather than on the
      borrower’s ability to repay an obligation, or asset-based
      lending;




●
            inducing
      a borrower to refinance a loan repeatedly in order to charge high points
      and fees each time the loan is refinanced, or loan flipping;
      and




●
            engaging
      in fraud or deception to conceal the true nature of the loan obligation
      from an unsuspecting or unsophisticated
  borrower.





Federal
Reserve regulations aimed at curbing such lending significantly widened the pool
of high-cost home-secured loans covered by the Home Ownership and Equity
Protection Act of 1994, a federal law that requires extra disclosures and
consumer protections to borrowers. The following triggers coverage under the
Home Ownership and Equity Protection Act of 1994:




●
            interest
      rates for first lien mortgage loans in excess of 8 percentage points above
      comparable U.S. Treasury
securities;




●
            subordinate-lien
      loans of 10 percentage points above U.S. Treasury securities;
      and




●
            fees,
      such as optional insurance and similar debt protection costs paid in
      connection with the credit transaction, when combined with points and fees
      if deemed excessive.





In
addition, the Home Ownership and Equity Protection Act of 1994 bars “loan
flipping” by the same lender or loan servicer within a year. Lenders also will
be presumed to have violated the law, which states loans should not be made to
those that are unable to repay them, unless documentation is maintained proving
that the borrower has the ability to repay the loan. Lenders that violate these
regulations face cancellation of loans and penalties equal to the finance
charges paid. We do not expect these rules and potential state action in this
area to have a material impact on our financial condition or results of
operations.


Privacy.Federal
banking laws limit the ability of banks and other financial institutions to
disclose nonpublic information about consumers to nonaffiliated third parties.
Pursuant to these rules, financial institutions must provide:




●
            initial
      notices to customers about their privacy policies, describing the
      conditions under which they may disclose nonpublic personal information to
      nonaffiliated third parties and
affiliates;




●
            annual
      notices of their privacy policies to current customers;
  and




●
            a
      reasonable method for customers to opt out of disclosures to nonaffiliated
      third parties.





7


Interstate
Banking and Branching.The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the “Interstate Act”) generally authorizes
interstate branching. Currently, bank holding companies may purchase banks in
any state, and banks may merge with banks in other states, as long as the home
state of neither merging bank has opted out under the legislation. The
Interstate Act requires regulators to consult with community organizations
before permitting an interstate institution to close a branch in a low-income
area.


The State
of California has enacted “opting in” legislation authorizing interstate mergers
pursuant to the Interstate Act. The California statute permits out-of-state
banks and bank holding companies meeting certain requirements to maintain and
operate the California branches of a California bank with which the out-of-state
company engaged in an interstate combination. An out-of-state depository without
a branch in California, or an out-of-state holding company without a depository
institution in California, must first acquire the California institution itself
or its charter, before it can establish a de novo branch or acquire a California
branch through merger.




Deposit
Insurance.The
FDIC is an independent federal agency that insures deposits, up to prescribed
statutory limits, of federally insured banks and savings institutions and
safeguards the safety and soundness of the banking and savings industries.
Previously, the FDIC administered two separate insurance funds, the Bank
Insurance Fund (“BIF”), which generally insured commercial bank and state
savings bank deposits, and the Savings Association Insurance Fund (“SAIF”),
which generally insured savings association deposits.





Under the
Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was
signed into law on February 15, 2006, the Bank Insurance Fund and the Savings
Association Insurance Fund were merged into a new combined fund, called the
Deposit Insurance Fund (the “DIF”). The FDIC was also given greater latitude in
setting the assessment rates for insured depository institutions which could be
used to impose minimum assessments.





Pursuant
to the Emergency Economic Stabilization Act of 2008, the maximum deposit
insurance amount has been increased from $100,000 to $250,000 until December 31,
2009.  On October 13, 2008, the FDIC established a Temporary Liquidity
Guarantee Program (“TLGP”) under which the FDIC will fully guarantee all
non-interest-bearing transaction accounts and qualifying senior unsecured debt
of any insured depository institutions or their qualified holding companies that
did not opt out of the program issued between October 14, 2008 and June 30,
2009.  Qualifying senior unsecured debt includes federal funds
purchased and certificates of deposit outstanding to the credit of the bank with
a maturity of 30 days or greater.  The Subsidiary Bank opted to remain
in both the transaction account guarantee and debt guarantee portions of the
TLGP.





The FDIC
is authorized to set the reserve ratio for the DIF annually at between 1.15% and
1.50% of estimated insured deposits. If the DIF’s reserves exceed the designated
reserve ratio, the FDIC is required to pay out all or, if the reserve ratio is
less than 1.50%, a portion of the excess as a dividend to insured depository
institutions based on the percentage of insured deposits held on December 31,
1996 adjusted for subsequently paid premiums.  Insured depository
institutions that were in existence on December 31, 1996 and paid assessments
prior to that date (or their successors) are entitled to a one-time credit
against future assessments based on their past contributions to the BIF or
SAIF.





Pursuant
to the Reform Act, the FDIC has determined to maintain the designated reserve
ratio at its current 1.25%. The FDIC has also adopted a new risk-based premium
system that provides for quarterly assessments based on an insured institution’s
ranking in one of four risk categories based on their examination ratings and
capital ratios.  Under these regulations, all insured depository
institutions are placed into one of four risk categories.  As of
January 1, 2009, all insured institutions will pay a base rate assessment of 12
to 50 basis points for the first quarter of 2009 of assessable deposits based on
the risk of loss to the DIF posed by the particular institution.





Institutions
in Risk Category I will be assessed at an annual rate of 12 to 14 basis points
for the first quarter of 2009.  This is a substantial increase from
the base rate assessment of 2 to 4 basis points in effect during
2008.  The increase in the base rate assessment from 2008 to 2009 is
due to insurance fund depletion in 2008 with an outlook for substantial further
insurance fund payouts.  For institutions such as the Subsidiary
Bank, which do not have
a long-term public debt ratings, the individual risk assessment is based on its
supervisory ratings and certain financial ratios and other measurements of its
financial condition.  For institutions that have a long-term public
debt rating, the individual risk assessment is based on its supervisory ratings
and its debt rating.





On
February 27, 2009, the FDIC issued new rules that took effect on April 1, 2009
which changed the way the FDIC differentiates risk and appropriate assessment
rates.  Base assessment rates that took effect on April 1, 2009 ranged
from 12 to 45 basis points, but giving effect to certain risk adjustments in the
new rules, assessments may range from 7 to 77.5 basis points.  In
addition, the FDIC also issued an interim final rule that, unless
amended,  will impose an emergency special assessment of 20 basis
points in addition to its risk-based assessment  The emergency special
assessment will be based on deposit balances as of June 30, 2009 and collected
on September 30, 2009.





In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation (“FICO”), an agency of the Federal government established to
recapitalize the predecessor to the SAIF. The FICO assessment rate for 2008 was
approximately .0110% of insured deposits. These assessments will continue until
the FICO bonds mature in 2017.





8


The FDIC
may terminate the deposit insurance of any insured depository institution, if it
determines after a hearing that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any
condition imposed by an agreement with the FDIC.  It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible
capital.  If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC.  Management is aware of no existing circumstances which
would result in termination of the Subsidiary Bank’s deposit
insurance.





Capital
Adequacy




Regulatory
Capital Guidelines.Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. The guidelines
are risk-based, meaning that they are designed to make capital requirements more
sensitive to differences in risk profiles among banks and bank holding
companies.


Tier1and Tier2Capital.Under the capital adequacy
guidelines, the capital of an institution is divided into two broad categories,
Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common
stockholders’ equity, surplus and undivided profits. Tier 2 capital generally
consists of the allowance for loan losses, hybrid capital instruments, and
subordinated debt. The sum of Tier 1 capital and Tier 2 capital represents an
institution’s total capital. The guidelines require that at least 50% of an
institution’s total capital consist of Tier 1 capital.  The Bank
regulatory agencies can also impose stricter guidelines on an
institution.  As described above, the Subsidiary Bank entered into a
Regulatory Agreement with its regulators, which increased its minimum
capital requirements.




Risk-based
Capital Ratios.The adequacy of an institution’s capital is gauged primarily with
reference to the institution’s risk-weighted assets. The guidelines assign risk
weightings to an institution’s assets in an effort to quantify the relative risk
of each asset and to determine the minimum capital required to support that
risk. These risk-weighted assets are then compared with Tier 1 capital and total
capital to arrive at a Tier 1risk-based ratio and a total risk-based ratio,
respectively. The guidelines provide that an institution must have a minimum
Tier 1 risk-based ratio of 4%, and a minimum total risk-based ratio of 8% to be
considered adequately capitalized.




In March
2005, the Board of Governors of the Federal Reserve adopted a final rule that
allows the continued inclusion of trust preferred securities in the Tier
1 capital of bank holding companies, subject to stricter quantitative
limits and qualitative standards. Under the final ruling, qualifying mandatory
preferred securities may be included in Tier 1 capital, subject to a limit of
25% of all core capital. Amounts of restricted core capital elements in excess
of this limit generally may be included in Tier 2 capital. The quantitative
limits become effective on March 31, 2011.  As of December 31, 2007,
SoCal had no trust preferred securities outstanding.  However, as part
of the Spectrum acquisition a total of $15.0 million of trust preferred
securities were issued by a subsidiary of SoCal, and a corresponding amount of
junior subordinated debentures were issued by SoCal.  In addition, SoCal
sold $20 million of non-cumulative perpetual preferred stock to the Fund on
December 10, 2007.  The trust preferred securities and the
non-cumulative perpetual preferred stock are generally included in Tier I
capital for regulatory capital purposes, and the trust preferred securities are
subject to the quantitative limits discussed above.  In addition, the
Federal Reserve also has a strong preference for voting common stockholders’
equity, which should be the dominant element within Tier 1 capital.  Thus
where a banking organization relies excessively on nonvoting elements within
Tier 1 capital, the Federal Reserve generally may require the banking
organization to allocate a portion of the nonvoting elements to Tier 2 capital.
At December 31, 2008 the balance of non-cumulative perpetual preferred stock was
$23.0 million, reflecting both the original issuance amount as well as
cumulative dividend-in-kind payments recorded since the original issuance
date.




Leverage
Ratio.The
guidelines also employ a leverage ratio, which is Tier 1 capital as a percentage
of average total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The minimum leverage ratio is 3%; however, for all but the
most highly-rated bank holding companies and for bank holding companies seeking
to expand, regulators generally expect a leverage ratio of 5% or
more.  The Subsidiary Bank’s leverage ratio as of March 31, 2009 was
8.39%.




Prompt Corrective
Action.Under
the guidelines, an institution is assigned to one of five capital categories
depending on its total risk-based capital ratio, Tier 1 risk-based capital
ratio, and leverage ratio, together with certain subjective factors. The
categories range from “well-capitalized” to “critically undercapitalized.”
Institutions that are deemed to be “undercapitalized,” depending on the category
to which they are assigned, are subject to certain mandatory supervisory
corrective actions. SoCal was “adequately capitalized  and
“well-capitalized” at December 31, 2008 and 2007,
respectively.  The Subsidiary Bank’s Tier 1 risk-based capital ratio
and leverage ratio exceeded the “well-capitalized” regulatory requirements at
December 31, 2008 and 2007 and its total risk-based capital ratio exceeded the
“adequately capitalized” regulatory capital requirement at December 31, 2008 and
2007.  Subsequent to December 31, 2008, SoCal made additional capital
contributions to the Subsidiary Bank in the amount of $7.0
million.  Pursuant to a Regulatory Agreement between the Subsidiary
Bank’s Board of Directors and the Subsidiary Bank’s regulators, discussed above,
the Subsidiary Bank must achieve and thereafter maintain a tangible shareholder
equity ratio of at least 9%, a Tier 1 leverage ratio of at least 9%, and a total
risk-based capital ratio of at least 12% by December 31, 2009 so long as the
Regulatory Agreement is in effect.  See “Recent Regulatory Actions”
above in this section for a discussion of the Regulatory Agreement.





9


Corporate
Governance and Accounting Legislation




Sarbanes-Oxley
Act of 2002.As a public
company, SoCal is subject to the Sarbanes-Oxley Act of 2002 (the “Act”), which
implements a broad range of corporate governance and financial reporting
measures for public companies designed to promote honesty and transparency in
corporate America and better protect investors from corporate
wrongdoing.  In general, the Act mandated important new corporate
governance and financial reporting requirements intended to enhance the accuracy
and transparency of public companies’ reported financial results. It established
new responsibilities for corporate chief executive officers, chief financial
officers and audit committees in the financial reporting process, and it created
a new regulatory body to oversee auditors of public companies. It backed these
requirements with new SEC enforcement tools, increased criminal penalties for
federal mail, wire and securities fraud, and created new criminal penalties for
document and record destruction in connection with federal investigations. It
also increased the opportunity for more private litigation by lengthening the
statute of limitations for securities fraud claims and providing new federal
corporate whistleblower protection.





Section
402 of the Act prohibits the extension of personal loans to directors and
executive officers of issuers (as defined in the Act).  The
prohibition, however, does not apply to mortgages advanced by an insured
depository institution that are subject to the insider lending restrictions of
Section 22(h) of the Federal Reserve Act.





As a
public reporting company, SoCal is subject to the requirements of the Act and
related rules and regulations issued by the SEC. SoCal has incurred additional
expense as a result of the Act, but it is not expected that such compliance
will have a material impact on SoCal’s business.  SoCal intends to
file a Form 15 Notice of Termination of Registration with the SEC in May
2009 which would suspend our filing obligations under the Exchange
Act and suspend SoCal’s compliance obligation under the Act


Anti-terrorism
Legislation




USAPatriot Act of
2001.In October
2001, the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism of 2001 was signed.  The
USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the
scope of United States anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations, creating new crimes
and penalties and expanding the extra-territorial jurisdiction of the United
States. The United States Treasury Department has issued and, in some cases
proposed, a number of regulations that apply various requirements of the
USA Patriot Act to financial institutions. These regulations impose obligations
on financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing
and to verify the identity of their customers. Certain of those regulations
impose specific due diligence requirements on financial institutions that
maintain correspondent or private banking relationships with non-U.S. financial
institutions or persons. On March 9, 2006, the President signed the USA Patriot
Improvement and Reauthorization Act, which extended and modified the original
USA Patriot Act. Failure of a financial institution to maintain and implement
adequate programs to combat money laundering and terrorist financing, or to
comply with all of the relevant laws or regulations, could have serious legal
and reputation-related consequences for the institution.




Bank Secrecy
Act.The Subsidiary Bank is subject to the Bank Secrecy Act,
as amended by the USA PATRIOT Act, which gives the federal government powers to
address money laundering and terrorist threats through enhanced domestic
security measures, expanded surveillance powers, and mandatory transaction
reporting obligations.  By way of example, the Bank Secrecy Act
imposes an affirmative obligation on the Subsidiary Bank to report currency
transactions that exceed certain thresholds and to report other transactions
determined to be suspicious.




Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among financial institutions, bank regulatory agencies and law enforcement
bodies.  Further, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including banks,
thrifts, brokers, dealers, credit unions, money transfer agents and parties
registered under the Commodity Exchange Act.  Among other
requirements, the USA PATRIOT Act imposes the following obligations on financial
institutions:





●
            financial
      institutions must establish anti-money laundering programs that include,
      at minimum: (i) internal policies, procedures, and controls, (ii) specific
      designation of an anti-money laundering compliance officer, (iii) ongoing
      employee training programs, and (iv) an independent audit function to test
      the anti-money laundering program;





●
            financial
      institutions must establish and meet minimum standards for customer due
      diligence, identification and
verification;





10


●
            financial
      institutions that establish, maintain, administer, or manage private
      banking accounts or correspondent accounts in the United States for
      non-United States persons or their representatives (including foreign
      individuals visiting the United States) must establish appropriate,
      specific, and, where necessary, enhanced due diligence policies,
      procedures, and controls designed to detect and report money laundering
      through those accounts;





●
            financial
      institutions are prohibited from establishing, maintaining, administering
      or managing correspondent accounts for foreign shell banks (foreign banks
      that do not have a physical presence in any country), and are subject to
      certain recordkeeping obligations with respect to correspondent accounts
      of foreign banks; and





●
            bank
      regulators are directed to consider a depository institution’s or holding
      company’s effectiveness in combating money laundering when ruling on
      Federal Reserve Act and Bank Merger Act
  applications.





Recent Regulatory
Developments.    In light of current conditions in
the global financial markets and the global economy, regulators have increased
their focus on the regulation of the financial services industry. Proposals for
legislation that could substantially intensify the regulation of the financial
services industry are expected to be introduced in the U.S. Congress and in
state legislatures. The agencies regulating the financial services industry also
frequently adopt changes to their regulations. Substantial regulatory and
legislative initiatives, including a comprehensive overhaul of the regulatory
system in the U.S., are possible in the months or years ahead. Any such action
could have a materially adverse effect on SoCal’s business, financial condition
and results of operations.





Recent
months have seen an unprecedented number of government initiatives designed to
respond to the stresses experienced in financial markets.





In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, the Emergency Economic Stabilization Act of 2008 (“EESA”) was
signed into law on October 3, 2008. Pursuant to EESA, the U.S. Treasury was
given the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. Pursuant to EESA, the U.S. Treasury
established the Troubled Asset Relief Program (“TARP”) and has since injected
capital into many financial institutions under the TARP Capital Purchase Program
(“TARP CPP”).





On
February 10, 2009, the U.S. Treasury announced the Financial Stability Plan
(“FSP”), which, among other things, proposes to establish a new Capital
Assistance Program (“CAP”) through which eligible banking institutions will have
access to U.S. Treasury capital as a bridge to private capital until market
conditions normalize, and extends the FDIC’s TLGP to October 31, 2009. As a
complement to CAP, a new Public-Private Investment Fund on an initial scale of
up to $500 billion, with the potential to expand up to $1 trillion, was
announced to catalyze the removal of legacy assets from the balance sheets of
financial institutions. This proposed fund will combine public and private
capital with government financing to help free up capital to support new
lending. In addition, the Federal Reserve’s existing Term Asset-Backed
Securities Lending Facility (“TALF”) would be expanded (up to $1 trillion) with
the intention of reducing credit spreads and restarting the securitized
credit markets that in recent years supported a substantial portion of lending
to households, students, small businesses, and others. Furthermore, the FSP
proposes a new framework of governance and oversight to help ensure that banks
receiving funds are held responsible for appropriate use of those funds through
stronger conditions on lending, dividends and executive compensation along with
enhanced reporting to the public. As of the date of this report, SoCal
has decided not to participate in the CAP. However, it will continue to
monitor emerging government programs to evaluate whether such programs would be
applicable and beneficial to SoCal.





On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”)
was signed into law. ARRA is intended to provide tax breaks for individuals and
businesses, direct aid to distressed states and individuals, and infrastructure
spending. In addition, ARRA imposes new executive compensation and expenditure
limits on all previous and future TARP CPP recipients and expands the class of
employees to whom the limits and restrictions apply. ARRA also provides the
opportunity for additional repayment flexibility for existing TARP CPP
recipients. Among other things, ARRA prohibits the payment of bonuses, other
incentive compensation and severance to certain highly paid employees (except in
the form of restricted stock subject to specified limitations and conditions),
and requires each TARP CPP recipient to comply with certain other executive
compensation related requirements. These provisions modify the executive
compensation provisions that were included in EESA, and in most instances apply
retroactively for so long as any obligation arising from financial assistance
provided to the recipient under TARP remains outstanding. To the extent that the
executive compensation provisions in ARRA are more restrictive than the
restrictions described in the Treasury’sexecutive
compensation guidelines already issued under EESA, the new ARRA guidelines
appear to supersede those restrictions. However, both ARRA and the existing
Treasury guidelines contemplate that the Secretary of the Treasury will adopt
standards to provide additional guidance regarding how the executive
compensation restrictions under ARRA and EESA will be applied. Because, as of
the date of this report, SoCal is not a TARP CPP recipient, such provisions are
not currently applicable.





11


In
addition, ARRA directs the Secretary of the Treasury to review previously-paid
bonuses, retention awards and other compensation paid to the senior executive
officers and certain other highly-compensated employees of each TARP CPP
recipient to determine whether any such payments were excessive, inconsistent
with the purposes of ARRA or the TARP, or otherwise contrary to the public
interest. If the Secretary determines that any such payments have been made by a
TARP CPP recipient, the Secretary will seek to negotiate with the TARP CPP
recipient and the subject employee for appropriate reimbursements to the U.S.
government (not the TARP CPP recipient) with respect to any such compensation or
bonuses. ARRA also permits the Secretary, subject to consultation with the
appropriate federal banking agency, to allow a TARP CPP recipient to repay any
assistance previously provided to such TARP CPP recipient under the TARP,
without regard to whether the TARP CPP recipient has replaced such funds from
any source, and without regard to any waiting period. Any TARP CPP recipient
that repays its TARP assistance pursuant to this provision would no longer be
subject to the executive compensation provisions under ARRA. Because, as of the
date of this report, SoCal is not a TARP CPP recipient, such provisions are not
currently applicable to us.





On
February 18, 2009, the U.S. Treasury announced the Homeowner Affordability and
Stability Plan (“HASP”), which proposes to provide refinancing for certain
homeowners, to support low mortgage rates by strengthening confidence in Fannie
Mae and Freddie Mac, and to establish a Homeowner Stability Initiative to reach
at-risk homeowners. Among other things, the Homeowner Stability Initiative would
offer monetary incentive to mortgage servicers and mortgage holders for certain
modifications of at-risk loans, and would establish an insurance fund designed
to reduce foreclosures.





It is not
clear at this time what impact EESA, the CPP, the TLGP, the FSP, AARA, HASP, or
other liquidity and funding initiatives will have on the financial markets and
the other difficulties described above, including the high levels of volatility
and limited credit availability currently being experienced, or on the U.S.
banking and financial industries and the broader U.S. and global economies.
Failure of these programs to address the issues noted above could have an
adverse effect on the Subsidiary Bank’s business.





Future
Legislation. Additional legislation, including proposals to change
substantially the financial institution regulatory system, is from time to time
introduced in Congress. Such legislation may change banking statutes and our
operating environment in substantial and unpredictable ways. If enacted, such
legislation could increase or decrease the cost of doing business, limit or
expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions, and other financial institutions. SoCal
cannot predict whether any of this potential legislation will be enacted and, if
enacted, the effect that it, or any implementing regulations, would have on its
business, results of operations or financial condition.




Commercial Real
Estate Lending.  On December 6, 2006, the federal bank
regulatory agencies released final guidance on “Concentrations in Commercial
Real Estate Lending” (the “Final Guidance”), largely consistent with the
proposed guidance they released on January 10, 2006.  This guidance
defines commercial real estate (“CRE”) loans as exposures secured by raw land,
land development and construction (including 1-4 family residential
construction), multi-family property, and non-farm nonresidential property where
the primary or a significant source of repayment is derived from rental income
associated with the property or the proceeds of the sale, refinancing, or
permanent financing of the property.  Loans on owner occupied CRE are
generally excluded.


The Final
Guidance requires that appropriate processes be in place to identify, monitor
and control risks associated with real estate lending
concentrations.  This could include enhanced strategic planning, CRE
underwriting policies, risk management, internal controls, portfolio stress
testing and risk exposure limits as well as appropriately designed compensation
and incentive programs.  Higher allowances for loan losses and higher
capital levels may also be required.  The Final Guidance is triggered
when one of the following CRE loan concentration measures is
exceeded:




●
            total
      reported loans for construction, land development, and other land of 100%
      or more of a bank’s total capital;
or




●
            total
      reported loans secured by multifamily and nonfarm nonresidential
      properties and loans for construction, land development, and other land of
      300% or more of a bank’s total
capital.





Management
of SoCal believes that the Final Guidance may apply to its CRE lending
activities due to the concentration in construction and land development loans
in the Subsidiary Bank.  SoCal believes its Subsidiary Bank’s
long-term experience in CRE lending, underwriting policies, internal controls,
and other policies currently in place are generally appropriate in managing its
concentrations as required under the Final Guidance.  Furthermore, the
Subsidiary Bank has adopted additional enhancements to its analysis and review
of CRE concentrations consistent with Final Guidance requirements.





AVAILABLE INFORMATION





We maintain an Internet website atwww.probizbank.com. The website contains information about us and our
operations.The content of our websiteisnot part of this
report.Through a link to the Investor Relations section of our website, copies
of each of our filings with the SEC, on Form 10-K, Form 10-Q and Form 8-K and
all amendments to those reports, can be viewed and downloaded free of charge as
soon as reasonably practicable after thereports and
amendments are electronically filed with or furnished to the
SEC.





In addition, copies of any document we file with or
furnish to the SEC may be obtained from the SEC at its public reference room at100 F Street, N.E.,Washington,D.C.20549.  You
may obtain information on the operation of the SEC’s public reference
room by calling the SEC at 1-800-SEC-0330.  You can request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC at its
principal office at100 F
Street, N.E.,Washington,D.C.20549. The SEC
maintains an Internet website atwww.sec.govthat contains reports, proxy and information
statements, and other information regarding issuers that file or furnish such
information electronically with the SEC. Our SECfilings are accessible through the Internet at that
website.





12


ITEM
1A.  RISK FACTORS





The
material risks and uncertainties that management believes may affect our
business are described below. The risks and uncertainties described below are
not the only ones facing our business. Additional risks and uncertainties that
management is not aware of or focused on or that management currently deems
immaterial may also impair our business operations.  If any of the
following risks actually occur, our financial condition and results of
operations could be materially and adversely affected.





Risks
Related to Our Business





If
SoCal is not able to raise outside financing, SoCal may be forced to sell
the Subsidiary Bank in order to pay its creditors.   In such case,
holders of SoCal’s capital stock may not receive any consideration from the sale
of the Subsidiary Bank.




As of
March 31, 2009, SoCal had current unencumbered liquid assets of approximately
$1.7 million, consisting primarily of cash and cash equivalents.  As
of this date, SoCal had approximately $32.9 million of outstanding
indebtedness.  SoCal has no borrowing availability under its current
debt arrangements and is currently seeking, with the assistance of the
Fund, its majority shareholder, other sources of
liquidity.   Previously, SoCal has relied on the Fund
for its financing needs.  However, the Fund has advised SoCal
that it no longer has the capacity to extend SoCal further financial
support.




SoCal is
currently pursuing a restructuring plan which would have investors in SoCal
debt (other than the secured lender) and preferred equity securities convert
their holdings into SoCal common stock.  Management believes
accomplishment of this restructuring would significantly improve SoCal’s
potential for attracting new investors.  This restructuring plan would
result in the issuance of new common equity that would dilute current common
shareholders’ percentage ownership of SoCal, but would at the same time
eliminate a substantial amount of senior claims.  The Fund has
indicated a willingness to participate, but as of the date of this
filing, all investors have not agreed to such
conversion.  Therefore, we are not able to predict whether this
or any other restructuring plan will be successful.  If SoCal is not
able to complete some type of restructuring, SoCal believes that it is unlikely
that any outside financing would be available on acceptable terms, if at
all.  In addition, even if the restructuring plan is successful,
SoCal may not be able to secure any financing or other sources of
liquidity due to the difficult credit and investment environment for financial
institutions.




If
SoCal is not able to raise outside financing, it may be forced to sell the
Subsidiary Bank to pay its creditors.  Under such a scenario, it is
difficult to predict what price SoCal would be able to obtain for the Subsidiary
Bank. Due to the forced nature of any such sale and the current difficult
environment for financial institutions, the price that SoCal may be able to
obtain for the Subsidiary Bank may not be sufficient to satisfy its obligations
to creditors.  Therefore, there may not be any amounts available for
distribution to the holders of SoCal’s capital stock in the event of a sale
of the Subsidiary Bank.





Subsidiary
Bank dividends and additional holding company debt and equity funding may be
insufficient for SoCal to meet its financial obligations.





SoCal has
contractual obligations to pay interest and repay loan principal as well as pay
its ongoing operating expenses while acting as a source of strength to
the Subsidiary Bank.  SoCal is a holding company with no
significant assets beyond its investment in Subsidiary Bank
equity.  SoCal’s ability to meet its obligations is heavily dependent
on receiving dividends from the Subsidiary Bank and SoCal’s ability to attract
new debt and equity investors.  The ability of the Subsidiary Bank to
pay dividends is subject to the regulatory authority of the FDIC and the
DFI.  At present, the Subsidiary Bank is prohibited from making
dividend payments without their prior approval and is further legally
constrained by a accumulated deficit of $42.8 million at December 31,
2008.  Further, current capital market disruptions and recent
operating losses make raising funds at competitive rates
challenging.  Any needed financing may not be available on acceptable
terms, if at all.  If additional financing is not available when
needed, you may lose your entire investment in SoCal.





SoCal’s
operations and activities are subject to heightened regulatory oversight and
further regulatory action may be taken.





As a
result of a regulatory agreement (the “Regulatory Agreement”) between the
Subsidiary Bank, the FDIC and the DFI, the Subsidiary Bank’s operations and
activities are now subject to heightened regulatory oversight, over and above
the extensive regulation which normally applies.  Our ability to
conduct operations and meet our obligations requires, in many circumstances,
that we obtain prior regulatory approval.  In addition, the Regulatory
Agreement requires the Subsidiary Bank to have a plan to meet certain
capital requirements, which will require it to raise its capital
ratios.  Without a successful transaction to increase capital and/or a
substantial restructuring and shrinking of the balance sheet, the Subsidiary
Bank will not be able to become fully compliant with the provisions of
the Regulatory Agreement. As a result of any failure to comply with
the Regulatory Agreement, the FDIC or DFI may take further enforcement
action, including a capital directive, a cease and desist order or placing
the Subsidiary Bank into receivership with the FDIC.





13


The
Subsidiary Bank’s allowance for loan losses may not be adequate to cover actual
losses.





A
significant source of risk arises from the possibility that losses could be
sustained because borrowers, guarantors, and related parties may fail to perform
in accordance with the terms of their loans and leases. The underwriting and
credit monitoring policies and procedures that the Subsidiary Bank adopted to
address this risk may not prevent unexpected losses that could have a material
adverse effect on SoCal’s business, financial condition, results of operations
and cash flows. Unexpected losses may arise from a wide variety of specific or
systemic factors, many of which are beyond the Subsidiary Bank’s ability to
predict, influence, or control.





Like all
financial institutions, the Subsidiary Bank maintains an allowance for loan
losses to provide for credit losses. The allowance for loan losses may not be
adequate to cover actual loan losses, and future provisions for loan losses
could materially and adversely affect the Subsidiary Bank’s business, financial
condition, results of operations and cash flows. The allowance for loan losses
reflects the Subsidiary Bank’s estimate of the probable losses in its loan
portfolio at the relevant balance sheet date. Its allowance for loan losses is
based on prior experience, as well as an evaluation of the known risks in the
current portfolio, composition and growth of the loan portfolio and economic
factors. The determination of an appropriate level of loan loss allowance is an
inherently difficult process and is based on numerous assumptions. The amount of
future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond the
Subsidiary Bank’s control and credit losses may exceed current estimates.
Federal regulatory agencies, as an integral part of their examination process,
review the Subsidiary Bank’s loans and allowance for loan losses. While the
Subsidiary Bank believes that the allowance for loan losses is adequate to cover
current losses, there is no assurance that it will not increase the allowance
for loan losses further, or that regulators will not require increases to this
allowance. Either of these occurrences could materially adversely affect the
Subsidiary Bank’s business, financial condition, results of operations and cash
flows.





SoCal
has a very limited operating history and cannot assure future
results.





SoCal was
formed specifically for the acquisition of PBB and to be the platform for the
Fund’s expansion into the Southern California financial services market. The
acquisition of PBB closed on November 23, 2007. On January 31, 2008, SoCal
acquired Spectrum which was merged into PBB on July 3, 2008.  SoCal’s
business is subject to the risks inherent in the establishment of any new
business enterprise in addition to the special risks of starting a new bank
holding company. No assurance can be given what return, if any, holders of our
common stock will receive on their investment.





The
Subsidiary Bank’s loan portfolio is concentrated in real estate, which has a
high degree of risk and a sustained downturn in real estate values may
significantly affect the Subsidiary Bank’s business.





The
continued downturn in the Subsidiary Bank’s real estate markets may adversely
affect its business because many of the Subsidiary Bank’s loans are secured by
real estate. Real estate values and real estate markets are generally affected
by changes in national, regional or local economic conditions, fluctuations in
interest rates and the availability of loans to potential purchasers, changes in
tax laws and other governmental statutes, regulations and policies and acts of
nature. If real estate prices continue to decline, the value of real estate
collateral securing the Subsidiary Bank’s loans would be reduced. Recoveries
from the sale of defaulted loans through foreclosure and sale of the underlying
real estate collateral would then be diminished, and the Subsidiary Bank would
be more likely to suffer losses on defaulted loans. As of December 31, 2008,
approximately 64% of the book value of Subsidiary Bank’s loan portfolio
consisted of loans collateralized by various types of real
estate.  Almost all of the Subsidiary Bank’s real property collateral
is located in California. If real estate values continue to decline, especially
in California, the collateral for the Subsidiary Bank’s loans will provide less
security. Real estate values could also be affected by, among other things,
earthquakes and national disasters particular to California. Any such downturn
or disaster could have a material adverse effect on SoCal’s and the Subsidiary
Bank’s business, financial condition, results of operations and cash
flows.




SoCal
may need to recognize a goodwill or core deposit intangible impairment
charge.




Management
is required to assess goodwill and other intangible assets at least annually for
impairment. Goodwill is recognized when a company acquires a business and the
purchased assets and liabilities are recorded at fair value. The fair value of
most financial assets and liabilities is determined by discounting anticipated
cash flows using current market rates applicable to each asset and liability.
Excess consideration paid to acquire a business over the fair value of the
acquired assets, less the fair value of assumed liabilities, is recorded as
goodwill. The calculation of goodwill and the determination of impairment is an
estimate subject to ongoing review based on certain factors such as declines in
stock price, adverse economic conditions in the U.S. and international financial
markets, unprecedented lack of liquidity, uncertainty regarding future economic
policy and banking regulation changes and negative market sentiment towards the
banking industry in general and additional impairment may be assessed in future
periods.




During
its impairment testing of goodwill during the third quarter of 2008, SoCal
determined that its carrying amount exceeded its fair value, requiring
it to record a goodwill impairment charge of $33.3 million.  If
goodwill is written down further in future periods it may have a material affect
on SoCal’s results of operations, but not regulatory capital
ratios.




