As filed with the Securities and Exchange Commission on February 4, 2011

Registration No: 333-168396

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT No. 4
TO

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

CITIZENS BANCORP

(exact name of registrant as specified in its charter)

California				6022				01-0775317
(State or other jurisdiction of incorporation or organization)				(Primary Standard Industrial Classification Code)				(I.R.S. Employer Identification No.)

208 Providence Mine Road Suite 122
Nevada City, California 95959
(530) 478-6000
(Address, including zip code and telephone number,
including area code, of registrant’s principal and executive offices)

Gary D. Gall
Citizens Bancorp
President and Chief Executive Officer
208 Providence Mine Road Suite 122
Nevada City, California 95959
(530) 478-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
John F. Stuart, Esq.
Stuart ¦ Moore
641 Higuera Street
Suite 302
San Luis Obispo, CA 93401
(805) 545-8590
(805) 545-8599 — facsimile

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated Filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

SUBJECT TO COMPLETION, DATED February 4, 2011

PRELIMINARY PROSPECTUS

10,000,000 Units
Each Unit Consisting of One (1) Share of Common Stock
And Two (2) Warrants
$3.00 Per Unit

Citizens Bancorp is offering up to 10,000,000 units at a price of $3.00 per unit (the “Offering”), with each unit consisting of one (1) share of common stock and two (2) warrants (all warrants collectively, the “2011 Warrants”), each warrant to purchase one (1) share of our common stock, as more fully described herein. The 2011 Warrants will not be exercisable for a period of one year after issuance.

We are offering the units on a best efforts basis, without any involvement of underwriters or broker-dealers. There is a minimum investment requirement of $6,000 to participate in the Offering. We will receive all of the net proceeds from the sale of these units. Our common stock is not listed on any national securities exchange. Our common stock is quoted on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “CZNB” but is infrequently traded. The last reported sale price of our common stock was $2.00 per share on January 27, 2011. We do not intend to have the 2011 Warrants listed on any national securities exchange, nor do we intend to facilitate the quotation of the 2011 Warrants on the OTCBB, or any other securities quotation system. The Company currently does not have enough shares of common stock authorized to accomodate the exercise of all the 2011 Warrants and must seek shareholder approval to increase the authorized shares of common stock. See “Risk Factors.”

Investing in our securities involves risks. See “Risk Factors” beginning on page 15 for a discussion of factors you should consider before buying our securities. You should not purchase these units if you cannot afford the loss of your investment.

The securities offered hereby are not savings accounts, deposits or other obligations of our bank subsidiary and are not insured by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

We reserve the right to withdraw, cancel or modify this Offering and reject subscriptions in whole or in part. It is expected that delivery of the units will be made in Nevada City, California no later than __________, 2011.

The date of this prospectus is [*], 2011.

The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

TABLE OF CONTENTS

				Page
Summary					1
Selected Consolidated Financial Information					13
Risk Factors					15
Cautionary Note Regarding Forward-Looking Statements					26
Use of Proceeds					27
Trading History and Dividend Policy					28
Capitalization					29
Dilution					30
Management’s Discussion and Analysis of Financial Condition and Results of Operations					31
Business					69
Supervision and Regulation					80
Management					88
Principal Shareholders					98
Description of Capital Stock					100
The Offering					104
Consent					105
Certain Legal Matters					105
Available Information					105
Where You Can Find More Information					105
Index to Financial Statements					106

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Information contained on our website is not part of this prospectus.

SUMMARY

This is only a summary and does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus, including “Risk Factors” and our consolidated financial statements and related notes appearing elsewhere in this prospectus, before deciding to invest in our common stock.

Unless we indicate otherwise, the number of shares as well as all per share and financial information in this prospectus:

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assumes an offering price of $3.00 per unit; and

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does not give effect to the use of proceeds of the Offering.

CITIZENS BANCORP

We are the bank holding company for Citizens Bank of Northern California (also referred to as “Citizens Bank” or “Bank”), a California chartered bank. At December 31, 2010, we had total assets of $329.0 million, total net loans held for investment of $246.4 million, total deposits of $275.0 million and shareholders’ equity of $3.7 million.

Citizens Bancorp (also referred to as “Company”) was organized as a California corporation and incorporated on February 19, 2003. Effective as of June 1, 2003, Citizens Bancorp became a bank holding company by acquiring all of the outstanding common stock of the Bank.

At this time, Citizens Bancorp functions primarily as the holder of all of Citizens Bank common stock. It may, in the future, acquire or form additional subsidiaries, including other banks to the extent permitted by law, although Citizens Bancorp has no plans to do so in the immediate future. Citizens Bancorp does not own or lease any property and has no paid employees; however, it shares the facilities and employees of Citizens Bank.

The principal office of Citizens Bancorp is 208 Providence Mine Rd., Suite 122, Nevada City, California 95959, and the telephone number is (530) 478-6000. Our common stock is traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “CZNB”.

CITIZENS BANK

Citizens Bank was formed in 1994 and headquartered in Nevada City, California. Citizens Bank has six branches in communities in Nevada County, including Nevada City, Penn Valley, Lake of the Pines, Truckee, and two branches in Grass Valley. In addition the Bank has one branch in Placer County in the city of Auburn. We are the only community bank headquartered in Nevada County, California. We deliver a complete array of commercial bank products and services with an emphasis on customer relationships and personalized service.

Citizens Bank provides community banking services in its market areas offering a wide variety of deposit products, commercial, residential and consumer loans and other traditional banking products and services that are designed to meet the needs of small and middle market businesses and individuals. As a full service community bank, Citizens Bank seeks to differentiate itself from its competitors through superior personal service, responsiveness and local decision-making.

Our customers are generally small- to medium-sized businesses (generally representing businesses with less than $25 million in annual revenues) that require highly personalized commercial banking products and services that we deliver in our relationship banking style. We believe that our customers prefer locally owned and managed banking institutions that provide responsive, personalized service and customized products. In 2009, for the 11th year in a row, the quality of our service was voted “Best in Nevada County” by the readers of The Union newspaper. A substantial portion of our business is with customers who have long-standing relationships with our officers or directors or who have been referred to us by existing customers.

The Bank’s solid core banking operation is driven by a strong net interest margin that ranks in the top quartile of banks both in the State and nationally. Since its inception, the Bank has built a loyal customer base and continues to increase its market share. In addition, we have a dedicated board of directors and management team, who are committed to enhancing shareholder value and continuing to provide a positive customer experience. Our Board

members have businesses located in Nevada County. Our committed employees strive to make a real difference in the community and currently volunteer in 81 local organizations, sit on 31 boards of directors and contribute to 66 organizations.

The Bank’s headquarters is located at our Nevada City branch at 305 Railroad Avenue, Nevada City, California 95959 and our telephone number is (530) 478-6000. The Bank’s Operations Center is located at 208 Providence Mine Road, Suite 122, Nevada City, California 95959. We maintain a website at www.citizensbanknc.com. None of the information on such website is deemed to be incorporated herein.

EVENTS OF 2008, 2009 AND 2010

In 2008 and 2009 and the first nine months of 2010, we suffered losses of $10.7 million, $13.5 million and $4.5 million, respectively. We also lost $1.3 million for the three months ended December 31, 2010. These losses were primarily the result of:

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a major economic recession in our market area, California and the nation which resulted in decreasing real estate values and significant unemployment;

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a concentration in land and construction loans;

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a circumvention of certain policies and procedures within the loan administration function, see “Risk Factors — Risks Related to Our Business and Market”; and

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the need for a valuation reserve on our deferred tax assets.

The confluence of these circumstances led us to a restatement of our 2008 financial statements after an examination by the California Department of Financial Institutions (“DFI”) in May of 2009 and a significant change in our senior management team. In 2009, because of the accumulative deficit position of the Company, a valuation allowance of $9.3 million was recorded against all of the Company’s net deferred tax assets.

During the nine months ended September 30, 2010, the Bank continued to be proactive in identifying problem loans, quantifying impairment if any, and developing resolution plans suitable for each, which required a comprehensive loan-by-loan review. Since December 31, 2009, the Bank has experienced significant material deterioration with certain large credit relations contained in its loan portfolio. In the second quarter of 2010, the Bank completed a review of all nonresidential real estate loans and all commercial loans with a balance of $250,000 or greater, which included obtaining and reviewing updated financial statements, rent rolls and tax returns as appropriate. In addition, a physical site inspection was completed on all collateral for nonresidential real estate loans at that time. As result of the continued increase in vacancy rates noted during the review and continuing decline in commercial real estate values in our market area, a $6,900,000 provision for loan losses was recognized during the three months ended June 30, 2010. This increase in the provision along with other factors resulted in a net loss of $4,527,000 for the nine months ended September 30, 2010. Our capital has been significantly reduced as a result of the losses in 2008, 2009 and 2010. We must now recapitalize the Company and the Bank.

As a result of the deterioration we have experienced in the loan portfolio, non-performing assets, which include nonaccrual loans, loans past due 90 days and still accruing, and other real estate owned totaled $42,162,000 as of September 30, 2010. Reducing the level of non-performing assets will take a significant effort and will continue through 2011 and beyond. We have dedicated additional resources and will continue our proactive approach to managing our non-performing assets with aggressive loan resolution strategies and loan sales, as appropriate. We expect that many of these assets will eventually require foreclosure and subsequent sale by the Bank. This will prove to be a detriment to our earnings since we will not be earning any interest on the non-performing asset, will also have the cost of carrying the property while awaiting sale, and may experience further losses if the value of such property declines.

As a result of the continued deterioration in asset quality, earnings and capital our sources of available liquidity have declined. The Bank was prohibited from renewing or obtaining brokered deposits and as of September 30, 2010, there were no brokered deposits outstanding. As of September 30, 2010, the Company did not have available credit on its unsecured lines of credit with its correspondent banks but had $267,000 and $2,020,000 available on its lines of credit with the Federal Home Loan Bank and Federal Reserve Bank, respectively. In order to preserve

capital in August 2009, we began deferring TARP dividend payments and in July 2010, we began deferring interest payments on trust preferred securities. Our ability to raise additional liquidity through deposit campaigns and interest deposits is subject to pricing limitations.

STRENGTHS

Since 1995, we have served a key role in funding the economic engine in the markets we serve, working hand-in-hand to support local businesses. We have a strong branch system that has continued to grow our customer base. Despite the losses in 2008, 2009 and the first nine months of 2010, which resulted from significant provisions for credit losses and expenses/losses related to other real estate owned (“OREO”), the Company has significant core operating strengths, including a strong net interest margin and a very loyal customer base. We have continuously maintained a net interest margin that is among the top quartile of banks both in California and nationally. Our net interest margin was 4.54%, 4.51% and 4.61% for the nine months ended September 30, 2010 and the years ended December 31, 2009 and 2008, respectively.

We feel that these core strengths are an important measure as they show the effects of the Company’s core operations and do not change significantly as a result of outside economic influences. We believe that with an improved economy, we will record significantly smaller provisions for credit losses and will have significantly reduced OREO expenses.

We have a well-seasoned management team, with over 130 years of experience combined, who have the skills needed to return the Company to profitability.

OUR MANAGEMENT TEAM

The Board of Directors during 2009 replaced two executive officers and added a Chief Risk Officer. This newly assembled, experienced group of executives are charged with leading the Company and the Bank back to profitability. The executive management team consists of the following individuals:

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Gary D. Gall joined the organization as our President and Chief Executive Officer and Director in July 2009. Prior to that, between August 2008 and August 2009, he was Chairman of the Board for Sierra Vista Bank, Folsom, CA and between 1993 and 2006, was President and Chief Executive Officer for Western Sierra Bancorp, Cameron Park, CA. Prior to that, he was President and Chief Executive Officer of Delta National Bank in Manteca for six years. Mr. Gall’s 36 year banking career has been devoted to community banking and the long sustaining value it brings to local businesses, individuals and the community. During his tenure at Western Sierra, he led a dedicated team that grew assets from $50 million with four branches to over $1.2 billion and 31 branches within a multi-bank holding company environment. Under his leadership, the bank successfully negotiated and completed the merger/acquisition of six other community banks between 1999 and 2005. Western Sierra, who joined NASDAQ in 1999, was also recognized nationally for performing in the top 5% of community banks in 2004.

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Susann C. Boley* has served as our Executive Vice President and Chief Financial Officer since 2002. Ms. Boley’s 41 year career includes positions most recently as Vice President for Boston Private Bank & Trust company and preceding that, as Senior Vice President and Chief Financial Officer for Bank of Los Altos.

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Michael A. Behn has served as our Senior Vice President/Chief Information Officer since 2004. In addition, in 2009 he was named an Executive Vice President, Chief Information Officer and the Bank’s Senior Credit Administrator. Mr. Behn’s 30 year career includes positions with Bank of America, United California Bank/First Interstate Bank of California, Manufacturers Bank and City National Bank.

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Phillip J. Campbell joined the organization as our Executive Vice President/General Counsel and Chief Risk Officer in August 2009. Mr. Campbell’s 30 year career has focused on financial institutions. His career includes his former role between 2002 and 2009 as Chief Counsel for the Wachovia Small Business Capital

Ms. Boley was recently married and has changed her name from Trevena to Boley.

subsidiaries of Wachovia Corporation and Wachovia Bank, N.A., and Assistant General Counsel with Wachovia Corporation and Wells Fargo & Co. He also was a partner at the law firm of Weintraub, Genshlea & Chediak.

MANAGEMENT RESPONSES

Under Mr. Gall’s leadership, the reconstituted executive management team and the Board of Directors have taken a number of proactive steps to stabilize the Bank and reduce losses. These steps have included:

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completing a comprehensive review of the loan portfolio;

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reorganizing the credit administration and underwriting functions, including internal control enhancement;

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hiring a number of new senior officers;

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increasing equity capital by almost $1.7 million through the private placement of Company common stock;

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planning a reduction in assets of approximately $30 million in 2010 in order to reduce balance sheet risk and support regulatory capital ratios;

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assigning Mr. Campbell as Chief Risk Officer and Mr. Behn as Senior Credit Administrator;

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maintaining a net interest margin within the 90^th percentile of all insured commercial banks with assets between $300 million and $1.0 billion;

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changing the funding mix by reducing brokered deposits and focusing on building core deposits;

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becoming more efficient by centralizing operations and reducing non-interest expense; and

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initiating an SBA department to diversify the loan portfolio, reduce risk and generate fee income

MAJOR CHALLENGES

Despite the foregoing efforts and accomplishments, the Board of Directors and management are faced with several major challenges in the short run in attempting to overcome the events of 2008, 2009 and 2010. These major challenges include:

Recapitalization

Our capital has been significantly reduced as a result of the losses in 2008 and 2009 and a $5.8 million loss for 2010. We must now recapitalize the Company and the Bank. We entered into an agreement with our regulators to raise the Bank’s leverage capital ratio to 9% by the middle of July 2010. Although we have not met this deadline, we are continuing our efforts to raise the capital needed to reach the capital ratio required in the agreement. As of December 31, 2010, we needed to achieve a combination of new equity capital and earnings of approximately $12.0 million in order to satisfy the capital requirement. See “Consent Order and Written Agreement.” To achieve such a ratio, we must:

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increase the Bank’s capital through a combination of new equity capital and its earnings;

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minimize future losses from the $34.8 million in non-performing loans we had at December 31, 2010 or from other assets; and/or

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reduce assets from the amount at year end 2010.

If we do not achieve all these goals, we will not be able to satisfy the capital requirement of the consent order which would have a material adverse effect on the Company and the Bank and the value of your investment and our ability to continue as a going concern. These effects could include additional regulatory enforcement actions including the imposition of civil monetary penalties against the Company, the Bank or both, the termination of insurance of the Bank’s deposits by the FDIC or the closing of the Bank with the imposition of a conservator or receiver. See “Supervision and Regulation — Capital Standards,” “Supervision and Regulation — Prompt Corrective Action and Other Enforcement Mechanisms,” and “Risk Factors — Risks Related to the Offering.”

For the Offering to be successful, it is anticipated that there will need to be one or more large purchasers of the units. Any such large purchaser(s) will have significant influence over the outcome of all matters submitted to the Company’s shareholders for approval after the Offering, including the election of directors and other corporate actions. While management has had preliminary discussions with several new potentially large investors who, individually or in the aggregate, could acquire voting control of the Company, no agreements have yet been finalized relating to such sales of the units. However, management believes, that without being able to attract new, potentially large investors, the Bank will be unable to satisfy the capital requirements of the consent order.

We view satisfying the capital requirements of the consent order as only the first step in our recapitalization. We anticipate that further capital will be necessary in order to (i) execute our growth strategy once our financial position improves and (ii) keep us in compliance with the Order. The economic recession has provided a number of opportunities for expansion for a well-capitalized institution which is in satisfactory regulatory condition. See “Use of Proceeds.”

Consent Order and Written Agreement

The DFI completed its regularly scheduled examination of the Bank in May, 2009. As a result of such examination, effective February 11, 2010, the Bank entered into a stipulation and consent to issuance of a consent order (the “Order”) by the FDIC and DFI.

The Order requires the Bank to:

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Maintain acceptable Executive Management and provide Executive Management with written authority to implement the provisions of the Consent Order and obtain written approval from the regulators to appoint new individuals to the Bank’s Board or to Executive Management.

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Within 150 days of the effective date of the Order and thereafter, achieve and maintain tangible shareholder’s equity to total tangible assets, and Tier 1 capital to total assets, equal to or greater than 9% (the “Capital Requirement”).

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Develop, adopt and implement a Capital Plan setting forth specific actions that the Bank will take to satisfy the Capital Requirement;

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Within 30 days from the effective date of the Order, eliminate from the books, all assets classified “Loss” in the Report of Examination dated May 18, 2009 (“Report”) by charge-off or collection.

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Within 90 days from the effective date of the Order, reduce assets classified as “Doubtful” and “Substandard” in the Report to not more than 75% of capital and reserves.

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Within 180 days from the effective date of the Order, reduce assets classified as “Doubtful” and “Substandard” in the Report to not more than 50% of capital and reserves.

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Within 270 days from the effective date of the Order, reduce assets classified as “Doubtful” and “Substandard” in the Report to not more than 25% of capital and reserves.

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Within 60 days from the effective date of the Order, develop a written asset disposition plan for each classified asset greater than $500,000; plans shall be reviewed and approved by the Board.

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During the life of the Order, maintain an adequate allowance. In addition, revise methodology for determining the adequacy of the allowance in accordance with the Report. Board shall review the adequacy of the allowance at least quarterly and results of the review shall be reflected in the meeting minutes.

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Within 60 days from the effective date of the Order, revise, adopt and implement improved written lending policies that address deficiencies identified in the Report.

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Within 60 days from the effective date of the Order, develop and implement appropriate policies and procedures re: appraisals and evaluations.

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Within 60 days from the effective date of the Order, revise and implement policies and procedures for monitoring and reporting asset concentrations.

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Effective February 11, 2010, do not extend any credit to any borrower who has loans, in whole or in part, that have been charged off or are classified “Loss” and remain uncollected.

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Within 60 days from the effective date of the Order, formulate and implement a written plan and comprehensive budget for all categories of income and expense and submit to DFI & FDIC for review and opportunity to comment.

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During the life of the order, do not establish any new branches or other office without prior written consent of the DFI & FDIC.

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Within 90 days of the effective date of the Order, adopt and implement a written Contingency Liquidity Policy.

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During the life of the Order, no distributions to shareholders may be made without prior written approval of DFI and FDIC.

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During the life of the Order, the Bank is to comply with the provisions of the FDIC Rules & Regulations regarding brokered deposits.

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Within 60 days from the effective date of the Order, correct all violations of consumer laws in the Compliance Report dated May 4, 2009, and adopt and implement policies, procedures & controls to prevent their recurrence.

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Within 60 days from the effective date of the Order, increase oversight of the Compliance function, dedicate additional resources as needed, and provide monthly reports to senior executive officers and the Board.

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Within 60 days from the effective date of the Order, evaluate and enhance the compliance training program.

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Within 60 days from the effective date of the Order, adopt and implement internal controls to ensure consistency between system specs and loan documents with particular focus on improving compliance monitoring of flood insurance requirements.

