Edgar Filing: First California Financial Group, Inc.

fcal-10q_0805.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

FORM 10-Q

___________________

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

For the quarterly period ended June 30, 2010

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

For the transition period from ___________ to ___________

Commission file number 000-52498

___________________

FIRST CALIFORNIA FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

___________________

Delaware	38-3737811
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

3027 Townsgate Road, Suite 300 Westlake Village, California	91361
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (805) 322-9655

___________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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


Large accelerated filer	¨	Accelerated filer	¨

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

28,174,076 shares of Common Stock, $0.01 par value, as of August 4, 2010

FIRST CALIFORNIA FINANCIAL GROUP, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended June 30, 2010

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4T	Controls and Procedures	45

PART II—OTHER INFORMATION

Item 1	Legal Proceedings	46

Item 1A	Risk Factors	46

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3	Defaults Upon Senior Securities	47

Item 4	Other Information	47

Item 5	Exhibits	47

SIGNATURES		48

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(in thousands, except share and per share data)	June 30, 2010			December 31, 2009
Cash and due from banks	$	33,618		$	26,757
Interest bearing deposits with other banks		97,899			19,737
Securities available-for-sale, at fair value		286,100			349,645
Loans, net		875,089			922,741
Premises and equipment, net		19,729			20,286
Goodwill		60,720			60,720
Other intangibles, net		10,748			11,581
Deferred tax assets, net		3,811			6,046
Cash surrender value of life insurance		12,012			11,791
Foreclosed property		27,850			4,893
Accrued interest receivable and other assets		25,423			25,624

Total assets	$	1,452,999		$	1,459,821

Non-interest checking	$	341,103		$	317,610
Interest checking		79,796			82,806
Money market and savings		363,996			339,750
Certificates of deposit, under $100,000		75,470			116,012
Certificates of deposit, $100,000 and over		232,092			268,537

Total deposits		1,092,457			1,124,715
Securities sold under agreements to repurchase		45,000			45,000
Federal Home Loan Bank advances		83,750			98,500
Junior subordinated debentures		26,779			26,753
Accrued interest payable and other liabilities		6,629			7,627

Total liabilities		1,254,615			1,302,595

Perpetual preferred stock; authorized 2,500,000 shares
Series A - $0.01 par value, 1,000 shares issued and outstanding as of June 30, 2010 and December 31, 2009		1,000			1,000
Series B - $0.01 par value, 25,000 shares issued and outstanding as of June 30, 2010 and December 31, 2009		23,399			23,170
Common stock, $0.01 par value; authorized 100,000,000 shares; 28,521,965 shares issued at June 30, 2010 and 11,969,294 shares issued at December 31, 2009; 28,175,564 and 11,622,893 shares outstanding at June 30, 2010 and December 31, 2009		283			118
Additional paid-in capital		174,909			136,635
Treasury stock, 346,401 shares at cost at June 30, 2010 and at December 31, 2009		(3,061	)		(3,061	)
Retained earnings		4,719			5,309
Accumulated other comprehensive loss		(2,865	)		(5,945	)

Total shareholders’ equity		198,384			157,226

Total liabilities and shareholders’ equity	$	1,452,999		$	1,459,821

See accompanying notes to consolidated financial statements.

FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (unaudited)

	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2010			2009			2010			2009
Interest and fees on loans	$	12,819		$	13,386		$	25,806		$	25,813
Interest on securities		1,508			3,431			3,097			7,028
Interest on federal funds sold and interest bearing deposits		59			235			79			290

Total interest income		14,386			17,052			28,982			33,131

Interest on deposits		1,884			3,214			4,056			6,581
Interest on borrowings		1,257			1,502			2,569			3,057
Interest on junior subordinated debentures		439			439			878			926

Total interest expense		3,580			5,155			7,503			10,564


Net interest income before provision for loan losses		10,806			11,897			21,479			22,567
Provision for loan losses		1,766			1,110			3,520			6,179

Net interest income after provision for loan losses		9,040			10,787			17,959			16,388

Service charges on deposit accounts and other banking-related fees		973			1,038			1,903			2,088
Loan sales and commissions		—			44			16			53
Net gain on sale of securities		130			2,000			262			2,671
Impairment loss on securities		—			(565	)		(18	)		(565	)
Gain on transfer of foreclosed property		691			—			691			—
Earnings on cash surrender value of life insurance		109			109			220			216
Other income		51			113			73			191

Total noninterest income		1,954			2,739			3,147			4,654

Salaries and employee benefits		4,889			5,363			9,859			11,021
Premises and equipment		1,517			1,780			3,054			3,313
Data processing		597			479			1,192			950
Legal, audit and other professional services		590			597			772			1,217
Printing, stationery and supplies		113			211			125			403
Telephone		213			264			437			527
Directors’ expense		113			141			233			256
Advertising, marketing and business development		286			443			513			899
Postage		47			96			103			151
Insurance and regulatory assessments		780			1,346			1,580			1,655
Loss on and expense of foreclosed property		468			249			546			249
Amortization of intangible assets		417			417			833			793
Market loss on loans held-for-sale		—			709			—			709
Other expenses		721			781			1,420			1,510

Total noninterest expense		10,751			12,876			20,667			23,653

Income (loss) before provision for income taxes		243			650			439			(2,611	)
Provision (benefit) for income taxes		96			433			175			(950	)

Net income (loss)		147			217			264			(1,661	)
Preferred stock dividends		(313	)		(313	)		(626	)		(507	)
Net loss available to common shareholders	$	(166	)	$	(96	)	$	(362	)	$	(2,168	)

Loss per common share:
Basic	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.19	)
Diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.19	)

See accompanying notes to consolidated financial statements.

FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended June 30,
(in thousands)	2010			2009
Net income (loss)	$	264		$	(1,661	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Provision for loan losses		3,520			6,179
Stock-based compensation costs		348			531
Gain on sales of securities		(262	)		(2,671	)
Loss (gain) on sale and transfer of foreclosed property		(695	)		15
Market loss on loans held-for-sale		—			709
Impairment loss on securities		18			565
Amortization of net premiums on securities available-for-sale		1,683			244
Depreciation and amortization of premises and equipment		938			883
Amortization of core deposit and trade name intangibles		833			793
Loss on disposal of premises and equipment		50			—
Proceeds from sale of, and payments received from, loans held-for-sale		—			181
Increase in cash surrender value of life insurance		(221	)		(216	)
(Increase) decrease in deferred tax assets		2,235			(436	)
Increase in accrued interest receivable and other assets, net of effects of acquisition		(125)			(2,968	)
Increase (decrease) in accrued interest payable and other liabilities, net of effects of acquisition		(998	)		1,456

Net cash provided by operating activities		7,588			3,604

Purchases of securities available-for-sale, net of effects of acquisition		(75,334	)		(51,775	)
Proceeds from repayments and maturities of securities available-for-sale		62,587			30,021
Proceeds from sales of securities available-for-sale		79,917			71,094
Purchases of Federal Home Loan Bank and other stock		(6	)		(49)
Redemption of Federal Home Loan Bank stock		313			—
Net change in federal funds sold and interest bearing deposits, net of effects from acquisition		(78,162	)		52,075
Loan originations and principal collections, net of effects of acquisition		17,814			(28,868	)
Purchases of premises and equipment, net of effects of acquisition		(375	)		(787	)
Proceeds from sale of foreclosed property		1,210			251
Net cash paid in acquisition		—			(48,790	)

Net cash provided by investing activities		7,964			23,172

Net increase in noninterest-bearing deposits, net of effects of acquisition		23,494			9,350
Net decrease in interest-bearing deposits, net of effects of acquisition		(55,752	)		(1,080)
Net decrease in FHLB advances and other borrowings		(14,724	)		(10,724	)
Dividends paid on preferred stock		(625	)		(507	)
Proceeds from issuance of common stock		38,916			—
Proceeds from exercise of stock options		—			8

Net cash used by financing activities		(8,691	)		(2,953)

Change in cash and due from banks		6,861			23,823
Cash and due from banks, beginning of period		26,757			13,712

Cash and due from banks, end of period	$	33,618		$	37,535


Supplemental cash flow information:
Cash paid for interest	$	7,287		$	10,620
Cash paid for income taxes	$	1,000		$	1,666
Supplemental disclosure of noncash items:
Net change in fair value of securities available-for-sale, net of tax	$	3,352		$	4,559
Net change in fair value of cash flow hedges, net of tax	$	(86	)	$	—
Loans transferred to foreclosed property	$	24,398		$	6,767
Transfer of loans held-for-sale to loans	$	—		$	31,221

See accompanying notes to consolidated financial statements.

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organization and nature of operations – First California Financial Group, Inc., or First California, or the Company, is a bank holding company incorporated under the laws of the State of Delaware and headquartered in Westlake Village, California. The principal asset of the Company is the capital stock of First California Bank, or the Bank. The Bank is a full-service commercial bank headquartered in Westlake Village, California, chartered under the laws of the State of California and subject to supervision by the California Department of Financial Institutions and the Federal Deposit Insurance Corporation, or the FDIC. The FDIC insures the Bank’s deposits up to the maximum legal limit.

On January 23, 2009, the Bank assumed the insured, non-brokered deposits of 1st Centennial Bank, totaling approximately $270 million from the FDIC. The Bank also purchased from the FDIC approximately $178 million in cash and cash equivalents, $89 million in securities and $101 million in loans related to 1st Centennial Bank. The assumption of deposits and purchase of assets from the FDIC, or the FDIC-assisted 1st Centennial Bank transaction, was an all-cash transaction with an aggregate transaction value of $48.8 million. The Bank recorded $10.6 million in goodwill in connection with this transaction. All six of the former 1st Centennial Bank branches have been fully integrated into the Bank’s full-service branch network.

The Bank serves the comprehensive financial needs of businesses and consumers in Los Angeles, Orange, Riverside, San Diego, San Bernardino and Ventura counties through 17 full-service branch locations.

Consolidation – The accompanying condensed consolidated financial statements include, in conformity with generally accepted accounting principles in the United States of America, the accounts of the Company, the Bank, Wendy Road Office Development LLC, a subsidiary of the Bank which manages and disposes of real estate, and SC Financial, an inactive subsidiary of First California. The Company does not consolidate the accounts of FCB Statutory Trust I and First California Statutory Trust I, or the Trusts, in the consolidated financial statements. The Company does include however the junior subordinated debentures issued by the Company to the Trusts on the consolidated balance sheets. Results of operations for the six months ended June 30, 2009 include the effects of the FDIC-assisted 1st Centennial Bank transaction from the date of the acquisition. All material intercompany transactions have been eliminated.

Basis of presentation – The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnote disclosures normally required by generally accepted accounting principles for complete financial statements. In our opinion, all normal recurring adjustments necessary for a fair presentation are reflected in the unaudited condensed consolidated financial statements. Operating results for the period ended June 30, 2010 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2010. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K.

Reclassifications – Certain reclassifications have been made to the 2009 consolidated financial statements to conform to the current year presentation.

Management’s estimates and assumptions – The preparation of the consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Significant estimations made by management primarily involve the calculation of the allowance for loan losses, the carrying amount of deferred tax assets, the assessments for impairment related to goodwill and securities, the estimated fair value of financial instruments and the effectiveness of derivative instruments in offsetting changes in fair value or cash flows of hedged items.

Allowance for loan losses – The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectability of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquent and nonaccrual loans, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national levels, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior sixteen quarters. Individual loans are also evaluated for impairment and if a portion of a loan is impaired, the impaired amount is charged-off or a specific reserve is allocated for that loan. Various regulatory agencies, as a regular part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations. The allowance for loan losses was $16.5 million at both June 30, 2010 and December 31, 2009.

Deferred income taxes – Deferred income tax assets and liabilities represent the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance for deferred tax assets. There was no valuation allowance at June 30, 2010 or December 31, 2009. There were net deferred tax assets of $3.8 million at June 30, 2010 and $6.0 million at December 31, 2009.

Derivative instruments and hedging – The Company assesses the effectiveness of derivative instruments designated in cash flow hedging relationships in off-setting changes in the overall cash flows of designated hedged transactions on a quarterly basis. To the extent these instruments are not effective, the unrealized gains or losses on these instruments are reflected directly in current period earnings. In December 2009, the Company purchased a $10.3 million notional forward-starting interest rate cap to limit the variable interest rate payments on the Company’s $10.3 million junior subordinated debentures. The first and second quarter 2010 and fourth quarter 2009 effectiveness assessments indicated that this instrument was effective for those periods.

Assessments of impairment – Goodwill is assessed for impairment on an annual basis or at interim periods if an event occurs or circumstances change which may indicate a change in the implied fair value of the goodwill. The implied fair value of goodwill is estimated by comparing the estimated fair value of the Company to the estimated fair value of the Company’s individual assets, liabilities, and identifiable intangible assets. Impairment exists when the carrying amount of goodwill exceeds this implied fair value. First California uses independent data where possible in determining the fair value of the Company and in determining appropriate market factors used in the fair value calculations. At December 31, 2009, the annual assessment resulted in the conclusion that goodwill was not impaired. At June 30, 2010, an interim assessment was not performed as 2010 year-to-date results were not materially different than the estimates used in the year-end assessment.

An impairment assessment is performed quarterly on the securities available-for-sale portfolio in accordance with Financial Accounting Standards Board, or FASB, accounting standards codification guidance related to the consideration of impairment related to certain debt and equity securities. All of the securities classified as available-for-sale are debt securities.

If the Company does not intend to sell, and it is more likely than not that the Company is not required to sell, a debt security before recovery of its cost basis, other-than-temporary impairment is separated into (a) the amount representing credit loss and (b) the amount related to other factors. The amount of the other-than-temporary impairment related to credit loss is recognized in earnings and other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). Other-than-temporary declines in fair value are assessed based on the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the long-term financial outlook of the issuer, the expected future cash flows from the security and the Company’s ability and intent to hold the security until the fair value recovers. Please see the “Securities” section of Management’s Discussion and Analysis in this document for a detailed explanation of the impairment analysis process. The Company will continue to evaluate the securities portfolio for other-than-temporary impairment at each reporting date and can provide no assurance there will not be an other-than-temporary impairment in future periods.

For 2009, other-than-temporary impairment related to the credit loss on three debt securities and recognized in earnings was $1.1 million. In addition, an impairment of $0.4 million on a $1.0 million community development-related equity investment was recognized in earnings in 2009. There was an additional impairment of $18,000 recognized in the six months ended June 30, 2010 related to the community development-related equity investment.

NOTE 2 – RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS

Improving Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the FASB issued guidance requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. As a result of this guidance, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This guidance will only result in increased financial statement disclosures and will not have an impact on the Company’s results of operations, financial condition, or cash flows.

