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 June 30, 2009. The contingent asset was ultimately settled during the quarter ended June 30, 2009 resulting in a pretax gain of $117,000.

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 six-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
                                                        6/30/09          12/31/08           6/30/08
Loans and Leases                                             84.87 %           84.23 %           84.05 %
Investment securities available for sale                     13.79 %           14.30 %           15.10 %
Interest-bearing deposits in other banks                      1.34 %            1.39 %            0.69 %
Federal funds sold                                            0.00 %            0.08 %            0.16 %
  Total earning assets                                      100.00 %          100.00 %          100.00 %

NOW accounts                                                  8.50 %            7.92 %            8.12 %
Money market accounts                                        20.05 %           22.89 %           23.08 %
Savings accounts                                              6.99 %            7.50 %            7.73 %
Time deposits                                                36.56 %           42.51 %           48.01 %
Other borrowings                                             25.64 %           16.84 %           10.66 %
Subordinated debentures                                       2.26 %            2.34 %            2.40 %
   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 4.39% for the six months ended June 30, 2009, as compared to 4.36% for the year ended December 31, 2008, and 4.61% for the six months ended June 30, 2008. With approximately 66% of the loan portfolio in floating rate instruments at June 30, 2009, the effects of market rates continue to impact loan yields. Loans yielded 5.77% during the six months ended June 30, 2009, as compared to 6.81% for the year ended December 31, 2008, and 7.48% for the six months ended June 30, 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 have remained low during 2009, resulting in overnight and short-term borrowing rates of less than 0.50% during the six months ended June 30, 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 1.55% for the six months ended June 30, 2009 as compared to 2.75% for the year ended December 31, 2008, and 3.18% for the six months ended June 30, 2008.

Total noninterest income of $2.4 million reported for the six months ended June 30, 2009 decreased $1.6 million or 40.3% as compared to the six months ended June 30, 2008, resulting in part to changes in SFAS No. 159 fair market value adjustments between the two six-month periods on the Company's junior subordinated debt. Noninterest income continues to be driven by customer service fees, which totaled $2.0 million for the six months ended June 30, 2009, representing a decrease of $461,000 or 18.7% over the $2.5 million in customer service fees reported for the six months ended June 30, 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 83.0% and 60.9% of total noninterest income for the six-month periods ended June 30, 2009 and 2008, respectively.

Noninterest expense increased approximately $2.9 million or 24.5% between the six-month periods ended June 30, 2008 and June 30, 2009. The primary reason for the increase in noninterest expense experienced during the first six months of 2009 was the result of a goodwill impairment loss totaling $3.0 million recognized during the quarter ended June 30, 2009. While impairment losses on the Company's core deposit intangible assets decreased $567,000 between the six-month periods ended June 30, 2008 and 2009, the Company took impairment charges of $503,000 during the first six months of 2009 on real estate owned through foreclosure, and $403,000 on investment securities. Salary expense decreased $1.5 million or 25.4% between the six months ended June 30, 2008 and June 30, 2009, primarily as the result of declines in accrued bonuses and employee incentives between the two periods.

On June 23, 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 July 10, 2009, an additional 120,788 shares were issued to shareholders on July 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 the 1% stock dividend to shareholders for all periods presented.

The Company has sought to maintain a strong, yet conservative balance sheet during the six months ended June 30, 2009 with only modest increases in net loans during the period. Total assets decreased approximately $22.5 million during the six months ended June 30, 2009, with a decrease of $27.8 million in interest-bearing deposits in other banks and investment securities as the Company decreased its borrowing exposure during 2009. Average loans comprised approximately 86% of overall average earning assets during the six months ended June 30, 2009.

Nonperforming assets, which are primarily related to the real estate portfolio, remained high during the six months ended June 30, 2009 as real estate markets continue to suffer from the mortgage crisis which began during mid-2007. Nonaccrual loans increased $10.5 million from the balance reported at December 31, 2008, and increased $17.5 million from the balance reported at June 30, 2008, to a balance of $56.2 million at June 30, 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 $18.2 million during the six months ended June 30, 2009 to a balance of $67.2 million at June 30, 2009, and increased $9.1 million during the quarter ended June 30, 2009. Other real estate owned through foreclosure increased $6.9 million between December 31, 2008 and June 30, 2009, as sales of existing OREO properties were more than offset by the transfer of the $10.3 million in loans to other real estate owned during the six months ended June 30, 2009. As a result of these events, nonperforming assets as a percentage of total assets increased from 9.96% at December 31, 2008 to 14.03% at June 30, 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 at March 31, 2009 that there was not a possibility of goodwill impairment under the current economic conditions. During the second quarter of 2009, the Company utilized 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 was impaired, and if so, how much the impairment was. Management, with the assistance of the independent third-party, concluded that there was impairment of the goodwill related to the Campbell operating unit, and as a result the Company recognized an impairment loss of $3.0 million or $0.25 per share (pre-tax and after-tax) for the quarter ended June 30, 2009.