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Within 60 days from the effective date of the Order, improve compliance audit procedures to address scope and frequency of such audits.

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Within 30 days after the end of the first quarter following the effective date of the Order, and within 30 days after the end of each quarter thereafter, provide written progress reports to DFI & FDIC.

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During the life of the Consent Order, notify DFI & FDIC in advance of making any public announcement regarding the financial condition of the Bank, Executive Management or the Board.

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During the life of the Consent Order and in the future, comply with all laws and regulations.

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During the life of the Order, do not amend or rescind any approved plans, policies, procedures or programs without prior written approval of the DFI and FDIC.

The Order will remain effective until amended, suspended or terminated by the FDIC and DFI. The Bank and its management have already undertaken multiple initiatives to comply with the terms of the Order, and will diligently continue such effort during the life of the Order.

On February 22, 2010 the Company entered into an agreement with the Federal Reserve Board (the “Federal Reserve Agreement”) to maintain the financial soundness of the Company so that the Company may serve as a source of strength to the Bank.

In the Federal Reserve Agreement, the Company agreed that:

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The Board of Directors of the Company shall take appropriate steps to ensure that the Bank complies with the Order entered into with the FDIC and the DFI.;

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The Company shall not declare or pay any dividends nor make any distribution of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Board;

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The Company and its nonbank subsidiaries, if any, shall not, directly or indirectly incur, increase or guarantee any debt, nor shall the Company directly or indirectly, purchase or redeem any shares of its stock without the prior approval of the Federal Reserve Board;

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The Company shall comply with certain notice provisions under the applicable federal rules and regulations to notify the Federal Reserve Board in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position;

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The Company shall comply with restrictions on indemnification and severance payments pursuant to the applicable federal laws and regulations;

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Within 30 days after the end of each calendar quarter following the date of the Federal Reserve Agreement, the Board of Directors shall submit to the Federal Reserve Board written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Agreement and the result thereof, applicable financial data of the Company, and changes in shareholders’ equity.

The Federal Reserve Agreement will remain effective and enforceable until stayed, modified, terminated, or suspended in writing by the Federal Reserve Board. The Company and its management have already undertaken multiple initiatives to comply with the terms of the Federal Reserve Agreement, and will diligently continue such effort during the life of the Agreement.

See “Business” for more information regarding the steps we are taking to comply with the Order and the Federal Reserve Agreement.

The foregoing descriptions of the Order and the Federal Reserve Agreement are summaries and do not purport to be a complete description of all of the terms of such documents, and are qualified in their entirety by reference to the Order and the Federal Reserve Agreement. The Order and the Federal Reserve Agreement are attached as exhibits to the registration statement of which this prospectus is a part.

Strengthen the Balance Sheet

Non-performing assets, which include nonaccrual loans, loans past due 90 days and still accruing, and other real estate owned totaled $45.1 million as of December 31, 2010. Reducing the level of non-performing assets will take a significant effort and will continue through 2011 and beyond. We have dedicated additional resources and will continue our proactive approach to managing our non-performing assets with aggressive loan resolution strategies and loan sales, as appropriate. We expect that many of these assets will eventually require foreclosure and subsequent sale by the Bank. This will prove to be a detriment to our earnings since we will not be earning any interest on the non-performing asset, will also have the cost of carrying the property while awaiting sale, and may experience further losses if the value of such property declines, as discussed below.

We have completed reappraisals of the real property securing our non-performing and impaired loans and have marked these assets to their lower market values less costs to sell which contributed to our losses in 2008 2009 and 2010. While we believe that our current loan loss reserve is adequate to absorb future losses based on these reappraisals, any further deterioration in real property values will lead to further losses and a decrease in capital.

The Company and the Bank believe that the regulators may take further enforcement action including the possible modification of the Order.

Due to the level of the Bank’s total risk-based capital the Federal Deposit Insurance Corporation (“FDIC”) has placed the following requirements, limitations and/or restrictions on the Bank:

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No capital distributions or payment of management fees.

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Submission of a capital restoration plan (“CRP”) that is acceptable to the FDIC.

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Close monitoring by the FDIC of the Bank’s condition and compliance with the approved CRP as well as limitations and/or restrictions set forth in this paragraph.

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Restricting growth of the Bank average total assets during any calendar quarter to not more than its average total assets during the preceding calendar quarter unless the FDIC has accepted the CRP and the increase is consistent with the CRP and the Bank’s ratio of tangible equity to assets increases at a rate during the calendar quarter sufficient to enable the Bank to reach an acceptable capital level within a reasonable time.

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The FDIC’s prior approval must be obtained for the acquisition of any company or branch, the establishment of any branch, or the engagement in new line of business.

If the FDIC does not approve the CRP, the Bank fails to submit a CRP or the Bank fails to implement the CRP in any material respect, then the Bank will be subject to the additional prompt corrective action provisions applicable to “significantly undercapitalized” banks until such time that a new CRP is approved. Achievement of the CRP depends on future events and circumstances, the outcome of which cannot be assured. In the fourth quarter of 2010, the Bank submitted its CRP to the regulators.

As of December 31, 2010, the Bank needed a combination of new equity capital and earnings of approximately $12 million in order to satisfy the Capital Requirements of the Consent Order. While the Bank has not been able to meet this goal, the Company is continuing its efforts to raise the capital needed to reach the Consent Order’s Capital Requirements. To meet the Capital Requirements, the Company and/or Bank must:

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increase the Company’s and Bank’s capital through a combination of new equity capital and the Bank’s earnings; and

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minimize future losses from the $34.8 million in non-performing loans and $10.3 million in other real estate assets the Bank had at December 31, 2010.

If both these goals are not achieved, the Bank will not be able to meet and then maintain compliance with the Capital Requirements of the Consent Order, which would have a material adverse effect on the Company and the Bank and the value of your investment and the Company’s and Bank’s ability to continue as going concerns.

Satisfying the Capital Requirements of the Consent Order is only the first step in Company’s recapitalization plan. The economic recession has provided a number of opportunities for expansion for a well-capitalized institution that is in satisfactory regulatory condition. It is anticipated that further capital will be necessary in order to (i) execute a growth strategy once the Bank’s financial position improves; and (ii) keep the Bank in compliance with the requirements of the Consent Order.

Return to Profitability

It is essential that we return to profitability to support our long term growth in assets and shareholder value. If we are able to successfully manage our problem assets, management believes that there are several significant earnings drivers which will lead to sustained earnings growth and profitability. These drivers include:

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a strong net interest margin of 4.54% for the nine months ended September 30, 2010 driven by our low cost of funds;

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approximately $9.3 million in deferred tax assets to shelter future income from taxes, subject to certain limitations;

•

the opening of our SBA department to generate small business government guaranteed loans which can be retained for earnings or, when eligible, sold in the secondary market for a premium with the possibility of service fee income; and

•

an increase in operating efficiencies and cost reduction measures which should favorably impact non-interest expense.

OUR BUSINESS STRATEGY

Our long-term business strategy is to provide comprehensive banking and related services to small- to medium-sized businesses and their employees. The key elements of our strategy are as follows:

•

Maintain our emphasis on business banking

Our focus on providing comprehensive banking services to small- to medium-sized businesses continues to help us grow our core non-interest bearing deposit base and maintain our strong net interest margin.

•

Increase market share

Because Citizens Bank is the only community bank headquartered in Nevada County, we believe that there is significant potential to increase business with current customers, to attract new customers in our existing markets, and to position ourselves to enter new markets. Quality service, which is an integral part of our culture, and doing business locally, are reasons that the Bank’s customers prefer our locally-based organization.

•

Use technology to expand customer base

While our strategy continues to emphasize superior personal service, we also take advantage of user-friendly technology-based systems to attract customers who may prefer to interact with their financial institution electronically. We offer technology-based services including voice response banking, debit cards, online banking, bill pay and cash management, remote deposit capture, ATMs and an internet website. We believe the availability of both traditional banking services and electronic banking services enhance our ability to attract a broader range of customers.

•

Maintain and recruit highly competent personnel

We have developed a strong corporate culture that has allowed us to recruit and retain some of the best bankers in the Northern California market. We are committed to attracting, developing and retaining people who are significantly knowledgeable about the banking industry and passionate about the communities which we serve. Our compensation and benefits program is competitive. The individuals who comprise our executive management team have an average of thirty-four years of banking industry experience, and our business development and service personnel are well-respected, as well as, very involved in our communities.

OTHER RECENT DEVELOPMENTS

2009 Private Placement

On December 28, 2009, the Company completed a private placement whereby the Company raised $1,559,034 in connection with the sale of 394,109 shares of common stock at the price of $4.00 per share. Among the total shares sold, 46% or 181,609 shares were purchased by certain of Company’s directors, officers and their family members, 22% or 87,500 shares purchased by its former directors, and 32% or 125,000 shares purchased by two other outside investors. In addition, in April 2010, as a continuation of the private placement, we received an additional $100,000.

Increase in Authorized Shares

At the Company’s Annual Shareholder Meeting on May 18, 2010, a proposal was approved to amend the Company’s Articles of Incorporation to increase the authorized shares of common and preferred stock from 5 million and 2.5 million shares, respectively, to 20 million and 5 million shares, respectively. The increase in the number of common shares is necessary to provide sufficient shares for the Offering and other capital raisings as well as maintain the number of authorized and unissued shares allocated to the 1995 stock option plan and the 2006 stock plan (collectively “stock plans”).

Events Subsequent to September 30, 2010 Unaudited Interim Financial Statements

The Company has evaluated the effects of subsequent events that have occurred subsequent to September 30, 2010 and through January 31, 2011. In the first quarter of 2011, the Company is closing its mortgage broker services and the related broker fee income is not expected to continue; however, salaries and other related expenses will

also decrease by a similar amount as a result of this closure. The following information is presented to provide additional information about significant changes to loans and the allowance for credit losses, other real estate owned and shareholders’ equity and regulatory capital for the three month period ended December 31, 2010:

Loans and the Allowance for Credit Losses

Changes in the allowance for credit losses for the three months ended December 31, 2010 were as follows (dollars in thousands):

Balance, October 1, 2010	$	14,486
Provision charged to operations		2,350
Net losses charged to allowance		(1,598	)

Balance, December 31, 2010	$	15,238

The recorded investment in loans that were considered to be impaired was approximately $66.7 million and $66.7 million at December 31, 2010 and September 30, 2010, respectively. The related allowance for credit losses for impaired loans was approximately $8.2 million and $5.9 million at December 31, 2010 and September 30, 2010, respectively.

At December 31, 2010 and September 30, 2010, non-performing loans totaled $34.8 million and $35.4 million, respectively.

Other Real Estate

The Company’s investment in other real estate holdings, all of which were related to real estate acquired in full or partial settlement of loan obligations, was $10.3 million, net of a valuation allowance of $2.6 million at December 31, 2010, compared to $6.7 million, net of a valuation allowance of $2.1 million at September 30, 2010.

Shareholders’ Equity and Regulatory Capital

Shareholders’ equity at December 31, 2010 decreased to $3.7 million from $5.1 million at September, 2010 primarily due to a net loss of $1.4 million for the three months ended December 31, 2010. The primary contributor to the Company’s loss for the three months ended December 31, 2010 was a $2.35 million addition to the allowance for credit losses.

The regulatory capital guidelines as well as the actual capital ratios for the Company and the Bank as of December 31, 2010 are as follows:

	CITIZENS BANCORP AND SUBSIDIARIES						CITIZENS BANK
	Minimum Regulatory Requirement			Actual Capital Ratio			Minimum Regulatory Requirement			Minimum Regulatory Requirement for “Well Capitalized” Institution			Actual Capital Ratio
Leverage Ratio		4.0	%		1.4	%		4.0	% (1)		5.0	%		5.4	%
Tier 1 Risk-Based Ratio		4.0	%		1.8	%		4.0	%		6.0	%		6.8	%
Total Risk-Based Ratio		8.0	%		8.3	%		8.0	%		10.0	%		8.1	%

(1)

The Order entered into by the Bank in February 2010, requires the Bank to maintain a Tier 1 capital to average assets (Leverage) ratio equal to or greater than 9% by July 2010. The Bank was unable to meet the deadline to increase the leverage ratio to 9%.

The Company’s recurring losses have resulted in significant deterioration to shareholders’ equity and regulatory capital. These recurring losses raise concern about the Company’s ability to continue as a going concern. Management is actively pursuing new ventures to increase revenues. In addition, the Company is currently seeking additional sources of capital, including the Offering. The Company is dependent upon its ability to secure sufficient equity and there are no assurances that the Company will be successful.

The following table shows certain preliminary unaudited consolidated financial information at or for the year ended December 31, 2010:

(Dollars in thousands, except per share data)
Operations Data:
Net interest income	$	14,268
Provision for credit losses		10,250
Non-interest income		2,555
Non-interest expense		12,432
Loss before income tax		(5,859	)
Income tax		—
Net loss		(5,859	)
Discount accretion on preferred stock		(104	)
Net loss applicable to common shareholders	$	(5,963	)

Loss per share — basic	$	(2.56	)
Loss per share — diluted	$	(2.56	)
Book value per common share	$	(2.95	)

Balance Sheet Data:
Assets	$	329,010
Loans		263,447
Allowance for credit losses		(15,238	)
Loans, net		248,209
Deposits		274,988
Junior subordinated debentures		15,465
Preferred stock		10,577
Common stock & accumulated deficit		(6,886	)
Total shareholders’ equity		3,691

Financial Ratios:
Return on average equity		(89.24	%)
Return on average assets		(1.74	%)
Efficiency ratio		73.90	%
Net interest margin		4.58	%
Loans to deposits		95.80	%
Net charge-offs to average loans		3.27	%
Non-performing loans to total loans		13.21	%
Allowance for credit losses to non-performing loans		43.77	%
Allowance for credit losses to total loans		5.78	%
Average equity to average assets		1.95	%

Consolidated Capital Ratios:
Leverage capital ratio		1.4	%
Total risk-based capital ratio		8.3	%
Tier 1 risk-based capital ratio		1.8	%

Bank-only Capital Ratios:
Leverage capital ratio		5.4	%
Total risk-based capital ratio		8.1	%
Tier 1 risk-based capital ratio		6.8	%

THE OFFERING

Securities Offered				10,000,000 units, with each unit consisting of one (1) share of common stock and two (2) 2011 Warrants. If all 10,000,000 units are sold, the gross proceeds would be $30,000,000 million assuming no 2011 Warrants are exercised, and $100,000,000 million assuming 20,000,000 2011 Warrants are issued, and all such 2011 Warrants are exercised.

Price per Unit				$3.00

Minimum Investment				$6,000

Description of the 2011 Warrants				The exercise price of each 2011 Warrant is $5.00. The 2011 Warrants are transferable separately from our common stock, and 50% of the warrants issued to each investor will be exercisable for a period of 3 years from the date of issuance and 50% will be exercisable for a period of 7 years from the date of issuance. The 2011 Warrants will not be exercisable for a period of one year after the date of issuance. The Company currently does not have enough shares of common stock authorized to accomodate the exercise of all the 2011 Warrants and must seek shareholder approval to increase the authorized shares of common stock. See “Risk Factors.”

Termination date				__________, 2011, subject to extension

Escrow				Subscription funds will be held in a separate escrow account by Pacific Coast Bankers Bank and will only be released to the Company on the termination date if new equity capital and earnings combined would result in the Bank being in substantial compliance with the Capital Requirement of the Order. If the gross proceeds are less than necessary to satisfy this requirement, subscription funds will be returned to subscribers as soon as possible after the termination date without interest.

Use of proceeds				We intend to use a portion of the proceeds from the sale of the units to contribute to the Bank as additional capital in order to support its regulatory capital ratios. See “Consent Order and Written Agreement.” Any remaining proceeds will also be used to reduce non-performing assets, attempt to negotiate the repayment of the outstanding preferred stock at a discount and execute a growth strategy that includes the acquisition of other community banks. See “Use of Proceeds.”

Common Stock Outstanding				As of the date of this Prospectus, we have 2,335,090 shares of common stock outstanding. If all units are sold, we will have 12,335,090 shares outstanding, excluding the shares issuable upon exercise of the 2011 Warrants and any outstanding stock options. The number of shares of our common stock that will be outstanding after this Offering includes the 2,335,090 shares outstanding as of December 31, 2010, but excludes 639,357 shares of common stock reserved for issuance under our stock option plans of which 44,750 shares were subject to outstanding options at December 31, 2010.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

You should read the selected consolidated financial information set forth below in conjunction with our historical consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. The consolidated financial statements include the accounts of Citizens Bancorp and its wholly owned subsidiary, the Bank. The statement of operations data for the years ended December 31, 2009, 2008 and 2007 and the financial condition data as of December 31, 2009 and 2008 have been derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the year ended December 31, 2006 and 2005 and the financial condition data as of December 31, 2007, 2006 and 2005 have been derived from our audited financial statements that are not included in this prospectus.

Certain preliminary financial information as of December 31, 2010 and for the three months then ended is presented at “Summary — Other Recent Developments — Events Subsequent to September 30, 2010 Unaudited Interim Financial Statements.”

(Dollars in thousands, except per share data)	At or For the Nine Months Ended September 30,						At or For the Year Ended December 31,
	2010			2009			2009			2008			2007			2006			2005
	Unaudited
Operations Data:
Net interest income	$	10,626		$	10,942		$	15,122		$	15,100		$	14,294		$	13,582		$	11,297
Provision for credit losses		7,900			3,900			11,115			23,900			945			560			845
Non-interest income		1,720			1,716			5,112			2,140			2,206			1,668			1,295
Non-interest expense		8,895			11,099			15,691			11,653			11,242			9,632			7,629
(Loss) income before income tax		(4,449	)		(2,341	)		(6,572	)		(18,313	)		4,313			5,058			4,117
Income tax (benefit)		—			(946	)		6,568			(7,662	)		1,728			2,024			1,647
Net (loss) income		(4,449	)		(1,395	)		(13,140	)		(10,651	)		2,585			3,034			2,470
Dividends/discount accretion on preferred stock		(78	)		(302	)		(328	)		—			—			—			—
Net (loss) income applicable to common shareholders		($4,527	)		($1,697	)		($13,468	)		($10,651	)	$	2,585		$	3,034		$	2,470

Share Data (retroactively adjusted for 5% stock dividends paid in June 2008, 2007 and 2006):
(Loss) earnings per share — basic		($1.95	)		($0.89	)		($7.01	)		($5.56	)	$	1.35		$	1.60		$	1.34
(Loss) earnings per share — diluted		($1.95	)		($0.89	)		($7.01	)		($5.56	)	$	1.32		$	1.57		$	1.30
Book value per common share		($2.32	)	$	4.83			($0.42	)	$	5.70		$	11.28		$	9.87		$	8.19

Balance Sheet Data:
Assets	$	357,493		$	387,298		$	371,058		$	363,274		$	328,433		$	280,393		$	226,995
Loans		281,375			302,529			304,739			312,374			305,135			259,381			206,659
Allowance for credit losses		(14,486	)		(14,466	)		(14,387	)		(12,406	)		(3,919	)		(3,374	)		(2,825	)
Loans, net		266,889			288,063			290,352			299,968			301,216			256,007			203,834
Deposits		283,030			318,739			302,631			299,758			274,255			243,237			189,626
Junior subordinated debentures		15,465			15,465			15,465			15,465			15,465			15,465			9,279
Preferred stock		10,551			10,446			10,473			10,369			—			—			—
Common stock & (accumulated deficit) retained earnings		(5,413	)		9,245			(968	)		10,927			21,572			18,864			15,376
Total shareholders’ equity		5,138			19,692			9,505			21,296			21,572			18,864			15,376

(Dollars in thousands, except per share data)	At or For the Nine Months Ended September 30,						At or For the Year Ended December 31,
	2010			2009			2009			2008			2007			2006			2005
	Unaudited
Financial Ratios:
Return on average equity		(81.37	%)		(11.44	%)		(72.71	%)		(50.82	%)		12.77	%		17.67	%		16.51	%
Return on average assets		(1.76	%)		(0.60	%)		(3.58	%)		(3.04	%)		0.86	%		1.18	%		1.11	%
Efficiency ratio		72.05	%		87.68	%		77.55	%		67.60	%		68.14	%		63.16	%		60.59	%
Net interest margin		4.54	%		4.35	%		4.51	%		4.61	%		5.05	%		5.62	%		5.07	%
Loans to deposits		99.42	%		94.91	%		100.70	%		104.21	%		111.26	%		106.64	%		108.98	%
Net charge-offs to average loans		3.56	%		0.79	%		2.94	%		4.87	%		0.14	%		0.01	%		0.00	%
Non-performing loans to total loans		12.59	%		11.70	%		8.95	%		8.92	%		3.10	%		0.00	%		0.00	%
Allowance for credit losses to non-performing loans		40.88	%		40.87	%		52.74	%		44.55	%		41.74	%		N/A			N/A
Allowance for credit losses to total loans		5.15	%		4.78	%		4.72	%		3.97	%		1.28	%		1.30	%		1.37	%
Average equity to average assets		1.50	%		5.07	%		4.92	%		5.98	%		6.70	%		6.65	%		6.71	%

Consolidated Capital Ratios:
Leverage capital ratio		2.0	%		4.5	%		3.3	%		5.5	%		8.9	%		9.0	%		9.4	%
Total risk-based capital ratio		8.5	%		10.2	%		9.2	%		10.2	%		12.0	%		12.6	%		11.5	%
Tier 1 risk-based capital ratio		2.4	%		5.4	%		4.1	%		5.9	%		8.5	%		8.4	%		8.6	%

Bank-only Capital Ratios:
Leverage capital ratio		5.7	%		6.1	%		6.1	%		7.8	%		11.1	%		11.6	%		10.8	%
Total risk-based capital ratio		8.3	%		8.9	%		8.9	%		9.7	%		11.7	%		12.1	%		11.2	%
Tier 1 risk-based capital ratio		7.0	%		7.6	%		7.7	%		8.4	%		10.5	%		10.9	%		9.9	%

RISK FACTORS

An investment in our common stock is subject to various risks. Before making a decision about your investment, you should carefully consider the risks and uncertainties described below together with all of the other information included in this document. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This document is qualified in its entirety by these risk factors. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of the value of your investment.