14




Additionally,
core deposit intangible asset amortization is continuously reviewed to assess
whether the amortization rate used for financial reporting purposes is
consistent with actual acquired deposit attrition.  In the event that
the pace of acquired deposit attrition exceeds that previously anticipated, the
Subsidiary Bank would record an impairment charge and shorten the remaining core
deposit intangible amortization period.





Other-than-temporary
impairment (“OTTI”) charges in the Subsidiary Bank’s investment securities
portfolio could result in significant losses and cause SoCal and the Subsidiary
Bank to become significantly undercapitalized and adversely affect continuing
operations.




At
December 31, 2008, the Subsidiary Bank maintained a $23.9 million portfolio of
private label collateralized mortgage obligations (“CMOs”) that are classified
for financial reporting purposes as held-to-maturity.  These CMOs are
secured by prime and “Alt-A” first lien residential mortgage loans and were
purchased at a discount to par value.  At December 31, 2008, the fair
value of these securities was $22.0 million.  Under U.S. generally
accepted accounting principles, when a security is deemed to have OTTI, it must
be written down to its fair value as a charge against net income.  As
of December 31, 2008, and at the time of this filing, no OTTI charges have been
recorded on this portfolio.  In April 2009, SoCal adopted Financial
Accounting Standards Board (“FASB”) Staff Positions FAS 115-2 and FAS 124-2
“Recognition and Presentation of Other-Than-Temporary Impairment (OTTI)”which changesexisting
guidance for determining whether an impairment is other than temporary to debt
securities, replaces the existing requirement that management assert it has
both the intent and ability to hold an impaired security until recovery with a
requirement that management assert: (a) it does not have the intent to sell
the security; and (b) it is more likely than not it will not have to sell
the security before recovery of its cost basis. Under FAS 115-2 and FAS 124-2,
declines in fair value of held to maturity and available for sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses to the extent the impairment is related to credit
losses. The amount of impairment related to other factors is recognized in Other
Comprehensive Income in our consolidated financial statements. FAS 115-2 and FAS
124-2 are effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.





The
Subsidiary Bank closely monitors these and its other investment securities for
changes in credit risk, and intends to hold these CMOs until the market value
recovers or they mature.  These securities’ reported fair value is
influenced by external market and other factors, including implementation of SEC
and Financial Accounting Standards Board guidance on fair value accounting, and
default and recovery rates on residential mortgage collateral underlying these
CMOs, rating agency actions, and the prices at which observable market
transactions in similar securities occur.  The current relatively
illiquid market environment significantly limits the Subsidiary Bank’s ability
to mitigate its exposure to valuation changes in these securities by selling
them.  Accordingly, if market conditions deteriorate further and the
Subsidiary Bank determines its holdings of these or other investment securities
are OTTI, future earnings, shareholders’ equity, and regulatory capital could be
adversely affected.





SoCal
may violate existing loan covenants and be subjected to more punitive terms and
have more operating restrictions imposed by the lender as a condition for
receiving a covenant waiver or may have the loan declared to be in
default.





SoCal has
an $8.0 million loan from Pacific Coast Bankers’ Bank secured by the Subsidiary
Bank’s stock that requires SoCal to satisfy financial covenants quarterly and
places other restrictions on management.  On September 30, 2008, SoCal
violated two of the four covenants and upon request and following payment of an
administrative fee, received a waiver.  On December 31, 2008, SoCal
violated three financial covenants relating to the amount of the Subsidiary
Bank’s regulatory capital and debt service coverage.  Following
payment of an administrative fee and execution of a loan amendment that
increased the loan interest rate and accelerated the principal repayment
schedule, SoCal received a waiver.  On March 31, 2009, SoCal violated
one financial covenant relating to the amount of total capital.  On
May 12, 2009, SoCal entered into an agreement with Pacific Coast Bankers’ Bank
wherein the March 31, 2009 covenant violation was waived.  The
agreement resets quarterly debt service payments to be interest-only from June
2009 through June 2010 and thereafter includes a fixed quarterly $300,000
principal repayment, creates an interest reserve account dedicated to making
interest payments until exhausted and to be funded with a $0.8 million payment
from SoCal in May 2009, requires a $200,000 principal payment in May 2009, and
requires that SoCal grant each quarter, from June 2009 to and including June
2010, to Pacific Coast Bankers’ Bank, 10,000 warrants to purchase SoCal common
stock at one cent per warrant.  The agreement requires that 25% of new
SoCal capital financings be dedicated to principal payments on the Pacific Coast
Bankers’ Bank loan, and that loan principal be paid down by $2.3 million by
September 2010.





15


SoCal’s
business is subject to interest rate risk and variations in interest rates may
negatively affect its financial performance.





Changes
in the interest rate environment in combination with unhedged interest rate
positions may reduce SoCal’s net interest income. A substantial portion of the
Subsidiary Bank’s income is derived from the differential or “spread” between
the interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities.
Because of the differences in the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities, changes in interest
rates will not produce equivalent changes in interest income earned on
interest-earning assets and interest paid on interest-bearing liabilities.
Accordingly, fluctuations in interest rates could adversely affect its
profitability. In addition, new loan origination volumes are affected by market
interest rates on loans; rising interest rates generally are associated with a
lower volume of loan originations while lower interest rates are usually
associated with higher loan originations. Conversely, in rising interest rate
environments, loan repayment rates will decline and in falling interest rate
environments, loan repayment rates will increase. In addition, an increase in
the general level of interest rates may adversely affect the ability of certain
borrowers to pay the interest on and principal of their obligations.
 Changes in levels of market interest rates could materially and adversely
affect SoCal’s net interest spread, asset quality, loan origination volume,
business, financial condition, results of operations and cash
flows.





Liquidity
risk could impair the Subsidiary Bank’s ability to fund operations and
jeopardize its financial condition.





Liquidity
is essential to the Subsidiary Bank’s business.  An inability to raise
funds through deposits, borrowings, capital contributions from SoCal and other
sources could have a substantial negative effect on its
liquidity.  The Subsidiary Bank’s access to funding sources in amounts
adequate to finance its activities, on at least equitable terms, could be
impaired by factors that impact it specifically or the financial services
industry in general.  Factors that could detrimentally impact the
Subsidiary Bank’s access to liquidity sources include a reduction in the level
of business activity due to a market downturn or adverse regulatory action
against it, or a decrease in depositor or investor confidence in the Subsidiary
Bank.  Further, as a business bank, a significant portion of the
Subsidiary Bank’s deposits are raised from companies in amounts that exceed
levels covered by FDIC insurance.  In addition, the Subsidiary Bank’s
ability to borrow could also be impaired by factors that are not specific to us,
such as the severe disruption of the financial markets or negative views and
expectations about the prospects for the financial services industry as a whole
as the recent turmoil faced by banking in the domestic and worldwide credit
markets deteriorates.





SoCal
may not be able to provide sufficient capital support required by its Subsidiary
Bank.





Due to
increased loan loss provision expense and a reduction in capital-eligible
deferred tax assets, the Subsidiary Bank has needed capital support from
SoCal.  In December 2008, SoCal contributed $1.0 million to the
Subsidiary Bank and in the first quarter 2009 contributed a further $7.0
million.  Given a current unencumbered liquidity asset balance of $1.7
million and significant short-term maturing obligations, it is uncertain if
SoCal will be able to meet any further capital needs by the Subsidiary
Bank.  It is uncertain what action, if any, regulators would take in
the event that the Subsidiary Bank’s future capital needs could not be met by
SoCal.





The
Fund may seek to deploy its assets into investments in the financial services
industry through vehicles other than SoCal.





The Fund
has provided financial support to SoCal to meet its liquidity requirements,
including monies needed for SoCal to make capital contributions to the
Subsidiary Bank.  The Fund is subject to concentration limits on its
aggregate investments in any single company.  The Fund has advised
management that following its $6.5 million loan to SoCal on March 31, 2009, it
no longer has legal capacity to provide further direct financial
support   Further, should the Fund obtain additional capacity
under its concentration limits, the Fund may choose not to provide further
direct support to SoCal and instead direct its capital to the pursuit other
opportunities which it may consider, in its sole discretion, to be more
advantageous to the Fund.





SoCal
may not be able to successfully implement its longer term business strategy to
expand through business combinations with regionally and strategically
compatible financial institutions, and therefore its market value and
profitability may suffer.





Growth
through business combinations with other banks represents a key component of
SoCal’s business strategy. Any future combinations will be accompanied by the
risks commonly encountered, including, among other things:




●
            difficulty
      in finding suitable business combination candidates willing to combine
      business on economic terms;




●
            difficulty
      of integrating the operations and
personnel;




●
            potential
      disruption of the Subsidiary Bank’s ongoing
  business;




●
            inability
      of management to maximize SoCal’s financial and strategic position by the
      successful implementation of uniform product offerings and the
      incorporation of uniform technology into the Subsidiary Bank’s product
      offerings and control systems; and




●
            inability
      to maintain uniform standards, controls, procedures and policies and the
      impairment of relationships with employees and customers as a result of
      changes in management.





16


Moreover,
SoCal’s inability to improve the operating performance of acquired banks or to
integrate their operations successfully could have a material adverse effect on
its business, financial condition, results of operations and cash flows. SoCal
could incur substantial expenses, including the expenses of integrating the
businesses of the acquired banks with its existing business.





SoCal
expects that competition for additional acquisition candidates may be
significant. SoCal may compete with other banks or financial service companies
with similar acquisition strategies, many of which may be larger or have greater
financial and other resources. The purchase price of banks that might be
attractive acquisition candidates for SoCal may significantly exceed the
fair values of their net assets. As a result, material goodwill and other
intangible assets would be required to be recorded.





Depending
upon the structure of an acquisition and the consideration SoCal may utilize, it
may not be required to seek shareholder approval. Further, acquisitions may be
structured to include cash consideration that may result in the depletion of a
substantial portion of SoCal’s available cash or result in increasing its
borrowings and interest payments.





Further,
SoCal’s growth may place a strain on its administrative, operational and
financial resources and increase demands on its systems and controls. SoCal
anticipates its business growth may require continued enhancements to and
expansion of its operating and financial systems and controls and may strain or
significantly challenge them. The process of implementing the strategic
integration of any acquired businesses may take a significant amount of time. It
may also place additional strain on SoCal’s resources and could subject it to
additional expenses. There is no assurance that SoCal will be able to integrate
these businesses successfully or in a timely manner. In addition, SoCal cannot
assure you that its existing operating and financial control systems and
infrastructure will be adequate to maintain and effectively monitor future
growth.





The
following risks, associated with SoCal’s growth, could have a material adverse
effect on its business, financial condition, results of operations and cash
flows:




●
            inability
      to raise the capital necessary to finance any future
      acquisition;




●
            inability
      to continue to upgrade or maintain effective operating and financial
      control systems;




●
            inability
      to recruit and hire necessary personnel or to successfully integrate new
      personnel into operations;




●
            inability
      to integrate successfully the operations of acquired businesses or to
      manage growth effectively; or




●
            inability
      to respond promptly or adequately to the emergence of unexpected expansion
      difficulties.





If
the Subsidiary Bank cannot attract and retain deposits, growth may be
inhibited.





The
Subsidiary Bank’s long term strategy is to increase the level of its
assets, including its loan portfolio. Its ability to increase assets
depends in large part on its ability to attract and retain deposits at
competitive rates. The Subsidiary Bank intends to seek additional deposits by
offering deposit products that are competitive with those offered by other
financial institutions in its markets and by establishing personal relationships
with its customers. SoCal cannot assure you that these efforts will be
successful. The Subsidiary Bank’s inability to attract additional deposits at
competitive rates could have a material adverse effect on its business,
financial condition, results of operations and cash flows.





SoCal
is dependent upon the services of its management team.





SoCal is
dependent upon the ability and experience of a number of key management
personnel who have experience with its operations, the financial services
industry and the markets in which the Subsidiary Bank offers our services. It is
possible that the loss of the services of one or more senior executives or key
managers would have an adverse effect on operations. SoCal’s success also
depends on its ability to continue to attract, manage and retain other qualified
personnel as it grows.




Competition
for qualified employees and personnel in the banking industry is intense and
there are a limited number of qualified persons with knowledge of, and
experience in, the California banking industry. The process of recruiting
personnel with the combination of skills and attributes required to carry out
SoCal’s strategies is often lengthy. SoCal’s success depends to a significant
degree upon its ability to attract and retain qualified management, loan
origination, finance, administrative, marketing and technical personnel and upon
the continued contributions of the SoCal’s management and personnel. In
particular, SoCal’s success has been and continues to be highly dependent upon
the abilities of key executives.




In 2008,
SoCal appointed William Baribault as Chief Executive Officer and Executive
Chairman, and James Westfall as Chief Financial Officer.  Upon Mr.
Baribault’s resignation in March 2009, SoCal appointed Mary Lynn Lenz as
President and Chief Executive Officer.  There is no assurance that
turnover in senior executive positions with the attendant loss of operating
continuity will not be experienced again in the future.





17


The
Subsidiary Bank’s performance could be adversely affected by a diminished
reputation among customers, employees, vendors, counterparties, and/or
regulators.





Negative
publicity or public opinion could adversely affect the Subsidiary Bank’s ability
to keep and attract customers and expose it to adverse legal and regulatory
consequences. Negative public opinion could result from the Subsidiary Bank’s
actual or perceived conduct in any number of activities, including lending
practices, corporate governance, regulatory compliance, mergers and
acquisitions, and inadvertent disclosure, sharing or inadequate protection of
customer information, and from actions taken by government regulators and
community organizations in response to that conduct.





SoCal
will rely on communications, information, operating and financial control
systems technology from third-party service providers, and it may suffer an
interruption in or breakdown of those systems that may result in lost
business.





SoCal
will rely heavily on third-party service providers for much of its
communications, information, operating and financial control systems technology,
including customer relationship management, general ledger, deposit, servicing
and loan origination systems. Any failure or interruption or breach in security
of these systems could result in failures or interruptions in SoCal’s customer
relationship management, general ledger, deposit, servicing and/or loan
origination systems. There is no assurance that such failures or interruptions
will not occur or, if they do occur, that they will be adequately addressed by
SoCal or the third parties on which SoCal relies. The occurrence of any failures
or interruptions could have a material adverse effect on SoCal’s business,
financial condition, results of operations and cash flows. If any of its
third-party service providers experience financial, operational or technological
difficulties, or if there is any other disruption in its relationships with
them, SoCal may be required to locate alternative sources of such services, and
there is no assurance that we could negotiate terms that are as favorable to
SoCal, or could obtain services with similar functionality as found in the
existing systems utilized by the Subsidiary Bank without the need to expend
substantial resources, if at all. Any of these circumstances could have a
material adverse effect on SoCal’s business, financial condition, results of
operations and cash flows.





The
Subsidiary Bank will be exposed to risk of environmental liabilities with
respect to properties to which it takes title.





In the
course of the Subsidiary Bank’s business, it may foreclose and take title to
real estate, and could be subject to environmental liabilities with respect to
these properties. The Subsidiary Bank may be held liable to a governmental
entity or to third parties for property damage, personal injury, investigation
and clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic
substances, or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. In addition, if
the Subsidiary Bank is the owner or former owner of a contaminated site, it may
be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from the property. If the
Subsidiary Bank becomes subject to significant environmental liabilities, its
business, financial condition, results of operations and cash flows could be
materially adversely affected.





If
SoCal fails to maintain an effective system of internal and disclosure controls,
it may not be able to accurately report financial results or prevent
fraud.





Effective
internal and disclosure controls are necessary for SoCal to provide reliable
financial reports and effectively prevent fraud and to operate successfully as a
public company. If SoCal cannot provide reliable financial reports or prevent
fraud, its reputation and operating results would be harmed. As part of SoCal’s
ongoing monitoring of internal controls it may discover material weaknesses or
significant deficiencies in its internal control as defined under standards
adopted by the Public Company Accounting Oversight Board (“PCAOB”) that require
remediation. Under the PCAOB standards, a “material weakness” is a significant
deficiency or combination of significant deficiencies that result in more than a
remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. A “significant
deficiency” is a control deficiency or combination of control deficiencies, that
is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of a company’s financial
reporting.





As a
result of weaknesses that may be identified in SoCal’s internal controls, it may
also identify certain deficiencies in some of its disclosure controls and
procedures that SoCal believes require remediation. If SoCal discovers
weaknesses, it will make efforts to improve its internal and disclosure
controls. Any failure to maintain effective controls or timely effect any
necessary improvement of its internal and disclosure controls could harm
operating results or cause SoCal to fail to meet its reporting obligations.
Ineffective internal and disclosure controls could also cause investors to lose
confidence in SoCal’s reported financial information, which would likely have a
negative effect on the trading price of its securities.





18


SoCal
faces strong competition from financial service companies and other companies
that offer banking services which could hurt its business.





SoCal
conducts its banking operations primarily in Southern California. Increased
competition in that market may result in reduced loans and deposits. Ultimately,
SoCal may not be able to compete successfully against current and future
competitors. Many competitors offer the banking services that the Subsidiary
Bank offers. These competitors include national banks, regional banks and other
community banks. SoCal will also face competition from many other types of
financial institutions, including savings and loan associations, finance
companies, brokerage firms, insurance companies, credit unions, mortgage
banks and other financial intermediaries. In particular, the competitors will
include several major financial companies whose greater resources may afford
them a marketplace advantage by enabling them to maintain numerous
locations and mount extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalization
and financial intermediaries not subject to bank regulatory restrictions may
have larger lending limits which would allow them to serve the credit needs of
larger customers. Areas of competition include interest rates for loans and
deposits, efforts to obtain loan and deposit customers and a range in quality of
products and services provided, including new technology-driven products and
services. Technological innovation continues to contribute to greater
competition in domestic and international financial services markets as
technological advances enable more companies to provide financial services.
SoCal also faces competition from out-of-state financial intermediaries that
have opened loan production offices or that solicit deposits in SoCal’s market
areas. If the Subsidiary Bank is unable to attract and retain banking customers,
it may be unable to achieve appropriate loan growth and level of deposits and
its business, financial condition, results of operations and cash flows may be
adversely affected.





The
soundness of other financial institutions could adversely affect
SoCal.





Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships.  SoCal and the Subsidiary Bank
routinely execute transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks, investment banks,
mutual and hedge funds, and other institutional clients.  Many of
these transactions expose SoCal and the Subsidiary Bank to credit risk in the
event of default of our counterparty or client.  In addition, SoCal’s
and the Subsidiary Bank’s credit risk may be increased when the collateral we
hold cannot be realized or is liquidated at prices not sufficient to recover the
full amount of the secured obligation.  Such losses could materially
and adversely affect SoCal’s and the Subsidiary Bank’s results of operations or
earnings.





Risks
Related to Our Industry





The
current changing economic environment poses significant challenges.





SoCal is
operating in a challenging and uncertain economic
environment.  Financial institutions continue to be affected by the
softening of the real estate market and constrained access to financial
markets.  While the Subsidiary Bank has very limited direct exposure
to the residential real estate market and while it has essentially no sub-prime
residential loans or securities backed by such loans on our books, it is
nevertheless affected by these market events.  Continued declines in
real estate values, home sales volumes and financial stress on borrowers as a
result of the uncertain economic environment, including job losses, upward
interest rate resets on adjustable rate mortgage loans and other factors could
have adverse effects on the Subsidiary Bank’s borrowers which would adversely
affect SoCal’s financial condition and results of operations.  This
deterioration in economic conditions could drive losses beyond that which is
provided for in the Subsidiary Bank’s allowance for loan losses and result in
the following other consequences:




●
            Increased
      loan delinquencies, nonaccrual loans and Other Real Estate Owned (“OREO”)
      assets;




●
            Reduced
      demand for our products and
services;




●
            General
      depositor nervousness in bank industry stability, individual bank
      creditworthiness and FDIC system soundness may precipitate customer
      deposit withdrawals;




●
            Collateral
      supporting the Subsidiary Bank’s real estate loans may decline in value,
      and in turn reduce customers’ borrowing
power;




●
            Reduced
      borrowing capacity under Federal Home Loan Bank borrowing facilities and
      loss of correspondent bank Federal Funds
lines;




●
            Reduced
      access to capital market debt and equity funding due to relative market
      illiquidity, general investor nervousness and heightened uncertainty about
      economic trends and future regulatory actions;
  and




●
            Increased
      regulatory scrutiny and the added cost of compliance, including higher
      FDIC insurance assessments.





19


SoCal
and the Subsidiary Bank are subject to extensive government
regulation, which may restrict or direct management actions and priorities,
and could result in a decrease in the value of your shares.





SoCal and
the Subsidiary Bank are subject to extensive regulation, supervision and
examination by the DFI, as its state regulatory agency, and by the FDIC as the
insurer of its deposits up to certain limits.  This regulation and
supervision limits the activities in which we may engage.  The purpose
of regulation and supervision is primarily to protect our depositors and
borrowers and, in the case of FDIC regulation, the FDIC’s insurance
fund.  Regulatory authorities have extensive discretion in the
exercise of their supervisory and enforcement powers.  They may, among
other things, impose restrictions on the operation of a banking institution, the
classification of assets by such institution and such institution’s allowance
for loan losses.





As
discussed above under the caption “Supervision and Regulation,” financial
institutions have been the subject of significant legislative and regulatory
changes and will continue to be the subject of further significant legislation
or regulation in the future, none of which is within our control. These changes
as well as any future change in the laws or regulations applicable to SoCal or
the Subsidiary Bank, or in banking regulators’ supervisory policies or
examination procedures, whether by the FDIC, other state or federal regulators,
or the United States Congress could have a material adverse effect on our
business, financial condition, results of operations and cash flows. In
addition, the cost and burden of compliance, over time, could significantly
increase and adversely affect our ability to operate profitably.





Recent
legislative and regulatory initiatives to address these difficult market and
economic conditions may not stabilize the U.S. banking system.





The U.S.
Congress enacted the EESA in response to the impact of the volatility and
disruption in the capital and credit markets on the financial sector. The U.S.
Department of the Treasury (the “Treasury”) and the federal banking regulators
are implementing a number of programs under this legislation that are intended
to address these conditions and the asset quality, capital and liquidity issues
they have caused for certain financial institutions and to improve the general
availability of credit for consumers and businesses. In addition, the U.S.
Congress recently enacted the ARRA in an effort to save and create jobs,
stimulate the U.S. economy and promote long-term growth and stability. There can
be no assurance that EESA, ARRA or the programs that are implemented under them
will achieve their intended purposes. The failure of EESA, ARRA or the programs
that are implemented under them to achieve their intended purposes could result
in a continuation or worsening of current economic and market conditions, and
this could adversely affect our financial condition, results of operations,
and/or the trading price of our common stock. Moreover, the success of
government programs with regard the economy as a whole could still adversely
affect our financial condition.





FDIC
deposit insurance premiums have increased and may increase further in the
future.





Under the
Federal Deposit Insurance Act, the FDIC, absent extraordinary circumstances,
must establish and implement a plan to restore the deposit insurance reserve
ratio to 1.15% of insured deposits, over a five-year period, at any time that
the reserve ratio falls below 1.15%. The FDIC’s reserve ratio has continued to
decline due to costs associated with bank failures and FDIC-assisted
transactions, and the reserve ratio is expected to continue to decline due to
future bank failures and FDIC-assisted transactions.





Pursuant
to the EESA, the maximum deposit insurance amount has been increased from
$100,000 to $250,000 until December 31, 2009, and certain types of deposit
accounts will have unlimited deposit insurance coverage through that date. On
October 13, 2008, the FDIC established a Temporary Liquidity Guarantee Program
under which the FDIC will fully guarantee all non-interest-bearing transaction
accounts and all senior unsecured debt of any insured depository institutions
or their qualified holding companies that did not opt out of the program
issued between October 14, 2008 and June 30, 2009. Senior unsecured debt
includes federal funds purchased and certificates of deposit outstanding to the
credit of the bank with a maturity of 30 days or greater. These increases have
increased the aggregate amount of deposits that the FDIC insures and thus have
exposed the FDIC’s deposit insurance fund to potentially greater losses. The
Subsidiary Bank will be subject to increased deposit premium expenses in 2009
and futures years which will have an adverse impact on our results of
operations.





Risks
Related to Our Securities





An
investment in SoCal common stock may be illiquid or holders may find it
difficult to sell their shares.





The
limited trading of SoCal’s common stock may cause fluctuations in its traded
market value to be exaggerated, leading to price volatility in excess of that
which would occur if it were more actively traded.  In addition, even
if a more active market in SoCal’s common stock develops, there is no assurance
that such a market will continue or that you will be able to sell your shares in
an orderly process.  Due to the absence of an actively traded market
in SoCal common shares, investors seeking to sell their shares may have to
accept reduced prices in order to stimulate buyer interest.





20


Future
issuances or sales of shares of SoCal common stock could have an adverse effect
on its common stock price and dilute existing shareholders.





As of May
1, 2009, SoCal had 3,332,500 shares of our common stock
outstanding.  In addition, 1.5 million shares of our common stock are
reserved for future issuance to directors, officers, employees and consultants
under the Belvedere SoCal 2007 Equity Incentive Plan.  In addition,
179,312 shares of our common stock are reserved for future issuance pursuant to
the warrants that were issued in connection with the acquisition of
PBB.  Any sales of substantial amounts of common stock, including
shares issued upon the exercise of outstanding options or warrants, may cause
the market price of our common stock to decline.





Future
sales of our common stock, or even the perception that such sales could occur,
could adversely affect prevailing market prices for the shares of SoCal’s common
stock and be dilutive to its shareholders. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that is deemed appropriate. SoCal’s inability to raise funds and capital
through the issuance of equity securities or the conversion of existing debt or
preferred stock to common or preferred stock could adversely affect SoCal’s
business or its ability to implement its business plan.





Additionally,
SoCal may need authorization for additional shares of common stock to satisfy
the conversion of existing debt and/or preferred stock, which if issued may have
an adverse effect on its common stock price and dilute existing
shareholders.





SoCal
has no present intention of paying dividends on its common stock, and its future
ability to pay dividends is subject to restrictions.





SoCal’s
ability to pay dividends is subject to the restrictions of the California
Corporations Code and the Federal Reserve.  The ability of the
Subsidiary Bank to pay dividends or make other capital distributions to SoCal
will be subject to the regulatory authority of the FDIC and the
DFI.





SoCal has
also issued certain long term debt and corresponding junior subordinated
deferrable interest debentures and perpetual non-cumulative preferred stock in
connection with the acquisition of Spectrum, which contain provisions limiting
SoCal’s ability to pay dividends on its common stock.  One of the
agreements executed in connection with the secured loan to SoCal also contains
certain restrictions on the ability of the Subsidiary Bank to pay dividends for
purposes other than to service such debt.





Additionally,
the Subsidiary Bank has entered into a regulatory agreement with its regulators
that, among other things, requires the prior written consent of the FDIC and DFI
before the Subsidiary Bank may declare or pay dividends.





Concentrated
ownership of SoCal’s common stock creates a risk of sudden changes in its share
price.





The Fund
beneficially owned 73.9% of SoCal’s outstanding common stock at December 31,
2008.  Other shareholders may be subject to certain risks due to the
Fund’s concentrated ownership position. The sale by the Fund of a significant
portion of its respective holdings could have a material adverse effect on the
market price of SoCal’s common stock.





Concentrated
ownership of SoCal’s common stock creates a potential conflict of interest risk
between the Fund and other common shareholders.





Since the
Fund controls a majority of SoCal’s outstanding common stock, the Fund has the
ability to control or influence the outcome of matters to be decided by a vote
of SoCal’s shareholders and board of directors. As such, it may be able to cause
SoCal to enter into transactions that may not be perceived as being in the best
interests of the other shareholders. In addition, it may be able to delay or
prevent a change in control of SoCal, even when a change in control may be in
the best interests of other shareholders. The Fund could also forego acquisition
opportunities in the event that its control position would be
jeopardized.





The
Fund’s general partner, Belvedere Capital, provides management services and
oversight to SoCal, in addition to being general partner of the controlling
shareholder, which may present a conflict between the interest of the Fund and
SoCal’s other shareholders.





SoCal has
entered into a management agreement with the Fund and the Fund’s general
partner, under which the Fund’s general partner will provide certain management
services to SoCal for a yearly fee. The fee is equal to 5% of the Subsidiary
Bank’s pre-tax income but in no event shall such yearly fee be less than
$200,000 or more than $750,000. The execution of SoCal’s business plan will be,
in some ways, dependent on the management expertise of the Fund in using SoCal
and the Subsidiary Bank as its platform for expansion into the financial
services market in Southern California. The Fund’s agreements with SoCal,
related fees, participation in management of SoCal, and its controlling interest
in SoCal may present conflicts of interest between the Fund and SoCal’s other
shareholders.





21


SoCal
may default under its Pacific Coast Bankers’ Bank loan.





Should a
loan default occur, PCBB has the right to foreclose on the loan and obtain the
common stock of the Subsidiary Bank held as collateral and, subject to
regulatory approvals, sell the Subsidiary Bank.  Should this occur, it
is uncertain what, if any, remuneration SoCal common shareholders would
ultimately receive for their SoCal shares.





Anti-takeover
provisions and federal law may limit the ability of another party to acquire us,
which could cause SoCal’s stock price to decline.





Various
provisions of SoCal’s articles of incorporation and by-laws could delay or
prevent a third-party from acquiring it, even if doing so might be beneficial to
SoCal’s shareholders. These provisions provide for, among other things, advance
notice requirements for director nominations, a supermajority approval of
certain matters by the shareholders or board members, and the authorization to
issue “blank check” preferred stock by action of the board of directors acting
alone, thus without obtaining shareholder approval. The Bank Holding Company Act
of 1956, as amended, and the Change in Bank Control Act of 1978, as amended,
together with federal regulations, require that, depending on the particular
circumstances, either FDIC approval must be obtained or notice must be furnished
to the FDIC and not disapproved prior to any person or entity acquiring
“control” of an FDIC insured bank, such as the Subsidiary Bank. These
provisions may prevent a business combination that would be attractive to
shareholders and could limit the price investors would be willing to pay in the
future for SoCal common stock.





ITEM
1B.  UNRESOLVED STAFF COMMENTS.





Not
applicable.





ITEM
2.  PROPERTIES.





Currently,
SoCal operates out of leased offices at One Maritime Plaza, Suite 825,
San Francisco, California.  The Subsidiary Bank operates out of owned
offices located at 2417 West Whittier Blvd., Montebello, and at leased offices
at 199 South Los Robles, Suite 130, Pasadena, California; 250 North Orange
Street, Glendale, California; 7110 North Fresno Street, Suite 340, Fresno,
California; 15615 Alton Parkway, Irvine, California and 6094 Warner Avenue,
Huntington Beach, California.




Premises
are considered adequate for SoCal’s needs.  In management’s opinion,
SoCal has sufficient insurance to cover its interests in the occupied
premises.


ITEM
3.  LEGAL PROCEEDINGS.





SoCal is
involved from time to time in a number of judicial, regulatory and arbitration
proceedings and inquiries concerning matters arising in connection with the
conduct of our business.  SoCal reviews such matters on a case-by-case
basis and establishes any required reserves in accordance with Statement of
Financial Accounting Standards No. 5, “Accounting For
Contingencies.”  Management believes, based on currently
available information, that the results of the following matter will not have a
material adverse effect on SoCal’s financial condition but may be material to
SoCal’s operating results or cash flows for any particular period, depending
upon the operating results for such period.





On
October 28, 2008, a former executive officer filed a suit against SoCal in
the Superior Court of the State of California, claiming, among other things, breach of contract. No specific damages have been
pleaded.  Depositions are in process and the Court has set an initial
court date of September 28, 2009.  SoCal believes this case is without
merit and intends to vigorously defend the claim.





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





There
were no matters submitted to a vote of the security holders during the fourth
quarter 2008.





22


PART
II





ITEM
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.





Our common stock isnot listed on any national securities exchange or quoted
onthe OTC Bulletin Board.  Any trades are currently reported on the
Pink Sheetsunder the symbol “BLVE.PK”.There is not an
active market for our common stock and what limited trading that is currently
reported on the Pink Sheets may cease at any time.As of December 31, 2008, there were approximately 149
shareholders of record of SoCal common stock and3,331,877shares of
common stock issued and outstanding.





The bid pricesbeloware over-the-counter market
quotations,asobtained
fromPink Sheets, LLC.The limited trading market for SoCal’s common stock may
cause fluctuations in the market value of our common stock to be exaggerated, leading to price
volatility in excess of that which would occur in a more active trading of its
common stock.





The following table shows the highs and low prices for
the common stock for each quarter in 2008:





Bid PricesLow
            
            
            HighFirst
      quarter
            
            
            11.80
            
            
            
            21.60Second
      quarter
            
            
            7.05
            
            
            
            12.10Third
      quarter
            
            
            6.00
            
            
            
            8.10Fourth
      quarter
            
            
            1.00
            
            
            
            6.25




In
January 2008, SoCal filed a Form S-8 which registered 1,500,000 shares of its
common stock, no par value, in connection with its 2007 Equity Incentive
Plan.  On March 9, 2009, SoCal filed a post-effective amendment
deregistering these shares, all of which remain unsold. On March 11, 2009, SoCal withdrew its registration
statement on Form S-1,which was filed
with the SEC on September 12, 2008 (the “Registration Statement”). No amendments to the Registration Statement were ever
filed and no securities were sold in connection with the offering contemplated
by the Registration Statement.Subsequent to filing this Form 10-K, SoCal plans on filing a
Form 15 Notice of Termination of Registration under Section 12h-3 of the
Exchange Act, which would suspend its filing obligations under the Exchange
Act.





Shareholders
of SoCal common stock are entitled to receive dividends when and as declared by
our board of directors (the “Board”) , out of funds legally available
therefore, subject to a variety of regulatory restrictions.  In
addition, SoCal has issued certain long term debt and corresponding junior
subordinated deferrable interest debentures and perpetual non-cumulative
preferred stock in connection with the acquisition of Spectrum, which
contain provisions limiting SoCal’s ability to declare and pay dividends on its
common stock in certain events.  SoCal has paid no cash dividends to
its common shareholders since inception and has no present intent to commence
the payment of dividends to common shareholders in the foreseeable
future.  In addition, the California Financial Code and various other
regulatory provisions restrict its ability to pay cash dividends.





Whether
or not dividends, either cash or stock, will be paid in the future will be
determined by SoCal’s Board after consideration of various
factors.  SoCal’s profitability and regulatory capital ratios, in
addition to other financial conditions and regulatory restrictions, will be key
factors considered by the Board in making such determinations regarding the
payment of dividends.




