UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

FORM 10-K

(Mark One)

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

For the fiscal year ended  December 31, 2011

or

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

For the transition period from           to           

000-50974

(Commission File Number)

Bridge Capital Holdings

(Exact name of registrant as specified in its charter)

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

55 Almaden Boulevard, San Jose, CA   95113

(Address of principal executive offices, Zip Code)

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

Securities registered pursuant to Section 12 (b) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Stock, no par value	Nasdaq Capital Market

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

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

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  o  No  x

Bridge Capital Holdings (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

Indicate be 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

Indicate by checkmark 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.  o

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” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  x

The aggregate market value of the voting stock held by non-affiliates of Bridge Capital Holdings was $102,170,874 as of June 30, 2011.

As of March 1, 2012, Bridge Capital Holdings had 15,166,042 shares of common stock outstanding.

Documents incorporated by reference: The Company’s Proxy Statement for its 2012 Annual Meeting of Shareholders is incorporated herein by reference in Part III, Items 10 through 14.

Forward-looking Statements

IN ADDITION TO THE HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND WHICH ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS. THE READER OF THIS ANNUAL REPORT SHOULD UNDERSTAND THAT ALL SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS UNCERTAINTIES AND RISKS THAT COULD AFFECT THEIR OUTCOME.  THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCES MARGINS; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, CONTINUE TO DETERIORATE OR FAIL TO IMPROVE, RESULTING IN, AMONG OTHER THINGS, FURTHER DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT; (5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; (6) COSTS AND EXPENSES OF COMPLYING WITH THE INTERNAL CONTROL PROVISIONS OF THE SARBANES-OXLEY ACT AND OUR DEGREE OF SUCCESS IN ACHIEVING COMPLIANCE; (7) CHANGES IN SECURITIES MARKETS; (8) FUTURE CREDIT LOSS EXPERIENCE; (9) CIVIL DISTURBANCES OR TERRORIST THREATS OR ACTS, OR APPREHENSION ABOUT POSSIBLE FUTURE OCCURANCES OF ACTS OF THIS TYPE; (10) THE INVOLVEMENT OF THE UNITED STATES IN WAR OR OTHER HOSTILITIES; AND (11) THE MATTERS DISCUSSED IN THIS REPORT UNDER “ITEM 1A — RISK FACTORS” AND “ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CRITICAL ACCOUNTING POLICIES. THEREFORE,THE INFORMATION IN THIS ANNUAL REPORT SHOULD BE CAREFULLY CONSIDERED AGAINST THESE UNCERTAINTIES AND RISKS WHEN EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY.

FORWARD-LOOKING STATEMENTS ARE GENERALLY IDENTIFIABLE BY THE USE OF TERMS SUCH AS “BELIEVE,” “EXPECT,” “INTEND,” “ANTICIPATE,” “ESTIMATE,” “PROJECT,” “ASSUME,” “PLAN,” “PREDICT,” “FORECAST,” “IN MANAGEMENT’S OPINION,” “MANAGEMENT CONSIDERS” OR SIMILAR EXPRESSIONS.  WHEREVER SUCH PHRASES ARE USED, SUCH STATEMENTS ARE AS OF AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TO FORWARD-LOOKING STATEMENTS.  THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

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PART 1

Item 1.  Business

General

Bridge Capital Holdings (the “Company”) is a bank holding company. The Company was incorporated in the State of California on April 6, 2004 for the purpose of becoming the holding company for its subsidiary, Bridge Bank, National Association (the “Bank”). As a bank holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (the “FRB”).

The Company acquired 100% of the voting shares of the Bank effective October 1, 2004 following approval of the Bank’s shareholders on May 20, 2004. Prior to becoming a subsidiary of the Company, the common stock of the Bank had been registered with the Comptroller of the Currency (the “Comptroller”) under the Securities and Exchange Act of 1934, as amended. After becoming the Bank’s holding company, the Company’s common stock was registered with the Securities and Exchange Commission. Filings by Bridge Capital Holdings are made with the SEC rather than the Comptroller and are available on the SEC’s website, www.sec.gov as well as on the Company’s website, www.bridgecapitalholdings.com.

The Bank is a national banking association chartered by the Comptroller. The Bank was organized on December 6, 2000 and commenced operations on May 14, 2001. Its headquarters office is located at 55 Almaden Boulevard, San Jose, California, 95113. It maintains two branch offices in the Silicon Valley region, and five loan production offices located throughout the U.S.

Bridge Bank’s lending solutions include working capital lines of credit, structured finance (asset-based lending and factoring), 7(a) and 504 Small Business Administration (SBA) loans, commercial real estate loans, sustainable energy project financing, growth capital loans, equipment financing, letters of credit, and corporate credit cards. The bank’s depository and corporate banking services include cash and treasury management solutions, interest-bearing term deposit accounts, checking accounts, ACH payment and wire solutions, fraud protection, remote deposit capture through its Smart Deposit Express, courier services, and online banking. Additionally, Bridge Bank’s International Banking Division serves clients operating in the global marketplace through services including foreign exchange (FX payments and hedging), letters of credit, and import/export financing.

The Bank attracts the majority of its loan and deposit business from the numerous small and middle market companies located in the Silicon Valley, though with an increasingly larger portion of new business from its national loan production offices. The Bank reserves the right to change its business plan at any time, and no assurance can be given that, if the Bank’s proposed business plan is followed, it will prove successful.

The Bank does not offer trust services, but it will attempt to make such services available to the Bank’s customers through correspondent institutions. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits, and the Bank is a member of the Federal Reserve System.

In 2002, the Bank opened a full-service branch office in Palo Alto, California. Also in 2002, it established a U.S. Small Business Administration Lending Group and launched Bridge Capital Finance Group, a factoring and asset-based lending group. In 2003, the Bank opened an office in downtown San Jose. In 2005, the Bank launched its Technology Banking Group and the International Banking Group. In 2011, it launched its Energy and Infrastructure Group. In addition, the Bank operates loan production offices in San Francisco, Pleasanton and Orange County, California, Dallas, Texas, Reston, Virginia and Boston, Massachusetts.

Deposits

The Bank offers a wide range of deposit accounts designed to attract small and medium size commercial businesses as well as business professionals and retail customers, including a complete line of checking and savings products, such as passbook savings, “Money Market Deposit” accounts which require minimum balances and frequency of withdrawal limitations, NOW accounts, and bundled accounts.

Additional deposit services include a full complement of convenience oriented services, including direct payroll and social security deposit, post-paid bank-by-mail, and Internet banking, including on-line access to account information.  However, at this time, the Bank does not open accounts through the Internet.  Any plans to offer online account opening must be approved in advance by the Comptroller.  No assurance can be given that, if applied for, such approval will be obtained.

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As the Bank has no automated teller machines, the Bank may refund all or a portion of the transaction charges incurred by its customers for their use of another bank’s ATM.  The majority of the Bank’s deposits are obtained from businesses located in the Bank’s primary service area.

Lending Activities

The Bank engages in a full range of lending products designed to meet the specialized needs of its customers, including commercial lines of credit and term loans, constructions loans, and equipment loans. Additionally, the Bank extends accounts receivable, factoring and inventory financing to qualified customers.  Loans are also offered through the Small Business Administration guarantee 7(a) and 504 loan programs (described below under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—FINANCIAL CONDITION AND EARNING ASSETS—Loan Portfolio”).

The Bank finances real estate construction projects, primarily for the construction of owner occupied and 1 to 4 unit residential developments and commercial buildings.

The Bank directs its commercial lending principally toward businesses whose demands for credit fall within the Bank’s lending limit.  In the event there are customers whose commercial loan demands exceed the Bank’s lending limits, the Bank seeks to arrange for such loans on a participation basis with other financial institutions.

The Bank also extends lines of credit to individual borrowers, and provides homeowner equity loans, home improvement loans, auto financing, credit and debit cards and overdraft/cash reserve accounts.

Business Hours

In order to attract loan and deposit business, the Bank maintains lobby hours currently between 9:00 a.m. and 5:00 p.m. Monday through Friday.

For additional information concerning the Bank, see Selected Financial Data under Item 6 on page 23.

Competition

The banking business in Santa Clara County, as it is elsewhere in California, is highly competitive, and each of the major branch banking institutions operating in California has one or more offices in the Bank’s service area.  The Bank competes in the marketplace for deposits and loans, principally against these banks, independent community banks, savings and loan associations, thrift and loan companies, credit unions, mortgage banking companies, and non-bank institutions such as mutual fund companies and investment brokerage firms that claim a portion of the market.

Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns.  They also perform services, such as trust services, discount brokerage and insurance services, which the Bank is not authorized or prepared to offer currently. The Bank has made arrangements with its correspondent banks and with others to provide such services for its customers.  For borrowers requiring loans in excess of the Bank’s legal lending limit, the Bank has offered, and intends to offer in the future, such loans on a participating basis with its correspondent banks and with other independent banks, retaining the portion of such loans which is within its lending limit.  As of December 31, 2011, the Bank’s unsecured legal lending limit to a single borrower and such borrower’s related parties was $20.1 million based on regulatory capital of $133.7 million.  However, for risk management purposes, the Bank has established internal policies, which at present provide lending limits that are less than the Bank’s legal lending limit.

The Bank’s business is concentrated in its service area, which primarily encompasses Santa Clara County, and also includes, to a lesser extent, the contiguous areas of Alameda, San Mateo and Santa Cruz counties.  In certain lines of business the Bank has extended beyond its primary service area.

In order to compete with major financial institutions in its primary service area, the Bank uses to the fullest extent possible the flexibility that is accorded by its independent status.  This includes an emphasis on specialized services, local promotional activity, and personal contacts by the Bank’s officers, directors and employees.  The Bank also seeks to provide special services and programs for individuals in its primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture, and tools of the trade or expansion of practices or businesses.

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Banking is a business that depends on interest rate differentials.  In general, the difference between the interest rate paid by the Bank to obtain its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and on securities held in the Bank’s portfolio comprises the major portion of the Bank’s earnings.

Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds.  For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits.  Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.

The interest rate differentials of the Bank, and therefore its earnings, are affected not only by general economic conditions, both domestic and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal agencies, particularly the Federal Reserve Board.  This agency can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board (FRB).  These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits.

Supervision and Regulation

General

The Company and the Bank are subject to extensive regulation under both federal and state law.  This regulation is intended primarily for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not the protection of shareholders of the Company.  Set forth below is a summary description of some of the significant laws and regulations applicable to the Company and the Bank.  The description is qualified in its entirety by reference to the applicable laws and regulations.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted. The Dodd-Frank Act is intended to effect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act also creates a new independent federal regulator to administer federal consumer protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations as its provisions take effect. Among the provisions that could affect us are the following:

·Holding Company Capital Requirements. The Dodd-Frank Act requires the FRB to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act also requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness

·Source of Strength Requirement.  The Dodd-Frank Act codifies the FRB’s long-standing “source of strength” policy, requiring that a bank holding company serve as a source of financial strength for any subsidiary bank.

