Overview

Certain matters discussed or incorporated by reference in this Quarterly Report of Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those described in Management's Discussion and Analysis of Financial Condition and Results of Operations. Such risks and uncertainties include, but are not limited to, the following factors: i) competitive pressures in the banking industry and changes in the regulatory environment; ii) exposure to changes in the interest rate environment and the resulting impact on the Company's interest rate sensitive assets and liabilities; iii) decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company's loans; iv) credit quality deterioration that could cause an increase in the provision for loan losses; v) Asset/Liability matching risks and liquidity risks; volatility and devaluation in the securities markets, vi) expected cost savings from recent acquisitions are not realized, and, vii) potential impairment of goodwill and other intangible assets. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

The Company has made certain reclassifications to the 2008 financial information to conform to the classifications used in 2009. Effective January 1, 2009, the Company reclassified a contingent asset that represents a claim from an insurance company related to a charged-off lease portfolio, including specific reserves, from loans to other assets. Management believes the asset is better reflected, given its nature, as an asset other than loans (see Note 1 for more details). All periods presented have been retroactively adjusted for the reclassification to other assets and therefore amounts have been excluded from loans and reserves for credit losses, including impaired and nonaccrual balances for periods prior to March 31, 2009.

The Company currently has eleven banking branches, which provide financial services in Fresno, Madera, Kern, and Santa Clara counties in the state of California.

Trends Affecting Results of Operations and Financial Position

The following table summarizes the three-month and year-to-date averages of the
components of interest-bearing assets as a percentage of total interest-bearing
assets and the components of interest-bearing liabilities as a percentage of
total interest-bearing liabilities:

                                                      YTD Average       YTD Average       YTD Average
                                                        3/31/09          12/31/08           3/31/08
Loans and Leases                                             83.89 %           84.11 %           83.80 %
Investment securities available for sale                     14.06 %           14.41 %           15.47 %
Interest-bearing deposits in other banks                      2.05 %            1.40 %            0.45 %
Federal funds sold                                            0.00 %            0.08 %            0.28 %
  Total earning assets                                      100.00 %          100.00 %          100.00 %

NOW accounts                                                  8.21 %            7.92 %            7.91 %
Money market accounts                                        19.85 %           22.89 %           21.88 %
Savings accounts                                              7.05 %            7.50 %            7.73 %
Time deposits                                                33.00 %           42.51 %           53.58 %
Other borrowings                                             29.64 %           16.84 %            6.45 %
Subordinated debentures                                       2.25 %            2.34 %            2.45 %
   Total interest-bearing liabilities                       100.00 %          100.00 %          100.00 %

The Company's overall operations are impacted by a number of factors, including not only interest rates and margin spreads, which impact results of operations, but also the composition of the Company's balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.

Continued weakness in the real estate markets and the general economy have impacted the Company's operations during the past several quarters although, the Company continues its business development and expansion efforts throughout a diverse market area.

With market rates of interest declining 100 basis points during the fourth quarter of 2007, and another 400 basis points during the year ended December 31, 2008, the Company continues to experience compression of its net interest margin. The Company's net interest margin was 4.48% for the three months ended March 31, 2009, as compared to 4.36% for the year ended December 31, 2008, and 4.67% for the three months ended March 31, 2008. With approximately 67% of the loan portfolio in floating rate instruments at March 31, 2009, the effects of market rates continue to impact loan yields. Loans yielded 6.03% during the three months ended March 31, 2009, as compared to 6.81% for the year ended December 31, 2008, and 7.91% for the three months ended March 31, 2008. With the rapid decline in market rates of interest experienced during 2008, deposit repricing was slow to follow the decline in loan rates during the second half of 2008. However, with stock market declines, combined with more substantial FDIC insurance coverage, deposit rates declined during the fourth quarter of 2008 as investors sought safety in bank deposits. Borrowing rates declined significantly during the fourth quarter of 2008 and remained low during the first quarter of 2009, resulting in overnight and short-term borrowing rates of less than 0.50% during the quarter ended March 31, 2009. The Company has benefited from these rate declines, as it has continued to utilize overnight and short-term borrowing lines through the Federal Reserve and Federal Home Loan Bank to a greater degree. The Company's average cost of funds was 1.68% for the three months ended March 31, 2009 as compared to 2.75% for the year ended December 31, 2008, and 3.55% for the three months ended March 31, 2008.