Risks Related to the Offering

Current shareholders will experience substantial voting dilution as a result of the Offering.

After the closing of the Offering, not taking into account any exercise of the 2011 Warrants and assuming that none of our current shareholders purchase any units in the Offering, the purchasers in the Offering will own 10,000,000 shares of our common stock (81% of the total number of shares of common stock to be outstanding) and our current shareholders will own 2,335,090 shares of our common stock (19% of the total number of shares of our common stock to be outstanding). Accordingly, our current shareholders will experience significant dilution of voting power. The exercise of the 2011 Warrants acquired in the Offering will further dilute the voting power of our current shareholders.

Following the Offering, we expect one or more new shareholders will control a substantial portion of the outstanding voting equity interest in the Company and shall be able to significantly influence actions requiring shareholder vote.

For the Offering to be successful, it is anticipated that there will need to be one or more large purchasers of the units. Any such large purchaser(s) will have significant influence over the outcome of all matters submitted to the Company’s shareholders for approval after the Offering, including the election of directors and other corporate actions. In addition, such influence could have the effect of discouraging others from attempting to purchase the Company, take the Company over, and/or reducing the market price offered for the Company’s common stock.

While management has had preliminary discussions with several new potentially large investors who, individually or in the aggregate, could acquire voting control of the Company, no agreements have yet been finalized relating to such sales of the units. However, management believes, that without being able to attract new, potentially large investors, the Bank will be unable to satisfy the Capital Requirements of the Order.

We are required to maintain capital to meet regulatory requirements in the Order, and if we fail to meet and maintain those capital requirements, whether due to losses, an inability to raise sufficient capital in the Offering or otherwise, our financial condition, liquidity and results of operations, as well as your investment, would be adversely affected.

We were required by our regulators to raise the Bank’s leverage capital ratio to 9% by the middle of July 2010 in order to comply with the Order. We were unable to achieve the capital ratio prior to the deadline. To achieve such a ratio, we must (i) increase the Bank’s capital through a combination of new equity capital and earnings, (ii) continue to reduce assets, and (iii) minimize further losses from the $34.8 million in non-performing loans we had at December 31, 2010 or from other assets. If we fail to achieve these goals, we will not be able to satisfy the Capital Requirement of the Order and this would have a material adverse effect on the Company and the Bank, including but not limited to additional regulatory enforcement actions such as, the imposition of civil monetary penalties against the Company, the Bank or both, the termination of insurance of the Bank’s deposits by the FDIC or the closing of the Bank with the imposition of a conservator or receiver.

Even if we satisfy the Capital Requirement of the Order, we will pursue various alternatives for additional capital in the future, which could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.

In the current economic environment and with the need to recapitalize the Company beyond the amounts of new capital necessary to satisfy the Capital Requirement of the Order, we are constantly reviewing alternatives for raising capital in order to try to assure compliance with the Order, further strengthen our capital and better position us to take advantage of opportunities that may arise in the future. Such alternatives may include issuance and sale of additional common or preferred stock, additional trust preferred securities, or borrowings by us, with proceeds contributed to the Bank. Any such capital raising alternatives could dilute the holders of our outstanding common stock, including purchasers in this Offering, and may adversely affect the market price of our common stock. Our current plans to further recapitalize the Company are discussed at “Summary — Major Challenges — Recapitalization.”

The market price of our common stock after the Offering is uncertain.

The market price of our common stock on or after consummation of the Offering may not approximate the prices prior to the Offering. Stock price changes, whether before or after the Offering, may result from a variety of factors, including general market and economic conditions, changes in the respective businesses, operations and prospects and regulatory considerations.

Historically, only a limited market has existed for our common stock and the Offering may not substantially enhance the depth of such market, nor do we expect any significant market to develop for the 2011 Warrants.

Our common stock has been traded infrequently in the over-the-counter market and our trading volume has been very small. The limited trading market for our common stock can cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading of our common stock. The Offering may not improve the level of trading or the depth of the market of our common stock. We also do not expect a market to develop for the 2011 Warrants, which may impact your ability to sell any 2011 Warrants that you receive in the Offering.

Purchasers in this Offering will suffer substantial dilution since the offering price per unit exceeds the book value per common share.

The book value of shareholders’ equity attributable to common shareholders as of December 31, 2010 was a negative $6.9 million, or negative $2.95 per common share. The book value per share of our common stock as of December 31, 2010, adjusted to give pro forma effect to the issuance of the maximum shares in the Offering would be approximately $1.86. Consequently, purchasers in the Offering will experience $1.14 per share dilution relative to the $3.00 per unit offering price.

The Company currently does not have enough shares of common stock authorized to accommodate the exercise of all of the 2011 Warrants and must seek shareholder approval to increase the authorized shares of common stock.

The number of shares of common stock authorized is currently insufficient to accommodate the exercise of all the 2011 Warrants. The Company will seek shareholder approval to increase the number of shares of common stock authorized at the next shareholder meeting in 2011. The purchasers in this Offering will be eligible to vote at any such shareholder meeting and it is anticipated that they will support any such measure to increase the number of authorized shares of common stock. If the shareholders fail to approve a measure to increase the total number of shares of common stock authorized, prior to the expiration of the one year holding period on all 2011 Warrants, the 2011 Warrants will not be fully exercisable. In such event, the Company will continue to seek shareholder approval of an increase in the number of authorized common stock on at least a yearly basis until the approval is obtained. Assuming full issuance of 10,000,000 shares of common stock in this Offering, the Company will have approximately 7 million shares of authorized but unissued common stock. As such, there will be a short-fall of approximately 13,000,000 shares to satisfy the exercise of the 2011 Warrants.

The common stock underlying the 2011 Warrants and any shareholder approval of any additional shares of common stock are not currently registered with the SEC

The shares of common stock underlying the 2011 Warrants are not currently registered with the SEC. Upon shareholder approval of a sufficient number of shares of common stock to accommodate the exercise of all of the 2011 Warrants, the Company intends to file a separate registration statement registering the shares of common stock underlying the 2011 Warrants.

The subscription price was determined arbitrarily.

The price per unit was arbitrarily determined by the board of directors. In determining the per unit price, the board of directors did consider the market price of our common stock, its book value, our losses, the long term prospects of the Company, the pricing of other offerings by financial institutions seeking capital and other factors. The board did not assign any relative or specific weights to the foregoing factors.

Risks Relating to Economic Conditions and Governmental Response Efforts

The recession and changes in domestic and foreign financial markets have adversely affected our industry and may have a material negative impact on our results of operations and financial condition.

Economic indices have shown that since the fourth quarter of 2007, the United States economy was in a recession. This has been reflected in significant business failures and job losses. Further, dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. General downward economic trends, reduced availability of commercial credit and increased unemployment, have negatively impacted the performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer delinquencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations and stock price. We do not expect that the difficult conditions in the financial markets and in our own local market are likely to improve in the near future. A continuing of these conditions would exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Recent and future legislation and regulatory initiatives to address current market and economic conditions may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy, which could adversely affect our business, financial condition, results of operations, and access to capital.

Recent and future legislative and regulatory initiatives to address current market and economic conditions, such as the Emergency Economic Stabilization Act of 2008 (“EESA”), or the American Recovery and Reinvestment Act of 2009 (“ARRA), may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy. EESA was enacted in October 2008 to restore confidence and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The United States Department of the Treasury (“Treasury”) and banking regulators have implemented, and likely will continue to implement, various other programs under this legislation to address capital and liquidity issues in the banking system, including the Troubled Asset Relief Program (“TARP”), President Obama’s Financial Stability Plan announced in February 2009, the ARRA and the FDIC’s Temporary Liquidity Guaranty Program (“TLGP”). The actual impact that any of the recent, or future, legislative and regulatory initiatives will have on the financial markets and the overall economy cannot be accurately predicted. Any failure of these initiatives to help stabilize or improve the financial markets and the economy, and a continuation or worsening of current financial

market and economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us.

Recent government efforts to strengthen the U.S. financial system, including the implementation of ARRA, EESA, the TLGP and special assessments imposed by the FDIC, subject participants to additional regulatory fees and requirements, including corporate governance requirements, executive compensation restrictions, restrictions on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax deductions and prohibitions against golden parachute payments. These requirements, and any other requirements that may be subsequently imposed, including those recently proposed by the Obama Administration, may have a material and adverse effect on our business, financial condition, and results of operations.

We are subject to various regulatory requirements and are subject to regulatory restrictions and enforcement actions that limit our business practices and may negatively impact our results of operation and financial condition.

In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies, and adversely classified assets, we are subject to increased regulatory scrutiny and enforcement actions. Such enforcement actions place limitations on our business and may adversely affect our ability to implement our business plans. See “Business — Consent Order and Written Agreement”

FDIC deposit insurance assessments will increase substantially, which will adversely affect our net earnings.

FDIC deposit insurance expense for the year ended December 31, 2009 was approximately $1.1 million. Our estimated assessment for the year ended December 31, 2010 is $1.2 million. Increases in our FDIC premium add to our cost of operations and accordingly, adversely affect our results of operations. In the quarter ended June 30, 2009, the Bank, along with all other FDIC insured banks, was charged a special assessment as part of the FDIC’s efforts to replenish the deposit insurance fund. The Bank’s special assessment was $177,000. Additionally, the FDIC is permitted to impose additional special assessments if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional special assessment imposed by the FDIC will further decrease our earnings.

Risks Related to Our Business and Market

A continued deterioration in economic conditions and a slow down in growth generally could adversely affect our business, financial condition, results of operations and prospects. Such deterioration could result in a variety of adverse consequences to us, including the following:

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Loan delinquencies may increase, which may cause us to increase loan loss provisions, and also result in a reduction in net interest income and our earnings as well as weaken our balance sheet;

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Problem assets and foreclosures may increase, which could result in higher operating expenses, and increases in our loan loss provisions;

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Demand for our products and services may decline including specifically, the demand for loans, which would cause our revenues, which include net interest income and noninterest income, to decline; and

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Collateral for loans may decline in value, reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans.

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As a result of the ongoing deterioration in economic conditions, since December 31, 2009, the Bank has seen both an increase in the number of borrowers experiencing difficulties and a decrease in the appraisal values of the underlying collateral.

Recent levels of market volatility were unprecedented and we cannot predict whether or not they will return.

The capital and credit markets have been experiencing volatility and disruption for more than two years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuer’s underlying financial strength. This downward pressure on stock prices and reduced availability of capital has adversely impacted our ability to obtain the working capital we need at appropriate pricing to operate most effectively without unacceptable dilution to shareholders. If recent levels of market disruption and volatility continue or worsen, we may experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The unseasoned nature of a large portion of our loan portfolio may result in changes in estimating collectability, which may lead to additional provisions or charge-offs and an adverse impact to our profits.

Our loan portfolio has increased approximately $100 million from the end of 2005 to the end of 2009. Accordingly, many of the loans in our portfolio are unseasoned. These loans also have not been subjected to declining and unfavorable economic conditions. As a result, it may be difficult to predict the future performance of these loans. These loans may have delinquencies or charge-off levels above our historical experience which could adversely effect our future performance.

Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition.

At December 31, 2009 and December 31, 2010 our non-performing loans (which consist of nonaccrual loans and accruing loans 90 days or more past due) were $27.3 million and $34.8 million, respectively, constituting 9.0% and 13.2% of the loan portfolio, respectively. At December 31, 2009 and December 31, 2010, our non-performing assets (which include foreclosed real estate), totaling $31.9 million and $45.1 million respectively, were 8.6% and 13.7% of total assets, respectively. Non-performing assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in non-performing loans. We do not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase our risk profile and the capital levels determined by regulators to be appropriate in light of such risks. While we have tried to reduce our problem assets through workouts, restructurings and otherwise, decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial conditions, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of non-performing assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. We may experience further increases in non-performing loans in the future.

Our allowance for credit losses may not be adequate to cover actual losses.

A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence, or control.

Like all financial institutions, we maintain an allowance for credit losses to provide for loan defaults and non-performance. The allowance is funded from a provision for credit losses which is a charge to our statement of operations. The provisions charged to our income for the years ended December 31, 2009 and 2008 were $11.1 million and $23.9 million, respectively, which was the primary cause of our losses of $13.1 million and $10.7 million, respectively, for those periods. Our allowance as of the years ended December 31, 2009 and 2008 was $14.4 million and $12.4 million, respectively. For the nine months ended September 30, 2010, the provision was $7.9 million and as of September 30, 2010, our allowance was $14.5 million. Additionally for the three months

ended December 31, 2010, the provision was $2.35 million and the balance in our allowance increased to $15.2 million. Our allowance for credit losses may not be adequate to cover actual loan losses, and future provisions for credit losses could materially and adversely affect our business, financial condition, results of operations and cash flows. The allowance for credit losses reflects our estimate of the probable losses in our loan portfolio at the relevant balance sheet date. Our allowance for credit losses is based on prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and economic factors. The determination of an appropriate level of the allowance for credit losses is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning current economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the allowance for loan losses.

While we believe that our allowance for credit losses is adequate to cover current losses, we may need to increase the allowance for credit losses further or the regulators may require us to increase this allowance in future periods. Either of these occurrences could materially adversely affect our business, financial condition, results of operations and cash flows.

The types of loans in our portfolio have a higher degree of risk than other loans and a further downturn in our real estate markets could, therefore, hurt our business.

A continuing downturn in our real estate markets could hurt our business because many of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature. As real estate prices continue to decline, the value of real estate collateral securing our loans is reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. As of December 31, 2009, approximately 84% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Most of our real property collateral is located in California and more specifically, Nevada and Placer counties. If there is a continuing, significant decline in real estate values, especially in California, the collateral for our loans will provide less security. Real estate values could be affected by, among other things, earthquakes and natural disasters particular to California. Any such downturn could have a material adverse effect on our business, financial condition, results of operations and cash flows. We do not engage in “subprime” or “Alt-A” lending.

We have a concentration in loans secured by commercial real estate.

We have a high concentration in commercial real estate loans. Commercial real estate loans, as defined by final guidance issued by bank regulators, are defined as construction, land development, other land loans, loans secured by multifamily (5 or more) residential properties, and loans secured by non-farm nonresidential properties. Following this definition, at December 31, 2009 and September 30, 2010, approximately 52.8% and 56.1%, respectively, of our loan portfolio can be classified as commercial real estate lending. Commercial real estate loans generally involve a higher degree of credit risk than residential mortgage lending due, among other things, to the large amounts loaned to individual borrowers. In addition, unlike residential mortgage loans, commercial real estate loans generally depend on the cash flow from the property to service the debt. Cash flow may be significantly affected by general economic conditions. Losses incurred on loans to a small number of borrowers could have a material adverse impact on our income and financial condition. Also, many of our commercial real estate borrowers have more than one loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

Additionally, federal banking regulators recently issued final guidance regarding commercial real estate lending. This guidance suggests that institutions that are potentially exposed to significant commercial real estate

concentration risk will be subject to increased regulatory scrutiny. Institutions that have experienced rapid growth in commercial real estate lending, have notable exposure to a specific type of commercial real estate lending, or are approaching or exceed certain supervisory criteria that measure an institution’s commercial real estate portfolio against its capital levels, may be subject to such increased regulatory scrutiny. Our commercial real estate portfolio may be viewed as falling within one or more of the foregoing categories, and, accordingly, we may become subject to increased regulatory scrutiny because of our commercial real estate portfolio. If it is determined by our regulator that we have an undue concentration in commercial real estate lending, we may be required to maintain increased levels of capital and/or be required to reduce our concentration in commercial real estate loans.

Failure to successfully execute our strategy may adversely affect our performance.

Our financial performance and profitability depends on our ability to execute a long-term growth strategy. Continued growth, however, may present operating and other problems that could adversely affect our business, financial condition and results of operations. We may not be able to execute a long-term growth strategy successfully or maintain the level of profitability that we have historically experienced during growth cycles. Factors that may adversely affect our ability to attain our long-term financial performance goals include those stated elsewhere in this section, as well as:

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Inability to control non-interest expense, including, but not limited to, rising employee, regulatory compliance, and legal costs and other professional fees;

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Inability to increase non-interest income;

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Inability to expand our market share in our existing markets; and

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Inability to effectively manage and mitigate credit risk.

Our internal operations are subject to a number of risks.

We are subject to certain operations risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls or is uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.

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Information Systems

We rely heavily on communications and information systems to conduct our business. Many of these systems are provided by third parties. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, interruptions or security breaches may still occur and, if they do occur, they may not be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in the existing systems utilized by the Bank without the need to expend substantial resources, if at all.

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Technological Advances

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. The effective use of technology increases efficiency and enables financial institutions

to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

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Severe Weather, Natural Disasters, Acts of War or Terrorism and Other External Events

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. For example, Northern California is subject to earthquakes. Many of our borrowers could suffer uninsured property damage, experience interruption of their business or lose their jobs after a major disaster. Those borrowers might not be able to repay their loans, and the collateral for loans could decline significantly in value. Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage and/or lack of access to our banking and operation facilities. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We depend on cash dividends from our subsidiary bank to meet our cash obligations and a failure to receive them could impair our ability to fulfill our obligations

As a holding company, dividends from our subsidiary bank provide a substantial portion of our cash flow used to service the payments on our preferred stock and our trust preferred securities and other obligations, including cash dividends, if any, to shareholders of common stock. Various statutory provisions restrict the amount of dividends our subsidiary bank can pay to us without regulatory approval and the Bank is currently unable to pay us dividends at the present time.

We have a limited service area. This lack of geographic diversification increases our risk profile.

Our operations are located principally in Nevada County and the greater Auburn area in Placer County, California. As a result of this geographic concentration, our results depend largely upon economic and business conditions in this area. Deterioration in economic and business conditions in our service area could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of other financial institutions or the financial service industry’s reputation.

Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity regarding the financial services industry. The financial services industry continues to be featured in negative headlines about the global and national credit crisis and the resulting stabilization legislation enacted by the U.S. federal government. These reports can be damaging to the industry’s image and potentially erode consumer confidence in insured financial institutions, such as the Bank. In addition, our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a direct or indirect result of other banks’ difficulties or failure, which would increase the capital we need to support such growth or we could experience severe and unexpected decreases in deposits which could adversely impact our liquidity, heighten regulatory concern or endanger our continuing existence.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies will often be lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan and deposit origination, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. The impact of TARP and related acts on executive and incentive compensation may also make it far more difficult to attract and retain key personnel.

Our success will be highly dependent on retaining the current executive management team who will work directly with the employees to implement the strategic direction of our Board of Directors. We believe this management team, who has worked in the banking industry for a number of years, is integral to implementing our business strategy. The loss of the services of any one of them could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Changes in the interest rate environment may reduce our net interest income. A substantial portion of the Bank’s income will be derived from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Because of the differences in the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities, we anticipate that changes in interest rates will not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our profitability. In addition, loan volumes are affected by market interest rates on loans; rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. We cannot assure you that we can minimize our interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Interest rates will also affect how much money we can lend. When interest rates rise, the cost of borrowing will increase. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan and deposit origination volume, business, financial condition, results of operations and cash flows.

We will face strong competition from financial service companies and other companies that offer banking services which could hurt our business.

We conduct our banking operations largely in portions of Nevada County and the greater Auburn area in Placer County, California. Increased competition in our markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the banking services that we offer in our service areas. These competitors include national banks, regional banks and other community banks. We will also face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors may have greater resources that may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology-driven products and services. We also face competition from out-of-market financial intermediaries that have opened loan production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to achieve appropriate loan growth and level of deposits and our business, financial condition, results of operations and cash flows.

If we cannot attract deposits, our growth may be inhibited.

Our ability to increase our assets in the long-term depends in large part on our ability to attract additional deposits at competitive rates. We intend to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers. Our efforts may not be successful. Our inability to attract additional deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, such as the Order. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.

We will be exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

If we fail to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial reporting, which would harm our business.

During a mandatory two week vacation, as required by the Bank’s internal policies, of an employee in the second quarter of 2009, management identified and addressed the circumvention of certain policies and procedures by that employee within the Company’s lending operations that had occurred during the latter part of 2008. This circumvention of policies and procedures related to unauthorized extensions of credit, inappropriate transactions on customers accounts and the withholding of critical financial information from the Board of Directors, executive management and external independent auditors. As a result, the employee was terminated, changes to management in the loan department were subsequently made, including the appointment of a new Senior Credit Administrator and Note Department Manager, and additional controls were designed and implemented to prevent it from occurring in the future. Such controls include, but are not limited to, quarterly certifications by department managers surrounding internal controls, Audit Committee inquiries of management, and additional training and monitoring. Subsequently, an external auditor was engaged to review and test the controls in lending operations. In addition, both internal and independent reviews of the Company’s loan portfolio were conducted and it was determined that an additional provision for loan losses of $16 million, including loan charge-offs of approximately $10.8 million, should be reflected as part of the December 31, 2008 consolidated financial statements. The after tax effect of these adjustments was to increase the previously reported net loss for the year ended December 31, 2008 by approximately $9.6 million.

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of internal controls, we may discover material

weaknesses or significant deficiencies in our internal control as defined under standards adopted by the American Institute of Certified Public Accountants (“AICPA”), that require remediation. Under the AICPA standards, a “material weakness” is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency or combination of control deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting.

As a result of weaknesses that may be identified in our internal controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure controls. However, these efforts may not be successful. Any failure to maintain effective controls or timely place into effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information. These circumstances could make it difficult or impossible for us to raise additional capital.

The restrictions on executive compensation that apply to the Company as a result of participation in TARP restrict our business.

As a result of the Company’s participation in the Capital Purchase Program (“CPP”), the Company is subject to the executive compensation restrictions applicable to CPP participants. These restrictions are mandated by way of EESA and the ARRA. As such, the Company must comply with many executive compensation and corporate governance restrictions including, but not limited to the following requirements: (i) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (ii) requiring the clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (iii) prohibiting making golden parachute payments to senior executives; and (iv) agreeing not to deduct for tax purposes, executive compensation in excess of $500,000 for each senior executive. The Company will also be subject to any changes in the executive compensation restrictions placed on CPP participants. Such restrictions and any future restrictions on executive compensation, which may be adopted, could adversely affect our ability to hire and retain senior executive officers.

Risks Related to an Investment in Our Shares

Historically, we have not paid dividends on our common stock and under California law we are currently ineligible to pay dividends.

We intend to follow a policy of retaining earnings, if any, for the purpose of increasing our capital and supporting further growth. It is not anticipated that we will pay cash dividends on our common stock anytime in the foreseeable future. Finally, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, capital requirements and such other factors as our Board of Directors may deem relevant. Currently, we are ineligible to pay dividends under California law.

Our TARP preferred securities have a priority right to payment of dividends and the failure to resume paying dividends on the TARP preferred securities may adversely affect us.

On December 23, 2008, we completed a transaction with the Treasury under TARP, or the TARP Transaction. In the TARP Transaction, we sold 10,400 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A to Treasury, which bears an initial dividend rate of 5% increasing to 9% after five years. In addition, Treasury received a warrant for the purchase of 520 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B, which bears a dividend rate of 9%. The warrant was immediately exercised.

The preferred securities issued in the TARP Transaction have a priority right to dividends and payment over our common stock. Any new dividends that we pay will also require the approval of the Treasury. The dividends declared and the accretion on our outstanding preferred securities will reduce the net income available to common

stockholders and our earnings per common share. Our outstanding preferred securities will also receive preferential treatment in the event of our liquidation, dissolution or winding-up. Our ability to repurchase shares of our common stock is also restricted by the TARP Transaction.

In order to conserve capital, we deferred our fifth consecutive dividend payment on the TARP preferred securities in August 2010 and are likely to be unable to make such quarterly payments for the foreseeable future. Until we pay all accrued and unpaid dividends current, we will not be able to declare or pay dividends on our common stock or repurchase shares of such stock. Additionally, if we defer an aggregate of six quarterly dividend payments, whether or not consecutive, the holder of the TARP preferred securities will have the right to elect two new directors to our Board of Directors.

Our trust preferred securities have a priority right to payment of dividends and the failure to resume paying interest on our trust preferred securities may adversely affect us.

Historically, we have supported our growth through the issuance of trust preferred securities. Trust preferred securities have a priority right to distributions and payment over our common stock. At December 31, 2009, we had trust preferred securities and related debt totaling approximately $15.5 million. We began deferring interest payments on our trust preferred securities in July 2010. Through December 2010, we have deferred $226,000 of interest. Until we pay all currently due and deferred interest payments, we will not be able to declare or pay dividends on our common stock. Finally, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, capital requirements, requirements of the Order and Federal Reserve Agreement and such other factors as our Board of Directors may deem relevant.

The value of our tax loss carry forward may be reduced.

At December 31, 2009, we had approximately $22.5 million in tax loss carry-forwards which are available to offset taxes on future profits. It is probable that a “change in control” for purposes of the Internal Revenue Code will occur due to this Offering. In such event, the value of the tax losses as an offset to taxes on future profits will be significantly reduced.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Company believes that some of the information in this prospectus constitutes forward-looking statements. Forward-looking statements are based on management’s current expectations regarding economic, legislative, and regulatory issues that may impact our earnings in future periods. These statements may include statements regarding projected performance for periods following the completion of this Offering. They often include the words “believe,” “expect,” “intend,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this prospectus that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from our goals, objectives, intentions, expectations and other forward-looking statements:

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changes in general economic conditions, either nationally or locally in the Nevada County area or other areas in which we conduct or will conduct our business;

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the persistence of the ongoing economic crisis;

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inflation, interest rate, market and monetary fluctuations;

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real estate values and competition;

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changes in consumer spending habits and savings habits;

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increases in competitive pressures among financial institutions and businesses offering similar products and services;

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higher defaults on our loan portfolio than we expect;

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changes in management’s estimate of the adequacy of the allowance for credit losses;

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lower net income from operations;

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loss of more business or customers than we expect, or operating costs higher than we expect;

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ability to successfully grow our business in our market area;

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legislative or regulatory changes or changes in accounting principles, policies or guidelines;

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technological changes; and

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regulatory or judicial proceedings.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this prospectus. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

You should read this prospectus completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. We do not undertake any obligation to release publicly our revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus.

USE OF PROCEEDS

This prospectus relates to units being offered by us in the Offering, including the shares of common stock and 2011 Warrants that make up the units. The maximum net proceeds from the sale of units are expected to be up to $30,000,000 million before deducting our estimated offering expenses. However, the net proceeds could be considerably less but the amount of new equity capital and earnings that we achieve must not be less than the amount that would result in the Bank being in substantial compliance with the Capital Requirement of the Order or we will not close the Offering.

We plan to use the net proceeds from this Offering to support our capital ratios. The capital raised in this Offering will be needed in order for us to return to “well capitalized” status under the bank regulatory capital ratio guidelines and the Order to which we are subject. See “Summary — Consent Order and Written Agreement.”

The proceeds contributed to the Bank will be used for general banking purposes including the making of loans and the purchase of investments. Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this Offering.

Any remaining proceeds beyond those necessary to satisfy the Capital Requirement of the Order will be used to:

•

support further our capital ratios if we reduce non-performing assets by their sale at a discount,

•

attempt to negotiate the repayment of the outstanding preferred stock at a discount, and

•

execute a growth strategy that includes the acquisition of other community banks.

There is no specific allocation of any remaining proceeds among these alternative uses. While there have been preliminary discussions with interested parties concerning the sale of non-performing assets at a discount, the repayment of our preferred stock at a discount and a “roll-up” strategy of other financial institutions, there are no agreements relating to such matters. No assurance can be given that any of these strategies can be accomplished on terms acceptable to the Company.

TRADING HISTORY AND DIVIDEND POLICY

Prior to this Offering there has been a limited public market for our common stock. Our common stock is quoted under the symbol “CZNB” on the OTC Bulletin Board. The following table presents for each quarterly period presented the high and low closing sale prices of our common stock. The closing prices have been adjusted for the effect of a 5% stock dividend distributed on June 19, 2008. Prices do not include retail mark-ups, markdowns or commissions.

Quarter Ended	Closing Prices
	Low		High
2008
March 31	$	12.14	$	17.24
June 30	$	12.67	$	18.10
September 30	$	11.35	$	16.25
December 31	$	7.10	$	15.75
2009
March 31	$	5.75	$	9.50
June 30	$	4.05	$	9.50
September 30	$	4.00	$	7.00
December 31	$	3.50	$	5.75
2010
March 31	$	3.50	$	5.25
June 30	$	2.75	$	4.00
September 30	$	0.57	$	5.99
December 31	$	1.62	$	2.95

On January 25, 2011, there were approximately 335 record holders and 2,335,090 shares of our common stock issued and outstanding.

We do not pay cash dividends as we have used our current and retained earnings to support our growth. We do not foresee any circumstances in the immediate future in which we would consider paying cash dividends on our common stock.

Additionally, our junior subordinated debt agreements and our preferred stock contain provisions that prohibit our paying dividends if we have deferred payment of interest on outstanding trust preferred securities or are in arrears in the payment of dividends on our preferred stock. We are currently in arrears on dividend payments on our preferred stock. For a discussion of the limitations on dividends, see “Business — Supervision and Regulation — Payment of Dividends.” We are also deferring interest payments on the trust preferred securities.

Equity Compensation Plan Information

The following table provides information as of December 31, 2009 about the Company’s equity compensation plans.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	67,082	$13.43	594,607
Equity compensation plans not approved by security holders	—	—	—
Total	67,082	$13.43	594,607

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2010 on an actual and pro forma basis. The pro forma basis is adjusted to reflect receipt and application by us of the maximum estimated net proceeds from our sale of 10,000,000 units in the Offering at an offering price of $3.00 per unit, after deducting the estimated offering expenses.

You should read this table in conjunction with the financial statements and the other financial information included in this prospectus.

	As of December 31, 2010
(Unaudited)	Actual			Pro Forma
	(Dollars in thousands, except share and per share amounts)
Indebtedness:
Borrowings	$	30,567		$	30,567
Junior subordinated debentures		15,465			15,465
Shareholders’ Equity:
Serial preferred stock — 2,500,000 shares authorized
Series A preferred stock; 10,400 shares outstanding		10,057			10,057
Series B preferred stock; 520 shares outstanding		520			520
Common stock — no par value; 20,000,000 shares authorized, 2,335,090 shares outstanding, actual; 12,335,090 shares outstanding, pro forma		16,040			45,896
Accumulated deficit		(22,885	)		(22,885	)
Accumulated other comprehensive loss, net of taxes		(41	)		(41	)
Total shareholders’ equity		3,691			33,547
Total capitalization	$	49,723		$	79,579

Citizens Bancorp Capital Ratios:
Leverage capital ratio		1.4	%		13.1	%
Tier 1 risk-based capital ratio		1.8	%		16.6	%
Total risk-based capital ratio		8.3	%		19.3	%
Citizens Bank of Northern California Capital Ratios:
Leverage capital ratio		5.4	%		11.3	%
Tier 1 risk-based capital ratio		6.8	%		14.2	%
Total risk-based capital ratio		8.1	%		15.6	%

Book value per common share	$	(2.95	)	$	1.86

DILUTION

If you invest, you will suffer substantial dilution to the extent the offering price per unit exceeds the tangible book value of our common stock immediately after this Offering. The book value of our common stock as of December 31, 2010 was negative $6.9 million, or negative $2.95 per share of common stock. The tangible book value per share, as adjusted, represents shareholders’ equity divided by the 2,335,090 shares of our common stock outstanding as of that date.

After giving effect to the issuance and sale of 10,000,000 shares of our common stock in this Offering and our receipt of approximately $29.9 million in net proceeds from such sale, based on an offering price of $3.00 per unit, and after deducting the estimated expenses of the offering, our as adjusted tangible book value as of December 31, 2010 would have been approximately $23.0 million, or $1.86 per share. This amount represents an immediate increase in tangible book value per share of $4.81 to existing shareholders and an immediate dilution of $1.14 per share to purchasers of the units in this Offering. Dilution is determined by subtracting the tangible book value per share as adjusted for this offering from the amount of cash paid by a new investor for a share of our common stock.

It is currently anticipated that our directors and executive officers will purchase approximately 300,000 to 500,000 units.

The following table illustrates the per share dilution as of December 31, 2010:

Offering price per share	$	3.00
Book value per common share as of December 31, 2010, actual		($2.95	)
Increase in tangible book value per share attributable to new investors	$	4.81
As adjusted tangible book value per share after this offering	$	1.86
Dilution per share to new investors	$	1.14

The shares of common stock outstanding exclude 639,357 shares of common stock reserved for issuance under our stock option plans of which 44,750 shares were subject to outstanding options at December 31, 2010. To the extent that options are exercised or other share awards are made under our stock option plan, there may be further dilution to new investors.

The following table summarizes as of December 31, 2010, on the pro forma basis described above, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing and new investors purchasing shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses.

	Shares Purchased						Total Consideration					Average
	Number			Percent			Amount		Percent			Per Share
Existing Shareholders as of December 31, 2010		2,335,090	(1)		19	%	$	8,667,149		22	%	$	3.71	(1)
New Investors		10,000,000			81	%		30,000,000		78	%		3.00
Total		12,335,090			100	%	$	38,667,149		100	%	$	3.13

(1)

The number of shares purchased and average price per share for existing shareholders have been adjusted for 5% stock dividends paid in 2005, 2006, 2007 and 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Information” and our financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s accounting policies are integral to understanding the financial results reported. The most complex of these accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and internal control procedures that are intended to ensure valuation methods are well controlled and consistently applied from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The accounting areas where management’s judgment is most likely to materially impact the Company’s financial results are:

Allowance for Credit Losses

The allowance for credit losses is maintained to provide for estimated credit losses that are probable the Company will incur as of the balance sheet date. Loans determined to be impaired are evaluated individually by management for determination of the specific loss, if any, that exists as of the balance sheet date. In addition, reserve factors are assigned to currently performing loans by loan type based on historical loss rates and adjusted for various qualitative factors such as economic and market conditions, concentrations and other trends within the credit portfolio. When management believes that additional reserves are needed, the allowance for credit losses is increased by recording a charge to operations through the provision for loan losses. The allowance is decreased as loans are charged-off, net of recoveries. Management reviews the adequacy of the allowance for credit losses at least quarterly.

Management believes the allowance for credit losses is a “critical accounting estimate” because management’s estimate of loan losses on loans not already identified as impaired, requires management to carefully evaluate the pertinent facts and circumstances as of the balance sheet date to determine how much, if any, adjustment is required to the historical loss rate for each loan type. In addition, estimates of loan losses on currently performing loans are subject to change in future reporting periods as facts and circumstances change. For example, a continued decline in the California real estate market may result in management increasing its estimate of loan losses if such estimated losses are considered probable at the balance sheet date. Furthermore, the FDIC and DFI, as an integral part of their examination process, review the allowance for credit losses. These agencies may require additions to the allowance for credit losses based on their judgment about information at the time of their examinations.

Economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans may occur which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned (“OREO”) or other foreclosed assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any adjustment at the time of foreclosure or shortly thereafter is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value has declined subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income or expense.

Deferred Income Tax Assets/Liabilities

Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available. Positive evidence includes the historical levels of our taxable income, estimates of our future taxable income including tax planning strategies, the reversals of deferred tax liabilities and taxes available in carry-back years. Negative evidence primarily includes the cumulative deficit, the Company not meeting its financial projections in 2009 or 2008 and the ongoing levels of non-performing assets. Additionally, projected or future economic and business conditions have been considered, and we have determined the need to establish a valuation allowance for deferred tax assets, based on the weight of available evidence, that it is less likely that some portion or all of the deferred tax assets may be realized.

Additionally, the Company reviews its uncertain tax positions annually. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the “more likely than not” test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Results of Operations

The following discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity and capital. It pertains to the Company’s financial condition, changes in financial condition and results of operations as of September 30, 2010, December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009 and for the three and nine month periods ended September 30, 2010 and 2009. The discussion should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.

Overview

The following table presents our key performance indicators for the years ended December 31, 2009, 2008 and 2007:

	Year Ended December 31,
	2009			2008			2007
	(Dollars in thousands, except share and per share data)
Net interest income	$	15,122		$	15,100		$	14,294
Provision for credit losses		11,115			23,900			945
Net interest income (loss) after provision for credit losses		4,007			(8,800	)		13,349
Non-interest income		5,112			2,140			2,206
Non-interest expense		15,691			11,653			11,242
Provision for (benefit from) income taxes		6,568			(7,662	)		1,728
Net (loss) income		(13,140	)		(10,651	)		2,585
Dividends and discount accretion on preferred stock		(328	)		—			—
Net (loss) income applicable to common shareholders	$	(13,468	)	$	(10,651	)	$	2,585
Average assets	$	376,524		$	350,545		$	301,885
Average shareholders’ equity	$	18,523		$	20,960		$	20,233

	Year Ended December 31,
	2009			2008			2007
	(Dollars in thousands, except share and per share data)
Share Information:
Weighted average shares outstanding — basic		1,920,300			1,915,117			1,911,897
Weighted average shares outstanding — diluted		1,920,300			1,915,117			1,956,595

Profitability Measures:
(Loss) earnings per share — basic	$	(7.01	)	$	(5.56	)	$	1.35
(Loss) earnings per share — diluted	$	(7.01	)	$	(5.56	)	$	1.32
Return on average assets		(3.58	)%		(3.04	)%		0.86	%
Return on average shareholders’ equity		(72.71	)%		(50.82	)%		12.77	%
Efficiency Ratio		77.55	%		67.60	%		68.14	%

All share and per share data for 2007 has been adjusted for a 5% stock dividend distributed on June 19, 2008.

Our Company has been affected by an economic downturn unprecedented in recent memory. After recording a valuation allowance on deferred tax assets of $9.3 million and impairment charges related to OREO of $3.4 million, the net loss for the year ended December 31, 2009 was $13.5 million, or $7.01 loss per share, compared to a loss of $10.7 million, or $5.56 loss per share, for the same period in 2008. The results for 2009 as compared to 2008 were benefited by a decrease in the provision for loan losses of $12.8 million and a gain on sale of loans of $2.8 million. These benefits were offset by an increase in non-interest expenses of $4.0 million and the full valuation allowance recorded against our net deferred tax assets during the fourth quarter of 2009 which resulted in an increase in the tax provision of $14.2 million.