·Deposit Insurance. The Dodd-Frank Act permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012.  The Dodd-Frank Act also broadens the base for the Federal Deposit Insurance Corporation (FDIC) insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.  The Dodd-Frank Act also eliminates the federal statutory prohibition against the payment of interest on business checking accounts.

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·Corporate Governance. The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The new legislation also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials.  The Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded.  It also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

·Prohibition Against Charter Conversions of Troubled Institutions. The Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives  notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days.

·Interstate Branching. The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will now be able to enter markets in some states more freely than prior to adoption of the act.

·Limits on Derivatives. The Dodd-Frank Act prohibits state-chartered banks from engaging in derivatives transactions unless the loans to one borrower limits of the state in which the bank is chartered take into consideration credit exposure to derivatives transactions. For this purpose, derivative transaction includes any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities securities, currencies, interest or other rates, indices or other assets.

·Transactions with Affiliates and Insiders. The Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. A previous exemption from Section 23A for transactions with financial subsidiaries was eliminated.

·Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

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Emergency Economic Stabilization Act and American Recovery and Reinvestment Act

On October 3, 2008, Congress adopted the Emergency Economic Stabilization Act (“EESA”), including a Troubled Asset Relief Program (“TARP”).  TARP gave the United States Treasury Department (“Treasury”) authority to deploy up to $700 billion into the financial system for the purpose of improving liquidity in capital markets.  On October 14, 2008, Treasury announced plans to direct $250 billion of this authority into preferred stock investments in banks and bank holding companies through a Capital Purchase Program (“CPP”).  The American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law on February 17, 2009 and imposed additional restrictions and requirements on TARP participants.  Certain terms of the TARP CPP are as follows:

·Treasury’s preferred stock earns 5% dividends for the first five years and 9% dividends thereafter; dividends on preferred stock issued by holding companies are cumulative; dividends on preferred stock issued by banks without holding companies are non-cumulative;

·No increase in common stock dividends for three years while Treasury is an investor;

·Treasury’s consent is required for stock repurchases;

·Treasury receives warrants for common stock equal to 15% of Treasury’s total investment, with an exercise price based on the common stock’s market price;

·Participating bank executives must agree to certain compensation restrictions and executive compensation above $500,000 may not be claimed as a tax deduction; TARP recipients are prohibited from paying bonuses, other that certain incentive compensation and severance, to their most highly paid employees (except in the form of restricted stock subject to specified limitations and conditions), and each TARP recipient must comply with certain other executive compensation related requirements;

·If an issuer fails to pay dividends for six quarters, whether or not consecutive, Treasury is entitled to appoint two persons to the issuer’s board of directors;

In December of 2008, the Company elected to participate in the CPP by issuing to Treasury $23,864,000 in preferred stock and a warrant to purchase 396,412 shares of common stock at an exercise price of $9.03 per share to Treasury.  On March 16, 2011, the Company completed its redemption of the preferred stock its entirety. On April 20, 2011, the Company announced that it had repurchased the warrant issued to Treasury.

Bank Holding Company Act

The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”).  As a bank holding company, the Company is subject to examination by the FRB and is subject to limitations on the kinds of businesses in which it can engage directly or through subsidiaries.  While the Company may manage or control banks, it is generally prohibited from acquiring direct or indirect ownership or control of more than five percent of any class of voting shares of an entity engaged in non-banking activities, unless the FRB finds such activities to be “so closely related to banking” as to be deemed “a proper incident thereto” within the meaning of the BHCA.  As a bank holding company, the Company may not acquire more than five percent of the voting shares of any domestic bank without the prior approval of (or, for “well managed” companies, prior written notice to) the FRB.

The BHCA includes minimum capital requirements for bank holding companies.  See the section titled “Regulation and Supervision — Regulatory Capital Requirements”.  Under certain conditions, the FRB may conclude that certain actions of a bank holding company, such as the payment of a cash dividend, would constitute an unsafe and unsound banking practice.

Change in Bank Control

The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended, together with regulations of the FRB and the Comptroller, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the Comptroller and not disapproved prior to any person or company acquiring “control” of a national bank, such as the Bank, subject to exemptions for some transactions.  Control is conclusively presumed to exist if an individual or company (i) acquires 25% or more of any class of voting securities of the bank or (ii) has the direct or indirect power to direct or cause the direction of the management and policies of the Bank, whether through ownership of voting securities, by contract or otherwise; provided that no individual will be deemed to control the Bank solely on account of being director, officer or employee of the Bank.  Control is presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting securities immediately after the transaction.

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“Source of Strength” Policy

The FRB has long taken the view that a bank holding company should serve as a source of financial and managerial strength to its subsidiary banks.  Under this FRB policy, a bank holding company is required to stand ready to use available resources to provide adequate capital funds to a subsidiary bank during periods of financial stress or adversity and that it should maintain the financial flexibility and capital-raising capacity needed to obtain additional resources for assisting the subsidiary bank.  The Dodd-Frank Act largely codifies this policy, requiring that a bank holding company serve as a source of financial strength for any subsidiary bank.

Securities Exchange Act of 1934

The Company’s common stock is registered under the Securities Exchange Act of 1934, as amended (“Exchange Act”). This registration requires ongoing compliance with the Exchange Act and its periodic filing requirements, as well as a wide range of federal and state securities laws. Under the Exchange Act and the SEC’s rules, the Company must electronically file periodic and current reports as well as proxy statements with the SEC.  The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Current Report), and Schedule 14A (Information Required in Proxy Statement).  The Company may prepare additional filings as required.  The SEC maintains an Internet site, http://www.sec.gov, at which all forms filed electronically may be accessed.  Our SEC filings are also available on our website at http://www.bridgebank.com.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 implemented legislative reforms intended to address corporate and accounting fraud.  In addition to the establishment of an accounting oversight board to enforce auditing, quality control and independence standards, the law restricts provision of both auditing and consulting services by accounting firms.  To ensure auditor independence, any non-audit services being provided to an audit client require pre-approval by the company’s audit committee members.  In addition, the audit partners assigned to the company must be rotated every five years.  The act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate the certification requirement.  Under the act legal counsel are required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

The act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statement’s materially misleading. The act requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by both management and the external auditors in the annual report to stockholders.  In addition, the act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States and filed with the SEC reflect all material correcting adjustments that are identified by a “registered public accounting firm” in accordance with accounting principles generally accepted in the United States and the rules and regulations of the SEC.

The Company’s chief executive officer and chief financial officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact.  The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal controls; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal controls; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

Regulation of the Bank

The Bank is regulated and supervised by the Comptroller and is subject to periodic examination by the Comptroller.  Deposits of the Bank’s customers are insured by the FDIC up to the maximum limit of $250,000 and unlimited for certain non-interest bearing deposits accounts; and, as an insured bank, the Bank is subject to certain regulations of the FDIC.  As a national bank, the Bank is a member of the Federal Reserve System and is also subject to the regulations of the FRB.

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The regulations of the Comptroller, the FDIC and the FRB govern most aspects of the Bank’s business and operations, including but not limited to, requiring the maintenance of non-interest bearing reserves on deposits, limiting the nature and amount of investments and loans which may be made, regulating the issuance of securities, restricting the payment of dividends and regulating bank expansion and bank activities. The Bank also is subject to the requirements and restrictions of various consumer laws and regulations.

Statutes, regulations and policies affecting the banking industry are frequently under review by Congress and by the federal bank regulatory agencies that are charged with supervisory and examination authority over banking institutions.  Changes in the banking and financial services industry are likely to occur in the future.  Some of the changes may create opportunities for the Bank to compete in financial markets with less regulation.  However, these changes also may create new competitors in geographic and product markets which have historically been limited by law to insured depository institutions such as the Bank.  Changes in the statutes, regulations, or policies that affect the Bank cannot necessarily be predicted and may have a material effect on the Bank’s business and earnings.  In addition, the regulatory agencies which have jurisdiction over the Bank have broad discretion in exercising their supervisory powers.

The Comptroller can pursue an enforcement action against the Bank for unsafe and unsound practices in conducting its business, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency, or any written agreement with the agency.  During periods of economic stress, regulatory oversight can be expected to increase and regulatory agencies become more aggressive in responding to concerns and trends identified in examinations.  One result of this heightened activity is an increase in the issuance of enforcement actions.  Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties and removal and prohibition orders against institution-affiliated parties.  See “Supervision and Regulation — Potential Enforcement Actions and Supervisory Agreements.”

In addition to the regulation and supervision outlined above, banks must be prepared for judicial scrutiny of their lending and collection practices.  For example, some banks have been found liable for exercising remedies which their loan documents authorized upon the borrower’s default.  This has occurred in cases where the exercise of those remedies was determined to be inconsistent with the previous course of dealing between the bank and the borrower.  As a result, banks must exercise caution, incur expense and face exposure to liability when dealing with delinquent loans.

Capital Adequacy Requirements

Federal regulations establish guidelines for calculating “risk-adjusted” capital ratios.  These guidelines, which apply to banks and bank holding companies, establish a systematic approach of assigning risk weights to bank assets and commitments, making capital requirements more sensitive to differences in risk profiles among banking organizations.  For these purposes, “Tier 1” capital consists of common equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries and excludes goodwill.  “Tier 2” capital consists of cumulative perpetual preferred stock, limited-life preferred stock, mandatory convertible securities, subordinated debt and (subject to a limit of 1.25% of risk-weighted assets) general loan loss reserves.  In calculating the relevant ratio, a bank’s assets and off-balance sheet commitments are risk-weighted; thus, for example, generally loans are included at 100% of their book value while assets considered less risky are included at a percentage of their book value (20%, for example, for inter-bank obligations and Government Agency securities, and 0% for vault cash and U.S. Government securities).  Under these regulations, to be considered adequately capitalized, banks and bank holding companies are required to maintain a risk-based capital ratio of 8%, with Tier 1 risk-based capital (primarily shareholders’ equity) constituting at least 50% of total qualifying capital or 4% of risk-weighted assets.  The Comptroller may impose additional capital requirements on banks based on market risk.

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

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

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

The federal banking agencies, including the Comptroller, have adopted regulations implementing a system of prompt corrective action under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”).  The regulations establish five capital categories with the following characteristics:  (1) “Well capitalized,” consisting of institutions with a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and which are not operating under an order, written agreement, capital directive or prompt corrective action directive; (2) “Adequately capitalized,” consisting of institutions with a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital of 4.0% or greater and a leverage ratio of 4.0% or greater and which do not meet the definition of a “well capitalized” institution; (3) “Undercapitalized,” consisting of institutions with a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 4.0%; (4) “Significantly undercapitalized,” consisting of institutions with a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (5) “Critically undercapitalized,” consisting of institutions with a ratio of tangible equity to total assets that is equal to or less than 2.0%.