For sales
of unregistered securities made by SoCal during the period covered by this
report, please refer to our Quarterly Report on Form 10-Q filed on May 15,
2008.




ITEM
6.  SELECTED FINANCIAL DATA.





Not
applicable.





ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS.





CAUTIONARY
NOTES





Certain
statements contained in this document,  including, without limitation,
statements containing the words “believes”, “anticipates”, “intends”, “expects”,
and words of similar import, constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.  Such forward looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements.  Such factors include, among others,
the following: our inability to successfully implement our business strategy,
our inability to successfully implement a restructuring plan, our inability to
raise outside financing on acceptable terms, general economic and business
conditions in those areas in which we operate, demographic changes, competition,
fluctuations in interest rates, changes in business strategy or development
plans, changes in governmental regulation, credit quality, the availability of
capital, and other risk factors referenced in “Item 1A Risk Factors” and
elsewhere in this document.  The risk factors and other cautionary
statements made in this document should be read and understood as being
applicable to all forward-looking statements wherever they appear in this
document.  We disclaim any obligation to update any such factors
or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments, except as may be required by law.





The
following includes discussion and analysis of the financial position at December
31, 2008 and 2007, and results for the year ended December 31, 2008 and the
period ended December 31, 2007.




23


OVERVIEW




Formation
and Structure





SoCal
acquired PBB on November 23, 2007 and Spectrum on January 31,
2008.  Prior to November 23, 2007, SoCal had no significant
operations.  Accordingly, the discussion of the results of operations
and financial condition for periods subsequent to November 23, 2007 are for
SoCal.  Periods prior to November 23, 2007 relate to PBB
only.  Management believes the information is comparable since the
sole subsidiary of SoCal through and including December 31, 2007 was PBB. 
Results of operations for 2008 include Spectrum from January 31, 2008, the
acquisition date, through December 31, 2008.





Effective
July 3, 2008, PBB and Spectrum merged.  By combining the two banks,
SoCal expects to improve operational efficiency, reduce regulatory compliance
costs, and consolidate vendor relationships.  The merger was accounted for
as a transfer of assets and liabilities between entities under common control
and, accordingly, the assets and liabilities of Spectrum were transferred at
their carrying amounts, similar to a pooling of interests.  The
existing Spectrum branches and certain customer-related activities will continue
to be conducted using the Spectrum brand.





SoCal
Liquidity





The
Subsidiary Bank is SoCal’s sole operating asset.  SoCal, like other
bank holding companies, relies on dividends from the Subsidiary Bank and outside
financing sources as its primary sources of liquidity.  At present, the
Subsidiary Bank does not have the legal capacity to pay dividends.





As of
March 31, 2009, SoCal had current unencumbered liquid assets of approximately
$1.7 million, consisting primarily of cash and cash
equivalents.  Pursuant
to the May 12, 2009 signed term sheet, $1.0 million of SoCal unencumbered liquid
assets will be committed in May 2009 to payment of interest and principal on the
Pacific Coast Bankers’ Bank loan.As of this date, SoCal had
approximately $32.9 million of outstanding indebtedness, including $8 million of
secured indebtedness, $9.5 million of senior unsecured notes held by the Fund
and $15 million of subordinated indebtedness related to trust preferred
securities.  SoCal has no borrowing availability under its current
debt arrangements and is currently seeking, with the assistance of the Fund,
other sources of liquidity.  Previously, SoCal has relied on the Fund for
its financing needs.  However, the Fund has advised SoCal that it no
longer has the capacity to extend SoCal further financial support.





While
SoCal has deferred the scheduled April and May 2009 interest payments under the
indenture related to the trust preferred securities, it continues to make
interest payments under the $8.0 million of senior secured debt held by
PCBB.  The modified interest rate on that loan is 810 basis points
over 3-month LIBOR





As
described above, SoCal entered into agreements with PCBB, which, among
other things, waived certain covenant violations as of December 31, 2008 and at
March 31, 2009.





The
senior notes held by the Fund mature on July 1, 2009.  Although, SoCal
currently anticipates that it will be able to negotiate an extension from the
Fund or an agreement to convert the senior notes to equity, there can be no
assurance that it will be able to do so.  However, the Fund has
currently agreed to defer interest payments.





Due to
SoCal’s ability to continue deferring interest payments on the trust preferred
securities and assuming the Fund extends the maturity, or agrees to convert the
senior notes, current unencumbered liquidity assets are sufficient to meet
maturing obligations and normal operating expenses until August
2010.





As a
result of the foregoing, SoCal is currently pursuing a plan under which
investors in SoCal debt (other than the secured lender) and preferred equity
securities would convert their holdings into SoCal common
stock.  Management believes accomplishment of this restructuring would
significantly improve SoCal’s potential for attracting new
investors.  This restructuring plan would result in the issuance of
new common shares that would dilute current common shareholders’ percentage
ownership of SoCal, but would at the same time eliminate a substantial amount of
debt and preferred equity.  As of the date of this filing, the holders
have not agreed to such conversion but the Fund has indicated its interest in a
proposed conversion but the exact terms have yet to be
determined.  Therefore,  SoCal cannot provide any assurance
that the restructuring plan will be successful.  In addition, even if
the restructuring plan is successful, we can provide no assurance that any
financing or other sources of liquidity will be available to SoCal on acceptable
terms, if at all.





See
“Business—Near Term Stabilization Strategy” above for more detail on SoCal’s
restructuring plan; see also “—Liquidity” below for more information on SoCal’s
liquidity position, including its outstanding debt instruments.





24


Recent
SoCal Operating Results





In the
first quarter 2009, SoCal incurred a loss of $4.3 million.  Key
contributing factors were a $2.7 million loan loss provision and a $0.7 million
severance expense.  The loan loss provision expense was primarily
attributable to the continued decline of both national and local market business
conditions.  During the first quarter there was a $4.4 million
increase in nonaccrual loans and $7.0 million increase in non-performing assets
recorded.





The
Subsidiary Bank’s regulatory capital ratios at March 31, 2009 improved relative
to December 31, 2008.  The improvement was due to $7.0 million of
capital contributions made by SoCal during the first quarter, partially offset
by the first quarter operating loss.





During
the first quarter, SoCal borrowed $9 million from the Fund and contributed $7
million of capital to the Subsidiary Bank.  The remainder of these
loan proceeds augmented SoCal’s cash and cash equivalent
account.  Additionally, SoCal renegotiated its Pacific Coast Bankers’
Bank loan in order to obtain a waiver for December 31, 2008 and March 31, 2009
financial covenant violations.  A description of the amended loan
agreement is included on page 40.





At March
31, 2009, SoCal had $1.7 million of unencumbered cash and
equivalents.  By comparison, SoCal has projected net cash expenditure
obligations of $1.4 million for the remainder of 2009.  Monies due
Pacific Coast Bankers’ Bank constitute $1.1 million of this
total.  The Subsidiary Bank does not currently or prospectively have
dividend payment capacity.  Management and  the board have
had discussions with potential investors, but it is uncertain what, if any, new
funding may be obtained from these sources.





CONSOLIDATED
EARNINGS SUMMARY




Financial
data for 2008 includes the consolidated results of SoCal and the Subsidiary
Bank.  For comparative analysis, PBB’s net loss of $843 thousand for
the period January 1, 2007 through November 23, 2007 (pre-acquisition) is
combined with PBB’s net income of $99 thousand for the period from November 24,
2007 to December 31, 2007, SoCal’s loss for 2007 of $473 thousand and a $143
thousand (net of tax) pro forma adjustment for additional amortization of the
PBB core deposit intangible for a total pro forma combined loss of $1.4 million,
or $(0.68), basic and diluted earnings per share.




The
following unaudited pro forma financial information is presented for information
purposes only and you should not assume that the combined company would have
achieved the pro forma results if they had actually been combined at the
beginning of the period presented.




25


UNAUDITED
PRO FORMA COMBINED CONDENSED INCOME STATEMENT


FOR
THE YEAR ENDED DECEMBER 31, 2007





Professional
      Business Bank
              
              
              Belvedere
      SoCalJanuary
      1 - November 23, 2007
              
              
              November
      24 - December 31, 2007
              
              
              January
      17 (inception) - December 31, 2007
              
              
              Combined
              
              
              Pro
      Forma Adjustments
              
              
              Pro
      Forma
                CombinedInterest
      income:Interest
      and fees on loans
              $
              13,369
              
              
              $
              1,769
              
              
              $
              -
              
              
              $
              15,138
              
              
              $
              -
              
              
              $
              15,138Interest
      on investments
              
              589
              
              
              
              46
              
              
              
              
              
              
              
              635
              
              
              
              
              
              
              
              635Other
      interest income
              
              519
              
              
              
              40
              
              
              
              
              
              
              
              559
              
              
              
              
              
              
              
              559Total
      interest income
              
              14,477
              
              
              
              1,855
              
              
              
              -
              
              
              
              16,332
              
              
              
              -
              
              
              
              16,332Interest
      expense:Interest
      on NOW, savings and money market
              
              2,369
              
              
              
              121
              
              
              
              
              
              
              
              2,490
              
              
              
              
              
              
              
              2,490Interest
      on time deposits less than $100,000
              
              1,030
              
              
              
              194
              
              
              
              
              
              
              
              1,224
              
              
              
              
              
              
              
              1,224Interest
      on time deposits $100,000 and over
              
              671
              
              
              
              140
              
              
              
              
              
              
              
              811
              
              
              
              
              
              
              
              811Interest
      on other borrowings
              
              358
              
              
              
              23
              
              
              
              170
              
              
              
              551
              
              
              
              
              
              
              
              551Total
      interest expense
              
              4,428
              
              
              
              478
              
              
              
              170
              
              
              
              5,076
              
              
              
              -
              
              
              
              5,076Net
      interest income
              
              10,049
              
              
              
              1,377
              
              
              
              (170
              )
              
              
              11,256
              
              
              
              -
              
              
              
              11,256Provision
      for loan losses
              
              1,903
              
              
              
              351
              
              
              
              -
              
              
              
              2,254
              
              
              
              -
              
              
              
              2,254Net
      interest income after provision for loan losses
              
              8,146
              
              
              
              1,026
              
              
              
              (170
              )
              
              
              9,002
              
              
              
              -
              
              
              
              9,002Non-interest
      income:Service
      charges and fees
              
              388
              
              
              
              44
              
              
              
              -
              
              
              
              432
              
              
              
              -
              
              
              
              432Other
      income
              
              1
              
              
              
              3
              
              
              
              -
              
              
              
              4
              
              
              
              -
              
              
              
              4Total
      non-interest income
              
              389
              
              
              
              47
              
              
              
              -
              
              
              
              436
              
              
              
              -
              
              
              
              436Non-interest
      expense:Salaries
      and employee benefits
              
              5,355
              
              
              
              530
              
              
              
              37
              
              
              
              5,922
              
              
              
              -
              
              
              
              5,922Occupancy
      and equipment expenses
              
              603
              
              
              
              78
              
              
              
              
              
              
              
              681
              
              
              
              -
              
              
              
              681Professional
      fees
              
              1,716
              
              
              
              72
              
              
              
              568
              
              
              
              2,356
              
              
              
              -
              
              
              
              2,356Office
      and administrative expenses
              
              724
              
              
              
              95
              
              
              
              30
              
              
              
              849
              
              
              
              -
              
              
              
              849Loan
      origination expenses
              
              30
              
              
              
              1
              
              
              
              
              
              
              
              31
              
              
              
              -
              
              
              
              31Other
      expenses
              
              1,309
              
              
              
              128
              
              
              
              
              
              
              
              1,437
              
              
              
              242
              A
              
              
              1,679Total
      non-interest expense
              
              9,737
              
              
              
              904
              
              
              
              635
              
              
              
              11,276
              
              
              
              242
              
              
              
              11,518Income
      (loss) before tax expense (benefit)
              
              (1,202
              )
              
              
              169
              
              
              
              (805
              )
              
              
              (1,838
              )
              
              
              (242
              )
              
              
              (2,080
              )Income
      tax expense (benefit)
              
              (359
              )
              
              
              70
              
              
              
              (332
              )
              
              
              (621
              )
              
              
              (99
              )
              
              
              (720
              )Net
      income (loss)
              $
              (843
              )
              
              
              99
              
              
              
              (473
              )
              
              $
              (1,217
              )
              
              $
              (143
              )
              
              $
              (1,360
              )Net
      loss per share - basic
              $
              (0.42
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              -
              
              
              $
              (0.68
              )Net
      loss per share - diluted
              
              n/a
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              n/aWeighted
      average shares - basic
              
              1,998,199
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,011,343





(A)  Represents
amortization of PBB core deposit intangible




26


The net
loss in 2008 was $46.0 million, or $15.28 per diluted share, compared to the pro
forma net loss of $1.4 million, or $0.68 per diluted share, in
2007.  Net interest income before provision for loan losses increased
$3.7 million, or 33.0%, to $15.0 million for the year ended December 31, 2008,
compared to $11.3 million for the prior year.  The increase was
primarily due to an increase in interest-earning assets due to the acquisition
of Spectrum, as well as a decline in our average cost of funds, as deposits have
repriced downward in response to lower market interest rates.Noninterest income
increased $717,000, or 164.4%, to $1.2 million in 2008 compared to $436,000 in
2007 due to the acquisition of Spectrum’s deposit base.  Noninterest
expense increased $39.4 million, or 342.5%, from $11.5 million in 2007 to $51.0
million in 2008.  The increase resulted from a $33.3 million goodwill
impairment charge, a $3.4 million, or 57.2%, increase in personnel costs, and a
$2.8 million, or 49.3% increase in other noninterest expenses.  The
acquisition of Spectrum was the primary cause for the personnel and other
noninterest expense increases.





CONSOLIDATED
BALANCE SHEET SUMMARY




As of December 31, 2008,total assets were $384.9million, an increase of $114.8million, or42.5%, from total assets of $270.1 million
at December 31, 2007.   Net loans grew
from $210.3 million at December 31, 2007 to $299.4million at December 31, 2008, an
increase of $89.1million, or42.4%.Deposits grew from $194.0 million at
December 31, 2007 to $303.7 million at December 31, 2008, an increase of
$109.7 million, or
56.5%.  The primary reason for the increase in assets, loans and
deposits relates to the acquisition of Spectrum, which contributed $187.4
million in assets, $79.5million in loans and $142.0 million in
deposits at the acquisition date.





The
allowance for loan losses as a percentage of total loans was 2.9% and 1.9% at
December 31, 2008 and 2007, respectively.  During the year ended
December 31, 2008, net charge-offs totaled $7.5 million, compared to $46,000
during the prior year.





Shareholders’
equity decreased $23.8 million for the year ended December 31, 2008 primarily
due to the net loss in 2008 offset by issuance of common stock to the Fund to
provide cash in connection with the acquisition of Spectrum.


The
following table sets forth several key operating ratios:




Year
      Ended December 31,2008
            
            
            2007Return
      on Average Assets
            
            
            -10.93%
            
            
            
            -0.66%Return
      on Average Equity
            
            
            -67.57%
            
            
            
            -4.97%




CRITICAL
ACCOUNTING POLICIES


This
discussion and analysis is based upon SoCal’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires SoCal’s management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses and
related disclosure of contingencies. A summary of the more significant
accounting policies of SoCal can be found in Note 1 to the audited financial
statements included herein.




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 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 the significant 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, including 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.  Refer to “Provision and Allowance for Loan
Losses” on page 37 for a full discussion of SoCal’s methodology of
assessing the adequacy of the allowance for loan losses.




Loans are
considered impaired if, based on current information and events, it is probable
that SoCal 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.




27


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
Subsidiary Bank has an analysis of its portfolio performed on a quarterly basis
utilizing a model which calculates an estimated reserve based upon loan type,
collateral type, geographic location and credit grade.  The model
estimates the likelihood of payment default, and the potential charge-off rate
given default.  The model is further enhanced for Joint Policy
Statement factors and actual loan performance on a loan by loan basis. 
Underlying factors for geography, collateral type and overall payment history
and losses given default are adjusted quarterly from call report data gathered
from approximately 1,100 small community banks in the Western United
States.




Goodwill and
OtherIntangibles.  Net assets of
entities acquired in purchase transactions are recorded at fair value at the
date of acquisition. The historical cost basis of individual assets and
liabilities are adjusted to reflect their fair value. Identified intangibles are
amortized on a straight-line basis over the period benefited. Goodwill is not
amortized for book purposes, although it is reviewed for potential impairment on
an annual basis, or if events or circumstances indicate a potential impairment.
The impairment test is performed in two phases. The first step of the
goodwill impairment test compares the fair value of the reporting unit with its
carrying amount, including goodwill. If the fair value of the reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired; however, if the carrying amount of the reporting unit exceeds its fair
value, an additional procedure must be performed. That additional procedure
compares the implied fair value of the reporting unit’s goodwill (as defined in
SFAS No. 142,Goodwill and Other Intangible
Assets ) with the carrying amount of that goodwill. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds its implied
fair value.  During the third quarter of 2008, SoCal engaged a third
party to provide an independent impairment analysis of goodwill in accordance
with the requirements of SFAS 142. The fair value of SoCal was determined using
valuation approaches typically applied in business combinations involving
financial institutions: (1) comparable transactions approach, (2) discounted
cash flow approach and (3) control premium approach. The process of evaluating
goodwill for impairment requires assumptions and estimates including market
trends and multiples of companies engaged in similar businesses. If any of
those assumptions change over time, the estimated value assigned to goodwill
could change significantly.




The
independent analysis resulted in a non-cash charge of $33.3 million for the
write-down of goodwill.  The charge does not affect our tangible
equity or our liquidity position.  Regulatory capital ratios are
unaffected by the write-down of goodwill.  As goodwill is not tax
deductible at the time of acquisition, there is no corresponding tax impact for
the write-down of this asset.  This charge is not expected to impact
ongoing operations.


Other
intangible assets subject to amortization are also evaluated for impairment in
accordance with SFAS No. 144,Accounting for the Impairment or Disposal ofLong-Lived Assets . An
impairment loss will be recognized if the carrying amount of the intangible
asset is not recoverable and exceeds fair value. The carrying amount of the
intangible is considered “not recoverable” if it exceeds the sum of the
undiscounted cash flows expected to result from the use of the
asset.


Fair Value
Measurements.  Effective January 1, 2008, SoCal adopted SFAS
No. 157,Fair Value
Measurements, which among other things, requires enhanced disclosures
about financial instruments carried at fair value. SFAS No. 157 establishes a
hierarchical disclosure framework associated with the level of observable
pricing scenarios utilized in measuring financial instruments at fair value. The
degree of judgment utilized in measuring the fair value of financial instruments
generally correlates to the level of the observable pricing scenario. Financial
instruments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree
of observable pricing and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will
generally have little or no observable pricing and a higher degree of judgment
utilized in measuring fair value.




On
October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies
how companies should apply the fair value measurement methodologies of SFAS 157
to financial assets when markets they are traded in are illiquid or inactive.
Under the provisions of this FSP, companies may use their own assumptions about
future cash flows and appropriately risk-adjusted discount rates when relevant
observable inputs are either not available or are based solely on transaction
prices that reflect forced liquidations or distressed sales. This FSP is
effective as of September 30, 2008. There was no impact to our financial
position or results of operations from the adoption of this FSP.





Accounting for
Income Taxes.SoCal files its income
taxes on a consolidated basis with its Subsidiary Bank. The allocation of income
tax expense (benefit) represents each entity’s proportionate share of the
consolidated provision for income taxes.





28


SoCal
applies the asset and liability method to account for income taxes. Deferred tax
assets and liabilities are calculated by applying applicable tax laws to the
differences between the financial statement basis and the tax basis of assets
and liabilities. The effect on deferred taxes of changes in tax laws and rates
is recognized in income in the period that includes the enactment
date.  A valuation allowance is established to reduce deferred tax
assets to the level at which it is “more likely than not” that the tax assets or
liabilities will be realized.  Realization of tax benefits of
deductible temporary differences and operating loss carry forwards depends on
having sufficient taxable income of an appropriate character within the carry
forward periods.





SoCal
accounts for uncertainty in income taxes under FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). Under the provisions of FIN 48, only tax positions that
meet the more likely than not recognition threshold that the tax position would
be sustained in a tax examination are recognized.





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than fifty percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.





Impairment of
Investment Securities.Investment securities
are evaluated for other-than-temporary impairment on at least a quarterly basis
and more frequently when economic or market conditions warrant such an
evaluation to determine whether a decline in their value below amortized cost is
other than temporary. Management utilizes criteria such as the magnitude and
duration of the decline, the financial condition of the issuer, rating agency
changes related to the issuer’s securities and the intent and ability of the
Bank to retain its investment in the issues for a period of time sufficient to
allow for an anticipated recovery in fair value, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than
temporary. The term “other than temporary” is not intended to indicate that the
decline is permanent, but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be other than temporary,
the value of the security is reduced and a corresponding charge to earnings is
recognized.





DISTRIBUTION
OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY


The
following tables present, for the periods indicated, the distribution of average
assets, liabilities and shareholders’ equity, as well as the total dollar
amounts of interest income and the resultant yields, and the dollar amounts of
interest expense and resultant rates. Loan fees, which are not material, are
included in interest earned on loans (dollar amounts in thousands).




29





For
      the Year Ended December 31,2008
            
            
            2007Average
            
            
            
            
            
            
            
            
            AverageInterest
            
            
            Yield
      or
            
            
            
            
            
            Interest
            
            
            Yield
      orAverage
            
            
            Earned
            
            
            Rate
            
            
            Average
            
            
            Earned
            
            
            RateBalance
            
            
            or
      Paid
            
            
            Paid
            
            
            Balance
            
            
            or
      Paid
            
            
            PaidAssetsInterest-Earning
      Assets:Investment
      Securities-taxable
            
            $
            24,217
            
            
            $
            1,280
            
            
            
            5.29%
            
            
            $
            13,394
            
            
            $
            635
            
            
            
            4.74%Investment
      Securities-nontaxable
            
            
            7,308
            
            
            
            298
            
            
            
            6.18%
            
            
            
            -
            
            
            
            -
            
            
            
            -Interest-Bearing
      Deposits with OtherFinancial Institutions
            
            
            892
            
            
            
            46
            
            
            
            5.16%
            
            
            
            2,021
            
            
            
            154
            
            
            
            7.62%Federal
      Funds Sold
            
            
            13,868
            
            
            
            300
            
            
            
            2.16%
            
            
            
            7,935
            
            
            
            406
            
            
            
            5.12%Loans
            
            
            301,688
            
            
            
            21,226
            
            
            
            7.04%
            
            
            
            170,658
            
            
            
            15,138
            
            
            
            8.87%Total
      Interest-Earning Assets
            
            
            347,973
            
            
            
            23,150
            
            
            
            6.65%
            
            
            
            194,008
            
            
            
            16,333
            
            
            
            8.42%Noninterest-Earning
      Assets:Cash
      and Due from Banks
            
            
            8,294
            
            
            
            
            
            
            
            
            
            
            
            6,953Premises
      and Equipment
            
            
            4,837
            
            
            
            
            
            
            
            
            
            
            
            461Accrued
      Interest and Other Assets
            
            
            15,718
            
            
            
            
            
            
            
            
            
            
            
            6,976Goodwill
            
            
            46,366
            
            
            
            
            
            
            
            
            
            
            
            -Other
      Intangible Assets, Net
            
            
            2,776
            
            
            
            
            
            
            
            
            
            
            
            -Other
      Real Estate Owned
            
            
            752
            
            
            
            
            
            
            
            
            
            
            
            -Allowance
      for Loan Losses
            
            
            (
      5,841
            )
            
            
            
            
            
            
            
            
            
            
            (
      2,609
            )Total
      Assets
            
            $
            420,875
            
            
            
            
            
            
            
            
            
            
            $
            205,789Liabilities
      and Shareholders’ EquityInterest-Bearing
      Liabilities:Money
      Market, Savings and NOW
            
            $
            83,061
            
            
            
            1,175
            
            
            
            1.41%
            
            
            $
            74,306
            
            
            
            2,491
            
            
            
            3.35%Time
      Deposits under $100,000
            
            
            75,521
            
            
            
            2,857
            
            
            
            3.78%
            
            
            
            23,817
            
            
            
            1,225
            
            
            
            5.14%Time
      Deposits of $100,000 or More
            
            
            57,009
            
            
            
            2,014
            
            
            
            3.53%
            
            
            
            15,672
            
            
            
            810
            
            
            
            5.17%Short-Term
      Borrowings
            
            
            12,766
            
            
            
            323
            
            
            
            2.53%
            
            
            
            7,802
            
            
            
            551
            
            
            
            7.06%Junior
      Subordinated Debentures
            
            
            14,154
            
            
            
            1,418
            
            
            
            10.02%
            
            
            
            -
            
            
            
            -
            
            
            
            -Notes
      Payable
            
            
            7,322
            
            
            
            388
            
            
            
            5.30%
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Interest-Bearing Liabilities
            
            
            249,833
            
            
            
            8,175
            
            
            
            3.27%
            
            
            
            121,597
            
            
            
            5,077
            
            
            
            4.18%Noninterest-Bearing
      Liabilities:Demand
      Deposits
            
            
            99,005
            
            
            
            
            
            
            
            
            
            
            
            55,471Other
      Liabilities
            
            
            3,966
            
            
            
            
            
            
            
            
            
            
            
            1,359Shareholders’
      Equity
            
            
            68,071
            
            
            
            
            
            
            
            
            
            
            
            27,362Total
      Liabilities and Shareholders’ Equity
            
            $
            420,875
            
            
            
            
            
            
            
            
            
            
            $
            205,789Net
      Interest Income
            
            
            
            
            
            $
            14,975
            
            
            
            
            
            
            
            
            
            
            $
            11,256Net
      Yield on Interest-Earning
      Assets (Net Interest Margin)
            
            
            
            
            
            
            
            
            
            
            4.30%
            
            
            
            
            
            
            
            
            
            
            
            5.80%





Yields
are computed on a tax equivalent basis resulting in an adjustment of $154,000 to
interest earned on municipal bonds for the year ended December 31,
2008.  There were no municipal bonds held during 2007.





30


CONSOLIDATED
EARNINGS ANALYSIS




NET
INTEREST INCOME


A
significant component of earnings is net interest income which is the difference
between the interest earned on loans and investments and the interest paid on
deposits and other interest-bearing liabilities.


SoCal’s
net interest income is affected by changes in the amount and mix of our
interest-earning assets and interest-bearing liabilities, referred to as a
“volume change.” It is also affected by changes in the yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a “rate change.”




The
following table sets forth changes in interest income and interest expense for
each major category of interest-earning asset and interest-bearing liability,
and the amount of change attributable to volume and rate changes for the years
indicated. Changes not solely attributable to rate or volume have been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in each (dollar amounts in
thousands).




Year
      Ended December 31, 2008versusYear
      Ended December 31, 2007Increase
      (Decrease) DueTo
      Change inVolume
            
            
            Rate
            
            
            TotalInterest-Earning
      Assets:Investment
      Securities-Taxable
            
            $
            565
            
            
            $
            80
            
            
            $
            645Investment
      Securities-Nontaxable
            
            
            298
            
            
            
            -
            
            
            
            298Interest
      Bearing Deposits in Other Financial Institutions
            
            
            (
      68
            )
            
            
            (40
            )
            
            
            (
      108
            )Federal
      Funds Sold
            
            
            205
            
            
            
            (311
            )
            
            
            (
      106
            )Loans
            
            
            9,729
            
            
            
            (3,641
            )
            
            
            6,088Total
      Interest Income
            
            
            10,729
            
            
            
            (3,912
            )
            
            
            6,817Interest-Bearing
      Liabilities:Money
      Market, Savings and NOW
            
            
            265
            
            
            
            (
      1,581
            )
            
            
            (1,316
            )Time
      Deposits under $100,000
            
            
            2,032
            
            
            
            (400
            )
            
            
            1,632Time
      Deposits of $100,000 or More
            
            
            1,533
            
            
            
            (329
            )
            
            
            1,204Short-Term
      Borrowings
            
            
            239
            
            
            
            (467
            )
            
            
            (228
            )Notes
      Payable
            
            
            388
            
            
            
            -
            
            
            
            388Junior
      Subordinated Debentures
            
            
            1,418
            
            
            
            -
            
            
            
            1,418Total
      Interest Expense
            
            
            5,875
            
            
            
            (2,777
            )
            
            
            3,098Net
      Interest Income
            
            $
            4,854
            
            
            $
            (1,135
            )
            
            $
            3,719


Net
interest income was $15.0 million and $11.3 million for the years ended December
31, 2008 and 2007, respectively. The increase of $3.7 million, or 33.0%, was
primarily due to the increase in average interest-earning assets in 2008 over
2007 due to the Spectrum acquisition. The net interest margin was 4.30% and
5.80% for 2008 and 2007, respectively. The decrease in net interest margin is
primarily due to declines in market interest rates and additional holding
company financings.




Interest
income was $23.2 million and $16.3 million for 2008 and 2007, respectively. The
year over year increase of $6.8 million, or 41.7%, was due to the $154.0
million, or 79.4%, increase in average interest-earning assets year over year.
The yield on interest-earning assets decreased 177 basis points from 8.42% to
6.65% for 2007 and 2008, respectively, due to a decrease in average market rates
year over year.  The prime rate decreased seven times, totaling a
reduction of 400 basis points from December 31, 2007 to December 31,
2008.  Variable rate loans, with rates primarily tied to the prime
rate, comprise approximately 64% of the loan portfolio.  The decline
in prime rate impacted the loan portfolio immediately and to a greater extent
than its impact on the interest-bearing liabilities generally due to a lag in
deposit repricing as compared to loans.





31


Interest
expense was $8.2 million and $5.1 million for the years ended December 31, 2008
and 2007, respectively. The increase of $3.1 million, or 61.1%, was due to the
increase in average interest-bearing liabilities resulting from the acquisition
of Spectrum along with an increase in holding company debt issued in conjunction
with the Spectrum acquisition.  The average balance of
interest-bearing liabilities increased $128.2 million, or 105.5%, from
$121.6 million to $249.8 million for 2007 and 2008, respectively. The average
rate paid on interest-bearing liabilities decreased 91 basis points from 4.18%
to 3.27% for 2007 and 2008, respectively, in response to lower market interest
rates.





NONINTEREST
INCOME




Noninterest
income consists primarily of service charges on deposit accounts. Noninterest
income was $1.2 million for 2008 compared to $436,000 for
2007.  Virtually all of the increase relates to the acquisition of
Spectrum’s deposit base.  During 2008, losses on sales of
available-for-sale investment securities of $116,000 were included in
non-interest income.  There were no sales of investment securities
during 2007.


NONINTEREST
EXPENSE




Noninterest
expense reflects SoCal’s costs of operations including systems, facilities,
personnel, and administration. The following are the major components of
noninterest expense for the years ended December 31, 2008 and 2007 (dollar
amounts in thousands):


2008
            
            
            2007
            
            
            Percent
              ChangeSalaries
      and employee benefits
            
            $
            9,307
            
            
            $
            5,922
            
            
            
            57.2
      %Professional
      fees
            
            
            2,566
            
            
            
            2,356
            
            
            
            8.9
      %Occupancy
      and equipment
            
            
            1,443
            
            
            
            681
            
            
            
            111.9
      %Data
      processing
            
            
            1,268
            
            
            
            551
            
            
            
            130.3
      %Other
      intangible asset amortization
            
            
            499
            
            
            
            276
            
            
            
            80.6
      %Office
      and administrative expenses
            
            
            490
            
            
            
            263
            
            
            
            86.0
      %Correspondent
      banking fees
            
            
            472
            
            
            
            556
            
            
            
            (15.0
      %)Insurance
            
            
            432
            
            
            
            202
            
            
            
            113.8
      %Marketing
      and business promotion
            
            
            125
            
            
            
            136
            
            
            
            (8.5
      %)Goodwill
      impairment charge
            
            
            33,301
            
            
            
            -
            
            
            
            100.0
      %Other
      expenses
            
            
            1,061
            
            
            
            575
            
            
            
            84.6
      %Total
            
            $
            50,964
            
            
            $
            11,518
            
            
            
            342.5
      %





The
increase of $39.4 million in noninterest expense, or 342.5%, for 2008 over 2007
was primarily due to the following:




●
            The
      $33.3 million goodwill impairment charge in 2008 resulted from an
      independent analysis performed in the third quarter of 2008 which has been
      discussed previously.





●
            Salary
      and employee benefits increased $3.4 million, or 57.2%, due to the
      addition of 33 full-time and two part-time Spectrum
      employees.   The remainder of the increase was the result
      of increased stock-based compensation costs, salary adjustments and other
      employee benefits.




●
            Professional
      fees increased $210,000, or 8.9%, which is reflective of the larger
      organization in 2008.





●
            Occupancy
      and equipment expenses increased $762,000, or 111.9%, due to the
      acquisition of Spectrum, which added three branch offices to the existing
      branches of PBB.





32


●
            Data
      processing expenses increased $717,000, or 130.3%, due to system
      conversion costs and the increased transaction volume subsequent to the
      acquisition of Spectrum.





●
            Other
      intangible asset amortization increased $223,000 or 80.6%, due to the
      amortization of Spectrum’s core deposit intangible in
  2008.





●
            Office
      and administrative expenses increased $227,000, or 86.0%, due to increased
      administrative costs associated with the expanded organization subsequent
      to the acquisition of Spectrum.





●
            Correspondent
      banking fees decreased $83,000, or 15.0%, due to reduced costs resulting
      from the consolidation of PBB and Spectrum  correspondent
      banking relationships.





●
            Insurance
      costs increased $230,000, or 113.8%, due primarily to FDIC insurance
      assessments on the increased deposit base resulting from the Spectrum
      acquisition.





●
            Marketing
      and business promotion expenses decreased $11,000, or
  8.5%.





●
            Other
      expenses increased $486,000, or 84.6%, due to expenses incurred by SoCal
      and the larger organization  including increased courier costs,
      collection and foreclosure costs and ATM related
  expenses.





As a
percentage of average assets, noninterest expense was 12.1%, of which 65% was
attributable to a goodwill impairment charge, and 5.6% in 2008 and 2007,
respectively.




INCOME
TAXES




The
income tax expense (benefit) was $384,000, or an effective rate of 0.84%, and
($720,000), or an effective rate of (34.6)%, for 2008 and 2007, respectively.
The lower absolute income tax expense rate in 2008 was due to the
nondeductibility of the goodwill impairment charge along with a $5.6 million
valuation allowance recorded on deferred tax assets. The income tax benefit for
2007 was due primarily to the 2007 acquisition that occurred during the year and
the related impact on operations. As of December 31, 2008, SoCal has net
operating loss carry forwards of approximately $15.1 million for federal income
tax and $17.7 million for California franchise tax purposes.  Federal
net operating loss carry forwards, to the extent not used, will expire in 2028.
California net operating loss carry forwards, to the extent not used, will
expire in 2030.