Total noninterest income of $1.1 million reported for the three months ended March 31, 2009 decreased $1.2 million or 51.1% as compared to the three months ended March 31, 2008, resulting in part to changes in SFAS No. 159 fair market value adjustments between the two three-month periods on the Company's junior subordinated debt. Noninterest income continues to be driven by customer service fees, which totaled $989,000 for the three months ended March 31, 2009, representing a decrease of $208,000 or 17.4% over the $1.2 million in customer service fees reported for the three months ended March 31, 2008. Although we believe the decline in current economic conditions has had an impact on the level of customer service fees, decreases in ATM fees between the two periods presented resulting from the loss of a contract during 2008 to provide multiple ATM's in a single location have also adversely impacted the level of customer service fees. Customer service fees represented 86.7% and 51.3% of total noninterest income for the three-month periods ended March 31, 2009 and 2008, respectively.

Noninterest expense decreased approximately $447,000 or 7.3% between the three-month periods ended March 31, 2008 and March 31, 2009. While impairment losses on the Company's core deposit intangible assets decreased $567,000 between the three-month periods ended March 31, 2008 and 2009, the Company had impairment charges during the first quarter of 2009 of $166,000 on other real estate owned through foreclosure, and $163,000 on investment securities. Salary expense decreased $619,000 or 21.8% between the quarters ended March 31, 2008 and March 31, 2009, primarily as the result of declines in accrued bonuses and employee incentives between the two periods.

On March 24, 2009, the Company's Board of Directors again declared a one-percent (1%) stock dividend on the Company's outstanding common stock. The stock dividend replaces quarterly cash dividends and reflects a similar value. Although the Company's capital position remains strong, the change in the dividend from cash to stock begun during the third quarter of 2008 was employed as a precaution against uncertainties in the 1-4 family residential real estate market and the potential impact on the Company's construction and related land and lot loan portfolio. The Company believes, given the current uncertainties in the economy and unprecedented declines in real estate valuations in our markets, it is prudent to retain capital in this environment, and better position the Company for future growth opportunities. Based upon the number of outstanding common shares on the record date of April 10, 2009, an additional 119,622 shares were issued to shareholders on April 22, 2009. For purposes of earnings per share calculations, the Company's weighted average shares outstanding and potentially dilutive shares used in the computation of earnings per share have been restated after giving retroactive effect to a 1% stock dividend to shareholders for all periods presented.

The Company has sought to maintain a strong, yet conservative balance sheet during the three months ended March 31, 2009 with only minor decreases in net loans during the period. Total assets decreased approximately $27.7 million during the three months ended March 31, 2009, with a decrease of $21.6 million in interest-bearing deposits in other banks and investment securities as the Company decreased its borrowing exposure during the quarter. Average loans comprised approximately 86% of overall average earning assets during the three months ended March 31, 2009.

Nonperforming assets remained high during the quarter ended March 31, 2009 as real estate markets continue to suffer from the mortgage crisis which began during mid-2007. Nonaccrual loans increased $6.9 million from the balance reported at December 31, 2008, and increased $35.7 million from the balance reported at March 31, 2008, to a balance of $52.6 million at March 31, 2009. In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit issues related to the specific loans. Impaired loans increased $9.1 million during the three months ended March 31, 2009 to a balance of $58.0 million at March 31, 2009. Other real estate owned through foreclosure decreased $1.0 million between December 31, 2008 and March 31, 2009, as sales of existing OREO exceeded the amount of the single new property that was transferred to OREO during the first quarter of 2009. As a result of these events, nonperforming assets as a percentage of total assets increased from 9.96% at December 31, 2008 to 11.33% at March 31, 2009.

As the economy has declined along with asset valuations, increased emphasis has been placed on impairment analysis of both tangible and intangible assets on the balance sheet. As of March 31, 2009, the Company conducted annual impairment testing on the largest component of its outstanding balance of goodwill, that of the Campbell operating unit (resulting from the Legacy merger during February 2007.) In part, as a result of the severe decline in interest rates and other economic factors within the industry, we could not conclude that there was not a possibility of goodwill impairment under the current economic conditions. We cannot reasonably estimate at this time if there is actually impairment of goodwill related to the Campbell operating unit, and if so, what that the goodwill impairment amount would be. As a result, during the second quarter of 2009 we will utilize an independent valuation service to determine the aggregate fair value of the individual assets, liabilities, and identifiable intangible assets of the Campbell operating unit in question to determine if the goodwill related to that operating unit is impaired, and if so, how much the impairment is.