The regulations establish procedures for the classification of financial institutions within the capital categories, for filing and reviewing capital restoration plans required under the regulations, and for the issuance of directives by the appropriate regulatory agency, among other matters.  See “Supervision and Regulation — Prompt Corrective Action” for additional discussion regarding regulations.

An institution that is less than well-capitalized cannot accept brokered deposits without the consent of the FDIC.  The appropriate federal banking agency, after notice and an opportunity for a hearing, is authorized to treat a well capitalized, adequately capitalized or undercapitalized insured depository institution as if it had a lower capital-based classification if it is in an unsafe and unsound condition or engaging in an unsafe and unsound practice.  Thus, an adequately capitalized institution can be subjected to the restrictions (described below) that are imposed on undercapitalized institutions (provided that a capital restoration plan cannot be required of the institution), and an undercapitalized institution can be subjected to the restrictions (also described below) applicable to significantly undercapitalized institutions.  See “Supervision and Regulation — Prompt Corrective Action” for additional discussion regarding federal banking agency supervision.

An insured depository institution cannot make a capital distribution (as broadly defined to include, among other things, dividends, redemptions and other repurchases of stock), or pay management fees to any person or persons that control the institution, if it would be undercapitalized following the distribution.  However, a federal banking agency may (after consultation with the FDIC) permit an insured depository institution to repurchase, redeem, retire or otherwise acquire its shares if (i) the action is taken in connection with the issuance of additional shares or obligations in at least an equivalent amount and (ii) the action will reduce the institution’s financial obligations or otherwise improve its financial condition.  An undercapitalized institution is generally prohibited from increasing its average total assets, and is also generally prohibited from making acquisitions, establishing new branches, or engaging in any new line of business except under an accepted capital restoration plan or with the approval of the FDIC.  In addition, a federal banking agency has authority with respect to undercapitalized depository institutions to take any of the actions it is required to or may take with respect to a significantly undercapitalized institution (as described below) if it determines “that those actions are necessary to carry out the purpose” of FDICIA.

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The federal banking agencies have adopted a joint agency policy statement to provide guidance on managing interest rate risk.  The statement indicates that the adequacy and effectiveness of a bank’s interest rate risk management process and the level of its interest rate exposures are critical factors in the agencies’ evaluation of the bank’s capital adequacy.  If a bank has material weaknesses in its risk management process or high levels of exposure relative to its capital, the agencies will direct it to take corrective action.  These directives may include recommendations or directions to raise additional capital, strengthen management expertise, improve management information and measurement systems, or reduce levels of exposure, or to undertake some combination of these actions.

At December 31, 2011, the Company and the Bank have capital ratios that place them in the “well capitalized” category. See Footnote 16 to the Bank’s Financial Statements included under Item 8 of this Annual Report.

Deposit Insurance Coverage and Premiums

The Bank is a member of the Deposit Insurance Fund (“DIF”), which is administered by the FDIC.  Deposits at the Bank are insured by the FDIC up to applicable limits.

In 2008, the FDIC established a Temporary Liquidity Guarantee Program (“TLGP”), which includes the Transaction Account Guarantee Program, which provides unlimited deposit insurance coverage for noninterest-bearing transaction accounts and certain funds swept into noninterest-bearing savings accounts (“TAGP”).  The TAGP was originally scheduled to expire on December 31, 2009, was initially extended through June 30, 2010 and on April 13, 2010 was again extended through December 31, 2010.  Through December 31, 2009, institutions participating in the TAGP paid a 10 basis point fee (annualized) on the balance of each covered account in excess of $250,000.  This fee was increased to 15 to 25 basis points beginning January 1, 2010.  The enactment of the Dodd-Frank Act effectively extended the TAGP through December 31, 2012, as the Dodd-Frank Act extends full deposit insurance coverage to non-interest bearing transaction accounts, effective January 1, 2011 through December 31, 2012.

The FDIC assesses deposit insurance premiums on each FDIC-insured institution quarterly based on annualized rates.  A depository institutions’ FDIC insurance premium assessment rate is adjusted for risk and is based on its capital, supervisory ratings and other factors.  Under FDIC regulations, the assessment base against which deposit insurance premiums are calculated is the depository institution’s average total consolidated assets less the institution’s average tangible equity.  Assessment rates on this assessment base initially range from 5 to 35 basis points.  After potential adjustment for certain risk elements, the assessments rates range from 2.5 to 45 basis points.

As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which is due on December 30, 2009).  The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance.  For purposes of calculating the prepaid amount, assessments were measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on the institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%.  If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 13, 2013, as applicable.  Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future.  The rule includes a process for exemption from the prepayment for institutions whose safety and soundness would be affected adversely.

The Dodd-Frank Act increased the minimum reserve ratio (the ratio of the net worth of the DIF to estimated insured deposits) from 1.15% of estimated deposits to 1.35% of estimated deposits (or a comparable percentage of the asset-based assessment base described above).  The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio when setting assessments for insured depository institutions with less than $10 billion in total consolidated assets, including the Bank. The FDIC has until September 30, 2020 to achieve the new minimum reserve ratio of 1.35%.

FDIC insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the quarterly period ended December 31, 2009, the Financing Corporation assessment equaled 1.02 basis points for each $100 in domestic deposits.  These assessments, which may be revised based upon the level of deposits, will continue until the bonds mature in the years 2017 through 2019. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by 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.

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Prompt Corrective Action

The FDIC has authority: (a) to request that an institution’s primary regulatory agency (in the case of the Bank, the Comptroller) take enforcement action against it based upon an examination by the FDIC or the agency, (b) if no action is taken within 60 days and the FDIC determines that the institution is in an unsafe and unsound condition or that failure to take the action will result in continuance of unsafe and unsound practices, to order that action be taken against the institution, and (c) to exercise this enforcement authority under “exigent circumstances” merely upon notification to the institution’s primary regulatory agency.  This authority gives the FDIC the same enforcement powers with respect to any institution and its subsidiaries and affiliates as the primary regulatory agency has with respect to those entities.

An undercapitalized institution is required to submit an acceptable capital restoration plan to its primary federal bank regulatory agency.  The plan must specify (a) the steps the institution will take to become adequately capitalized, (b) the capital levels to be attained each year, (c) how the institution will comply with any regulatory sanctions then in effect against the institution and (d) the types and levels of activities in which the institution will engage.  The banking agency may not accept a capital restoration plan unless the agency determines, among other things, that the plan “is based on realistic assumptions, and is likely to succeed in restoring the institution’s capital” and “would not appreciably increase the risk . . . to which the institution is exposed.”  A requisite element of an acceptable capital restoration plan for an undercapitalized institution is a guaranty by its parent holding company that the institution will comply with the capital restoration plan.  Liability with respect to this guaranty is limited to the lesser of (i) 5% of the institution’s assets at the time when it becomes undercapitalized and (ii) the amount necessary to bring the institution into capital compliance with applicable capital standards as of the time when the institution fails to comply with the plan.  The guaranty liability is limited to companies controlling the undercapitalized institution and does not affect other affiliates.  In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment over the claims of other creditors, including the holders of the company’s long-term debt.

FDICIA provides that the appropriate federal regulatory agency must require an insured depository institution that is significantly undercapitalized, or that is undercapitalized and either fails to submit an acceptable capital restoration plan within the time period allowed by regulation or fails in any material respect to implement a capital restoration plan accepted by the appropriate federal banking agency, to take one or more of the following actions: (a) sell enough shares, including voting shares, to become adequately capitalized; (b) merge with (or be sold to) another institution (or holding company), but only if grounds exist for appointing a conservator or receiver; (c) restrict specified transactions with banking affiliates as if the “sister bank” exception to the requirements of Section 23A of the Federal Reserve Act did not exist; (d) otherwise restrict transactions with bank or non-bank affiliates; (e) restrict interest rates that the institution pays on deposits to “prevailing rates” in the institution’s “region”; (f) restrict asset growth or reduce total assets; (g) alter, reduce or terminate activities; (h) hold a new election of directors; (i) dismiss any director or senior executive officer who held office for more than 180 days immediately before the institution became undercapitalized, provided that in requiring dismissal of a director or senior executive officer, the agency must comply with procedural requirements, including the opportunity for an appeal in which the director or officer will have the burden of proving his or her value to the institution; (j) employ “qualified” senior executive officers; (k) cease accepting deposits from correspondent depository institutions; (l) divest non-depository affiliates which pose a danger to the institution; (m) be divested by a parent holding company; and (n) take any other action which the agency determines would better carry out the purposes of the prompt corrective action provisions.

In addition to the foregoing sanctions, without the prior approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to any senior executive officer or increase the rate of compensation for a senior executive officer without regulatory approval.  If an undercapitalized institution has failed to submit or implement an acceptable capital restoration plan the appropriate federal banking agency is not permitted to approve the payment of a bonus to a senior executive officer.

Not later than 90 days after an institution becomes critically undercapitalized, the institution’s primary federal bank regulatory agency must appoint a receiver or a conservator, unless the agency, with the concurrence of the FDIC, determines that the purposes of the prompt corrective action provisions would be better served by another course of action.  Any alternative determination must be documented by the agency and reassessed on a periodic basis.  Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the FDIC determines that the institution has positive net worth, is in compliance with a capital plan, is profitable or has a sustainable upward trend in earnings, and is reducing its ratio of non-performing loans to total loans, and unless the head of the appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail.

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The FDIC is required, by regulation or order, to restrict the activities of critically undercapitalized institutions.  The restrictions must include prohibitions on the institution’s doing any of the following without prior FDIC approval: entering into any material transactions not in the usual course of business, extending credit for any highly leveraged transaction; engaging in any “covered transaction” (as defined in Section 23A of the Federal Reserve Act) with an affiliate; paying “excessive compensation or bonuses”; and paying interest on “new or renewed liabilities” that would increase the institution’s average cost of funds to a level significantly exceeding prevailing rates in the market.

Potential Enforcement Actions and Supervisory Agreements

Under federal law, national banks and their institution-affiliated parties may be the subject of potential enforcement actions by the Comptroller for unsafe and unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency.  During periods of economic stress, regulatory oversight can be expected to increase and regulatory agencies become more aggressive in responding to concerns and trends identified in examinations.  One result of this heightened activity is an increase in the issuance of enforcement actions.  Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties and removal and prohibition orders against institution-affiliated parties.

Payment of Dividends

The Company - Historically the Company has not paid dividends but has retained earnings to support growth.  The ability of the Company to make dividend payments is subject to statutory and regulatory restrictions.  A California corporation such as the Company may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution.  In the event sufficient retained earnings are not available for the proposed distribution, a California corporation may nevertheless make a distribution to its shareholders if, giving effect to the distribution, the value of the corporation’s assets would equal or exceed the value of its liabilities plus the amount of shareholder preferences, if any.

The primary source of funds for payment of any dividends by the Company to its shareholders will be the receipt of dividends and management fees from the Bank.  FDIC policies generally allow cash dividends to be paid only from net operating income, and do not permit dividends to be paid until an appropriate allowance for loans and lease losses has been established and overall capital is adequate.  See “Supervision and Regulation — Capital Adequacy Requirements” for additional discussion regarding capital adequacy.