A
valuation allowance is established for any deferred tax assets for which
management does not believe it is more-likely-than-not that the full future tax
benefit will be utilized. At December 31, 2008, management does not believe
it is more-likely-than-not that $5.6 million of our net deferred tax asset will
be realized.  Accordingly, a valuation allowance of $5.6 million has
been established against such benefits. No valuation allowance was
considered necessary at December 31, 2007.





33


CONSOLIDATED
BALANCE SHEET ANALYSIS





INVESTMENT
PORTFOLIO


The
following table summarizes the amounts and distribution of investment securities
held as of the dates indicated (dollar amounts in thousands):





December
      31, 2008
              
              
              December
      31, 2007Weighted
              
              
              
              
              
              
              
              
              WeightedAmortized
              
              
              Market
              
              
              Average
              
              
              Amortized
              
              
              Market
              
              
              AverageCost
              
              
              Value
              
              
              Yield
              
              
              Cost
              
              
              Value
              
              
              YieldAvailable-for-Sale
      SecuritiesU.S.
      Government AgenciesWithin
      One Year
              
              $
              -
              
              
              $
              -
              
              
              
              
              
              
              $
              2,004
              
              
              $
              2,002
              
              
              
              4.24
              %One
      to Five Years
              
              
              1,628
              
              
              
              1,704
              
              
              
              5.85
              %
              
              
              
              2,024
              
              
              
              2,024
              
              
              
              5.42
              %1,628
              
              
              
              1,704
              
              
              
              5.85
              %
              
              
              
              4,028
              
              
              
              4,026
              
              
              
              4.40
              %States
      and Political SubdivisionsOver
      Ten Years
              
              
              6,253
              
              
              
              6,112
              
              
              
              4.10
              %
              
              
              
              -
              
              
              
              -
              
              
              
              -6,253
              
              
              
              6,112
              
              
              
              4.10
              %
              
              
              
              
              
              
              
              
              
              
              
              -Mortgage-Backed
      SecuritiesWithin
      One Year
              
              
              1,163
              
              
              
              1,161
              
              
              
              3.80
              %
              
              
              
              -
              
              
              
              -One
      to Five Years
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              1,230
              
              
              
              1,231
              
              
              
              4.16
              %After
      Five Years to Ten Years
              
              
              151
              
              
              
              152
              
              
              
              4.99
              %
              
              
              
              558
              
              
              
              559
              
              
              
              4.98
              %Over
      Ten Years
              
              
              346
              
              
              
              338
              
              
              
              5.80
              %
              
              
              
              2,953
              
              
              
              2,970
              
              
              
              4.78
              %1,660
              
              
              
              1,651
              
              
              
              4.32
              %
              
              
              
              4,741
              
              
              
              4,760
              
              
              
              4.84
              %Subtotal
      available-for-sale securities
              
              
              9,541
              
              
              
              9,467
              
              
              
              4.45
              %
              
              
              
              8,769
              
              
              
              8,786
              
              
              
              4.56
              %Held-to-Maturity
      SecuritiesPrivate
      Label Collateralized Mortgage ObligationsOver
      Ten Years
              
              
              23,854
              
              
              
              21,967
              
              
              
              5.81
              %
              
              
              
              -
              
              
              
              -
              
              
              
              -23,854
              
              
              
              21,967
              
              
              
              5.81
              %
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      investment securities
              
              $
              33,395
              
              
              $
              31,434
              
              
              
              5.40
              %
              
              
              $
              8,769
              
              
              $
              8,786
              
              
              
              4.56
              %




During
2008, SoCal purchased $24.5 million of seasoned private label collateralized
mortgage obligation (“CMO”) securities secured by prime and “Alt-A” residential
mortgages originated from 2003 to 2007, 94% of which were originated prior to
2006. CMO purchase prices ranged from 75.8% to 93.3% of their par value and
credit loss protection provided by subordinated tranches ranged from 4.02% to
12.10% of par. At the time of acquisition, these securities were
AAA-rated.  At March 31, 2009, 51% are AAA-rated, 26% are investment
grade rated but rate below the AAA level, and 23% have been downgraded below
investment grade.





Management’s
OTTI evaluation at December 31, 2008 and March 31, 2009 indicated that the
decline in fair value below the Subsidiary Bank’s carrying value at that date
was not OTTI.  Chief factors considered in this evaluation were the
relative decline in value since purchase, the extent of time that the value had
been depressed, credit rating downgrades, the credit performance of the
underlying loan collateral and whether contracted interest and principal
payments had been made.





LOAN
PORTFOLIO




The
following table sets forth the components of total net loans outstanding in each
category at the date indicated (dollar amounts in thousands):




December
      31,2008
            
            
            2007LoansCommercial
            
            $
            79,008
            
            
            $
            56,791Real
      Estate - Construction
            
            
            43,104
            
            
            
            37,566Real
      Estate - Other
            
            
            179,432
            
            
            
            113,123Consumer
            
            
            7,032
            
            
            
            7,127Net
      Deferred Loan Fees
            
            
            (
      388
            )
            
            
            (
      273
            )Total
      Loans
            
            
            308,188
            
            
            
            214,334Allowance
      for Loan Losses
            
            
            (
      8,799
            )
            
            
            (
      4,077
            )Net
      Loans
            
            $
            299,389
            
            
            $
            210,257CommitmentsLetters
      of Credit
            
            $
            -
            
            
            $
            769Undisbursed
      Loans andCommitments
      to Grant Loans
            
            
            57,121
            
            
            
            62,459Total
      Commitments
            
            $
            57,121
            
            
            $
            63,228





34


At
December 31, 2008 and 2007, respectively, approximately 58% and 53%, of the loan
portfolio was comprised of real estate-other loans. Real
estate-other loans
consist primarily of loans secured by owner-occupied and investor commercial
real estate.




In an
effort to diversify its loan portfolio, in 2006, PBB, now the Subsidiary Bank,
became an approved lender under CalCAP under which $15.4 million and $5.9
million of commercial loans were outstanding at December 31, 2008 and 2007,
respectively. The outstanding balances of real estate loans originated under the
CalCAP program were $2.4 million and  $1.9 million at December 31,
2008 and 2007, respectively. Under the CalCAP program, the borrower, CalCAP and
the Subsidiary Bank contribute funds (generally 2%, 4% and 2%, respectively, of
the loan commitment amount) to a CalCAP reserve account that is held in an
interest-bearing demand account at the Subsidiary Bank. The Subsidiary Bank’s
contributions to the CalCAP reserve account have been recorded as a receivable
and are included in accrued interest and other assets. The allowance for loan
losses allocated to the CalCAP loans takes into consideration the credit support
provided by the CalCAP reserve account. If the Subsidiary Bank were to formally
withdraw from the program, the remaining balance in the CalCAP reserve account
after all loans have been repaid and there are no pending claims for
reimbursement and the California Pollution Control Financing Authority withdraws
its pro rata portion (based on total contributions) of the account balance will
be paid to the Subsidiary Bank as repayment of the previously recorded
receivable.


The
following table sets forth the maturity distribution of loans outstanding at
December 31, 2008. In addition, the table shows the distribution of such loans
between those loans with predetermined (fixed) interest rates and those with
variable (floating) interest rates. Floating rates generally fluctuate with
changes in the national prime rate or other interest rate indices. Variable rate
loans where the interest rate has fallen below contractual minimums are
classified in the following chart as fixed rate loans (dollar amounts in
thousands):




Over
      OneYear
      ButLess
      Than
            
            
            Less
      Than
            
            
            Over
      FiveOne
      Year
            
            
            Five
      Years
            
            
            Years
            
            
            TotalCommercial
            
            $
            65,749
            
            
            $
            11,388
            
            
            $
            1,871
            
            
            $
            79,008Real
      Estate - Construction
            
            
            39,979
            
            
            
            3,125
            
            
            
            -
            
            
            
            43,104Real
      Estate - Other
            
            
            49,469
            
            
            
            98,999
            
            
            
            30,964
            
            
            
            179,432Consumer
            
            
            3,447
            
            
            
            900
            
            
            
            2,685
            
            
            
            7,032Total
            
            $
            158,644
            
            
            $
            114,412
            
            
            $
            35,520
            
            
            $
            308,576Loans
      with fixed interest rates
            
            $
            48,835
            
            
            $
            30,189
            
            
            $
            33,187
            
            
            $
            112,211Loans
      with variable interest rates
            
            
            109,809
            
            
            
            84,223
            
            
            
            2,333
            
            
            
            196,362Total
            
            $
            158,644
            
            
            $
            114,412
            
            
            $
            35,520
            
            
            $
            308,576





NONPERFORMING
ASSETS




At
September 30, 2008, one borrowing relationship totaling $3.5 million, of which
$3.4 million was outstanding, was graded Substandard.  Of the total
outstanding balance, approximately $1.0 million was past due at September 30,
2008, of which $0.5 million is collateralized by deposits at the Subsidiary
Bank.  The Subsidiary Bank declared the loans in default. During the fourth
quarter, the $2.9 million unsecured portion of the debt was charged
off.  The remaining balance of the loan is on nonaccrual. While the
loans are supported by various guarantors, the Subsidiary Bank is currently
unsure of what action, if any, will be required to collect from the
guarantors.





35


Nonaccrual
loans are those loans for which we have discontinued accrual of interest because
there exists reasonable doubt as to the full and timely collection of either
principal or interest.  Loans past due 90 days will continue to accrue
interest for financial reporting purposes only when the loan is both well
secured and in the process of collection.


When a
loan is placed on nonaccrual status, all interest previously accrued but
uncollected is reversed against current period operating
results.  Income on such loans is then recognized only to the extent
that cash is received and, where the ultimate collection of the carrying amount
of the loan is probable, after giving consideration to the borrower’s current
financial condition, historical repayment performance and other
factors.  Accrual of interest is resumed only when (i) principal and
interest are brought fully current, and (ii) such loan is either considered, in
management’s judgment, to be fully collectible or otherwise well secured and in
the process of collection.


SoCal
considers a loan to be impaired when, based on current information and events,
it is probable that it will be unable to collect all amounts due (principal and
interest) according to the contractual terms of the loan agreement. The
measurement of impairment may be based on (i) the present value of the
expected cash flows of the impaired loan discounted at the loan’s original
effective interest rate, (ii) the observable market price of the impaired
loan or (iii) the fair value of the collateral of a collateral-dependent
loan.





At
December 31, 2008, nonperforming loans consisted of $2.1 million in SBA loans,
$3.5 million in real estate secured loans and $7.7 million in construction
loans.  At December 31, 2007, nonperforming loans consisted of one
$920,000 loan secured by commercial real estate.  If interest had been
recognized on nonaccrual loans, such income would have approximated $332,000 and
$71,000 for 2008 and 2007, respectively. At December 31, 2008 and 2007, SoCal
had no loans that were 90 days past due that were still accruing interest or
loans that were “troubled debt restructurings”.





Other
real estate owned (“OREO”) at December 31, 2008 consists of one property taken
in settlement of an SBA loan obligation and a participation interest in a
construction loan that was taken into OREO.  Subsequent to year end,
two additional commercial properties with fair values of $2.6 million were
transferred to OREO.  There was no OREO at December 31,
2007.





The
current economic slowdown has negatively affected the ability of borrowers to
meet their loan and credit line payment obligations.  Management
continues to actively evaluate the entire loan portfolio as part of their
internal credit review process.





The
following table sets forth information about non-performing assets at the date
indicated (dollar amounts in thousands):




December
      31,2008
            
            
            2007Loans
      90 Days Past Due and Still Accruing
            
            $
            -
            
            
            $
            -Nonaccrual
      Loans
            
            
            13,258
            
            
            
            920Total
      Nonperforming Loans
            
            
            13,258
            
            
            
            920Other
      Real Estate Owned
            
            
            647
            
            
            
            -Total
      Nonperforming Assets
            
            $
            13,905
            
            
            $
            920Nonperforming
      Loans as a Percentage of Total Loans4.30%
            
            
            
            0.43%Allowance
      for Loan Loss as a Percentage of Nonperforming Loans66.37%
            
            
            
            443.15%Nonperforming
      Assets as a Percentage of Total Assets3.64%
            
            
            
            0.34%





POTENTIAL
PROBLEM LOANS




On at
least a quarterly basis, the Subsidiary Bank applies an internal credit quality
rating system to loans that are either past due or fully performing but exhibit
certain characteristics that could reflect a potential weakness. Loans are
placed on nonaccrual status when the likely amount of future principal and
interest payments are expected to be less than the contractual amounts, even if
such loans are not 90 days past due.




36




Periodically
the Subsidiary Bank reviews the loan portfolio for evidence of potential problem
loans.  Potential problem loans are loans that are currently performing in
accordance with contractual terms, but where known information about possible
credit problems of the borrower causes doubt about the ability of the borrower
to comply with the loan payment terms and may result in disclosure of such loans
as nonperforming at some time in the future.   At December 31, 2008, the
Subsidiary Bank identified $9.4 million of potential problem loans consisting of
three commercial loans totaling $3.5 million, two construction loans totaling
$2.9 million, three commercial real estate loans totaling $2.1 million and five
SBA loans totaling $935 thousand. At December 31, 2007, the Subsidiary Bank
identified $824,000 of potential problem loans consisting of one commercial real
estate loan totaling $592 thousand, one commercial loan totaling $142,000 and
$90,000 of purchased consumer loans as potential problem loans.  Potential
problem loans totaled 3.06% and 0.38% of total loans at December 31, 2008 and
2007, respectively.  Factors such as payment history, value of
supporting collateral, and personal or government guarantees led us to conclude
that the current risk exposure on these loans did not require accounting for the
loans as nonperforming.




PROVISION
AND ALLOWANCE FOR LOAN LOSSES




The
provision for loan losses is based on management’s assessment of the allowance
for loan losses required to provide for the loan losses inherent in the loan
portfolio. For 2008 and 2007, the provision for loan losses was $10.8 million
and $2.3 million, respectively.  The increase in the provision for
loan losses during 2008 was due to loan portfolio credit deterioration
exemplified by the increase in our non-performing loans. Non-performing loans as
of December 31, 2008 were $13.3 million, compared to $920,000 at December 31,
2007.




Management
believes that the allowance for loan losses is adequate. Quarterly detailed
reviews are performed by management to identify the risks inherent in the loan
portfolio, assess the overall quality of the loan portfolio and to determine the
adequacy of the allowance for loan losses and the related provision for loan
losses to be charged to expense. Management has adopted a methodology designed
by a third-party to determine the required loan loss
reserve.  Management believes that this methodology is consistent with
the methodology set forth by the FDIC in its 2006 policy statement on the
allowance for loan losses.


The
methodology estimates the expected loss rates based on a two-factor
approach.  The first factor is based on the actual payment default
rate in the loan portfolio.  For loan types that have not generated an
actual payment default rate, a rate is applied based on industry experience for
such loans by type and geographic location.  The second factor is
based on the rate of loss as determined by dividing the expected net charge-off
of defaulted loans, with defaulted loans being defined as loans that have 30
days or greater payment delinquency plus nonaccrual and gross loans charged-off,
by total loans in each group.   This rate reflects industry
experience as determined by state and loan type.  Taken together, the
two factors produce the expected loss rate.





The
calculation is applied to outstanding loan balances, including participation
loans, and expected contingent funding of commitments to fund as of the
measurement date. Expected losses on loans identified as specifically impaired
are excluded from the above measurements, as the provision for such loans is
based on the present value of expected future cash flows discounted at the
historical effective interest rate stipulated in the loan agreement, or based on
the fair value of collateral for collateral-dependent loans and is included as a
separate component in calculating the required provision for loan
losses.




SoCal
takes external, subjective (so-called qualitative) factors into consideration
when assessing the adequacy of the allowance for loan losses. These qualitative
factors, as determined by management, take into account and weight by risk,
among other things, the growth and nature of the loan portfolio, concentration
of credits, lending policies, economic trends, competition and legal and
regulatory requirements. The total qualitative reserve requirement is determined
by applying the risk weights of the qualitative factors to the total amount of
loans outstanding and is included as the third component in the
calculation.




The
credit quality of our loans will be influenced by underlying trends in the
economic cycle, particularly in Southern California, and other factors, which
are beyond management’s control. Accordingly, no assurance can be given that we
will not sustain loan losses that in any particular period will be sizable in
relation to the allowance. Additionally, subsequent evaluation of the loan
portfolio by us and by our regulators, in light of factors then prevailing, may
require increases in the allowance through charges to the provision for loan
losses.


The
following table summarizes the allocation of the allowance for loan losses by
loan type as of the dates indicated and the percent of loans in each category to
total loans (dollar amounts in thousands):




December
      31,2008
            
            2007Amount
            
            Loan
      Percent
            
            Amount
            
            Loan
      PercentCommercial
            
            $
            3,730
            
            
            
            25.6%
            
            
            $
            1,286
            
            
            
            26.5%Real
      Estate - Construction
            
            
            2,761
            
            
            
            14.0
      %
            
            
            
            1,163
            
            
            
            17.5
      %Real
      Estate - Other
            
            
            2,074
            
            
            
            58.1
      %
            
            
            
            1,468
            
            
            
            52.7
      %Consumer
            
            
            234
            
            
            
            2.3
      %
            
            
            
            152
            
            
            
            3.3
      %Unallocated
            
            
            -
            
            
            
            -
            
            
            
            8
            
            
            
            -Total
            
            $
            8,799
            
            
            
            100.0
      %
            
            
            $
            4,077
            
            
            
            100.0
      %





37


The
CalCAP loans totaled $17.8 million and $29.9 million at December 31, 2008 and
2007, respectively, and are included in the Commercial and Real Estate—Other
categories in the above table. The allowance for loan losses allocated to the
CalCAP loans takes into consideration the credit support provided by the CalCAP
reserve account. The balance in the CalCAP reserve account, including amounts
due from CalCAP, was $2.4 million and $2.2 million at December 31, 2008 and
2007, respectively.


As a
percentage of total loans, the allowance for loan losses increased 96 basis
points from 1.90% at December 31, 2007 to 2.86% at December 31, 2008. The
increase is due to an increase in nonperforming loans and an increase in the
percentage of loans categorized at higher risk ratings.




The
following table sets forth information about the allowance for loan losses and
non-performing assets at the date indicated (dollar amounts in
thousands):





For the Year Ended December
    31,2008
            
            
            2007Outstanding Loans:Average for the
      Year
            
            $
            301,688
            
            
            $
            170,658End of the
      Year
            
            
            308,188
            
            
            
            214,334Allowance For Loan Losses:Balance at Beginning of
Year
            
            
            4,077
            
            
            
            1,869Allowance acquired at acquisition of
      Spectrum
            
            
            1,437Actual Charge-Offs:Commercial
            
            
            (3,899
            )
            
            
            -Real Estate
      Construction
            
            
            (1,935)
            
            
            
            -Real Estate-
      Other
            
            
            (1,456
            )
            
            
            -Consumer
            
            
            (46
            )
            
            
            (46)Total Charge-Offs
            
            
            (7,530
            )
            
            
            (46
            )Less Recoveries:Commercial
            
            
            26
            
            
            
            -Real Estate
      ConstructionReal Estate-
      Other
            
            
            
            
            
            
            -Consumer
            
            
            16
            
            
            
            -Total Recoveries
            
            
            42
            
            
            
            -Net Loans Charged-Off
            
            
            (7,488
            )
            
            
            (46
            )Provision for Loan Losses
            
            
            10,773
            
            
            
            2,254Balance at End of Year
            
            $
            8,799
            
            
            $
            4,077Ratios:Net Loans Charged-Off
      toAverage
      Loans
            
            
            2.48%
            
            
            
            0.03%Allowance for Loan Losses
      toTotal Loans
            
            
            2.86%
            
            
            
            1.90%Net Loans Charged-Off to
      BeginningAllowance for Loan
      Losses
            
            
            183.66%
            
            
            
            2.46%Net Loans Charged-Off
      toProvision for Loan
    Losses
            
            
            69.51%
            
            
            
            2.04%Allowance for Loan Losses
      toNonperforming
      Loans
            
            
            66.37%
            
            
            
            443.15%





38


SUBSIDIARY
BANK FUNDING




Deposits
are the primary source of funds for the Subsidiary Bank.




The
acquisition of Spectrum on January 31, 2008 underlay significant deposit
increases in 2008 versus 2007. The following table summarizes the distribution
of average deposits and the average rates paid for the period indicated (dollar
amounts in thousands):




Years
      Ended December 31,2008
            
            
            2007Average
            
            
            Average
            
            
            Average
            
            
            AverageBalance
            
            
            Rate
            
            
            Balance
            
            
            RateMoney
      Market, Savings and NOW
            
            $
            83,061
            
            
            
            1.41
            %
            
            
            $
            74,306
            
            
            
            3.35
            %Time
      Deposits under $100,000
            
            
            75,521
            
            
            
            3.78
            %
            
            
            
            23,817
            
            
            
            5.14
            %Time
      Deposits of $100,000 or More
            
            
            57,009
            
            
            
            3.53
            %
            
            
            
            15,672
            
            
            
            5.17
            %Total
      Interest-Bearing Deposits
            
            
            215,591
            
            
            
            2.80
            %
            
            
            
            113,795
            
            
            
            3.98
            %Noninterest-Bearing
      Demand Deposits
            
            
            99,005
            
            
            
            n/a
            
            
            
            
            55,471
            
            
            
            n/aTotal
      Average Deposits
            
            $
            314,596
            
            
            
            1.92
            %
            
            
            $
            169,266
            
            
            
            2.67
            %


The
average balance of money market, savings and NOW accounts increased $8.8
million, or 11.8%, from $74.3 million in 2007 to $83.1 million in 2008. The
average balance of time deposits under $100,000 increased $51.7 million, or
217.1%, from $23.8 million in 2007 to $75.5 million in 2008. The average balance
of time deposits greater than $100,000 increased $41.3 million, or 263.8%, from
$15.7 million in 2007 to $57.1 million in 2008. The overall average rate
decreased 75 basis points from 2.67% in 2007 to 1.92% in 2008.  The
decrease was primarily due to a decline in interest rates on deposits, as
deposits have repriced downward in response to lower wholesale market interest
rates.


The
scheduled maturity distribution of time deposits of $100,000 or greater were as
follows (dollar amounts in thousands):




Three
      Months or Less
            
            $
            17,189Over
      Three Months to One Year
            
            
            15,701Over
      One Year to Three Years
            
            
            7,995Over
      Three Years
            
            
            865Total
            
            $
            41,750





The
Subsidiary Bank has from time to time borrowed funds on a short-term basis from
the Federal Home Loan Bank and other financial institutions. Outstanding
borrowings totaled $24.0 million and $18.0 million at December 31, 2008 and
2007, respectively. The interest rate was 0.50% and 3.80% on these outstanding
borrowings at December 31, 2008 and 2007, respectively. The maximum amount of
borrowings at any month-end was $39.0 million and $18.0 million in 2008 and
2007, respectively. The average amounts outstanding totaled $15.0 million and
$7.8 million and the weighted average interest rates were 1.92% and 4.90% in
2008 and 2007, respectively.




LIQUIDITY





The
following discusses liquidity of both SoCal and the Subsidiary Bank on an
unconsolidated basis.





SoCal





SoCal and
the Subsidiary bank liquidity positions are managed separately since SoCal, as a
bank holding company, is blocked by regulation from accessing the liquidity of
its subsidiary bank.


Management’s
primary measure of SoCal’s liquidity is the time until its existing unencumbered
asset liquidity would be exhausted if used to satisfy maturing obligations and
meet normal operating expenses.  This analysis precludes any assumed
Subsidiary Bank dividend income and potential new financings.  At
December 31, 2008, SoCal’s unencumbered liquid assets were sufficient to meet
SoCal’s projected expenditures to February 2009.  As of the date of
this filing, SoCal’s liquidity position has somewhat
improved.  Current unencumbered liquid assets are sufficient to meet
maturing obligations and normal operating expenses until August 2010, assuming
SoCal’s principal shareholder would extend or convert to common or preferred
equity its $9.5 million of unsecured senior notes, maturing on July 1,
2009.





39


In March
2008, SoCal borrowed $8.0 million from Pacific Coast Bankers’ Bank (“PCBB”)
through a loan secured by the stock of the Subsidiary Bank.  On
December 31, 2008, SoCal was in violation of three financial covenants. In the First Amendment and
Waiver Agreement (the “Agreement”) executed April 14, 2009, both parties agreed
to amend the loan terms and conditions in exchange for waiver of the covenant
violations.  Certain PCBB loan financial covenants were modified in
the amendment. On May 12, 2009, SoCal and PCBB agreed to a term sheet whereby
the loan agreement would be modified again.  Under the May 12, 2009
term sheet, SoCal is obligated to make a principal payment of $200,000 in May
2009 and fund an interest reserve account in the amount of
$800,000.  Interest payments due PCBB beginning with the June 2009
quarterly debt service payments would be funded from the interest reserve
account until it is exhausted.  The loan rate was reset to 3-month
LIBOR plus 810 basis points.  Loan amortization would begin in
September 2010 with quarterly principal payments in the amount of
$300,000.  The agreement further requires that 25% of any new capital
financings be dedicated to PCBB loan principal payment with an obligation for
SoCal to have made $2.3 million of principal payments by September
2010.





SoCal
also agreed to defer all interest and principal cash payments on loans due to
the Fund, including any refinancing loans, and within its legal capacity to do
so, defer all interest payments on its Fixed Rate Junior Subordinated Deferrable
Interest Rate Debentures until the principal of the PCBB loan has been paid down
to less than $5.5 million and no event of default exists or is
continuing.





In
January 2008, SoCal issued $15.5 in junior subordinated debentures to the Trust,
a Delaware business trust that was formed for the exclusive purpose of issuing
trust preferred securities. The Trust purchased debentures with: (1) the
proceeds of the sale of its common trust securities to SoCal for $464,000, and
(2) certain shares of common stock in Spectrum valued at $15 million that the
Trust received from certain shareholders of Spectrum in exchange for the Trust’s
trust preferred securities. The junior subordinated debentures and trust
preferred securities have generally identical terms, including that they mature
in January 2038 are redeemable after 2013 at SoCal’s option at par and require
monthly interest payments at an annual rate of 10%. SoCal has unconditionally
guaranteed certain distributions on, and certain payments on liquidation and
redemption of, the trust preferred securities.  The trust preferred
securities and corresponding junior subordinated deferrable interest debentures
contain provisions limiting our ability to declare and pay dividends on SoCal’s
common stock in certain events.  Consistent
with its obligations under the amended Pacific Coast Bankers’ Bank loan
agreement, in March and again in April 2009, SoCal notified the trustee
of its $15.4 million Fixed Rate Junior Subordinated Deferrable Interest Rate
Debentures that it would be deferring the scheduled April and May 2009 interest
payments.  Terms of the debenture permit SoCal to defer up to 60
monthly interest payments.  Deferred interest payments accrue interest
is at a 10% annual rate, the same rate as the debenture.





In
December 2008 and January, February and March 2009, the Fund made loans to SoCal
in the amounts of $0.5 million, $2.0 million, $0.5 million  and $6.5
million, respectively.  The annual interest rate on these loans is 15%
and each loan included a transaction fee equal to 2% of the principal
amount.  The loans mature on July 1, 2009 and can be repaid at the
Fund’s discretion in either cash, SoCal common stock at 120% of the then
prevailing fair value as determined by an independent appraisal of shares
of SoCal’s Series A Non-Cumulative Perpetual Preferred Stock at face
value.  SoCal believes that the Fund will either convert its
outstanding loans to common or preferred stock, or extend the maturity
date.





The
Subsidiary Bank





Liquidity
management for banks requires that funds be available to pay anticipated deposit
withdrawals and maturing financial obligations promptly and fully in accordance
with their terms. Subsidiary Bank fund inflows are primarily sourced from loan
payments, loan sales, asset liquidations, acquisition of additional deposit
liabilities, and Federal Home Loan Bank advances. One method banks utilize for
acquiring additional liabilities is through the acceptance of “brokered
deposits” (defined to include not only deposits received through deposit
brokers, but also deposits bearing interest in excess of 75 basis points over
market rates), typically attracting large certificates of deposit at higher
interest rates. At December 31, 2008 and 2007 the deposit portfolio consisted of
$44.6 million and $20.3 million, respectively, in brokered
deposits.  Scheduled maturities of the deposit portfolio at December
31, 2008 are $25.1 million in 2010, $5.2 million in 2011, $3.3 million in
2012 and $11.0 million in 2013. The Subsidiary Bank’s Regulatory Agreement
precludes access to the brokered deposit marketplace.  In lieu of
refinancing these maturities with brokered deposits, funds to cover maturing
brokered deposits will be obtained through core deposit growth, asset
liquidation and capital growth. The Subsidiary Bank’s “adequately capitalized”
status as of December 31, 2008 precludes access to the brokered deposit
marketplace without a waiver from the FDIC.  In January 2009, a waiver
request was submitted to the FDIC which has not been acted upon.  The
Subsidiary Bank has $28.2 million in callable brokered certificates of deposit
which could be refinanced for their same remaining maturities at rates up to 200
basis points lower, but which have not been called due to the current inability
to replace that funding in the brokered deposit market.




40


As of
December 31, 2008, the Subsidiary Bank had available unused short-term borrowing
facilities totaling approximately $108 million. This consisted of $15 million in
advised federal funds lines of credit with two correspondent banks and
approximately $93 million in a secured line of credit with Federal Home Loan
Bank (“FHLB”).  The FHLB notified the Subsidiary Bank that it will
likely reduce the amount of funds that are available to the Subsidiary Bank
under its collateralized borrowing facilities. As of the date of this filing,
the FHLB has not yet acted.  During the first quarter of 2009, the
Subsidiary Bank was notified by one correspondent bank that its $5 million
advised federal funds line was being withdrawn and that $3.5 million of
correspondent bank commitments would require
collateralization.  Collateral was provided in the form of $3.5
million of Federal Funds Sold to that correspondent bank.





As of
December 31, 2008, one depositor accounted for 5.4%, or $16.4 million, of total
deposits. The Subsidiary Bank believes it could replace these deposits through
asset sales, alternative deposit-taking programs or utilize its borrowing
facilities to fund the cash outflow.





INTEREST
RATE SENSITIVITY





Interest
rate risk is the exposure of a bank’s earnings and the economic value of equity
to adverse movements in interest rates. Interest rate exposures exist in the
form of differences in the maturity or rate reset timing of interest-earning
assets and interest-bearing liabilities, basis risk due to imperfect correlation
in the adjustment of rates earned and paid on variable rate instruments with
otherwise similar characteristics (e.g., three-month Treasury bill versus
three-month LIBOR) and from interest-rate-related embedded options (e.g. loan
prepayment risk, callable brokered CD’s, early withdrawal of time deposits,
interest rate caps on loans, etc).


The
potential impact of interest rate risk is significant because of the
profitability and capital adequacy consequences that reduced earnings could
imply. Interest rate risk is a routine part of bank operations and will from
time to time adversely impact profits and a bank’s capital position. The
objective of interest rate risk management is to contain net interest income and
economic value of equity adverse exposures within tolerances set by the board of
directors.




The
aligning of asset and liability maturities is an integral part of the active
management of an institution’s interest rate risk exposure. To the extent
maturities of assets and liabilities do not match, the net interest margin may
be affected. Even with perfectly matched repricing of assets and liabilities,
risk remains in the form of basis risk and embedded option risk. In an overall
attempt to match assets and liabilities, SoCal takes into account rates and
maturities to be offered in connection with certificates of deposit and variable
rate loans. SoCal has generally been able to control exposure to changing
interest rates by maintaining a large percentage of floating interest rate loans
and funding from generally shorter maturity or variable rate
sources.




CAPITAL
RESOURCES




Shareholders’
equity at December 31, 2008 was $31.2 million, a decrease of $23.8 million from
$55.0 million at December 31, 2007. The decrease was primarily due to the 2008
net loss, offset by the issuance of common stock to the Fund to provide cash for
the Spectrum acquisition.




As part
of the Spectrum acquisition a total of $15.0 million of 10% trust preferred
securities were issued by the Trust, a non-bank subsidiary of SoCal, and a
corresponding amount of junior subordinated debentures were issued by
SoCal.  In addition, SoCal sold $20 million of 15% non-cumulative
perpetual preferred stock to the Fund on December 10, 2007.   The
trust preferred securities and the non-cumulative perpetual preferred stock have
been partially included in Tier 1 capital for regulatory capital.




The
Subsidiary Bank’s Tier 1 risk-based capital ratio and leverage ratio exceeded
the “well capitalized” regulatory minimum requirements and its total risk-based
capital ratio exceeded the “adequately capitalized” regulatory capital minimum
requirement at December 31, 2008.  As the lowest capital status
governs, the Subsidiary Bank was deemed to be “adequately capitalized” at
December 31, 2008. During the first quarter 2009, SoCal made $7 million of
additional capital contributions to the Subsidiary Bank.


Under
regulatory capital adequacy guidelines, capital adequacy is measured relative to
period-end risk-adjusted assets and average net ledger assets.  Risk
weights are applied to assets and certain off-balance-sheet items, such as
unused loan commitments and standby letters of credit, to compute risk-adjusted
assets. Capital ineligible assets, primarily goodwill, core deposit intangibles
and certain amounts of deferred tax assets, are deducted from both risk-adjusted
and average net ledger assets.  The guidelines require that a portion
of total capital be core, or Tier 1, capital consisting of common shareholders’
equity and perpetual preferred stock, less goodwill and certain deductions. Tier
2 capital consists of other elements, primarily non-perpetual preferred stock,
subordinated debt and mandatory convertible debt, plus the allowance for loan
losses, subject to certain limitations.





41


Pursuant
to a Regulatory Agreement between the Subsidiary Bank’s board of directors and
the Subsidiary Bank’s regulators discussed previously, the Subsidiary Bank
must by December 31, 2009 achieve and thereafter maintain a tangible
shareholders’ equity ratio of at least 9%, a Tier 1 leverage ratio of at
least 9%, and a total risk-based capital ratio of at least 12% so long as
the agreement is in effect.  See “Recent Regulatory
Actions” previously for a discussion of the Regulatory
Agreement.