Effect of a Loan Modification When the Loan is part of a Pool that is Accounted for as a Single Asset. In April 2010, the FASB issued guidance to account for the modification of a loan which is part of an acquired pool that is accounted for as a single asset. This new guidance clarifies that modifications of acquired loans do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The guidance also allows an entity to make a one-time election to prospectively terminate accounting for loans as a pool. An entity shall apply this election on a pool-by-pool basis. In addition, this election does not preclude an entity from accounting for future loan acquisitions as a pooled unit. The new guidance is to be applied prospectively for any modification of a loan (or loans) accounted for within a pool occurring in the first interim or annual period ending on or after July 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on the Company’s results of operations, financial condition, or cash flows.

Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements. In January 2010, the FASB issued amended guidance for fair value measurement disclosures. The update requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Furthermore, this update requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. The Company adopted this guidance effective January 1, 2010, which resulted in increased financial statement disclosures and did not have any impact on the Company’s financial condition, results of operations, or cash flows.

Accounting for Consolidation of Variable Interest Entities. In June 2009, the FASB issued guidance for amending certain requirements of consolidation of variable interest entities, or VIEs. This guidance is to improve financial reporting by enterprises involved with VIEs and to provide more relevant and reliable information to users of financial statements. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company evaluated its investments in VIEs held as of January 1, 2010, and determined that consolidation accounting is not required under the new accounting guidance. Therefore, the adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

Accounting for Transfers of Financial Assets. In June 2009, the FASB issued guidance intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company adopted this guidance as of January 1, 2010, and the adoption did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

NOTE 3 – ACQUISITION

On January 23, 2009, or the Transaction Date, the Bank assumed the insured, non-brokered deposits of 1st Centennial Bank from the FDIC, acting in its capacity as receiver of 1st Centennial Bank. Under the terms of the purchase and assumption agreement between the Bank and the FDIC, the Bank also purchased certain assets from the FDIC at the close of the transaction. The Bank paid cash consideration of $48.8 million to the FDIC for the assets acquired and liabilities assumed. The Bank continues to operate the former 1st Centennial Bank’s six branch locations as part of the Bank’s seventeen branch locations. The Company desired this transaction to enter into new markets and to assume a diversified deposit portfolio with a large percentage of stable core deposits.

Under the acquisition method of accounting, the Bank recorded the assets acquired and liabilities assumed based on their estimated fair values as of the Transaction Date. Results of operations for the six months ended June 30, 2009 include the effects of the assumption of deposits and purchase of assets from the FDIC from the Transaction Date. The excess of the purchase price over the estimated fair values of the underlying assets acquired, the identified intangible assets, and liabilities assumed was allocated to goodwill. Goodwill represents intangible assets that do not qualify for separate recognition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the Transaction Date.

(Dollars in thousands)
Assets Acquired:
Federal Funds sold	$	113,090
Securities		88,969
Loans		101,217
Goodwill		10,606
Core deposit intangible		4,755
Other assets		1,365

Total assets acquired		320,002


Liabilities Assumed:
Deposits		269,688
Other liabilities		1,524

Total liabilities assumed		271,212

Total cash consideration paid to FDIC	$	48,790

The Bank based the allocation of the purchase price above on the fair values of the assets acquired and the liabilities assumed. All of the resulting goodwill is expected to be deductible for tax purposes.

The following information presents the pro forma results of operations for the six months ended June 30, 2009, as though the transaction had occurred on January 1, 2009. The pro forma data was derived by combining the historical consolidated financial information of First California and the results of operations from the assets purchased and liabilities assumed from the FDIC using the acquisition method of accounting for business combinations. The pro forma results do not necessarily indicate results that would have been obtained had the transaction actually occurred on January 1, 2009 or the results that may be achieved in the future.

(in thousands, except per share data)	Pro forma Six months ended June 30, 2009
Net interest income	$	23,173
Noninterest income		4,741
Noninterest expense		23,875
Provision for loan losses		6,179

Loss before provision for income taxes		(2,140	)
Income tax benefit		779

Net loss	$	(1,361	)

Pro forma loss per common share:
Basic	$	(0.16	)
Diluted	$	(0.16	)
Pro forma weighted average shares:
Basic		11,528
Diluted		11,528

NOTE 4 – SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of securities available-for-sale at June 30, 2010 and December 31, 2009 are summarized as follows:

	June 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Treasury notes/bills	$	45,863	$	66	$	—		$	45,929
U.S. government agency notes		92,410		345		(20	)		92,735
U.S. government agency mortgage-backed securities		54,099		1,209		—			55,308
U.S. government agency collateralized mortgage obligations		57,991		595		(63	)		58,523
Private label collateralized mortgage obligations		29,490		36		(4,830	)		24,696
Municipal securities		5,933		31		(52	)		5,912
Other domestic debt securities		4,801		—		(1,804	)		2,997

Securities available-for-sale	$	290,587	$	2,282	$	(6,769	)	$	286,100

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Treasury notes/bills	$	142,617	$	114	$	(71	)	$	142,660
U.S. government agency notes		77,097		170		(102	)		77,165
U.S. government agency mortgage-backed securities		47,034		280		(467	)		46,847
U.S. government agency collateralized mortgage obligations		47,028		68		(156	)		46,940
Private label collateralized mortgage obligations		32,984		17		(7,456	)		25,545
Municipal securities		7,985		98		(55	)		8,028
Other domestic debt securities		4,848		—		(2,388	)		2,460

Securities available-for-sale	$	359,593	$	747	$	(10,695	)	$	349,645

As of June 30, 2010, securities available-for-sale with a fair value of $70.0 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

The following table shows the gross unrealized losses and amortized cost of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2010 and December 31, 2009. This table excludes the three securities with other-than-temporary impairments at June 30, 2010 and December 31, 2009.

	At June 30, 2010
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	—	$	—		$	—	$	—		$	—	$	—
U.S. government agency notes		17,526		(20	)		—		—			17,526		(20	)
U.S. government agency mortgage-backed securities		—		—			—		—			—		—
U.S. government agency collateralized mortgage obligations		11,214		(63	)		—		—			11,214		(63	)
Private-label collateralized mortgage obligations		—		—			14,975		(2,045	)		14,975		(2,045	)
Municipal securities		3,882		(50	)		172		(2	)		4,054		(52	)
Other domestic debt securities		—		—			4,801		(1,804	)		4,801		(1,804	)

	$	32,622	$	(133	)	$	19,948	$	(3,851	)	$	52,570	$	(3,984	)

	At December 31, 2009
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	55,962	$	(71	)	$	—	$	—		$	55,962	$	(71	)
U.S. government agency notes		17,613		(102	)		—		—			17,613		(102	)
U.S. government agency mortgage-backed securities		38,349		(467	)		—		—			38,349		(467	)
U.S. government agency collateralized mortgage obligations		19,113		(156	)		—		—			19,113		(156	)
Private-label collateralized mortgage obligations		—		—			17,424		(4,147	)		17,424		(4,147	)
Municipal securities		4,399		(53	)		172		(2	)		4,571		(55	)
Other domestic debt securities		—		—			4,848		(2,388	)		4,848		(2,388	)

	$	135,436	$	(849	)	$	22,444	$	(6,537	)	$	157,880	$	(7,386	)

An impairment analysis on our debt and equity securities is performed each quarter by the Company. When the Company does not intend to sell, and it is more-likely-than-not that the Company is not required to sell, a debt security before recovery of its cost basis, the Company separates other-than-temporary impairment into (a) the amount representing credit loss and (b) the amount related to other factors. The Company recognizes in earnings the amount of other-than-temporary impairment related to credit loss. The Company recognizes in other comprehensive income the amount of other-than-temporary impairment related to other factors. The Company’s assessment of other-than-temporary declines in fair value considers the duration the debt security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the debt security, and the long-term financial outlook of the issuer. In addition, the Company considers the expected future cash flows of the debt security and our ability and intent on holding the debt security until the fair values recover. For 2009, other-than-temporary impairment related to the credit loss on three debt securities and recognized in earnings was $1.1 million. In addition, the Company recognized an impairment of $0.4 million on a $1.0 million community development-related equity investment. There was an additional impairment of $18,000 recognized in the six months ended June 30, 2010 related to the community development-related equity investment.

The Company will continue to evaluate the securities portfolio for other-than-temporary impairment at each reporting date and can provide no assurance there will not be further other-than-temporary impairments in future periods.

The following table presents the other-than-temporary impairment activity related to credit loss, which is recognized in earnings, and the other-than-temporary impairment activity related to all other factors, which are recognized in other comprehensive income.

	Six Months Ended June 30, 2010
(in thousands)	Impairment Related to Credit Loss		Impairment Related to Other Factors		Total Impairment
Recognized as of beginning of period	$	1,115	$	—	$	1,115
Charges on securities for which OTTI was previously recognized		—		—		—

Recognized as of end of period	$	1,115	$	—	$	1,115

The amortized cost and estimated fair value of securities by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	At June 30, 2010
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	74,414	$	74,524
Due after one year through five years		60,407		60,672
Due after five years through ten years		17,197		17,187
Due after ten years		138,569		133,717

Total	$	290,587	$	286,100

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The loan portfolio by type consists of the following:

(in thousands)	At June 30, 2010			At December 31, 2009
Commercial mortgage	$	389,077		$	381,334
Commercial loans and lines of credit		209,684			235,849
Multifamily mortgage		137,870			138,548
Construction and land development		59,914			86,609
Home mortgage		51,253			51,036
Home equity loans and lines of credit		38,309			40,122
Installment and credit card		5,434			5,748

Total loans		891,541			939,246
Allowance for loan losses		(16,452	)		(16,505	)

Loans, net	$	875,089		$	922,741

At June 30, 2010, loans with a balance of $534.1 million were pledged as security for Federal Home Loan Bank, or FHLB, advances. Loan balances include net deferred fees of $1.2 million and $1.5 million at June 30, 2010 and December 31, 2009, respectively.

Most of the Company’s lending activity is with customers located in the six Southern California counties where our branches are located. The Company has no significant credit exposure to any individual customer; however, the economic condition in Southern California could adversely affect customers. A significant portion of our loans are collateralized by real estate. Changes in the economic condition in Southern California could adversely affect the value of real estate.

Changes in the allowance for loan losses were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning balance	$	15,598		$	11,275		$	16,505		$	8,048
Provision for loan losses		1,766			1,110			3,520			6,179
Loans charged-off		(1,111	)		(664	)		(3,844	)		(2,511	)
Recoveries on loans charged-off		199			234			271			239

Ending balance	$	16,452		$	11,955		$	16,452		$	11,955


Allowance to gross loans		1.85	%		1.27	%		1.85	%		1.27	%

Past due loans and foreclosed assets consist of the following:

(dollars in thousands)	At June 30, 2010		At December 31, 2009
Accruing loans past due 30 - 89 days	$	1,078	$	14,592
Accruing loans past due 90 days or more	$	—	$	200
Nonaccrual loans	$	13,192	$	39,958
Foreclosed assets	$	27,850	$	4,893

There were $13.2 million and $27.0 million of nonaccrual loans at June 30, 2010 and June 30, 2009, respectively. Had these loans performed according to their original terms, additional interest income of approximately $541,000 and $487,000 would have been recognized in the three months ended June 30, 2010 and 2009, respectively. Had these loans performed according to their original terms, additional interest income of approximately $1,106,000 and $642,000 would have been recognized in the six months ended June 30, 2010 and 2009, respectively.

We had ten restructured loans for $4.2 million at June 30, 2010. Two loans for $1.9 million are reported as current at June 30, 2010. Eight loans for $2.3 million are reported as nonaccrual loans at June 30, 2010. We had one $0.6 million restructured loan which was reported as a nonaccrual loan at December 31, 2009.

The Company considers a loan to be impaired when, based on current information and events, the Company does not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments. Due to the size and nature of the loan portfolio, impaired loans are determined by periodic evaluation on an individual loan basis. The average balance of impaired loans was $34.0 million for the six months ended June 30, 2010 and $32.1 million for the six months ended June 30, 2009. Impaired loans were $14.4 million at June 30, 2010 and $40.0 million at December 31, 2009. Loan loss allowances for individually impaired loans are computed in accordance with FASB accounting standards related to accounting by creditors for impairment of a loan and are based on either the estimated collateral value less estimated selling costs (if the loan is a collateral-dependent loan), or the present value of expected future cash flows discounted at the loan’s effective interest rate. Of the $14.4 million of impaired loans at June 30, 2010, $3.1 million had specific allowances of $1.8 million. Of the $40.0 million of impaired loans at December 31, 2009, $3.5 million had specific allowances of $2.7 million.

NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $60.7 million at June 30, 2010 and at December 31, 2009. No impairment loss was recognized for the periods ended June 30, 2010 and June 30, 2009.

Core deposit intangibles, net of accumulated amortization, were $8.1 million at June 30, 2010 and $8.7 million at December 31, 2009. Amortization expense for the three months ended June 30, 2010 and 2009 was $317,000 in each period. Amortization expense for the six months ended June 30, 2010 and 2009 was $633,000 and $593,000, respectively.

Trade name intangible, net of accumulated amortization, was $2.7 million at June 30, 2010 and $2.9 million at December 31, 2009. Amortization expense for the three months ended June 30, 2010 and 2009 was $100,000 in each period. Amortization expense for the six months ended June 30, 2010 and 2009 was $200,000 in each period.

NOTE 7 — DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable-rate loan assets and borrowings. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated in qualifying hedging relationships.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of June 30, 2010 and December 31, 2009.

	Tabular Disclosure of Fair Values of Derivative Instruments
	Asset Derivatives						Liability Derivatives
	As of June 30, 2010			As of December 31, 2009			As of June 30, 2010			As of December 31, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Products	Other Assets	$	47,141	Other Assets	$	194,680	Other Liabilities	$	—	Other Liabilities	$	—

Total derivatives designated as hedging instruments		$	47,141		$	194,680		$	—		$	—

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate loan assets, interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable payments over the life of the agreements without exchange of the underlying notional amount. For hedges of the Company’s variable-rate borrowings, interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of June 30, 2010, and December 31, 2009, the Company had one interest rate cap with a notional amount of $10.3 million that was designated as a cash flow hedge associated with the Company’s variable-rate borrowings. The cap is forward-starting and will become effective December 15, 2010.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2010, such derivatives were used to hedge the forecasted variable cash outflows associated with subordinated debt related to trust preferred securities. No hedge ineffectiveness was recognized during the three and six months ended June 30, 2010. The Company did not have any outstanding derivatives during the three and six months ended June 30, 2009.

Amounts reported in Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that an additional $7,560 will be reclassified as an addition to interest expense.

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the statements of operations for the three and six months ended June 30, 2010.