The Bank - The Board of Directors of a national bank may declare the payment of dividends depending upon the earnings, financial condition and cash needs of the bank and general business conditions.  A national bank may not pay dividends from its capital.  All dividends must be paid out of net profits then on hand, after deducting losses and bad debts.  The approval of the Comptroller is required for the payment of dividends if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock.

In addition to the above requirements, guidelines adopted by the Comptroller set forth factors which are to be considered by a national bank in determining the payment of dividends.  A national bank, in assessing the payment of dividends, is to evaluate the bank’s capital position, its maintenance of an adequate allowance for loan and lease losses, and the need to revise or develop a comprehensive capital plan.

The Comptroller also has broad authority to prohibit a national bank from engaging in banking practices which it considers to be unsafe or unsound.  It is possible, depending upon the financial condition of the national bank in question and other factors, that the Comptroller may assert that the payment of dividends or other payments by a bank is considered an unsafe or unsound banking practice and therefore, implement corrective action to address such a practice.

Accordingly, the future payment of cash dividends by the Company will not only depend upon the Bank’s earnings during any fiscal period but will also depend upon the assessment of its Board of Directors of capital requirements and other factors, including dividend guidelines and the maintenance of an adequate allowance for loan and lease losses.

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Community Reinvestment Act

Pursuant to the Community Reinvestment Act (“CRA”) of 1977, the federal regulatory agencies that oversee the banking industry are required to use their authority to encourage financial institutions to help meet the credit needs of the local communities in which such institutions are chartered, consistent with safe and sound banking practices.  When conducting an examination of a financial institution such as the Bank, the agencies assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate- income neighborhoods.  This record is taken into account in an agency’s evaluation of an application for creation or relocation of domestic branches or for merger with another institution.  Failure to address the credit needs of a bank’s community may also result in the imposition of certain other regulatory sanctions, including a requirement that corrective action be taken.

Effect of State Law

The laws of the State of California affect the Bank’s business and operations. For example, under 12 U.S.C. 36, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, state laws regarding community reinvestment, consumer protection, fair lending and establishment of intrastate branches may affect the operations of national banks in states other than their home states. On a similar basis, 12 U.S.C. 85 provides that state law, in most circumstances, determines the maximum rate of interest which a national bank may charge on a loan.  As California law exempts all state-chartered and national banks from the application of its usury laws, national banks are also provided such an exemption by 12 U.S.C. 85.

Transactions with Affiliates

Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W limit transactions between a bank and its affiliates and limit a bank’s ability to transfer to its affiliates the benefits arising from the bank’s access to insured deposits, the payment system and the discount window and other benefits of the Federal Reserve system.  The statute and regulation impose quantitative and qualitative limits on the ability of a bank to extend credit to, or engage in certain other transactions with, an affiliate (and a non-affiliate if an affiliate benefits from the transaction).  However, certain transactions that generally do not expose a bank to undue risk or abuse the safety net are exempted from coverage under Regulation W.

Tying Arrangements and Transactions with Affiliated Persons

A bank is prohibited from tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services.  For example, with some exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries (if any), or on a promise by its customer not to obtain other services from a competitor.

Directors, officers and principal shareholders of the Bank, and the companies with which they are associated, may have banking transactions with the Bank in the ordinary course of business.  Any loans and commitments to loan included in these transactions must be made in compliance with the requirements of applicable law, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and on terms not involving more than the normal risk of collectability or presenting other unfavorable features.

USA PATRIOT Act

Pursuant to USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial  The act requires financial institutions to establish anti-money laundering programs and sets forth minimum standards for these programs  The Bank has adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act, and management believes that the Bank is currently in compliance with the Act.

Consumer Laws and Regulations

The Bank must also comply with consumer laws and regulations that are designed to protect consumers in transactions with banks.  While the list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act and the Fair Credit Reporting Act among others.  These laws and regulations mandate disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans.  The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing regulatory compliance and customer relations efforts.

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Exposure to and Management of Risk

The federal banking agencies examine banks and bank holding companies with respect to their exposure to and management of different categories of risk.  Categories of risk identified by the agencies include legal risk, operational risk, market risk, credit risk, interest rate risk, price risk, foreign exchange risk, transaction risk, compliance risk, strategic risk, credit risk, liquidity risk, and reputation risk.  This examination approach causes bank regulators to focus on risk management procedures, rather than simply examining every asset and transaction.  This approach supplements rather than replaces existing rating systems based on the evaluation of an institution’s capital, assets, management, earnings and liquidity.

Safety and Soundness Standards

Federal banking regulators have adopted guidelines prescribing standards for safety and soundness.  The guidelines create standards for a wide range of operational and managerial matters including (a) internal controls, information systems, and internal audit systems; (b) loan documentation; (c) credit underwriting; (d) interest rate exposure; (e) asset growth; (f) compensation and benefits; and (g) asset quality and earnings.  Although meant to be flexible, an institution that falls short of the guidelines’ standards may be requested to submit a compliance plan or be subjected to regulatory enforcement actions.

Impact of Government Monetary Policy

The earnings of the Bank are and will be affected by the policies of regulatory authorities, including the Federal Reserve.  An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements against bank deposits, and changes in the discount rate which banks pay on advances from the Federal Reserve System.  These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates on loans or interest rates paid for deposits.  The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  The effect, if any, of such policies upon the future business earnings of the Bank cannot be predicted.

Legislation and Proposed Changes

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 and before various bank regulatory agencies.  For example, certain proposals to substantially revise the structure of regulation of financial services are under consideration.  No prediction can be made as to the likelihood of any major changes or the impact that new laws or regulations might have on the Company or the Bank.

Conclusion

It is impossible to predict with any certainty the competitive impact the laws and regulations described above will have on commercial banking in general and on the business of the Company in particular, or to predict whether or when any of the proposed legislation and regulations described above will be adopted.  It is anticipated that banking will continue to be a highly regulated industry.  Additionally, there has been a continued lessening of the historical distinction between the services offered by financial institutions and other businesses offering financial services, and the trend toward nationwide interstate banking is expected to continue.  As a result of these factors, it is anticipated banks will experience increased competition for deposits and loans and, possibly, further increases in their cost of doing business.

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Item 1A.  Risk Factors

RISK FACTORS

Readers and prospective investors in our securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report.

The risks and uncertainties described below are not the only ones facing us.  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. This report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s securities could decline significantly, and you could lose all or part of your investment.

Risks Related to the Credit Crisis

Current market developments may adversely affect our industry, business and results of operations.

Dramatic declines in the real estate market during recent years, combined with increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks.  These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.  Many lenders and institutional investors, concerned about the stability of the financial markets generally and the strength of counterparties, have reduced or ceased to provide funding to borrowers, including other financial institutions.  The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

The soundness of other financial institutions could adversely affect us.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.  We 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 us to credit risk in the event of default of our counterparty or client.  In addition, our 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.  There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.

There can be no assurance that the recently enacted Dodd-Frank Act, Emergency Economic Stabilization Act of 2008 (“EESA”) and American Recovery and Reinvestment Act (“ARRA”) will help stabilize the U.S. financial system.

On October 3, 2008, President Bush signed into law the EESA, which evolved from the U.S. Treasury’s initial proposal in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. This was followed by the ARRA on February 17, 2009 and the Dodd-Frank Act on July 21, 2010.  The U.S. Treasury and banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system.  There can be no assurance, however, as to the actual impact that the Dodd-Frank Act, EESA or ARRA will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced.  The failure of the Dodd-Frank Act, EESA or ARRA to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

As a financial services company, adverse changes in general business or economic conditions could have a material adverse effect on our financial condition and results of operations.

The United States is currently in a serious economic downturn, as are economies around the world.  Financial markets are volatile, business and consumer spending has declined, and overall business activities have slowed.  A ustained or continuing weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse impacts on our business:

·a decrease in the demand for loans and other products and services offered by us;

·a decrease in the value of our loans held for sale;

·an increase or decrease in the usage of unfunded commitments;

·an impairment of certain intangible assets, such as goodwill;

an increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us.  An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans held for sale.

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Premiums for federal deposit insurance may increase.

The Federal Deposit Insurance Corporation uses the Deposit insurance Fund (“DIF”) to cover insured deposits in the event of a bank failure, and maintains the fund by assessing member banks an insurance premium.  Recent failures have caused the DIF to fall below the minimum balance required by law, forcing the FDIC to consider action to rebuild the fund by raising the insurance premiums assessed member banks.  Depending on the frequency and severity of bank failures, future increases in premiums or assessments could be significant and negatively affect our earnings.

Market and Interest Rate Risks

Changes in interest rates could reduce income and cash flow

The Company’s income and cash flow depend to a great extent on the difference between the interest earned on loans and investment securities, and the interest paid on deposits and other borrowings (the “interest rate spread”). We cannot control or prevent changes in the level of interest rates.  They fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the FRB. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits and other liabilities.  See “Item 7a Quantitative and Qualitative Disclosures About Market Risk” is incorporated by reference in this paragraph.

Recent decreases in market interest rates have caused the Company’s interest rate spread to decline significantly, which reduces revenue and net income.  Sustained low levels of market interest rates will likely continue to put pressure on our profitability.  Any material reduction in interest rate spread could have a material adverse effect on our business, profitability and financial position.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition

Liquidity is essential to our business.  An inability to raise funds through deposits, borrowings, capital offerings and other sources could have a substantial negative effect on our liquidity.  Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that impact us specifically or the financial services industry in general.  Factors that could detrimentally impact our access to liquidity sources include a reduction in the level of business activity due to a market downturn or adverse regulatory action against us, or a decrease in depositor or investor confidence in us.  Further, as a business bank, a significant portion of our deposits are raised from companies in amounts that exceed levels covered by FDIC insurance.  In addition, our 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.

Risks Related to the nature and geographical location of Bridge Capital Holdings’ business

Bridge Capital Holdings’ invests in loans that contain inherent credit risks that may cause us to incur losses

In our business as a lender, we face the risk that borrowers may fail to pay their loans when due.  If borrower defaults cause large aggregate losses, it could have a material adverse impact on our business, profitability and financial condition.  We closely monitor the markets in which we conduct our lending operations and attempt to adjust our strategy to control exposure to loans with higher credit risk.  Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies.  We have established an evaluation process designed to determine the adequacy of our allowance for loan losses.  While this process uses historical and other objective information, the classification of loans and the forecasts and establishment of loan losses are dependent to a great extent on our subjective assessment based upon our experience and judgment.  During 2008 and 2009, the rapid deterioration of real estate values prompted us to take substantial charges and provisions to the allowance for loan losses.  We can provide no assurance that the credit quality of our loans will not deteriorate in the future and that such deterioration will not adversely affect the Company and that our allowance for loan losses will be adequate to absorb actual losses in the future.