The
following table sets forth the regulatory standards for well-capitalized and
adequately capitalized institutions and the capital ratios for SoCal and the
Subsidiary Bank as of the date indicated:




Consolidated
SoCal


Minimum
      Requirements to be Adequately Capitalized
            
            Actual
              December
      31, 2008Tier
      1 Capital to Average Assets
            
            4.00%
            
            4.92%Tier
      1 Capital to Risk-Weighted Assets
            
            4.00%
            
            5.41%Total
      Capital to Risk-Weighted Assets
            
            8.00%
            
            6.67%




(1) These
minimum  reequirements apply to consolidated bank holding companies in
excess of $500 million in assets.  As such, Consolidated SoCal is not
currently required to meet these minimum requirements.




The Subsidiary
Bank


Minimum
      Requirement to be Adequately
              Capitalized
            
            Minimum
      Requirement to be Well Capitalized (1)
            
            Actual
              December
      31, 2008
            
            Actual
              December
      31, 2007(PBB
      only)Tier
      1 Capital to Average Assets
            
            4.00%
            
            9.00%
            
            7.03%
            
            8.82%Tier
      1 Capital to Risk-Weighted Assets
            
            4.00%
            
            9.00%
            
            7.69%
            
            8.29%Total
      Capital to Risk-Weighted Assets
            
            8.00%
            
            12.00%
            
            8.96%
            
            9.55%




(1)
            The
      minimum required ratios have been adjusted pursuant to the Regulatory
      Agreement entered into by the Subsidiary Bank and its
      regulators.  See “Recent Regulatory Actions” above for further
      discussion of the Regulatory Agreement.  At December 31, 2008,
      prior to execution of the Regulatory Agreement, the minimum requirement to
      be Well-Capitalized was 5.00% for Tier 1 capital to average assets, 6.00%
      Tier 1 capital to risk-weighted assets, and 10.00% for total capital to
      risk-weighted assets.





TARP
APPLICATION





The
United States Treasury Department recently announced the TARP CPP, the $700
billion relief program for financial institutions passed by Congress. Under the
TARP CPP, the Treasury department is offering to purchase senior preferred stock
in qualifying financial institutions with an initial cumulative dividend rate of
5%, increasing to 9% after five years. Financial institutions participating in
the program are required to issue warrants to purchase their common stock equal
to 15% of the value of the preferred stock purchased by the Treasury
Department.





SoCal has
applied for $10.4 million of TARP CPP funding. Management reserves the right to
modify or withdraw the application following release of program rules applicable
to SoCal. Application approval is at the discretion of the Treasury Department,
with consideration given to a concurrent recommendation from SoCal’s primary
federal regulator.  It is uncertain when SoCal’s application will be
processed and, if approved, when funding may occur.





EFFECTS
OF INFLATION




The
financial statements and related financial information presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution’s
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or same magnitude as the price of
goods and services.





42


OFF-BALANCE
SHEET ARRANGEMENTS





Off-balance
sheet arrangements are any contractual arrangement to which an unconsolidated
entity is a party, under which we have: (1) any obligation under a guarantee
contract; (2) 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; (3) any
obligation under certain derivative instruments; or (4) any obligation under a
material variable interest held by us in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to us, or engages in
leasing, hedging or research and development services with us.





In the
ordinary course of business, we have entered into off-balance sheet financial
instruments consisting of commitments to extend credit, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the financial statement when they are funded or related fees are incurred or
received.





The
Subsidiary Bank enters into leases for real estate used in the conduct of its
business.  At December 31, 2008, the future minimum rental payments
under these lease commitments follows:





Year
      Ending
            
            Amount2009
            
            $490,4432010
            
            436,2222011
            
            421,3092012
            
            386,0672013
            
            363,064Thereafter
            
            76,657$2,173,762





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
applicable.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





The
financial statements called for by this item appear in this document beginning
on the following page, and include audited consolidated financial statements for
SoCal for the year ended December 31, 2008 and for the period from January 17,
2007 (Inception) to December 31, 2007.




INDEX TO FINANCIAL
      STATEMENTSBelvedere SoCal and
      Subsidiary
            PageReport of Independent
      Registered Public Accounting Firm
            44Consolidated Statement of
      Financial Condition
            45Consolidated Statement of
      Operations
            46Consolidated Statement of
      Changes in Shareholders’ Equity
            47Consolidated
      Statement of Cash Flows
            48Notes
            50





43




REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
 The
Shareholders and Board of Directors
 Belvedere
SoCal and Subsidiary
 
 
 We have
audited the accompanying consolidated statement of financial condition of
Belvedere SoCal and subsidiary as of December 31, 2008 and 2007 and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the year ended December 31, 2008 and the period from January 17, 2007
(inception) to December 31, 2007.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial condition of Belvedere
SoCal and subsidiary as of December 31, 2008 and 2007, and the consolidated
results of their operations and their cash flows for the year ended December 31,
2008 and the period from January 17, 2007 (inception) to December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
 
 
 
 
 /s/
Perry-Smith LLP
 Sacramento,
California
 May 14,
2009
   44


BELVEDERE
SoCAL AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
 
 December
31, 2008 and 2007
 
 2008
                        
                        
                        2007ASSETSCash
      and due from banks
                        
                        $
                        6,917,815
                        
                        
                        $
                        4,401,632Federal
      Funds sold
                        
                        
                        3,460,000
                        
                        
                        
                        9,130,000Total
      cash and cash equivalents
                        
                        
                        10,377,815
                        
                        
                        
                        13,531,632Interest-bearing
      deposits in other financial institutions
                        
                        
                        225,000
                        
                        
                        
                        100,000Investment
      securities available-for-sale
                        
                        
                        9,467,470
                        
                        
                        
                        8,786,293Investment
      securities held-to-maturity
                        
                        
                        23,853,591
                        
                        
                        
                        -Loans:Commercial
                        
                        
                        79,008,123
                        
                        
                        
                        56,791,314Real
      Estate – Construction
                        
                        
                        43,103,911
                        
                        
                        
                        37,566,205Real
      Estate – Other
                        
                        
                        179,432,738
                        
                        
                        
                        113,123,251Consumer
                        
                        
                        7,031,589
                        
                        
                        
                        7,126,720Total
      loans
                        
                        
                        308,576,361
                        
                        
                        
                        214,607,490Deferred
      loan fees, net of costs
                        
                        
                        (388,392
                        )
                        
                        
                        (273,115
                        )Allowance
      for loan losses
                        
                        
                        (8,798,713
                        )
                        
                        
                        (4,077,213
                        )Net
      loans
                        
                        
                        299,389,256
                        
                        
                        
                        210,257,162Premises
      and equipment, net
                        
                        
                        5,257,185
                        
                        
                        
                        461,760Goodwill
                        
                        
                        24,185,915
                        
                        
                        
                        29,459,783Other
      intangible asset, net
                        
                        
                        2,440,080
                        
                        
                        
                        2,368,172Federal
      Home Loan Bank stock, at cost
                        
                        
                        1,598,000
                        
                        
                        
                        916,300Other
      real estate owned
                        
                        
                        647,447
                        
                        
                        
                        -Accrued
      interest and other assets
                        
                        
                        7,442,438
                        
                        
                        
                        4,198,740Total
      assets
                        
                        $
                        384,884,197
                        
                        
                        $
                        270,079,842LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
                        
                        $
                        100,053,616
                        
                        
                        $
                        73,358,729NOW,
      savings and money market accounts
                        
                        
                        92,971,587
                        
                        
                        
                        49,514,411Time
      deposits under $100,000
                        
                        
                        68,929,661
                        
                        
                        
                        45,460,646Time
      deposits $100,000 and over
                        
                        
                        41,750,479
                        
                        
                        
                        25,715,811Total
      deposits
                        
                        
                        303,705,343
                        
                        
                        
                        194,049,597Federal
      Home Loan Bank advances
                        
                        
                        24,000,000
                        
                        
                        
                        18,000,000Notes
      payable, net of fees
                        
                        
                        8,460,224
                        
                        
                        
                        -Junior
      subordinated debentures, net of issuance costs
                        
                        
                        15,426,192
                        
                        
                        
                        -Accrued
      interest and other liabilities
                        
                        
                        2,066,085
                        
                        
                        
                        3,044,416Total
      liabilities
                        
                        
                        353,657,844
                        
                        
                        
                        215,094,013Commitments
      and contingencies (Notes 5 and 12)
                        
                        
                        -
                        
                        
                        
                        -Shareholders'
      equity:Preferred
      stock – non-cumulative, perpetual, no par value;authorized
      20,000,000 shares; 934,642 and 806,666 Series Ashares
      issued and outstanding at December 31, 2008 and 2007,respectively
                        
                        
                        22,966,050
                        
                        
                        
                        19,766,650Common
      stock – no par value; authorized 20,000,000 shares;3,331,877
      and 2,011,343 shares issued and outstanding atDecember
      31, 2008 and 2007, respectively
                        
                        
                        58,038,621
                        
                        
                        
                        35,749,587Accumulated
      deficit
                        
                        
                        (49,734,318
                        )
                        
                        
                        (540,408
                        )Accumulated
      other comprehensive (loss) income
                        
                        
                        (44,000
                        )
                        
                        
                        10,000Total
      shareholders' equity
                        
                        
                        31,226,353
                        
                        
                        
                        54,985,829Total
      liabilities and shareholders' equity
                        
                        $
                        384,884,197
                        
                        
                        $
                        270,079,842
 
 The
accompanying notes are an integral part of these consolidated financial
statements.


45




BELVEDERE
SoCAL AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENT OF OPERATIONS
 
 For
the Year Ended December 31, 2008 and the
 Period
from January 17, 2007 (Inception) to December 31, 2007
 
 2008
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2007Interest
      income:Interest
      and fees on loans
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        21,225,508
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        1,769,077Interest
      on investment securities
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,514,914
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        45,919Other
      interest income
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        409,277
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        40,132Total
      interest income
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        23,149,699
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,855,128Interest
      expense:Interest
      on NOW, savings and money market accounts
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,175,160
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        121,230Interest
      on time deposits
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,871,087
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        194,281Interest
      on advances and notes payable
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        710,514
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        139,502Interest
      on junior subordinated debentures
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,418,725
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        192,670Total
      interest expense
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,175,486
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        647,683Net
      interest income
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        14,974,213
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,207,445Provision
      for loan losses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        10,772,742
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        350,859Net
      interest income after provision for loan losses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,201,471
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        856,586Non-interest
      income:Service
      charges and fees
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,047,634
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        43,720Loss
      on sales of available-for-sale investment securities
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (116,000
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Other
      income
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        220,950
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,962Total
      non-interest income
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,152,584
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        46,682Non-interest
      expense:Salaries
      and employee benefits
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,306,699
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        566,418Professional
      fees
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,565,998
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        640,627Occupancy
      and equipment
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,442,769
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        77,704Data
      processing
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,268,064
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        55,392Other
      intangible asset amortization
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        499,135
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        34,321Office
      and administrative
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        489,849
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        54,924Correspondent
      banking fees
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        472,581
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        69,531Insurance
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        431,962
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        26,749Marketing
      and business promotion
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        124,917
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        12,550Goodwill
      impairment
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        33,301,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Other
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,061,150
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        699Total
      non-interest expense
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        50,964,124
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,538,915Loss
      before income tax provision (benefit)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (45,610,069
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (635,647
                                                                                                                                                                        )Income
      tax provision (benefit)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        384,441
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (261,889
                                                                                                                                                                        )Net
      loss
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (45,994,510
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (373,758
                                                                                                                                                                        )Net
      loss per share – basic and diluted
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (15.28
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (2.45
                                                                                                                                                                        )
 The
accompanying notes are an integral part of these consolidated financial
statements.








46


BELVEDERE
SoCAL AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
 
 For
the Year Ended December 31, 2008 and the
 Period
from January 17, 2007 (Inception) to December 31, 2007
 
 
 AccumulatedOtherPreferred Stock
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Common Stock
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          ComprehensiveComprehensive
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Accumulated
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Income
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          TotalLoss
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Shares
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Amount
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Shares
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Amount
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Deficit
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (Loss)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          EquityCommon
      stock issued
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,125,539
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          11,500,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          11,500,000Series
      A non-cumulative perpetual preferredstock
      issued, net of issuance costs
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          800,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          19,600,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          19,600,000Common
      stock issued for acquisition of ProfessionalBusiness
      Bank, net of issuance costs
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          885,804
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          24,249,587
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          24,249,587Comprehensive
      loss:Net
      loss
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          (373,758
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (373,758
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (373,758
                                                                                                                                                                                          )Unrealized
      gain on available-for-sale securities,net
      of tax of $7,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          10,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          10,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          10,000Total
      comprehensive loss
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          (363,758
                                                                                                                                                                                          )Series
      A preferred stock dividend declared
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          6,666
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          166,650
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (166,650
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Balance,
      December 31, 2007
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          806,666
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          19,766,650
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          2,011,343
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          35,749,587
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (540,408
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          10,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          54,985,829Warrants
      exercised
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          7,102
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          71
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          71Stock-based
      compensation
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          288,963
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          288,963Common
      stock issued
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,313,432
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          22,000,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          22,000,000Comprehensive
      loss:Net
      loss
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          (45,994,510
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (45,994,510
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (45,994,510
                                                                                                                                                                                          )Unrealized
      loss on available-for-sale securities,net
      of tax of $84,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (123,000
                                                                                                                                                                                          )Less
      reclassification adjustment for loss includedin
      net loss, net of tax of $47,000
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          69,000Net
      unrealized loss
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (54,000
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (54,000
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (54,000
                                                                                                                                                                                          )Total
      comprehensive loss
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          (46,048,510
                                                                                                                                                                                          )Series
      A preferred stock dividends declared
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          127,976
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          3,199,400
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (3,199,400
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Balance,
      December 31, 2008
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          934,642
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          22,966,050
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          3,331,877
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          58,038,621
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          (49,734,318
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          (44,000
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          31,226,353
 
 The
accompanying notes are an integral part of
these consolidated financial statements.


47




BELVEDERE
SoCAL AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 
 For
the Year Ended December 31, 2008 and the
 Period
from January 17 (Inception) to December 31, 2007
 
 2008
                    
                    
                    2007Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (45,994,510
                    )
                    
                    $
                    (373,758
                    )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization expense
                    
                    
                    653,644
                    
                    
                    
                    61,874Net
      loss on sales of available-for-sale investmentsecurities
                    
                    
                    116,000
                    
                    
                    
                    -Provision
      for loan losses
                    
                    
                    10,772,742
                    
                    
                    
                    350,859Stock-based
      compensation
                    
                    
                    288,963
                    
                    
                    
                    -Loss
      on sale of other real estate owned
                    
                    
                    98,805
                    
                    
                    
                    -Federal
      Home Loan Bank dividends
                    
                    
                    (63,415
                    )
                    
                    
                    -Goodwill
      impairment
                    
                    
                    33,301,000
                    
                    
                    
                    -Net
      decrease (increase) in accrued interest and other assets
                    
                    
                    6,213,080
                    
                    
                    
                    (1,117,401
                    )Net
      decrease in accrued interest and other liabilities
                    
                    
                    (9,962,915
                    )
                    
                    
                    (61,329
                    )Net
      cash used in operating activities
                    
                    
                    (4,576,606
                    )
                    
                    
                    (1,139,755
                    )Cash
      flows from investing activities:Proceeds
      from maturities and principal paydowns ofavailable-for-sale
      investment securities
                    
                    
                    22,422,957
                    
                    
                    
                    1,575,806Proceeds
      from sales of available-for-sale investment securities
                    
                    
                    18,343,387
                    
                    
                    
                    -Purchases
      of held-to-maturity investment securities
                    
                    
                    (24,501,082
                    )
                    
                    
                    -Proceeds
      from principal paydowns of held-to-maturityinvestment
      securities
                    
                    
                    647,491
                    
                    
                    
                    -Net
      decrease in interest-bearing deposits in other financialinstitutions
                    
                    
                    2,483,000
                    
                    
                    
                    -Increase
      in loans, net
                    
                    
                    (22,625,728
                    )
                    
                    
                    (21,126,708
                    )Purchases
      of premises and equipment
                    
                    
                    (214,745
                    )
                    
                    
                    (10,788
                    )Purchase
      of Federal Home Loan Bank stock
                    
                    
                    (618,285
                    )
                    
                    
                    -Proceeds
      from sales of other real estate owned
                    
                    
                    1,381,100
                    
                    
                    
                    -Cash
      paid in connection with the acquisition of ProfessionalBusiness
      Bank, net of cash received
                    
                    
                    -
                    
                    
                    
                    (15,735,981
                    )Cash
      received in connection with the acquisition of SpectrumBank,
      net of cash paid
                    
                    
                    3,390
                    
                    
                    
                    -Net
      cash used in investing activities
                    
                    
                    (2,678,515
                    )
                    
                    
                    (35,297,671
                    )Cash
      flows from financing activities:Net
      (decrease) increase in deposits
                    
                    
                    (32,354,767
                    )
                    
                    
                    2,605,558Net
      increase in Federal Home Loan Bank advances
                    
                    
                    6,000,000
                    
                    
                    
                    16,500,000Proceeds
      from notes payable, net of fees
                    
                    
                    8,456,000
                    
                    
                    
                    -Proceeds
      from issuance of common stock, net of issuance costs
                    
                    
                    22,000,000
                    
                    
                    
                    11,263,500Proceeds
      from issuance of preferred stock, net of issuance costs
                    
                    
                    -
                    
                    
                    
                    19,600,000Proceeds
      from exercise of warrants
                    
                    
                    71
                    
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    4,101,304
                    
                    
                    
                    49,969,058(Decrease)
      increase in cash and cash equivalents
                    
                    
                    (3,153,817
                    )
                    
                    
                    13,531,632Cash
      and cash equivalents, beginning of period
                    
                    
                    13,531,632
                    
                    
                    
                    -Cash
      and cash equivalents, end of year
                    
                    $
                    10,377,815
                    
                    
                    $
                    13,531,632
 (Continued)






48






BELVEDERE
SoCAL AND SUBSIDIARY





CONSOLIDATED
STATEMENT OF CASH FLOWS


(Continued)


For
the Year Ended December 31, 2008 and the


Period
from January 17 (Inception) to December 31, 2007




2008
                
                
                2007Noncash
      investing activities:Net
      change in unrealized gain (loss) on available-for-saleinvestment
      securities
                
                $
                91,000
                
                
                $
                17,000Noncash
      financing activities:Fair
      value of common stock, options and warrants issued inacquisition
      of Professional Business Bank
                
                $
                -
                
                
                $
                24,596,087Junior
      subordinated debentures issued in acquisition ofSpectrum
      Bank
                
                $
                15,464,000
                
                
                $
                -Preferred
      stock dividend paid in stock
                
                $
                3,199,400
                
                
                $
                166,650Loans
      transferred to other real estate
                
                $
                2,127,352
                
                
                $
                -Supplemental
      Disclosures of Cash Flow Information:Interest
      paid
                
                $
                8,181,415
                
                
                $
                62,264Taxes
      paid
                
                $
                2,400
                
                
                $
                155,000











The
accompanying notes are an integral


part of
these consolidated financial statements.








49


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS







1.            
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The
Business





Belvedere
SoCal (SoCal) a bank holding company incorporated in 2007 in the state of
California, was formed by its majority shareholder, Belvedere
Capital Fund II L.P. (the "Fund"), a Delaware limited partnership
formed in 2002.  SoCal was formed specifically to acquire Professional
Business Bank (PBB), which occurred on November 23, 2007, and to be the platform
for acquiring other banks in Southern California.  SoCal closed the
acquisition of Spectrum Bank (Spectrum) on January 31, 2008, further expanding
its market presence.  Effective July 3, 2008, SoCal completed the
merger of Spectrum Bank into Professional Business Bank.  The merger
was accounted for as a transfer of assets and liabilities between entities under
common control and, accordingly, the assets and liabilities of Spectrum were
transferred at their carrying amounts, similar to a pooling of
interests.  However, the existing Spectrum branches and certain
customer-related activities will continue to be conducted using the Spectrum
brand.  SoCal issued an additional 1,313,432 shares of common stock to
the Fund for proceeds of $22 million to fund the Spectrum
acquisition.  After sale of the shares, the Fund owns approximately
73% of SoCal's common stock and all of the outstanding Series A non-cumulative
perpetual preferred stock.  Collectively, PBB and Spectrum are
referred to as the "Bank".  Collectively, SoCal and its subsidiary are
referred to as the "Company".





Significant
related party transactions for the period ended December 31, 2008 and 2007
include the reimbursement by SoCal of the Fund's merger related expenses in
connection with the acquisition of PBB and Spectrum.  SoCal paid the
Fund transaction fees of $1.0 million and $740,000 related to the acquisitions
of PBB and Spectrum, respectively.  Additionally, SoCal paid $400,000
to the Fund in connection with the issuance of the Series A preferred
stock.  SoCal and the Bank entered into a management agreement on
November 2, 2007, which was amended in January 2008, under which the Fund's
General Partner will provide certain management services to the Bank for an
annual fee equal to 5% of the Bank's pre-tax income, but not less than $200,000
and not more than $750,000.  During 2008, management fees of $191,667
were paid to the Fund.  The amount paid is less than the $200,000
minimum due to the proration of management fees for Spectrum.  At
December 31, 2008, SoCal had a note payable due to the Fund, which is discussed
further in Note 9.  In management's opinion, these transactions are on
the same terms as those for comparable transactions with unrelated
parties.





SoCal has
one other wholly-owned subsidiary, Belvedere SoCal Statutory Trust I (the
"Trust"), which was formed in 2008, to issue trust preferred
securities.  FIN 46R does not allow the consolidation of the Trust
into SoCal's consolidated financial statements.  As a result, the
accompanying consolidated statement of financial condition includes the
investment in the Trust of $464,000 in other assets as of December 31,
2008.











50


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)





1.      
     SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





The
following are descriptions of the more significant of these
policies:





Basis of
Presentation





The
consolidated financial statements include the accounts of SoCal and the
Bank.  All material intercompany accounts and transactions have been
eliminated.





The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and within the
banking industry.





Use of Estimates in the
Preparation of Financial Statements





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Cash and Cash
Equivalents





For
purposes of reporting cash flows, cash and cash equivalents include cash, due
from banks and federal funds sold.  Generally, federal funds are sold
for one-day periods.





Cash and Due From
Banks





Banking
regulations require that banks maintain a percentage of their deposits as
reserves in cash or on deposit with the Federal Reserve Bank.  The
Bank was in compliance with its reserve requirements as of December 31,
2008 and 2007.





Correspondent Banking
Agreements





The Bank
maintains funds on deposit with other federally insured financial institutions
under correspondent banking agreements.  Those insured financial
institutions have elected to participate in the Federal Deposit Insurance
Corporation (FDIC) sponsored Transaction Account Guarantee
Program.  Under that program, through December 31, 2009, all
noninterest-bearing transaction accounts are fully guaranteed by the FDIC for
the entire amount in the account.  Coverage under the Transaction
Account Guarantee Program is in addition to and separate from the coverage
available under the FDIC's general deposit insurance rules.  This
program was not in effect in 2007 and uninsured deposits totaled $1,352,000 at
December 31, 2007.





51


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




1. 
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Investment
Securities





Bonds,
notes, and debentures for which the Company has the positive intent and ability
to hold to maturity are reported at cost, adjusted for premiums and discounts
that are recognized in interest income using the interest method over the period
to maturity.  Securities classified as trading are those securities
that are bought and held principally for the purpose of selling them in the near
term.





Investments
not classified as trading securities nor as held-to-maturity securities are
classified as available-for-sale securities and recorded at fair value.
Unrealized gains or losses on available-for-sale securities are excluded from
net income and reported as an amount net of applicable taxes as a separate
component of other comprehensive income included in shareholders' equity.
Premiums or discounts on held-to-maturity and available-for-sale securities are
amortized or accreted into income using the interest method. Realized gains or
losses on sales of held-to-maturity or available-for-sale securities are
recorded using the specific identification method.





Declines
in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other-than-temporary result in write-downs
of the individual securities to their fair value.  The related
write-downs are included in earnings as realized losses.  In
estimating other-than-temporary impairment losses, management considers the
length of time and the extent to which the fair value has been less than cost,
the financial condition and near-term prospects of the issuer, and the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair
value.  At December 31, 2008 and 2007, no losses on investment
securities were considered other-than-temporary.





Loans





Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
allowance and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.





Loan
origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related
loan.  Amortization of deferred loan fees is discontinued when a loan
is placed on nonaccrual status.





Loans on
which the accrual of interest has been discontinued are designated as nonaccrual
loans.  The accrual of interest on such loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due, based on the contractual terms of the note.  When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received
and the loan's principal balance is deemed collectible. Interest accruals are
resumed on such loans only when the loan is brought current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to all principal and interest.





52


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)







1.  
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Loans
(Continued)





The Bank
considers a loan to be impaired when it is probable that the Bank will be unable
to collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118. Measurement of
impairment is based on the expected future cash flows of an impaired loan, which
are to be discounted at the loan's effective interest rate, or measured by
reference to an observable market value, if one exists, or the fair value of the
collateral for a collateral-dependent loan.  The Bank selects the
measurement method on a loan-by-loan basis except that collateral-dependent
loans for which foreclosure is probable are measured at the fair value of the
collateral.  The Bank recognizes interest income on impaired loans
based on its existing methods of recognizing interest income on nonaccrual
loans.





Gains and
losses on loan sales are recognized at the time of sale and are calculated based
on the difference between the selling price and the fair value of servicing
assets or liabilities and the allocated carrying value of the retained portion
of the loan, the interest-only strip and the sold portion of the loan, based on
the relative fair value of each portion.  As a result of the relative
fair value allocation, the carrying value of the retained portion is discounted,
with the discount accreted to interest income over the life of the
loan.  That portion of the excess servicing fees that represent
contractually specified servicing fees (contractual servicing) are reflected as
a servicing asset which is amortized over anestimated life
using a method approximating the level yield method; in the event future
prepayments exceed management's estimates and future expected cash flows are
inadequate to cover the unamortized servicing asset, additional amortization
would be recognized.  The portion of excess servicing fees in excess
of the contractual servicing fees is reflected as interest-only (I/O) strips
receivable, which are classified as interest-only strips receivable available
for sale and are carried at fair value.





Allowance for Loan
Losses





The
allowance for loan losses is maintained to provide for losses related to
impaired loans and other losses that can be expected to occur in the normal
course of business.  The determination of the allowance is based on
estimates made by management, to include consideration of the character of the
loan portfolio, specifically identified problem loans, potential losses inherent
in the portfolio taken as a whole and economic conditions in the Company's
service area.





Loans
determined to be impaired or classified are individually evaluated by management
for specific risk of loss. In addition, reserve factors are assigned to
currently performing loans based on management's assessment of the following for
each identified loan type: (1) inherent credit risk, (2) historical losses
and, (3) where the Company has not experienced losses, the loss experience of
peer banks.  These estimates are particularly susceptible to changes
in the economic environment and market conditions.





53


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)





1. 
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Allowance for Loan
Losses (Continued)





The
Company's Board of Directors reviews the adequacy of the allowance for loan
losses and reserves for off-balance-sheet commitments quarterly, to include
consideration of the relative risks in the portfolio and current economic
conditions.  The balances are adjusted based on that review if, in the
judgment of the Board of Directors and management, changes are
warranted.





The
allowance is established through a provision for loan losses which is charged to
expense.  Additions to the allowance are expected to maintain the
adequacy of the total allowance after credit losses and loan
growth.  Loans are charged against the allowance when management
believes that collectibility of the principal is unlikely.  Subsequent
recoveries, if any, are credited to the allowance.  The allowance for
loan losses at December 31, 2008 and 2007 reflects management's estimate of
possible losses in the portfolio.  In addition, the FDIC and
California Department of Financial Institutions (DFI), as an integral part of
their examination process, review the adequacy of the allowance for loan
losses.  These agencies may require additions to the allowance for
loan losses based on their judgment about information available at the time of
their examinations.





Premises and
Equipment





Premises
and equipment are carried at cost less accumulated depreciation and
amortization.  Depreciation is computed using the straight-line method
over the estimated useful lives, which ranges from three to ten years for
furniture and equipment and forty years for buildings.  Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the remaining lease term (including option
periods if more likely than not to be exercised), whichever is
shorter.  Expenditures for betterments or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred.





Goodwill and Other
Intangible Asset





The
Company has recorded a premium related to the acquisitions of PBB and
Spectrum.  The premium is recorded as intangible assets in the form of
goodwill and core deposit intangibles.  In accordance with the
provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is not being amortized whereas the core deposit
intangibles are being amortized using the straight-line method over expected
lives of seven years and five years for the PBB and Spectrum acquisitions,
respectively.  In accordance with the standard, the Company tests
goodwill for impairment on an annual basis.  See
Note 6.





Investment in Federal Home
Loan Bank Stock





As a
member of the Federal Home Loan Bank System, the Bank is required to maintain an
investment in the capital stock of the Federal Home Loan Bank of San
Francisco.  The investment is carried at cost and redeemable at par
and is included in accrued interest receivable and other assets on the balance
sheet.  The Federal Home Loan Bank can suspend redemptions upon
notification to its members.





54


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)







1. 
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Other Real Estate
Owned





Other
real estate owned includes real estate acquired in full or partial settlement of
loan obligations.  When property is acquired, any excess of the Bank's
recorded investment in the loan balance and accrued interest income over the
estimated fair market value of the property, less costs to sell, is charged
against the allowance for loan losses.  A valuation allowance for
losses on other real estate owned is maintained to provide for temporary
declines in value.  The allowance is established through a provision
for losses on other real estate owned which is included in other
expenses.  Subsequent gains or losses on sales or writedowns resulting
from permanent impairments are recorded in other income or expense as
incurred.





Deposits





The Bank
is participating in the FDIC's Transaction Account Guarantee
Program.  Under this program, through December 31, 2009, all
noninterest-bearing transaction accounts are fully guaranteed by the FDIC for
the entire amount in the account and the Bank is assessed an annual fee of 10
basis points for all deposit amounts exceeding the existing deposit insurance
limit of $250,000.  Coverage under the Transaction Account Guarantee
Program is in addition to and separate from the coverage available under the
FDIC's general deposit insurance rules.





Advertising
Costs





The
Company expenses the costs of advertising in the year incurred.





Income
Taxes





Deferred
income taxes are computed using the asset and liability method, which recognizes
a liability or asset representing the tax effects, based on current tax law, of
future deductible or taxable amounts attributable to events that have been
recognized in the consolidated financial statements.  A valuation
allowance is established to reduce the deferred tax asset to the level at which
it is "more likely than not" that the tax asset or benefits will be
realized.  Realization of tax benefits of deductible temporary
differences and operating loss carry forwards depends on having sufficient
taxable income of an appropriate character within the carry forward
periods.





The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48).  FIN 48 clarifies the accounting for
uncertainty in tax positions taken or expected to be taken on a tax return and
provides that the tax effects from an uncertain tax position can be recognized
in the financial statements only if, based on its merits, the position is more
likely than not to be sustained on audit by the taxing
authorities.  Management believes that all tax positions taken to date
are highly certain and, accordingly, no accounting adjustment has been made to
the financial statements.





55


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)







1.            SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Comprehensive
Income





SFAS
No. 130, Reporting
Comprehensive Income, requires the disclosure of comprehensive income and
its components.  For the year ended December 31, 2008 and the period
ended December 31, 2007, the net change in unrealized gain or loss on
available-for-sale investment securities, net of applicable income taxes, is the
only component of other comprehensive income for the Company.





Off-Balance-Sheet Financial
Instruments





In the
ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit, and standby letters of credit as described in Note
12.  Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or
received.





Earnings Per Share
(EPS)





Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period.  Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.  However, diluted earnings
per share is not presented when a net loss occurs because the conversion of
potential common stock is anti-dilutive.





Reclassifications





Certain
reclassifications have been made to prior year's balances to conform to
classifications used in 2008.





Stock-Based
Compensation





The
Company recognizes the cost of employee services received in exchange for awards
of stock options, or other equity instruments, based on the grant-date fair
value of those awards.  This cost is recognized over the period which
an employee is required to provide services in exchange for the award, generally
the vesting period.





56


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




1.  
         SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Stock-Based
Compensation (Continued)





The
Company has one stock-based compensation plan, the Belvedere SoCal 2007 Equity
Incentive Plan (the "Plan"), which, among other things, permits the grant of
stock options and stock purchase rights.  The Plan is designed
primarily to attract and retain personnel and provide additional incentives to
employees, directors and consultants to promote the success of the Company's
business.  The maximum aggregate number of shares that may be issued
under the Plan is 1,500,000.  The amount, frequency and terms of
share-based awards are subject to all applicable terms and conditions of the
Plan and such other terms and conditions as prescribed by a Committee of the
Board of Directors.  New shares are issued upon the exercise of
options.  In addition, certain options held by directors and employees
of Professional Business Bank were converted to options of the Company under the
terms of the merger agreement.  Shares available under such options
are not counted against the shares available for grant under the
Plan.





The Plan
requires that the option or share price may not be less than the fair market
value of the stock on the grant date, except for options granted in substitution
for options outstanding under the Professional Business Bank Stock Option Plan,
and that the stock be paid in full at the time the option is
exercised.  All options vest on a date determined by the Committee,
but not later than ten years from the date of grant.





Management
estimates the fair value of each option award as of the date of grant using a
Black-Scholes-Merton option pricing model.  Expected volatility is
based on historical volatility of similar entities over a preceding period
commensurate with the expected term of the option because the Company's common
stock has been publicly traded for a shorter period than the expected term of
the options.  The expected term represents the period that the
stock-based awards are expected to be outstanding.  The risk free
interest rate for the expected term of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.  Expected dividend yield
was not considered in the option pricing formula because the Company has not
previously paid, and at this time does not intend to pay, cash
dividends.  In addition to these assumptions, management makes
estimates regarding pre-vesting forfeitures that will impact total compensation
expense recognized under the Plan.





Impact of New Financial
Accounting Standards





Fair
Value Measurements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines and establishes a framework for measuring fair value used in
pronouncements issued by FASB that require or permit fair value
measurement.  This statement expands disclosures using fair value to
measure assets and liabilities in interim and annual periods subsequent to the
period of initial recognition.  SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those years.  Management adopted this
statement on January 1, 2008.  The impact of adoption was not
material to the Company's financial condition or results of
operations.  See Note 17 – Fair Value Measurements.





57


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)







1.  
         SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Impact of New Financial
Accounting Standards (Continued)





Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active





In
October 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting
Standard No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.  The FSP clarifies the application of SFAS No. 157
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active.  The FSP is effective immediately, and includes prior period
financial statements that have not yet been issued.  The Company is
subject to the provisions of the FSP effective immediately; however, the impact
of adoption was not material to the Company's financial condition or results of
operations.