	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Location of Gain or (Loss) Recognized in	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended June 30, 2010			Six Months Ended June 30, 2010			OCI into Income (Effective Portion)	Three Months Ended June 30, 2010		Six Months Ended June 30, 2010		Income on Derivative (Ineffective Portion)	Three Months Ended June 30, 2010		Six Months Ended June 30, 2010

Interest Rate Products	$	(34,468	)	$	(85,550	)	Interest income	$	-	$	-	Other non-interest income	$	-	$	-


Total	$	(34,468	)	$	(85,550	)		$	-	$	-		$	-	$	-

Credit-risk-related Contingent Features

The terms of the one outstanding interest rate cap at June 30, 2010 does not contain any credit-risk-related contingent features. Therefore, consideration of the counterparty’s credit risk is not applicable.

The Company has no derivatives payable, so consideration of the Company’s own credit risk is not applicable.

NOTE 8 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if common shares were issued pursuant to the exercise of common stock options under the Company’s stock option plans and if common shares were issued from the conversion of the convertible preferred stock.

The following table illustrates the computations of basic and diluted EPS for the periods indicated:

	Three months ended June 30,												Six months ended June 30,
	2010						2009						2010						2009
(in thousands, except per share data)	Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic
Net income (loss) as reported	$	147		$	147		$	217		$	217		$	264		$	264		$	(1,661	)	$	(1,661	)
Less preferred stock dividend declared		(313	)		(313	)		(313	)		(313	)		(625	)		(625	)		(507	)		(507	)

Loss available to common shareholders	$	(166	)	$	(166	)	$	(96	)	$	(96	)	$	(361	)	$	(361	)	$	(2,168	)	$	(2,168	)


Weighted average common shares outstanding (1)		28,182			28,182			11,633			11,633			20,588			20,588			11,581			11,581


Earnings (loss) per common share	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.19	)	$	(0.19	)

__________________

(1)

In accordance with FASB accounting standards related to earnings per share, due to the net loss for the periods presented, the impact of securities convertible to common stock is not included as its effect would be anti-dilutive. These securities include convertible preferred stock, restricted stock and warrants to acquire common stock. The dilutive calculation excludes 323,115 and 343,449 weighted average shares for the three months ended June 30, 2010 and 2009, respectively. The dilutive calculation excludes 321,238 and 335,994 weighted average shares for the six months ended June 30, 2010 and 2009, respectively.

The increase in weighted average common shares outstanding for the 2010 periods compared to prior periods was the result of the Company’s consummation of an underwritten public offering of common stock at a price of $2.50 per share in March 2010. The Company sold 16,560,000 common shares, which include the exercise by the underwriter of its over-allotment option, for gross proceeds of $41.4 million. The Company contributed $36.0 million to our bank subsidiary. The Company intends to use the net proceeds of this public offering for general corporate purposes, including funding working capital requirements, supporting the growth of our business from internal efforts and from whole bank or failed bank acquisitions, and regulatory capital needs related to any such growth and acquisitions.

NOTE 9 – COMPREHENSIVE INCOME

Other comprehensive income is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Total comprehensive income was as follows:

	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2010			2009			2010			2009
Other comprehensive income:
Unrealized loss on interest rate cap	$	(59	)	$	—		$	(148	)	$	—
Unrealized gain on securities available-for-sale		2,758			3,264			5,461			4,559
Reclassification adjustment for gains included in net income (loss)		(130	)		(2,000	)		(262	)		(2,671	)

Other comprehensive income, before tax		2,569			1,264			5,051			1,888
Income tax expense related to items of other comprehensive income		(1,135	)		(532	)		(2,235	)		(65	)

Other comprehensive income		1,434			732			2,816			1,823
Net income (loss)		147			217			264			(1,661	)

Comprehensive income	$	1,581		$	949		$	3,080		$	162

NOTE 10 – FAIR VALUE MEASUREMENT

The FASB accounting standards codification related to fair value measurements defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurement. This standard applies to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis.

As defined in the FASB accounting standards codification, fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2010.The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

•

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes available-for-sale securities which are regularly priced in an active market.

•

Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data.

The Company uses fair value to measure certain assets, primarily securities available-for-sale, on a recurring basis when fair value is the primary measure for accounting. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values, such as for loans held-for-sale, collateral dependent impaired loans, and foreclosed property. Fair value is also used when evaluating impairment on certain assets, including securities, goodwill, core deposit and other intangibles, for valuing assets and liabilities acquired in a business combination and for disclosures of financial instruments as required by the FASB accounting standards codification related to fair value disclosure reporting.

The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis at June 30, 2010.

			Financial Assets Measured at Fair Value on a Recurring Basis at June 30, 2010, Using
	Fair value at June 30, 2010		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
Available-for-sale securities	$	286,100	$	—	$	286,100	$	—

Total assets measured at fair value	$	286,100	$	—	$	286,100	$	—

			Financial Assets Measured at Fair Value on a Non-Recurring Basis at June 30, 2010, Using
	Fair value at June 30, 2010		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total gains (losses)
	(in thousands)
Impaired loans	$	1,352	$	—	$	—	$	1,352	$	(382	)
Foreclosed property		27,850		—		—		27,850		554

Total assets measured at fair value	$	29,202	$	—	$	—	$	29,202	$	172

There were no significant transfers of assets into or out of Level 1, Level 2 or Level 3 of the fair value hierarchy during the quarter ended June 30, 2010. There have been no changes in valuation techniques for the quarter ended June 30, 2010 and such techniques are consistent with techniques used in prior periods.

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities – Fair values for securities are based on quoted market prices of identical securities, where available (Level 1). When quoted prices of identical securities are not available, the fair value estimate is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. In determining the fair value of the securities categorized as Level 2, the Company obtains a report from a nationally recognized broker-dealer detailing the fair value of each security in our portfolio as of each reporting date. The broker-dealer uses observable market information to value our securities, with the primary source being a nationally recognized pricing service. The Company reviews the market prices provided by the broker-dealer for our securities for reasonableness based upon our understanding of the marketplace and we consider any credit issues related to the bonds. As the Company has not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Impaired loans – Impaired loans are measured and recorded at the fair value of the loan’s collateral on a nonrecurring basis as the impaired loans shown are collateral dependent. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the estimated cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.

Foreclosed property – Foreclosed property is initially measured at fair value at acquisition and carried at the lower of this new cost or fair value on a nonrecurring basis. The foreclosed property shown is collateral dependent and, accordingly, is measured based on the fair value of such collateral. The fair value of collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the estimated cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.

The FASB accounting standards codification requires that the Company disclose estimated fair values for its financial instruments during annual and interim reporting periods. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of the disclosures regarding fair value of financial instruments. The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above.

Cash and cash equivalents – The carrying amounts of cash and interest bearing deposits at other banks is assumed to be the fair value given the liquidity and short-term nature of these deposits.

Loans – Loans are not measured at fair value on a recurring basis. Therefore, the following valuation discussion relates to estimating the fair value to be disclosed under fair value disclosure requirements. Loans were divided into three major groups. The loan groups included (1) loans that mature or re-price in three months or less, (2) loans that amortize or mature in more than three months, and (3) impaired loans. We estimated the fair value of impaired loans and loans that mature or re-price within three months at their carrying value. We used discounted cash flow methodology to estimate the fair value of loans that amortize or mature in more than three months. We developed pools of these loans based on similar characteristics such as underlying type of collateral, fixed or adjustable rate of interest, payment or amortization method, credit risk categories and other factors. We projected monthly principal and interest cash flows based on the contractual terms of the loan, adjusted for assumed prepayments and defaults, and discounted these at a rate that considered funding costs, a market participant’s required rate of return and adjusted for servicing costs and a liquidity discount. Loans are not normally purchased and sold by the Company, and there are no active trading markets for much of this portfolio.

Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts and fixed-term certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank advances and other borrowings – The fair value of the FHLB advances and other borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated debentures – The fair value of the debentures is estimated using a discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance sheet instruments – Off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.

The following table estimates fair values and the related carrying amounts of the Company’s financial instruments:

	At June 30, 2010
(in thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash, due from banks and interest bearing deposits with other banks	$	131,517	$	131,517
Securities available-for-sale		286,100		286,100
FHLB and other stock		9,177		9,177
Loans		891,541		753,704
Interest rate cap		47		47
Financial liabilities:
Demand deposits, money market and savings	$	784,895	$	784,895
Time certificates of deposit		307,562		308,116
FHLB advances and other borrowings		128,750		134,190
Junior subordinated debentures		26,779		16,485

These fair value disclosures represent the Company’s best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This discussion contains certain forward-looking statements about us; we intend these statements to fall under the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:

•

revenues are lower than expected;

•

credit quality deterioration, which could cause an increase in the provision for loan losses;

•

competitive pressure among depository institutions increases significantly;

•

changes in consumer spending, borrowings and savings habits;

•

our ability to successfully integrate acquired entities or to achieve expected synergies and operating efficiencies within expected time-frames or at all;

•

technological changes;

•

the cost of additional capital is more than expected;

•

a change in the interest rate environment reduces interest margins;

•

asset/liability repricing risks and liquidity risks;

•

general economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business are less favorable than expected;

•

legislative, accounting or regulatory requirements or changes adversely affecting our business;

•

the effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve, or the Federal Reserve Board;

•

recent volatility in the credit or equity markets and its effect on the general economy;

•

regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule; and

•

demand for the products or services of First California and the Bank, as well as their ability to attract and retain qualified people.

If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A in our 2009 Annual Report on Form 10-K and under Part II, Item 1A of this Quarterly Report on Form 10-Q. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements. All forward-looking statements contained in this document and all subsequent written and oral forward-looking statements attributable to us or any other person acting on our behalf, are expressly qualified by these cautionary statements.

Overview

First California Financial Group, Inc., or First California, or the Company, is a bank holding company which serves the comprehensive banking needs of businesses and consumers in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties through our wholly-owned subsidiary, First California Bank, or the Bank. The Bank is a state chartered commercial bank that provides traditional business and consumer banking products through 17 full-service branch locations. The Company also has two unconsolidated statutory business trust subsidiaries, First California Capital Trust I and FCB Statutory Trust I, which raised capital through the issuance of trust preferred securities.

At June 30, 2010, we had consolidated total assets of $1.5 billion, total loans of $891.5 million, deposits of $1.1 billion and shareholders’ equity of $198.4 million. At December 31, 2009, we had consolidated total assets of $1.5 billion, total loans of $939.2 million, deposits of $1.1 billion and shareholders’ equity of $157.2 million.

For the second quarter of 2010, we had net income of $0.1 million, compared with net income of $0.2 million for the second quarter of 2009. Our net income for the first six months of 2010 was $0.3 million, compared with a loss of $1.7 million for the first six months of 2009. The net loss for the first six months of 2009 was due largely to the $6.2 million provision for loan losses.

After dividend payments on our Series B preferred shares of $312,500 in the second quarter of 2010 and 2009, we incurred a loss per diluted common share of $0.01 for both the 2010 and 2009 second quarters. Our net loss for the first six months of 2010, after Series B preferred share dividends of $625,000, was $0.02 per diluted common share. Our net loss for the first six months of 2009, after Series B preferred dividends of $507,000, was $0.19 per diluted common share.

Critical accounting policies

We base our discussion and analysis of our consolidated results of operations and financial condition on our unaudited consolidated interim financial statements and our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, income and expense, and the related disclosures of contingent assets and liabilities at the date of these consolidated financial statements. We believe these estimates and assumptions to be reasonably accurate; however, actual results may differ from these estimates under different assumptions or circumstances. The following are our critical accounting policies and estimates.

Allowance for loan losses

We establish the allowance for loan losses through a provision charged to expense. We charge-off loan losses against the allowance when we believe that the collectability of the loan is unlikely. We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. The allowance is an amount that we believe will be adequate to absorb estimated probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. We believe the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because: changes in it can materially affect the provision for loan losses and net income, it requires management to predict borrowers’ likelihood or capacity to repay, and it requires management to distinguish between losses incurred as of a balance sheet date and losses expected to be incurred in the future. Accordingly, this is a highly subjective process and requires significant judgment since it is often difficult to determine when specific loss events may actually occur. Our evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquent and nonaccrual loans, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national levels, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior sixteen quarters. We also evaluate individual loans for impairment and if a portion of a loan is impaired, we charge-off the impaired amount or allocate a specific reserve for that loan. Various regulatory agencies, as a regular part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations. The allowance for loan losses was $16.5 million at both June 30, 2010 and December 31, 2009.

Deferred income taxes

We recognize deferred tax assets subject to our judgment that realization of the assets are more-likely-than-not. We establish a valuation allowance when we determine that realization of income tax benefits may not occur in future years. There were net deferred tax assets of $3.8 million at June 30, 2010 and $6.0 million at December 31, 2009. There was no valuation allowance at either period end.

Derivative instruments and hedging

We record all derivatives on the balance sheet at fair value. For derivative instruments designated in cash flow hedging relationships, we assess the effectiveness of the instruments in offsetting changes in the overall cash flows of designated hedged transactions on a quarterly basis. We recognize the unrealized gains or losses directly in current period earnings to the extent these instruments are not effective. In December 2009, we purchased a $10.3 million notional forward-starting interest rate cap to limit the variable interest rate payments on our $10.3 million junior subordinated debentures. Our first and second quarter 2010 and fourth quarter 2009 effectiveness assessments indicated that this instrument was effective for those periods.

Assessments of impairment

We assess goodwill for impairment on an annual basis as of December 31, or at interim periods if an event occurs or circumstances change which may indicate a change in the implied fair value of the goodwill. We estimate the implied fair value of goodwill by comparing the estimated fair value of the Company to the estimated fair value of the Company’s individual assets, liabilities, and identifiable intangible assets. Impairment exists when the carrying amount of goodwill exceeds this implied fair value. Based on the results of our assessment, we concluded that the fair value of goodwill was greater than our carrying value and that no goodwill impairment existed at December 31, 2009. At June 30, 2010, we did not perform an interim assessment because results for the first half of 2010 were not materially different from the estimates used in our year-end assessment.

We also undertake an impairment analysis on our debt and equity securities each quarter. When we do not intend to sell, and it is more likely than not that we are not required to sell, a debt security before recovery of its cost basis, we separate other-than-temporary impairment into (a) the amount representing credit loss and (b) the amount related to other factors. We recognize in earnings the amount of the other-than-temporary impairment related to credit loss. We recognize in other comprehensive income the amount of other-than-temporary impairment related to other factors. Our assessment of other-than-temporary declines in fair value considers the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, and the long-term financial outlook of the issuer. In addition, we consider the expected future cash flows from the security and our ability and intent to hold the security until the fair value recovers.

For 2009, other-than-temporary impairment related to the credit loss on three debt securities and recognized in earnings was $1.1 million. In addition, we recognized an impairment loss of $0.4 million on a $1.0 million community development-related equity investment in our 2009 earnings. We recognized an additional impairment loss of $18,000 on this community development-related equity investment in the first quarter of 2010.