17

Bridge Capital Holdings’ operations are concentrated geographically in California, and poor economic conditions in California may cause us to incur losses.

Substantially all of Bridge Capital Holdings’ business is located in California. Bridge Capital Holdings’ financial condition and operating results will be subject to changes in economic conditions in California. A significant and prolonged downturn in the California economy could adversely affect financial institutions doing business in California, such as the Company. Economic conditions in California are subject to various uncertainties at this time, including the decline in the technology sector, the California state government’s budgetary difficulties and continuing fiscal difficulties.  The Company will be subject to changes in economic conditions. We can provide no assurance that conditions in the California economy will not deteriorate in the future and that such deterioration will not adversely affect Bridge Capital Holdings.

The markets in which Bridge Capital Holdings operates are subject to the risk of earthquakes and other natural disasters

Most of the properties of Bridge Capital Holdings are located in California. Also, most of the real and personal properties which currently secure the Company’s loans are located in California. California is a state which is prone to earthquakes, brush fires, flooding and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major earthquake, flood or other natural disaster, Bridge Capital Holdings faces the risk that many of its borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. A major earthquake, flood or other natural disaster in California could have a material adverse effect on Bridge Capital Holdings’ business, financial condition, results of operations and cash flows.

Substantial competition in the California banking market could adversely affect us

Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California. Our competitors include a large number of state and national banks, thrift institutions and credit unions, as well as many financial and non-financial firms that offer services similar to those offered by us. Other competitors include large financial institutions that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively.

Regulatory Risks

Restrictions on dividends and other distributions could limit amounts payable to us

Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any subsidiary of ours were to liquidate, that subsidiary’s creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary.

Adverse effects of, or changes in, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us

We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies, including accounting standards and interpretations currently affecting us and our subsidiaries, may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations.  During periods of economic stress, regulatory oversight can be expected to increase and regulatory agencies become more aggressive in responding to concerns and trends identified in examinations.  Such a regulatory response may effect, among other things, growth rates, business mix, capital levels and payment of dividends   Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, including legislative and regulatory reactions to the current credit crisis, the terrorist attack on September 11, 2001 and future acts of terrorism, and major U.S. corporate bankruptcies and reports of accounting irregularities at U.S. public companies.

18

As noted above, on October 3, 2008, President Bush signed into law the EESA, which evolved from the U.S. Treasury’s initial proposal in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. This was followed by the ARRA on February 17, 2009 and the Dodd-Frank Act on July 21, 2010.  Each of these laws mandate significantly increased supervisory activities and many new studies and regulations.  We can give no assurance as to what form these regulations might take or whether and when they could become effective.  The laws also set limits on executive compensation which may adversely impact our ability to attract and/or retain qualified executives.

Additionally, our business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Under long-standing policy of the Federal Reserve Board and the Dodd-Frank Act, a bank holding company is required to act as a source of financial strength for its subsidiary banks. As a result of that requirement, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the Federal Reserve Board are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates of borrowings by depository institutions, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the Federal Reserve Board may have a material effect on our business, results of operations and financial condition.

See “Supervision and Regulation — Legislation and Proposed Changes” for additional discussion regarding adverse effects of, or changes in, banking or other laws and regulations and governmental fiscal or monetary policies.

Systems, Accounting and Internal Control Risks

The accuracy of the Company’s judgments and estimates about financial and accounting matters will impact operating results and financial condition

The Company makes certain estimates and judgments in preparing its financial statements.  The quality and accuracy of those estimates and judgments will have an impact on the Company’s operating results and financial condition. See “Critical Accounting Policies and Estimates” in this report and the information referred to in that discussion.

The Company’s information systems may experience an interruption or breach in security

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management and systems. There can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately corrected by the Company. The occurrence of any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s controls and procedures may fail or be circumvented

Management regularly reviews and updates the Company’s internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

Item 1B.  Unresolved Staff Comments

None.

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Item 2.  Properties

The Company’s principal executive office and a full service banking office are located at 55 Almaden Boulevard, City of San Jose, County of Santa Clara, State of California.  The office consists of approximately 42,337 square feet on three floors of an eight-story office building.  24,767 square feet of the space was originally sublet from a prior tenant in a sublease which commenced December 26, 2003 and terminated December 31, 2006.  The sublease provided for an initial base rent of $28,730 with annual escalations to $45,819 in the final year of the sublease.  The Bank has entered into a direct lease with the landlord, which commenced immediately following the expiration of the sublease term on January 1, 2007 for 120 months ending on December 31, 2016.  The direct lease provides for an initial twelve-month period of reduced rent followed by a base rent of $47,305 beginning on January 1, 2008 and increasing 3.0% on each anniversary date thereafter.  The Bank has also entered into an additional direct lease with the landlord to occupy 17,570 square feet, which commenced November 1, 2006 and terminates on December 31, 2016.  The direct lease provides for an initial twelve-month period with no rent followed by an initial base rent of $36,897 with annual escalations to $48,142 in the final year of the lease.  The foregoing description is qualified by reference to the lease agreement dated November 1, 2006 Exhibit 10.3 to this Report.

An additional full service banking office is located at 525 University Avenue, City of Palo Alto, County of Santa Clara, State of California.  The office consists of approximately 6,495 square feet located in Suite 31 in the building known as the Palo Alto Office Center.  The Lease is an amendment to a lease which ended November 30, 2006 and is for a term of 86 months commencing on February 1, 2007 and ending on January 31, 2014.  The Lease provides for a base rent of $29,228 through the first anniversary of the lease date.  Effective with the first anniversary date the lease payments will be adjusted by a factor that is tied to the Consumer Price Index.  The foregoing description is qualified by reference to the lease agreement dated October 15, 2001 attached as exhibit 10.2 to this Report and the amendment to this lease agreement dated March 9, 2006 exhibit 10.5 to this Report.

In addition, the Bank operates loan production offices in San Francisco, Pleasanton and Orange County, California, Dallas, Texas and Reston, Virginia.

Item 3.  Legal Proceedings

The Company is not a defendant in any material pending legal proceedings and no such proceedings are known to be contemplated.  No director, officer, affiliate, more than 5.0% shareholder of the Company or any associate of these persons is a party adverse to the Company or has a material interest adverse to the Company in any material legal proceeding.

Item 4.  Mine Safety Disclosures

Not applicable.

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Common Stock trades on the Nasdaq Capital Market under the symbol “BBNK”.  The following table summarizes those trades of which the Company has knowledge, setting forth the high and low sales prices for the periods indicated.

	Sales Price of
	Common Stock (1)
Three Months Ended	Low		High
March 31, 2009	$	3.70	$	7.55
June 30, 2009	$	4.50	$	6.39
September 30, 2009	$	5.25	$	7.31
December 31, 2009	$	6.45	$	7.47
March 31, 2010	$	6.85	$	9.15
June 30, 2010	$	8.96	$	11.49
September 30, 2010	$	8.64	$	9.44
December 31, 2010	$	8.05	$	9.19
March 31, 2011	$	8.60	$	9.42
June 30, 2011	$	9.34	$	11.75
September 30, 2011	$	9.18	$	11.99
December 31, 2011	$	9.11	$	11.40

(1) Prices represent the actual trading history on the Nasdaq Capital Market.  Additionally, since trading in the Company’s common stock is limited, the range of prices stated is not necessarily representative of prices which would result from a more active market.

The Company had 1,234 common shareholders of record as of December 31, 2011.

The Company’s shareholders are entitled to receive dividends, when and as declared by its Board of Directors, out of funds legally available, subject to statutory, regulatory, and contractual restrictions.  See “Supervision and Regulation — Payment of Dividends” for additional discussion regarding dividends.  A California corporation such as Bridge Capital Holdings generally may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution, or, alternatively, to the extent that its assets exceed its liabilities plus Shareholder preferences, if any.

In a policy statement, the FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action.  Additionally, the Dodd-Frank requirement that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company’s ability to pay dividends.

The Company has not declared dividends on its common stock since inception of the Bank’s existence.  In the future, the Company may consider cash and stock dividends, subject to the restrictions on the payment of cash dividends as described above, depending upon the level of earnings, management’s assessment of future capital needs and other factors considered by the Board of Directors.

The following chart reflects the total return performance of the Company’s common stock for the years ended December 31, 2011, 2010, 2009, 2008, and 2007.

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	Period Ending
Index	12/31/06	12/31/07	12/31/08	12/31/09	12/31/10	12/31/11
Bridge Capital Holdings	100.00	105.09	19.57	35.46	42.56	50.88
NASDAQ Composite	100.00	110.66	66.42	96.54	114.06	113.16
SNL Western Bank	100.00	83.53	81.33	74.68	84.62	76.45

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Item 6.  Selected Financial Data

The following table presents certain consolidated financial information concerning the business of the Company.  This information should be read in conjunction with the Financial Statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere herein.

	As of and for the year ended
	December 31,
(dollars in thousands, except per share data)	2011			2010			2009			2008			2007
Statement of Operations Data:
Interest income	$	50,694		$	45,188		$	44,572		$	58,692		$	66,745
Interest expense	2,256			3,071			6,763			13,827			19,160
Net interest income	48,438			42,117			37,809			44,865			47,585
Provision for credit losses	2,600			4,700			9,200			31,520			2,275
Net interest income after provision for credit losses	45,838			37,417			28,609			13,345			45,310
Other income	9,930			6,849			10,312			9,971			6,713
Other expenses	42,424			39,720			38,071			36,318			33,574
Income before income taxes	13,344			4,546			850			(13,002		)	18,449
Income taxes	5,497			1,955			(585		)	(5,661		)	7,583
Net income (loss)	$	7,847		$	2,591		$	1,435		$	(7,341	)	$	10,866
Preferred Dividends	200			1,955			4,203			152			—
Net income (loss) available to common shareholders	$	7,647		$	636		$	(2,768	)	$	(7,493	)	$	10,866
Per Share Data:
Basic earnings (loss) per share	$	0.54		$	0.06		$	(0.42	)	$	(1.15	)	$	1.70
Diluted earnings (loss) per share	0.52			0.06			(0.42		)	(1.15		)	1.57
Book value per common share	8.55			8.16			7.81			8.51			10.04
Cash dividend per common share	—			—			—			—			—
Balance Sheet Data:
Balance sheet totals:
Assets	$	1,161,033		$	1,029,731		$	844,067		$	947,596		$	774,832
Loans, net	740,696			634,557			558,977			679,451			642,265
Deposits	998,675			847,946			705,046			777,245			671,356
Shareholders’ equity	129,513			142,303			109,314			112,490			65,084
Average balance sheet amounts:
Assets	$	1,047,141		$	897,140		$	868,166		$	831,958		$	750,538
Loans, net	641,894			573,173			593,352			671,065			581,253
Deposits	884,683			751,119			719,001			725,952			665,925
Shareholders’ equity	128,128			114,624			110,447			67,551			56,192
Selected Ratios:
Return on average equity	6.12		%	2.26		%	1.30		%	-10.87		%	19.34		%
Return on average assets	0.75		%	0.29		%	0.17		%	-0.88		%	1.45		%
Efficiency ratio	72.68		%	81.12		%	79.12		%	66.23		%	61.83		%
Total risk based capital ratio	16.06		%	20.87		%	19.45		%	16.90		%	11.67		%
Net chargeoffs (recoveries) to average gross loans	-0.06		%	0.85		%	1.92		%	3.14		%	0.17		%
Allowance for loan losses to total gross loans	2.43		%	2.39		%	2.78		%	2.65		%	1.32		%
Average equity to average assets	12.24		%	12.78		%	12.72		%	8.12		%	7.49		%

23

Item  7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Critical Accounting Policies

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 to the Consolidated Financial Statements. 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 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 our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses

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

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

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

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

Sale of SBA Loans

The Company has the ability and the intent to sell all or a portion of certain SBA loans in the loan portfolio and, as such, carries the saleable portion of these loans at the lower of aggregate cost or fair value.  At December 31, 2011 and December 31, 2010, the fair value of SBA loans exceeded aggregate cost and therefore, SBA loans were carried at aggregate cost.