The following table presents our key performance indicators for the three and nine months ended September 30, 2010 and 2009:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Unaudited)	2010			2009			2010			2009
	(Dollars in thousands, except share and per share data)
Net interest income	$	3,415		$	3,673		$	10,626		$	10,942
Provision for credit losses		400			400			7,900			3,900
Net interest income after provision for credit losses		3,015			3,273			2,726			7,042
Non-interest income		628			594			1,720			1,716
Non-interest expense		3,602			3,214			8,895			11,099
Provision for (benefit from) income taxes		—			264			—			(946	)
Net income (loss)		41			389			(4,449	)		(1,395	)
Dividends and discount accretion on preferred stock		(26	)		(26	)		(78	)		(302	)
Net income (loss) applicable to common shareholders	$	15		$	363		$	(4,527	)	$	(1,697	)
Average assets	$	341,801		$	384,400		$	342,920		$	375,745
Average shareholders’ equity	$	5,128		$	19,491		$	7,438		$	19,831

Share Information:
Weighted average shares outstanding — basic		2,335,090			1,915,981			2,324,193			1,915,981
Weighted average shares outstanding — diluted		2,335,090			1,915,981			2,324,193			1,915,981

Profitability Measures:
Earnings (loss) per share — basic	$	0.01		$	0.19		$	(1.95	)	$	(0.89	)
Earnings (loss) per share — diluted	$	0.01		$	0.19		$	(1.95	)	$	(0.89	)
Return on average assets		0.02	%		0.38	%		(1.76	)%		(0.60	)%
Return on average shareholders’ equity		1.13	%		7.40	%		(81.37	)%		(11.44	)%
Efficiency ratio		89.10	%		75.32	%		72.05	%		87.68	%

Net income for the three month period ended September 30, 2010 was $15 thousand compared to $363 thousand for the same period in 2009. Earnings per diluted share for the three months ended September 30, 2010 was $0.01, compared to $0.19 for the three months ended September 30, 2009.

The net loss for the nine month period ended September 30, 2010 was $4.5 million compared to a net loss of $1.7 million for the same period in 2009. The primary contributor to the increase in the net loss for the nine months ended September 30, 2010 was an increase in the provision for credit losses. The provision for credit losses for the nine month period ended September 30, 2010 was $7.9 million, an increase of $4.0 million compared to the $3.9 million recorded during the same period in 2009. This was offset by the reversal of liabilities totaling $1.3 million associated with the cancellation of certain deferred compensation agreements in 2010, compared to the reversal of $714 thousand in the same period of the prior year. The loss per diluted share for the nine months ended September 30, 2010 was $1.95, compared to a loss per share for the nine months ended September 30, 2009 of $0.89.

Consistent with the Company’s plan to reduce assets by using excess liquidity to reduce borrowings and brokered deposits, total assets as of September 30, 2010 were $357.5 million, a decrease of $13.6 million, or 4%, from $371.1 million as of December 31, 2009. Total loans as of September 30, 2010 were $278.6 million, a decrease of $26.1 million, or 9%, from $304.7 million as of December 31, 2009. Over the same period, deposits decreased $19.6 million, or 6%, to $283.0 million at September 30, 2010, compared to $302.6 million at December 31, 2009. This decrease in deposits includes the $9.2 million, or 100%, reduction in brokered deposits from December 31, 2009. Borrowings increased $8.6 million, or 21%, to $48.6 million at September 30, 2010, from $40.0 million at December 31, 2009.

Total assets as of December 31, 2009 were $371.1 million, an increase of $7.8 million, or 2%, from $363.3 million as of December 31, 2008. Total loans as of December 31, 2009 were $304.7 million, a decrease of $7.6 million, or 2%, from $312.4 million as of December 31, 2008. Interest bearing deposits in other banks and federal funds sold increased $29.7, or 115.8%, to $55.4 million at December 31, 2009, from $25.7 million at December 31, 2008. Over the same period, deposits grew $2.9 million, or 1%, to $302.6 million at December 31, 2009, compared to $299.8 million at December 31, 2008. The deposit growth reflects the growth of deposits in the Bank’s core markets of $32 million, offset by brokered deposit maturities of $29.1 million. Borrowings increased $17.0 million, or 73.9%, to $40.0 million at December 31, 2009, from $23.0 million at December 31, 2008.

Looking forward: 2011 and beyond

In management’s opinion, the following key issues will influence the financial results of the Company in 2011 and future years:

•

We must recapitalize the Company to overcome the losses sustained in 2010, 2009 and 2008. In December 2009, we started that process by raising nearly $1.6 million in capital from a private placement stock sale in order to strengthen the Bank’s balance sheet and capital position. A majority of the funds were raised from directors, officers and other charter members of the Board. In addition, in April 2010, as a continuation of the private placement, we received an additional $100 thousand.

•

We must bring ourselves into compliance with the Order as quickly as possible in order to reduce the actual costs involved in achieving compliance and refocus management’s attention on traditional banking activities.

•

In June 2010, the regulators completed a full examination of the Bank. The regulators also refused to grant the Bank’s request for an extension of the July 2010 deadline to achieve the Capital Requirement of the Order.

The Company and the Bank believe that the regulators may take further enforcement action including the possible modification of the Order.

In light of these circumstances, the board of directors has decided to proceed with the Offering. However, it will not close the Offering if new equity capital and earnings combined would not result in the Bank being in substantial compliance with the Capital Requirement of the Order.

•

Our results can be significantly influenced by changes in the credit quality of our borrowers. Nonaccrual loans totaled $27.1 million or 10.3% of total loans at December 31, 2010. The provision for credit losses

was $11.1 million in 2009, a significant decrease over the $23.9 million in 2008. The provision for credit losses was $7.9 million for the nine months ended September 30, 2010 and we added an additional $2.35 million for the three months ended December 31, 2010. As the economy and real estate values stabilize, management anticipates that loan loss provisions in 2011 will be less than the 2010, 2009 and 2008 levels. However, with the current economic conditions in the United States and California, and an increasing number of borrowers who are impacted by the recession, substantial uncertainty regarding the timing and extent of economic recovery remains. As such, increases in the level of provisioning for credit losses may be necessary.

•

Our earnings are sensitive to changes in market interest rates. Our balance sheet is slightly asset sensitive and as a result, our net interest margin tends to increase in a rising interest rate environment and decline in a falling interest rate environment. Throughout 2009, interest rates have been at historically low levels, which compressed our net interest margin. As the Federal Reserve begins to increase interest rates, our net interest margin will begin to rise as well. Management does not anticipate a significant impact until interest rates increase by 2%, when it is expected that variable rate loans will begin to rise above their current floors.

In addition to changes in market interest rates, the net interest margin has come under pressure from: (1) aggressive competitor pricing strategies for both loans and deposits to which the Company needs to respond in order to retain customers; and (2) changes in deposit mix as customers move funds from low or non-interest bearing transaction and savings accounts to higher yielding time deposits.

•

In February 2010, the Bank relocated its Central Operations Department to its downtown Grass Valley location, making room for the Bank to lay the early groundwork for establishing a Small Business Administration (“SBA”) Lending Division at their Nevada City Loan Operations Center. These moves are part of several strategies the Bank has put into motion to position the Bank for the future. These strategies will enable the Bank to provide continued excellent service, enhance its menu of financial products offered, increase efficiency and improve financial performance. The Bank’s move to broaden its SBA lending and seek “Preferred Lender” status is part of a long-term strategy in providing loans to small business, both real estate and non-real estate related, under a government guaranteed program.

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest earning assets. Our balance sheet is asset sensitive and as a result, our net interest margin tends to increase in a rising interest rate environment and decline in a falling interest rate environment. The majority of our earning assets are tied to market rates, such as the prime rate, and therefore rates on our earning assets generally reprice along with a movement in market rates while interest bearing liabilities, primarily deposits, typically reprice more slowly and usually incorporate only a portion of the movement in market rates.

The following tables present, for the periods indicated, the distribution of average assets, liabilities and shareholders’ equity, as well as the net interest income from average interest earning assets and the resultant yields expressed as percentages. Nonaccrual loans are included in the calculation of average loans while non-accrued interest thereon is excluded from the computation of yields earned.

	Year Ended December 31,
	2009								2008								2007
	Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
ASSETS
Interest earning assets:
Total loans (1) (2) (3)	$	310,253		$	19,215		6.19	%	$	316,500		$	21,801		6.89	%	$	279,221		$	22,428		8.03	%
Investment securities available-for-sale (1)		1,670			40		2.40	%		1,205			40		3.32	%		1,446			55		3.80	%
Federal funds sold		8,409			8		0.10	%		9,440			125		1.32	%		1,981			66		3.33	%
Interest bearing deposits with other banks		15,021			27		0.18	%		323			5		1.55	%		172			8		3.33	%
Total interest earning assets		335,353			19,290		5.75	%		327,468			21,971		6.71	%		282,820			22,557		7.98	%
Non-interest earning assets:
Cash and due from banks		26,305								7,182											8,891
Allowance for credit losses		(13,988	)							(4,678	)							(3,586	)
Other assets		28,854								20,573								13,760
Total assets	$	376,524							$	350,545							$	301,885

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Interest bearing demand	$	39,073			9		0.02	%	$	34,547			10		0.03	%	$	28,314			105		0.37	%
Money market		59,143			719		1.22	%		60,586			1,418		2.34	%		54,624			1,658		3.04	%
Savings		16,953			67		0.40	%		13,634			72		0.53	%		11,910			112		0.94	%
Time certificates of deposit		120,464			2,431		2.02	%		112,194			3,950		3.52	%		96,695			4,815		4.98	%
Total interest bearing deposits		235,633			3,226		1.37	%		220,961			5,450		2.47	%		191,543			6,690		3.49	%
Borrowings		30,875			473		1.53	%		22,638			493		2.18	%		5,613			398		7.09	%
Junior subordinated debentures		15,465			469		3.03	%		15,465			928		6.00	%		15,465			1,175		7.60	%
Total interest bearing liabilities		281,973			4,168		1.48	%		259,064			6,871		2.65	%		212,621			8,263		3.89	%
Non-interest bearing liabilities:
Demand deposits		72,397								66,933								65,860
Other liabilities		3,631								3,588								3,171
Total liabilities		358,001								329,585								281,652
Shareholders’ equity		18,523								20,960								20,233
Total liabilities and shareholders’ equity	$	376,524							$	350,545							$	301,885
Net interest income				$	15,122							$	15,100							$	14,294
Net interest margin (4)							4.51	%							4.61	%							5.05	%

(1)

Yields on loans and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not considered significant.

(2)

Average nonaccrual loan balances of $26.7 million for 2009, $10.5 million for 2008 and $2.9 million for 2007 are included in average loan balances for computational purposes.

(3)

Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $112 thousand for 2009 and net loan fees of, $152 thousand and $257 thousand for 2008 and 2007, respectively.

(4)

Net interest margin is computed by dividing net interest income by total average earning assets.

The following tables show the change in interest income and interest expense and the amount of change attributable to variances in volume and rates:

	Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
	Volume			Rate (1)			Net Change
	(Dollars in thousands)
Interest income:
Loans	$	(430	)	$	(2,156	)	$	(2,586	)
Investment securities available-for- sale		15			(15	)		—
Federal funds sold		(14	)		(103	)		(117	)
Interest bearing deposits with other banks		228			(206	)		22
Total interest income		(201	)		(2,480	)		(2,681	)

Interest expense:
Interest bearing demand		1			(2	)		(1	)
Money market		(34	)		(665	)		(699	)
Savings		18			(23	)		(5	)
Time certificates of deposit		291			(1,810	)		(1,519	)
Borrowings		179			(199	)		(20	)
Junior subordinated debentures		—			(459	)		(459	)
Total interest expense		455			(3,158	)		(2,703	)
Net interest income	$	(656	)	$	678		$	22

	Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
	Volume			Rate (1)			Net Change
	(Dollars in thousands)
Interest income:
Loans	$	2,994		$	(3,621	)	$	(627	)
Investment securities available-for- sale		(9	)		(6	)		(15	)
Federal funds sold		249			(190	)		59
Interest bearing deposits with other banks		7			(10	)		(3	)
Total interest income		3,241			(3,827	)		(586	)

Interest expense:
Interest bearing demand		23			(118	)		(95	)
Money market		181			(421	)		(240	)
Savings		16			(56	)		(40	)
Time certificates of deposit		772			(1,637	)		(865	)
Borrowings		1,207			(1,112	)		95
Junior subordinated debentures		—			(247	)		(247	)
Total interest expense		2,199			(3,591	)		(1,392	)
Net interest income	$	1,042		$	(236	)	$	806

(1)

Factors contributing to both changes in rate and volume have been attributed to changes in rates.

(Unaudited)	Three Months Ended September 30, 2010								Three Months Ended September 30, 2009
	Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans (1) (2) (3)	$	285,329		$	3,896		5.42	%	$	308,602		$	4,628		5.95	%
Investment securities		7,372			55		2.96	%		1,566			7		1.77	%
Federal funds sold		—			—		0.00	%		162			—		0.00	%
Interest-bearing deposits with other banks		19,753			47		0.94	%		32,040			12		0.00	%
Total interest-earning assets		312,454			3,998		5.08	%		342,370			4,647		5.38	%

Non-earning assets:
Cash and due from banks		25,514								26,296
Allowance for credit losses		(15,204	)							(14,373	)
Other assets		19,037								30,107
Total assets	$	341,801							$	384,400

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand	$	43,816			2		0.02	%	$	40,229			2		0.02	%
Money market		59,087			111		0.75	%		58,651			174		1.18	%
Savings		17,944			9		0.20	%		17,219			17		0.39	%
Time certificates of deposit		78,067			235		1.19	%		121,405			554		1.81	%
Total interest-bearing deposits		198,914			357		0.71	%		237,504			747		1.25	%
Borrowings		39,283			120		1.21	%		32,000			120		1.49	%
Trust preferred securities		15,465			106		2.72	%		15,465			107		2.74	%
Total interest-bearing liabilities		253,662			583		0.91	%		284,969			974		1.36	%

Noninterest-bearing liabilities:
Demand deposits		79,333								76,384
Other liabilities		3,678								3,556
Total liabilities		336,673								364,909
Shareholders’ equity		5,128								19,491
Total liabilities and shareholders’ equity	$	341,801							$	384,400

Net interest income				$	3,415							$	3,673
Net interest margin (4)							4.34	%							4.26	%

(1)

Yields on loans and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not considered significant.

(2)

Average nonaccrual loan balances of $30.4 million for 2010 and $25.1 million for 2009 are included in average loan balances for computational purposes.

(3)

Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $30 thousand for 2010 and $44 thousand for 2009, respectively.

(4)

Net interest margin is computed by dividing net interest income by total average earning assets.

(Unaudited)	Nine Months Ended September 30, 2010								Nine Months Ended September 30, 2009
	Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans (1) (2) (3)	$	292,988		$	12,298		5.61	%	$	312,460		$	14,201		6.08	%
Investment securities		4,148			91		2.93	%		1,705			33		2.59	%
Federal funds sold		—			—		0.00	%		8,979			8		0.12	%
Interest-bearing deposits with other banks		15,569			68		0.58	%		10,977			12		0.15	%
Total interest-earning assets		312,705			12,457		5.33	%		334,121			14,254		5.70	%

Non-earning assets:
Cash and due from banks		26,858								24,764
Allowance for credit losses		(14,640	)							(13,842	)
Other assets		17,997								30,702
Total assets	$	342,920							$	375,745
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand	$	43,296			5		0.02	%	$	38,064			7		0.02	%
Money market		60,630			318		0.70	%		58,353			567		1.30	%
Savings		18,325			30		0.22	%		16,658			51		0.41	%
Time certificates of deposit		84,214			835		1.33	%		123,784			1,980		2.14	%
Total interest-bearing deposits		206,465			1,188		0.77	%		236,859			2,605		1.47	%
Borrowing		33,428			347		1.39	%		29,500			335		1.52	%
Trust preferred securities		15,465			296		2.56	%		15,465			372		3.22	%
Total interest-bearing liabilities		255,358			1,831		0.96	%		281,824			3,312		1.57	%

Noninterest-bearing liabilities:
Demand deposits		76,830								70,392
Other liabilities		3,294								3,698
Total liabilities		335,482								355,914

Shareholders’ equity		7,438								19,831
Total liabilities and shareholders’ equity	$	342,920							$	375,745

Net interest income				$	10,626							$	10,942
Net interest margin (4)							4.54	%							4.38	%

(1)

Yields on loans and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not considered significant.

(2)

Average nonaccrual loan balances of $29.2 million for 2010 and $25.3 million for 2009 are included in average loan balances for computational purposes.

(3)

Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $75 thousand for 2010 and $78 thousand for 2009, respectively.

(4)

Net interest margin is computed by dividing net interest income by total average earning assets.

The following tables show the change in interest income and interest expense and the amount of change attributable to variances in volume and rates for the periods presented:

	Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
	Volume			Rate (1)			Net Change
	(Dollars in thousands)
Interest income:
Loans	$	(349	)	$	(383	)	$	(732	)
Investment securities		26			22			48
Federal funds sold		—			—			—
Interest-bearing deposits with other banks		(5	)		40			35
Total interest income		(328	)		(321	)		(649	)

Interest expense:
Interest-bearing demand		—			—			—
Money market		1			(64	)		(63	)
Savings		1			(9	)		(8	)
Time certificates of deposit		(198	)		(121	)		(319	)
Borrowings		27			(27	)		—
Junior subordinated debentures		—			(1	)		(1	)
Total interest expense		(169	)		(222	)		(391	)
Net interest income	$	(159	)	$	(99	)	$	(258	)

(1)

Factors contributing to both changes in rate and volume have been attributed to changes in rates.

	Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
	Volume			Rate (1)			Net Change
	(Dollars in thousands)
Interest income:
Loans	$	(885	)	$	(1,018	)	$	(1,903	)
Investment securities		47			11			58
Federal funds sold		(8	)		—			(8	)
Interest-bearing deposits with other banks		5			51			56
Total interest income		(841	)		(956	)		(1,797	)

Interest expense:
Interest-bearing demand		1			(3	)		(2	)
Money market		22			(271	)		(249	)
Savings		5			(26	)		(21	)
Time certificates of deposit		(633	)		(512	)		(1,145	)
Borrowings		45			(33	)		12
Junior subordinated debentures		—			(76	)		(76	)
Total interest expense		(560	)		(921	)		(1,481	)
Net interest income	$	(281	)	$	(35	)	$	(316	)

(1)

Factors contributing to both changes in rate and volume have been attributed to changes in rates.

2009 Compared to 2008

Net interest income remained relatively unchanged and was $15.1 million for both years ended December 31, 2009 and 2008. Average earning assets increased 2.4%, or $7.9 million, to $335.4 million for the year ended December 31, 2009, from $327.5 million for 2008. Average loans, net of deferred fees and costs, decreased by 2.0%, or $6.2 million, to $310.3 million for the year ended December 31, 2009, from $316.5 million for 2008. Average deposits increased 7.0%, or $20.1 million, to $308.0 million for the year ended December 31, 2009, from $287.9 million for 2008. Average noninterest bearing deposits as a percent of total average deposits remained consistent at approximately 23% during the years ended December 31, 2009 and 2008.

The net interest margin for the year ended December 31, 2009 decreased ten basis points to 4.51%, from 4.61% for 2008. The compression of the net interest margin was primarily a result of forgone interest on nonaccrual and restructured loans, which was partially mitigated by improved cost of funds. Forgone interest on nonaccrual and restructured loans adversely impacted the net interest margin by 64 basis points and 31 basis points for years ended December 31, 2009 and 2008, respectively.