The
Fair Value Option for Financial Assets and Financial Liabilities





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115.  SFAS No.159 permits fair value accounting to be
irrevocably elected for certain financial assets and liabilities on an
individual contract basis at the time of acquisition or at a remeasurement event
date.  Upon adoption of SFAS No. 159, fair value accounting may
also be elected for existing financial assets and liabilities.  For
those instruments for which fair value accounting is elected, changes in fair
value will be recognized in earnings and fees and costs associated with
origination or acquisition will be recognized as incurred rather than
deferred.  The Company adopted SFAS No. 159 on January 1, 2008, but
did not elect the fair value option for any assets or liabilities for the year
ended December 31, 2008.





Business
Combinations





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(SFAS
No. 141(R)).  SFAS No. 141(R), among other things, establishes principles
and requirements for how the acquirer in a business combination
(i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquired business, (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and
(iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  The Company is required to adopt SFAS No.
141(R) for all business combinations for which the acquisition date is on or
after January 1, 2009.  Earlier adoption is
prohibited.  This Standard will change the Company's accounting
treatment for business combinations on a prospective basis.





58


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)







1. 
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Impact of New Financial
Accounting Standards (Continued)





Noncontrolling
Interests in Consolidated Financial Statements





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51.  SFAS
No. 160 establishes accounting and reporting standards for noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary. 
Minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity.  It also establishes a single method
of accounting for changes in a parent's ownership interest in a subsidiary and
requires expanded disclosures.  This statement is effective for fiscal
years beginning on or after December 15, 2008, with early adoption
prohibited.  The Company does not expect the adoption of this
Statement will have a material impact on its financial position, results of
operations or cash flows.





The
Hierarchy of Generally Accepted Accounting Principles





In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  This standard identifies a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles (GAAP) for nongovernmental entities. It
establishes that the GAAP hierarchy should be directed to entities because it is
the entity (not the auditor) that is responsible for selecting accounting
principles for financial statements that are presented in conformity with
GAAP.  SFAS No. 162 is effective November 15, 2008.  The
adoption of this Statement did not have any effect on the Company's consolidated
financial statements.





FASB
Staff Positions Issued in 2009





In April
2009, the FASB issued the following three Staff Positions (FSPs) intended to
provide additional guidance and enhance disclosures regarding fair value
measurements and impairment of securities:





FSP FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have decreased significantly.  FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is
not orderly.  The provisions of FSP FAS 157-4 are effective for the
Company's interim period ending on June 30, 2009.  Management is
currently evaluating the effect that the provisions of FSP FAS 157-4 may have on
the Company's consolidated financial statements.







59


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




1. 
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)





Impact of New Financial
Accounting Standards (Continued)





FASB Staff Positions Issued in 2009(Continued)





FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments,requires disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements.  The provisions of FSP FAS 107-1 and APB 28-1
are effective for the Company's interim period ending on June 30,
2009.  As FSP FAS 107-1 and APB 28-1 amends only the disclosure
requirements about fair value of financial instruments in interim periods, the
adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company's
consolidated financial statements.





FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends current other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. 
The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company's
interim period ending on June 30, 2009.  Management is currently
evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may
have on the Company's condensed consolidated financial statements.





2.      
     ACQUISITIONS





Spectrum
Bank





Effective
January 31, 2008, SoCal acquired all of the common stock of Spectrum, a
California state-chartered bank headquartered in Irvine, California with branch
offices in Huntington Beach and Montebello, California.  All the
outstanding Spectrum shares were exchanged for $20.2 million in cash and $15
million in trust preferred securities.  The acquisition was accounted
for in accordance with SFAS No. 141, Business
Combinations.  Accordingly, the net assets were recorded at
their estimated fair values, and the operating results were included in the
financial statements from the date of acquisition.  Goodwill totaled
$28.0 million (none of which is deductible for tax purposes) and a core deposit
intangible of $571,000 was recorded and is being amortized over approximately
five years.  Capitalized direct transaction costs were approximately
$1 million, including $740,000 paid to the Fund.  The purchase price
has been allocated as presented on the following page (dollars in
thousands).








60


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


2.   
        ACQUISITIONS
(Continued)




Spectrum Bank
(Continued)





Assets
      acquired:Cash
      and due from banks
                                                                            
                                                                            $
                                                                            4,283Federal
      funds sold
                                                                            
                                                                            
                                                                            17,080Interest-bearing
      deposits in other financial institutions
                                                                            
                                                                            
                                                                            2,608Investment
      securities available for sale
                                                                            
                                                                            
                                                                            41,475Loans,
      net
                                                                            
                                                                            
                                                                            79,452Premises
      and equipment
                                                                            
                                                                            
                                                                            4,947Goodwill
                                                                            
                                                                            
                                                                            27,983Other
      intangible assets, net
                                                                            
                                                                            
                                                                            571Accrued
      interest and other assets
                                                                            
                                                                            
                                                                            8,956Total
      assets acquired
                                                                            
                                                                            
                                                                            187,355Liabilities
      assumed:Total
      deposits
                                                                            
                                                                            
                                                                            142,011Accrued
      interest and other liabilities
                                                                            
                                                                            
                                                                            8,985Total
      liabilities assumed
                                                                            
                                                                            
                                                                            150,996Total
      consideration paid
                                                                            
                                                                            $
                                                                            36,359





The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the operating results of Spectrum have been included in the
consolidated financial statements from the date of acquisition.





Professional Business
Bank





As of the
close of business November 23, 2007, the Company completed its acquisition of
PBB.  The Company made this acquisition to expand its market presence
in Southern California.  In exchange for 100% of the outstanding
common stock of PBB, shareholders received $24,478,000 in cash and 885,804
shares of Company common stock with a fair value of
$24,596,000.  Capitalized direct transaction costs totaled
$1,605,000.  PBB shareholders also received 44,729 warrants to
purchase additional shares of Company common stock at $0.01 per
share.  The Company assumed all outstanding options which were
converted to options to acquire Company common stock at a rate of 0.87 Company
shares for each share of PBB with a converted exercise price equal to the
original exercise price divided by 0.87.





61


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


2.  
         ACQUISITIONS
(Continued)





Professional Business
Bank (Continued)





A summary
of the purchase price allocations for the acquisition follows (dollars in
thousands):





Assets
      acquired:Cash
      and due from banks
                                                                          
                                                                          $
                                                                          2,307Federal
      funds sold
                                                                          
                                                                          
                                                                          8,040Interest
      bearing deposits in other financial institutions
                                                                          
                                                                          
                                                                          100Investment
      securities available for sale
                                                                          
                                                                          
                                                                          10,346Loans,
      net
                                                                          
                                                                          
                                                                          189,404Premises
      and equipment
                                                                          
                                                                          
                                                                          478Federal
      Home Loan Bank stock, at cost
                                                                          
                                                                          
                                                                          916Goodwill
                                                                          
                                                                          
                                                                          29,504Other
      intangible assets, net
                                                                          
                                                                          
                                                                          2,402Accrued
      interest and other assets
                                                                          
                                                                          
                                                                          3,166Total
      assets acquired
                                                                          
                                                                          
                                                                          246,663Liabilities
      assumed:Noninterest-bearing
      deposits
                                                                          
                                                                          
                                                                          60,698Interest
      bearing deposits
                                                                          
                                                                          
                                                                          130,746Borrowed
      funds
                                                                          
                                                                          
                                                                          1,500Accrued
      interest payable and other liabilities
                                                                          
                                                                          
                                                                          2,996Total
      liabilities assumed
                                                                          
                                                                          
                                                                          195,940Total
      consideration paid
                                                                          
                                                                          $
                                                                          50,723





The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the operating results of PBB have been included in the consolidated
financial statements from the date of acquisition.





Pro Forma Financial
Information





The
following unaudited pro forma financial information presents the Company's
results of operations for the years indicated had the Spectrum and PBB mergers
taken place as of January 1, 2007:





Year Ended December 31,2008
                                                              
                                                              
                                                              2007Revenue
      (net interest income plus non-interestincome)
                                                              
                                                              $
                                                              16,658
                                                              
                                                              
                                                              $
                                                              17,241Net
      loss available to common shareholders
                                                              
                                                              $
                                                              (53,003
                                                              )
                                                              
                                                              $
                                                              (475
                                                              )Basic
      loss per share
                                                              
                                                              $
                                                              (15.93
                                                              )
                                                              
                                                              $
                                                              (0.14
                                                              )





62


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


3.
              INVESTMENT
      SECURITIES
 
 Debt
securities have been classified in the statement of financial condition
according to management's intent.  The carrying amount and fair values
of available-for-sale and held-to-maturity securities at December 31, 2008
and 2007, were as follows:
 
 2008Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueAvailable-for-Sale
    SecuritiesU.S.
      Government agency
                          
                          $
                          1,628,075
                          
                          
                          $
                          75,580
                          
                          
                          $
                          -
                          
                          
                          $
                          1,703,655States
      and political subdivisions
                          
                          
                          6,253,037
                          
                          
                          
                          15,370
                          
                          
                          
                          (156,048
                          )
                          
                          
                          6,112,359U.S.
      Government agenciescollateralized
      by mortgageobligations
                          
                          
                          1,660,358
                          
                          
                          
                          504
                          
                          
                          
                          (9,406
                          )
                          
                          
                          1,651,456$
                          9,541,470
                          
                          
                          $
                          91,454
                          
                          
                          $
                          (165,454
                          )
                          
                          $
                          9,467,470Held-to-Maturity SecuritiesCollateralized
      mortgageobligations
                          
                          $
                          23,853,591
                          
                          
                          $
                          11,198
                          
                          
                          $
                          (1,898,173
                          )
                          
                          $
                          21,966,616
 
 
 2007Gross
                        
                        
                        GrossAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        FairCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        ValueAvailable-for-Sale
    SecuritiesU.S.
      Government agencies
                        
                        $
                        4,028,321
                        
                        
                        $
                        -
                        
                        
                        $
                        (2,158
                        )
                        
                        $
                        4,026,163U.S.
      Government agenciescollateralized
      by mortgageobligations
                        
                        
                        4,740,972
                        
                        
                        
                        19,158
                        
                        
                        
                        -
                        
                        
                        
                        4,760,130$
                        8,769,293
                        
                        
                        $
                        19,158
                        
                        
                        $
                        (2,158
                        )
                        
                        $
                        8,786,293
 
 Proceeds
and realized losses from the sale of available-for-sale investment securities
for the year ended December 31, 2008 totaled $18,343,000 and $116,000,
respectively.  There were no transfers of investment securities for
the year ended December 31, 2008.  There were no sales or transfers of
investment securities for the period ended December 31,
2007.








63


BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


3.
              INVESTMENT SECURITIES
      (Continued)
 
 The
scheduled maturities of available-for-sale and held-to-maturity securities at
December 31, 2008 are contained in the table that follows.  Actual
maturities may differ from contractual maturities because some investment
securities may allow the right to call or prepay the obligation with or without
call or prepayment penalties:
 
 Available-for-Sale
                                                                
                                                                
                                                                Held-to-MaturityAmortized
                                                                
                                                                
                                                                Fair
                                                                
                                                                
                                                                Amortized
                                                                
                                                                
                                                                FairCost
                                                                
                                                                
                                                                Value
                                                                
                                                                
                                                                Cost
                                                                
                                                                
                                                                ValueDue
      in one year or less
                                                                
                                                                $
                                                                1,162,566
                                                                
                                                                
                                                                $
                                                                1,161,473
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -Due
      from one year to five years
                                                                
                                                                
                                                                1,628,075
                                                                
                                                                
                                                                
                                                                1,703,655
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Due
      from five to ten years
                                                                
                                                                
                                                                151,306
                                                                
                                                                
                                                                
                                                                151,664
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Due
      after ten years
                                                                
                                                                
                                                                6,599,523
                                                                
                                                                
                                                                
                                                                6,450,678
                                                                
                                                                
                                                                
                                                                23,853,591
                                                                
                                                                
                                                                
                                                                21,966,616Total
                                                                
                                                                $
                                                                9,541,470
                                                                
                                                                
                                                                $
                                                                9,467,470
                                                                
                                                                
                                                                $
                                                                23,853,591
                                                                
                                                                
                                                                $
                                                                21,966,616
 
 As of
December 31, 2008, securities with an amortized cost of $27.1 million and a fair
value of $25.3 million were pledged to secure borrowings and for other
purposes.
 
 As of
December 31, 2007, the Company had pledged all of its investment securities
to secure borrowings and for other purposes.
 
 Unrealized
losses and fair values, aggregated by investment category and length of time
that the individual securities have been in an unrealized loss position, at
December 31, 2008 and 2007 are summarized as follows:
 
 December 31, 2008Less than 12 Months
                                
                                
                                12 Months or More
                                
                                
                                TotalEstimated
                                
                                
                                Unrealized
                                
                                
                                Estimated
                                
                                
                                Unrealized
                                
                                
                                Estimated
                                
                                
                                UnrealizedFair Value
                                
                                
                                Losses
                                
                                
                                Fair Value
                                
                                
                                Losses
                                
                                
                                Fair Value
                                
                                
                                LossesAvailable-for-Sale
    SecuritiesStates
      and politicalsubdivisions
                                
                                $
                                4,807,327
                                
                                
                                $
                                156,048
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                4,807,327
                                
                                
                                $
                                156,048U.S.
      Government agenciescollateralized
      by mortgageobligations
                                
                                
                                1,474,689
                                
                                
                                
                                9,406
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,474,689
                                
                                
                                
                                9,406$
                                6,282,016
                                
                                
                                $
                                165,454
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                6,282,016
                                
                                
                                $
                                165,454Held-to-Maturity SecuritiesCollateralized
      mortgageobligations
                                
                                $
                                18,608,511
                                
                                
                                $
                                1,898,173
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                18,608,511
                                
                                
                                $
                                1,898,173
 
 December
      31, 2007Less
      than 12 Months
                                                            
                                                            
                                                            12
      Months or More
                                                            
                                                            
                                                            TotalEstimated
                                                            
                                                            
                                                            Unrealized
                                                            
                                                            
                                                            Estimated
                                                            
                                                            
                                                            Unrealized
                                                            
                                                            
                                                            Estimated
                                                            
                                                            
                                                            UnrealizedFair
      Value
                                                            
                                                            
                                                            Losses
                                                            
                                                            
                                                            Fair
      Value
                                                            
                                                            
                                                            Losses
                                                            
                                                            
                                                            Fair
      Value
                                                            
                                                            
                                                            LossesAvailable-for-Sale
    SecuritiesU.S.
      Government agencies
                                                            
                                                            $
                                                            4,807,327
                                                            
                                                            
                                                            $
                                                            156,048
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            4,807,327
                                                            
                                                            
                                                            $
                                                            156,048
 
  64
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
   3.
                                      INVESTMENT SECURITIES
      (Continued)
 
 The
unrealized losses on mortgage-backed securities and collateralized mortgage
obligations were caused by changes in market interest rates or the widening of
market spreads subsequent to the initial purchase of the securities, and not
concerns regarding the underlying credit of the issuers or the underlying
collateral.  It is expected that the securities will not be settled at
a price less than the amortized cost of the investment.  Because the
decline in fair value is attributable to changes in interest rates or widening
market spreads and not credit quality, and because the Company has the ability
and intent to hold these investments until a market price recovery or to
maturity, these investments are not considered other-than-temporarily
impaired.
 
 The
unrealized losses on obligations of states and political subdivisions were
caused by changes in market interest rates or the widening of market spreads
subsequent to the initial purchase of the securities.  Management
monitors published credit ratings of these securities and no adverse ratings
changes have occurred since the date of purchase on obligations of political
subdivisions in an unrealized loss position as of December 31,
2008.  Because the decline in fair value is attributable to changes in
interest rates or widening market spreads and not credit quality, and because
the Company has the ability and intent to hold these investments until a market
price recovery or to maturity, these investments are not considered
other-than-temporarily impaired.
 
 4.
                                      LOANS
 
 The
Bank's loan portfolio consists primarily of loans to borrowers in Los Angeles
and Orange counties.  The Bank also purchases loan participations from
other banks that include borrowers throughout California.  Although
the Bank seeks to avoid concentrations of loans to a single industry or based
upon a single class of collateral, real estate and real estate associated
businesses are among the principal industries in the Bank's market area and, as
a result, the Bank's loan and collateral portfolios are, to some degree,
concentrated in those industries.  The Bank's loan policy requires
sufficient collateral, which consists primarily of real estate, be obtained as
necessary to meet the Bank's relative risk criteria for each
borrower.
 
 A
substantial decline in the performance of the economy in general or a continued
decline in real estate values in the Bank's primary market area, in particular,
could have an adverse impact on collectibility, increase the level of real
estate related nonperforming loans, or have other adverse effects which alone or
in the aggregate could have a material adverse effect on the financial condition
of the Bank.
 
 Transactions
in the allowance for loan losses are summarized as follows:
  2008
                                                                                
                                                                                
                                                                                2007Balance
      at beginning of period
                                                                                
                                                                                $
                                                                                4,077,213
                                                                                
                                                                                
                                                                                $
                                                                                -Allowance
      acquired at acquisition date
                                                                                
                                                                                
                                                                                1,437,465
                                                                                
                                                                                
                                                                                
                                                                                3,726,354Charge-offs
                                                                                
                                                                                
                                                                                (7,530,964
                                                                                )
                                                                                
                                                                                
                                                                                -Recoveries
                                                                                
                                                                                
                                                                                42,257
                                                                                
                                                                                
                                                                                
                                                                                -Additional
      provision charged to expense
                                                                                
                                                                                
                                                                                10,772,742
                                                                                
                                                                                
                                                                                
                                                                                350,859Balance
      at end of period
                                                                                
                                                                                $
                                                                                8,798,713
                                                                                
                                                                                
                                                                                $
                                                                                4,077,213
 
  
 65
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  4.
                                      LOANS
      (Continued)
 
 The
allowance for off-balance sheet credit exposure relates to commitments to extend
credit, letters of credit and undisbursed funds on lines of
credit.  The Company evaluates credit risk associated with off-balance
sheet commitments at the same time it evaluates credit risk associated with the
loan portfolio.  As of December 31, 2008 and 2007, the balance in this
reserve was $128,622 and $141,400, respectively, and is included in accrued
interest and other liabilities on the consolidated statement of
operations.
 
 Nonaccrual
loans totaled $13,258,000 and $920,000 at December 31, 2008 and 2007,
respectively.  Accruing loans past due 90 days or more at
December 31, 2008 and 2007 were not material.  Interest forgone
on nonaccrual loans totaled approximately $332,000 during
2008.  Interest forgone on nonaccrual loans was not material during
2007.
 
 At
December 31, 2008, the recorded investment in impaired loans was
$17,892,000.  At December 31, 2007, there was one impaired loan for
$920,000 with no specific reserve.  The Company's investment in
impaired loans at December 31, 2008 included $832,000 in nonperforming loans
that are 100% guaranteed by the Small Business Administration
(SBA).  The Company had $2,703,000 of specific allowance for loan
losses on impaired loans of $12,932,000 at December 31,
2008.  The average outstanding balance of impaired loans during 2008
was $3,997,000, on which interest income recognized on a cash basis was not
material.
 
 The Bank
originates SBA loans which it periodically sells to institutional investors. At
December 31, 2008 and 2007, the Bank was servicing approximately
$26,484,000 and $11,737,000 in loans previously sold or
participated.  The Bank has recorded servicing assets related to these
loans totaling $188,239 and $141,511 as of December 31, 2008 and 2007,
respectively, which approximates fair value.  The Bank may also
receive a portion of subsequent interest collections on loans sold that exceed
the contractual servicing fee. In that case, the Bank records an interest-only
strip based on the relative fair market value of it and the other components of
the loan.  The Bank had interest-only strips of $18,166 and $21,227 as
of December 31, 2008 and 2007, respectively, which approximated fair
value.  Fair value is estimated by discounting estimated future cash
flows from the interest-only strips using assumptions similar to those used in
valuing servicing assets.
 
 Included
in total loans are discounts related to the retained unguaranteed portion of SBA
loans of approximately $238,000 and $253,000 at December 31, 2008 and 2007,
respectively.
   66
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  4.
                                      LOANS
      (Continued)
 
 The Bank
has been approved by the California Pollution Control Financing Authority
(CalCAP) to originate loans to qualified small businesses.  The
outstanding balance of CalCAP loans was $17.8 million and $21.9 million at
December 31, 2008 and 2007, respectively, which are included in commercial and
real estate – other loans on the consolidated statement of financial
condition.  Under the CalCAP program, the borrower, CalCAP and the
Bank contribute funds to a loss reserve account, or CalCAP reserve account, that
is held in an interest-bearing demand account at the Bank.  The
balance in the CalCAP reserve account, including amounts due from CalCAP, was
$2.4 million and $2.2 million at December 31, 2008 and 2007,
respectively.  Losses on loans originated under the CalCAP program
will be charged to the CalCAP reserve account after notification to
CalCAP.  In the event that the Bank leaves the CalCAP program, any
excess funds in the CalCAP reserve account, after all loans have been repaid and
there are no pending claims for reimbursement, will be distributed ratably to
CalCAP and the Bank based on contributions to the CalCAP reserve
account.  The allowance for loan losses allocated to the CalCAP loans
takes into consideration the credit support provided by the CalCAP reserve
account.  The Bank records its contributions to the CalCAP reserve
account as a receivable, which is included in accrued interest and other assets
on the consolidated statement of financial position.  To date, the
Bank's contributions to the CalCAP reserve account total $588,600.
 
 5.
                                      PREMISES
      AND EQUIPMENT
 
 A summary
of premises and equipment as of December 31, 2008 and 2007
follows:
  2008
                                                                                          
                                                                                          
                                                                                          2007Land
      and building
                                                                                          
                                                                                          $
                                                                                          4,517,452
                                                                                          
                                                                                          
                                                                                          $
                                                                                          -Leasehold
      improvements
                                                                                          
                                                                                          
                                                                                          188,393
                                                                                          
                                                                                          
                                                                                          
                                                                                          146,043Furniture
      and equipment
                                                                                          
                                                                                          
                                                                                          848,610
                                                                                          
                                                                                          
                                                                                          
                                                                                          176,601Computer
      equipment
                                                                                          
                                                                                          
                                                                                          202,746
                                                                                          
                                                                                          
                                                                                          
                                                                                          165,8045,757,201
                                                                                          
                                                                                          
                                                                                          
                                                                                          488,448Less
      accumulated depreciation and amortization
                                                                                          
                                                                                          
                                                                                          (500,016
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (26,688
                                                                                          )Total
                                                                                          
                                                                                          $
                                                                                          5,257,185
                                                                                          
                                                                                          
                                                                                          $
                                                                                          461,760
 The
Pasadena branch is leased under an operating lease that expires in April
2014.  The lease provides for an additional five-year option to
renew.  The Glendale branch is leased under an operating lease that
expires in June 2013.  The lease provides for two five-year options to
renew.  The Huntington Beach branch is leased under an operating lease
that expires in August 2011.  The Irvine branch is leased under an
operating lease that expires in 2009.  This lease was renewed in
January 2009 for a five-year period ending December 2013.  The Bank
also leases an administrative office under an operating lease that expires in
March 2010.  Certain of these leases include provisions for periodic
rent increases as well as payment by the lessee of certain operating
expenses.
   67
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 5.
                                      PREMISES AND EQUIPMENT
      (Continued)
 
 At
December 31, 2008, the future minimum rental payments under these lease
commitments are as follows:
  Year Ending2009
                                                                            
                                                                            $
                                                                            490,4432010
                                                                            
                                                                            
                                                                            436,2222011
                                                                            
                                                                            
                                                                            421,3092012
                                                                            
                                                                            
                                                                            386,0672013
                                                                            
                                                                            
                                                                            363,064Thereafter
                                                                            
                                                                            
                                                                            76,657$
                                                                            2,173,762
  The
minimum rental payments shown above are given for the existing lease
obligations, including annual rent adjustments, and are not a forecast of future
rental expense.  In addition, the Company is responsible for its pro
rata share of common area expenses on the Pasadena lease.
 
 Total
rent expense, net of rental income and including common area expenses, was
approximately $592,000 and $38,000 for the year ended December 31, 2008 and the
period ended December 31, 2007,
respectively.
 
 6.
                                      GOODWILL
      AND OTHER INTANGIBLE ASSET
 
 The
acquisition of PBB in November 2007 and Spectrum in January 2008 gave rise to
core deposit intangibles of $2.4 million and $571,000, respectively, an
amortizable intangible asset, and $29.5 million and $28 million in goodwill,
respectively.  The remaining amortization period for the core deposit
intangible approximates 6 years.
 
 The
Company's annual impairment testing of goodwill, as required by SFAS No. 142,
was performed during the third quarter of 2008.  The Company engaged
an independent firm to perform the goodwill impairment testing.  Based
on the results of the step one testing procedures, it was determined that the
carrying amount of the Company exceeded its fair value, thus requiring the
Company to perform the step two "implied fair value" analysis.  Based
on the results of the step two testing, the Company determined that an
impairment charge of $33.3 million was required to adjust goodwill to its
implied fair value of $24.2 million.  However, no assurance can be
given that goodwill will not be further written down in future
periods.
 
 During
2008 and 2007, approximately $499,000 and $34,000, respectively, of amortization
was recorded related to the core deposit intangibles.
   68
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  6.
                                      GOODWILL AND OTHER INTANGIBLE
      ASSET (Continued)
 
 The
amortization expense for future years follows:
 Year Ending2009
                                                                                    
                                                                                    $
                                                                                    532,7972010
                                                                                    
                                                                                    
                                                                                    532,7972011
                                                                                    
                                                                                    
                                                                                    532,7972012
                                                                                    
                                                                                    
                                                                                    532,7972013
                                                                                    
                                                                                    
                                                                                    308,892Total
                                                                                    
                                                                                    $
                                                                                    2,440,080
 
 7.
                                      DEPOSITS
 
 At
December 31, 2008, the scheduled maturities of time deposits are as
follows:
  Due
      in one year
                                                                    
                                                                    $
                                                                    52,642,343Due
      in from one to three years
                                                                    
                                                                    
                                                                    42,237,627Due
      after three years
                                                                    
                                                                    
                                                                    15,800,170Total
                                                                    
                                                                    $
                                                                    110,680,140
 
 As of
December 31, 2008 and 2007, the Bank had one depositor that accounted for 5.4%
and 7.8%, respectively, of total deposits.
 
 As of
December 31, 2008 and 2007, time deposits acquired through third-party brokers
totaled $44.2 million and $20.3 million, respectively.
 
 8.
                                      OTHER
      BORROWING ARRANGEMENTS
 
 As of
December 31, 2008 and 2007, the Bank had $24.0 million and $18.0 million,
respectively, of outstanding borrowings from the Federal Home Loan Bank (FHLB)
with interest payable at .05% and 3.8%, respectively.  The balance at
December 31, 2008 will mature on January 2, 2009.  The Bank has
pledged investment securities of approximately $17.6 million, loans of
approximately $171.8 million and FHLB stock as collateral for these advances as
well as potential future borrowings.  The Bank's excess borrowing
capacity with FHLB was approximately $68.9 million at December 31,
2008.
 
 The
Company may also borrow up to $15 million overnight on an unsecured basis from
correspondent banks.  As of December 31, 2008 and 2007, no amounts
were outstanding under these arrangements.
   69
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  8.
                                      OTHER BORROWING
      ARRANGEMENTS (Continued)
 
 The Bank
is eligible to issue certain debt, up to a limit of approximately $7.0 million,
under the FDIC's Temporary Liquidity Guarantee Program that is backed by the
full faith and credit of the United States.  Any senior unsecured debt
with a stated maturity of more than thirty days issued by the Bank up to its
debt guarantee limit falls under this program.  The Bank receives an
annualized assessment from the FDIC, ranging from 50 to 100 basis points, based
on the term and amount of the debt.  At December 31, 2008, the
Bank had no borrowings under this debt guarantee program.
 
 9.
                                      NOTES
      PAYABLE
 
 In March
2008, SoCal borrowed $8 million through a loan secured by the stock of the
Bank.  The loan bears interest at three-month LIBOR plus 3.1% (4.525%
at December 31, 2008) with quarterly interest payments through September
2009, followed by principal and interest payments through the maturity date of
March 2018.  The promissory note and related loan agreements contain
certain customary restrictions including a limitation on the ability of
SoCal to make interest and principal cash payments on loans due to the Fund or
interest payments on the Junior Subordinated Debentures until the principal of
the loan has been and down to less than $5.5 million.  The Company
notified the holder that it was in violation of the loan's debt service, minimum
total capital and minimum capital ratio covenants at December 31,
2008.  As described in Note 19, the holder has waived their right to
declare the loan in default in conjunction with an amendment to the terms of the
loan.
 
 Maturities
of this note payable in future years are as follows:
 Year Ending
                                                                                December 31,2009
                                                                              
                                                                              $
                                                                              193,0002010
                                                                              
                                                                              
                                                                              796,0002011
                                                                              
                                                                              
                                                                              834,0002012
                                                                              
                                                                              
                                                                              873,0002013
                                                                              
                                                                              
                                                                              914,000Thereafter
                                                                              
                                                                              
                                                                              4,390,000$
                                                                              8,000,000
 
 In
December 2008, SoCal borrowed $500,000 from the Fund.  The note bears
interest at 15%, is due July 1, 2009 and is convertible, in whole or in part,
into either shares of SoCal common stock at a 20% premium to the fair value, or
Series A non-cumulative perpetual preferred stock at $25 per
share.  SoCal is required to pay a transaction fee of $10,000 to the
Fund by January 31, 2009 in relation to this note.  See Note 19 for
discussion of additional borrowings from the Fund.
   70
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  10.
                                      JUNIOR
      SUBORDINATED DEBENTURES
 
 In
January 2008, SoCal issued $15.5 million of junior subordinated debentures to
Belvedere SoCal Statutory Trust I, a Delaware business trust that was formed for
the exclusive purpose of issuing trust preferred securities.  The
Trust purchased debentures with: (1) the proceeds of the sale of its common
trust securities to SoCal for $464,000, and (2) certain shares of common stock
in Spectrum valued at $15 million that the Trust received from certain
shareholders of Spectrum in exchange for the Trust's trust preferred
securities.  The subordinated debentures and trust preferred
securities have generally identical terms, including that they mature in 2038,
are redeemable at SoCal's option at par, and require monthly
distributions/interest payments at a rate of 10%.  Refer to Note 19
for information on the deferment of these payments.  The trust
preferred securities and corresponding junior subordinated debentures contain
provisions limiting SoCal's ability to declare and pay dividends on its common
stock in certain events.  SoCal has unconditionally guaranteed certain
distributions on, and certain payments on liquidation and redemption of, the
trust preferred securities.
 
 Interest
expense recognized by SoCal for the year ended December 31, 2008 related to the
subordinated debentures was $1,418,725.
 
 11.           INCOME
TAXES
 
 Deferred
taxes are a result of differences between income tax accounting and generally
accepted accounting principles with respect to income and expense
recognition.  The following is a summary of the components of the net
deferred tax assets at December 31, 2008 and 2007:
  2008
                                                                                                        
                                                                                                        
                                                                                                        2007Deferred
      tax assets:Operating
      loss carryforwards
                                                                                                        
                                                                                                        $
                                                                                                        6,153,000
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        59,000Market
      value adjustment on investment securities
                                                                                                        
                                                                                                        
                                                                                                        30,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Depreciation
      differences
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        16,000Allowance
      for loan losses due to tax limitations
                                                                                                        
                                                                                                        
                                                                                                        4,279,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,802,000Stock-based
      compensation
                                                                                                        
                                                                                                        
                                                                                                        128,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        133,000Cash
      basis of accounting
                                                                                                        
                                                                                                        
                                                                                                        340,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        449,000Purchase
      premium on certificates of deposit
                                                                                                        
                                                                                                        
                                                                                                        373,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Other
                                                                                                        
                                                                                                        
                                                                                                        160,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        120,000Total
      deferred tax assets prior to valuation allowance
                                                                                                        
                                                                                                        
                                                                                                        11,463,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,579,000Valuation
      allowance
                                                                                                        
                                                                                                        
                                                                                                        (5,600,000
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        -Total
      deferred tax assets
                                                                                                        
                                                                                                        
                                                                                                        5,863,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,579,000
  71
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  11.           INCOME TAXES
(Continued)
 
 Deferred
      tax liabilities:Market
      value adjustment on investment securities
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (7,000
                                                                                              )Core
      deposit intangible, net
                                                                                              
                                                                                              
                                                                                              (1,111,000
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1,062,000
                                                                                              )Deferred
      loan costs
                                                                                              
                                                                                              
                                                                                              (69,000
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (132,000
                                                                                              )Depreciation
      differences
                                                                                              
                                                                                              
                                                                                              (1,402,000
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -Future
      liability of State deferred tax assets
                                                                                              
                                                                                              
                                                                                              (760,000
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (120,000
                                                                                              )Total
      deferred tax liabilities
                                                                                              
                                                                                              
                                                                                              (3,342,000
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1,321,000
                                                                                              )Net
      deferred tax assets
                                                                                              
                                                                                              $
                                                                                              2,521,000
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,258,000
 The
provision for income taxes consists of the following:
  2008
                                                                                                                
                                                                                                                
                                                                                                                2007Current:Federal
                                                                                                                
                                                                                                                $
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                -State
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                -Total
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                -Deferred:Federal
                                                                                                                
                                                                                                                
                                                                                                                4,944,617
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (194,583
                                                                                                                )State
                                                                                                                
                                                                                                                
                                                                                                                1,039,824
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (67,306
                                                                                                                )Total
                                                                                                                
                                                                                                                
                                                                                                                5,984,441
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (261,889
                                                                                                                )Change
      in valuation allowance
                                                                                                                
                                                                                                                
                                                                                                                (5,600,000
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                -Income
      tax expense (benefit)
                                                                                                                
                                                                                                                $
                                                                                                                384,441
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                (261,889
                                                                                                                )
  The
reconciliation of the statutory Federal income tax rate to the consolidated
effective income tax rate was as follows:
  2008
                                                                                                                        
                                                                                                                        
                                                                                                                        2007Federal
      income tax benefit, at statutory rate
                                                                                                                        
                                                                                                                        $
                                                                                                                        (15,963,525
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (35.00
                                                                                                                        )%
                                                                                                                        
                                                                                                                        $
                                                                                                                        (222,476
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (35.00
                                                                                                                        )%State
      franchise tax benefit, net of federal tax effect
                                                                                                                        
                                                                                                                        
                                                                                                                        (865,866
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (1.90
                                                                                                                        )%
                                                                                                                        
                                                                                                                        
                                                                                                                        (45,226
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (7.11
                                                                                                                        )%Goodwill
      impairment
                                                                                                                        
                                                                                                                        
                                                                                                                        11,655,350
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        25.55
                                                                                                                        %
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.00
                                                                                                                        %Change
      in valuation allowance
                                                                                                                        
                                                                                                                        
                                                                                                                        5,600,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        12.28
                                                                                                                        %
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.00
                                                                                                                        %Other
                                                                                                                        
                                                                                                                        
                                                                                                                        (41,518
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (0.09
                                                                                                                        )%
                                                                                                                        
                                                                                                                        
                                                                                                                        5,814
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.91
                                                                                                                        %$
                                                                                                                        384,441
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.84
                                                                                                                        %
                                                                                                                        
                                                                                                                        $
                                                                                                                        (261,888
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (41.20
                                                                                                                        )%
   72
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  11.           INCOME TAXES
(Continued)
 
 The
Company files income tax returns in the United States and California
jurisdictions.  The Company will file tax returns for the year ended
December 31, 2008 which will be open to audit by U.S. federal and state tax
authorities.  The Company is also a successor to PBB, which had filed
tax returns that are open to audit by U.S. federal tax authorities for tax years
ended on or after December 31, 2005 and subject to examination by California tax
authorities for years ended on or after December 31, 2004.
 