24

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

Investment Securities

Our securities are classified as either available-for-sale or held-to-maturity. The fair value of most securities classified as available-for-sale is based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Held-to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.

Supplemental Employee Retirement Plan

The Company has entered into supplemental employee retirement agreements with certain executive and senior officers.  The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement, and expected benefit levels.  Should these estimates prove materially wrong, we could incur additional or reduced expense to provide the benefits.

Deferred Tax Assets

Our deferred tax assets are explained in Note 8 to the Consolidated Financial Statements. The Company has sufficient taxable income from current and prior periods to support our position that the benefit of our deferred tax assets will be realized.  As such, we have provided no valuation allowance against our deferred tax assets.

Operating Results

The Company reported net operating income of $7.8 million for the twelve months ended December 31, 2011 representing an increase of $5.2 million, compared to net operating income of $2.6 million for the same period one year ago.  Net income available to common shareholders was reduced by preferred dividends of $200,000 and $2.0 million during the years ended 2011 and 2010, respectively, resulting in earnings per diluted share of $0.52 and $0.06, respectively.  For the year ended December 31, 2009, the Company reported net operating income of $1.4 million.  Net income available to common shareholders was reduced by preferred dividends of $4.2 million resulting in a loss per diluted share of $(0.42) for the year ended December 31, 2009.

The reduction in preferred dividends during 2011 was due to the early conversion of Series B and B-1 preferred shares in March 2010 and the early redemption of Series C preferred shares in March 2011.  (See discussion in Capital Resources section under Private Placement 2008 and Trouble Assets Relief Program (TARP)).

The increase in earnings during 2011 compared to 2010 resulted primarily from an increase in interest income related to loans and investment securities, and a decrease in provision for credit losses, an increase in non-interest income related to international fee income and a gain on sale of SBA loans, offset in part by an increase in non-interest expense related to supporting growth and investments in new initiatives.  The increase in earnings during 2010 compared to 2009 resulted primarily from a decrease in provision for credit losses and a decrease in interest expense related to deposits.  See the specific sections below for details regarding these changes.

Net Interest Income and Margin

Net interest income is the principal source of the Company’s operating earnings.  Net interest income is affected by changes in the nature and volume of earning assets held during the year, the rates earned on such assets and the rates paid on interest-bearing liabilities.  The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the three years ended December 31, 2011, 2010 and 2009.

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	Year Ended December 31,
	2011						2010						2009
			Interest						Interest						Interest
	Average		Income/		Yields/		Average		Income/		Yields/		Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		Rates		Balance		Expense		Rates		Balance		Expense		Rates
Assets
Interest earning assets (2):
Loans (1)	$	660,614	$	45,352	6.9	%	$	590,334	$	42,071	7.1	%	$	612,318	$	43,350	7.1	%
Investment securities	216,870		5,068		2.3	%	134,349		2,733		2.0	%	28,259		464		1.6	%
Federal funds sold	109,134		255		0.2	%	112,940		263		0.2	%	167,434		395		0.2	%
Interest bearing deposits	998		19		1.9	%	5,775		121		2.1	%	16,843		363		2.2	%
Total earning assets	$	987,616	$	50,694	5.1	%	$	843,398	$	45,188	5.4	%	$	824,854	$	44,572	5.4	%
Noninterest earning assets:
Cash and due from banks	22,392						18,792						17,965
All other assets (3)	37,133						34,950						25,347
TOTAL	$	1,047,141					$	897,140					$	868,166
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposits:
Demand	$	6,205	4		0.1	%	$	6,079	6		0.1	%	$	4,776	5		0.1	%
Savings	326,546		884		0.3	%	306,461		1,223		0.4	%	292,464		2,150		0.7	%
Time	36,876		208		0.6	%	58,285		736		1.3	%	128,367		3,261		2.5	%
Other	20,217		1,160		5.7	%	17,622		1,106		6.3	%	26,431		1,347		5.1	%
Total interest-bearing
Liabilities	389,844		2,256		0.6	%	388,447		3,071		0.8	%	452,038		6,763		1.5	%
Noninterest-bearing liabilities:
Demand deposits	515,056						380,295						293,394
Accrued expenses and other liabilities	14,113						13,775						12,287
Shareholders’ equity	128,128						114,623						110,447
TOTAL	$	1,047,141					$	897,140					$	868,166
Net interest income and margin			$	48,438	4.9	%			$	42,117	5.0	%			$	37,809	4.6	%

(1)   Includes amortization of loan fees of $5.7 million for 2011, $4.1 million for 2010 and $4.3 million for 2009.  Nonperforming loans have been included in average loan balances.

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

(3)   Net of average allowance for credit losses of $16.9 million and average deferred loan fees of $1.8 million for 2011, average allowance for credit losses of $15.6 million and average deferred loan fees of $1.5 million for 2010, and average allowance for credit losses of $17.5 million and $1.4 million for 2009, respectively.

Interest differential is affected by changes in volume, changes in rates and a combination of changes in volume and rates. Volume changes are caused by changes in the levels of average earning assets and average interest bearing deposits and borrowings.  Rate changes result from changes in yields earned on assets and rates paid on liabilities.  Changes not solely attributable to volume or rates have been allocated to the rate component.

26

The following table shows the effect on the interest differential of volume and rate changes for the years ended December 31, 2011, 2010 and 2009:

	Year Ended December 31,
	2011 vs. 2010									2010 vs. 2009
	Increase (decrease)									Increase (decrease)
	due to change in									due to change in
VOLUME/RATE ANALYSIS	Average			Average			Total			Average			Average			Total
(dollars in thousands)	Volume			Rate			Change			Volume			Rate			Change
Interest income:
Loans	$	4,825		$	(1,544	)	$	3,281		$	(1,566	)	$	287		$	(1,279	)
Investment securities	1,928			407			2,335			2,158			111			2,269
Federal funds sold	(9		)	1			(8		)	(127		)	(5		)	(132		)
Other	(91		)	(11		)	(102		)	(232		)	(10		)	(242		)
Total interest income	6,654			(1,148		)	5,506			233			383			616
Interest expense:
Demand	0			(2		)	(2		)	1			(0		)	1
Savings	55			(394		)	(339		)	56			(983		)	(927		)
Time	(121		)	(407		)	(528		)	(885		)	(1,640		)	(2,525		)
Other	149			(95		)	54			(552		)	312			(241		)
Total interest expense	84			(898		)	(815		)	(1,380		)	(2,312		)	(3,692		)
Change in net interest income	$	6,570		$	(250	)	$	6,321		$	1,613		$	2,695		$	4,308

Net interest income was $48.4 million in 2011, comprised of $50.7 million in interest income and $2.3 million in interest expense.  Net interest income was $42.1 million in 2010, comprised of $45.2 million in interest income and $3.1 million in interest expense.  The increase of $6.3 million in net interest income in 2011, comprised of an increase in interest income of $5.5 million combined with a decrease of $815,000 in interest expense, was primarily attributable to an increase in average earning assets combined with a decrease in average non-performing loans and a lower cost of funds.

The increase of $4.3 million in net interest income in 2010, comprised of a decrease of $3.7 million in interest expense and an increase of $600,000 in interest income, was primarily attributed to an increase in earning assets combined with a lower cost of funds.

The net interest margin (net interest income divided by average earning assets) was 4.90% for the year ended December 31, 2011, as compared to 4.99% for the year ended December 31, 2010 and 4.58% for 2009.  The decrease in net interest margin in 2011 was primarily due to decreased balance sheet leverage and a less favorable mix in average earning assets, partially offset by increased loan fees related to growth in the factoring and asset-based lending portfolio. The Company’s loan-to-deposit ratio, a measure of leverage, averaged 74.7% during the twelve months ended December 31, 2011, which represented a decrease compared to an average of 78.6% for the same period in 2010.  The positive impact on the net interest margin from increased loan fees for the twelve months ended December 31, 2011 compared to the same period one year ago was 9 basis points.

The increase in net interest margin in 2010 compare to 2009 was primarily the result of decreased balance sheet leverage combined with a lower cost of funds. The Company’s loan-to-deposit ratio averaged 78.6% in 2010 compared to 85.2% in 2009 reflecting faster deposit funding relative to loan growth during the year.

Interest Income

For the year ended December 31, 2011, the Company reported interest income of $50.7 million, an increase of $5.5 million or 12.2% over $45.2 million reported in 2010.  The increase in interest income primarily reflects an increase in average earning assets.  Average earning assets were $987.6 million for the year ended December 31, 2011 an increase of $144.2 million, or 17.1%, over $843.4 million for the year ended December 31, 2010.  The increase in average earning assets reflects an increase in the average loan portfolio of $70.3 million over $590.3 million in 2010,

27

and an increase in the average securities portfolio of $82.5 million from $134.3 million in 2010.  The average yield on earning assets was 5.13% for the year ended December 31, 2011 compared to 5.36% for the year ended December 31, 2010 due to a higher rate of interest earned on securities instruments during 2011, and a decrease in the rate of interest earned on the loan portfolio during 2011.  The decrease in the rate of interest earned on the loan portfolio was partially offset by a decrease in average non-performing loans during the year, as well as increased loan fees related to loan recoveries and growth in the factoring and asset based lending portfolio.

For the year ended December 31, 2010, the Company reported interest income of $45.2 million, an increase of $0.6 million, or 1.4%, over $44.6 million reported in 2009.  The increase in interest income primarily reflects a substantial increase in the average securities portfolio of $106.1 million over $28.3 million in 2009; this was partially offset by a decrease in the average loan portfolio in 2010 of $22.0 million from $612.3 million in 2009. In addition, a higher rate of interest was earned on both of these instruments during 2010.  Average earning assets were $843.4 million for the year ended December 31, 2010 an increase of $18.5 million, or 2.3%, over $824.9 million for the year ended December 31, 2009. The increase in average earning assets primarily reflects an increase in the investment securities portfolio of $106.1 million, partially offset by decreases in federal funds sold, average loans and interest bearing deposits of $54.5 million, $22.0 million, and $11.1 million, respectively. The average yield on earning assets was 5.36% for the year ended December 31, 2010 compared to 5.40% for the year ended December 31, 2009, reflecting a relatively flat interest rate environment on earning assets.