Results of operations – for the three and six months ended June 30, 2010 and 2009

Net interest income

Our earnings are derived predominantly from net interest income, which is the difference between interest and fees earned on loans, securities and federal funds sold (these asset classes are commonly referred to as interest-earning assets) and the interest paid on deposits, borrowings and debentures (these liability classes are commonly referred to as interest-bearing funds). The net interest margin is net interest income divided by average interest-earning assets.

Our net interest income for the three months ended June 30, 2010 declined to $10.8 million from $11.9 million for the same period last year. For the first six months of 2010, our net interest income declined to $21.5 million from $22.6 million for the same period a year ago. The decline in net interest income for both periods principally reflects the decline in interest income from securities. Interest income for the 2010 second quarter was $14.4 million, down $2.7 million from the 2009 second quarter. The decline in interest income was due to lower yielding securities. Interest expense for the 2010 second quarter was $3.6 million, down $1.6 million from the 2009 second quarter. The decrease in interest expense was due to lower rates paid on interest-bearing deposits. For the first half of 2010, interest income was $29.0 million, down $4.1 million from the same period last year. The decline in interest income was again due to lower yielding securities. Interest expense for the first half of 2010 was $7.5 million, down $3.1 million from the same period a year ago. The decline in interest expense was again due to lower rates paid on interest-bearing deposits.

Our net interest margin (tax equivalent) for the second quarter of 2010 was 3.40 percent compared with 3.75 percent for the same quarter last year. For the first half of 2010, our net interest margin was 3.39 percent compared with 3.66 percent for the first half of 2009. The decline in our net interest margin was primarily due to lower yields on our securities and reflects the shift in the composition of our securities to lower yielding, shorter-term securities. The yield on interest-earning assets for the second quarter of 2010 was 4.77 percent, down 57 basis points from 5.34 percent for the second quarter a year ago. The reduction in the cost of our interest-bearing liabilities, which equaled 1.56 percent for the 2010 second quarter, down 53 basis points from 2.09 percent for the second quarter a year ago, partially offset that decline. The yield on interest-earning assets for the six months ended June 30, 2010 was 4.57 percent compared with 5.34 percent for the same period last year. Partially offsetting that decline was the decline in the cost of our interest-bearing liabilities. The rate paid on interest-bearing liabilities fell to 1.61 percent for the first half of 2010 compared with 2.19 percent for the same period last year.

The following table presents the distribution of our average assets, liabilities and shareholders’ equity in combination with the total dollar amounts of interest income from average interest earning assets and the resultant yields, and the dollar amounts of interest expense and average interest bearing liabilities, expressed in both dollars and rates for the three and six months ended June 30, 2010 and 2009.

Average Balance Sheet and Analysis of Net Interest Income

	Three months ended June 30,
	2010							2009
(dollars in thousands)	Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate			Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate
Loans1	$	913,251	$	12,819		5.63	%	$	929,027	$	13,386		5.78	%
Securities		278,395		1,508		2.22	%		276,072		3,431		5.30	%
Federal funds sold and deposits with banks		86,380		59		0.27	%		92,042		235		1.02	%

Total earning assets		1,278,026	$	14,386		4.77	%		1,297,141	$	17,052		5.34	%

Non-earning assets		155,955							153,751

Total average assets	$	1,433,981						$	1,450,892


Interest bearing checking	$	82,043	$	67		0.33	%	$	75,797	$	57		0.30	%
Savings and money market		360,668		866		0.96	%		258,452		720		1.12	%
Certificates of deposit		316,472		951		1.21	%		467,460		2,437		2.09	%

Total interest bearing deposits		759,183		1,884		1.00	%		801,709		3,214		1.61	%

Borrowings		130,698		1,257		3.86	%		158,706		1,502		3.80	%
Junior subordinated debentures		26,772		439		6.56	%		26,716		439		6.59	%

Total borrowed funds		157,470		1,696		4.30	%		185,422		1,941		4.20	%

Total interest bearing funds		916,653	$	3,580		1.56	%		987,131	$	5,155		2.09	%

Noninterest checking		310,943							290,660
Other liabilities		8,784							12,785
Shareholders’ equity		197,601							160,316

Total liabilities and shareholders’ equity	$	1,433,981						$	1,450,892

Net interest income			$	10,806						$	11,897
Net interest margin (tax equivalent) 2						3.40	%						3.75	%

	Six months ended June 30,
	2010							2009
(dollars in thousands)	Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate			Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate
Loans1	$	921,408	$	25,806		5.65	%	$	901,773	$	25,813		5.77	%
Securities		309,967		3,097		2.05	%		278,686		7,028		5.33	%
Federal funds sold and deposits with banks		48,976		79		0.32	%		81,490		290		0.72	%

Total earning assets		1,280,351	$	28,982		4.57	%		1,261,949	$	33,131		5.34	%

Non-earning assets		156,207							155,994

Total average assets	$	1,436,558						$	1,417,943


Interest bearing checking	$	80,859	$	130		0.32	%	$	75,358	$	103		0.28	%
Savings and money market		354,212		1,783		0.82	%		238,829		1,239		1.05	%
Certificates of deposit		339,574		2,143		1.27	%		469,350		5,239		2.25	%

Total interest bearing deposits		774,645		4,056		1.06	%		783,537		6,581		1.69	%

Borrowings		136,981		2,569		3.78	%		161,787		3,057		3.81	%
Junior subordinated debentures		26,766		878		6.56	%		26,714		926		6.99	%

Total borrowed funds		163,747		3,447		4.22	%		188,501		3,983		4.26	%

Total interest bearing funds		938,392	$	7,503		1.61	%		972,038	$	10,564		2.19	%

Noninterest checking		308,014							272,199
Other liabilities		9,428							13,496
Shareholders’ equity		180,724							160,210

Total liabilities and shareholders’ equity	$	1,436,558						$	1,417,943

Net interest income			$	21,479						$	22,567
Net interest margin (tax equivalent) 2						3.39	%						3.66	%

______________________

Yields and amounts earned on loans include loan fees of $-0.2 million and $0.1 million for the three months ended June 30, 2010 and 2009, respectively, and $-0.4 million and $0.1 million for the six months ended June 30, 2010 and 2009, respectively. The average loan balance includes loans held-for-sale and nonaccrual loans; however, there is no interest income related to nonaccrual loans in the amount earned on loans.

2	Includes tax equivalent adjustments primarily related to tax-exempt income on securities.

Our net interest income changes with the level and mix of average interest-earning assets and average interest-bearing funds. We call the changes between periods in interest-earning assets and interest-bearing funds balance changes. We measure the effect on our net interest income from balance changes by multiplying the change in the average balance between the current period and the prior period by the prior period average rate.

Our net interest income also changes with the average rate earned or paid on interest-earning assets and interest-bearing funds. We call the changes between periods in average rates earned and paid rate changes. We measure the effect on our net interest income from rate changes by multiplying the change in average rates earned or paid between the current period and the prior period by the prior period average balance.

We allocate the change in our net interest income attributable to both balance and rate on a pro rata basis to the change in average balance and the change in average rate. The following table presents the change in our interest income and interest expense.

Increase (Decrease) in Net Interest Income/Expense Due to Change in Average Volume and Average Rate (1)

	Three months ended June 30, 2010 to 2009 due to:
(in thousands)	Rate			Volume			Total
Interest income
Interest on loans	$	(340	)	$	(227	)	$	(567	)
Interest on securities		(1,952	)		29			(1,923	)
Interest on Federal funds sold and deposits with banks		(162	)		(14	)		(176	)

Total interest income		(2,454	)		(212	)		(2,666	)

Interest expense
Interest on deposits		1,160			170			1,330
Interest on borrowings		(20	)		265			245
Interest on junior subordinated debentures		—			—			—

Total interest expense		1,140			435			1,575

Net interest income	$	(1,314	)	$	223		$	(1,091	)

	Six months ended June 30, 2010 to 2009 due to:
(in thousands)	Rate			Volume			Total
Interest income
Interest on loans	$	(569	)	$	562		$	(7	)
Interest on securities		(4,720	)		789			(3,931	)
Interest on Federal funds sold and deposits with banks		(96	)		(115	)		(211	)

Total interest income		(5,385	)		1,236			(4,149	)

Interest expense
Interest on deposits		2,450			75			2,525
Interest on borrowings		(22	)		510			488
Interest on junior subordinated debentures		50			(2	)		48

Total interest expense		2,478			583			3,061

Net interest income	$	(2,907	)	$	1,819		$	(1,088	)

______________________

(1)	The change in interest income or interest expense that is attributable to both changes in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of changes in each.

(2)	Tables do not include interest income that would have been earned on nonaccrual loans.

Provision for loan losses

The provision for loan losses was $1.8 million for the three months ended June 30, 2010 compared with $1.1 million for the three months ended June 30, 2009. For the first six months of 2010, the provision for loan losses was $3.5 million compared with $6.2 million for the same period last year. We revised upward in the second quarter of 2010 and in the first quarter of 2009, our estimated loss factors for the qualitative considerations used in the determination of the adequacy of our allowance for loan losses. The change in our estimated loss factors for the 2010 period was less than the change for the 2009 period; however, the changes resulted in a higher ratio of the allowance for loan losses to loans. At June 30, 2010, the ratio of the allowance for loan losses to loans was 1.85 percent compared with 1.76 percent at December 31, 2009. A year ago, the ratio of the allowance for loan losses to loans was 1.27 percent at June 30, 2009 compared with 1.02 percent at December 31, 2008.

Noninterest income

Noninterest income was $2.0 million for the 2010 second quarter compared with $2.7 million for the same period a year ago. Noninterest income was $3.1 million for the first six months of 2010 compared with $4.7 million for the same period last year. The decline in each instance reflects principally a smaller amount of securities gains period to period offset by a market gain on foreclosed assets in the 2010 second quarter and higher impairment losses on securities in the 2009 second quarter.

The following table presents a summary of noninterest income:

	Three months ended June 30,					Six months ended June 30,
	2010		2009			2010			2009
	(in thousands)
Service charges on deposit accounts and other banking-related fees	$	973	$	1,038		$	1,903		$	2,088
Earnings on cash surrender value of life insurance		109		109			220			216
Commissions on brokered loans		—		44			16			53
Net gain on sale of securities		130		2,000			262			2,671
Impairment loss on securities		—		(565	)		(18	)		(565	)
Gain on transfer of foreclosed assets		691		—			691			—
Other income		51		113			73			191

Total noninterest income	$	1,954	$	2,739		$	3,147		$	4,654

Our service charges on deposit accounts for the three months ended both June 30, 2010 and 2009 were $1.0 million. Service charges on deposit accounts for the six months ended June 30, 2010 were $1.9 million, down from the $2.1 million in the six months ended June 30, 2009. The decrease reflects a lower incidence of customers drawing checks against their deposit account when insufficient funds are on deposit.

During the first six months of 2010 and 2009, we did not sell any loans. However, we brokered loans for commissions of $16,000 for the first six months of 2010 compared with $53,000 for the first six months of 2009.

We also recognized in noninterest income an impairment loss of $18,000 on a $1.0 million community development-related equity investment in the first quarter of 2010. A year ago, we recognized other-than-temporary impairment losses on securities of $565,000 in the second quarter of 2009. We will continue to evaluate our securities portfolio for other-than-temporary impairment at each reporting date and we can provide no assurance there will not be other impairment losses in future periods.

In the 2010 second quarter we completed the foreclosure on a $21.0 million completed office construction project. This project consists of 20 completed units ranging from approximately 1,650 square feet to 14,600 square feet in size. We obtained a current appraisal, evaluated the estimated retail sales prices as well as the estimated costs to sell and determined the fair value of this project to be $21.7 million. Accordingly, for the 2010 second quarter, we recognized a market value gain of $691,000. Subsequent to June 30, 2010, one unit of approximately 4,100 square feet was sold resulting in net proceeds of approximately $1.0 million.

In the second quarter of 2010, we sold $44.5 million of securities and realized net gains of $130,000. For the second quarter of 2009 we sold $51.2 million of securities and realized net gains of $2.0 million. In the first six months of 2010, we sold $79.9 million of securities and realized net gains of $262,000. For the first six months of 2009, we sold $68.4 million of securities and realized net gains of $2.7 million.

Noninterest expense

Our noninterest expense for the three months ended June 30, 2010 was $10.8 million, down 17 percent from $12.9 million for the three months ended June 30, 2009. For the first half of 2010, noninterest expense was $20.7 million, down 13 percent from $23.7 million for the same period last year. The decline in noninterest expense reflects the workforce reduction effected in the 2009 third quarter. In addition, in the first half of 2009, we incurred costs associated with the FDIC-assisted 1st Centennial Bank transaction. Noninterest expense for the three and six months ended June 30, 2009 included integration and conversion expenses related to the FDIC-assisted 1st Centennial Bank transaction of approximately $250,000 and $723,000, respectively.

The following table presents a summary of noninterest expense:

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
	(in thousands)
Salaries and employee benefits	$	4,889	$	5,363	$	9,859	$	11,021
Premises and equipment		1,517		1,780		3,054		3,313
Data processing		597		479		1,192		950
Legal, audit, and other professional services		590		597		772		1,217
Printing, stationery, and supplies		113		211		125		403
Telephone		213		264		437		527
Directors' expense		113		141		233		256
Advertising, marketing and business development		286		443		513		899
Postage		47		96		103		151
Insurance and regulatory assessments		780		1,346		1,580		1,655
Loss on and expense of foreclosed property		468		249		546		249
Amortization of intangible assets		417		417		833		793
Market loss on loans held-for-sale		—		709		—		709
Other expenses		721		781		1,420		1,510

Total noninterest expense	$	10,751	$	12,876	$	20,667	$	23,653

Salaries and benefits fell 9 percent to $4.9 million for the 2010 second quarter from $5.4 million for the same period last year. For the first half of 2010, salaries and benefits declined 11 percent to $9.9 million from $11.0 million. The decline reflects the 2009 third quarter workforce reduction and the completion of the integration and conversion effort related to the FDIC-assisted 1st Centennial Bank transaction. Our workforce declined approximately 10 percent to 245 full-time equivalent employees at June 30, 2010 from 273 a year ago.

The FDIC charges all financial institutions for deposit insurance. The 2009 second quarter included a $675,000 special assessment the FDIC charged all institutions. In addition, the FDIC increased regular insurance assessments. With a larger deposit base and increased premiums, our regular FDIC insurance expense for the first half of 2010 was $1.3 million compared with $0.7 million for the same period last year.

In the second quarter of 2009, we determined not to pursue the sale of $31.2 million of loans previously classified held-for-sale and returned these performing, multi-family loans to our regular portfolio. As such, we recognized a market loss of $709,000 to write down these loans to the lower of cost or market value.