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 first two quarters of 2009 materially impacted earnings, but the provisions made to the allowance for credit losses, totaling $1.4 million during the first quarter of 2009 and $6.8 million during the second 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 $4.1 million during the six months ended June 30, 2009 included $2.6 million during the quarter ended March 31, 2009 and an additional $1.5 million during the quarter ended June 30, 2009.

Deposits increased by $2.4 million during the six months ended June 30, 2009, with increases experienced in both interest-bearing checking accounts and time deposits.

The Company continues to utilize overnight borrowings and other term credit lines to a large degree, with borrowings totaling $135.3 million at June 30, 2009 as compared to $155.0 million at December 31, 2008. The average rate of those term borrowings was 0.60% at June 30, 2009 as compared to 0.93% at December 31, 2008, representing a cost reduction of 33 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 actually declined during the first six months of 2009. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 1.91% at June 30, 2009, representing a rate reduction of 62 basis points between March 31, 2009 and June 30, 2009, and a rate reduction of 85 basis points between December 31, 2008 and June 30, 2009. Pursuant to SFAS No. 159, the Company has recorded $105,000 in pretax fair value losses ($62,000 net of tax) on its junior subordinated debt during the six months ended June 30, 2009, bringing the total cumulative gain recorded on the debt to $3.6 million at June 30, 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. Balance sheet management, enhancing revenue sources, and maintaining 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 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.

For the six months ended June 30, 2009, the Company reported a net loss of $4.8 million or $0.39 per share ($0.39 diluted) as compared to net income of $4.6 million or $0.37 per share ($0.37 diluted) for the six months ended June 30, 2008. The decline in earnings between the two six month periods ended June 30, 2008 and 2009 is primarily the result of significant increases in provisions for loan losses and impairment losses taken during 2009, combined with continued declines in interest rate margins.

The Company's return on average assets was -1.30% for the six months ended June 30, 2009 as compared to 1.19% for the six months ended June 30, 2008, and was -3.11% for the quarter months ended June 30, 2009 as compared to 1.09% for the quarter ended June 30, 2008. The Bank's return on average equity was -12.00% for the six months ended June 30, 2009 as compared to 10.98% for the same six-month period of 2008, and was -28.45% for the quarter ended June 30, 2009 as compared to 10.11% for the quarter ended June 30, 2008.

Net Interest Income

Net interest income before provision for credit losses totaled $13.9 million for the six months ended June 30, 2009, representing a decrease of $1.8 million, or 11.3% when compared to the $15.7 million reported for the same six months of the previous year. The decrease in both the annual and 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 costs of 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 4.39% at June 30, 2009 from 4.61% at June 30, 2008, a decrease of 22 basis point (100 basis points = 1%) between the two periods. Average market rates of interest have decreased significantly between the six-month periods ended June 30, 2008 and 2009. The prime rate averaged 3.25% for the six months ended June 30, 2009 as compared to 5.65% for the comparative six months of 2008.

Table 1. Distribution of Average Assets, Liabilities and Shareholders' Equity:

Interest rates and Interest Differentials

Six Months Ended June 30, 2009 and 2008

                                                2009                                        2008
                                Average                       Yield/        Average                       Yield/
   (dollars in thousands)       Balance       Interest         Rate         Balance       Interest         Rate
Assets:
Interest-earning assets:
   Loans and leases (1)        $ 543,310     $   15,543           5.77 %   $ 576,410     $   21,435           7.48 %
   Investment Securities -
taxable                           87,066          2,304           5.34 %     101,929          2,600           5.13 %
   Investment Securities -
nontaxable (2)                     1,252             29           4.67 %       1,649             39           4.76 %
   Interest-bearing deposits
in other banks                     8,587             77           1.81 %       4,725             84           3.58 %
   Federal funds sold and
reverse repos                         22              0           0.00 %       1,073             17           3.19 %
     Total interest-earning
assets                           640,237     $   17,953           5.65 %     685,786     $   24,175           7.09 %
Allowance for credit losses      (10,882 )                                    (7,418 )
Noninterest-bearing assets:
   Cash and due from banks        17,591                                      21,275
   Premises and equipment,
net                               14,003                                      15,320
   Accrued interest
receivable                         2,472                                       3,101
   Other real estate owned        31,208                                       7,576
   Other assets                   50,274                                      45,715
     Total average assets      $ 744,903                                   $ 771,355