 The
Company has federal net operating loss carryforwards (NOLs) of $15.1 million
which expire in 2028 and California NOLs of $17.7 million that will expire in
2030.
 
 A
valuation allowance is provided to reduce deferred tax assets to a level which,
more likely than not, will be realized.  Management has determined
that a $5.6 million valuation allowance is required as of December 31,
2008.  No valuation allowance was considered necessary as of December
31, 2007.
 
 The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 17, 2007.  The Company had no
tax reserve for uncertain positions at December 31, 2008 and 2007.  In
accordance with FIN 48, the Company has elected to record interest accrued and
penalties related to unrecognized tax benefits in tax expense.  During
the years ended December 31, 2008 and 2007, the Company did not have an accrual
for interest or penalties associated with uncertain tax positions.
 
 12.
                                      COMMITMENTS
      AND CONTINGENCIES
 
 In the
ordinary course of business, the Bank enters into financial commitments to meet
the financing needs of its customers.  These financial commitments
include commitments to extend credit and standby letters of
credit.  Those instruments involve to varying degrees, elements of
credit and interest rate risk not recognized in the Bank's financial
statements.
 
 The
Bank's exposure to loan loss in the event of nonperformance on commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments.  The Bank uses the same credit policies
in making commitments as it does for loans reflected in the financial
statements.
 
 As of
December 31, 2008 and 2007, the Bank had the following outstanding
financial commitments whose contractual amount represents credit
risk:
  2008
                                                                      
                                                                      
                                                                      2007Commitments
      to extend credit
                                                                      
                                                                      $
                                                                      57,121,000
                                                                      
                                                                      
                                                                      $
                                                                      62,459,000Standby
      letters of credit
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      769,000Total
                                                                      
                                                                      $
                                                                      57,121,000
                                                                      
                                                                      
                                                                      $
                                                                      63,228,000
   73
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  12.
                                      COMMITMENTS AND
      CONTINGENCIES (Continued)
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Since many of
the commitments are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements.  The
Bank evaluates each client's credit worthiness on a case-by-case
basis.  The amount of collateral obtained if deemed necessary by the
Bank is based on management's credit evaluation of the customer.  The
majority of the Bank's commitments to extend credit and standby letters of
credit are secured by real estate.
 
 At
December 31, 2008, commercial loan commitments represent approximately 55% of
total commitments and are generally secured by collateral other than real estate
or are unsecured.  Real estate loan commitments represent 45% of total
commitments and are generally secured by property with a loan-to-value ratio not
to exceed 80%.  In addition, the majority of the Bank's commitments
have variable interest rates.
 
 The
Company is involved in various litigation matters, which have arisen in the
ordinary course of its business.  In the opinion of management, the
disposition of such pending litigation will not have a material effect on the
Company's financial position or results of operations.
 
 13.
                                      COMPANY
      401(K) PLAN
 
 The
Company has established a deferred compensation plan for all eligible
employees.  The employees may defer a portion of their compensation
subject to certain limits based on federal tax laws.  The Company may
elect to make matching contributions to the plan. Matching contributions vest to
the employee equally over a five-year period.  The Company's
contribution to the plan for 2008 and 2007 was approximately $350,000 and
$17,000, respectively.
 
 14.
                                      LOSS
      PER SHARE
 
 A summary
of net loss and the number of shares used to compute loss per share is as
follows:
  Net
                                                                                                        Loss
                                                                                                      
                                                                                                      
                                                                                                      Weighted
                                                                                                        Average
                                                                                                        Number
                                                                                                        Of
      Shares
                                                                                                        Outstanding
                                                                                                      
                                                                                                      
                                                                                                      Per
      Share
                                                                                                        AmountDecember 31, 2008Basic
      loss per share:Net
      loss
                                                                                                      
                                                                                                      $
                                                                                                      (45,994,510
                                                                                                      )Preferred
      stock dividend
                                                                                                      
                                                                                                      
                                                                                                      (3,199,400
                                                                                                      )Net
      loss available to common shareholders
                                                                                                      
                                                                                                      $
                                                                                                      (49,193,910
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      3,218,715
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (15.28
                                                                                                      )
    74
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 14.
                                      LOSS PER SHARE
      (Continued)
  Net
                                                                                                          Loss
                                                                                                        
                                                                                                        
                                                                                                        Weighted
                                                                                                          Average
                                                                                                          Number
                                                                                                          Of
      Shares
                                                                                                          Outstanding
                                                                                                        
                                                                                                        
                                                                                                        Per
      Share
                                                                                                          AmountDecember 31, 2007Basic
      loss per share:Net
      loss
                                                                                                        
                                                                                                        $
                                                                                                        (373,758
                                                                                                        )Preferred
      stock dividend
                                                                                                        
                                                                                                        
                                                                                                        (166,650
                                                                                                        )Net
      loss available to common shareholders
                                                                                                        
                                                                                                        $
                                                                                                        (540,408
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        220,520
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        (2.45
                                                                                                        )
 15.
                                      STOCK
      OPTION PLAN
 
 Upon
acquisition of PBB, the outstanding options under the Professional Business Bank
2001 Incentive and Nonqualified Stock Option Plan became fully vested and were
converted to options of the Company at a rate of 0.87 of an option for each
option outstanding.  There were no other options issued under the Plan
during the period from January 17, 2007 (inception) to December 31, 2007 and,
therefore, no stock-based compensation expense has been recognized during
2007.
 
 There
were two types of options granted in 2008.  The first were options
granted with performance conditions that vest based on certain qualifying
events, or cliff vest at the 7th anniversary of the grant date if no qualifying
event occurs.  SoCal granted 175,402 and 11,640 of performance based
options during the first and third quarters of 2008,
respectively.  The second type of options were granted with a
time-based condition that cliff vest at the 5th anniversary of the grant date,
with the exception of one grant of 32,925 shares that cliff vest at the 1st
anniversary of the grant date.  SoCal granted 175,409 and 11,641 of
time-based options during the first and third quarters of 2008,
respectively.
 
 The
following table summarizes the range of assumptions utilized in the calculation
of the fair value of the options granted during the year ended December 31,
2008:
 
 Risk-free
      interest rate
                                                                    3.21%
      to 3.46%Expected
      life
                                                                    5
      to 6 yearsExpected
      volatility
                                                                    28%
      to 30%Expected
      dividend yield
                                                                    N/AWeighted
      average grant date fair value
                                                                    $4.92
      to $5.10
  75
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  15.
                                      STOCK OPTION PLAN
      (Continued)
 
 A summary
of stock option activity and related information for the year ended
December 31, 2008 follows:
  Number
      of Stock Options
                                                                          
                                                                          
                                                                          Weighted
                                                                            Average
                                                                            Exercise
                                                                            Price
                                                                          
                                                                          
                                                                          Weighted
                                                                            Average
                                                                            Remaining
                                                                            Contractual
                                                                            Term
      (Years)
                                                                          
                                                                          
                                                                          Aggregate
                                                                            Intrinsic
                                                                            Value(Dollars
      in thousands, except per share amounts)Options
      outstanding at December 31, 2007
                                                                          
                                                                          
                                                                          135,041
                                                                          
                                                                          
                                                                          $
                                                                          15.21Options
      granted
                                                                          
                                                                          
                                                                          374,092
                                                                          
                                                                          
                                                                          $
                                                                          15.00Options
      forfeited
                                                                          
                                                                          
                                                                          (36,584
                                                                          )
                                                                          
                                                                          $
                                                                          15.00Options
      exercised
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          -Options
      outstanding at December 31, 2008
                                                                          
                                                                          
                                                                          472,549
                                                                          
                                                                          
                                                                          $
                                                                          15.06
                                                                          
                                                                          
                                                                          
                                                                          8.0
                                                                          
                                                                          
                                                                          $
                                                                          -Options
      exercisable at December 31, 2008
                                                                          
                                                                          
                                                                          167,966
                                                                          
                                                                          
                                                                          $
                                                                          15.17
                                                                          
                                                                          
                                                                          
                                                                          5.9
                                                                          
                                                                          
                                                                          $
                                                                          -Options
      expected to vest after December 31, 2008
                                                                          
                                                                          
                                                                          218,113
                                                                          
                                                                          
                                                                          $
                                                                          15.00
                                                                          
                                                                          
                                                                          
                                                                          9.3
                                                                          
                                                                          
                                                                          $
                                                                          -
  All
options granted in 2008 allow for early exercise into shares of restricted
common stock of SoCal under identical vesting terms as the original
options.  Such options are not shown as exercisable in the above
table.
 
 At
December 31, 2008 and 2007, there was $823,000 and $1,500,000, respectively in
unrecognized compensation costs related to the outstanding options that is
expected to be recognized over a weighted average period of 5.1
years.
 
 16.
                                      SHAREHOLDERS'
      EQUITY
 
 Dividend
Restrictions
 
 The
Company's ability to pay cash dividends is dependent on dividends paid to it by
the Bank and limited by California law.  Under California law, the
holders of common stock of the Company are entitled to receive dividends when
and as declared by the Board of Directors, out of funds legally available,
subject to certain restrictions.  California General Corporation Law
prohibits the Company from paying dividends on its common stock unless: (i) its
retained earnings, immediately prior to the dividend payment, equals or exceeds
the amount of the dividend or (ii) immediately after giving effect to the
dividend, the sum of the Company's assets (exclusive of goodwill and deferred
charges) would be at least equal to 125% of its liabilities (not including
deferred taxes, deferred income and other deferred liabilities) and the current
assets of the Company would be at least equal to its current liabilities, or, if
the average of its earnings before taxes on income and before interest expense
for the two preceding fiscal years was less than the average of its interest
expense for the two preceding fiscal years, at least equal to 125% of its
current liabilities.  The Company has no formal dividend policy for
its common shares, and dividends are paid solely at the discretion of the Board
of Directors subject to compliance with the above regulations.
  76
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  16.
                                      SHAREHOLDERS' EQUITY
      (Continued)
 
 Dividend Restrictions
(Continued)
 
 California
law restricts the total dividend payments of any bank to the lesser of the
bank's retained earnings or the bank's net income for the latest three fiscal
years, less dividends previously paid during that period, without the prior
approval of the California Department of Financial
Institutions.  There was no amount available for dividend
distributions as of December 31, 2008.
 
 Preferred
Stock
 
 The
Company is authorized to issue 20,000,000 shares of preferred stock and
designated 2,000,000 shares as Series A Non-Cumulative Perpetual Preferred Stock
(the "Preferred Stock") on December 7, 2007 at a price of $25.00 per
share.  Holders of the Preferred Stock are entitled to receive, when
declared by the Board of Directors, non-cumulative dividends at an annual rate
of 15% of the sales price of the Preferred Stock.  Dividends shall be
paid, at the option of the Company, in cash or in additional shares of the
Preferred Stock.  Dividends accrue from the date of original issuance
and are payable quarterly, in arrears, on the first day of January, April, July
and October of each year, with the first dividend being payable on January 1,
2008.  If the full accrued dividends have not been paid or declared,
the Company may not declare or pay dividends or other distributions on any
shares of the capital stock of the Company.  The shares of Preferred
Stock may be redeemed at any time at the option of the Company for cash of
$25.00 per share plus unpaid dividends.  The holders of the Preferred
Stock have no voting rights.
 
 On
December 10, 2007, the Company sold 800,000 shares of the Preferred Stock to the
Fund, at a purchase price of $25.00 per share.  In addition, the
Company paid the purchaser a fee of $400,000, or 2% of the purchase
price.  In accordance with the terms of the Series A preferred stock,
the Board of Directors declared the first dividend payable January 1, 2008 and
elected to pay the dividend in shares of the Series A preferred
stock.  The dividend totaled $166,650, which represented 6,666 shares
of the Series A preferred stock.  All subsequent dividends have
been paid in shares of the Series A preferred stock and totaled $3,199,400,
which represented 127,976 shares of the Series A Preferred Stock, for the
year ended December 31, 2008.
 
 Warrants
 
 The
merger agreement between SoCal and PBB included the issuance of warrants at a
strike price of $0.01 per share as follows:  shareholders of PBB that
continued as shareholders of the Company were issued 44,729 warrants, the Fund
was issued 133,413 warrants, and 1,170 warrants were issued to an executive
officer of the Company.  During the year ended December 31, 2008,
7,102 warrants were exercised.  There were no warrants exercised
during the period ended December 31, 2007.
   77
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 16.
                                      SHAREHOLDERS' EQUITY
      (Continued)
 
 Regulatory
Matters
 
 The Bank
is subject to certain regulatory capital requirements administered by the
Federal Deposit Insurance Corporation (FDIC).  Failure to meet these
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial
statements.  The capital guidelines do not apply on a
consolidated basis to SoCal because its consolidated assets are less than $500
million and it (1) is not engaged in significant non-banking activities, (2)
does not conduct significant off-balance-sheet activities and (3) does not have
a material amount of debt or equity securities registered with the Securities
and Exchange Commission.
 
 Under
capital adequacy guidelines, the Bank must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices.  These quantitative measures are established by regulation
and require that minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets be
maintained.  Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
 
 The Bank
is also subject to additional capital guidelines under the regulatory framework
for prompt corrective action.  To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the table below.  The most
recent notification to the FDIC categorized the Bank as adequately capitalized
under these guidelines.
  December
      31, 2008
                                                                        
                                                                        
                                                                        December
      31, 2007Amount
                                                                        
                                                                        
                                                                        Rate
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        RatioLeverage RatioProfessional
      Business Bank
                                                                        
                                                                        $
                                                                        25,774
                                                                        
                                                                        
                                                                        
                                                                        7.1
                                                                        %
                                                                        
                                                                        $
                                                                        19,921
                                                                        
                                                                        
                                                                        
                                                                        8.8
                                                                        %Minimum
      requirement for "Well-Capitalized" institution under prompt corrective
      action provisions
                                                                        
                                                                        $
                                                                        18,216
                                                                        
                                                                        
                                                                        
                                                                        5.0
                                                                        %
                                                                        
                                                                        $
                                                                        11,300
                                                                        
                                                                        
                                                                        
                                                                        5.0
                                                                        %Minimum
      regulatory requirement
                                                                        
                                                                        $
                                                                        14,572
                                                                        
                                                                        
                                                                        
                                                                        4.0
                                                                        %
                                                                        
                                                                        $
                                                                        9,000
                                                                        
                                                                        
                                                                        
                                                                        4.0
                                                                        %Tier 1 Risk-Based Capital
    RatioProfessional
      Business Bank
                                                                        
                                                                        $
                                                                        25,774
                                                                        
                                                                        
                                                                        
                                                                        7.7
                                                                        %
                                                                        
                                                                        $
                                                                        19,921
                                                                        
                                                                        
                                                                        
                                                                        8.3
                                                                        %Minimum
      requirement for "Well-Capitalized" institution under prompt corrective
      action provisions
                                                                        
                                                                        $
                                                                        20,101
                                                                        
                                                                        
                                                                        
                                                                        6.0
                                                                        %
                                                                        
                                                                        $
                                                                        14,400
                                                                        
                                                                        
                                                                        
                                                                        6.0
                                                                        %Minimum
      regulatory requirement
                                                                        
                                                                        $
                                                                        13,401
                                                                        
                                                                        
                                                                        
                                                                        4.0
                                                                        %
                                                                        
                                                                        $
                                                                        9,600
                                                                        
                                                                        
                                                                        
                                                                        4.0
                                                                        %Total Risk-Based Capital
    RatioProfessional
      Business Bank
                                                                        
                                                                        $
                                                                        30,020
                                                                        
                                                                        
                                                                        
                                                                        9.0
                                                                        %
                                                                        
                                                                        $
                                                                        22,940
                                                                        
                                                                        
                                                                        
                                                                        9.5
                                                                        %Minimum
      requirement for "Well-Capitalized" institution under prompt corrective
      action provisions
                                                                        
                                                                        $
                                                                        33,502
                                                                        
                                                                        
                                                                        
                                                                        10.0
                                                                        %
                                                                        
                                                                        $
                                                                        24,000
                                                                        
                                                                        
                                                                        
                                                                        10.0
                                                                        %Minimum
      regulatory requirement
                                                                        
                                                                        $
                                                                        26,802
                                                                        
                                                                        
                                                                        
                                                                        8.0
                                                                        %
                                                                        
                                                                        $
                                                                        19,200
                                                                        
                                                                        
                                                                        
                                                                        8.0
                                                                        %
 
  78
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  17.
                                      FAIR
      VALUE MEASUREMENTS
 
 Fair Value of Financial
Instruments
 
 The
carrying and estimated fair values of the Company's financial instruments are as
follows (dollar amounts in thousands):
  December
      31, 2008
                                                                  
                                                                  
                                                                  December
      31, 2007Carrying
                                                                    Amount
                                                                  
                                                                  
                                                                  Estimated
                                                                    Fair
                                                                    Value
                                                                  
                                                                  
                                                                  Carrying
                                                                    Amount
                                                                  
                                                                  
                                                                  Estimated
                                                                    Fair
                                                                    ValueFinancial
      assets:Cash
      and due from banks
                                                                  
                                                                  $
                                                                  6,918
                                                                  
                                                                  
                                                                  $
                                                                  6,918
                                                                  
                                                                  
                                                                  $
                                                                  4,402
                                                                  
                                                                  
                                                                  $
                                                                  4,402Federal
      funds sold
                                                                  
                                                                  
                                                                  3,460
                                                                  
                                                                  
                                                                  
                                                                  3,460
                                                                  
                                                                  
                                                                  
                                                                  9,130
                                                                  
                                                                  
                                                                  
                                                                  9,130Deposits
      – other financial institutions
                                                                  
                                                                  
                                                                  225
                                                                  
                                                                  
                                                                  
                                                                  225
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  100Investment
      securities available-for-sale
                                                                  
                                                                  
                                                                  9,467
                                                                  
                                                                  
                                                                  
                                                                  9,467
                                                                  
                                                                  
                                                                  
                                                                  8,786
                                                                  
                                                                  
                                                                  
                                                                  8,786Investment
      securities held-to-maturity
                                                                  
                                                                  
                                                                  23,854
                                                                  
                                                                  
                                                                  
                                                                  21,967
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Loans
                                                                  
                                                                  
                                                                  299,389
                                                                  
                                                                  
                                                                  
                                                                  304,123
                                                                  
                                                                  
                                                                  
                                                                  210,257
                                                                  
                                                                  
                                                                  
                                                                  210,290FHLB
      stock
                                                                  
                                                                  
                                                                  1,598
                                                                  
                                                                  
                                                                  
                                                                  1,598
                                                                  
                                                                  
                                                                  
                                                                  916
                                                                  
                                                                  
                                                                  
                                                                  916Accrued
      interest receivable
                                                                  
                                                                  
                                                                  1,332
                                                                  
                                                                  
                                                                  
                                                                  1,332
                                                                  
                                                                  
                                                                  
                                                                  1,110
                                                                  
                                                                  
                                                                  
                                                                  1,110Financial
      liabilities:Deposits
                                                                  
                                                                  $
                                                                  303,705
                                                                  
                                                                  
                                                                  $
                                                                  303,158
                                                                  
                                                                  
                                                                  $
                                                                  194,050
                                                                  
                                                                  
                                                                  $
                                                                  193,751FHLB
      advances
                                                                  
                                                                  
                                                                  24,000
                                                                  
                                                                  
                                                                  
                                                                  24,000
                                                                  
                                                                  
                                                                  
                                                                  18,000
                                                                  
                                                                  
                                                                  
                                                                  18,000Notes
      payable
                                                                  
                                                                  
                                                                  8,460
                                                                  
                                                                  
                                                                  
                                                                  8,460
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Junior
      subordinated debentures
                                                                  
                                                                  
                                                                  15,426
                                                                  
                                                                  
                                                                  
                                                                  10,377
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Accrued
      interest payable
                                                                  
                                                                  
                                                                  570
                                                                  
                                                                  
                                                                  
                                                                  570
                                                                  
                                                                  
                                                                  
                                                                  415
                                                                  
                                                                  
                                                                  
                                                                  415
  These
estimates do not reflect any premium or discount that could result from offering
the Company's entire holdings of a particular financial instrument for sale at
one time, nor do they attempt to estimate the value of anticipated future
business related to the instruments.  In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of these estimates.
 
 The
following methods and assumptions were used to estimate the fair value of
financial instruments.  For cash and due from banks, Federal funds
sold, deposits at other financial institutions, variable-rate loans, FHLB stock,
accrued interest receivable and payable, demand deposits, short-term FHLB
advances and variable-rate and short-term notes payable, the carrying amount is
estimated to be fair value.  For investment securities, fair values
are based on quoted market prices, quoted market prices for similar securities
and indications of value provided by brokers.  The fair values for
fixed-rate loans are estimated using discounted cash flow analyses, using
interest rates being offered at each reporting date for loans with similar terms
to borrowers of comparable creditworthiness. Fair values for fixed-rate
certificates of deposit are estimated using discounted cash flow analyses using
interest rates offered at each reporting date by the Company for certificates
with similar remaining maturities.  The fair value of subordinated
debentures was determined based on the current market for like-kind instruments
of a similar maturity and structure.  The fair values of commitments
are estimated using the fees currently charged to enter into similar agreements
and are not significant and, therefore, not included in the above
table.
  79
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  17.
                                      FAIR VALUE MEASUREMENT
      (Continued)
 
 Fair Value Measurements
under SFAS 157
 
 SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures
about fair value measurement.  Upon adoption of SFAS No. 157,
there was no cumulative effect adjustment to beginning retained earnings and no
impact on the consolidated financial statements.
 
 Fair
Value Hierarchy
 
 In
accordance with SFAS No. 157, the Company groups its assets and 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.  Valuations within these levels are based
upon:
 
 Level 1 –
Quoted market prices for identical instruments traded in active exchange
markets.
 
 Level 2 –
Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable or can
be corroborated by observable market data.
 
 Level 3 –
Model-based techniques that use at least one significant assumption not
observable in the market.  These unobservable assumptions reflect the
Company's estimates of assumptions that market participants would use on pricing
the asset or liability.  Valuation techniques include management
judgment and estimation which may be significant.
 
 Assets
Recorded at Fair Value
 
 The
following tables present information about the Company's assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of
December 31, 2008:
 
 Recurring
Basis
 
 The
Company is required or permitted to record the following assets at fair value on
a recurring basis under other accounting pronouncements.
  Description
                                                        
                                                        Fair
      Value
                                                        
                                                        
                                                        Level
      1
                                                        
                                                        
                                                        Level
      2
                                                        
                                                        
                                                        Level
      3Available-for-sale
      investment securities
                                                        
                                                        $
                                                        9,467,470
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        9,467,470
                                                        
                                                        
                                                        $
                                                        -
  80
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  17.
                                      FAIR VALUE MEASUREMENT
      (Continued)
 
 Fair Value Measurements
under SFAS 157 (Continued)
 
 Assets Recorded at Fair Value
(Continued)
 
 Recurring
Basis (Continued)
 
 Fair
values for available-for-sale investment securities, which include debt
securities of U.S. Governmental agencies, obligations of states and political
subdivisions, and U.S. Government agencies collateralized by mortgage
obligations, are based on quoted market prices for similar
securities.
 
 Non-recurring
Basis
 
 The
Company may be required, from time to time, to measure certain assets at fair
value on a non-recurring basis.  These include assets that are
measured at the lower of cost or market value that were recognized at fair value
which was below cost at the reporting date.
 Description
                                                        
                                                        Fair
      Value
                                                        
                                                        
                                                        Level
      1
                                                        
                                                        
                                                        Level
      2
                                                        
                                                        
                                                        Level
      3Impaired
      loans
                                                        
                                                        $
                                                        15,189,000
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        15,189,000
                                                        
                                                        
                                                        $
                                                        -
 
 The fair
value of impaired loans is based on the fair value of the collateral for all
collateral dependent loans and for other impaired loans is estimated using a
discounted cash flow model.Impaired
loans were determined to be collateral dependent and categorized as Level 2 as
the fair values are based on current independent appraisals of the
collateral.
  81
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 
 18.
                                      PARENT
      COMPANY ONLY CONDENSED FINANCIAL
STATEMENTS
 
 The
condensed parent company financial statements of SoCal follow:
 
 CONDENSED
STATEMENT OF FINANCIAL CONDITION
 
 December
31, 2008 and 2007
 
 2008
                                                                
                                                                
                                                                2007ASSETSCash
      and cash equivalents
                                                                
                                                                $
                                                                428,829
                                                                
                                                                
                                                                $
                                                                3,948,093Investment
      in subsidiary
                                                                
                                                                
                                                                53,864,280
                                                                
                                                                
                                                                
                                                                50,798,154Other
      assets
                                                                
                                                                
                                                                920,608
                                                                
                                                                
                                                                
                                                                803,528Total
      assets
                                                                
                                                                $
                                                                55,213,717
                                                                
                                                                
                                                                $
                                                                55,549,775LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYNote
      payable, net of fees
                                                                
                                                                $
                                                                8,460,224
                                                                
                                                                
                                                                $
                                                                -Junior
      subordinated debentures, net of issuance costs
                                                                
                                                                
                                                                15,426,192
                                                                
                                                                
                                                                
                                                                -Other
      liabilities
                                                                
                                                                
                                                                100,948
                                                                
                                                                
                                                                
                                                                563,946Shareholders'
      equity
                                                                
                                                                
                                                                31,226,353
                                                                
                                                                
                                                                
                                                                54,985,829Total
      liabilities and shareholders' equity
                                                                
                                                                $
                                                                55,213,717
                                                                
                                                                
                                                                $
                                                                55,549,775
 CONDENSED
STATEMENT OF OPERATIONS
 
 For
the Year Ended December 31, 2008 and the
 Period
from January 17 (Inception) to December 31, 2007
 
 2008
                                                                                          
                                                                                          
                                                                                          2007Interest
      and other expenses
                                                                                          
                                                                                          $
                                                                                          3,213,670
                                                                                          
                                                                                          
                                                                                          $
                                                                                          805,468Loss
      before income tax benefit and equity in undistributed (loss) earnings of
      subsidiary
                                                                                          
                                                                                          
                                                                                          (3,213,670
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (805,468
                                                                                          )Income
      tax benefit
                                                                                          
                                                                                          
                                                                                          (121,926
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (332,283
                                                                                          )Loss
      before equity in undistributed (loss) earnings of
    subsidiary
                                                                                          
                                                                                          
                                                                                          (3,091,744
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (473,185
                                                                                          )Equity
      in undistributed (loss) earnings of subsidiary
                                                                                          
                                                                                          
                                                                                          (42,902,766
                                                                                          )
                                                                                          
                                                                                          
                                                                                          99,427Net
      loss
                                                                                          
                                                                                          $
                                                                                          (45,994,510
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (373,758
                                                                                          )
  82
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  18.
                                      PARENT
      COMPANY ONLY CONDENSED FINANCIAL
STATEMENTS
  CONDENSED
STATEMENT OF CASH FLOWS
 
 For
the Year Ended December 31, 2008 and the
 Period
from January 17 (Inception) to December 31, 2007
 2008
                                                                                                    
                                                                                                    
                                                                                                    2007Cash
      flows from operating activities:Net
      loss
                                                                                                    
                                                                                                    $
                                                                                                    (45,994,510
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (373,758
                                                                                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Undistributed
      net income of subsidiary
                                                                                                    
                                                                                                    
                                                                                                    42,902,766
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (99,427
                                                                                                    )Net
      decrease (increase) in other assets
                                                                                                    
                                                                                                    
                                                                                                    346,922
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (713,528
                                                                                                    )Net
      (decrease) increase in other liabilities
                                                                                                    
                                                                                                    
                                                                                                    (496,635
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    453,946Net
      cash used in operating activities
                                                                                                    
                                                                                                    
                                                                                                    (3,241,457
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (732,767
                                                                                                    )Cash
      flows from investing activities:Investment
      in bank subsidiary
                                                                                                    
                                                                                                    
                                                                                                    (6,000,000
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Cash
      paid in connection with the acquisition of PBB
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (26,182,640
                                                                                                    )Cash
      paid in connection with the acquisition of Spectrum
                                                                                                    
                                                                                                    
                                                                                                    (24,733,878
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Net
      cash used by investing activities
                                                                                                    
                                                                                                    
                                                                                                    (30,733,878
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (26,182,640
                                                                                                    )Cash
      flows from financing activities:Proceeds
      from notes payable
                                                                                                    
                                                                                                    
                                                                                                    8,456,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Proceeds
      from issuance of common stock, net of issuance costs
                                                                                                    
                                                                                                    
                                                                                                    22,000,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    11,263,500Proceeds
      from issuance of preferred stock, net of issuance costs
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    19,600,000Proceeds
      from exercise of warrants
                                                                                                    
                                                                                                    
                                                                                                    71
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Net
      cash provided by financing activities
                                                                                                    
                                                                                                    
                                                                                                    30,456,071
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    30,863,500(Decrease)
      increase in cash and cash equivalents
                                                                                                    
                                                                                                    
                                                                                                    (3,519,264
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    3,948,093Cash
      and cash equivalents at beginning of period
                                                                                                    
                                                                                                    
                                                                                                    3,948,093
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Cash
      and cash equivalents at end of year
                                                                                                    
                                                                                                    $
                                                                                                    428,829
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    3,948,093Noncash
      financing activities:Fair
      value of common stock, options and warrants issued in the acquisition of
      Professional Business Bank
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    24,596,087Preferred
      stock dividends paid in stock
                                                                                                    
                                                                                                    $
                                                                                                    3,199,400
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    166,650Junior
      subordinated debentures issued in acquisition of Spectrum
                                                                                                    
                                                                                                    $
                                                                                                    15,464,000
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
  83
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 19.
                                      SUBSEQUENT
      EVENTS
 
 Related Party Notes
Payable
 
 In
January, February and March 2009 the Fund made loans to SoCal in the amounts of
$2.0 million, $0.5 million and $6.5 million, respectively.  The annual
coupon rate on these loans is 15%, and each loan included a transaction fee of
2% of the principal amount payable to the Fund.  The loans mature on
July 1, 2009 and can be redeemed at the Fund's discretion in cash, shares of
SoCal common stock at 120% of the then prevailing fair value as determined by
independent appraisal or shares of SoCal Series A Non-Cumulative Perpetual
Preferred Stock at their face value.  Management believes the Fund
will either agree to extend the loan or convert the loan as discussed
above.  Subsequent to year end, the Fund agreed to defer all interest
and fee payments related to these borrowings.
 
 Capital Contributions to the
Bank
 
 In
January and March 2009, SoCal invested $2.0 million and $5.0 million,
respectively, in the Bank's common equity.
 
 Note
Payable
 
 On
December 31, 2008, SoCal was in violation of three financial covenants relating
to its $8.0 million note payable.  In an Amendment executed March 31,
2009, both parties agreed to amend the loan terms and conditions in exchange for
waiver of the covenant violations.  Further, on March 31, 2009, SoCal
violated a financial covenant relating to the amount of total
capital.  On May 12, 2009, SoCal and the lender signed a term sheet
wherein the March 31, 2009 covenant violation was waived.  The term
sheet also revised the loan terms including:
 
 ·
                                        resets
      quarterly debt service payments to be interest-only from June 2009 through
      June 2010 and thereafter includes a fixed quarterly $300,000 principal
      repayment;
  ·
                                          interest
      based on three-month LIBOR plus 8.1% for the life of the
    loan;
 ·
                                        creates
      an interest reserve account dedicated to making interest payments until
      exhausted to be funded with a $800,000 payment from SoCal in May
      2009;
 
 ·
                                        requires
      a $200,000 principal payment in May
2009;
 
 ·
                                        requires
      that SoCal grants each quarter, from June 2009 to and including June 2010,
      10,000 warrants to the lender to purchase SoCal common stock at one cent
      per warrant;
 
 ·
                                        requires
      that 25% of the proceeds from new SoCal capital financings be dedicated
      to principal payments on the loan;
and
 
 ·
                                        loan
      principal be paid down by $2.3 million by September
  2010.
  84
 BELVEDERE
SoCAL AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 19.
                                      SUBSEQUENT EVENTS
      (Continued)
 
 Other Borrowing
Arrangements
 
 During
the first quarter of 2009, the Bank was notified by one correspondent bank that
its $5 million advised Federal Funds line was being withdrawn and that $3.5
million of correspondent bank commitments would require
collateralization.  Collateral was provided in the form of Federal
Funds sold to that correspondent bank.
 
 Junior Subordinated
Debentures
 
 In April
and May 2009, SoCal notified the trustee of its $15.5 million junior
subordinated debentures that it would be deferring the scheduled April and May
2009 payments.  Terms of the debenture permit SoCal to defer up to 60
monthly interest payments.  Deferred interest payments accrue at a 10%
annual rate. The decision to defer future payments will be made monthly after
determining compliance with the terms of the note payable requiring principal
reductions to a balance less than $5.5 million as discussed in Note
9.
 