We acquired real estate through three foreclosures and sold previously foreclosed upon real estate in the quarter ended June 30, 2010. The cost of foreclosed real estate and the loss on sale of foreclosed real estate was $468,000 for the second quarter of 2010 compared with $249,000 for the second quarter of 2009.

Our efficiency ratio was 82 percent for the second quarter of 2010 compared with 99 percent for the second quarter of 2009. Our efficiency ratio for the first half of 2010 was 81 percent compared with 93 percent for the same period last year. The efficiency ratio is the percentage relationship of noninterest expense, excluding amortization of intangibles, to the sum of net interest income and noninterest income, excluding gains or losses on security sales. The improvement in the efficiency ratio for the second quarter of 2010 as compared to the second quarter of 2009 was due primarily to lower noninterest expense.

Income taxes

The income tax provision was $0.2 million for the six months ended June 30, 2010 compared with an income tax benefit of $1.0 million for the same period in 2009. The combined federal and state effective tax rate for the six months ended June 30, 2010 was 39.9 percent compared with 36.4 percent for the same period in 2009.

Financial position – June 30, 2010 compared with December 31, 2009

Lending and credit risk

We provide a variety of loan and credit-related products and services to meet the needs of borrowers primarily located in the six Southern California counties where our branches are located. Business loans, represented by commercial real estate loans, commercial loans and construction loans comprise the largest portion of the loan portfolio. Consumer or personal loans, represented by home mortgage, home equity and installment loans, comprise a smaller portion of the loan portfolio. We attempt to avoid the risk of an undue concentration of credits in a particular property type or with an individual customer.

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with us or otherwise to perform as agreed. All activities in which success depends on counterparty, issuer, or borrower performance have credit risk. Credit risk is present any time we extend, commit or invest funds; whenever we enter into actual or implied contractual agreements for funds, whether on or off the balance sheet, credit risk is present.

All categories of loans present credit risk. Major risk factors applicable to all loan categories include changes in international, national and local economic conditions such as interest rates, inflation, unemployment levels, consumer and business confidence and the supply and demand for goods and services.

Commercial real estate loans rely upon the cash flow originating from the underlying real property. Commercial real estate is a cyclical industry; general economic conditions and local supply and demand affect the commercial real estate industry. In the office sector, the demand for office space is highly dependent on employment levels. Consumer spending and confidence affect the demand for retail space and the levels of retail rents in the retail sector. The industrial sector has exposure to the level of exports, defense spending and inventory levels. Vacancy rates, location and other factors affect the amount of rental income for commercial property. Tenants may relocate, fail to honor their lease or go out of business. In the multifamily residential sector, the affordability of ownership housing, employment conditions and the vacancy of existing inventory heavily influences the demand for apartments. Population growth or decline and changing demographics, such as increases in the level of immigrants or retirees, are also factors influencing the multifamily residential sector.

Construction loans provide developers or owners with funds to build or improve properties; developers ultimately sell or lease these properties. Generally, construction loans involve a higher degree of risk than other loan categories because they rely upon the developer’s or owner’s ability to complete the project within specified cost and time limits. Cost overruns can cause the project cost to exceed the project sales price or exceed the amount of the committed permanent funding. Any number of reasons, such as poor weather, material or labor shortages, labor difficulties, or redoing substandard work to pass inspection, can delay construction projects. Furthermore, changes in market conditions or credit markets may affect a project’s viability once completed.

Commercial loans rely upon the cash flow originating from the underlying business activity of the enterprise. The manufacture, distribution or sale of goods or sale of services are not only affected by general economic conditions but also by the ability of the enterprise’s management to adjust to local supply and demand conditions, maintain good labor, vendor and customer relationships, as well as market, price and sell their goods or services for a profit. Customer demand for goods and services of the enterprise may change because of competition or obsolescence.

Home mortgages and home equity loans and lines of credit use first or second trust deeds on a borrower’s real estate property, typically their principal residence, as collateral. These loans depend on a person’s ability to regularly pay the principal and interest due on the loan and, secondarily, on the value of real estate property that serves as collateral for the loan. Generally, home mortgages involve a lower degree of risk than other loan categories because of the relationship of the loan amount to the value of the residential real estate and a person’s reluctance to forego their principal place of residence. General economic conditions and local supply and demand, however, affect home real estate values. Installment loans and credit card lines also depend on a person’s ability to pay principal and interest on a loan; however, generally these are unsecured loans or, if secured, the collateral value can rapidly decline, as is the case for automobiles. A person’s ability to service debt is highly dependent upon their continued employment or financial stability. Job loss, divorce, illness and bankruptcy are just a few of the risks that may affect a person’s ability to service their debt.

We obtain appraisals when extending credit for real estate secured loans as follows:

All business loans in excess of $1,000,000 where real estate was taken as collateral but where the sale or rental of the real estate is not the primary source of repayment;

All business loans in excess of $250,000 where real estate was taken as collateral and where the sale or rental of the real estate is the primary source of repayment; and

All other real estate secured loans in excess of $250,000.

All real estate secured loans, at the time of origination, renewal or extension, require a current appraisal. A current appraisal is an appraisal with an “as of” date not more than six months before the date of funding or renewal or extension. We also obtain updated appraisals when the useful life of the appraisal ceases. Under the Uniform Standards of Professional Appraisal Practice guidelines, the useful life of an appraisal, regardless of the dollar amount, is the life of the loan. However, useful life ends when (a) there has been a deterioration in the borrower’s performance and there is an increasing likelihood of a forced liquidation of the property and the existing appraisal is older than two years old, or (b) there has been deterioration in the property’s value due to a significant depreciation in local real estate values, lack of maintenance, change in zoning, environmental contamination or other circumstances.

Since the risks in each category of loan changes based on a number of factors, it is not possible to state whether a particular type of lending carries with it a greater or lesser degree of risk at any specific time in the economic cycle. Generally, in a stabilized economic environment, home mortgage loans have the least risk, followed by home equity loans, multifamily property loans, commercial property loans, commercial loans and lines and finally construction loans. However, this ordering may vary from time to time and the degree of risk from the credits with the least risk to those with the highest risk profile may expand or contract with the general economy.

We manage credit risk through Board-approved policies and procedures. At least annually, the Board of Directors reviews and approves these policies. Lending policies provide us with a framework for consistent loan underwriting and a basis for sound credit decisions. Lending policies specify, among other things, the parameters for the type or purpose of the loan, the required debt service coverage and the required collateral requirements. Credit limits are also established and certain loans require approval by the Directors’ Loan Committee. In addition, we have a well-defined set of standards for evaluating the loan portfolio, and management utilizes a comprehensive loan grading system to determine the risk potential in the portfolio. The Directors’ Audit Committee also engages a third party to perform an independent review of the loan portfolio to review credit quality, adequacy of documentation, appropriate loan grading administration, compliance with lending policies and assist in the evaluation of the credit risk inherent in the loan portfolio.

Loans

Loans decreased $47.7 million, or 5 percent, to $891.5 million at June 30, 2010 from $939.2 million at December 31, 2009. The $26.7 million decline in construction and land development loans principally reflects the $21.0 million completed office construction loan transferred to foreclosed assets. The $26.2 million decline in commercial loans and lines reflects slow loan demand in our market area. Usage under commercial lines of credit declined to 53 percent at June 30, 2010 from 59 percent at December 31, 2009.

(in thousands)	At June 30, 2010			At December 31, 2009
Commercial mortgage	$	389,077		$	381,334
Commercial loans and lines of credit		209,684			235,849
Multifamily mortgage		137,870			138,548
Construction and land development		59,914			86,609
Home mortgage		51,253			51,036
Home equity loans and lines of credit		38,309			40,122
Installment and credit card		5,434			5,748

Total loans		891,541			939,246
Allowance for loan losses		(16,452	)		(16,505	)

Loans, net	$	875,089		$	922,741

The loan categories above are derived from bank regulatory reporting standards for loans secured by real estate; however, a portion of the mortgage loans above are loans that we consider to be a commercial loan for which we have taken real estate collateral as additional support or from an abundance of caution. In these instances, we are not looking to the real property as its primary source of repayment, but rather as a secondary or tertiary source of repayment.

Commercial mortgage loans, the largest segment of our portfolio, were 44 percent of total loans at June 30, 2010 compared with 41 percent at December 31, 2009. We had 368 commercial mortgage loans with an average balance of $1,059,000 at June 30, 2010. Many different commercial property types collateralize our commercial mortgage loans. Our top three categories have been office, industrial, and retail, representing approximately 65 percent of commercial mortgage loans. In addition, most of our commercial property lending is in the six Southern California counties where our branches are located. The following is a table of our commercial mortgage lending by county.

Commercial mortgage loans by region/county (in thousands)	At June 30, 2010		At December 31, 2009
Southern California
Los Angeles	$	199,463	$	195,306
Orange		30,910		30,954
Ventura		98,189		93,899
Riverside		19,732		21,148
San Bernardino		16,384		17,518
San Diego		15,132		15,555
Santa Barbara		233		236

Total Southern California		380,043		374,616

Northern California
Alameda		346		319
Contra Costa		397		408
Fresno		2,463		2,479
Imperial		361		369
Kern		967		1,037
Madera		543		550
Placer		620		625
Sacramento		351		358
San Mateo		2,418		—
Solano		275		278
Tulare		293		295

Total Northern California		9,034		6,718

Total commercial mortgage loans	$	389,077	$	381,334

The following table shows the distribution of our commercial mortgage loans by property type.

Commercial mortgage loans by property type (in thousands)	At June 30, 2010		At December 31, 2009
Industrial/warehouse	$	88,938	$	90,379
Office		88,579		87,923
Retail		73,494		70,140
Self storage		28,670		20,024
Mixed use		17,072		18,292
Hotel		13,714		13,955
Medical		13,701		11,469
Assisted living		12,177		11,332
Restaurant		9,981		9,584
All other		42,751		48,236

Total commercial mortgage loans	$	389,077	$	381,334

The following table shows the maturity of our commercial mortgage loans by origination year.

Commercial mortgage loans by origination year/maturity year
(in thousands)

	Year of maturity
Origination									2014 and
Year	2010		2011		2012		2013		Thereafter		Total

2005 and earlier	$	6,575	$	6,735	$	8,382	$	21,880	$	77,254	$	120,826
2006		3,216		4,377		6,352		7,108		38,806		59,859
2007		7,740		6,934		16,627		759		38,833		70,893
2008		10,404		3,239		10,454		1,945		57,162		83,204
2009		10,443		-		1,662		-		35,106		47,211
2010		141		22		-		2,267		4,654		7,084
Total	$	38,519	$	21,307	$	43,477	$	33,959	$	251,815	$	389,077

We generally underwrote commercial mortgage loans with a maximum loan-to-value of 70 percent and a minimum debt service coverage ratio of 1.25. Beginning in the third quarter of 2009 we changed the maximum loan-to-value to 60 percent and the minimum debt service coverage ratio to 1.35. We believe these changes to our loan origination policies were prudent given the current economic environment. The weighted average loan-to-value percentage of our commercial real estate portfolio was 57.5 percent and the weighted average debt service coverage ratio was 1.74 at June 30, 2010. These criteria may become more conservative depending on the type of property. We focus on cash flow; consequently, regardless of the value of the collateral, the commercial real estate project must provide sufficient cash flow, or alternatively the principals must supplement the project with other cash flow, to service the debt. We generally require the principals to guarantee the loan. We also “stress-test” commercial mortgage loans to determine the potential effect changes in interest rates, vacancy rates, and lease or rent rates would have on the cash flow of the project. Additionally, at least on an annual basis, we require updates on the cash flow of the project and, where practicable, we visit the properties.

Commercial loans represent the next largest category of loans. These loans were 24 percent of total loans at June 30, 2010, down from 25 percent at December 31, 2009. We had 872 commercial loans with an average balance of $240,000 at June 30, 2010. Unused commitments on commercial loans were $104.3 million at June 30, 2010 compared with $88.8 million at December 31, 2009. Working capital, equipment purchases or business expansion are the typical purposes for commercial loans. Commercial loans may be unsecured or secured by assets such as equipment, inventory, accounts receivables, and real property. Personal guarantees of the business owner may also be present. These loans may also have partial guarantees from the U.S. Small Business Administration, or SBA, or other federal or state agencies. Broadly diversified business sectors with the largest sectors in real estate/construction, finance and insurance, healthcare, manufacturing and professional services comprise the commercial loan portfolio. Below is a table of our loans by business sector.

Commercial loans by industry/sector (in thousands)	At June 30, 2010		At December 31, 2009
Information	$	54,229	$	62,086
Real estate		52,050		51,714
Services		49,122		61,629
Trade		18,604		26,119
Manufacturing		17,565		16,141
Healthcare		15,182		12,566
Transportation and warehouse		2,905		5,562
Other		27		32

Total commercial loans	$	209,684	$	235,849

We underwrite commercial loans with maturities not to exceed seven years and we generally require full amortization of the loan within the term of the loan. We underwrite traditional working capital lines for a 12 month period and have a 30-day out-of-debt requirement. Accounts receivable and inventory financing revolving lines of credit have an annual maturity date, a maximum advance rate, and an annual field audit for lines of $200,000 or more. Third-party vendors perform field audits for our accounts receivable and inventory financing revolving lines of credit. The maximum advance rate for accounts receivable is 80 percent and the maximum advance rate for eligible inventory is 25 percent.

Construction and land loans represent 7 percent of total loans at June 30, 2010, down from 9 percent at December 31, 2009. At June 30, 2010, we had 28 projects with an average commitment of $2,073,000 compared with 30 projects with an average commitment of $2,967,000 at December 31, 2009. Construction loans represent single-family, multifamily and commercial building projects as well as land development loans. At June 30, 2010, 23 percent of these loans, or $13.5 million, represented single-family residential construction projects; 8 percent, or $4.8 million, were multi-family residential construction projects; 35 percent, or $20.9 million, were commercial projects; and, 34 percent, or $20.7 million, were land development projects.

Construction loans are typically short term, with maturities ranging from 12 to 18 months. For commercial projects, we have had a maximum loan-to-value requirement of 75 percent of the appraised value. For residential projects, the maximum loan-to-value has been 80 percent. Beginning in the third quarter of 2009 we changed the maximum loan-to-value to 70 percent for both commercial and residential projects. The weighted average loan-to-value ratio for our construction and land portfolio was 65.3 percent at June 30, 2010. At June 30, 2010, we had only five projects for which we capitalize interest income. Capitalized interest income for the six months ended June 30, 2010 was $737,000 for these five projects. At the borrower’s expense, we use a third party vendor for funds control, lien releases and inspections. In addition, we regularly monitor the marketplace and the economy for evidence of deterioration in real estate values.

Below is a table of our construction and land loans by county.