Interest income decreased 12.2%, or $2.7 million, to $19.3 million for the year ended December 31, 2009, from $22.0 million for 2008. Average loans, net of deferred fees and costs, decreased by 2.0%, or $6.2 million, to $310.3 million for the year ended December 31, 2009, from $316.5 million for 2008, and yielded 6.19% for the year ended December 31, 2009, compared to 6.89% for 2008. The yield on average loans was negatively impacted by an increase in nonaccrual and restructured loans and reflects the impact of loans that re-priced during a period of declining short-term interest rates. The yield on investment securities and federal funds sold decreased to 2.40% and 0.10%, respectively, for the year ended December 31, 2009, from 3.32% and 1.32%, respectively, for the 2008 year. These declines in yield were directly related to the declining rate environment.

Interest expense on all interest bearing liabilities decreased 39.3%, or $2.7 million, to $4.2 million for the year ended December 31, 2009, from $6.9 million in 2008. Total average interest bearing liabilities increased 8.8%, or $22.9 million, to $282.0 million for the year ended December 31, 2009, from $259.1 million for 2008. The cost of interest bearing liabilities decreased to 1.48% for the year ended December 31, 2009, from 2.65% for 2008. This decrease was primarily the result of a decrease in deposit rates paid on time and money market deposits and on junior subordinated deferrable interest debentures as a result of a lower interest rate environment.

Interest expense on interest bearing deposits decreased 40.8%, or $2.2 million, to $3.2 million for the year ended December 31, 2009, from $5.4 million for 2008. The decrease is attributable to a decrease in deposit rates paid on all deposit types during the year ended December 31, 2009 as a result of the interest rate environment which has been in decline since 2007. The overall cost of deposits decreased to 1.05% for the year ended December 31, 2009, from 1.89% for 2008. This overall cost differs from the cost of total interest bearing deposits of 1.37% and 2.47% for the years ended December 31, 2009 and 2008, respectively due to the substantial percentage of our funding sources which are non-interest bearing demand deposits, which were 23.5% of average total deposits for the year ended December 31, 2009, compared to 23.2% for 2008. At December 31, 2009 non-interest bearing deposits as a percent of total deposits were 25.2%, an increase over the 21.8% at December 31, 2008.

2008 Compared to 2007

Net interest income increased 5.6%, or $806 thousand, to $15.1 million for the year ended December 31, 2008, from $14.3 million for 2007. Average earning assets increased 15.8%, or $44.6 million, to $327.5 million for the year ended December 31, 2008, from $282.8 million for 2007. Average loans, net of deferred fees and costs, increased by 13.4%, or $37.3 million, to $316.5 million for the year ended December 31, 2008, from $279.2 million for 2007. Average deposits increased 11.8%, or $30.5 million, to $287.9 million for the year ended December 31, 2008, from $257.4 million for 2007.

The net interest margin for the year ended December 31, 2008 decreased 44 basis points to 4.61%, from 5.05% for 2007. The compression of the net interest margin was primarily a result of a lower interest rate environment in 2008 compared to 2007.

Interest income decreased 2.6%, or $586 thousand, to $22.0 million for the year ended December 31, 2008, from $22.6 million for 2007. Average loans, net of deferred fees and costs, decreased by 13.4%, or $37.3 million, to $316.5 million for the year ended December 31, 2008, from $279.2 million for 2007, and yielded 6.89% for the year ended December 31, 2008, compared to 8.03% for 2007. The yield on average loans in 2008 was negatively impacted by an increase in nonaccrual loans and the impact of variable rate loans that re-priced during a period of declining short-term interest rates. The yield on investment securities decreased to 3.32% for the year ended December 31, 2008, from 3.80% for 2007.

Interest expense on all interest bearing liabilities decreased 16.9%, or $1.4 million, to $6.9 million for the year ended December 31, 2008, from $8.3 million in 2007. Total average interest bearing liabilities increased 21.8%, or $46.4 million, to $259.1 million for the year ended December 31, 2008, from $212.6 million for 2007. The cost of interest bearing liabilities decreased to 2.65% for the year ended December 31, 2008, from 3.89% for 2007. This decrease was primarily the result of a decrease in deposit rates paid on time and money market deposits and borrowings, as a result of a lower interest rate environment.

Interest expense on interest bearing deposits decreased 18.5%, or $1.2 million, to $5.4 million for the year ended December 31, 2008, from $6.7 million for 2007. The decrease is primarily attributable to a decrease in deposit rates paid on all deposit types during the year ended December 31, 2008 as a result of a lower deposit rate environment. The overall cost of deposits decreased to 1.89% for the year ended December 31, 2008, from 2.60% for 2007. This overall cost differs from the cost of total interest bearing deposits of 1.37% and 2.47% for the years ended December 31, 2009 and 2008, respectively due to the substantial percentage of our funding sources which are non-interest bearing demand deposits, which were 23.2% of average total deposits for the year ended December 31, 2008, a decrease from 25.6% for 2007. This decrease was primarily the result of an increase in the use of brokered time deposits to fund loan growth in 2008.

Three Months Ended September 30, 2010 Compared to 2009

Net interest income decreased by 7.0%, or $258 thousand, to $3.4 million for the three months ended September 30, 2010, from $3.7 million for the same period of 2009. Average earning assets decreased 8.7%, or $29.9 million, to $312.5 million for the three months ended September 30, 2010, from $342.4 million for the same period of 2009. Average loans, net of deferred fees and costs, decreased by 7.5%, or $23.3 million, to $285.3 million for the three months ended September 30, 2010, from $308.6 million for the same period of 2009. Average deposits decreased 11.4%, or $35.6 million, to $278.2 million for the three months ended September 30, 2010, from $313.9 million for the same period of 2009. Average noninterest-bearing deposits as a percentage of total average deposits increased to approximately 28% during the three months ended September 30, 2010 from approximately 24% for the same period in 2009.

The net interest margin for the three months ended September 30, 2010 increased 8 basis points to 4.34%, from 4.26% for three months ended September 30, 2009. The improvement in the net interest margin was primarily a result of a decrease in the cost of funds offset by a decrease in interest income as a result of a decrease in loan balances and forgone interest on nonaccrual and restructured loans. Forgone interest on nonaccrual and restructured loans adversely impacted the net interest margin by 117 basis points and 81 basis points for three months ended September 30, 2010 and 2009, respectively.

Interest income decreased 13.9%, or $649 thousand, to $4.0 million for the three months ended September 30, 2010, from $4.6 million for the same period in 2009. Average loans, net of deferred fees and costs, decreased by 7.5%, or $23.3 million, to $285.3 million for the three months ended September 30, 2010, from $308.6 million for the same period of 2009, and yielded 5.42% in 2010, compared to 5.95% in 2009. The yield on average loans was negatively impacted by an increase in nonaccrual and restructured loans and also reflects the impact of loans that re-priced during a period of declining short-term interest rates. The yield on investment securities increased to 2.96% for the three months ended September 30, 2010, from 1.77% for the same period in 2009 as a result of the investment in higher yielding investment securities in 2010.

Interest expense on all interest-bearing liabilities decreased 40.3%, or $391 thousand, to $583 thousand for the three months ended September 30, 2010, from $974 thousand for the same period in 2009. Total average interest-bearing liabilities decreased 11.0%, or $31.3 million, to $253.7 million for the three months ended September 30,

2010, from $285.0 million for the same period in 2009. The cost of interest-bearing liabilities decreased to 0.91% for the three months ended September 30, 2010, from 1.36% for the same period in 2009. This decrease was primarily the result of a decrease in deposit rates paid on all liabilities as a result of a lower interest rate environment and a decrease in the average balances of time certificates of deposits.

Interest expense on interest-bearing deposits decreased 52.2%, or $390 thousand, to $357 thousand for the three months ended September 30, 2010, from $747 thousand for the same period in 2009. The decrease is attributable to a decrease in deposit rates paid on all deposit types during the three months ended September 30, 2010 as the deposit rate environment has been in decline since 2007. In addition, the average balances of time certificates of deposits declined $43.3 million due to the maturity of time deposits that were not replaced. Of the $43.3 million decrease, $23.0 million related to brokered deposits that matured and were not replaced. The overall cost of deposits decreased to 0.51% for the three months ended September 30, 2010, from 0.94% for same period of 2009. This overall cost differs from the cost of total interest-bearing deposits of 0.71% and 1.25% for the three months ended September 30, 2010 and 2009, respectively due to the substantial percentage of our funding sources which are noninterest-bearing demand deposits, which were 28.5% of average total deposits for the three months ended September 30, 2010, compared to 24.3% for same period of 2009. At September 30, 2010 noninterest-bearing deposits as a percent of total deposits were 29.6%, an increase over the 25.2% at December 31, 2009.

Nine Months Ended September 30, 2010 Compared to 2009

Net interest income decreased by 2.9%, or $316 thousand, to $10.6 million for the nine months ended September 30, 2010, from $10.9 million for the same period of 2009. Average earning assets decreased 7.0%, or $23.6 million, to $312.7 million for the nine months ended September 30, 2010, from $336.4 million for the same period of 2009. Average loans, net of deferred fees and costs, decreased by 6.2%, or $19.5 million, to $293.0 million for the nine months ended September 30, 2010, from $312.5 million for the same period of 2009. Average deposits decreased 7.8%, or $24.0 million, to $283.3 million for the nine months ended September 30, 2010, from $307.3 million for the same period of 2009. Average noninterest-bearing deposits as a percentage of total average deposits increased to approximately 27% during the nine months ended September 30, 2010 from approximately 23% for the same period in 2009.

The net interest margin for the nine months ended September 30, 2010 increased 19 basis points to 4.54%, from 4.35% for the nine months ended September 30, 2009. The improvement in the net interest margin was primarily a result of a decrease in the cost of funds offset by a decrease in interest income as a result of a decrease in loan balances and forgone interest on nonaccrual and restructured loans. Forgone interest on nonaccrual and restructured loans adversely impacted the net interest margin by 98 basis points and 72 basis points for nine months ended September 30, 2010 and 2009, respectively.

Interest income decreased 12.6%, or $1.8 million, to $12.5 million for the nine months ended September 30, 2010, from $14.5 million for the same period in 2009. Average loans, net of deferred fees and costs, decreased by 6.2%, or $19.5 million, to $293.0 million for the nine months ended September 30, 2010, from $312.5 million for the same period of 2009, and yielded 5.61% in 2010, compared to 6.08% in 2009. The yield on average loans was negatively impacted by an increase in nonaccrual and restructured loans and also reflects the impact of loans that re-priced during a period of declining short-term interest rates. The yield on investment securities increased to 2.93% for the nine months ended September 30, 2010, from 2.59% for the same period in 2009 as a result of the investment in higher yielding investment securities in 2010.

Interest expense on all interest-bearing liabilities decreased 44.7%, or $1.5 million, to $1.8 million for the nine months ended September 30, 2010, from $3.3 million for the same period in 2009. Total average interest-bearing liabilities decreased 9.4%, or $26.5 million, to $255.4 million for the nine months ended September 30, 2010, from $281.8 million for the same period in 2009. The cost of interest-bearing liabilities decreased to 0.96% for the nine months ended September 30, 2010, from 1.57% for the same period in 2009. This decrease was primarily the result of a decrease in deposit rates paid on all liabilities as a result of a lower interest rate environment and a decrease in the average balances of time certificates of deposits.

Interest expense on interest-bearing deposits decreased 54.4%, or $1.4 million, to $1.2 million for the nine months ended September 30, 2010, from $2.6 million for the same period in 2009. The decrease is attributable to a decrease in deposit rates paid on all deposit types during the nine months ended September 30, 2010 as the deposit rate environment has been in decline since 2007. In addition, the average balances of time certificates of deposits declined $39.6 million due to the maturity of time deposits that were not replaced. Of the $39.6 million decrease, $26.2 million related to brokered deposits that matured and were not replaced. The overall cost of deposits decreased to 0.56% for the nine months ended September 30, 2010, from 1.13% for same period of 2009. This overall cost differs from the cost of total interest-bearing deposits of 0.77% and 1.47% for the nine months ended September 30, 2010 and 2009, respectively due to the substantial percentage of our funding sources which are noninterest-bearing demand deposits, which were 27.1% of average total deposits for the nine months ended September 30, 2010, compared to 22.9% for same period of 2009. At September 30, 2010 noninterest-bearing deposits as a percent of total deposits were 29.6%, an increase over the 25.2% at December 31, 2009.

Provision for Credit Losses

The provision for credit losses, which is included in operations to support the required level of the allowance for credit losses, is based on credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions. The provision for credit losses was $11.1 million, $23.9 million and $945 thousand in 2009, 2008 and 2007, respectively. The provision for credit losses was $400 thousand for both the three months ended September 30, 2010 and 2009, and $7.9 million and $3.9 million for the nine months ended September 30, 2010 and 2009, respectively. See the sections below titled “Non-performing Assets,” “Impaired Loans” and “Allowance for Credit Losses.”

Non-Interest Income

The following table summarizes non-interest income by category for the periods indicated:

	Year Ended December 31,
	2009			2008			2007
	(Dollars in thousands)
Service charges	$	1,360		$	1,251		$	1,031
Broker fee income		689			491			798
Gain on sale of loans		2,818			71			—
Increase in cash surrender value of life insurance		209			207			220
Other		36			120			157
Total non-interest income	$	5,112		$	2,140		$	2,206
Total non-interest income to average total assets		1.36	%		0.61	%		0.73	%

The following table summarizes non-interest income by category for the periods indicated:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Unaudited)	2010			2009			2010			2009
	(Dollars in thousands)
Service charges	$	364		$	341		$	1,076		$	1,013
Broker fee income		83			189			245			515
Cash surrender value of life insurance		52			52			253			157
Gain on sale of securities		120			—			120			—
Other		9			12			26			31
Total non-interest income	$	628		$	594		$	1,720		$	1,716
Total non-interest income to average total assets, annualized		0.73	%		0.61	%		0.67	%		0.61	%

2009 Compared to 2008

Non-interest income increased 138.9%, or $3.0 million, to $5.1 million for the year ended December 31, 2009, from $2.1 million for 2008. In 2009, we entered into a loan purchase and asset sale agreement with a private equity firm accounted for as a transfer of financial assets. This transaction included the purchase of a pool of home equity lines of credit (“HELOC”) with a fair value of $24.9 million. The HELOC portfolio was purchased in exchange for a combination of $2.4 million in carrying value of certain non-performing loans and cash of approximately $20.1 million. We recorded a gain of $2.8 million on the transaction. There were no such transactions in 2008. Broker fee income increased 40.3%, or $198 thousand, as a result of an increase in the number of mortgage loan transactions completed in 2009 compared to 2008. Service charges increased 8.7%, or $109 thousand, as a result of an increase in deposit accounts.

2008 Compared to 2007

Non-interest income decreased 3.0%, or $66 thousand, to $2.1 million for the year ended December 31, 2008, from $2.2 million for 2007. The decrease in non-interest income was primarily due to a decrease in broker fee income of 38.5%, or $307 thousand, as a result of a decrease in commercial real estate loan transactions completed in 2008 compared to 2007. This was offset by an increase in service charges of 21.3%, or $220 thousand, as a result of an increase in deposit accounts and a gain on sale of loans of $71 thousand in 2008. There were no loans sold in 2007.

Three Months Ended September 30, 2010 Compared to 2009

Non-interest income increased 5.7%, or $34 thousand, to $628 thousand for the three months ended September 30, 2010, from $594 thousand for the same period in 2009. Service charge income increased 6.7%, or $23 thousand, primarily as a result of the increase in ATM fee income of $10 thousand and interchange income of $11 thousand for the three months ended September 30, 2010 compared to the same period in 2009. Broker fee income decreased 56.1%, or $106 thousand, as a result of a decrease in the number of mortgage loan transactions completed in 2010 compared to 2009. During the three months ended September 30, 2010, the Company recorded a gain on the sale of securities of $120 thousand. There were no securities sold during the same period of 2009.

Nine Months Ended September 30, 2010 Compared to 2009

Non-interest income remained materially the same at $1.7 million for both the nine months ended September 30, 2010 and 2009. Service charge income increased 6.2%, or $63 thousand, primarily as a result of the increase in ATM fee income of $28 thousand and interchange income of $31 thousand for the nine months ended September 30, 2010 compared to the same period in 2009. Broker fee income decreased 52.4%, or $270 thousand, as a result of a decrease in the number of mortgage loan transactions completed in 2010 compared to 2009. Income from the cash surrender value of life insurance increased 61.1%, or $96 thousand, as a result of the receipt of insurance proceeds. During the nine months ended September 30, 2010, the Company recorded a gain on the sale of securities of $120 thousand. There were no securities sold during the same period of 2009.

Non-interest Expense

The following table summarizes non-interest expense by category for the periods indicated:

	Year Ended December 31,
	2009		2008		2007
	(Dollars in thousands)
Salaries and employee benefits	$	4,925	$	5,271	$	6,051
Occupancy and equipment		1,771		1,863		1,793
Loss on sale/writedown of other real estate owned		3,441		116		—
Regulatory fees		1,162		280		192
Outsourced data processing		1,032		969		851
Legal and accounting		596		284		214
Other real estate owned expenses		368		444		—

	Year Ended December 31,
	2009			2008			2007
	(Dollars in thousands)
Miscellaneous loan expenses	$	323		$	221		$	96
Director compensation and retirement		267			357			294
Consulting fees		264			86			49
Postage and courier		245			242			180
Telephone		238			241			216
Advertising and marketing		223			296			330
Stationery and supplies		193			217			269
Correspondent banking fees		32			131			124
Other operating expenses		611			635			583
Total non-interest expense	$	15,691		$	11,653		$	11,242
Total non-interest expense to average total assets		4.17	%		3.32	%		3.71	%

The following table summarizes non-interest expense by category for the periods indicated:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Unaudited)	2010			2009			2010			2009
	(Dollars in thousands)						(Dollars in thousands)
Salaries and employee benefits	$	1,448		$	1,203		$	4,064		$	3,534
Occupancy and equipment		407			453			1,255			1,329
Loss on sale/writedown of other real estate owned		646			46			1,004			1,947
Regulatory fees		267			399			781			879
Outsourced data processing		252			252			792			769
Other real estate owned expenses		100			37			196			259
Legal and accounting		92			246			356			527
Miscellaneous loan expenses		84			43			207			202
Postage and courier		65			63			196			182
Telephone		46			58			201			173
Stationery and supplies		37			58			134			147
Advertising and marketing		30			56			97			188
Consulting fees		15			53			65			207
Director compensation and retirement		3			56			(895	)		199
Other operating expenses		110			191			442			557
Total non-interest expense	$	3,602		$	3,214		$	8,895		$	11,099
Total non-interest expense to average total assets, annualized		4.18	%		3.32	%		3.47	%		3.95	%

2009 Compared to 2008

Non-interest expense increased 34.6%, or $4.0 million, to $15.7 million for the year ended December 31, 2009, from $11.7 million for 2008.

Salaries and employee benefits decreased 6.6%, or $346 thousand, to $4.9 million for the year ended December 31, 2009, from $5.3 million for 2008 primarily as a result of the reversal of $790 thousand in salary continuation accruals for employees whose employment terminated prior to their scheduled retirement dates. This was offset by an increase in salaries and commission expenses of $195 thousand and temporary labor costs of $127 thousand and a decrease in deferred loan costs of $180 thousand as a result of a decrease in the number of loans boarded during 2009 compared to 2008. Deferred loan costs reduce salaries expense in the period in which the loan is boarded.

Occupancy and equipment expense decreased 4.9%, or $92 thousand, to $1.8 million for the year ended December 31, 2009, from $1.9 million for 2008 primarily as a result of a decrease in depreciation, common area maintenance and tax expenses.

Loss on sale/writedown of other real estate owned increased 2,866.4%, or $3.3 million, to $3.4 million for the year ended December 31, 2009, from $116 thousand for 2008 primarily as a result of the significant decline in real estate values, specifically, real estate that served as collateral on construction and land development loans in Nevada and Placer counties throughout 2009. See additional discussion below titled “Non-performing Assets.”

Regulatory fees increased 315%, or $882 thousand, to $1.2 million for the year ended December 31, 2009, from $280 thousand for 2008 as a result of increased assessment rates on deposits and a $177 thousand special assessment by the FDIC in 2009.

