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 September 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 nine-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
                                                        9/30/09          12/31/08           9/30/08
Loans and Leases                                             85.35 %           84.23 %           84.15 %
Investment securities available for sale                     13.57 %           14.30 %           14.69 %
Interest-bearing deposits in other banks                      1.08 %            1.39 %            1.05 %
Federal funds sold                                            0.00 %            0.08 %            0.11 %
Total earning assets                                        100.00 %          100.00 %          100.00 %

NOW accounts                                                  8.55 %            7.92 %            8.04 %
Money market accounts                                        21.32 %           22.89 %           23.47 %
Savings accounts                                              6.86 %            7.50 %            7.62 %
Time deposits                                                38.03 %           42.51 %           45.74 %
Other borrowings                                             22.97 %           16.84 %           12.78 %
Subordinated debentures                                       2.27 %            2.34 %            2.35 %
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 four quarters with increased levels of nonperforming assets, increased expenses related to foreclosed properties, and decreased profit margins. Although the Company continues its business development and expansion efforts throughout its market area, increased attention has been placed on reducing nonperforming assets and providing customers more options to help work through this difficult economic period.

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 compressed net interest margins. The Company's net interest margin was 4.46% for the nine months ended September 30, 2009, as compared to 4.36% for the year ended December 31, 2008, and 4.47% for the nine months ended September 30, 2008. With approximately 64% of the loan portfolio in floating rate instruments at September 30, 2009, the effects of low market rates continue to impact loan yields. Loans yielded 5.78% during the nine months ended September 30, 2009, as compared to 6.81% for the year ended December 31, 2008, and 7.10% for the nine months ended September 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 nine months ended September 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 1.47% for the nine months ended September 30, 2009 as compared to 2.75% for the year ended December 31, 2008, and 2.95% for the nine months ended September 30, 2008.

Total noninterest income of $3.4 million reported for the nine months ended September 30, 2009 decreased $2.2 million or 39.1% as compared to the nine months ended September 30, 2008, resulting in declines in all noninterest income categories between the two nine-month periods. Noninterest income continues to be driven by customer service fees, which totaled $3.0 million for the nine months ended September 30, 2009, representing a decrease of $595,000 or 16.7% over the $3.6 million in customer service fees reported for the nine months ended September 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 86.1% and 63.0% of total noninterest income for the nine-month periods ended September 30, 2009 and 2008, respectively.

Noninterest expense increased approximately $4.5 million or 26.5% between the nine-month periods ended September 30, 2008 and September 30, 2009. The primary reason for the increase in noninterest expense experienced during the first nine months of 2009 was the result of a goodwill impairment loss totaling $3.0 million recognized during the second quarter of 2009. While impairment losses on the Company's core deposit intangible assets decreased $567,000 between the nine-month periods ended September 30, 2008 and 2009, the Company took impairment charges of $866,000 during the first nine months of 2009 on real estate owned through foreclosure, and $720,000 on investment securities. Salary expense decreased $1.8 million or 21.9% between the nine months ended September 30, 2008 and September 30, 2009, primarily as the result of declines in accrued bonuses and employee incentives between the two periods.

Effective September 30, 2009 and beginning with the quarterly interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's $15.0 million of junior subordinated debentures relating to its trust preferred securities. This is the result of regulatory restraints which have precluded the Bank from paying dividends to the Holding Company. The terms of the debentures and trust indentures allow for the Company to defer interest payments for up to 20 consecutive quarters without default or penalty. During the period that the interest deferrals are elected, the Company will continue to record interest expense associated with the debentures. Upon the expiration of the deferral period, all accrued and unpaid interest will be due and payable. Under the terms of the debenture, the Company is precluded from paying cash dividends to shareholders or repurchasing its stock during the deferral period.

The Company has not paid any cash dividends on its common stock since the second quarter of 2008 and does not expect to resume common stock dividends for the foreseeable future. Because the Company has elected to defer the quarterly payments of interest on its junior subordinated debentures issued in connection with the trust preferred securities as discussed above, the Company is prohibited from paying cash dividends on its common stock during the deferral period. On September 22, 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 October 9, 2009, an additional should be 122,476 shares were issued to shareholders on October 21, 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 nine months ended September 30, 2009. Total assets decreased approximately $39.3 million during the nine months ended September 30, 2009, with a decrease of $29.9 million in interest-bearing deposits in other banks and investment securities as the Company decreased its borrowing exposure during 2009. Declines of approximately $10.4 million in loans during the nine months ended September 30, 2009 are due in large part to loan charge-offs or transfers to other real estate owned through foreclosure. Average loans comprised approximately 85% of overall average earning assets during the nine months ended September 30, 2009.