	At June 30, 2010				At December 31, 2009
Construction and land loans by county (in thousands)	Commitment		Outstanding		Commitment		Outstanding
Los Angeles	$	29,657	$	28,135	$	42,657	$	35,272
Orange		8,790		8,303		7,157		6,894
Ventura		21,823		19,526		55,896		40,459
Riverside		3,983		3,950		4,054		3,984

Total construction and land loans	$	64,253	$	59,914	$	109,764	$	86,609

We are mindful of the recent developments in our marketplace and have supplemented our regular monitoring practices by updating project appraisals, re-evaluating estimated project marketing time and re-evaluating the sufficiency of the original loan commitment to absorb interest charges (i.e., interest reserves). We are also re-evaluating the ability of the project sponsor, where applicable, to successfully complete other projects funded by other institutions. In circumstances where the interest reserve was not sufficient, the project sponsor has made payments to us from their general resources or the project sponsor placed with us the proceeds from a portion of the project sales. While we believe that our monitoring practices are adequate, we cannot assure you that there will not be further delinquencies, lengthened project marketing time or declines in real estate values.

Multifamily residential mortgage loans were 15 percent of total loans at June 30, 2010, the same as at December 31, 2009. We had approximately 162 multifamily loans with an average balance of $853,000 at June 30, 2010. Apartments mostly located in our six-county market area serve as collateral for our multifamily mortgage loans. We underwrite multifamily mortgage loans in a fashion similar to commercial mortgage loans previously described. The weighted average loan-to-value percentage was 59.9 percent and the weighted average debt service coverage ratio was 1.32 for our multifamily portfolio at June 30, 2010. Below is a table of our multifamily mortgage loans by county.

Multifamily mortgage loans by region/county (in thousands)	At June 30, 2010		At December 31, 2009
Southern California
Los Angeles	$	94,809	$	93,433
Orange		16,075		17,236
Ventura		7,540		7,590
San Bernardino		4,003		4,030
San Diego		5,035		5,065
Santa Barbara		1,125		1,131

Total Southern California		128,587		128,485

Northern California
Alameda		792		797
Calaveras		1,366		1,373
Fresno		248		251
Kern		2,644		2,679
Merced		666		671
Monterey		381		384
Mono		230		231
San Francisco		1,338		1,346
San Luis Obispo		496		499
Santa Clara		—		702
Santa Cruz		1,122		1,130

Total Northern California		9,283		10,063

Total multifamily mortgage	$	137,870	$	138,548

The following table shows the maturity of our multifamily mortgage loans by origination year.

Multifamily mortgage loans by origination year/maturity year
(in thousands)
	Year of maturity
Origination									2014 and
Year	2010		2011		2012		2013		Thereafter		Total

2005 and earlier	$	-	$	728	$	1,223	$	2,990	$	11,190	$	16,131
2006		-		-		-		-		1,367		1,367
2007		-		-		-		-		9,926		9,926
2008		-		-		-		-		52,330		52,330
2009		-		3,636		-		1,967		48,962		54,565
2010		-		1,305		-		-		2,246		3,551
Total	$	-	$	5,669	$	1,223	$	4,957	$	126,021	$	137,870

The table below illustrates the distribution of our loan portfolio by loan size at June 30, 2010. We distributed all loans by loan balance outstanding except for construction loans, which we distributed by loan commitment. At June 30, 2010, 34 percent of our loans were less than $1 million and 76 percent of our loans were less than $5 million. We believe the high number of smaller-balance loans aids in the mitigation of credit risk; however, a prolonged and deep recession can affect a greater number of borrowers.

	June 30, 2010
	Less than $500,000			$	500,000 to $999,999		$	1,000,000 to $2,999,999		$	3,000,000 to $4,999,999		$	5,000,000 to $9,999,999		$	10,000,000 to $12,600,000
Commercial mortgage		10	%		14	%		33	%		11	%		23	%		9	%
Commercial loans and lines of credit		29	%		12	%		31	%		9	%		8	%		11	%
Construction and land development		5	%		4	%		17	%		36	%		22	%		16	%
Multifamily mortgage		14	%		29	%		40	%		2	%		15	%		0	%
Home mortgage		29	%		23	%		21	%		0	%		27	%		0	%
Home equity loans and lines of credit		36	%		20	%		11	%		33	%		0	%		0	%
Installment and credit card		88	%		12	%		0	%		0	%		0	%		0	%

Totals		18	%		16	%		31	%		11	%		17	%		7	%
Number		1,557			210			176			26			24			6

Allowance for loan losses

We maintain an allowance for loan losses to provide for inherent losses in the loan portfolio. We establish the allowance through a provision charged to expense. We charge-off all loans judged uncollectible against the allowance while we credit any recoveries on loans to the allowance. We charge-off commercial and real estate loans – construction, commercial mortgage, and home mortgage – by the time their principal or interest becomes 120 days delinquent unless the loan is well secured and in the process of collection. We charge-off consumer loans by the time they become 90 days delinquent unless they too are well secured and in the process of collection. We also charge-off deposit overdrafts when they become more than 60 days old. We evaluate impaired loans on a case-by-case basis to determine the ultimate loss potential to us after considering the proceeds realizable from a sale of the collateral, less costs to sell. In those cases where the net realizable value is less than the loan, we charge-off the loan to reduce the balance to a level equal to the net realizable value of the collateral. We consider a loan impaired when, based on current information and events, we do not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments.

Our loan policy provides procedures designed to evaluate and assess the risk factors associated with our loan portfolio, to enable us to assess such risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. We assess the allowance on a monthly basis and undertake a more critical evaluation quarterly. At the time of the monthly review, the Board of Directors examines and formally approves the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquency and nonaccruals, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national level, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior sixteen quarters.

Our evaluation of the adequacy of the allowance for loan losses includes a review of individual loans to identify specific probable losses and assigns estimated loss factors to specific groups or types of loans to calculate possible losses. In addition, we estimate the probable loss on previously accrued but unpaid interest. We refer to these as quantitative considerations. Our evaluation also considers subjective factors such as changes in local and regional economic and business conditions, financial improvement or deterioration in business sectors and industries, changes in lending practices, changes in personnel, changes in the volume and level of past due and nonaccrual loans and concentrations of credit. We refer to these as qualitative considerations.

Our 2010 second quarter evaluation of the adequacy of the allowance for loan losses considered, among other things, estimated loss factors assigned to specific types of loans, changes and trends in the level of delinquencies, nonaccrual loans and loan charge-offs, changes in the value of collateral, changes in the local and regional economic and business conditions, and the judgment of the bank regulatory agencies at the conclusion of their examination process with respect to information available to them during such examination process.

In our evaluation of the adequacy of the allowance for loan losses, we changed our estimated loss factors for our qualitative considerations from those used at the 2009 year-end for the following reasons. We considered the trend in the level of delinquencies, nonaccrual loans and loan charge-offs. Total past due and nonaccrual loans declined to $14.3 million at June 30, 2010 from $54.8 million at December 31, 2009. The $40.5 million decline since year-end was in both loans past due 30 to 89 days and nonaccrual loans. Nonaccrual loans at June 30, 2010 were $13.2 million, down from $40.0 million as loan payments, payoffs, transfers to foreclosed property and returns to accruing status outpaced additions. We believe that the slowing of delinquencies and nonaccrual loans are early signs that the credit cycle may be peaking. However, we also considered the length and depth of the economic recession, the possibility that the economic recovery may stall, the outlook for unemployment for the U.S. and California and the continuing affect these adverse conditions might have on our borrowers. Based on these considerations, we concluded that an increase in our estimated loss factors for qualitative considerations was prudent at this time.

The allowance for loan losses was $16.5 million or 1.85 percent of loans at June 30, 2010 compared with $16.5 million or 1.76 percent of loans at December 31, 2009. We believe that our allowance for loan losses was adequate at June 30, 2010; however, the determination of the allowance for loan losses is a highly judgmental process and we cannot assure you that we will not further increase or decrease the allowance in future periods.

The following table presents activity in the allowance for loan losses:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning balance	$	15,598		$	11,275		$	16,505		$	8,048
Provision for loan losses		1,766			1,110			3,520			6,179
Loans charged-off		(1,111	)		(664	)		(3,844	)		(2,511	)
Recoveries on loans charged-off		199			234			271			239

Ending balance	$	16,452		$	11,955		$	16,452		$	11,955


Allowance to gross loans		1.85	%		1.27	%		1.85	%		1.27	%
Net loans charged-off to average loans, annualized		0.40	%		0.19	%		0.78	%		0.50	%

The following table presents the net loan charge-offs by loan type and the percentage of net loans charged-off to average loans by type for the periods indicated.

	Six Months Ended June 30, 2010								Six Months Ended June 30, 2009
(in thousands)	Net Charge-offs		Net Charge-offs to average loans, for period			Net Charge-offs to Average loans, annualized			Net Charge-offs		Net Charge-offs to average loans, for period			Net Charge-offs to Average loans, annualized
Construction and land development	$	350		0.45	%		0.91	%	$	788		0.64	%		1.29	%
Home mortgage		158		0.31	%		0.62	%		683		1.01	%		2.02	%
Commercial loans & lines		1,205		0.58	%		1.15	%		677		0.31	%		0.61	%
Commercial real estate		1,639		0.30	%		0.61	%		239		0.05	%		0.10	%
Home equity loans & lines		199		0.50	%		1.01	%		—		—			—
Installment		22		0.41	%		0.81	%		(115)		(2.56)	%		(5.12)	%

Total	$	3,573		0.40	%		0.78	%	$	2,272		0.25	%		0.50	%

Net loan charge-offs for the three months ended June 30, 2010 were $0.9 million compared with $0.4 million for the same period last year. Net loan charge-offs for the six months ended June 30, 2010 were $3.6 million compared with $2.3 million for the same period last year. In the first six months of 2010, significant charge-offs consisted of a $1.2 million charge-off on a $1.7 million nonaccrual multifamily loan for which we had a specific loss allowance of $1.7 million at December 31, 2009. We collected the remaining balance in the 2010 second quarter. Also in the 2010 first quarter we had a $325,000 charge-off on a $0.8 million completed construction project to reduce the balance to the expected net proceeds from the sale of the remaining collateral. Net annualized loan charge-offs to average loans for the 2010 second quarter were 0.40 percent compared with 0.19 percent for the 2009 second quarter. For the 2009 year, net loan charge-offs to average loans was 0.89 percent. Net annualized loan charge-offs to average loans for the six months ended June 30, 2010 were 0.78 percent compared with 0.50 percent for the first six months of 2009.

The following table presents the allocation of the allowance for loan losses to each loan category and the percentage relationship of loans in each category to total loans:

	June 30, 2010					December 31, 2009
(in thousands)	Allocation of the allowance by loan category		Percent of Loans in Category to Total loans			Allocation of the allowance by loan category		Percent of Loans in Category to Total loans
Commercial mortgage	$	5,318		44	%	$	4,850		41	%
Multifamily mortgage		1,986		15	%		3,277		15	%
Commercial loans		4,502		23	%		4,796		25	%
Construction loans		3,193		7	%		2,460		9	%
Home equity loans and lines		546		4	%		453		4	%
Home mortgage		810		6	%		605		5	%
Installment and credit card		97		1	%		64		1	%

Total	$	16,452		100	%	$	16,505		100	%

The amounts or proportions displayed above do not imply that charges to the allowance will occur in those amounts or proportions.

The following table presents past due loans, nonaccrual loans and foreclosed assets. We had ten restructured loans for $4.2 million at June 30, 2010. Two loans for $1.9 million are reported as current at June 30, 2010. Eight loans for $2.3 million are included in the $13.2 million nonaccrual loan total shown below. We had one $0.6 million restructured loan at December 31, 2009. The $0.6 million restructured loan at December 31, 2009 is included in the $40.0 million nonaccrual loan total shown below.

(dollars in thousands)	At June 30, 2010			At December 31, 2009
Accruing loans past due 30 - 89 days	$	1,078		$	14,592
Accruing loans past due 90 days or more	$	—		$	200
Nonaccrual loans	$	13,192		$	39,958
Foreclosed assets	$	27,850		$	4,893
Ratios:
Accruing loans past due 90 days or more to average loans		—			0.02	%
Nonaccrual loans to average loans		1.43	%		4.35	%

Accruing loans past due 30 to 89 days decreased to $1.1 million at June 30, 2010 from $14.6 million at December 31, 2009. This category of loans historically has had the most fluctuation from period to period.

Nonaccrual loans and loans past due 90 days or more and accruing decreased to $13.2 million at June 30, 2010 from $40.2 million at December 31, 2009. These non-performing loans, as a percentage of total loans, were 1.5 percent at the end of the second quarter compared with 4.3 percent at December 31, 2009.

Our largest nonaccrual loan was a completed high-end home in a coastal community of Los Angeles County for $4.5 million. The home was sold subsequent to June 30, 2010 and the loan was paid-off in full. Accordingly, we had no specific loss allowance for this loan at June 30, 2010.

Our next largest nonaccrual loan was a $1.8 million land loan in Palm Springs, California. The loan was past maturity at June 30, 2010. We are in the process of obtaining a current appraisal. We estimated at June 30, 2010 a specific loss allowance of $1.2 million for this loan.

Our third largest nonaccrual loan was a $1.2 million entertainment-related commercial loan. A legal dispute regarding royalty payments has affected our borrower’s ability to pay. We are receiving interest-only payments and interest was current as of June 30, 2010. Our most current appraisal indicates a loan-to-value ratio of 47 percent. We have no specific loss allowance for this loan at June 30, 2010.

We have one other nonaccrual loan, a $1.1 million business loans to a borrower who abruptly discontinued business in the 2009 third quarter. This amount is after charge-offs of $3.4 million. Since the end of 2009, we received proceeds of approximately $50,000 from the collection of accounts receivable. We estimated at June 30, 2010 a specific loss allowance of $0.5 million for this loan.

All other nonaccrual loans were individually under $1 million at June 30, 2010.

The following table presents the activity in our nonaccrual loan category for the periods indicated.

	Three months ended June 30,												Six months ended June 30,
	2010						2009						2010						2009
(dollars in thousands)	# of Loans			$ Amount			# of Loans			$ Amount			# of Loans			$ Amount			# of Loans			$ Amount
Beginning balance		26		$	37,034			11		$	8,380			21		$	39,958			7		$	8,475
New loans added		5			1,297			4			24,642			17			6,510			9			25,973
Advances on existing loans		—			317			—			—			—			317			—			136
Loans transferred to foreclosed property		(3	)		(22,225	)		(1	)		(5,720	)		(4	)		(23,676	)		(2	)		(6,493	)
Loans returned to accrual status		(2	)		(1,394	)		—			—			(3	)		(2,039	)		—			—
Payoffs of existing loans		(2	)		(517	)		(1	)		(209	)		(3	)		(3,616	)		(1	)		(209	)
Loans sold		(1	)		(490	)		—			—			(1	)		(490	)		—			—
Payments on existing loans		—			(4	)		—			(36	)		—			(1,162	)		—			(42	)
Charge offs on existing loans		—			—			(2	)		(100	)		(4	)		(375	)		(2	)		(100	)
Partial charge-offs on existing loans		—			(826	)		—			—			—			(2,235	)		—			(783	)

Ending balance		23		$	13,192			11		$	26,957			23		$	13,192			11		$	26,957

Foreclosed property at June 30, 2010 consists of a $21.7 million office complex project consisting of 20 buildings in Ventura County, a $4.9 million unimproved land property of 161 acres located in an unincorporated section of western Los Angeles County known as Liberty Canyon, a $1.0 million industrial property in Santa Clara County and a $0.2 million single-family residence in San Diego County.