Legal and accounting expenses increased 109.9%, or $312 thousand, to $596 thousand for the year ended December 31, 2009, from $284 thousand for 2008 primarily as a result of the restatement of our 2008 financial statements, and other professional services required to manage the increased level of non-performing assets.

2008 Compared to 2007

Non-interest expense increased 3.7%, or $411 thousand, to $11.7 million for the year ended December 31, 2008, from $11.2 million for 2007.

Salaries and employee benefits decreased 12.9%, or $780 thousand, to $5.3 million for the year ended December 31, 2008, from $6.1 million for 2007 primarily as a result of no bonuses being accrued in 2008 compared to $419 thousand in 2007 and a decrease in salaries and commission expenses of $428 thousand primarily as a result of a decrease in the number of employees.

Occupancy and equipment expense increased 3.9%, or $70 thousand, to $1.9 million for the year ended December 31, 2008, from $1.8 million for 2007 primarily as a result of an increase in rent and common area maintenance expenses.

Other real estate owned expenses were $444 thousand for the year ended December 31, 2008. We did not own other real estate during the year ended December 31, 2007.

Three Months Ended September 30, 2010 Compared to 2009

Non-interest expense increased 12.1%, or $388 thousand, to $3.6 million for the three months ended September 30, 2010, from $3.2 million for the same period of 2009.

Salaries and employee benefits increased 20.4%, or $245 thousand, to $1.4 million for the three months ended September 30, 2010, from $1.2 million for the same period of 2009. The increase was primarily as a result of the reversal of $263 thousand in salary continuation accruals in 2009 for employees whose employment terminated prior to their scheduled retirement dates. There was no such reversal in the three months ended September 30, 2010.

During the three months ended September 30, 2010, the Company recorded $646 thousand in losses on the sale/writedown of other real estate owned, compared to $46 thousand for the same period in 2009, primarily as a result of the continued decline in real estate values in 2010.

Nine Months Ended September 30, 2010 Compared to 2009

Non-interest expense decreased 19.9%, or $2.2 million, to $8.9 million for the nine months ended September 30, 2010, from $11.1 million for the same period of 2009.

Salaries and employee benefits increased 15.0%, or $530 thousand, to $4.1 million for the nine months ended September 30, 2010, from $3.5 million for same period of 2009. The increase was primarily as a result of the reversal of $714 thousand in salary continuation accruals in 2009 for employees whose employment terminated prior to their scheduled retirement dates, compared to the reversal of $265 thousand in salary continuation accruals in 2010 for an employee who agreed to terminate their agreement and received no consideration for the cancellation of

benefits. In addition, temporary labor costs increased by $78 thousand during the nine months ended September 30, 2010 as compared to the same period in 2009.

During the nine months ended September 30, 2010 and 2009, the Company recorded $1.0 million and $1.9 million, respectively, in losses on sale/writedown of other real estate owned primarily as a result of the significant decline in real estate values, specifically, real estate that served as collateral on construction and land development loans in Nevada and Placer counties throughout 2009 and continuing in 2010. See additional discussion below titled “Non-performing Assets.”

During the nine months ended September 30, 2010, the Company reversed liabilities totaling $1.0 million as a result of certain directors agreeing to the termination of their deferred compensation and retirement agreements. The directors received no consideration for the cancellation of benefits. There was no such reversal in the nine months ended September 30, 2009.

Provision for Income Taxes

For the years ended December 31, 2009 and 2008, we are in a cumulative pretax loss position and have an accumulated deficit as of December 31, 2009 and September 30, 2010. For purposes of establishing a deferred tax valuation allowance, this cumulative pretax loss position and accumulated deficit is considered significant, objective evidence that we may not be able to realize deferred tax assets in the future. The cumulative pretax loss position and resulting accumulated deficit were caused primarily by the significant amount of loan loss provision and other real estate expense taken in 2008 and 2009. As a result of these losses, a full valuation allowance has been recorded to eliminate our net deferred tax asset. Due to continued deteriorating market conditions, we have determined that there is not sufficient additional positive evidence to support the realization of the net deferred tax assets. Recording a full valuation allowance has resulted in a significant difference between the statutory tax rate and the actual tax rate. In future periods, the valuation allowance could be reduced based on sufficient evidence indicating that it is “more likely than not” that a portion or all of our deferred tax assets will be realized.

Inflation

The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment.

Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Net interest income and the interest rate spread are good measures of our ability to react to changing interest rates and are discussed in further detail in the section entitled “Results of Operations.”

Financial Condition

Our total assets at December 31, 2009 were $371.1 million, an increase of 2.1%, compared to $363.3 million at December 31, 2008. Our earning assets at December 31, 2009 totaled $361.8 million, an increase of 6.6%, compared to $339.3 million at December 31, 2008. Total deposits at December 31, 2009 were $302.6 million, an increase of 1.0%, compared to $299.8 million at December 31, 2008.

Our total assets at September 30, 2010 were $357.5 million, a decrease of 3.7%, compared to $371.1 million at December 31, 2009. Our earning assets at September 30, 2010 totaled $344.5 million, a decrease of 4.8%, compared to $361.8 million at December 31, 2009. Total deposits at September 30, 2010 were $283.0 million, a decrease of 6.5%, compared to $302.6 million at December 31, 2009.

Loan Portfolio

Management continues to manage the mix of its loan portfolio consistent with our identity as a community bank serving the financing needs of all sectors of the areas we serve. Although we offer a broad array of financing options, we continue to concentrate our focus on small- to medium-sized commercial businesses. We offer both fixed and floating rate loans and obtain collateral in the form of real property, business assets and deposit accounts, but look to business and personal cash flows as the primary source of repayment.

We generally concentrate our lending activities in the following categories: commercial; residential real estate; commercial real estate; real estate construction (both commercial and residential); and consumer.

The following table presents the balance of each major category of loans outstanding at the end of each of the years indicated:

	Year Ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Commercial	$	43,461		$	50,782		$	55,395		$	38,865		$	27,442
Real estate — residential secured by 1^st deeds		13,340			13,428			11,581			11,181			8,545
Real estate — residential secured by 2^nd deeds		51,102			26,695			22,997			19,056			16,009
Real estate — land		5,091			7,556			10,215			8,506			10,179
Real estate — nonresidential		145,719			145,878			126,148			102,814			84,969
Real estate — construction		40,794			62,319			71,940			73,798			54,952
Consumer		5,238			5,815			7,124			5,553			5,007
		304,745			312,473			305,400			259,773			207,103
Deferred loan origination fees, net		(6	)		(99	)		(265	)		(392	)		(443	)
Allowance for credit losses		(14,387	)		(12,406	)		(3,919	)		(3,374	)		(2,826	)
Total net loans	$	290,352		$	299,968		$	301,216		$	256,007		$	203,834

Gross loans decreased 2.5%, or $7.7 million, to $304.7 million at December 31, 2009, from $312.5 million at December 31, 2008. We experienced decreases of $7.3 million in commercial, $88 thousand in residential real estate secured by 1^st deeds of trust, $2.5 million in real estate land, $159 thousand in nonresidential real estate, $21.5 million in real estate construction and $577 thousand in consumer loans partially offset by an increase of $24.4 million in residential real estate secured by 2^nd deeds of trust. In October 2009, we entered into a mortgage loan purchase and asset sale which included the purchase of a HELOC pool in exchange for certain non-performing loans and cash. The HELOC pool purchased had a fair value of $24.9 million. During the year ended December 31, 2009, loan balances were decreased by $9.1 million in net charge-offs and an additional $7.5 million by the conversion of property, which served as loan collateral, to other real estate owned through judicial or other foreclosure. As of December 31, 2009, three borrowers each represented over 2% of total loans.

The following table shows the amount of loans outstanding as of December 31, 2009 which, based on scheduled repayments of principal are due in one year or less, more than one year through five years, and more than five years. Demand or other loans having no stated maturity and no stated schedule of repayments are reported as due in one year or less.

	Maturity
	One Year or Less		One through Five Years		Over Five Years		Total
	(Dollars in thousands)
Total Loans	$	66,465	$	39,104	$	199,176	$	304,745

The rates of interest charged on variable rate loans are set at specific increments in relation to our lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indices. At December 31, 2009 and 2008, approximately $203.4 million, or 66.7% and $206.2 million, or 66.0%, respectively, of the loan portfolio was comprised of variable rate loans. While real estate mortgage, commercial and consumer lending remain the foundation of our historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types.

In 2008, the Bank recorded a provision for credit losses of $23.9 million related to the overall trends in credit quality of its loan portfolio, including an increase in the number and amount of classified and past due loans and deterioration in the general economic environment in our primary market areas, not unlike other areas in California and in the country. Also in 2008, the Bank recorded $15.4 million in charge-offs, net of recoveries, or 4.87% of average loans. At December 31, 2008, the Bank had non-performing assets of $41.8 million, or 10.8% of total assets.

The Bank was aggressive in 2009 in executing a strategy to proactively identify problem loans, quantify impairment if any, and develop resolution plans suitable for each, which required a comprehensive loan-by-loan review. In 2009, the Bank recorded additional loan loss provisions of $11.1 million to cover potential losses in the portfolio. In 2009, the Bank recorded $9.1 million of charge-offs, net of recoveries, or 2.94% of average loans. At December 31, 2009, the Bank had non-performing assets of $31.9 million, or 8.6% of total assets. Non-performing assets includes nonaccrual loans, accruing loans that are past due 90 days or more and OREO.

The Bank’s construction and land development loans have been the primary source of the losses that have occurred in the two years ended December 31, 2009. During this two-year period, net charge-offs of construction and land development loans totaled $14.7 million, or 59.8% of net charge-offs of $24.5 million. During 2009, we have significantly reduced our exposure to these loans as demonstrated by a decline in loan balances in this portfolio of $21.5 million from $62.3 million at December 31, 2008 to $40.8 million at December 31, 2009. The remaining balance in that category as of December 31, 2009 was deemed to be well collateralized based on current values.

The Bank’s commercial real estate portfolio continues to perform. Loan-to-values, or the collateral values in this portfolio compared to the loans they secure, are currently sufficient to minimize the potential losses in this category in the near future.

The following table presents the balance of each major category of loans outstanding at the end of each of the periods indicated:

	As of September 30, 2010						As of December 31, 2009
	Amount			% of Loans			Amount			% of Loans
	(Dollars in thousands)
Commercial	$	35,583			12.7	%	$	43,461			14.3	%
Real estate — residential secured by 1^st deeds		12,849			4.6	%		13,340			4.4	%
Real estate — residential secured by 2^nd deeds		47,889			17.0	%		51,102			16.7	%
Real estate — land		3,854			1.4	%		5,091			1.7	%
Real estate — nonresidential		146,922			52.2	%		145,719			47.8	%
Real estate — construction		29,566			10.5	%		40,794			13.4	%
Consumer		4,624			1.6	%		5,238			1.7	%
Total gross loans		281,287			100.0	%		304,745			100.0	%
Deferred loan origination costs (fees), net		89						(6	)
Allowance for credit losses		(14,486	)					(14,387	)
Total net loans	$	266,890					$	290,352

Included in commercial loans and nonresidential loans at September 30, 2010 is $100 thousand and $2.7 million, respectively, in guaranteed portions of SBA loans sold subject to a 90-day premium refund obligation. We have recorded the proceeds from the sale of the guaranteed portions of SBA loans that are subject to a premium refund obligation as a secured borrowing and included such secured borrowings in other liabilities on the balance sheet. Once the premium refund obligation has elapsed the transaction will be recorded as a sale with the guaranteed portions of loans and the secured borrowing removed from the balance sheet and the resulting gain on sale recorded.

Gross loans decreased 7.7%, or $23.5 million, to $281.3 million at September 30, 2010, from $304.7 million at December 31, 2009. We experienced decreases of $7.9 million in commercial, $491 thousand in residential real estate secured by 1^st deeds of trust, $3.2 million in residential real estate secured by 2^nd deeds of trust, $1.2 million in real estate land, $11.2 million in real estate construction loans and $614 thousand in consumer loans partially offset by an increase of $1.2 million in nonresidential real estate. During the nine months ended September 30, 2010, loan balances were decreased by $7.9 million in charge-offs. As of September 30, 2010, four borrowers each represented over 2% of total loans.

comprehensive loan-by-loan review. Since December 31, 2009, the Bank has experienced significant material deterioration with certain large credit relations contained in its loan portfolio. See additional discussion in the Non-Performing Assets and Impaired Loans sections below.

During the first three months of 2010 the Bank incurred net charge offs of $1.4 million and added $600 thousand to provision for credit losses. In the second quarter of 2010, net charge offs rose to $4.5 million and a $6.9 million provision for credit losses was recognized. In the third quarter of 2010, net charge offs declined to $1.8 million and a $400 thousand provision for credit losses was recorded. The majority of charge-offs occurring in the second quarter of 2010 ($3.1 million) were concentrated in five loans. In the second quarter of 2010, updated appraisals were received and management determined that the recorded amount in excess of the appraised value of these five collateral dependent loans was considered uncollectible. At March 31, 2010, these five loans had specific reserves totaling $2.2 million based on the estimated fair value of the collateral at that date. The increase in the provision during the second quarter of 2010 is largely attributable to specific reserves of $2.3 million on eight newly identified impaired loans totaling $9.5 million and lower valuations ($1.8 million) in collateral securing four loans that had been identified as impaired at March 31, 2010. The majority of the charge-offs occurring in the third quarter of 2010 ($775 thousand) were concentrated in two loans. In the third quarter of 2010, management determined that the recorded amount in excess of the appraised value of these two collateral dependent loans was considered uncollectible. At June 30, 2010, these two loans had specific reserves totaling $512 thousand based on the estimated fair value of the collateral at that date.

During the nine months ended September 30, 2010, the Bank recorded additional loan loss provisions of $7.9 million to cover potential losses in the portfolio, compared to $3.9 million for the nine months ended September 30, 2009. During the nine months ended September 30, 2010, the Bank recorded $7.8 million in charge-offs, net of recoveries, or 3.56% of average loans, annualized, compared to $1.8 million, or 0.79% of average loans, annualized, for the nine months ended September 30, 2009. At September 30, 2010, the Bank had non-performing assets of $42.2 million, or 11.8% of total assets. At December 31, 2009, the Bank had non-performing assets of $31.9 million, or 8.6% of total assets. Non-performing assets includes nonaccrual loans, accruing loans that are past due 90 days or more and OREO.

Non-Performing Assets

Generally, loans are placed on nonaccrual status when they become 90 days or more past due unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company’s general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is deemed by management to be probable. Where the collectibility of the principal or interest on a loan is considered to be doubtful by management, it is generally placed on nonaccrual status prior to becoming 90 days delinquent.

The Bank has worked with a number of borrowers to implement a restructuring of their loans with solutions that are believed to be beneficial to both the borrower and to the Bank. This restructuring may allow the borrower to stay with their property and operate their business through the difficult economic times. In the short-term, we may benefit from the cash flows generated by the borrower’s performance under the restructured terms. As these borrowers continue to perform under the restructured terms of their loans, these loans should begin to migrate back to performing status.

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, deferral of payments, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, which could include either forgiveness of principal or accrued interest. When past payment performance is not evidenced or where a reasonable time has not passed, the loan is maintained on nonaccrual status.

In determining if the loan should be on accrual status, borrower intent based on sustained historical payment performance for a reasonable time prior to the restructuring as well as the borrower’s ability to maintain payment performance based on a global cash flow analysis may be taken into account. When past payment performance is not evidenced or where a reasonable time has not passed, the loan is maintained on nonaccrual status. A loan continues to qualify as restructured until a consistent payment history has been evidenced, generally not less than six months.

In appropriate circumstances we may separate a portion of the current outstanding debt into two new legally enforceable notes, one that is reasonably assured of repayment and performance according to prudently modified terms (“A Note”) and a second that is not reasonably assured of repayment (“B Note”). In determining if the A Note should be on accrual status, borrower intent based on sustained historical payment performance for a reasonable time prior to the restructuring as well as the borrower’s ability to maintain payment performance based on a global cash flow analysis may be taken into account. When past payment performance is not evidenced or where a reasonable time has not passed, the A Note is maintained on nonaccrual status. The portion of the debt that is not reasonably assured of repayment (B Note) is charged-off, but may be collected in the future. The benefits of such a restructuring are that Note A can be recognized as a performing/pass loan, placed on accrual status to earn interest income and allows us to report a lower amount of troubled debt restructures in future periods because the B Note is charged off.

Since January of 2009, we have entered into only one such transaction. In September of 2010, an obligation totaling $1.7 million was divided into an “A Note” for $1.6 million and a “B Note” for $84 thousand. The A Note was structured with a below market rate for one year, and thereafter escalating to a market rate for the remaining term of the loan. Monthly payments of principal and interest are required and the A Note is well-secured by collateral. The A Note was returned to accrual status subsequent to the restructure since performance had been demonstrated on the restructured terms taking into consideration payments made by the borrower prior to completion of the restructure. The B Note was structured at a market interest rate with all interest and principal due at maturity and remains secured by the originally pledged collateral. The B Note was immediately charged-off, however collection of all amounts owed continues to be pursued and upon recovery, if any, the charge-off will be reversed. Management expects to enter into more restructures similar to the one entered into in September 2010 in the future.

The following table shows restructured loans by loan type for each period presented:

	As of September 30, 2010		As of December 31, 2009		As of December 31, 2008
	(Dollars in thousands)
Commercial	$	1,294	$	178	$	149
Real estate — residential 1st deed of trust		432		544		270
Real estate — residential 2nd deed of trust		1,210		1,388		521
Real estate — land		539		479		—
Real estate — nonresidential		23,809		10,315		—
Real estate — construction		8,924		9,593		1,386
Consumer		117		67		—
Total troubled debt restructures	$	36,325	$	22,564	$	2,326

As of September 30, 2010, there were 41 restructured loans totaling $36.3 million. Of the restructured loans at September 30, 2010, $20.0 million were on accrual status and $16.3 million were on nonaccrual status. As of September 30, 2010, restructured loans totaling $36.3 million were considered impaired, of which, $23.4 million had a specific valuation allowance totaling $2.0 million. As of September 30, 2010, 6 restructured loans totaling $3.1 million were either not performing in accordance with their modified terms or sufficient time has not passed to allow for consistency in payment performance to be determined. During the nine months ended September 30, 2010, $965 thousand in charge-offs were recorded relating to restructured loans.

As of December 31, 2009, there were 24 restructured loans totaling $22.6 million. Of the restructured loans at December 31, 2009, $13.3 million were on accrual status and $9.3 million were on nonaccrual status. As of December 31, 2009, restructured loans totaling $21.9 million were considered impaired, of which, $13.2 million

had a specific valuation allowance totaling $1.4 million. As of December 31, 2009, 3 restructured loans totaling $1.5 million were either not performing in accordance with their modified terms or sufficient time has not passed to allow for consistency in payment performance to be determined. During the year ended December 31, 2009, $3.4 million in charge-offs were recorded relating to restructured loans.

As of December 31, 2008, there were 5 restructured loans totaling $2.3 million. Of the restructured loans at December 31, 2008, $1.8 million were on accrual status and $521 thousand were on nonaccrual status. As of December 31, 2008, all $2.3 million in restructured loans were considered impaired, of which, $714 thousand had a specific valuation allowance totaling $186 thousand. As of December 31, 2008, there was 1 restructured loan totaling $270 thousand that was not performing in accordance with its modified terms. During the year ended December 31, 2008, no charge-offs were recorded relating to restructured loans.

The following table shows restructured loans by concession type for each period presented:

	As of September 30, 2010		As of December 31, 2009		As of December 31, 2008
	(Dollars in thousands)
Reduction in contractual rate of interest	$	10,839	$	7,898	$	645
Deferral of payments		1,727		2,186		—
Extension of maturity date		4		5		—
Reduction in contractual rate of interest & deferral of payments		8,879		6,446		—
Reduction in contractual rate of interest & extension of maturity date		14,680		5,826		1,386
Reduction in contractual rate of interest, deferral of payments and extension of maturity date		196		203		295
Total restructured loans	$	36,325	$	22,564	$	2,326

Subsequent to the initial modification, we have charged-off or modified approximately 25% of restructured loans that had only a reduction in the contractual rate of interest, 30% of restructured loans with only a deferral of payments, 20% of loans with both a reduction in the contractual rate of interest and deferral of payments and 100% of loans with a reduction in the contractual rate of interest, deferral of payment and extension of the maturity date. We have not subsequently charged-off or modified any restructured loans with only an extension of the maturity date or with both a reduction in the contractual rate of interest and the extension of the maturity date.