 Recent Regulatory
Actions
 
 The Board
of Directors of the Bank signed a Memorandum of Understanding (the "Regulatory
Agreement") with the FDIC and the Commissioner of the DFI on May 1,
2009.  The Regulatory Agreement sets forth certain actions required to
be taken by management of the Bank.  The Regulatory Agreement relates
primarily to the Bank's asset quality, allowance for loan losses, capital,
management and earnings, and requires the Bank to submit certain written plans
and quarterly reports to the DFI and the FDIC regarding its loan portfolio,
capital levels and profitability, among other matters.  Under the
terms of the Regulatory Agreement, the Bank must achieve and maintain a Tier 1
leverage capital ratio and a minimum tangible shareholders’ equity to total
tangible assets ratio of not less than 9% and a total risk based capital ratio
at a minimum of 12% by December 31, 2009.  Further, classified
assets present at October 31, 2008 are required to be reduced relative to the
sum of prevailing Tier 1 capital plus the allowance for loan losses to no more
than 60% within 120 days and no more than 40% within 210 days of the Regulatory
Agreement.  As of March 31, 2009, these classified assets were 78% of
prevailing Tier 1 capital plus the allowance for loan
losses.  Additionally, the Regulatory Agreement requires that, prior
to declaring or paying any cash dividends, the Bank must obtain the prior
written consent of the FDIC and the DFI.





85


ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.





None.





ITEM
9A.  CONTROLS AND PROCEDURES.




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES




Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K (as required by paragraph (b) of Rule 13a-15 under the Securities
Exchange Act of 1934 (the Exchange Act)), SoCal's principal executive officer
and principal financial officer have concluded that SoCal’s disclosure controls
and procedures (as defined in Rules 13a-15(e) under the Exchange Act) were
effective to ensure that information required to be disclosed by SoCal in
reports that it files or submits under the Exchange Act was recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
 
 REPORT
OF MANAGMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


Management
is responsible for establishing and maintaining adequate internal control over
financial reporting at SoCal. Internal control over financial reporting is a
process designed under the supervision of the Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of SoCal’s financial statements for
external reporting purposes in accordance with U.S. generally accepted
accounting principles (GAAP). A company’s internal control over financial
reporting includes policies and procedures that (1) pertain to the
maintenance of records that accurately and fairly reflect, in reasonable detail,
transactions and dispositions of our assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP and that receipts and expenditures
are being made only in accordance with authorizations of management and the
directors of the company, and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of assets that could have a material effect on the financial
statements.





Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of SoCal’s financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.





As of
December 31, 2008, SoCal carried out an evaluation, under the supervision
and with the participation of Management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of internal control over
financial reporting pursuant to Rule 13a-15(c), as adopted by the SEC under
the Exchange Act. In evaluating the effectiveness of the internal control over
financial reporting, management used the framework established in Internal Control—Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).





A
material weakness is a control deficiency, or combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of SoCal’s annual or interim
financial statements will not be prevented or detected on a timely basis.
Management identified the following material weaknesses as of December 31,
2008:


1.
                Our
      Internal Control over Financial Reporting related to the allowance for
      loan losses and the completeness and accuracy of the provision for loan
      losses contained multiple deficiencies that represent material weaknesses.
      Specifically, SoCal did
not:


●
                Maintain
      policies and procedures to ensure that line personnel perform an analysis
      adequate to risk classify the loan portfolio.●
                Effectively
      monitor whether the number of qualified and trained personnel in our
      credit administration processes is sufficient to identify problem loans
      timely.●
                Maintain
      policies and procedures to ensure that SFAS 114 Accounting by Creditors for
      Impairment of a Loandocumentation is prepared timely, accurately
      and subject to supervisory review.●
                Effectively
      monitor whether lending personnel provide information about at risk loans
      to credit administration on a timely basis, including appraisals necessary
      to support the valuations of collateral included in our SFAS 114
      analysis.


Based on
our assessment and the criteria discussed above, SoCal has concluded that, as of
December 31, 2008, the internal control over financial reporting was not
effective as a result of the aforementioned material
weakness.





ITEM
9B.  OTHER INFORMATION.





None.





86





PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Board
of Directors


The
following table sets forth age, position and a brief account of the business
experience during the past five years of SoCal’s current directors and executive
officers.




Name
              
              Age
              
              Position/BackgroundAlison
      Davis
              
              47
              
              Ms.
      Davis is the Managing Partner of Belvedere Capital LLC, the management
      company of the Fund, and a Managing Member of Belvedere Capital Partners
      II LLC, the general partner of the Fund. Prior to joining Belvedere in
      February 2004, Ms. Davis was the CFO of Barclays Global Investors, the San
      Francisco-based institutional money management firm with over $1.5
      trillion of assets under management, and operations in North America,
      Europe and Asia since 2000. Ms. Davis began her career with McKinsey and
      Company in 1984 and joined A.T. Kearney in 1993 as a leader of the Global
      Financial Institutions Group in New York and later in San Francisco where
      she also took on the role of West Coast Practice Leader. Ms. Davis is a
      Director of Les Concierges, LECG, LLC, and Presidio Bank. Ms. Davis holds
      a B.A. with honors and a Masters degree from Cambridge University in
      England, and a combined M.B.A. from Harvard Business School and
      Stanford Graduate School of Business.Mary
      Lynn Lenz
              
              54
              
              Ms. Lenz was appointed Director of SoCal and
      President and CEO of both SoCal and the Subsidiary Bank on March 16, 2009.
      Ms. Lenz previously served as President and CEO of Massachusetts-based
      Slade’s Ferry Bancorp which was acquired by Independent
      Bank Corp. in 2008. Prior to Slade’s,Ms. Lenz
      was the Executive Vice President of Retail Banking for Citizens Bank of
      Massachusetts, a wholly owned subsidiary of Royal Bank of Scotland with
      assets of $164 billion. Ms. Lenz’s career
      also includes 10 years at Cleveland-based KeyCorp in a variety of
      leadership roles in small business banking, mortgage banking and retail
      banking. Ms. Lenz attended the State University of New York,CollegeofBuffaloandNiagaraUniversity.
      She served on numerous non-profit boards including Leadership SouthCoast,
      American Heart Association, Saint Anne’s Hospital
      (Fall River,MA) and the
      Massachusetts Bankers Association.Justin
      C.R.Evans
              
              31
              
              Mr.
      Evans is a member of Belvedere Capital Partners II LLC, the general
      partner of the Fund.  Prior to joining Belvedere in 2005, Mr.
      Evans served as an advisor and principal investor at organizations such as
      J.P. Morgan, Chinasource Investment Partners and Bain &
      Company.  Mr. Evans holds an M.B.A. from the Stanford University
      Graduate School of Business and an A.B. with honors from
      Dartmouth College.




Except
for Ms. Davis, none of SoCal’s directors are a director of any other company
with a class of securities registered pursuant to Section 12 of the Exchange Act
or subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940,
whose common stock is registered pursuant to Section 12 of the Exchange
Act.





87


Executive
Officers




The
following summary sets forth the age, position and a brief account of the
business experience during the past five years of those current executive
officers of SoCal who are not also directors of SoCal.




Name
            
            Age
            
            Position/BackgroundJames
      Westfall
            
            56
            
            Mr.
      Westfall is both SoCal’s and the Subsidiary Bank’s Chief Financial
      Officer.Prior to joining SoCal, Mr. Westfall spent more
      than 30 years in financial management positions, including at Bank of
      America,Chela Financial
      andGreater Bay Bancorp, the latter two as
      Chief Financial Officer.  Mr. Westfall is past president of the
      North American Asset Liability Management
      Association.   Mr. Westfall holds a B.A. in
      Economicsfrom
      Duke University and an M.B.A. from the University of Chicago,
      Graduate School of Business.Norman
      Broyer
            
            65
            
            Mr.
      Broyer is the Subsidiary Bank’s Chief Risk Officer and Chief Credit
      Officer.  Mr. Broyer joined the Subsidiary Bank in 2001 and
      brings over 35 years of commercial bank lending and real estate industry
      experience. Mr. Broyer began his banking career at Union Bank, followed by
      subsequent positions in lending and credit administration at several
      Southern California community and regional banks. He joined the Subsidiary
      Bank in 2001, as a Chief Credit Officer. Mr. Broyer holds a B.S. in
      Business Administration from the University of California,
      Berkeley.




Section 16(a) Beneficial Ownership
Reporting Compliance.  Section 16 of the Exchange Actdoes not apply to SoCal
because it does not have a class of security registered under Section 12 of the
Exchange Act.





Code of Ethics.  We
have adopted a Code of Ethics that applies to all of our employees and
directors, and complies with the SEC’s requirements for a code of ethics
applicable to senior executive officers.  A copy of the Code of Ethics
is being filed as anexhibit to this annual
report.





Nominating Committee. There
were no material changes to the procedures by which security holders may
recommend nominees to our Board during 2008.





Audit
Committee.  SoCal has an Audit Committee established in
accordance with Section 3(a)(58) of the Exchange Act.  Pursuant to its
charter, the Audit Committee is a standing committee appointed annually by the
Board.  The Committee assists the Board in fulfilling its
responsibility to the stockholders and depositors relating to the quality and
integrity of SoCal’s accounting systems, internal controls and
financial reporting processes, the identification and assessment of
business risks and the adequacy of overall control environment within
SoCal.





Audit Committee Financial
Expert.  The Board has determined it does not have an “audit
committee financial expert,” as such term is defined in the rules and regulation
under the Securities Act of 1933 as amended, serving on its audit
committee.The
Board does not have an audit committee financial expert for a variety of
reasons, including but not limited to the depth of financial experience of
Director Evans.





During 2008, the following were members of the audit,
compensation and/or nominating and corporate governance
committees:





Name
            
            Audit
            
            Compensation
            
            Nominating
      and Corporate GovernanceWilliam
      Baribault (1)
            
            
            
            X
            
            XAlison
      Davis
            
            X
            
            X
            
            XJustin
      C.R. Evans
            
            X
            
            XJae
      Lim (2)
            
            X
            
            XLarry
      Tashjian (3)
            
            X
            
            
            
            X





(1)
            Mr. Baribault resigned as director on March 31,
      2009.


(2)
            Mr. Lim resigned as directoronMay31,2008.


(3)
            Mr.Tashjianresigned as directoron March 23,
      2009.






88


ITEM
11.  EXECUTIVE COMPENSATION.





SUMMARY
COMPENSATION TABLE (1)





The
following table sets forth information regarding compensation earned by our
Named Executive Officers for service during each of the last two completed
fiscal years, as applicable:




Name
      and Principal Position
            
            Year
            
            Salary
      ($)
            
            Bonus
      ($)(4)
            
            Option
              Awards
              ($)(5)
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)(6)
            
            All
      Other
              Compensation
              ($)(7)
            
            Total
              ($)William
      Baribault
              Former
      President, CEO
              and
      Director (2)
            
            2008
            
            252,308
            
            100,000
            
            139,557
            
            -
            
            38,970
            
            530,835Alan
      Lane
              Former
      Executive Chairman (3)
            
            2008
            
            178,128
            
            72,500
            
            50,531
            
            -
            
            11,295
            
            312,4542007
            
            18,462
            
            -
            
            -
            
            -
            
            900
            
            19,362Norman
      Broyer
              Chief
      Risk Officer and Chief Credit Officer
            
            2008
            
            245,657
            
            50,000
            
            18,188
            
            -
            
            16,644
            
            330,4892007
            
            191,750
            
            -
            
            56,674
            
            123,750
            
            10,395
            
            382,569


_____________________


(1)
            SoCal
      acquired PBB on November 23, 2007. Prior to such date, SoCal had no
      significant operations. Accordingly, the compensation information and
      discussion thereof contained in this report for periods subsequent to
      November 23, 2007 are for SoCal. Periods prior to November 23, 2007 relate
      to PBB only. The information is comparable as the sole subsidiary of SoCal
      through and including December 31, 2007 was
PBB.


(2)
            Mr.
      Baribault was President and CEO from February 28, 2008 until March 23,
      2009.  Mr. Baribault resigned as director on March 31,
      2009.


(3)
            Mr.
      Lane resigned as Executive Chairman on December 5, 2008 and as a director
      on December 31, 2008.


(4)
            Amounts
      paid to each named officer in 2008 were discretionary and were approved by
      the Board on a subjective basis.


(5)
            Represents
      the compensation cost recognized in each respective year for financial
      statement reporting purposes under SFAS 123(R) with respect to the stock
      option awards of SoCal granted to the named executive
    officer.


(6)
            Represents
      amounts paid (or accrued) to each Named Executive Officer in 2007 based on
      certain performance goals. The performance goals included: i) loan and
      deposit growth goals, and ii) individual project
      goals.  Management team members were eligible for bonuses at 90%
      achievement of goals, and an escalating scale for each additional 10%
      growth level achieved, provided unlimited upside
      potential.


(7)
            Amountspaid in 2008 toeach respective Named Executive Officer are set
      forth in the table below and include automobile allowances, contributions
      to the SoCal 401(k) Plan, group life insurance imputed income and benefits
      premiums.




Automobile
      Allowance
                ($)
            
            Club
      Dues
                ($)
            
            401(k)
                Contributions
                ($)
            
            Group
      Life Insurance
            
            Benefits
      Premiums
            
            Total
                ($)William
      Baribault
            10,000
            
            
            7,494
            
            
            13,800
            
            
            330
            
            
            7,346
            
            
            38,970Alan
      Lane
            -
            
            
            -
            
            
            11,190
            
            
            105
            
            
            -
            
            
            11,295Norman
      Broyer
            7,200
            
            
            -
            
            
            8,866
            
            
            578
            
            
            -
            
            
            16,644





Employment Agreements





William
Baribault, Alan Lane and Norman Broyer had written employment agreements that
governed the terms of their compensation in 2008.  Their employment
agreements provided for potential payments upon termination of employment for
certain reasons, including a change in control.  Beginning March 16,
2009, Mary Lynn Lenz had a written employment agreement that governed the terms
of her compensation in 2009.





89


William
Baribault





SoCal
entered into an employment agreement with William Baribault on August 14, 2008,
effective February 28, 2008, to serve as President and Chief Executive
Officer.  Mr. Baribault’s employment agreement terminated upon his
resignation as President and Chief Executive Officer on March 23,
2009.  Mr. Baribault resigned as a director on March 31,
2009.





Alan
Lane





SoCal
entered into an employment agreement with Alan Lane on January 14, 2008 to serve
as Executive Chairman of the Board of SoCal.  Mr. Lane’s employment
agreement terminated upon his resignation as Executive Chairman on December 5,
2008.  Mr. Lane resigned as a director on December 31,
2008.





Norman
Broyer





SoCal
entered into an employment agreement with Norman Broyer on March 10, 2008 and
effective March 7, 2008 to serve as PBB’s President, Chief Risk Officer and
Chief Credit Officer, and as Spectrum’s (acquired by SoCal on January 31, 2008)
President, Chief Risk Officer.  This new agreement terminated the
previous employment agreement with PBB entered into on February 2, 2005. The
term of this new agreement is for a three year term commencing on March 7, 2008
with a base salary of $250,000, bonus target of $100,000 upon achievement of
certain performance objectives, and automobile allowance of $600 per month. In
the event of a termination without cause (as defined in the agreement),
severance would be payable equal to one year’s salary, a pro-rated bonus payment
and up to twelve months paid group health insurance. The agreement also allows
Mr. Broyer to participate in the company’s benefits plans generally available to
all employees, including health, welfare, 401(k) and paid time off.





Mary Lynn Lenz





SoCal entered into an employment agreement with Mary
Lynn Lenz on March 16, 2009 (the “Effective Date”) to serve as SoCal’s Chief Executive
Officer and President.  This new agreement is for a three year
term commencing on March 16, 2009 with a base salary of $300,000, bonus target
of $120,000 upon achievement of certain performance objectives, and automobile
allowance of $1,000 per month.  Ms. Lenz will also receive options
equal in count to 3.0% of SoCal’s outstanding common stockalong with futureoptiongrantsequal in count to3.0%ofanyincrease in SoCal common stock resulting from the close of future
acquisitions. In the event of a termination without cause (as
defined in the agreement), severance would be payable equal to one year’s
salary, a pro-rated bonus payment and up to twelve months paid group health
insurance.  Ms. Lenz also received relocation benefits of up to
$10,000 in legal expenses, $20,000 in relocation expenses and up to $3,500 per
month for temporary housing for up to 6 months.  The agreement also allows Ms. Lenz to participate in the
SoCal’s benefit plans generally available to all employees,
including health, welfare, 401(k) and paid time off.





There are
no other employment agreements in effect, as of May 13, 2009, between SoCal or
the Subsidiary Bank and the Named Executive Officers.





90


OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





Name
            
            Number
      of Securities Underlying Unexercised Options (#)
      Exercisable
            
            Number
      of Securities Underlying Unexercised Options (#) Unexercisable
      (1)
            
            Option
      Exercise Price ($)
            
            Option
      Expiration DateWilliam
      Baribault
            
            13,920
            
            -
            
            11.49
            
            10/27/20124,785
            
            -
            
            15.23
            
            5/24/201432,925
      (2)
            
            15.00
            
            2/27/201816,962
      (3)
            
            15.00
            
            2/27/201849,887
      (4)
            
            15.00
            
            2/27/2018Alan
      Lane
            
            -
            
            41,573
      (5)
            
            15.00
            
            3/1/201841,572
      (6)
            
            15.00
            
            3/1/2018Norman
      Broyer
            
            7,612
            
            -
            
            20.69
            
            5/1/201514,966
      (5)
            
            15.00
            
            3/1/201814,966
      (6)
            
            15.00
            
            3/1/2018





(1)
            At
      the election of the Named Executive Officer, these options may be
      exercised into shares of restricted stock, in whole or in part, as to the
      unvested shares.  Such restricted shares will be subject to
      repurchase by SoCal until the original vesting date of the underlying
      option.


(2)
            100%
      of the unvested options will vest on February 28,
  2009.


(3)
            100%
      of the unvested options will vest on February 28,
  2013.


(4)
            100%
      of the unvested options will vest on February 28,
  2015.


(5)
            100%
      of the unvested options will vest on February 29,
  2013.


(6)
            100%
      of the unvested options will vest on February 29,
  2015.







DIRECTOR
COMPENSATION





During
2008, outside directors were paid an annual retainer fee of $25,000, which was
paid on a monthly basis. Beginning April 1, 2009, outside
directors will receive anannual retainer fee of $30,000,
an additional $10,000 for each committee they chair and an additional
$10,000 if the director also serves on the Subsidiary Bank's board of
directors.  Additionally, in lieu of their option
awards, outside directors will receive an additional retainer fee of $4,500 per
month until the earlier of December 2009 or upon receipt of an option
award.  As of May 13, 2009, there are no outside
directors.





Name
            Fees
      Earned or Paid in Cash
              ($)
            Option
              Awards
              ($)
      (4)
            Total
              ($)William
      Baribault (1)
            5,000
            
            139,557
            
            144,557Alison
      Davis (5)
            -
            
            10,102
            
            10,102Justin
      C.R. Evans (5)
            -
            
            6,250
            
            6,250Jae
      Lim (2)
            -
            
            -
            
            -Larry
      Tashjian (3)
            25,000
            
            10,102
            
            35,102





(1)
            Mr.Baribault
      received outside director fees for the first quarter of 2008, prior to his
      appointment as President and CEO in February 2008.  His salary
      and other compensation as President and CEO are included in the Summary
      Compensation Table.Mr.
      Baribault resigned as director on March 31,
  2009.


(2)
            Mr. Lim resigned as director onMay 31,
2008.


(3)
            Mr. Tashjian resigned as director on March 23,
      2009.


(4)
            The amounts in this column represent the
      dollar expense amounts recognized for financial statement reporting
      purposes in fiscal year 2008 with regard to share-based awards, as
      determined pursuant to SFAS 123R.  Mr. Lim forfeited his option
      award upon his resignation and all associated 2008 SFAS 123(R) expense was
      reversed.


(5)
            As
      members of the General Partner of the Fund, SoCal’s majority shareholder,
      neither Ms. Davis nor Mr. Evans received any cash retainer fees during
      2008.






91


ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





SoCal has
one stock-based compensation plan, the Belvedere SoCal 2007 Equity Incentive
Plan (the “Plan”), which, among other things, permits the grant of stock options
and stock purchase rights.  The Plan is designed primarily to attract
and retain personnel and provide additional incentives to employees, directors
and consultants to promote the success of SoCal’s business.  The
maximum aggregate number of shares that may be issued under the Plan is
1,500,000.  The amount, frequency and terms of share-based awards are
subject to all applicable terms and conditions of the Plan and such other terms
and conditions as prescribed by a Committee of the Board of
Directors.  New shares are issued upon the exercise of
options.





Plan
      category
            Number
      of
              securities
      to be
              issued
      upon
              exercise
      of
              outstanding
              options,
      warrants
              and
      rights
              (a)
            Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
              (b)
            Number
      of securities
              remaining
      available
              for
      future issuance
              under
      equity
              compensation
      plans
              (excluding
      securities
              reflected
      in column (a))
              (c)Equity
      compensation plans approved by security holders
            644,759
            $11.06
            1,027,451Equity
      compensation plans not approved by security holders
            -
            -
            -Total
            644,759
            $11.06
            1,027,451








SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS





As of May
1, 2009, no individual known to SoCal owned more than five percent (5%) of the
outstanding shares of its Common Stock except as described below.





Name
      and Address of Beneficial Owner
            Amount
      and Nature of Beneficial Ownership
            Percent
      of ClassBelvedere
      Capital Fund II L.P.
              One Maritime PlazaSuite825
              San Francisco,CA94111
            2,562,597
      (1)
            73.9%




(1)
              Alison
      Davis and Richard W. Decker, Jr., through their position as managing
      members of Belvedere Capital and voting members of Belvedere Capital’s
      Investment Committee, have shared power to vote or dispose of the
      2,429,184 shares and 133,413 warrants convertible into 133,413 shares of
      common stock held by Belvedere Capital Fund II,
  L.P.


Security
Ownership of Management





The
following table sets forth, as of May 1, 2009, information as to the shares
concerning the equity ownership of SoCal’s directors and Named Executive Officer
and directors and executive officers as a group.  SoCal has two
classes of shares outstanding, Common Stock and Preferred Stock.





Under SEC rules, beneficial ownership includes any
shares of common stock which a person has sole or shared voting power or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or right,
through conversion of any security or pursuant to the automatic termination of a
power of attorney or revocation of a trust, discretionary account or similar
arrangement. Percentage of beneficial ownership is calculated based on 3,332,500
shares of our common stock outstanding as of May 1, 2009.In
calculating the number of shares beneficially owned and the percentage
ownership, options or warrants held by that person that are currently
exercisable or convertible or become exercisable or convertible within 60 days
after May 1, 2009 are deemed outstanding even if they have not actually been
exercised or converted. The shares issuable under these securities are treated
as outstanding for computing the percentage ownership of the person holding
these securities but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Unless otherwise indicated, we
believe that all persons named in this table have sole voting power and
investment power over all the shares beneficially owned by
them


92







Name
      of Beneficial Owner
            
            Relationship
      with Company
            
            Amount
      and Nature of
              Beneficial
      Ownership (1)
            
            Percent
      of ClassWilliam
      Baribault (2)
            
            Former
      President, Chief Executive Officer and Director
            
            130,105
            
            3.77%Alan
      Lane (3)
            
            Former
      Executive Chairman
            
            10,957
            
            *Norman
      Broyer (4)
            
            Chief
      Risk Officer and Chief Credit Officer
            
            42,331
            
            1.26%Mary
      Lynn Lenz (5)
            
            Chief
      Executive Officer,  President and Director
            
            -
            
            -Alison
      Davis (6)
            
            Director
            
            2,579,226
            
            74.1%Justin
      C.R. Evans (7)
            
            Director
            
            16,629
            
            *All
      directors and officers of the Company as a group (5
people)
            
            
            
            2,638,186
            
            74.6%




*Less
than 1% of the total outstanding shares of Common Stock.





(1)
            Except as otherwise indicated in these notes, and
      subject to applicable community property laws and shared voting and
      investment, amounts include shares held by each person’s spouse (except
      where legally separated) and minor children; shares held by a family trust
      as to which such person is a trustee with sole voting and investment power
      (or shares power with a spouse); or shares held in an Individual
      Retirement Account as to which such person has pass-through voting rights
      and investment power.


(2)
            Consists
      of: a) 11,626 shares as to which Mr. Baribault has sole voting and
      investment power and b) 118,479 shares issuable pursuant to options
      exercisable within 60 days of May 1,
2009.


(3)
            Consists
      of 10,957 shares as to which Mr. Lane has sole voting and investment
      power, including warrants convertible into 1,170 shares of common
      stock.  Mr. Lane forfeited all unexercised options as of March
      31, 2009, 90 days from his date of
resignation.


(4)
            Consists
      of: a) 4,787 shares as to which Mr. Broyer has sole voting and
      investment power and b) 37,544 shares issuable pursuant to options
      exercisable within 60 days of May 1,
2009.


(5)
            As
      of May 1, 2009, Ms. Lenz has no equity ownership in
  SoCal.


(6)
            Consists
      of: a) 2,562,597 shares which Ms. Davis, through her position as a
      managing member of Belvedere Capital and a voting member of Belvedere
      Capital’s Investment Committee, has shared power to vote or dispose of the
      securities held by the Fund, including warrants convertible into 133,413
      shares of common stock and b) 16,629 shares issuable pursuant to
      options exercisable within 60 days of May 1,
  2009.


(7)
            Consists
      of 16,629 shares issuable pursuant to options exercisable within
      60 days of May 1, 2009.  Mr. Evans is a non-voting member
      of Belvedere Capital’s Investment Committee and thus has no power to vote
      or dispose of the securities held by the Fund, including its ownership of
      SoCal.




ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS
INDEPENDENCE.





Transactions with Related
Persons.  Except as disclosed below, there have been no
transactions, or series of similar transactions, during 2008, or any currently
proposed transaction, or series of similar transactions, to which SoCal was or
is to be a party, in which the amount involved exceeded or will exceed the
lesser of $120,000 or 1% of the average total assets at year-end for the last
three completed fiscal years, and in which any director (or nominee for
director) of SoCal, executive officer of SoCal, any shareholder owning of record
or beneficially 5% or more of Company Common Stock, or any member of the
immediate family of any of the foregoing persons, had, or will have, a direct or
indirect material interest.





SoCal,
the Subsidiary Bank and the Fund entered into a management agreement under which
the Fund will provide to SoCal and the Subsidiary Bank certain management
support for a fee of 5% of Subsidiary Bank’s pretax profits subject to a minimum
of $200,000 and a maximum of $750,000 per year.  In 2008, SoCal paid
$191,997 to the Fund.  In addition, the Fund will work with SoCal in
identifying, structuring, negotiating and completing acquisitions.





93


Indebtedness of
Management.  Some of the current directors and executive
officers of SoCal and the companies with which they are associated have been
customers of, and have had banking transactions with SoCal, in the ordinary
course of SoCal’s business.  SoCal expects to continue to have such
banking transactions in the future.  All loans and commitments to lend
included in such transactions have been made, (i) in the ordinary course of
business, (ii) on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loan with persons not
related to SoCal, and (iii) in the opinion of management of SoCal, did not
involve more than the normal risk of collectability or present any other
unfavorable features.





DirectorIndependence.  SoCal is not
listed on an national securities exchange or quoted on the OTC Bulletin
Board.  Therefore, the Board has adopted the definition of
independence as defined in Rule 5000(a)(19), formerly Rule 4200(a)(15), of the
listing standards for the companies quoted on the NASDAQ Stock
Market.  There are no family relationships between any of the
directors or executive officers.  At December 31, 2008, the SoCal
Board had one independent director, Director Tashjian.  Upon Director Tashjian’s resignation, no
directors of the SoCalBoard were independent.





ITEM
14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.





During the fiscal years ended December 31, 2008 and
December 31, 2007, respectively, SoCal retained and paid Perry-Smith LLP to
provide audit and other services as follows:





2008
            
            
            2007Audit
      Fees (1)
            
            $
            208,810
            
            
            $
            109,000Tax
      Fees (2)
            
            
            55,545
            
            
            
            40,665All
      Other Fees (3)
            
            
            37,740
            
            
            
            2,300Total
            
            $
            302,095
            
            
            $
            151,965





(1)
            Audit fees consisted of audit work performed in
      the preparation and review of the financial
    statements.


(2)
            Tax fees consisted of assistance with matters
      related to tax compliance and
counseling.


(3)
            All other fees consisted of consulting
      services.




ITEM
15.  EXHIBITS.





Index
to Exhibits





15(a)(1) Financial Statements




The
financial statements of the registrant as listed in the “Index to Financial
Statements” included in Item 8, Financial Statements and Supplementary
Data, of this report, are filed as part of this report.




15(a)(2) Financial Statement
Schedules




Financial
statement schedules have been omitted because the required information is not
present, or not present in amounts sufficient to require submission of the
schedules, or because the required information is provided in the financial
statements or notes thereto.





15(a)(3) Exhibits




The
exhibits required to be filed as part of this Annual Report on Form 10-K are
listed in the Exhibit Index attached hereto and are incorporated herein by
reference.





94




EXHIBIT
INDEX
  Exhibit
      No.
                Exhibit
      Description3.1†
                Articles
      of Incorporation.3.2†
                Amended
      and Restated Bylaws, dated June 16, 2008.4.1
                Warrant
      Agreement, dated November 23, 2007 (incorporated by reference to Exhibit
      10.3 to the Quarterly Report on Form 10-Q filed November 19,
      2008).4.2
                Indenture,
      dated January 31, 2008 (incorporated by reference to Exhibit 4.1 to the
      Current Report on Form 8-K filed February 6, 2008).4.3
                Amended
      and Restated Declaration of Trust, dated January 31, 2008 (incorporated by
      reference to Exhibit 4.2 to the Current Report on Form 8-K filed February
      6, 2008).4.4
                Purchase
      Agreement, dated January 31, 2008 (incorporated by reference to Exhibit
      4.3 to the Current Report on Form 8-K filed February 6,
    2008).4.5
                Stock
      Purchase Agreement, dated January 29, 2008 (incorporated by reference to
      Exhibit 4.4 to the Current Report on Form 8-K filed February 6,
      2008).4.6
                Certificate
      of Determination for Series A Non-Cumulative Perpetual Preferred Stock,
      dated December 10, 2007 (incorporated by reference to Exhibit 3.1 to the
      Current Report on Form 8-K filed December 13, 2007).4.7
                Form
      of Stock Certificate (incorporated by reference to Exhibit 4.1 to the
      Registration Statement on Form S-4/A filed on May 2,
  2007).10.1*
                Employment
      Agreement with Michael McCall dated December 5, 2007 (incorporated by
      reference to Exhibit 10.8 to the Annual Report on Form 10-KSB filed March
      31, 2008).10.2*
                Employment
      Agreement with Alan J. Lane dated January 14, 2008 (incorporated by
      reference to Exhibit 10.3 to the Annual Report on Form 10-KSB filed March
      31, 2008).10.3*
                Employment
      Agreement with Norman Broyer dated March 7, 2008 (incorporated by
      reference to Exhibit 10.4 to the Annual Report on Form 10-KSB filed March
      31, 2008).10.4*
                Employment
      Agreement with William Baribault dated August 14, 2008 (incorporated by
      reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed
      November 19, 2008).10.5*
                Employment
      Agreement with Mary Lynn Lenz dated March 16, 2009 (incorporated by
      reference to Exhibit 10.5 to the Current Report on Form 8-K filed May 1,
      2009).10.6
                Series
      A Non-Cumulative Perpetual Preferred Stock Purchase Agreement, dated
      December 10, 2007 (incorporated by reference to Exhibit 3.1 to the Current
      Report on Form 8-K filed December 13, 2007).10.7
                Business
      Loan Agreement with Pacific Coast Bankers’ Bank dated March 18, 2008
      (incorporated by reference to Exhibit 10.5 to the Annual Report on Form
      10-KSB filed March 31, 2008).10.8
                Promissory
      Note with Pacific Coast Bankers’ Bank dated March 18,
      2008  (incorporated by reference to Exhibit 10.6 to the Annual
      Report on Form 10-KSB filed March 31, 2008).10.9
                Commercial
      Pledge Agreement with Pacific Coast Bankers’ Bank dated March 18,
      2008  (incorporated by reference to Exhibit 10.7 to the Annual
      Report on Form 10-KSB filed March 31, 2008).10.10
                First
      Amendment and Waiver Agreement dated April 14, 2009 (incorporated by
      reference to Exhibit 10.4 to the Current Report on Form 8-K filed May 1,
      2009).10.11†
                Second
      Amendment and Waiver Agreement dated May 12, 2009.10.12
                Senior
      Note with Belvedere Capital Fund II L.P. dated December 31, 2008
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed May 6, 2009).10.13
                Senior
      Note with Belvedere Capital Fund II L.P. dated January 30, 2009
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed May 1, 2009).10.14
                Senior
      Note with Belvedere Capital Fund II L.P. dated February 13, 2009
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed May 1, 2009).10.15
                Senior
      Note with Belvedere Capital Fund II L.P. dated March 31, 2009
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed May 1, 2009).10.16
                Form
      of Management Agreement with SoCal, PBB, and the Fund (incorporated by
      reference to Exhibit 10.1 to the Registration Statement on Form S-4/A
      filed on May 2, 2007).10.17
                First
      Amendment to Management Agreement with SoCal, PBB, and the Fund, dated
      January 29, 2008 (incorporated by reference to Exhibit 10.1 to the
      Quarterly Report on Form 10-Q filed November 19, 2008).10.18*
                2007
      Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
      Registration State on Form S-8 filed January 24, 2008).10.19
                Form
      of Indemnification Agreement.14.1†
                Code
      of Personal and Business Conduct Ethics21.1†
                Subsidiaries
      of Belvedere SoCal31.1†
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2†
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1†
                Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2†
                Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
  †
                Filed
      herewith.*
                Management
      contract or compensatory plan or
arrangement.


95


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 14, 2009.





Belvedere
      SoCal
              
              By:/s/ Mary Lynn
      Lenz
              Mary
      Lynn Lenz
              Chief
      Executive Officer
              (Principal
      Executive Officer)By:/s/ James
      Westfall
              James
      Westfall
              Senior
      Vice President and
              Chief Financial Officer
              (Principal
      Financial Officer)
              (Chief
      Accounting Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, the report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




/s/ Mary Lynn Lenz
            Chief
      Executive Officer, President and
      Director
            May
      14, 2009Mary Lynn Lenz/s/ Justin Evans
            Director
            May
      14, 2009Justin
      Evans/s/ Alison Davis
            Secretary,
      Director
            May 14,
    2009Alison
      Davis










96