The following table presents the activity of our foreclosed property for the periods indicated.

	Three months ended June 30,												Six months ended June 30,
	2010						2009						2010						2009
(dollars in thousands)	# of Properties			$ Amount			# of Properties			$ Amount			# of Properties			$ Amount			# of Properties			$ Amount
Beginning balance		2		$	5,997			3		$	1,069			1		$	4,893			2		$	327
New properties added		3			22,958			1			5,994			5			24,398			2			6,767
Writedowns of existing properties		—			(230	)		—			(15	)		—			(230	)		—			(15	)
Sales proceeds received		(1	)		(875	)		(1	)		(220	)		(2	)		(1,211	)		(1	)		(251	)

Ending balance		4		$	27,850			3		$	6,828			4		$	27,850			3		$	6,828

The allowance for losses on undisbursed commitments was $82,000 and $97,000 at June 30, 2010, and December 31, 2009, respectively. The allowance for losses on undisbursed commitments is included in “accrued interest payable and other liabilities” on the consolidated balance sheets.

We consider a loan impaired when, based on current information and events, we do not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments. Due to the size and nature of the loan portfolio, we determine impaired loans by periodic evaluation on an individual loan basis. The average investment in impaired loans was $34.0 million for the six months ended June 30, 2010 and $32.1 million for the six months ended June 30, 2009. Impaired loans were $14.4 million at June 30, 2010 and $40.0 million at December 31, 2009. Allowances for losses for individually impaired loans are computed in accordance with accounting standards related to accounting by creditors for impairment of a loan and are based on either the estimated collateral value less estimated selling costs (if the loan is a collateral-dependent loan), or the present value of expected future cash flows discounted at the loan’s effective interest rate. Of the $14.4 million of impaired loans at June 30, 2010, $3.1 million had specific allowances of $1.8 million. Of the $40.0 million of impaired loans at December 31, 2009, $3.5 million had specific allowances of $2.7 million.

Investing, funding and liquidity risk

Liquidity risk is the risk to earnings or capital arising from the inability to meet obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources as well as the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

We manage bank liquidity risk through Board-approved policies and procedures. The Board of Directors reviews and approves these policies at least annually. Liquidity risk policies provide us with a framework for consistent evaluation of risk and establish risk tolerance parameters. Management’s Asset and Liability Committee meets regularly to evaluate liquidity risk, review and establish deposit interest rates, review loan and deposit in-flows and out-flows and reports quarterly to the Directors’ Balance Sheet Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.

We enjoy a large base of core deposits (representing checking, savings and small balance retail certificates of deposit). At June 30, 2010, core deposits were $860.4 million. At December 31, 2009, core deposits were $830.4 million. Core deposits represent a significant low-cost source of funds that support our lending activities and represent a key part of our funding strategy. We seek and stress the importance of both loan and deposit relationships with customers in our business plans.

Alternative funding sources include large balance certificates of deposits, brokered deposits, federal funds purchased from other institutions, securities sold under agreements to repurchase and borrowings. Total alternative funds used at June 30, 2010 declined to $360.8 million from $437.8 million at December 31, 2009. The increasing balance of core deposits and the slow loan demand allowed us to reduce these funds.

In addition, we have lines of credit with other financial institutions providing for federal funds facilities up to a maximum of $27.0 million. The lines of credit support short-term liquidity needs and we cannot use them for more than 30 consecutive days. These lines are unsecured, have no formal maturity date and can be revoked at any time by the granting institutions. There were no borrowings under these lines of credit at June 30, 2010 or December 31, 2009. We also have a $15.2 million secured borrowing facility with the Federal Reserve Bank of San Francisco, or the Reserve Bank, which had no balance outstanding at June 30, 2010 or December 31, 2009. In addition, we had approximately $140.0 million of available borrowing capacity on the Bank’s secured FHLB borrowing facility at June 30, 2010.

The primary sources of liquidity for the Company, on a stand-alone basis, include the dividends from the Bank and, historically, our ability to issue trust preferred securities and secure outside borrowings. The ability of the Company to obtain funds for its cash requirements, including payments on the junior subordinated debentures underlying our outstanding trust preferred securities and the dividend on our series B preferred stock, is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations which limit its ability to transfer funds to the Company through intercompany loans, advances or cash dividends. The California Department of Financial Institutions, or DFI, under its general supervisory authority as it relates to a bank’s capital requirements regulates dividends paid by state banks, such as the Bank. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. At June 30, 2010, there were $10 million of dividends available for payment under the method described; however, as previously disclosed, the Company cannot receive dividends from the Bank without the prior written approval of the Reserve Bank. During 2009 we received no dividends from the Bank. The Company has $6.9 million in cash on deposit with the Bank at June 30, 2010.

In order to meet our deposit, borrowing and loan obligations when they come due, we maintain a portion of our funds in liquid assets. Liquid assets include cash balances at the Reserve Bank, interest bearing deposits with other financial institutions, and federal funds sold to other financial institutions. We also manage liquidity risk with readily saleable debt securities and debt securities that serve as collateral for borrowings.

At June 30, 2010, we had cash balances at the Reserve Bank of $28.5 million compared with $20.5 million at December 31, 2009. Interest bearing deposits with other financial institutions increased to $97.9 million at June 30, 2010 from $19.7 million at December 31, 2009. The $78.2 million increase reflects the decrease in securities from sales, pay downs and maturities as well as slow loan demand.

Securities

We classify securities as “available-for-sale” for accounting purposes and, as such, report them at their fair, or market, values in our balance sheets. We use quoted market prices for fair values. We report as “other comprehensive income or loss”, net of tax changes in the fair value of our securities (that is, unrealized holding gains or losses) and carry these cumulative changes as accumulated comprehensive income or loss within shareholders’ equity until realized.

Securities, at amortized cost, decreased by $69.0 million, or 19 percent, from $359.6 million at December 31, 2009 to $290.6 million at June 30, 2010. The decrease is primarily due to the $80.2 million of securities sold in the first six months of 2010.

Net unrealized holding losses were $6.8 million at June 30, 2010 and were $10.7 million at December 31, 2009. As a percentage of securities, at amortized cost, unrealized holding losses were 2.33 percent and 2.97 percent at the end of each respective period. Securities are comprised largely of U.S. Treasury notes and bills and U.S. government agency notes, mortgage-backed securities and collateralized mortgage obligations, or CMOs. On a quarterly basis, we evaluate our individual available-for-sale securities in an unrealized loss position for other-than-temporary impairment. As part of this evaluation, we consider whether we intend to sell each security and whether it is more likely than not that we will be required to sell the security before the anticipated recovery of the security’s amortized cost basis. Should a security meet either of these conditions, we recognize an impairment charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities in an unrealized loss position that meet neither of these conditions, we consider whether we expect to recover the entire amortized cost basis of the security by comparing our best estimate, on a present value basis, of the expected future cash flows from the security with the amortized cost basis of the security. If our best estimate of expected future cash flows is less than the amortized cost basis of the security, we recognize an impairment charge to earnings for this estimated credit loss.

The following table presents, at June 30, 2010 and December 31, 2009, the gross unrealized losses and amortized cost of securities and the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2010 and December 31, 2009. This table excludes the three securities with other-than-temporary impairments at June 30, 2010 and December 31, 2009.

	At June 30, 2010
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	—	$	—		$	—	$	—		$	—	$	—
U.S. government agency notes		17,526		(20	)		—		—			17,526		(20	)
U.S. government agency mortgage-backed securities		—		—			—		—			—		—
U.S. government agency collateralized mortgage obligations		11,214		(63	)		—		—			11,214		(63	)
Private-label collateralized mortgage obligations		—		—			14,975		(2,045	)		14,975		(2,045	)
Municipal securities		3,882		(50	)		172		(2	)		4,054		(52	)
Other domestic debt securities		—		—			4,801		(1,804	)		4,801		(1,804	)

	$	32,622	$	(133	)	$	19,948	$	(3,851	)	$	52,570	$	(3,984	)

	At December 31, 2009
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	55,962	$	(71	)	$	—	$	—		$	55,962	$	(71	)
U.S. government agency notes		17,613		(102	)		—		—			17,613		(102	)
U.S. government agency mortgage-backed securities		38,349		(467	)		—		—			38,349		(467	)
U.S. government agency collateralized mortgage obligations		19,113		(156	)		—		—			19,113		(156	)
Private-label collateralized mortgage obligations		—		—			17,424		(4,147	)		17,424		(4,147	)
Municipal securities		4,399		(53	)		172		(2	)		4,571		(55	)
Other domestic debt securities		—		—			4,848		(2,388	)		4,848		(2,388	)

	$	135,436	$	(849	)	$	22,444	$	(6,537	)	$	157,880	$	(7,386	)

We determined that, as of June 30, 2010, our U.S. Treasury notes and bills, and U.S. government agency notes, mortgage-backed securities and CMOs were temporarily impaired because these securities were in a continuous loss position for less than 12 months. We believe the cause of the gross unrealized losses was movements in interest rates and not the deterioration of the issuers’ creditworthiness.

We own one pooled trust preferred security, rated triple-A at purchase, with an amortized cost basis of $4.8 million and an unrealized loss of $1.8 million at June 30, 2010. At December 31, 2009, the unrealized loss was $2.4 million. The gross unrealized loss is mainly due to extraordinarily high investor yield requirements resulting from an illiquid market, causing this security to be valued at a discount to its acquisition cost. One credit rating agency has now rated the security single-A while another has rated the security triple-B-. The senior tranche owned by us has a collateral balance well in excess of the amortized cost basis of the tranche at June 30, 2010. Fourteen of the fifty-six issuers in the security have deferred or defaulted on their interest payments as of June 30, 2010. Our analysis determined that approximately half of the issuers would need to default on their interest payments before the senior tranche owned by us would be at risk of loss. As our estimated present value of expected cash flows to be collected was in excess of our amortized cost basis and we have the intent and ability to hold this security until the anticipated recovery of the remaining amortized cost basis, we concluded that the gross unrealized loss on this security was temporary.

The majority of unrealized losses at June 30, 2010 relate to a type of mortgage-backed security also known as private-label CMOs. As of June 30, 2010, the fair value of these securities was $24.7 million, representing 9 percent of our securities portfolio. Gross unrealized losses related to these securities were $4.8 million, or 16 percent of the aggregate cost basis of these securities as of June 30, 2010. At December 31, 2009, the gross unrealized losses were $7.5 million, or 23 percent of the amortized cost basis of these securities. The gross unrealized losses associated with these securities were primarily due to extraordinarily high investor yield requirements resulting from an extremely illiquid market, significant uncertainty about the future condition of the mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, causing these securities to be valued at significant discounts to their acquisition cost. Six of our private-label CMOs, approximately 85 percent of amortized cost, had credit agency ratings of less than investment grade at June 30, 2010. We performed discounted cash flow analyses for these securities using the current month, last three month and last twelve month historical prepayment speed, the cumulative default rate and the loss severity rate to determine if there was other-than-temporary impairment as of June 30, 2010. Based upon this analysis, we determined there was no additional other-than-temporary impairment at June 30, 2010. For the year ended December 31, 2009, we identified three private-label CMOs and charged to earnings other-than-temporary impairment losses of $1,115,000. We do not intend to sell these securities and we do not believe it likely that we will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. If current conditions in the mortgage markets and general business conditions continue to deteriorate, the fair value of our private-label CMOs may decline further and we may experience further impairment losses.

Deposits

Deposits represent our primary source of funds for our lending activities. The following table presents the balance of each deposit category for the periods indicated:

	June 30,		December 31,
(in thousands)	2010		2009

Non-maturity core deposits:
Non-interest checking	$	341,103	$	317,610
Interest checking		79,796		82,806
Money market and savings		363,996		339,750
Total non-maturity core deposits		784,895		740,166
Maturity core deposits:
Retail time deposits under $100,000		75,470		90,279
Total core deposits		860,365		830,445

Non-core deposits:
Retail time deposits $100,000 and over		157,092		158,536
Brokered time deposits		—		25,734
State of California time deposits		75,000		110,000
Total non-core deposits		232,092		294,270
Total deposits	$	1,092,457	$	1,124,715

The $32.3 million decline in deposits from the 2009 year-end was due principally to the $60.7 million reduction in our brokered and State of California time deposits. Core deposits have increased and loan demand has slowed allowing these deposits to mature and not be renewed. Core non-maturity deposits increased $44.7 million since year-end 2009. Core deposits represent 79 percent of deposits at June 30, 2010, up from 74 percent at December 31, 2009.

Large balance certificates of deposit (that is, balances of $100,000 or more) were $232.1 million at June 30, 2010. Large balance certificates of deposit were $268.5 million at December 31, 2009. A portion of these large balance time deposits represent time deposits placed by the State Treasurer of California with the Bank. The time deposit program is one element of a pooled investment account managed by the State Treasurer for the benefit of the State of California and all participating local agencies. The pooled investment account has approximately $70.5 billion of investments, of which approximately $4.4 billion represent time deposits placed at various financial institutions. At June 30, 2010, and December 31, 2009, State of California time deposits placed with us, with original maturities of three months, were $75.0 million and $110.0 million, respectively. We believe that the State Treasurer will continue this program; we also believe, if it becomes necessary to replace these deposits, that we have sufficient alternative funding capacity or the ability to establish large balance certificates of deposit rates that will enable us to attract deposits in sufficient amounts. The remainder of time deposits represents time deposits accepted from customers in our market area.

We use brokered time deposits to supplement our liquidity and achieve other asset liability management objectives. We include these deposits in the balance sheet line “Certificates of deposit, under $100,000”. Brokered deposits are wholesale time deposits in denominations less $100,000 placed by rate sensitive customers that do not have any other significant relationship with us. Professionals operating under established investment criteria manage most wholesale funds and the brokered deposits are typically in amounts that are within the FDIC deposit insurance limit. As a result, these funds are generally very sensitive to credit risk and interest rates, and pose greater liquidity risk to a bank. They may refuse to renew the time deposits at maturity if higher rates are available elsewhere or if they perceive that creditworthiness is deteriorating. At June 30, 2010, we had no brokered deposits. At December 31, 2009, we had brokered deposits of $25.7 million, all of which had maturities within 12 months. We also use the Certificate of Deposit Account Registry System, or CDARS, for our deposit customers who wish to obtain FDIC insurance on their deposits beyond that available from a single institution. We place these deposits into the CDARS network and accept in return other customers’ certificates of deposits in the same amount and at the same interest rate. We had $13.4 million of these reciprocal deposits, included in time deposits of $100,000 or more, at June 30, 2010.