Interest Expense

Interest expense was $2.3 million for the year ended December 31, 2011, which represented a decrease of $815,000 or 26.5% compared to $3.1 million for the year ended December 31, 2010.  The decrease in interest expense primarily reflects the lower interest rates paid on deposits in 2011 compared to 2010.  The average yield on interest-bearing liabilities was 0.58% for the period ended December 31, 2011 compared to 0.78% for the period ended December 31, 2010. Average interest-bearing liabilities were $389.8 million for the year ended December 31, 2011, an increase of $1.4 million or 0.4% from $388.4 million for the year ended December 31, 2010.

Average interest bearing deposits were $369.6 million for the year ended December 31, 2011, which represented 41.8% of total average deposits and was a decrease of $1.2 million, or 0.3%, from $370.8 million at December 31, 2010, representing 49.4% of total average deposits for the year.

Other (non-deposit) interest bearing liabilities are primarily comprised of junior subordinated debt securities issued by the Company and other borrowings.  The junior subordinated debt is intended to supplement capital requirements of the Company at a rate of interest that is fixed for five years.  Other interest bearing liabilities averaged $20.2 million and $17.6 million in the years ended December 31, 2011 and 2010, respectively.

Interest expense was $3.1 million for the year ended December 31, 2010, which represented a decrease of $3.7 million or 54.6% compared to $6.8 million for the year ended December 31, 2009.  The decrease in interest expense reflects the lower interest rates paid on liabilities as well as a lower balance of interest-bearing liabilities in 2010 compared to 2009.  The average yield on interest bearing liabilities was 0.79% for the period ended December 31, 2011 compared to 1.50% for the period ended December 31, 2010. Average interest-bearing liabilities were $388.4 million for the year ended December 31, 2010, a decrease of $63.6 million or 14.1% from $452.0 million for the year ended December 31, 2009.

Average interest bearing deposits were $370.8 million for the year ended December 31, 2010, which represented 49.4% of total average deposits and was a decrease of $54.8 million, or 12.9%, from $425.6 million at December 31, 2009, representing 59.2% of total average deposits for the year ended December 31, 2009.

Other (non-deposit) interest bearing liabilities are primarily comprised of junior subordinated debt securities issued by the Company and other borrowings.  The junior subordinated debt is intended to supplement capital requirements of the Company at a rate of interest that is fixed for five years.  Other interest bearing liabilities averaged $17.6 million and $26.4 million in the years ended December 31, 2010 and 2009, respectively.

Credit Risk and Provision for Credit Losses

The Bank maintains an allowance for credit losses which is based, in part, on the loss experience of the Bank and the California banking industry, the impact of economic conditions within the Bank’s market area, and, as applicable, the State of California and/or national macroeconomic conditions, the value of underlying collateral, loan performance, and inherent risks in the loan portfolio. The allowance is reduced by charge-offs and increased by provisions for credit losses charged to operating expense and recoveries of previously charged-off loans.  Based on management’s evaluation of such risks, the Company provided $2.6 million, $4.7 million, and $9.2 million to the allowance for credit

28

losses in 2011, 2010 and 2009, respectively.  The significant provision for 2009 came in response to increased risk posed by significant deterioration in real estate values and economic conditions generally, in addition to charge offs taken on specifically identified exposures in real estate loans. During 2011, the Bank had $2.9 million in charge offs, and had recoveries of $3.3 million as compared to $8.2 million in charge offs and recoveries of $3.0 million in 2010.  During 2009, the Bank had $12.8 million in charge offs and $1.1 million in recoveries.  The allowance for credit losses was $18.5 million representing 2.43% of total loans at December 31, 2011, as compared to $15.5 million representing 2.39% of total loans at December 31, 2010 and $16.0 million representing 2.78% of total loans at December 31, 2009.

Management is of the opinion that the allowance for credit losses is maintained at a level adequate for inherent losses in the loan portfolio.  However, the Bank’s loan portfolio, which includes approximately $211.4 million in real estate loans, representing approximately 27.8% of the portfolio, could be adversely affected if California economic conditions continue to contract and the real estate market in the Bank’s market area were to further weaken.  The effect of such events, although uncertain at this time, could result in an increase in the level of non-performing loans and Other Real Estate Owned (“OREO”) and the level of the allowance for loan losses, which could adversely affect the Bank’s future growth and profitability.

See “Allowance for Loan Losses” for additional discussion regarding the allowance for credit losses and nonperforming assets.

Non-interest Income

The following table sets forth the components of other income and the percentage distribution of such income for the years ended December 31, 2011, 2010 and 2009:

	Year Ended December 31,
	2011				2010				2009
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Service charges on deposit accounts	$	2,876	29.0	%	$	2,417	35.3	%	$	1,900	18.4	%
International fee income	2,488		25.1	%	1,785		26.1	%	1,583		15.4	%
Gain on sale of SBA loans	1,743		17.6	%	—		0.0	%	615		6.0	%
Gain on sale of securities	438		4.4	%	165		2.4	%	—		0.0	%
Gain on sale of OREO	421		4.2	%	1,011		14.8	%	1,628		15.8	%
Warrant income	392		3.9	%	36		0.5	%	81		0.8	%
Increase in value-bank owned life insurance	388		3.9	%	392		5.7	%	421		4.1	%
Other income-cash flow hedge	—		0.0	%	48		0.7	%	3,286		31.9	%
SBA loan servicing fee income	411		4.1	%	380		5.5	%	436		4.2	%
Other non-interest income	773		7.9	%	615		9.1	%	362		3.5	%
	$	9,930	100.0	%	$	6,849	100.0	%	$	10,312	100.0	%

Non-interest income totaled $9.9 million in 2011, an increase of $3.1 million or 45.0% over $6.8 million in 2010.  Non-interest income of $6.8 million in 2010 represented a decrease of $3.5 million or 33.6% over $10.3 million in 2009.  Non-interest income generally consists primarily of service charge income on deposit accounts, international fee income, gain on sales of OREO and gains recognized on sales of SBA loans.  The increase in non-interest income during the year ending December 31, 2011 was primarily attributable to an increase in gains on sales of SBA loans of $1.7 million during 2011. The company did not sell any SBA loans in 2010. Additionally, non-interest income benefited during 2011 by increased service charges on deposit accounts and increased international fee income.

The decrease in non-interest income during the year ending December 31, 2010 was primarily attributable to the decrease in cash flow hedge of $3.3 million.  In 2010, the Company did not recognize any benefit from acceleration of deferred gains on terminated interest rate swaps; whereas in 2009 the Company recognized $3.3 million due to the termination of interest rate swaps having a combined notional value of $100.0 million.

29

For the year ended December 31, 2011 service charge income on deposit accounts was $2.9 million, representing an increase of $459,000, or 19.0%, compared to $2.4 million for the same period one year ago.  The service charge income on deposit accounts for 2010 compared to $1.9 million in 2009, representing an increase of $517,000 or 27.2%.  The increase in 2011 and 2010 was attributable to an increase in deposit accounts and deposit related analysis charges.

The Company generates international fee income on spot contracts (binding agreements for the purchase or sale of currency for immediate delivery and settlement) and forward contracts (a contractual commitment for a fixed amount of foreign currency on a future date at an agreed upon exchange rate) in connection with client’s cross-border activities. The transactions incurred are during the ordinary course of business and are not speculative in nature.  The Company recognizes income on a cash basis at the time of contract settlement in an amount equal to the spread created by the exchange rate charged to the client versus the actual exchange rate negotiated by the Company in the open market.  During 2011, the Company recognized $2.5 million in international fee income, representing an increase of $703,000, or 39.4%, compared to $1.8 million for the same period one year ago.  The international fee income for 2010 compared to $1.6 million in 2009, representing an increase of $202,000, or 12.8%.  The increase in international fee income in both 2011 and 2010 was primarily caused by an increase in client demand for international services as a result of the recovering economic environment.

Revenue from sales of SBA loans is dependent on the Company’s decision to sell versus retain loans as well as consistent origination and funding of new loan volumes, the timing of which may be impacted by (1) increased competition from other lenders; (2) the relative attractiveness of SBA borrowing to other financing options; (3) adjustments to programs by the SBA; (4) changes in activities of secondary market participants and; (5) other factors.  The Company recognized $1.7 million in gains on sales of SBA loans in 2011. The company did not recognize any gains on sales of SBA loans during 2010 compared to gains of $615,000 during 2009.

The Company recognized gains on the sale of securities of $438,000 during the twelve months ended December 31, 2011 which represents an increase of $273,000 or 165.5% compared to $165,000 during 2010.  The Company did not sell any securities during the twelve months ended December 31, 2009.

During 2011, 2010, and 2009, the Company recognized $421,000, $1.0 million, and $1.6 million, respectively, in gains on the sale of OREO properties.

Non-interest Expenses

The components of other expense as a percentage of average assets are set forth in the following table for the years ended December 31, 2011, 2010 and 2009.

	Year Ended December 31,
	2011				2010				2009
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Salaries and benefits	$	24,606	2.3	%	$	21,292	2.4	%	$	20,286	2.3	%
Occupancy	3,296		0.3	%	3,343		0.4	%	3,457		0.4	%
Data processing	3,046		0.3	%	2,913		0.3	%	2,526		0.3	%
Professional services	2,667		0.3	%	2,106		0.2	%	1,939		0.2	%
Assessments	1,717		0.2	%	2,500		0.3	%	2,629		0.3	%
Marketing	1,571		0.2	%	1,012		0.1	%	916		0.1	%
Director/Shareholder expenses	1,158		0.1	%	1,273		0.1	%	916		0.1	%
OREO expense	1,140		0.1	%	1,975		0.2	%	1,231		0.1	%
Deposit services/supplies	954		0.1	%	909		0.1	%	1,015		0.1	%
Furniture and equipment	505		0.0	%	699		0.1	%	920		0.1	%
Other	1,764		0.2	%	1,698		0.2	%	2,236		0.3	%
	$	42,424	4.1	%	$	39,720	4.4	%	$	38,071	4.4	%

Non-interest expenses were $42.4 million in 2011 as compared to $39.7 million in 2010 and $38.1 million in 2009.  Non-interest expense increased approximately $2.7 million in 2011 compared to 2010.  This increase was primarily attributable to increased salaries and benefits, marketing costs and professional services. Overall, trends in non-interest expenses in 2011 reflect a lower level of expense related to problem asset valuation and resolution and higher expenses related to supporting growth and investments in new initiatives.

30

Non-interest expense increased approximately $1.6 million in 2010 compared to 2009.  This increase was primarily attributable to increased salaries and benefits and OREO expense.  Non-interest expenses measured as a percentage of average assets were 4.1% in 2011, and 4.4% in 2010 and 2009.