Nonperforming assets, which are primarily related to the real estate portfolio, remained high during the nine months ended September 30, 2009 as real estate markets continue to suffer from the mortgage crisis which began during mid-2007. Nonaccrual loans increased $9.5 million from the balance reported at December 31, 2008, and increased $5.5 million from the balance reported at September 30, 2008, to a balance of $55.2 million at September 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 $21.1 million during the nine months ended September 30, 2009 to a balance of $70.1 million at September 30, 2009, and increased $2.9 million during the quarter ended September 30, 2009. Other real estate owned through foreclosure increased $4.7 million between December 31, 2008 and September 30, 2009, as sales of existing OREO properties were more than offset by the transfer of the $16.4 million in loans to other real estate owned during the nine months ended September 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 14.79% at September 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. Greater focus has been placed on identifying and reducing the level of problem assets, while working with borrowers to find more options, including loan restructures, to work through these difficult economic times. Increased charge-offs and significant provisions for loan losses made during the first nine months 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, $6.8 million during the second quarter of 2009, and $435,000 made during the third quarter of 2009, provided a level in the allowance for loan losses that is deemed adequate to cover inherent losses in the loan portfolio. Loan and lease charge-offs totaling $6.0 million during the nine months ended September 30, 2009 included $2.6 million during the quarter ended March 31, 2009, $1.5 million during the quarter ended June 30, 2009, and an additional $1.9 million during the quarter ended September 30, 2009.

Deposits increased by $63.6 million during the nine months ended September 30, 2009, with increases experienced in both interest-bearing checking accounts and time deposits. Increases in time deposits experienced during the quarter ended September 30, 2009 were the result of a plan to reduce the Company's reliance on borrowed funds.

Although balances have declined during the most recent quarter, the Company continues to utilize overnight borrowings and other term credit lines, with borrowings totaling $54.4 million at September 30, 2009 as compared to $135.3 million at June 30, 2009, and $155.0 million at December 31, 2008. The average rate of those term borrowings was 0.95% at September 30, 2009, as compared to 0.60% at June 30, 2009, and 0.93% at December 31, 2008. 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 nine months of 2009. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 1.60% at September 30, 2009, representing a rate reduction of 31 basis points between June 30, 2009 and September 30, 2009, and a rate reduction of 116 basis points between December 31, 2008 and September 30, 2009. Pursuant to fair value accounting guidance, the Company has recorded $290,000 in pretax fair value gains ($171,000 net of tax) on its junior subordinated debt during the nine months ended September 30, 2009, bringing the total cumulative gain recorded on the debt to $4.0 million at September 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 nine months ended September 30, 2009, the Company reported a net loss of $4.1 million or $0.33 per share ($0.33 diluted) as compared to net income of $3.2 million or $0.26 per share ($0.26 diluted) for the nine months ended September 30, 2008. The decline in earnings between the two nine month periods ended September 30, 2008 and 2009 is primarily the result of significant increases in provisions for loan losses and impairment losses taken during 2009, combined with declines in market rates of interest.

For the quarter ended September 30, 2009, the Company reported net income of $693,000 or $0.06 per share ($0.06 diluted) as compared to a net loss of $1.3 million or $0.11 per share ($0.11 diluted) for the quarter months ended September 30, 2008. The increase in earnings between the quarters ended September 30, 2008 and 2009 is primarily the result of large provisions for loan losses taken during the quarter third quarter of 2008, which were not as large during the third quarter of 2009.

The Company's return on average assets was (0.74%) for the nine months ended September 30, 2009 as compared to 0.56% for the nine months ended September 30, 2008, and was 0.38% for the quarter ended September 30, 2009 as compared to (0.68%) for the quarter ended September 30, 2008. The Bank's return on average equity was (6.95%) for the nine months ended September 30, 2009 as compared to 5.18% for the same nine-month period of 2008, and was 3.63% for the quarter ended September 30, 2009 as compared to (6.48%) for the quarter ended September 30, 2008.

Net Interest Income

Net interest income before provision for credit losses totaled $21.1 million for the nine months ended September 30, 2009, representing a decrease of $2.0 million, or 8.8% when compared to the $23.1 million reported for the same nine months of the previous year. Net interest income before provision for credit losses totaled $7.2 million for the quarter ended September 30, 2009, representing a decrease of $268,000, or 3.6% when compared to the $7.4 million reported for the third quarter of 2008. 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 Company's net interest margin, as shown in Table 1, decreased to 4.46% at September 30, 2009 from 4.47% at September 30, 2008, a decrease of only 1 basis point (100 basis points = 1%) between the two periods. For the comparative quarters ended September 30, 2009 and 2008, the net interest margin decreased to 4.59% for the quarter ended September 30, 2009 from 4.64% reported for the quarter ended September 30, 2008. Average market rates of interest have decreased significantly between the nine-month periods ended September 30, 2008 and 2009. The prime rate averaged 3.25% for the nine months ended September 30, 2009 as compared to 5.43% for the comparative nine months of 2008.