Management continues to monitor economic conditions in the real estate market for signs of further deterioration or improvement which may impact the level of the allowance for loan losses required to cover identified losses in the loan portfolio. Increased charge-offs and significant provisions for loan losses made during the three months ended March 31, 2009 impacted earnings during the first quarter of 2009, but the provision made to the allowance for credit losses, totaling $1.3 million during the first quarter of 2009, along with the allowance for loan losses, is adequate to cover inherent losses in the loan portfolio. Loan and lease charge-offs totaling $2.6 million during the quarter ended March 31, 2009 included the charge-off of a single unsecured commercial loan relationship totaling $1.6 million.

Deposits increased by $13.7 million during the three months ended March 31, 2009, with increases experienced in both interest-bearing checking accounts and time deposit of $100,000 or more. Increases in time deposits of $100,000 or more were largely the result of additional brokered deposits taken during the first quarter of 2009 in an effort to decrease the reliance on borrowed funds as the cost of those brokered deposits became more attractive.

The Company continues to utilize overnight borrowings and other term credit lines to a large degree, with borrowings totaling $113.1 million at March 31, 2009 as compared to $155.0 million at December 31, 2008. The average rate of those term borrowings was 0.65% at March 31, 2009 as compared to 0.93% at December 31, 2008, representing a cost reduction of 28 basis points between the two period-ends. Although the Company continues to realize significant interest expense reductions by utilizing these overnight and term borrowings lines, the use of such lines are monitored closely to ensure sound balance sheet management in light of the current economic and credit environment.

The cost of the Company's subordinated debentures issued by USB Capital Trust II has remained low as market rates have changed little during the quarter ended March 31, 2009. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 2.53% at March 31, 2009, representing a rate reduction of 23 basis points between December 31, 2008 and March 31, 2009. Pursuant to SFAS No. 159, the Company recorded a $59,000 pretax fair value loss ($34,000 net of tax) on its junior subordinated debt bringing the total cumulative gain recorded on the debt to $3.7 million at March 31, 2009.

The Company continues to emphasize relationship banking and core deposit growth, and has focused greater attention on its market area of Fresno, Madera, and Kern Counties, as well as Campbell, in Santa Clara County. The San Joaquin Valley and other California markets continue to exhibit weak demand for construction lending and commercial lending from small and medium size businesses, as commercial and residential real estate markets declined during much of 2008, a condition which still persists at this time. The past year has presented significant challenges for the banking industry with tightening credit markets, weakening real estate markets, and increased loan losses adversely affecting the industry.

The Company continually evaluates its strategic business plan as economic and market factors change in its market area. Growth and increasing market share will be of primary importance during 2009 and beyond. The banking industry is currently experiencing continued pressure on net margins as well as asset quality resulting from conditions in the sub-prime real estate market, and a general deterioration in credit markets. As a result, market rates of interest and asset quality will continue be an important factor in the Company's ongoing strategic planning process.

Results of Operations

For the three months ended March 31, 2009, the Company reported net income of $921,000 or $0.08 per share ($0.08 diluted) as compared to $2.5 million or $0.20 per share ($0.20 diluted) for the three months ended March 31, 2008. The decline in earnings between the two quarters ended March 31, 2008 and 2009 is primarily the result of a decline in interest rate margins combined with an increase in provisions for loan losses.

The Company's return on average assets was 0.50% for the three-month period ended March 31, 2009 as compared to 1.29% for the three-month period ended March 31, 2008. The Bank's return on average equity was 4.46% for the three months ended March 31, 2009 as compared to 11.79% for the same three-month period of 2008.

Net Interest Income

Net interest income before provision for credit losses totaled $7.1 million for the three months ended March 31, 2009, representing a decrease of $837,000, or 10.5% when compared to the $8.0 million reported for the same three months of the previous year. The decrease in quarterly net interest income between 2008 and 2009 is primarily the result of decreased yields on interest-earning assets, which more than offset the decreased yields on interest-bearing liabilities. Additionally, the Company experienced decreases in the volume of interest-earning assets.

The Bank's net interest margin, as shown in Table 1, decreased to 4.48% at March 31, 2009 from 4.67% at March 31, 2008, a decrease of 19 basis point (100 basis points = 1%) between the two periods. Average market rates of interest have decreased significantly between the three-month periods ended March 31, 2008 and 2009. The prime rate averaged 3.25% for the three months ended March 31, 2009 as compared to 6.23% for the comparative three months of 2008.