Salaries and related benefits was the largest component of the Bank’s non-interest expense.  Salaries and benefits were $24.6 million for the year ended December 31, 2011 as compared to $21.3 million and $20.3 million for the years ended December 31, 2010 and 2009, respectively.  The Bank had 193 full time equivalent employees (FTE) at December 31, 2011 as compared to 170 FTE at December 31, 2010 and 164 FTE at December 31, 2009.  The increase in salaries and related benefits in 2011 compared to 2010 and 2009 was primarily attributable to the increase in full time equivalent employees FTE, as well as an increase in commissions and incentive compensation directly related to increased loan and deposit production.

Occupancy expense for the year ended December 31, 2011 was $3.3 million and remained relatively flat compared to the prior year.  Occupancy expense for the year ended December 31,2010 represented a decrease of approximately $114,000 over $3.5 million from 2009. The decrease in occupancy expense was primarily attributed to the termination of the Santa Clara lease in the fourth quarter of 2009.

The Company contracts with third-party vendors for most data processing needs and to support technical infrastructure.  Data processing expense in 2011 was $3.0 million which represented an increase of approximately $133,000 over $2.9 million one year earlier.  Data processing expense in 2010 represented an increase of approximately $387,000 over $2.5 million one year earlier.  The increase in data processing in both years was primarily due to an increase in deposit transaction volumes.

Legal and professional expenses were $2.7 million for the year ended December 31, 2011, which represents a $561,000 increase over $2.1 million one year earlier.  Legal and professional expenses were $1.9 million for the year ended December 31, 2009.  The increase in legal and professional expenses in 2011 was primarily due to the early redemption of Series C preferred shares and repurchase of the related warrant, as well as legal fees associated with the active management of one non-real estate credit exposure.  The increase in legal and professional expenses in 2010 was primarily attributed to legal fees associated with a $30.0 million private placement of common stock as well as legal fees resulting from elevated levels of non-performing assets.

As required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, on February 7, 2011, the FDIC issued a final rule that changes its assessment system for deposit insurance coverage from one based on domestic deposits to one that will be based on consolidated total assets.  That change became effective on April 1, 2011 and was based on asset balances starting with the quarter ended September 30, 2011.  The FDIC assessment recognized during the year ended December 31, 2011 was $1.7 million compared to $2.5 million for the prior year. The decrease in regulatory assessments was a result of the change in the FDIC assessment system, as well as the elimination of the Transaction Guarantee program in the second quarter of 2011.

OREO expense for the year ended December 31, 2011 was $1.1 million, which represents a decrease of $835,000 compared to $2.0 million for the same period one year earlier.  This decrease in OREO and loan related charges in 2011 compared to 2010 was primarily attributed to a decline in non-performing assets.  December 31, 2010 OREO expense reflects an increase of $744,000 over $1.2 million in 2009. The increase in 2010 reflects sales related expenses and write-downs of property values during the year due to increased levels of OREO activity.

The Company’s efficiency ratio, the ratio of non-interest expenses to revenues, was 72.68% for the twelve months ended December 31, 2011, compared to 81.12% and 79.12% for the twelve months ended December 31, 2010 and December 31, 2009, respectively.  As pressure continues on net interest margins and net asset growth, management of operating expenses will continue to be a priority.

Income Taxes

The Company’s effective tax rate was 41.2% for the year ended December 31, 2011, 43.0% for the year ended December 31, 2010 and (68.8)% for the year ended December 31, 2009.  See Note 8 to the financial statements for additional information on income taxes.

Quarterly Income

The unaudited income statement data of the Company, in the opinion of management, includes all normal and recurring adjustments necessary to state fairly the information set forth herein.  The results of operations are not necessarily indicative of results for any future period.  The following table shows the Company’s unaudited quarterly income statement data for the years 2011, 2010, and 2009.

31

	Three Months Ended
(dollars in thousands, except share amounts)	March 31			June 30			September 30			December 31
Year Ended December 31, 2011:
Interest income	$	11,710		$	12,301		$	13,180		$	13,503
Interest expense	652			535			529			540
Net interest income	11,058			11,766			12,651			12,963
Provision for credit losses	750			0			1,250			600
Other income	2,546			1,511			3,257			2,616
Other expense	10,237			10,205			10,923			11,059
Income before income taxes	2,617			3,072			3,735			3,920
Income taxes	1,047			1,286			1,532			1,633
Net income	$	1,570		$	1,786		$	2,203		$	2,287
Preferred dividends	200			0			0			0
Net income available to common shareholders	$	1,370		$	1,786		$	2,203		$	2,287
Earnings per share - basic	$	0.10		$	0.13		$	0.15		$	0.16
Earnings per share - diluted	$	0.09		$	0.12		$	0.15		$	0.16
Year Ended December 31, 2010:
Interest income	$	10,757		$	10,990		$	11,369		$	12,072
Interest expense	882			835			701			653
Net interest income	9,875			10,155			10,668			11,419
Provision for credit losses	1,250			1,150			350			1,950
Other income	1,626			1,703			1,433			2,087
Other expense	9,653			9,659			9,268			11,140
Income before income taxes	598			1,049			2,483			416
Income taxes	233			294			1,161			267
Net income	$	365		$	755		$	1,322		$	149
Preferred dividends	1,060			298			299			298
Net income (loss) available to common shareholders	$	(695	)	$	457		$	1,023		$	(149	)
Earnings (loss) per share - basic	$	(0.11	)	$	0.04		$	0.10		$	(0.01	)
Earnings (loss) per share - diluted	$	(0.11	)	$	0.04		$	0.09		$	(0.01	)
Year Ended December 31, 2009:
Interest income	$	11,960		$	11,476		$	10,515		$	10,621
Interest expense	2,310			1,783			1,523			1,147
Net interest income	9,650			9,693			8,992			9,474
Provision for credit losses	3,650			4,000			650			900
Other income	4,004			2,326			1,689			2,294
Other expense	9,463			9,343			9,202			10,064
Income before income taxes	541			(1,324		)	829			804
Income taxes	208			(482		)	290			(601		)
Net income (loss)	$	333		$	(842	)	$	539		$	1,405
Preferred dividends	1,017			1,057			1,064			1,065
Net income (loss) available to common shareholders	$	(684	)	$	(1,899	)	$	(525	)	$	340
Earnings (loss) per share - basic	$	(0.10	)	$	(0.29	)	$	(0.08	)	$	0.05
Earnings (loss) per share - diluted	$	(0.10	)	$	(0.29	)	$	(0.08	)	$	0.05

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FINANCIAL CONDITION AND EARNING ASSETS

As of December 31, 2011, total assets were $1.2 billion, gross loans were $762.0 million and deposits were $998.7 million. Assets increased $131.3 million, or 13.0%, from $1.0 billion at December 31, 2010.  Gross loans increased $110.5 million, or 17.0%, from $651.5 million at December 31, 2010.  Deposits increased $150.7 million, or 17.8%, from $847.9 million at December 31, 2010.

As of December 31, 2010, total assets were $1.0 billion, gross loans were $651.5 million and deposits were $847.9 million. Assets increased $185.7 million, or 22.0%, from $844.1 million at December 31, 2009.  Gross loans increased $75.1 million, or 13.0% from $576.4 million at December 31, 2009.  Deposits increased $142.9 million, or 20.3%, from $705.0 million at December 31, 2009.

Federal Funds Sold

Federal funds sold were $106.7 million at December 31, 2011 as compared to $114.2 million at December 31, 2010.  The Company’s investment in federal funds sold reflects the Company’s current strategy of deploying other earning assets primarily in federal funds sold to address the potential volatility of deposit balances and to accommodate projected loan funding throughout the remainder of the current economic cycle.

The average balance of federal funds sold was $109.1 million in 2011 and $112.9 million in 2010.  These balances represented 12.3% and 15.0% of average deposits for 2011 and 2010, respectively.  They are maintained primarily for the short-term liquidity needs of the Bank.

Securities

Investment securities are classified as either available for sale or held to maturity.  Any unrealized gain or loss on investment securities available for sale is reflected in the carrying value of the security and reported net of income taxes in the equity section of the balance sheet.  Held-to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. The pre-tax unrealized gain on securities available for sale at December 31, 2011 was $1.6 million.  The pre-tax unrealized loss on securities at December 31, 2010 and December 31, 2009 was $1.3 million and $255,000, respectively.

The following table shows the composition of the securities portfolio at December 31, 2011 and 2010.  As of December 31, 2009, the Company did not own any investment securities.

The maturities and yields of the debt securities included in the investment portfolio at December 31, 2011 and December 31, 2010 are shown in the table below.  There were no equity securities in 2011.  The equity securities had a weighted average yield of 1.2% during 2010.

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	As of December 31,
	2011				2010
	Amortized		Fair		Amortized		Fair
(dollars in thousands)	Cost		Value		Cost		Value
Securities available for sale
Debt securities:
U.S. government agency securities	$	14,873	$	15,014	$	49,417	$	49,574
Mortgage backed securities	181,226		183,138		111,901		110,416
Corporate Bonds	26,294		25,859		7,908		7,956
Total debt securities	222,393		224,011		169,226		167,946
Equity securities	—		—		40,153		40,153
Total securities available for sale	$	222,393	$	224,011	$	209,379	$	208,099
Securities held to maturity
Debt securities:
Mortgage backed securities	16,256		16,604		9,204		9,206
Total securities held to maturity	$	16,256	$	16,604	$	9,204	$	9,206
Total investment securities	$	238,649	$	240,615	$	218,583	$	217,305

			Due in one year or less				Due after one year through five years				Due greater than five years
					Weighted				Weighted				Weighted
	Amortized				Average				Average				Average
(dollars in thousands)	Cost		Amount		Yield		Amount		Yield		Amount		Yield
As of December 31, 2011:
U.S. government agencies	14,873		—		0.0	%	5,002		1.3	%	9,871		2.6	%
Mortgage backed securities	197,482		1,500		2.7	%	49,453		2.1	%	146,529		3.3	%
Corporate bonds	26,294		5,627		2.1	%	16,690		2.0	%	3,977		3
Total debt securities	$	238,649	$	7,127	2.2	%	$	71,145	2.0	%	$	160,377	3.2	%
As of December 31, 2010:
U.S. government agencies	$	49,417	$	16,164	1.3	%	$	30,257	1.9	%	$	2,996	1.8	%
Mortgage backed securities	121,105		2,729		2.8	%	34,025		2.5	%	84,351		2.5	%
Corporate bonds	7,908		5,031		1.2	%	2,877		2.2	%	—		—
Total debt securities	$	178,430	$	23,924	1.4	%	$	67,159	2.1	%	$	87,347	2.4	%

Loan Portfolio

The following table shows the Company’s loans by type and their percentage distribution at December 31, 2011, 2010, 2009, 2008, and 2007.

34

As of December 31,