At June 30, 2010, the scheduled maturities of time certificates of deposit in denominations of $100,000 or more were as follows:

(Dollars in thousands)
Three months or less	$	123,707
Over three months to twelve months		46,903
Over twelve months		61,482

	$	232,092

Borrowings

Borrowings are comprised of federal funds purchased from other financial institutions, FHLB advances and securities sold under agreements to repurchase. At June 30, 2010, we had $128.8 million of borrowings outstanding, of which $45.0 million was comprised of securities sold under agreements to repurchase and $83.8 million of FHLB advances. For our FHLB advances, the following table presents the amounts and weighted average interest rates outstanding.

	Six Months Ended June 30, 2010					Year Ended December 31, 2009
(in thousands)	Federal Home Loan Bank Advances		Weighted average interest rate			Federal Home Loan Bank Advances		Weighted average Interest rate
Amount outstanding at end of period	$	83,750		3.91	%	$	98,500		3.82	%
Maximum amount outstanding at any month-end during the period	$	110,205		3.43	%	$	122,000		3.88	%
Average amount outstanding during the period	$	91,941		3.83	%	$	110,252		3.86	%

The higher levels of liquid assets and slow loan demand allowed these borrowings to mature and not be renewed.

The following table presents the maturities of FHLB term advances:

	At June 30, 2010						At December 31, 2009
(dollars in thousands)	Amount		Maturity Year		Weighted Average Interest Rate		Amount		Maturity Year		Weighted Average Interest Rate
	$	27,250		2010		3.89%	$	42,000		2010	3.70%
		13,000		2011		3.21%		13,000		2011	3.21%
		18,500		2012		4.03%		18,500		2012	4.03%
		17,500		2014		4.24%		17,500		2014	4.24%
		7,500		2017		4.07%		7,500		2017	4.07%

	$	83,750					$	98,500

The following table presents maturities of securities sold under agreements to repurchase:

	At June 30, 2010						At December 31, 2009
(dollars in thousands)	Amount		Maturity Year		Weighted Average Interest Rate		Amount		Maturity Year		Weighted Average Interest Rate
	$	15,000		2011		3.64%	$	15,000		2011	3.64%
		20,000		2013		3.60%		20,000		2013	3.60%
		10,000		2014		3.72%		10,000		2014	3.72%

	$	45,000					$	45,000

Junior Subordinated Debentures

As of June 30, 2010 and December 31, 2009, we had $26.8 million of junior subordinated debentures outstanding from two issuances of trust preferred securities. First California Capital Trust I’s capital securities have an outstanding balance of $16.5 million, mature on March 15, 2037, and are redeemable, at par, at the Company’s option at any time on or after March 15, 2012. The securities have a fixed annual rate of 6.80% until January 15, 2012, and a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate plus 1.60% per annum. FCB Statutory Trust I’s capital securities have an outstanding balance of $10.3 million, mature on December 15, 2035, and are redeemable, at par, at the Company’s option at any time on or after December 15, 2010. The securities have a fixed annual rate of 6.145% until December 15, 2010, and a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate plus 1.55% per annum.

Capital resources

We have 1,000 issued shares of preferred stock series A, $0.01 par value, with a liquidation preference of $1,000 per share. Redemption of the preferred stock series A is at our option subject to certain restrictions imposed by our preferred stock series B. The redemption amount is computed at the per-share liquidation preference plus unpaid dividends at a rate of 8.5%. Each holder of preferred stock series A has the right, exercisable at the option of the holder, to convert all or some of such holder’s series A shares into common stock. The sum of each share’s liquidation preference plus unpaid dividends divided by the conversion factor of $5.63 per share represents the number of common shares issuable upon the conversion of each share of preferred stock series A. As of June 30, 2010, we reserved 306,731 of common shares for the conversion of the preferred stock series A.

On December 19, 2008, we participated in the U.S. Treasury Capital Purchase Program, or the CPP, under which we received $25 million in exchange for issuing 25,000 preferred stock series B shares and a warrant to purchase common stock to the Treasury. As a participant in the CPP, we are subject to various restrictions and requirements, such as restrictions on our stock repurchases and payment of dividends, and other requirements relating to our executive compensation and corporate governance practices. Moreover, under legislation such as the American Recovery and Reinvestment Act of 2009, we may early redeem the shares issued to the Treasury under the CPP without any early penalty or requirement to raise new capital, as previously required under the original terms of the CPP. The preferred stock series B qualifies as Tier 1 capital, and holders are entitled to receive cumulative cash dividends at a rate of 5 percent per year for the first five years and 9 percent per year thereafter, on a liquidation preference of $1,000 per share. Dividends are payable quarterly in arrears on each of February 15, May 15, August 15, and November 15, if, as and when declared by our Board of Directors, out of assets legally available for payment. The common stock warrant entitles the Treasury to purchase 599,042 shares of our common stock at an initial exercise price of $6.26 for a term of ten years.

The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on a company’s financial statements. Under capital adequacy guidelines, bank holding companies must meet specific capital guidelines that involve quantitative measures of the company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In February 2010, the Board of Directors of First California Financial Group, Inc. and the Reserve Bank entered into an informal agreement. The informal agreement requires the Board to take all appropriate steps to utilize fully its financial and managerial resources to assist the Company and the Bank in functioning in a safe and sound manner pursuant to Regulation Y of the Board of Governors of the Federal Reserve System. The informal agreement restricts the ability of the Company to (a) receive dividends or another form of payment or distribution representing a reduction of capital from the Bank without the prior written approval from the Reserve Bank, (b) declare or pay dividends, make any payments on trust preferred securities, or make any other capital distributions, without the prior written approval of the Reserve Bank, (c) directly or indirectly incur, renew, increase or guarantee any debt, without the prior written approval of the Reserve Bank, (d) directly or indirectly issue any trust preferred securities without the prior written approval of the Reserve Bank, and (e) purchase, redeem, or otherwise acquire, directly or indirectly, any of its stock without the prior written approval of the Reserve Bank.

The Reserve Bank has approved all dividend payments due to the holders of our preferred stock series B and all interest payments due to the holders of our junior subordinated debentures, also known as trust preferred securities, since the effective date of the informal agreement.

On March 3, 2010, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock, par value $0.01 per share, from 25,000,000 shares to 100,000,000 shares, and to increase the number of authorized shares of all classes of the Company’s stock from 27,500,000 shares to 102,500,000 shares.

In March 2010, we consummated an underwritten public offering of common stock at a price of $2.50 per share. We sold 16,560,000 common shares, which include the exercise by the underwriter of its over-allotment option, for gross proceeds of $41.4 million. We contributed $36.0 million to our bank subsidiary. We intend to use the net proceeds of this public offering for general corporate purposes, including funding working capital requirements, supporting the growth of our business from internal efforts and from whole bank or failed bank acquisitions, and regulatory capital needs related to any such growth and acquisitions.

The following tables present the capital amounts and ratios of the Company with a comparison to the minimum ratios for the periods indicated:

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
	(in thousands)
June 30, 2010
Total capital	$	170,965		17.33	%	$	78,909		³ 8.00	%
(to risk weighted assets)
Tier I capital	$	158,584		16.08	%	$	39,454		³ 4.00	%
(to risk weighted assets)
Tier I capital	$	158,584		11.62	%	$	54,613		³ 4.00	%
(to average assets)

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
	(in thousands)
December 31, 2009
Total capital	$	133,078		12.69	%	$	83,926		³ 8.00	%
(to risk weighted assets)
Tier I capital	$	119,924		11.43	%	$	41,963		³ 4.00	%
(to risk weighted assets)
Tier I capital	$	119,924		8.52	%	$	56,324		³ 4.00	%
(to average assets)

The Bank is also subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of June 30, 2010, that the Bank meets all capital adequacy requirements to which it is subject.

As of June 30, 2010, the Bank exceeded the minimum ratios to be well-capitalized under the prompt corrective action provisions. There are no conditions or events since June 30, 2010 that we believe would change the Bank’s category.

The following tables present the capital amounts and ratios of the Bank with a comparison to the minimum ratios for the periods indicated:

	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
June 30, 2010
Total capital	$	164,096		16.66	%	$	78,781		³ 8.00	%	$	98,476		³ 10.00	%
(to risk weighted assets)
Tier I capital	$	151,734		15.41	%	$	39,390		³ 4.00	%	$	59,086		³ 6.00	%
(to risk weighted assets)
Tier I capital	$	151,734		11.10	%	$	54,673		³ 4.00	%	$	68,341		³ 5.00	%
(to average assets)

	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
December 31, 2009
Total capital	$	127,315		12.17	%	$	83,669		³ 8.00	%	$	104,587		³ 10.00	%
(to risk weighted assets)
Tier I capital	$	114,198		10.92	%	$	41,835		³ 4.00	%	$	62,752		³ 6.00	%
(to risk weighted assets)
Tier I capital	$	114,198		8.08	%	$	56,507		³ 4.00	%	$	70,633		³ 5.00	%
(to average assets)

We recognize that a strong capital position is vital to growth, continued profitability, and depositor and investor confidence. Our policy is to maintain sufficient capital at not less than the well-capitalized thresholds established by banking regulators.

Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, we make commitments to extend credit or issue letters of credit to customers. We generally do not recognize these commitments in our balance sheet. These commitments involve, to varying degrees, elements of credit risk; however, we use the same credit policies and procedures as we do for on-balance sheet credit facilities.

The following summarizes our outstanding commitments at June 30, 2010 and December 31, 2009:

(in thousands)	June 30, 2010		December 31, 2009
Financial instruments whose contract amounts contain credit risk:
Commitments to extend credit	$	159,955	$	162,842
Commercial and standby letters of credit		1,620		1,439

	$	161,575	$	164,281

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Total commitment amounts do not necessarily represent future cash requirements because many expire without use. We may obtain collateral for the commitment based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.

Letters of credit written are conditional commitments issued by us to guarantee the performance of a customer to a third party. These guarantees support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Credit risk for letters of credit is essentially the same as that for loan facilities to customers. When we deem collateral necessary, we will hold cash, marketable securities, or real estate as collateral supporting those commitments.

Interest Rate Risk

Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (re-pricing risk), from changing rate relationships among different yield curves affecting bank activities (basis risk), from changing rate relationships across the spectrum of maturities (yield curve risk), and from interest-related options embedded in loans and products (options risk).

We manage bank interest risk through Board-approved policies and procedures. The Board of Directors reviews and approves these policies at least annually. Interest rate risk policies provide management with a framework for consistent evaluation of risk and establish risk tolerance parameters. Management’s Asset and Liability Committee meets regularly to evaluate interest rate risk, engages a third party to assist in the measurement and evaluation of risk and reports quarterly to the Directors’ Balance Sheet Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.

We use simulation-modeling techniques that apply alternative interest rate scenarios to periodic forecasts of future business activity and assess the potential changes to net interest income. Our base scenario examines our balance sheet where we assume rate changes occur ratably over an initial 12-month horizon based upon a parallel shift in the yield curve and then is maintained at that level over the remainder of the simulation horizon. We also create alternative scenarios where we assume different types of yield curve movements. In our most recent base simulation, we estimated that net interest income would increase approximately 0.30% within a 12-month time horizon for an assumed 100 basis point decrease in prevailing interest rates or decrease approximately 0.76% for an assumed 100 basis point increase in prevailing interest rates. In addition, we estimated that net interest income would decrease approximately 0.84% within a 12-month time horizon for an assumed 200 basis point increase in prevailing rates. These estimated changes were within the policy limits established by the Board. The table below illustrates the estimated percentage change in our net interest income in our base scenario over hypothetical 1, 2 and 3 year horizons.

	Time Horizon
Percentage Change	1 Year			2 Years			3 Years
-100 bps		0.30	%		3.36	%		5.49	%
+100 bps		-0.76	%		1.36	%		5.95	%
+200 bps		-0.84	%		1.99	%		7.64	%
+400 bps		-0.81	%		3.98	%		15.85	%

Our simulation model includes assumptions about anticipated prepayments on mortgage-related instruments, the estimated cash flow on loans and deposits, and our future business activity. These assumptions are inherently uncertain and, as a result, our modeling techniques cannot precisely estimate the effect of changes in net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, cash flow and business activity.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Please see the section above titled “Interest Rate Risk” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which provides an update to our quantitative and qualitative disclosure about market risk. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure above under “Forward Looking Statements” in Item 2 regarding such forward-looking information.

Item 4T. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter ending June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The nature of our business causes us to be involved in routine legal proceedings from time to time. We are not aware of any pending or threatened legal proceedings expected to have a material adverse effect on our business, financial condition, results of operations or cash flow that arose during the fiscal quarter ended June 30, 2010 or any material developments in our legal proceedings previously reported in Item 3 to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes from risk factors as previously disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the period ended December 31, 2009, filed with the SEC on March 5, 2010.

We are subject to extensive regulation which could adversely affect our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was recently signed into law. The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes, such as: (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) enhanced lending limits strengthening the existing limits on a depository institution’s credit exposure to one borrower; (3) increased capital and liquidity requirements; (4) increased regulatory examination fees; (5) changes to assessments to be paid to the FDIC for federal deposit insurance; (6) prohibiting bank holding companies, such as us, from including in regulatory Tier 1 capital future issuances of trust preferred securities or other hybrid debt and equity securities; and (7) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including us. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:

a reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

the limitation on our ability to raise capital through the use of trust preferred securities as these securities will no longer be included as Tier 1 capital going forward; and

the limitation on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

Further, we may be required to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

In addition, there are other currently proposed laws, rules and regulations that, if adopted, would impact our operations. For example, federal bank regulators are required, within nine months of the enactment of the Dodd-Frank Act, to jointly prescribe regulations to (1) require banking organizations to report the structures of all incentive-based compensation arrangements and (2) prohibit incentive-based payment arrangements that encourage inappropriate risks by providing employees, directors, or principal shareholders with excessive compensation or that could lead to material financial loss to the organization.

Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us. For more information, please see the section entitled “Business-Supervision and Regulation” under Part I, Item 1 in our 2009 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Other Information

None.

Item 5. Exhibits

The following Exhibits are filed as a part of this report:

Exhibit Number		Description
31.1		Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	First California Financial Group, Inc.

Date: August 6, 2010	By:	/s/ Romolo Santarosa
		Romolo Santarosa (Principal Financial Officer and Duly Authorized Officer)