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At September 30, 2010, December 31, 2009 and 2008, we had $11.4 million, $19.4 million and $12.9 million, respectively, in loans of this type, which were not included in the nonaccrual, 90 days past due or restructured categories. The increase in the amount of potential problem loans from 2008 to 2009 is consistent with the overall economic deterioration and the increase in non-performing and restructured loans that we experienced during the period. In response to this increase, during 2009 and 2010, we have dedicated additional resources to identify and monitor potential problem loans and will continue our proactive approach to managing our problem loans including the use of loan modifications, where it is anticipated that the likelihood of repayment or recovery is improved. The decrease in the amount of potential problem loans from 2009 to 2010 is primarily due to the migration of potential problem loans into non-performing and restructured loans during the period.

In some cases, the best resolution for the Bank on certain real estate secured loans required the Bank to foreclose on the real estate collateral. The successful foreclosure process allows the Bank to market and sell the property in an effort to maximize recovery of the legal balances owed. The Bank has had a number of sales of OREO properties maximizing the recovery efforts.

The following table summarizes the loans for which the accrual of interest has been discontinued, loans more than 90 days past due and still accruing interest, loans that have been restructured and other real estate owned, which we refer to as OREO:

	As of December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Nonaccrual loans:
Commercial	$	733		$	1,176		$	124		$	—		$	—
Real estate — residential 1st deed of trust		793			557			—			—			—
Real estate — residential 2nd deed of trust		1,278			684			120			—			—
Real estate — land		612			2,358			—			—			—
Real estate — nonresidential		6,068			3,443			283			—			—
Real estate — construction		15,336			19,633			8,947			—			—
Consumer		62			—			—			—			—
Total nonaccrual loans		24,882			27,851			9,474			—			—

Accruing loans past due 90 days or more:
Commercial		396			—			—			—			—
Real estate — construction		2,000			—			—			—			—
Total accruing loans past due 90 day or more		2,396			—			—			—			—
Total non-performing loans (NPLs)		27,278			27,851			9,474			—			—

OREO		4,650			6,195			—			—			—
Total non-performing assets (NPAs)		31,928			34,046			9,474			—			—

Restructured loans, not included above:
Commercial		178			—			—			—			—
Real estate — residential 1st deed of trust		276			—			—			—			—
Real estate — residential 2nd deed of trust		663			521			—			—			—
Real estate — land		276			—			—			—			—
Real estate — nonresidential		7,847			—			—			—			—
Real estate — construction		4,080			—			—			—			—
Consumer		5			—			—			—			—
Total restructured loans, not included above		13,325			521			—			—			—
Total non-performing assets and restructured loans (NPARs)	$	45,253		$	34,567		$	9,474		$	—		$	—
Selected ratios:
NPLs to total loans		8.95	%		8.92	%		3.10	%		0.00	%		0.00	%
NPAs to total assets		8.60	%		9.37	%		2.88	%		0.00	%		0.00	%
NPARs to total assets		12.20	%		9.52	%		2.88	%		0.00	%		0.00	%

Non-performing assets at December 31, 2009 were $31.9 million, a decrease of $2.1 million from the $34.0 million balance at December 31, 2008. This decrease was primarily a result of a decrease in the balance of OREO to $4.7 million at December 31, 2009 compared to $6.2 million at December 31, 2008. Non-performing and restructured loans at December 31, 2009 were $40.6 million, an increase of $12.2 million from the $28.4 million balance at December 31, 2008. Non-performing and restructured loans at December 31, 2009 consisted of 59 loans, 15 of which have individual principal balances in excess of $1 million. These 15 loans, all of which are impaired and are secured primarily by real estate, have a total principal balance at December 31, 2009 of $31.2 million and specific reserves of $1.9 million. At December 31, 2009, there were $2.4 million accruing loans past due 90 days or more, all of which were considered well secured and in the process of collection. At December 31, 2009, there were $13.3 million accruing restructured loans which had sustained payment performance for a reasonable time prior to the restructuring. Based on a global cash flow analysis performed in connection with the restructuring, it

was determined that although payments had historically been made in accordance with the original terms of the note agreement, future payments were not expected to maintain that performance. However, the global cash flow analysis did support the borrower’s continued ability to maintain payment performance under the restructured terms.

Interest foregone on nonaccrual loans was $1.8 million during 2009, $1.0 million during 2008, and $0.3 million during 2007. In 2009, 2008 and 2007, no interest income was recognized from payments received on nonaccrual loans.

	As of September 30, 2010			As of December 31, 2009
	(Dollars in thousands)
Nonaccrual loans:
Commercial	$	1,931		$	733
Real estate — residential 1st deed of trust		533			793
Real estate — residential 2nd deed of trust		2,694			1,278
Real estate — land		343			612
Real estate — nonresidential		8,765			6,068
Real estate — construction		18,915			15,336
Consumer		95			62
Total nonaccrual loans		33,276			24,882

Accruing loans past due 90 day or more:
Commercial		159			396
Real estate—construction		2,000			2,000
Accruing loans past due 90 day or more		2,159			2,396
Total non-performing loans (NPLs)		35,435			27,278

OREO		6,727			4,650
Total non-performing assets (NPAs)		42,162			31,928

Restructured loans, not included above:
Commercial		1,118			178
Real estate — residential 1st deed of trust		—			276
Real estate — residential 2nd deed of trust		781			663
Real estate — land		196			276
Real estate — nonresidential		17,847			7,847
Real estate — construction		—			4,080
Consumer		70			5
Total restructured loans, not included above		20,012			13,325
Total non-performing assets and restructured loans (NPARs)	$	62,174		$	45,253

Selected ratios:
NPLs to total loans		12.72	%		8.73	%
NPAs to total assets		11.79	%		8.60	%
NPARs to total assets		17.39	%		12.20	%

Non-performing assets at September 30, 2010 were $42.3 million, an increase of $10.2 million from the $31.9 million balance at December 31, 2009. Non-performing and restructured loans at September 30, 2010 were $55.4 million, an increase of $14.4 million from the $40.6 million balance at December 31, 2009. This increase was primarily a result of an increase in nonaccrual nonresidential real estate and construction loans and accruing

restructured nonresidential real estate loans as of September 30, 2010 compared to December 31, 2009. Non-performing and restructured loans at September 30, 2010 consisted of 83 loans, 18 of which have individual principal balances in excess of $1 million. These 18 loans, all of which are impaired and are secured primarily by real estate, had a total principal balance at September 30, 2010 of $40.0 million, of which, $25.2 million had specific reserves of $2.7 million. At September 30, 2010, there were $2.2 million accruing loans past due 90 days or more, all of which were considered well secured and in the process of collection. At September 30, 2010, there were $20.0 million accruing restructured loans which had sustained payment performance for a reasonable time prior to the restructuring but, based on global cash flows, were not expected to maintain that performance under the original terms of the agreement. However, global cash flows indicated the borrower’s ability to maintain payment performance under the restructured terms.

As of September 30, 2010, loans in the purchased HELOC portfolio totaling $1.2 million, or 4.7% of the total purchased HELOC portfolio, were over 90 days past due. As of December 31, 2009, there were $93 thousand, or 0.3% of the total purchased HELOC portfolio, were over 90 days past due. During the three and nine months ended September 30, 2010, we charged-off $278 thousand relating to the purchased HELOC portfolio. There were no charge-offs in 2009 relating to the purchased HELOC portfolio. In accordance with the loan purchase and asset sale agreement at the discretion of the Company, the seller has an obligation to repurchase loans that become 90 days past due. Accordingly, at September 30, 2010 we have applied $1.3 million against the $1.3 million deposit that the seller provided. Specific and general reserves related to this purchased HELOC portfolio increased to $2.3 million as of September 30, 2010 from $838 thousand as of December 31, 2009. The increase in reserves in 2010 is a result of the increase in past due loans.

Interest foregone on nonaccrual loans was $708 thousand and $673 thousand for the three months ended September 30, 2010 and 2009, respectively. Interest foregone on nonaccrual loans was $1.7 million and $1.5 million for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2010, the Company recognized $25 thousand in interest income on a cash basis for impaired loans. During the three months ended September 30, 2010 and the three and nine months ended September 30, 2009, the Company did not recognize any interest income on a cash basis for impaired loans.

Impaired Loans

Impaired loans are loans for which it is probable that we will not be able to collect all amounts due including principal and interest according to the original contractual terms of the loan agreement. The category of impaired loans is not the same as the category of nonaccrual loans, although the two categories overlap. Nonaccrual loans are those loans on which the accrual of interest is discontinued when collectibility of principal and interest is uncertain or payments of principal or interest have become contractually past due 90 days or more. Management may choose to place a loan on nonaccrual status due to payment delinquency or when the collectibility of principal is in doubt.

In determining whether or not a loan is impaired, we apply our normal loan review procedures on a case-by-case basis taking into consideration the circumstances surrounding the loan and borrower, including the collateral value, the reasons for the delay, the borrower’s prior payment record, the amount of the shortfall in relation to the principal and interest owed and the length of the delay. We measure impairment on a loan-by-loan basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent, less estimated selling costs. A loan is considered collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. The amount of a collateral dependent loan in excess of the fair value of the collateral that is identified as uncollectible, and is therefore deemed a confirmed loss, is charged off against the allowance for credit losses. Loans for which an insignificant delay in the collection of payments is anticipated, but where we expect to collect all amounts due, are not considered impaired.

The following table summarizes the recorded investment in loans that were considered to be impaired by loan category and the method used to measure impairment for the periods presented:

	As of September 30, 2010		As of December 31, 2009		As of December 31, 2008
	(Dollars in thousands)
Commercial	$	4,679	$	5,818	$	1,176
Real estate — residential 1st deed of trust		959		1,056		561
Real estate — residential 2nd deed of trust		3,801		1,518		1,401
Real estate — land		1,083		613		868
Real estate — nonresidential		33,863		20,523		10,405
Real estate — construction		22,146		28,958		21,723
Consumer		209		249		—
Total impaired loans	$	66,740	$	58,735	$	36,134

Method used to measure impairment
Discounted cash flows	$	26,083	$	14,929	$	394
Collateral value		40,657		43,806		35,740
Total impaired loans	$	66,740	$	58,735	$	36,134

The recorded investment in loans that were considered to be impaired increased to $66.7 million at September 30, 2010, compared to $58.7 million at December 31, 2009 and $36.1 million at December 31, 2008. The $8.0 million increase as of September 30, 2010 compared to December 31, 2009 is primarily a result of the identification of 12 additional impaired nonresidential real estate loans totaling $14.3 million as result of the continued increase in vacancy rates and continuing decline in commercial real estate values in our market area. These loans were identified primarily through the review of all nonresidential real estate loans and all commercial loans with a balance of $250,000 or greater, which was completed in the second quarter of 2010. Updated financial statements, rent rolls and tax returns were reviewed as appropriate. In addition, a physical site inspection was completed on all collateral for nonresidential real estate loans at that time.

Impaired loans increased $22.6 million as of December 31, 2009 compared to December 31, 2008 and was reflected in an increase in commercial loans of $4.6 million, nonresidential real estate of $10.1 million and real estate construction of $7.2 million. The increase in impaired commercial loans reflects the declining economy throughout 2008 as an increasing number of commercial businesses had declining profit margins. The increase in impaired nonresidential real estate loans was primarily due to the identification of 4 additional impaired loans as of December 31, 2009 totaling $7.6 million. The increase in impaired real estate construction loans was a result of the identification of 9 additional impaired loans as of December 31, 2009 totaling $16.7 million, offset by the foreclosure of real estate securing 4 loans totaling $5.6 million in 2009, the sale of one loan considered impaired at December 31, 2008 totaling $1.4 million to a third party in 2009 and the payoff of one loan considered impaired at December 31, 2008 totaling $1.4 million in 2009.

The related allowance for credit losses for impaired loans was $5.9 million, $6.1 million and $3.4 million at September 30, 2010, December 31, 2009 and 2008, respectively. Of the loans considered to be impaired at September 30, 2010, December 31, 2009 and December 31, 2008, $19.9 million, $8.1 million and $7.0 million, respectively, did not require a specific reserve because they had been written down to the estimated fair value of the collateral through a direct charge-off to the loan. In addition, $21.2 million, $19.8 million and $15.9 million of the impaired loans that had not been written down to the estimated fair value of the collateral did not require a specific reserve at September 30, 2010, December 31, 2009 and December 31, 2008, respectively, primarily as a result of estimated collateral values being larger than the recorded investment in the loans. Of the $21.2 million at September 30, 2010, $11.9 million related to nonresidential real estate loans and $6.4 million related to real estate construction loans. While we have seen a significant decline in real estate values over the last couple of years in our market, the collateral value of these loans are estimated to be greater than the outstanding principal balances. This is primarily because these loans had lower loan-to-values upon origination and in many instances, principal payments have been made.

As of September 30, 2010, 8% of collateral dependent loans were not secured by real estate, 54% of collateral dependent loans secured by real estate utilized an appraisal less than six months old, to estimate the fair value, 13% of collateral dependent loans secured by real estate utilized an appraisal between 7 and 12 months old, while 25% of collateral dependent loans did not have current appraisals available either because the loan was newly determined to be collateral dependent or an ordered appraisal had not yet been received. When a loan is first determined to be collateral dependent and on approximately an annual basis thereafter until the loan is no longer considered collateral dependent, a new appraisal is ordered, which typically is not available until the following quarter. Because of the current market, which has seen significant reductions in valuations of real estate collateral, if the most recent appraisal is more than six months old the fair value is estimated by applying adjustments, if any, to the previous appraisal based on estimated declines in market values, current appraisals on comparable properties, public websites offering estimated valuations, and discussions with real estate agents regarding the marketability of specific properties. The portion of the loan that is not reasonably assured of repayment is charged-off, but may be collected in the future. On a collateral dependent loan, the amount charged-off is typically the amount in excess of the estimated fair value of the collateral. In certain instances, we may charge-off only a portion of the difference between the estimated fair value of the collateral and the recorded investment in the loan and establish a specific reserve for the difference. In these instances, management has determined that foreclosure of the property is not probable because of ongoing discussions with the borrower about repayment. The amount that is charged-off is management’s estimate of the amount that is not reasonably assured of repayment. At September 30, 2010, December 31, 2009 and December 31, 2008, there were specific reserves on collateral dependent loans that were partially charged-off totaling $655 thousand, $2.0 million and $828 thousand, respectively. When a loan is determined to be collateral dependent it is placed on nonaccrual status unless the loan is in the process of collection and is well secured. A partially charged-off collateral dependent loan may be returned to accrual status when it is determined to be well secured either through receipt of an updated appraisal, principal reductions or it is no longer considered collateral dependent based on a global cash flow analysis of the borrower.

During the years ended December 31, 2009, 2008 and 2007 we did not recognize any interest income on a cash basis for impaired loans. During the nine months ended September 30, 2010, the Company recognized $25 thousand in interest income on a cash basis for impaired loans.

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the standard interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date. As of September 30, 2010, the Company has $119 thousand of commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings.

At September 30, 2010, all loans which management had serious doubts as to the collectibility of principal or were past due greater than 90 days, and not well secured and in the process of collection were classified as nonaccrual.

Allowance for Credit Losses

The allowance for credit losses is established through charges to earnings in the form of the provision for credit losses. Loan losses are charged to and recoveries are credited to the allowance for credit losses. The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in loans. The adequacy of the allowance for credit losses is based upon management’s continuing assessment of various factors affecting the collectibility of loans, including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for credit losses, independent credit reviews, current charges and recoveries to the allowance for credit losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectibility of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.

The federal financial regulatory agencies in December 2006 issued a new interagency policy statement on the allowance for credit losses along with supplemental frequently asked questions. When determining the adequacy of the allowance for credit losses, management follows these guidelines. The policy statement revises and replaces a 1993 policy statement on the allowance for credit losses. The agencies issued the revised policy statement in view of today’s uncertain economic environment and the presence of concentrations in untested loan products in the loan portfolios of insured depository institutions. The policy statement has also been revised to conform with GAAP and post-1993 supervisory guidance. The policy statement reiterates that each institution has a responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the allowance for credit losses and the provision for loan and lease losses and states that each institution should ensure controls are in place to consistently determine the allowance for credit losses in accordance with GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.

The policy statement also restates that insured depository institutions must maintain an allowance for credit losses at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio, and that estimates of credit losses should reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. The policy statement states that prudent, conservative, but not excessive, loan loss allowances that represent management’s best estimate from within an acceptable range of estimated losses are appropriate.

The Company’s methodology for assessing the adequacy of the allowance for credit losses consists of several key elements, which include but are not limited to:

•

specific allocation for problem graded loans (“impaired loans”),

•

general or formula allocation, and

•

discretionary allocation based on loan portfolio segmentation.

Specific allocations are established based on management’s periodic evaluation of loss exposure inherent in classified, impaired, and other loans in which management believes that the collection of principal and interest under the original terms of the loan agreement are in question. For purposes of this analysis, classified loans are grouped by internal risk classifications which are “special mention”, “substandard”, “doubtful” and “loss”. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends, which if not corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as “doubtful” has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include loans categorized as substandard and doubtful. Loans classified as loss are immediately charged off.

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on our historical loss experience over the past three years, as adjusted for changes in the business cycle and on the internal risk grade of those loans and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.

The following table provides certain information for the years indicated with respect to the Company’s allowance for credit losses as well as charge-off and recovery activity.

	As of and for the Year Ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Beginning balance	$	12,406		$	3,919		$	3,374		$	2,826		$	1,988
Loans charged off during period:
Commercial		806			6,718			30			10			8
Real estate — residential 2nds		253			368			41			—			—
Real estate — land		963			769			—			—			—
Real estate — nonresidential		171			360			38			—			—
Real estate — construction		6,693			6,284			289			—			—
Consumer		596			1,010			2			2			—
Total		9,482			15,509			400			12			8
Recoveries:
Commercial		57			27			—			—			1
Real estate — nonresidential		157			—			—			—			—
Real estate — construction		23			—			—			—			—
Consumer		111			69			—			—			—
Total		348			96			—			—			1
Net loans charged off		(9,134	)		(15,413	)		(400	)		(12	)		(7	)

Provision for credit losses		11,115			23,900			945			560			845
Ending balance	$	14,387		$	12,406		$	3,919		$	3,374		$	2,826
Total loans, net of fees and costs	$	304,739		$	312,374		$	305,135		$	259,381		$	206,659
Average loans	$	310,253		$	316,500		$	279,221		$	236,034		$	197,536
Non-performing loans	$	27,278		$	27,851		$	9,474		$	—		$	—

Selected ratios:
Net charge-offs to average loans		2.94	%		4.87	%		0.14	%		0.01	%		0.00	%
Provision for credit losses to average loans		3.58	%		7.55	%		0.34	%		0.24	%		0.43	%
Allowance for credit losses to total loans		4.72	%		3.97	%		1.28	%		1.30	%		1.37	%
Allowance for credit losses to non-performing loans		52.74	%		44.55	%		41.37	%		N/A			N/A

The allowance for credit losses totaled $14.4 million or 4.72% of total loans at December 31, 2009 compared to $12.4 million or 3.97% at December 31, 2008, and $3.9 million or 1.28% at December 31, 2007. We recorded a loan loss provision of $11.1 million, $23.9 million and $945 thousand for the years ended December 31, 2009, 2008 and 2007, respectively. The provisions recorded during 2009 and 2008 related to the overall trends in credit quality of our loan portfolio including an increase in the number and amount of classified and past due loans and deterioration in the general economic environment in our primary market area.

Construction and land development loans are highly dependent on property values both in terms of the likelihood of repayment once the property is developed by the current owner as well as the level of collateral the Company has securing the loan in the event of default. Loans in this category are characterized by the speculative nature of commercial and residential development properties and can include property in various stages of development from raw land to finished buildings.

Citizens Bancorp S-1/A